Microsoft 2008 Annual Report Download - page 41

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PAGE 40
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
arrangements include a perpetual license for current products combined with rights to receive future versions of
software products on a when-and-if-available basis under Open, Select, and Enterprise Agreement volume
licensing programs. Premier support services agreements, MSN Internet Access subscriptions, Xbox Live, and
Microsoft Developer Network subscriptions are also accounted for as subscriptions.
Revenue related to our Xbox game console and other hardware components is recognized upon shipment of
the product to retailers. Revenue related to games published by us is recognized when those games have been
delivered to retailers. Revenue related to games published by third parties for use on the Xbox platform is
recognized when games are manufactured by the game publishers. Online advertising revenue is recognized as
advertisements are displayed. Search advertising revenue is recognized when the ad appears in the search
results or when the action necessary to earn the revenue has been completed. Consulting services revenue is
recognized as services are rendered, generally based on the negotiated hourly rate in the consulting arrangement
and the number of hours worked during the period. Consulting revenue for fixed-price services arrangements is
recognized as services are provided.
Revenue generally is recognized net of any taxes collected from customers and subsequently remitted to
governmental authorities.
Costs related to insignificant obligations, including bug fixes and technical support, are accrued when the
related revenue is recognized. Provisions are recorded for estimated returns, concessions, warranties, and bad
debts.
COST OF REVENUE
Cost of revenue includes manufacturing and distribution costs for products sold and programs licensed, operating
costs related to product support service centers and product distribution centers, costs incurred to support and
maintain Internet-based products and services, warranty costs, inventory write-downs, costs associated with the
delivery of consulting services, and the amortization of capitalized research and development costs associated
with software products that have reached technological feasibility.
RESEARCH AND DEVELOPMENT
Research and development expenses include payroll, employee benefits, stock-based compensation, and other
headcount-related expenses associated with product development. Research and development expenses also
include third-party development and programming costs, localization costs incurred to translate software for
international markets, the amortization of purchased software code and services content, and in-process research
and development. We have determined that technological feasibility for our software products is reached shortly
before the products are released to manufacturing. The amortization of these costs is included in cost of revenue
over the estimated lives of the products.
SALES AND MARKETING
Sales and marketing expenses include payroll, employee benefits, stock-based compensation, and other
headcount-related expenses associated with sales and marketing personnel, and the cost of advertising,
promotions, tradeshows, seminars, and other programs. Advertising costs are expensed as incurred. Advertising
expense was $1.2 billion, $1.3 billion, and $1.2 billion in fiscal years 2008, 2007, and 2006, respectively.
PRODUCT WARRANTY
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 estimated life of the
software. We regularly reevaluate our estimates to assess the adequacy of the recorded warranty liabilities and
adjust the amounts as necessary.