Microsoft 2008 Annual Report Download - page 33

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
SFAS No. 109, Accounting for Income Taxes, establishes financial accounting and reporting standards for the
effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes
payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences
of events that have been recognized in an entity’s financial statements or tax returns. Accruals for uncertain tax
positions are provided for in accordance with the requirements of FIN 48. Under FIN 48, we may recognize the
tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in
the financial statements from such a position should be measured based on the largest benefit that has a greater
than 50% likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition of
income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting
for interest and penalties associated with tax positions, and income tax disclosures. Judgment is required in
assessing the future tax consequences of events that have been recognized in our financial statements or tax
returns. Variations in the actual outcome of these future tax consequences could materially impact our financial
position, results of operations, or cash flows.
We account for stock-based compensation in accordance with SFAS No. 123(R), Share-Based Payment.
Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the
grant date based on the fair value of the award and is recognized as expense over the requisite service period.
Determining the fair value of share-based awards at the grant date requires judgment, including estimating
expected dividends. In addition, judgment is also required in estimating the amount of share-based awards that
are expected to be forfeited. If actual results differ significantly from these estimates, stock-based compensation
expense and our results of operations could be materially impacted.
We account for product warranties in accordance with SFAS No. 5, Accounting for Contingencies. We provide
for the estimated costs of hardware and software warranties at the time the related revenue is recognized. For
hardware warranty, we estimate the costs based on historical and projected product failure rates, historical and
projected repair costs, and knowledge of specific product failures (if any). The specific hardware warranty terms
and conditions vary depending upon the product sold and country in which we do business, but generally include
parts and labor over a period generally ranging from 90 days to three years. For software warranty, we estimate
the costs to provide bug fixes, such as security patches, over the life of the software. We regularly reevaluate our
estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary.