Unearned revenue comprises mainly unearned revenue related to volume licensing programs, which may include SA and cloud services. Unearned revenue is generally invoiced annually at the beginning of each contract period for multi-year agreements and recognized ratably over the coverage period. Unearned revenue also includes payments for consulting services to be performed in the future, LinkedIn subscriptions, Office 365 subscriptions, Xbox subscriptions, Windows post-delivery support, Dynamics business solutions, and other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service.


MSFT Contract Balances and Other Receivables

Refer to Note 13 – Unearned Revenue for further information, including unearned revenue by segment and changes in unearned revenue during the period.


Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers or to provide customers with financing. Examples include invoicing at the beginning of a subscription term with revenue recognized ratably over the contract period, and multi-year on-premises licenses that are invoiced annually with revenue recognized upfront.


As of June 30, 2023 and 2022, long-term accounts receivable, net of allowance for doubtful accounts, was $4.5 billion and $3.8 billion, respectively, and is included in other long-term assets in our consolidated balance sheets.


The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence.


Activity in the allowance for doubtful accounts was as follows: (In millions)################## Year Ended June 30,####2023######2022######2021## Balance, beginning of period##$##710####$##798####$##816## Charged to costs and other####258######157######234## Write-offs####(252##)####(245##)####(252##) Balance, end of period##$##716####$##710####$##798##


Allowance for doubtful accounts included in our consolidated balance sheets: (In millions)############ June 30,####2023####2022####2021 Accounts receivable, net of allowance for doubtful accounts##$##650##$##633##$##751 Other long-term assets####66####77####47 Total##$##716##$##710##$##798


As of June 30, 2023 and 2022, other receivables related to activities to facilitate the purchase of server components were $9.2 billion and $6.1 billion, respectively, and are included in other current assets in our consolidated balance sheets.


We record financing receivables when we offer certain of our customers the option to acquire our software products and services offerings through a financing program in a limited number of countries. As of June 30, 2023 and 2022, our financing receivables, net were $5.3 billion and $4.1 billion, respectively, for short-term and long-term financing receivables, which are included in other current assets and other long-term assets in our consolidated balance sheets. We record an allowance to cover expected losses based on troubled accounts, historical experience, and other currently available evidence.


Assets Recognized from Costs to Obtain a Contract with a Customer


We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales incentive programs meet the requirements to be capitalized. Total capitalized costs to obtain a contract were immaterial during the periods presented and are included in other current and long-term assets in our consolidated balance sheets.


We apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. These costs include our internal sales organization compensation program and certain partner sales incentive programs as we have determined annual compensation is commensurate with annual sales activities.


MSFT 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 include software on PCs sold by original equipment manufacturers (“OEM”), to drive traffic to our websites, and to acquire online advertising space; costs incurred to support and maintain cloud-based and other online products and services, including datacenter costs and royalties; warranty costs; inventory valuation adjustments; costs associated with the delivery of consulting services; and the amortization of capitalized software development costs. Capitalized software development costs are amortized over the estimated lives of the products.


MSFT Product Warranty

We provide for the estimated costs of fulfilling our obligations under hardware and software warranties at the time the related revenue is recognized. For hardware warranties, 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 the 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 warranties, 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.


MSFT Research and Development

Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs and the amortization of purchased software code and services content. Such costs related to software development are included in research and development expense until the point that technological feasibility is reached, which for our software products, is generally shortly before the products are released to production. Once technological feasibility is reached, such costs are capitalized and amortized to cost of revenue over the estimated lives of the products.


MSFT Sales and Marketing

Sales and marketing expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with sales and marketing personnel, and the costs of advertising, promotions, trade shows, seminars, and other programs. Advertising costs are expensed as incurred. Advertising expense was $904 million, $1.5 billion, and $1.5 billion in fiscal years 2023, 2022, and 2021, respectively.


MSFT Stock-Based Compensation

Compensation cost for stock awards, which include restricted stock units (“RSUs”) and performance stock units (“PSUs”), is measured at the fair value on the grant date and recognized as expense, net of estimated forfeitures, over the related service or performance period. The fair value of stock awards is based on the quoted price of our common stock on the grant date less the present value of expected dividends not received during the vesting period. We measure the fair value of PSUs using a Monte Carlo valuation model. Compensation cost for RSUs is recognized using the straight-line method and for PSUs is recognized using the accelerated method.


MSFT Stock-Based Compensation

Compensation expense for the employee stock purchase plan (“ESPP”) is measured as the discount the employee is entitled to upon purchase and is recognized in the period of purchase.


MSFT Employee Severance

On January 18, 2023, we announced a decision to reduce our overall workforce by approximately 10,000 jobs through the third quarter of fiscal year 2023. During the three months ended December 31, 2022, we recorded $800 million of employee severance expenses related to these job eliminations as part of an ongoing employee benefit plan. These employee severance expenses were incurred as part of a corporate program, and were included in general and administrative expenses in our consolidated income statements and allocated to our segments based on relative gross margin. Refer to Note 19 – Segment Information and Geographic Data for further information.


MSFT Income Taxes

Income tax expense includes U.S. and international income taxes, and interest and penalties on uncertain tax positions. Certain income and expenses are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. Deferred tax assets are reported net of a valuation allowance when it is more likely than not that a tax benefit will not be realized. All deferred income taxes are classified as long-term in our consolidated balance sheets.


MSFT Investments

We consider all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The fair values of these investments approximate their carrying values. In general, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations.


MSFT Investments

Debt investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding credit losses and impairments, are recorded in other comprehensive income. Fair value is calculated based on publicly available market information or other estimates determined by management. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost. To determine credit losses, we employ a systematic methodology that considers available quantitative and qualitative evidence. In addition, we consider specific adverse conditions related to the financial health of, and business outlook for, the investee. If 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, then a decline in fair value below cost is recorded as an impairment charge in other income (expense), net and a new cost basis in the investment is established. If market, industry, and/or investee conditions deteriorate, we may incur future impairments.


MSFT Investments

Equity investments with readily determinable fair values are measured at fair value. Equity investments without readily determinable fair values are measured using the equity method or measured at cost with adjustments for observable changes in price or impairments (referred to as the measurement alternative). We perform a qualitative assessment on a periodic basis and recognize an impairment if there are sufficient indicators that the fair value of the investment is less than carrying value. Changes in value are recorded in other income (expense), net.


MSFT Derivatives

Derivative instruments are recognized as either assets or liabilities and measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.


MSFT Derivatives

For derivative instruments designated as fair value hedges, gains and losses are recognized in other income (expense), net with offsetting gains and losses on the hedged items. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net.


MSFT Derivatives

For derivative instruments designated as cash flow hedges, gains and losses are initially reported as a component of other comprehensive income and subsequently recognized in other income (expense), net with the corresponding hedged item. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net.


MSFT Derivatives

For derivative instruments that are not designated as hedges, gains and losses from changes in fair values are primarily recognized in other income (expense), net.


MSFT Fair Value Measurements

We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are: •Level 1 – inputs are based upon unadjusted quoted prices for identical instruments in active markets. Our Level 1 investments include U.S. government securities, common and preferred stock, and mutual funds. Our Level 1 derivative assets and liabilities include those actively traded on exchanges. •Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit spreads, foreign exchange rates, and forward and spot prices for currencies. Our Level 2 investments include commercial paper, certificates of deposit, U.S. agency securities, foreign government bonds, mortgage- and asset-backed securities, corporate notes and bonds, and municipal securities. Our Level 2 derivative assets and liabilities include certain cleared swap contracts and over-the-counter forward, option, and swap contracts. •Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Our Level 3 assets and liabilities include investments in corporate notes and bonds, municipal securities, and goodwill and intangible assets, when they are recorded at fair value due to an impairment charge. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities.


MSFT Fair Value Measurements

We measure equity investments without readily determinable fair values on a nonrecurring basis. The fair values of these investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections.


MSFT Fair Value Measurements

Our other current financial assets and current financial liabilities have fair values that approximate their carrying values.


