SecProbe.io

CORRESP
1
filename1.htm

Correspondence Letter

Microsoft Corporation

Tel 425 882 8080

One Microsoft Way

Fax 425 936 7329

Redmond, WA 98052-6399

http://www.microsoft.com

 March 11, 2011

 Mr. Craig D. Wilson

 Senior Assistant Chief Accountant

Division of Corporation Finance

 U.S. Securities
and Exchange Commission

 100 F Street, N.E.

 Washington, DC 20549

RE:

Microsoft Corporation

Form 10-K for the Fiscal Year Ended June 30, 2010

Form 10-Q for the Quarterly Period Ended December 31, 2010

File No. 000-14278

 Dear Mr. Wilson,

This letter responds to your comments communicated to us in your letter dated March 1, 2011. Following are our responses to the specific comments in
your letter.

 Form 10-K for the Fiscal Year Ended June 30, 2010

 Management’s Discussion and Analysis of Financial Condition and Results of Operations

Income Taxes, page 33

1.
You indicate in your response to prior comments 1 and 4 that you will expand your MD&A discussion of your effective tax rate. Ensure that your disclosure also
addresses the impact on your effective tax rate of emphasizing production and distribution through your regional operational centers; particularly those in Ireland, Singapore and Puerto Rico. Such disclosures seem relevant due to the concentration
in these countries and the recent uncertainty associated with the economic conditions and events in Ireland.

 Response:

 We will ensure that future MD&A disclosures address the impact on our effective tax rate of emphasizing production and distribution
through our regional operational centers, particularly those in Ireland, Singapore and Puerto Rico, and any anticipated impact of economic uncertainty.

 Financial Condition, page 33

2.
We note your response to prior comment 2. As previously requested, tell us what consideration you gave to discussing the amount of cash and investments that are
currently held by your foreign subsidiaries with material repatriation tax effects or other restrictions on the free flow of funds from those subsidiaries.

 1

Microsoft Corporation

Tel 425 882 8080

One Microsoft Way

Fax 425 936 7329

Redmond, WA 98052-6399

http://www.microsoft.com

 Response:

 As of June 30, 2010, our consolidated liquid assets included $36.8 billion in cash and short-term investments and $7.8 billion in equity and other investments. Of these amounts, approximately $30
billion of cash and short-term investments were held by our foreign subsidiaries and were subject to material repatriation tax effects. The amount of cash and investments held by foreign subsidiaries subject to other restrictions on the free flow of
funds was approximately $150 million.

 Our domestic cash flows from operations continue to be sufficient to fund not only our operating
activities but also our cash commitments for investing and financing activities, such as dividends and debt service. In addition, we have the ability to borrow funds domestically at reasonable rates to fund discretionary investing and financing
activities, such as significant share repurchases.

 We believe that we have adequate domestic and foreign liquidity, and we believe that our
financial statements, accompanying footnotes and MD&A reflect these circumstances. However, in order to provide additional information to investors, in addition to the disclosures proposed in our initial response to your comments, we will
disclose in the financial condition section of our MD&A in future filings the amount of cash and investments that are held by our foreign subsidiaries with material repatriation tax effects or other restrictions on the free flow of funds from
those subsidiaries.

 Form 10-Q for the Quarterly Period Ended December 31, 2010

Notes to Financial Statements

 Note 16
– Segment Information, page 25

3.
We note your response to prior comment 6 indicating that expanded disclosure of the changes in your segment presentation was not necessary because the impact of the
changes was not material. Please provide us with your materiality analysis. Address what consideration you gave to each of the significant differences in revenue and provide us with the impact on trends for each of your segments. We specifically
note the significant impact on revenue in the Windows & Windows Live and Entertainment and Devices divisions. Furthermore, tell us what consideration you gave to disclosing the impact of these changes in your discussion of segment product
revenue/operating income (loss) within your results of operations section in MD&A.

 Response:

As requested, please see our materiality analysis in Appendix A, which addresses the differences in revenue and operating income for each operating
segment and the associated impact on trends, as well as documents considerations we gave to disclosing the impact of these changes in our MD&A.

 Management acknowledges that the company is responsible for the adequacy and accuracy of the disclosure in the filing; staff comments or changes to disclosure in response to staff comments do not
foreclose the Commission from taking any action with respect to the filing; and the company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United
States.

 2

Microsoft Corporation

Tel 425 882 8080

One Microsoft Way

Fax 425 936 7329

Redmond, WA 98052-6399

http://www.microsoft.com

 If you have any further questions, please call me at (425) 704-8002 or email me at
fbrod@microsoft.com.

