Microsoft 2010 Annual Report Download - page 32

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Microsoft Office system at minimal or no cost when the product becomes generally available. Accordingly, estimated
revenue related to the undelivered 2010 Microsoft Office system is deferred until the product is delivered.
Impairment of Investment Securities
Investments are reviewed quarterly for indicators of other-than-temporary impairment. This determination requires
significant judgment. In making this judgment, we employ a systematic methodology quarterly that considers
available quantitative and qualitative evidence in evaluating potential impairment of our investments. If the cost of an
investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt
instrument issuers, the duration and extent to which the fair value is less than cost, and for equity securities, our
intent and ability to hold, or plans to sell, the investment. For fixed income securities, we also evaluate whether we
have plans to sell the security or it is more likely than not that we will be required to sell the security before recovery.
We also consider specific adverse conditions related to the financial health of and business outlook for the investee,
including industry and sector performance, changes in technology, and operational and financing cash flow factors.
Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded to other
income (expense) and a new cost basis in the investment is established. If market, industry, and/or investee
conditions deteriorate, we may incur future impairments.
Goodwill
Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating
segment) on an annual basis (May 1 for us) and between annual tests if an event occurs or circumstances change
that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or
circumstances could include a significant change in the business climate, legal factors, operating performance
indicators, competition, or sale or disposition of a significant portion of a reporting unit. Application of the goodwill
impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities
to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit.
The fair value of each reporting unit is estimated using a discounted cash flow methodology. This analysis requires
significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation
of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and
determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially
affect the determination of fair value and goodwill impairment for each reporting unit. We allocate goodwill to
reporting units based on the reporting unit expected to benefit from the business combination. We evaluate our
reporting units on an annual basis and, if necessary, reassign goodwill using a relative fair value allocation approach.
In addition to the impairment test performed on May 1, 2010, we performed an interim impairment analysis of our
Online Services Division goodwill balance during the first quarter of fiscal year 2010 in connection with the disposal
of Razorfish. No impairment of goodwill was identified.
Research and Development Costs
Costs incurred internally in researching and developing a computer software product are charged to expense until
technological feasibility has been established for the product. Once technological feasibility is established, all
software costs are capitalized until the product is available for general release to customers. Judgment is required in
determining when technological feasibility of a product is established. We have determined that technological
feasibility for our software products is reached after all high-risk development issues have been resolved through
coding and testing. Generally, this occurs shortly before the products are released to manufacturing. The
amortization of these costs is included in cost of revenue over the estimated life of the products.
Legal and Other Contingencies
The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. An estimated
loss from a loss contingency such as a legal proceeding or claim is accrued by a charge to income if it is probable
that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably
estimated. Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been
incurred. In determining whether a loss should be accrued we evaluate, among other factors, the degree of
probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes
in these factors could materially impact our financial statements.