MSFT Inventories

Inventories are stated at average cost, subject to the lower of cost or net realizable value. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. Net realizable value is the estimated selling price less estimated costs of completion, disposal, and transportation. We regularly review inventory quantities on hand, future purchase commitments with our suppliers, and the estimated utility of our inventory. If our review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis through a charge to cost of revenue.


MSFT Property and Equipment

Property and equipment is stated at cost less accumulated depreciation, and depreciated using the straight-line method over the shorter of the estimated useful life of the asset or the lease term. The estimated useful lives of our property and equipment are generally as follows: computer software developed or acquired for internal use, three years; computer equipment, two to six years; buildings and improvements, five to 15 years; leasehold improvements, three to 20 years; and furniture and equipment, one to 10 years. Land is not depreciated.


MSFT Leases

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities in our consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in our consolidated balance sheets.


MSFT Leases

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.


MSFT Leases

We have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component. Additionally, for certain equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities.


MSFT 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) 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.


MSFT Intangible Assets

Our intangible assets are subject to amortization and are amortized using the straight-line method over their estimated period of benefit, ranging from one to 20 years. We evaluate the recoverability of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired.


MSFT NOTE 2 — EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards.


MSFT NOTE 2 — EARNINGS PER SHARE

The components of basic and diluted EPS were as follows: (In millions, except earnings per share)############ Year Ended June 30,####2023####2022####2021 Net income available for common shareholders (A)##$##72,361##$##72,738##$##61,271 Weighted average outstanding shares of common stock (B)####7,446####7,496####7,547 Dilutive effect of stock-based awards####26####44####61 Common stock and common stock equivalents (C)####7,472####7,540####7,608 Earnings Per Share############ Basic (A/B)##$##9.72##$##9.70##$##8.12 Diluted (A/C)##$##9.68##$##9.65##$##8.05


MSFT NOTE 2 — EARNINGS PER SHARE

Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented.


MSFT NOTE 3 — OTHER INCOME (EXPENSE), NET

The components of other income (expense), net were as follows: (In millions)################## Year Ended June 30,####2023######2022######2021## Interest and dividends income##$##2,994####$##2,094####$##2,131## Interest expense####(1,968##)####(2,063##)####(2,346##) Net recognized gains on investments####260######461######1,232## Net gains (losses) on derivatives####(456##)####(52##)####17## Net gains (losses) on foreign currency remeasurements####181######(75##)####54## Other, net####(223##)####(32##)####98## Total##$##788####$##333####$##1,186##


MSFT Net Recognized Gains (Losses) on Investments

Net recognized gains (losses) on debt investments were as follows: (In millions)################## Year Ended June 30,####2023######2022######2021## Realized gains from sales of available-for-sale securities##$##36####$##162####$##105## Realized losses from sales of available-for-sale securities####(124##)####(138##)####(40##) Impairments and allowance for credit losses####(10##)####(81##)####(2##) Total##$##(98##)##$##(57##)##$##63##


Net recognized gains (losses) on equity investments were as follows: (In millions)################## Year Ended June 30,####2023######2022######2021## Net realized gains on investments sold##$##75####$##29####$##123## Net unrealized gains on investments still held####303######509######1,057## Impairments of investments####(20##)####(20##)####(11##) Total##$##358####$##518####$##1,169##


MSFT Investment Components

The components of investments were as follows: (In millions)##Fair Value Level####Adjusted Cost Basis####Unrealized Gains####Unrealized Losses######Recorded Basis####Cash and Cash Equivalents####Short-term Investments####Equity Investments June 30, 2023################################ Changes in Fair Value Recorded in Other Comprehensive Income################################ Commercial paper##Level 2##$##16,589##$##0##$##0####$##16,589##$##12,231##$##4,358##$##0 Certificates of deposit##Level 2####2,701####0####0######2,701####2,657####44####0 U.S. government securities##Level 1####65,237####2####(3,870##)####61,369####2,991####58,378####0 U.S. agency securities##Level 2####2,703####0####0######2,703####894####1,809####0 Foreign government bonds##Level 2####498####1####(24##)####475####0####475####0 Mortgage- and asset-backed securities##Level 2####824####1####(39##)####786####0####786####0 Corporate notes and bonds##Level 2####10,809####8####(583##)####10,234####0####10,234####0 Corporate notes and bonds##Level 3####120####0####0######120####0####120####0 Municipal securities##Level 2####285####1####(18##)####268####7####261####0 Municipal securities##Level 3####103####0####(16##)####87####0####87####0 Total debt investments####$##99,869##$##13##$##(4,550##)##$##95,332##$##18,780##$##76,552##$##0 Changes in Fair Value Recorded in Net Income################################ Equity investments##Level 1################$##10,138##$##7,446##$##0##$##2,692 Equity investments##Other##################7,187####0####0####7,187 Total equity investments##################$##17,325##$##7,446##$##0##$##9,879 Cash##################$##8,478##$##8,478##$##0##$##0 Derivatives, net (a)####################6####0####6####0 Total##################$##121,141##$##34,704##$##76,558##$##9,879 (In millions)##Fair Value Level####Adjusted Cost Basis####Unrealized Gains####Unrealized Losses######Recorded Basis####Cash and Cash Equivalents####Short-term Investments####Equity Investments June 30, 2022################################ Changes in Fair Value Recorded in Other Comprehensive Income################################ Commercial paper##Level 2##$##2,500##$##0##$##0####$##2,500##$##2,498##$##2##$##0 Certificates of deposit##Level 2####2,071####0####0######2,071####2,032####39####0 U.S. government securities##Level 1####79,696####29####(2,178##)####77,547####9####77,538####0 U.S. agency securities##Level 2####419####0####(9##)####410####0####410####0 Foreign government bonds##Level 2####506####0####(24##)####482####0####482####0 Mortgage- and asset-backed securities##Level 2####727####1####(30##)####698####0####698####0 Corporate notes and bonds##Level 2####11,661####4####(554##)####11,111####0####11,111####0 Corporate notes and bonds##Level 3####67####0####0######67####0####67####0 Municipal securities##Level 2####368####19####(13##)####374####0####374####0 Municipal securities##Level 3####103####0####(6##)####97####0####97####0 Total debt investments####$##98,118##$##53##$##(2,814##)##$##95,357##$##4,539##$##90,818##$##0 Changes in Fair Value Recorded in Net Income################################ Equity investments##Level 1################$##1,590##$##1,134##$##0##$##456 Equity investments##Other##################6,435####0####0####6,435 Total equity investments##################$##8,025##$##1,134##$##0##$##6,891 Cash##################$##8,258##$##8,258##$##0##$##0 Derivatives, net (a)####################8####0####8####0 Total##################$##111,648##$##13,931##$##90,826##$##6,891


MSFT Investment Components

(a)Refer to Note 5 – Derivatives for further information on the fair value of our derivative instruments.


MSFT Investment Components

Equity investments presented as “Other” in the tables above include investments without readily determinable fair values measured using the equity method or measured at cost with adjustments for observable changes in price or impairments, and investments measured at fair value using net asset value as a practical expedient which are not categorized in the fair value hierarchy. As of June 30, 2023 and 2022, equity investments without readily determinable fair values measured at cost with adjustments for observable changes in price or impairments were $4.2 billion and $3.8 billion, respectively.


MSFT Unrealized Losses on Debt Investments

Debt investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values were as follows: ######Less than 12 Months############12 Months or Greater########## (In millions)####Fair Value######Unrealized Losses######Fair Value######Unrealized Losses######Total Fair Value June 30, 2023############################ U.S. government and agency securities##$##7,950####$##(336##)##$##45,273####$##(3,534##)##$##53,223 Foreign government bonds####77######(5##)####391######(19##)####468 Mortgage- and asset-backed securities####257######(5##)####412######(34##)####669 Corporate notes and bonds####2,326######(49##)####7,336######(534##)####9,662 Municipal securities####111######(3##)####186######(31##)####297 Total##$##10,721####$##(398##)##$##53,598####$##(4,152##)##$##64,319 ######Less than 12 Months############12 Months or Greater##############Total Unrealized Losses## (In millions)####Fair Value######Unrealized Losses######Fair Value######Unrealized Losses######Total Fair Value###### June 30, 2022################################## U.S. government and agency securities##$##59,092####$##(1,835##)##$##2,210####$##(352##)##$##61,302##$##(2,187##) Foreign government bonds####418######(18##)####27######(6##)####445####(24##) Mortgage- and asset-backed securities####510######(26##)####41######(4##)####551####(30##) Corporate notes and bonds####9,443######(477##)####786######(77##)####10,229####(554##) Municipal securities####178######(12##)####74######(7##)####252####(19##) Total##$##69,641####$##(2,368##)##$##3,138####$##(446##)##$##72,779##$##(2,814##)


Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Management does not believe any remaining unrealized losses represent impairments based on our evaluation of available evidence.