 Sincerely,

 /S/ FRANK BROD

Frank Brod

Corporate Vice President and Chief Accounting Officer

cc:

Peter Klein, Senior Vice President and Chief Financial Officer

John Seethoff, Vice President and Deputy General Counsel

Brad Smith, Senior Vice President and General Counsel

 3

Microsoft Corporation

Tel 425 882 8080

One Microsoft Way

Fax 425 936 7329

Redmond, WA 98052-6399

http://www.microsoft.com

 Appendix A

 Analysis of FY 2011 Q1 Segment Reorganizations and Cost Allocation Changes

Background:

 Leading a large
complex global company operating in a dynamic industry, our CEO (our chief operating decision maker) continuously monitors and assesses the business operations of Microsoft and frequently makes organizational changes. His assessment includes
reviewing each segment’s long-term strategy and ensuring that the operations of the segments are properly aligned. Therefore, on a quarterly basis, reorganizations may occur within Microsoft’s business. These reorganizations can be minor
in nature (i.e., a small group of 10 individuals moving from one segment to another) to a more sizable change (i.e., moving a certain product from one segment to another). Such organizational changes, and corresponding changes to segment
information, reflect how the chief operating decision maker currently evaluates the segments in deciding how to allocate resources and in assessing performance.

 When reorganizations occur during a quarter, the results for that quarter are presented as if the reorganization occurred at the beginning of that period. Prior periods are also recast to reflect the
reorganization as if it had occurred in the first period reported so that the reported information is comparable.

 During the first quarter of
Fiscal 2011, we recast certain prior period amounts to conform to the way our CEO internally managed and monitored segment performance during the current period. This included moving Windows Embedded, PC Hardware, and Mac Office from the
Entertainment and Devices Division segment to the Server and Tools, Windows and Windows Live, and Microsoft Business Division segments, respectively, as well as intersegment cost allocations between all segments related to the collaborative
investment in mobile platform development.

 The mobile platform has increasingly become a foundation for information workers and consumers who
use our business and enterprise software and services, entertainment services, and search technology to work, have fun, and stay in touch. All of this functionality that has defined the PC experience must now be extended to the mobile device –
all with the familiar and dependable Windows backbone and in the cloud. Keeping with our policy that one segment is not solely burdened by the cost of a mutually beneficial activity, we implemented an intersegment mobile platform development cost
allocation so that the necessary investment in mobile is shared across the platform.

 Quantitative Considerations:

Recasts made in Fiscal Q1 2011 of prior period financial results were primarily attributed to the following reorganizations and cost allocation changes:

•

 PC Hardware was moved from Entertainment and Devices Division (EDD) to the Windows & Windows Live Division (WWLD)

 4

Microsoft Corporation

Tel 425 882 8080

One Microsoft Way

Fax 425 936 7329

Redmond, WA 98052-6399

http://www.microsoft.com

•

 Windows Embedded was moved from EDD to Server and Tools (STB)

•

 Mac Office was moved from EDD to the Microsoft Business Division (MBD)

•

 Windows Live Mobility was moved from EDD to WWLD

•

 Trustworthy Computing was moved from Corporate to STB

•

 Health Solutions was moved from Corporate to MBD

•

 Retail sales organization was moved from EDD to Corporate with changes in the related intersegment cost allocations

•

 eHome (Media Center) was moved from EDD to WWLD with changes in the related intersegment revenue share

•

 Mobile platform development cost allocation was implemented as discussed above

Following are quantitative analyses of the impact of the reorganizations and cost allocation changes on our results of operations previously disclosed in
our MD&A.

 Microsoft Corporation

 FY11 Q1 Reorgs and Allocation Changes - Annual Impact on Segments

Previously Reported

Recasting Impact

Recasted

Fiscal Year Ended June 30,

Fiscal Year Ended June 30,

Fiscal Year Ended June 30,

(USD in millions)

2010

2009

2010

2009

2010

2009

 Revenue

 Windows & Windows Live

$
18,491

$
14,974

$
1,014

$
880

$
19,505

$
15,854

 Server and Tools

14,866

14,191

512

410

15,378

14,601

 Online Services Division

2,199

2,121

2

—

2,201

2,121

 Microsoft Business Division

18,642

18,910

434

347

19,076

19,257

 Entertainment and Devices Division

8,058

8,035

(1,900
)

(1,626
)

6,158

6,409

 Corporate-level activity

228

206

(62
)

(11
)

166

195

 Total Revenue

$
62,484

$
58,437

$
—

$
—

$
62,484

$
58,437

 Operating Income (Loss)

 Windows & Windows Live

$
12,977

$
9,982

$
68

$
(185
)

$
13,045

$
9,797

 Server and Tools

5,491

4,803

(5
)

(46
)

5,486

4,757

 Online Services Division

(2,355
)

(1,652
)

15

10

(2,340
)

(1,642
)

 Microsoft Business Division

11,776

11,664

(214
)

(247
)

11,562

11,417

 Entertainment and Devices Division

679

108

(74
)

242

605

350

 Corporate-level activity

(4,470
)

(4,542
)

210

226

(4,260
)

(4,316
)

 Total Operating Income

$
24,098

$
20,363

$
—

$
—

$
24,098

$
20,363

 When the reorganizations and cost allocation changes were made in Q1 FY 2011, we reviewed our MD&A results of operations
disclosures in our FY 2010 10-K in conjunction with the table above to determine if there were any significant changes in the trends for each of our segments. We determined that while some amounts in the MD&A changed, the trends discussed within
our MD&A did not change for any of the segments. For instance, for our reorganized EDD segment, the significant drivers of the change in revenue for EDD continue to be decreased revenue from Xbox 360 platform and PC games, Zune and Windows
Phone. The significant drivers of the change in EDD operating income continues to be lower Xbox 360 console costs, offset in part by increased royalty costs resulting from increased Xbox LIVE digital marketplace third-party content sales and charges
resulting from the discontinuation of the KIN phone.