MSFT Debt Investment Maturities

(In millions)####Adjusted Cost Basis####Estimated Fair Value June 30, 2023######## Due in one year or less##$##38,182##$##38,048 Due after one year through five years####47,127####44,490 Due after five years through 10 years####13,262####11,628 Due after 10 years####1,298####1,166 Total##$##99,869##$##95,332


MSFT NOTE 5 — DERIVATIVES

We use derivative instruments to manage risks related to foreign currencies, interest rates, equity prices, and credit; to enhance investment returns; and to facilitate portfolio diversification. Our objectives for holding derivatives include reducing, eliminating, and efficiently managing the economic impact of these exposures as effectively as possible. Our derivative programs include strategies that both qualify and do not qualify for hedge accounting treatment.


MSFT Foreign Currencies

Certain forecasted transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our foreign currency exposures daily to maximize the economic effectiveness of our foreign currency hedge positions.


MSFT Foreign Currencies

Foreign currency risks related to certain non-U.S. dollar-denominated investments are hedged using foreign exchange forward contracts that are designated as fair value hedging instruments. Foreign currency risks related to certain Euro-denominated debt are hedged using foreign exchange forward contracts that are designated as cash flow hedging instruments.


MSFT Foreign Currencies

Certain options and forwards not designated as hedging instruments are also used to manage the variability in foreign exchange rates on certain balance sheet amounts and to manage other foreign currency exposures.


MSFT Interest Rate

Interest rate risks related to certain fixed-rate debt are hedged using interest rate swaps that are designated as fair value hedging instruments to effectively convert the fixed interest rates to floating interest rates.


MSFT Interest Rate

Securities held in our fixed-income portfolio are subject to different interest rate risks based on their maturities. We manage the average maturity of our fixed-income portfolio to achieve economic returns that correlate to certain broad-based fixed-income indices using option, futures, and swap contracts. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.


MSFT Equity

Securities held in our equity investments portfolio are subject to market price risk. At times, we may hold options, futures, and swap contracts. These contracts are not designated as hedging instruments.


MSFT Credit

Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We use credit default swap contracts to manage credit exposures relative to broad-based indices and to facilitate portfolio diversification. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.


MSFT Credit-Risk-Related Contingent Features

Certain of our counterparty agreements for derivative instruments contain provisions that require our issued and outstanding long-term unsecured debt to maintain an investment grade credit rating and require us to maintain minimum liquidity of $1.0 billion. To the extent we fail to meet these requirements, we will be required to post collateral, similar to the standard convention related to over-the-counter derivatives. As of June 30, 2023, our long-term unsecured debt rating was AAA, and cash investments were in excess of $1.0 billion. As a result, no collateral was required to be posted.


The following table presents the notional amounts of our outstanding derivative instruments measured in U.S. dollar equivalents: (In millions)####June 30, 2023####June 30, 2022 Designated as Hedging Instruments######## Foreign exchange contracts purchased##$##1,492##$##635 Interest rate contracts purchased####1,078####1,139 Not Designated as Hedging Instruments######## Foreign exchange contracts purchased####7,874####10,322 Foreign exchange contracts sold####25,159####21,606 Equity contracts purchased####3,867####1,131 Equity contracts sold####2,154####0 Other contracts purchased####1,224####1,642 Other contracts sold####581####544


MSFT Fair Values of Derivative Instruments

The following table presents our derivative instruments: (In millions)####Derivative Assets######Derivative Liabilities######Derivative Assets######Derivative Liabilities#### ########June 30, 2023############June 30, 2022###### Designated as Hedging Instruments########################## Foreign exchange contracts##$##34######$##(67##)##$##0####$##(77##) Interest rate contracts####16########0######3######0## Not Designated as Hedging Instruments########################## Foreign exchange contracts####249########(332##)####333######(362##) Equity contracts####165########(400##)####5######(95##) Other contracts####5########(6##)####15######(17##) Gross amounts of derivatives####469########(805##)####356######(551##) Gross amounts of derivatives offset in the balance sheet####(202##)######206######(130##)####133## Cash collateral received####0########(125##)####0######(75##) Net amounts of derivatives##$##267######$##(724##)##$##226####$##(493##) Reported as########################## Short-term investments##$##6######$##0####$##8####$##0## Other current assets####245########0######218######0## Other long-term assets####16########0######0######0## Other current liabilities####0########(341##)####0######(298##) Other long-term liabilities####0########(383##)####0######(195##) Total##$##267######$##(724##)##$##226####$##(493##)


Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $442 million and $804 million, respectively, as of June 30, 2023, and $343 million and $550 million, respectively, as of June 30, 2022.


The following table presents the fair value of our derivatives instruments on a gross basis: (In millions)####Level 1####Level 2######Level 3####Total## June 30, 2023#################### Derivative assets##$##0##$##462####$##7##$##469## Derivative liabilities####0####(805##)####0####(805##) June 30, 2022#################### Derivative assets####1####349######6####356## Derivative liabilities####0####(551##)####0####(551##)


Gains (losses) on derivative instruments recognized in other income (expense), net were as follows: ########(In millions)########## Year Ended June 30,####2023######2022######2021## Designated as Fair Value Hedging Instruments################## Foreign exchange contracts################## Derivatives##$##0####$##49####$##193## Hedged items####0######(50##)####(188##) Excluded from effectiveness assessment####0######4######30## Interest rate contracts################## Derivatives####(65##)####(92##)####(37##) Hedged items####38######108######53## Designated as Cash Flow Hedging Instruments################## Foreign exchange contracts################## Amount reclassified from accumulated other comprehensive income####61######(79##)####17## Not Designated as Hedging Instruments################## Foreign exchange contracts####(73##)####383######27## Equity contracts####(420##)####13######(6##) Other contracts####(41##)####(85##)####15##


Gains (losses), net of tax, on derivative instruments recognized in our consolidated comprehensive income statements were as follows: (In millions)############## Year Ended June 30,####2023####2022######2021 Designated as Cash Flow Hedging Instruments############## Foreign exchange contracts############## Included in effectiveness assessment##$##34##$##(57##)##$##34


MSFT NOTE 6 — INVENTORIES

The components of inventories were as follows: ######(In millions)#### June 30,####2023######2022 Raw materials##$##709####$##1,144 Work in process####23######82 Finished goods####1,768######2,516 Total##$##2,500####$##3,742


MSFT NOTE 7 — PROPERTY AND EQUIPMENT

The components of property and equipment were as follows: ######(In millions)###### June 30,####2023######2022## Land##$##5,683####$##4,734## Buildings and improvements####68,465######55,014## Leasehold improvements####8,537######7,819## Computer equipment and software####74,961######60,631## Furniture and equipment####6,246######5,860## Total, at cost####163,892######134,058## Accumulated depreciation####(68,251##)####(59,660##) Total, net##$##95,641####$##74,398##


MSFT NOTE 7 — PROPERTY AND EQUIPMENT

During fiscal years 2023, 2022, and 2021, depreciation expense was $11.0 billion, $12.6 billion, and $9.3 billion, respectively. Depreciation expense declined in fiscal year 2023 due to the change in estimated useful lives of our server and network equipment.


MSFT NOTE 7 — PROPERTY AND EQUIPMENT

As of June 30, 2023, we have committed $13.5 billion for the construction of new buildings, building improvements, and leasehold improvements, primarily related to datacenters.


MSFT NOTE 8 — BUSINESS COMBINATIONS

Nuance Communications, Inc.


MSFT NOTE 8 — BUSINESS COMBINATIONS

On March 4, 2022, we completed our acquisition of Nuance Communications, Inc. (“Nuance”) for a total purchase price of $18.8 billion, consisting primarily of cash. Nuance is a cloud and artificial intelligence (“AI”) software provider with healthcare and enterprise AI experience, and the acquisition will build on our industry-specific cloud offerings. The financial results of Nuance have been included in our consolidated financial statements since the date of the acquisition. Nuance is reported as part of our Intelligent Cloud segment.


MSFT NOTE 8 — BUSINESS COMBINATIONS

The allocation of the purchase price to goodwill was completed as of December 31, 2022. The major classes of assets and liabilities to which we have allocated the purchase price were as follows: (In millions)###### Goodwill (a)##$##16,326## Intangible assets####4,365## Other assets####42## Other liabilities (b)####(1,972##) Total##$##18,761##


MSFT NOTE 8 — BUSINESS COMBINATIONS

(a)Goodwill was assigned to our Intelligent Cloud segment and was primarily attributed to increased synergies that are expected to be achieved from the integration of Nuance. None of the goodwill is expected to be deductible for income tax purposes.


MSFT NOTE 8 — BUSINESS COMBINATIONS

(b)Includes $986 million of convertible senior notes issued by Nuance in 2015 and 2017, substantially all of which have been redeemed.


MSFT NOTE 8 — BUSINESS COMBINATIONS

Following are the details of the purchase price allocated to the intangible assets acquired: (In millions, except average life)####Amount####Weighted Average Life Customer-related##$##2,610##9 years## Technology-based####1,540##5 years## Marketing-related####215##4 years## Total##$##4,365##7 years##


MSFT NOTE 8 — BUSINESS COMBINATIONS

ZeniMax Media Inc.


MSFT NOTE 8 — BUSINESS COMBINATIONS

On March 9, 2021, we completed our acquisition of ZeniMax Media Inc. (“ZeniMax”), the parent company of Bethesda Softworks LLC (“Bethesda”), for a total purchase price of $8.1 billion, consisting primarily of cash. The purchase price included $766 million of cash and cash equivalents acquired. Bethesda is one of the largest, privately held game developers and publishers in the world, and brings a broad portfolio of games, technology, and talent to Xbox. The financial results of ZeniMax have been included in our consolidated financial statements since the date of the acquisition. ZeniMax is reported as part of our More Personal Computing segment.


MSFT NOTE 8 — BUSINESS COMBINATIONS

The allocation of the purchase price to goodwill was completed as of December 31, 2021. The major classes of assets and liabilities to which we have allocated the purchase price were as follows: (In millions)###### Cash and cash equivalents##$##766## Goodwill####5,510## Intangible assets####1,968## Other assets####121## Other liabilities####(244##) Total##$##8,121##


MSFT NOTE 8 — BUSINESS COMBINATIONS

Goodwill was assigned to our More Personal Computing segment. The goodwill was primarily attributed to increased synergies that are expected to be achieved from the integration of ZeniMax. None of the goodwill is expected to be deductible for income tax purposes.


MSFT NOTE 8 — BUSINESS COMBINATIONS

Following are details of the purchase price allocated to the intangible assets acquired: (In millions, except average life)####Amount####Weighted Average Life Technology-based##$##1,341##4 years## Marketing-related####627##11 years## Total##$##1,968##6 years##


MSFT NOTE 8 — BUSINESS COMBINATIONS

Activision Blizzard, Inc.


MSFT NOTE 8 — BUSINESS COMBINATIONS

On January 18, 2022, we entered into a definitive agreement to acquire Activision Blizzard, Inc. (“Activision Blizzard”) for $95.00 per share in an all-cash transaction valued at $68.7 billion, inclusive of Activision Blizzard’s net cash. Activision Blizzard is a leader in game development and an interactive entertainment content publisher. The acquisition will accelerate the growth in our gaming business across mobile, PC, console, and cloud gaming. The acquisition has been approved by Activision Blizzard’s shareholders. We continue to work toward closing the transaction subject to obtaining required regulatory approvals and satisfaction of other customary closing conditions. Microsoft and Activision Blizzard have jointly agreed to extend the merger agreement through October 18, 2023 to allow for additional time to resolve remaining regulatory concerns.


MSFT NOTE 9 — GOODWILL

Changes in the carrying amount of goodwill were as follows: (In millions)####June 30, 2021####Acquisitions####Other######June 30, 2022####Acquisitions####Other######June 30, 2023 Productivity and Business Processes##$##24,317##$##599##$##(105##)##$##24,811##$##11##$##(47##)##$##24,775 Intelligent Cloud####13,256####16,879####47######30,182####223####64######30,469 More Personal Computing####12,138####648####(255##)####12,531####0####111######12,642 Total##$##49,711##$##18,126##$##(313##)##$##67,524##$##234##$##128####$##67,886


MSFT NOTE 9 — GOODWILL

The measurement periods for the valuation of assets acquired and liabilities assumed end as soon as information on the facts and circumstances that existed as of the acquisition dates becomes available, but do not exceed 12 months. Adjustments in purchase price allocations may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined.


MSFT NOTE 9 — GOODWILL

Any change in the goodwill amounts resulting from foreign currency translations and purchase accounting adjustments are presented as “Other” in the table above. Also included in “Other” are business dispositions and transfers between segments due to reorganizations, as applicable.


MSFT Goodwill Impairment

We test goodwill for impairment annually on May 1 at the reporting unit level, primarily using a discounted cash flow methodology with a peer-based, risk-adjusted weighted average cost of capital. We believe use of a discounted cash flow approach is the most reliable indicator of the fair values of the businesses.


MSFT Goodwill Impairment

No instances of impairment were identified in our May 1, 2023, May 1, 2022, or May 1, 2021 tests. As of June 30, 2023 and 2022, accumulated goodwill impairment was $11.3 billion.


MSFT NOTE 10 — INTANGIBLE ASSETS

The components of intangible assets, all of which are finite-lived, were as follows: (In millions)####Gross Carrying Amount####Accumulated Amortization######Net Carrying Amount####Gross Carrying Amount####Accumulated Amortization######Net Carrying Amount June 30,##############2023##############2022 Technology-based##$##11,245##$##(7,589##)##$##3,656##$##11,277##$##(6,958##)##$##4,319 Customer-related####7,281####(4,047##)####3,234####7,342####(3,171##)####4,171 Marketing-related####4,935####(2,473##)####2,462####4,942####(2,143##)####2,799 Contract-based####29####(15##)####14####16####(7##)####9 Total##$##23,490##$##(14,124##)##$##9,366##$##23,577##$##(12,279##)##$##11,298


MSFT NOTE 10 — INTANGIBLE ASSETS

No material impairments of intangible assets were identified during fiscal years 2023, 2022, or 2021. We estimate that we have no significant residual value related to our intangible assets.


MSFT NOTE 10 — INTANGIBLE ASSETS

The components of intangible assets acquired during the periods presented were as follows: (In millions)####Amount##Weighted Average Life####Amount##Weighted Average Life Year Ended June 30,####2023######2022## Technology-based##$##522##7 years##$##2,611##4 years Customer-related####0##0 years####2,837##9 years Marketing-related####7##5 years####233##4 years Contract-based####12##3 years####0##0 years Total##$##541##6 years##$##5,681##7 years


MSFT NOTE 10 — INTANGIBLE ASSETS

Intangible assets amortization expense was $2.5 billion, $2.0 billion, and $1.6 billion for fiscal years 2023, 2022, and 2021, respectively.