 5

Microsoft Corporation

Tel 425 882 8080

One Microsoft Way

Fax 425 936 7329

Redmond, WA 98052-6399

http://www.microsoft.com

 In addition, we also considered at the impact of the changes in segment revenue and operating income in
relation to Microsoft’s consolidated results, as shown in the following table.

 Microsoft Corporation

FY11 Q1 Reorgs and Allocation Changes - Annual Impact on Conslidated Results

Impact of Recasting as a % of Consolidated
Results

 Fiscal Year Ended June 30,

2010

2009

 Revenue

 Windows & Windows Live

2
%

2
%

 Server and Tools

1
%

1
%

 Online Services Division

0
%

0
%

 Microsoft Business Division

1
%

1
%

 Entertainment and Devices Division

-3
%

-3
%

 Corporate-level activity

0
%

0
%

 Total Revenue

0
%

0
%

 Operating Income (Loss)

 Windows & Windows Live

0
%

-1
%

 Server and Tools

0
%

0
%

 Online Services Division

0
%

0
%

 Microsoft Business Division

-1
%

-1
%

 Entertainment and Devices Division

0
%

1
%

 Corporate-level activity

1
%

1
%

 Total Operating Income

0
%

0
%

 6

Microsoft Corporation

Tel 425 882 8080

One Microsoft Way

Fax 425 936 7329

Redmond, WA 98052-6399

http://www.microsoft.com

 The following table represents the quarterly impacts for fiscal year 2010. We noted no impacts to the
segment trends.

 Microsoft Corporation

 FY11 Q1 Reorgs and Allocation Changes - Quarterly FY10 Impact to Segments

Three Months Ended

September 30, 2009

December 31, 2009

March 31, 2010

June 30, 2010

(USD in millions)

Reported

Recast

Reported

Recast

Reported

Recast

Reported

Recast

 Revenue

 Windows & Windows Live

$
2,624

$
2,880

$
6,904

$
7,189

$
4,415

$
4,661

$
4,548

$
4,775

 Server and Tools

3,434

3,550

3,845

3,973

3,575

3,706

4,012

4,149

 Online Services Division

486

487

582

580

566

566

565

568

 Microsoft Business Division

4,404

4,514

4,745

4,847

4,243

4,343

5,250

5,372

 Entertainment and Devices Division

1,891

1,412

2,902

2,396

1,665

1,197

1,600

1,153

 Corporate-level activity

81

77

44

37

39

30

64

22

 Total Revenue

$
12,920

$
12,920

$
19,022

$
19,022

$
14,503

$
14,503

$
16,039

$
16,039

 Operating Income (Loss)

 Windows & Windows Live

$
1,458

$
1,483

$
5,395

$
5,420

$
3,061

$
3,076

$
3,063

$
3,066

 Server and Tools

1,235

1,237

1,455

1,447

1,255

1,254

1,546

1,548

 Online Services Division

(481
)

(477
)

(465
)

(463
)

(713
)

(710
)

(696
)

(690
)

 Microsoft Business Division

2,859

2,827

3,011

2,943

2,622

2,563

3,284

3,229

 Entertainment and Devices Division

310

260

376

370

165

143

(172
)

(168
)

 Corporate-level activity

(899
)

(848
)

(1,259
)

(1,204
)

(1,217
)

(1,153
)

(1,095
)

(1,055
)

 Total Operating Income

$
4,482

$
4,482

$
8,513

$
8,513

$
5,173

$
5,173

$
5,930

$
5,930

 Based on these analyses, we concluded that the impacts of the changes on our previously reported results of operations were
immaterial because:

•

 These changes had no impact on the consolidated results of Microsoft, but rather reflect the changes in the way our CEO monitors and assesses the
business operations of Microsoft, and do not constitute a fundamental change in our operating segments.

•

 When compared to our consolidated results, the impacts of the changes on the operating segments and Corporate were no greater than 3% with respect to
Microsoft’s consolidated revenue, and no greater than 1% with respect to Microsoft’s consolidated operating income.

•

 We determined that while some amounts in the MD&A changed, the trends discussed within our MD&A did not change for any of the segments.

 7

Microsoft Corporation

Tel 425 882 8080

One Microsoft Way

Fax 425 936 7329

Redmond, WA 98052-6399

http://www.microsoft.com

 Additional Qualitative Considerations:

Although the recasting is the result of segment reorganizations and cost allocation changes rather than an error or “misstatement” in the
financial statements, we assessed the following additional qualitative indicators based on the guidance in