MSFT NOTE 10 — INTANGIBLE ASSETS

The following table outlines the estimated future amortization expense related to intangible assets held as of June 30, 2023: (In millions)#### Year Ending June 30,#### 2024##$##2,363 2025####1,881 2026####1,381 2027####929 2028####652 Thereafter####2,160 Total##$##9,366


MSFT NOTE 11 — DEBT

The components of debt were as follows: (In millions, issuance by calendar year)####Maturities (calendar year)######Stated Interest Rate######Effective Interest Rate####June 30, 2023########June 30, 2022## 2009 issuance of $3.8 billion######2039######5.20%######5.24%##$##520####$##520## 2010 issuance of $4.8 billion######2040######4.50%######4.57%####486######486## 2011 issuance of $2.3 billion######2041######5.30%######5.36%####718######718## 2012 issuance of $2.3 billion######2042######3.50%######3.57%####454######1,204## 2013 issuance of $5.2 billion##2023##–##2043##3.63%##–##4.88%##3.73%##–##4.92%####1,814######2,814## 2013 issuance of €4.1 billion##2028##–##2033##2.63%##–##3.13%##2.69%##–##3.22%####2,509######2,404## 2015 issuance of $23.8 billion##2025##–##2055##2.70%##–##4.75%##2.77%##–##4.78%####9,805######10,805## 2016 issuance of $19.8 billion##2023##–##2056##2.00%##–##3.95%##2.10%##–##4.03%####9,430######9,430## 2017 issuance of $17.0 billion##2024##–##2057##2.88%##–##4.50%##3.04%##–##4.53%####8,945######8,945## 2020 issuance of $10.0 billion##2050##–##2060##2.53%##–##2.68%##2.53%##–##2.68%####10,000######10,000## 2021 issuance of $8.2 billion##2052##–##2062##2.92%##–##3.04%##2.92%##–##3.04%####8,185######8,185## Total face value######################52,866######55,511## Unamortized discount and issuance costs######################(438##)####(471##) Hedge fair value adjustments (a)######################(106##)####(68##) Premium on debt exchange######################(5,085##)####(5,191##) Total debt######################47,237######49,781## Current portion of long-term debt######################(5,247##)####(2,749##) Long-term debt####################$##41,990####$##47,032##


MSFT NOTE 11 — DEBT

(a)Refer to Note 5 – Derivatives for further information on the interest rate swaps related to fixed-rate debt.


MSFT NOTE 11 — DEBT

As of June 30, 2023 and 2022, the estimated fair value of long-term debt, including the current portion, was $46.2 billion and $50.9 billion, respectively. The estimated fair values are based on Level 2 inputs.


MSFT NOTE 11 — DEBT

Debt in the table above is comprised of senior unsecured obligations and ranks equally with our other outstanding obligations. Interest is paid semi-annually, except for the Euro-denominated debt, which is paid annually. Cash paid for interest on our debt for fiscal years 2023, 2022, and 2021 was $1.7 billion, $1.9 billion, and $2.0 billion, respectively.


MSFT NOTE 11 — DEBT

The following table outlines maturities of our long-term debt, including the current portion, as of June 30, 2023: (In millions)#### Year Ending June 30,#### 2024##$##5,250 2025####2,250 2026####3,000 2027####8,000 2028####0 Thereafter####34,366 Total##$##52,866


MSFT Provision for Income Taxes

The components of the provision for income taxes were as follows: ########(In millions)########## Year Ended June 30,####2023######2022######2021## Current Taxes################## U.S. federal##$##14,009####$##8,329####$##3,285## U.S. state and local####2,322######1,679######1,229## Foreign####6,678######6,672######5,467## Current taxes##$##23,009####$##16,680####$##9,981## Deferred Taxes################## U.S. federal##$##(6,146##)##$##(4,815##)##$##25## U.S. state and local####(477##)####(1,062##)####(204##) Foreign####564######175######29## Deferred taxes##$##(6,059##)##$##(5,702##)##$##(150##) Provision for income taxes##$##16,950####$##10,978####$##9,831##


MSFT Provision for Income Taxes

U.S. and foreign components of income before income taxes were as follows: ######(In millions)###### Year Ended June 30,####2023####2022####2021 U.S.##$##52,917##$##47,837##$##34,972 Foreign####36,394####35,879####36,130 Income before income taxes##$##89,311##$##83,716##$##71,102


MSFT Effective Tax Rate

The items accounting for the difference between income taxes computed at the U.S. federal statutory rate and our effective rate were as follows: Year Ended June 30,##2023##2022##2021 Federal statutory rate##21.0%##21.0%##21.0% Effect of:###### Foreign earnings taxed at lower rates##(1.8)%##(1.3)%##(2.7)% Impact of intangible property transfers##0%##(3.9)%##0% Foreign-derived intangible income deduction##(1.3)%##(1.1)%##(1.3)% State income taxes, net of federal benefit##1.6%##1.4%##1.4% Research and development credit##(1.1)%##(0.9)%##(0.9)% Excess tax benefits relating to stock-based compensation##(0.7)%##(1.9)%##(2.4)% Interest, net##0.8%##0.5%##0.5% Other reconciling items, net##0.5%##(0.7)%##(1.8)% Effective rate##19.0%##13.1%##13.8%


MSFT Effective Tax Rate

In the first quarter of fiscal year 2022, we transferred certain intangible properties from our Puerto Rico subsidiary to the U.S. The transfer of intangible properties resulted in a $3.3 billion net income tax benefit in the first quarter of fiscal year 2022, as the value of future U.S. tax deductions exceeded the current tax liability from the U.S. global intangible low-taxed income (“GILTI”) tax.


MSFT Effective Tax Rate

We have historically paid India withholding taxes on software sales through distributor withholding and tax audit assessments in India. In March 2021, the India Supreme Court ruled favorably in the case of Engineering Analysis Centre of Excellence Private Limited vs The Commissioner of Income Tax for companies in 86 separate appeals, some dating back to 2012, holding that software sales are not subject to India withholding taxes. Although we were not a party to the appeals, our software sales in India were determined to be not subject to withholding taxes. Therefore, we recorded a net income tax benefit of $620 million in the third quarter of fiscal year 2021 to reflect the results of the India Supreme Court decision impacting fiscal year 1996 through fiscal year 2016.


MSFT Effective Tax Rate

The decrease from the federal statutory rate in fiscal year 2023 is primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations center in Ireland. The decrease from the federal statutory rate in fiscal year 2022 is primarily due to the net income tax benefit related to the transfer of intangible properties, earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations center in Ireland, and tax benefits relating to stock-based compensation. The decrease from the federal statutory rate in fiscal year 2021 is primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland and Puerto Rico, tax benefits relating to stock-based compensation, and tax benefits from the India Supreme Court decision on withholding taxes. In fiscal year 2023, our foreign regional operating center in Ireland, which is taxed at a rate lower than the U.S. rate, generated 81% of our foreign income before tax. In fiscal years 2022 and 2021, our foreign regional operating centers in Ireland and Puerto Rico, which are taxed at rates lower than the U.S. rate, generated 71% and 82% of our foreign income before tax. Other reconciling items, net consists primarily of tax credits and GILTI tax, and in fiscal year 2021, includes tax benefits from the India Supreme Court decision on withholding taxes. In fiscal years 2023, 2022, and 2021, there were no individually significant other reconciling items.


MSFT Effective Tax Rate

The increase in our effective tax rate for fiscal year 2023 compared to fiscal year 2022 was primarily due to a $3.3 billion net income tax benefit in the first quarter of fiscal year 2022 related to the transfer of intangible properties and a decrease in tax benefits relating to stock-based compensation. The decrease in our effective tax rate for fiscal year 2022 compared to fiscal year 2021 was primarily due to a $3.3 billion net income tax benefit in the first quarter of fiscal year 2022 related to the transfer of intangible properties, offset in part by changes in the mix of our income before income taxes between the U.S. and foreign countries, as well as tax benefits in the prior year from the India Supreme Court decision on withholding taxes, an agreement between the U.S. and India tax authorities related to transfer pricing, and final Tax Cuts and Jobs Act (“TCJA”) regulations.


MSFT Effective Tax Rate

The components of the deferred income tax assets and liabilities were as follows: (In millions)############ June 30,####2023######2022## Deferred Income Tax Assets############ Stock-based compensation expense##$##681####$##601## Accruals, reserves, and other expenses####3,131######2,874## Loss and credit carryforwards####1,441######1,546## Amortization (a)####9,440######10,183## Leasing liabilities####5,041######4,557## Unearned revenue####3,296######2,876## Book/tax basis differences in investments and debt####373######0## Capitalized research and development (a)####6,958######473## Other####489######461## Deferred income tax assets####30,850######23,571## Less valuation allowance####(939##)####(1,012##) Deferred income tax assets, net of valuation allowance##$##29,911####$##22,559## Deferred Income Tax Liabilities############ Book/tax basis differences in investments and debt##$##0####$##(174##) Leasing assets####(4,680##)####(4,291##) Depreciation####(2,674##)####(1,602##) Deferred tax on foreign earnings####(2,738##)####(3,104##) Other####(89##)####(103##) Deferred income tax liabilities##$##(10,181##)##$##(9,274##) Net deferred income tax assets##$##19,730####$##13,285## Reported As############ Other long-term assets##$##20,163####$##13,515## Long-term deferred income tax liabilities####(433##)####(230##) Net deferred income tax assets##$##19,730####$##13,285##


MSFT Effective Tax Rate

(a)Provisions enacted in the TCJA related to the capitalization for tax purposes of research and development expenditures became effective on July 1, 2022. These provisions require us to capitalize research and development expenditures and amortize them on our U.S. tax return over five or fifteen years, depending on where research is conducted.


MSFT Effective Tax Rate

Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when the taxes are paid or recovered.


MSFT Effective Tax Rate

As of June 30, 2023, we had federal, state, and foreign net operating loss carryforwards of $509 million, $1.2 billion, and $2.3 billion, respectively. The federal and state net operating loss carryforwards have varying expiration dates ranging from fiscal year 2024 to 2043 or indefinite carryforward periods, if not utilized. The majority of our foreign net operating loss carryforwards do not expire. Certain acquired net operating loss carryforwards are subject to an annual limitation but are expected to be realized with the exception of those which have a valuation allowance. As of June 30, 2023, we had $456 million federal capital loss carryforwards for U.S. tax purposes from our acquisition of Nuance. The federal capital loss carryforwards are subject to an annual limitation and will expire in fiscal year 2025.


MSFT Effective Tax Rate

The valuation allowance disclosed in the table above relates to the foreign net operating loss carryforwards, federal capital loss carryforwards, and other net deferred tax assets that may not be realized.


MSFT Effective Tax Rate

Income taxes paid, net of refunds, were $23.1 billion, $16.0 billion, and $13.4 billion in fiscal years 2023, 2022, and 2021, respectively.


MSFT Uncertain Tax Positions

Gross unrecognized tax benefits related to uncertain tax positions as of June 30, 2023, 2022, and 2021, were $17.1 billion, $15.6 billion, and $14.6 billion, respectively, which were primarily included in long-term income taxes in our consolidated balance sheets. If recognized, the resulting tax benefit would affect our effective tax rates for fiscal years 2023, 2022, and 2021 by $14.4 billion, $13.3 billion, and $12.5 billion, respectively.


MSFT Uncertain Tax Positions

As of June 30, 2023, 2022, and 2021, we had accrued interest expense related to uncertain tax positions of $5.2 billion, $4.3 billion, and $4.3 billion, respectively, net of income tax benefits. The provision for income taxes for fiscal years 2023, 2022, and 2021 included interest expense related to uncertain tax positions of $918 million, $36 million, and $274 million, respectively, net of income tax benefits.


MSFT Uncertain Tax Positions

The aggregate changes in the gross unrecognized tax benefits related to uncertain tax positions were as follows: (In millions)################## Year Ended June 30,####2023######2022######2021## Beginning unrecognized tax benefits##$##15,593####$##14,550####$##13,792## Decreases related to settlements####(329##)####(317##)####(195##) Increases for tax positions related to the current year####1,051######1,145######790## Increases for tax positions related to prior years####870######461######461## Decreases for tax positions related to prior years####(60##)####(246##)####(297##) Decreases due to lapsed statutes of limitations####(5##)####0######(1##) Ending unrecognized tax benefits##$##17,120####$##15,593####$##14,550##


MSFT Uncertain Tax Positions

We settled a portion of the Internal Revenue Service (“IRS”) audit for tax years 2004 to 2006 in fiscal year 2011. In February 2012, the IRS withdrew its 2011 Revenue Agents Report related to unresolved issues for tax years 2004 to 2006 and reopened the audit phase of the examination. We also settled a portion of the IRS audit for tax years 2007 to 2009 in fiscal year 2016, and a portion of the IRS audit for tax years 2010 to 2013 in fiscal year 2018. In the second quarter of fiscal year 2021, we settled an additional portion of the IRS audits for tax years 2004 to 2013 and made a payment of $1.7 billion, including tax and interest. We remain under audit for tax years 2004 to 2017.


MSFT Uncertain Tax Positions

As of June 30, 2023, the primary unresolved issues for the IRS audits relate to transfer pricing, which could have a material impact in our consolidated financial statements when the matters are resolved. We believe our allowances for income tax contingencies are adequate. We have not received a proposed assessment for the unresolved key transfer pricing issues. We do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our tax contingencies for these issues within the next 12 months.


MSFT Uncertain Tax Positions

We are subject to income tax in many jurisdictions outside the U.S. Our operations in certain jurisdictions remain subject to examination for tax years 1996 to 2022, some of which are currently under audit by local tax authorities. The resolution of each of these audits is not expected to be material to our consolidated financial statements.


MSFT NOTE 13 — UNEARNED REVENUE

Unearned revenue by segment was as follows: (In millions)######## June 30,####2023####2022 Productivity and Business Processes##$##27,572##$##24,558 Intelligent Cloud####21,563####19,371 More Personal Computing####4,678####4,479 Total##$##53,813##$##48,408


MSFT NOTE 13 — UNEARNED REVENUE

Changes in unearned revenue were as follows: (In millions)###### Year Ended June 30, 2023###### Balance, beginning of period##$##48,408## Deferral of revenue####123,935## Recognition of unearned revenue####(118,530##) Balance, end of period##$##53,813##


MSFT NOTE 13 — UNEARNED REVENUE

Revenue allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods, was $229 billion as of June 30, 2023, of which $224 billion is related to the commercial portion of revenue. We expect to recognize approximately 45% of this revenue over the next 12 months and the remainder thereafter.


MSFT NOTE 14 — LEASES

We have operating and finance leases for datacenters, corporate offices, research and development facilities, Microsoft Experience Centers, and certain equipment. Our leases have remaining lease terms of less than 1 year to 18 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within 1 year.


MSFT NOTE 14 — LEASES

The components of lease expense were as follows: (In millions)############ Year Ended June 30,####2023####2022####2021 Operating lease cost##$##2,875##$##2,461##$##2,127 Finance lease cost:############ Amortization of right-of-use assets##$##1,352##$##980##$##921 Interest on lease liabilities####501####429####386 Total finance lease cost##$##1,853##$##1,409##$##1,307


MSFT NOTE 14 — LEASES

Supplemental cash flow information related to leases was as follows: (In millions)############ Year Ended June 30,####2023####2022####2021 Cash paid for amounts included in the measurement of lease liabilities:############ Operating cash flows from operating leases##$##2,706##$##2,368##$##2,052 Operating cash flows from finance leases####501####429####386 Financing cash flows from finance leases####1,056####896####648 Right-of-use assets obtained in exchange for lease obligations:############ Operating leases####3,514####5,268####4,380 Finance leases####3,128####4,234####3,290


MSFT NOTE 14 — LEASES

Supplemental balance sheet information related to leases was as follows: (In millions, except lease term and discount rate)############ June 30,####2023######2022## Operating Leases############ Operating lease right-of-use assets##$##14,346####$##13,148## Other current liabilities##$##2,409####$##2,228## Operating lease liabilities####12,728######11,489## Total operating lease liabilities##$##15,137####$##13,717## Finance Leases############ Property and equipment, at cost##$##20,538####$##17,388## Accumulated depreciation####(4,647##)####(3,285##) Property and equipment, net##$##15,891####$##14,103## Other current liabilities##$##1,197####$##1,060## Other long-term liabilities####15,870######13,842## Total finance lease liabilities##$##17,067####$##14,902## Weighted Average Remaining Lease Term############ Operating leases####8 years######8 years## Finance leases####11 years######12 years## Weighted Average Discount Rate############ Operating leases####2.9%######2.1%## Finance leases####3.4%######3.1%##


MSFT NOTE 14 — LEASES

The following table outlines maturities of our lease liabilities as of June 30, 2023: (In millions)############ Year Ending June 30,####Operating  Leases######Finance  Leases## 2024##$##2,784####$##1,747## 2025####2,508######2,087## 2026####2,142######1,771## 2027####1,757######1,780## 2028####1,582######1,787## Thereafter####6,327######11,462## Total lease payments####17,100######20,634## Less imputed interest####(1,963##)####(3,567##) Total##$##15,137####$##17,067##


MSFT NOTE 14 — LEASES

As of June 30, 2023, we have additional operating and finance leases, primarily for datacenters, that have not yet commenced of $7.7 billion and $34.4 billion, respectively. These operating and finance leases will commence between fiscal year 2024 and fiscal year 2030 with lease terms of 1 year to 18 years.


MSFT U.S. Cell Phone Litigation

Microsoft Mobile Oy, a subsidiary of Microsoft, along with other handset manufacturers and network operators, is a defendant in 46 lawsuits, including 45 lawsuits filed in the Superior Court for the District of Columbia by individual plaintiffs who allege that radio emissions from cellular handsets caused their brain tumors and other adverse health effects. We assumed responsibility for these claims in our agreement to acquire Nokia’s Devices and Services business and have been substituted for the Nokia defendants. Nine of these cases were filed in 2002 and are consolidated for certain pre-trial proceedings; the remaining cases are stayed. In a separate 2009 decision, the Court of Appeals for the District of Columbia held that adverse health effect claims arising from the use of cellular handsets that operate within the U.S. Federal Communications Commission radio frequency emission guidelines (“FCC Guidelines”) are pre-empted by federal law. The plaintiffs allege that their handsets either operated outside the FCC Guidelines or were manufactured before the FCC Guidelines went into effect. The lawsuits also allege an industry-wide conspiracy to manipulate the science and testing around emission guidelines.


MSFT U.S. Cell Phone Litigation

In 2013, the defendants in the consolidated cases moved to exclude the plaintiffs’ expert evidence of general causation on the basis of flawed scientific methodologies. In 2014, the trial court granted in part and denied in part the defendants’ motion to exclude the plaintiffs’ general causation experts. The defendants filed an interlocutory appeal to the District of Columbia Court of Appeals challenging the standard for evaluating expert scientific evidence. In October 2016, the Court of Appeals issued its decision adopting the standard advocated by the defendants and remanding the cases to the trial court for further proceedings under that standard. The plaintiffs have filed supplemental expert evidence, portions of which were stricken by the court. A hearing on general causation took place in September of 2022. In April of 2023, the court granted defendants’ motion to strike the testimony of plaintiffs’ experts that cell phones cause brain cancer and entered an order excluding all of plaintiffs’ experts from testifying.


MSFT Irish Data Protection Commission Matter

In 2018, the Irish Data Protection Commission (“IDPC”) began investigating a complaint against LinkedIn as to whether LinkedIn’s targeted advertising practices violated the recently implemented European Union General Data Protection Regulation (“GDPR”). Microsoft cooperated throughout the period of inquiry. In April 2023, the IDPC provided LinkedIn with a non-public preliminary draft decision alleging GDPR violations and proposing a fine. Microsoft intends to challenge the preliminary draft decision. There is no set timeline for the IDPC to issue a final decision.


MSFT Other Contingencies

We also are subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business. Although management currently believes that resolving claims against us, individually or in aggregate, will not have a material adverse impact in our consolidated financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.


MSFT Other Contingencies

As of June 30, 2023, we accrued aggregate legal liabilities of $617 million. While we intend to defend these matters vigorously, adverse outcomes that we estimate could reach approximately $600 million in aggregate beyond recorded amounts are reasonably possible. Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact in our consolidated financial statements for the period in which the effects become reasonably estimable.


MSFT Shares Outstanding

Shares of common stock outstanding were as follows: (In millions)############ Year Ended June 30,##2023####2022####2021## Balance, beginning of year##7,464####7,519####7,571## Issued##37####40####49## Repurchased##(69##)##(95##)##(101##) Balance, end of year##7,432####7,464####7,519##


MSFT Share Repurchases

On September 18, 2019, our Board of Directors approved a share repurchase program authorizing up to $40.0 billion in share repurchases. This share repurchase program commenced in February 2020 and was completed in November 2021.


MSFT Share Repurchases

On September 14, 2021, our Board of Directors approved a share repurchase program authorizing up to $60.0 billion in share repurchases. This share repurchase program commenced in November 2021, following completion of the program approved on September 18, 2019, has no expiration date, and may be terminated at any time. As of June 30, 2023, $22.3 billion remained of this $60.0 billion share repurchase program.


MSFT Share Repurchases

We repurchased the following shares of common stock under the share repurchase programs: (In millions)##Shares######Amount##Shares######Amount##Shares######Amount Year Ended June 30,####2023########2022########2021#### First Quarter##17####$##4,600##21####$##6,200##25####$##5,270 Second Quarter##20######4,600##20######6,233##27######5,750 Third Quarter##18######4,600##26######7,800##25######5,750 Fourth Quarter##14######4,600##28######7,800##24######6,200 Total##69####$##18,400##95####$##28,033##101####$##22,970


MSFT Share Repurchases

All repurchases were made using cash resources. Shares repurchased during fiscal year 2023 and the fourth and third quarters of fiscal year 2022 were under the share repurchase program approved on September 14, 2021. Shares repurchased during the second quarter of fiscal year 2022 were under the share repurchase programs approved on both September 14, 2021 and September 18, 2019. All other shares repurchased were under the share repurchase program approved on September 18, 2019. The above table excludes shares repurchased to settle employee tax withholding related to the vesting of stock awards of $3.8 billion, $4.7 billion, and $4.4 billion for fiscal years 2023, 2022, and 2021, respectively.


MSFT Dividends

Our Board of Directors declared the following dividends: Declaration Date##Record Date####Payment Date##Dividend Per Share######Amount Fiscal Year 2023##############(In millions) September 20, 2022####November 17, 2022##December 8, 2022##$##0.68##$##5,066 November 29, 2022####February 16, 2023##March 9, 2023####0.68####5,059 March 14, 2023####May 18, 2023##June 8, 2023####0.68####5,054 June 13, 2023####August 17, 2023##September 14, 2023####0.68####5,054 Total########$##2.72##$##20,233 Fiscal Year 2022############## September 14, 2021####November 18, 2021##December 9, 2021##$##0.62##$##4,652 December 7, 2021####February 17, 2022##March 10, 2022####0.62####4,645 March 14, 2022####May 19, 2022##June 9, 2022####0.62####4,632 June 14, 2022####August 18, 2022##September 8, 2022####0.62####4,621 Total########$##2.48##$##18,550


MSFT Dividends

The dividend declared on June 13, 2023 was included in other current liabilities as of June 30, 2023.


MSFT NOTE 17 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes the changes in accumulated other comprehensive income (loss) by component: (In millions)################## Year Ended June 30,####2023######2022######2021## Derivatives################## Balance, beginning of period##$##(13##)##$##(19##)##$##(38##) Unrealized gains (losses), net of tax of $9, $(15), and $9####34######(57##)####34## Reclassification adjustments for (gains) losses included in other income (expense), net####(61##)####79######(17##) Tax expense (benefit) included in provision for income taxes####13######(16##)####2## Amounts reclassified from accumulated other comprehensive income (loss)####(48##)####63######(15##) Net change related to derivatives, net of tax of $(4), $1, and $7####(14##)####6######19## Balance, end of period##$##(27##)##$##(13##)##$##(19##) Investments################## Balance, beginning of period##$##(2,138##)##$##3,222####$##5,478## Unrealized losses, net of tax of $(393), $(1,440), and $(589)####(1,523##)####(5,405##)####(2,216##) Reclassification adjustments for (gains) losses included in other income (expense), net####99######57######(63##) Tax expense (benefit) included in provision for income taxes####(20##)####(12##)####13## Amounts reclassified from accumulated other comprehensive income (loss)####79######45######(50##) Net change related to investments, net of tax of $(373), $(1,428), and $(602)####(1,444##)####(5,360##)####(2,266##) Cumulative effect of accounting changes####0######0######10## Balance, end of period##$##(3,582##)##$##(2,138##)##$##3,222## Translation Adjustments and Other################## Balance, beginning of period##$##(2,527##)##$##(1,381##)##$##(2,254##) Translation adjustments and other, net of tax of $0, $0, and $(9)####(207##)####(1,146##)####873## Balance, end of period##$##(2,734##)##$##(2,527##)##$##(1,381##) Accumulated other comprehensive income (loss), end of period##$##(6,343##)##$##(4,678##)##$##1,822##


MSFT NOTE 18 — EMPLOYEE STOCK AND SAVINGS PLANS

We grant stock-based compensation to employees and directors. Awards that expire or are canceled without delivery of shares generally become available for issuance under the plans. We issue new shares of Microsoft common stock to satisfy vesting of awards granted under our stock plans. We also have an ESPP for all eligible employees.


Stock-based compensation expense and related income tax benefits were as follows: (In millions)############ Year Ended June 30,####2023####2022####2021 Stock-based compensation expense##$##9,611##$##7,502##$##6,118 Income tax benefits related to stock-based compensation####1,651####1,293####1,065


MSFT Stock Plans

Stock awards entitle the holder to receive shares of Microsoft common stock as the award vests. Stock awards generally vest over a service period of four years or five years.


MSFT Executive Incentive Plan

Under the Executive Incentive Plan, the Compensation Committee approves stock awards to executive officers and certain senior executives. RSUs generally vest ratably over a service period of four years. PSUs generally vest over a performance period of three years. The number of shares the PSU holder receives is based on the extent to which the corresponding performance goals have been achieved.


MSFT Activity for All Stock Plans

The fair value of stock awards was estimated on the date of grant using the following assumptions: Year ended June 30,######2023######2022######2021 Dividends per share (quarterly amounts)##$##0.62 – 0.68####$##0.56 – 0.62####$##0.51 – 0.56## Interest rates####2.0% – 5.4%######0.03% – 3.6%######0.01% – 1.5%##


MSFT Activity for All Stock Plans

During fiscal year 2023, the following activity occurred under our stock plans: ##Shares########Weighted Average Grant-Date Fair Value ##(In millions)######## ######Stock Awards#### Nonvested balance, beginning of year####93####$##227.59 Granted (a)####56######252.59 Vested####(44##)####206.90 Forfeited####(9##)####239.93 Nonvested balance, end of year####96####$##250.37


MSFT Activity for All Stock Plans

(a)Includes 1 million, 1 million, and 2 million of PSUs granted at target and performance adjustments above target levels for fiscal years 2023, 2022, and 2021, respectively.


MSFT Activity for All Stock Plans

As of June 30, 2023, total unrecognized compensation costs related to stock awards were $18.6 billion. These costs are expected to be recognized over a weighted average period of three years. The weighted average grant-date fair value of stock awards granted was $252.59, $291.22, and $221.13 for fiscal years 2023, 2022, and 2021, respectively. The fair value of stock awards vested was $11.9 billion, $14.1 billion, and $13.4 billion, for fiscal years 2023, 2022, and 2021, respectively. As of June 30, 2023, an aggregate of 164 million shares were authorized for future grant under our stock plans.


MSFT Employee Stock Purchase Plan

We have an ESPP for all eligible employees. Shares of our common stock may be purchased by employees at three-month intervals at 90% of the fair market value on the last trading day of each three-month period. Employees may purchase shares having a value not exceeding 15% of their gross compensation during an offering period.


MSFT Employee Stock Purchase Plan

Employees purchased the following shares during the periods presented: (Shares in millions)############ Year Ended June 30,####2023####2022####2021 Shares purchased####7####7####8 Average price per share##$##245.59##$##259.55##$##207.88


MSFT Employee Stock Purchase Plan

As of June 30, 2023, 74 million shares of our common stock were reserved for future issuance through the ESPP.


MSFT Savings Plans

We have savings plans in the U.S. that qualify under Section 401(k) of the Internal Revenue Code, and a number of savings plans in international locations. Eligible U.S. employees may contribute a portion of their salary into the savings plans, subject to certain limitations. We match a portion of each dollar a participant contributes into the plans. Employer-funded retirement benefits for all plans were $1.6 billion, $1.4 billion, and $1.2 billion in fiscal years 2023, 2022, and 2021, respectively, and were expensed as contributed.


MSFT NOTE 19 — SEGMENT INFORMATION AND GEOGRAPHIC DATA

In its operation of the business, management, including our chief operating decision maker, who is also our Chief Executive Officer, reviews certain financial information, including segmented internal profit and loss statements prepared on a basis not consistent with GAAP. During the periods presented, we reported our financial performance based on the following segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.


We have recast certain prior period amounts to conform to the way we internally manage and monitor our business.


Our reportable segments are described below.


MSFT Productivity and Business Processes

Our Productivity and Business Processes segment consists of products and services in our portfolio of productivity, communication, and information services, spanning a variety of devices and platforms. This segment primarily comprises: •Office Commercial (Office 365 subscriptions, the Office 365 portion of Microsoft 365 Commercial subscriptions, and Office licensed on-premises), comprising Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, Microsoft Viva, and Microsoft 365 Copilot. •Office Consumer, including Microsoft 365 Consumer subscriptions, Office licensed on-premises, and other Office services. •LinkedIn, including Talent Solutions, Marketing Solutions, Premium Subscriptions, and Sales Solutions. •Dynamics business solutions, including Dynamics 365, comprising a set of intelligent, cloud-based applications across ERP, CRM (including Customer Insights), Power Apps, and Power Automate; and on-premises ERP and CRM applications.


MSFT Intelligent Cloud

Our Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that can power modern business and developers. This segment primarily comprises: •Server products and cloud services, including Azure and other cloud services; SQL Server, Windows Server, Visual Studio, System Center, and related Client Access Licenses (“CALs”); and Nuance and GitHub. •Enterprise Services, including Enterprise Support Services, Industry Solutions (formerly Microsoft Consulting Services), and Nuance professional services.


MSFT More Personal Computing

Our More Personal Computing segment consists of products and services that put customers at the center of the experience with our technology. This segment primarily comprises: •Windows, including Windows OEM licensing and other non-volume licensing of the Windows operating system; Windows Commercial, comprising volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings; patent licensing; and Windows Internet of Things. •Devices, including Surface, HoloLens, and PC accessories. •Gaming, including Xbox hardware and Xbox content and services, comprising first- and third-party content (including games and in-game content), Xbox Game Pass and other subscriptions, Xbox Cloud Gaming, advertising, third-party disc royalties, and other cloud services. •Search and news advertising, comprising Bing (including Bing Chat), Microsoft News, Microsoft Edge, and third-party affiliates.


MSFT More Personal Computing

Revenue and costs are generally directly attributed to our segments. However, due to the integrated structure of our business, certain revenue recognized and costs incurred by one segment may benefit other segments. Revenue from certain contracts is allocated among the segments based on the relative value of the underlying products and services, which can include allocation based on actual prices charged, prices when sold separately, or estimated costs plus a profit margin. Cost of revenue is allocated in certain cases based on a relative revenue methodology. Operating expenses that are allocated primarily include those relating to marketing of products and services from which multiple segments benefit and are generally allocated based on relative gross margin.


MSFT More Personal Computing

In addition, certain costs are incurred at a corporate level and allocated to our segments. These allocated costs  generally include legal, including settlements and fines, information technology, human resources, finance, excise taxes, field selling, shared facilities services, customer service and support, and severance incurred as part of a corporate program. Each allocation is measured differently based on the specific facts and circumstances of the costs being allocated and is generally based on relative gross margin or relative headcount.


MSFT More Personal Computing

Segment revenue and operating income were as follows during the periods presented: (In millions)############ Year Ended June 30,####2023####2022####2021 Revenue############ Productivity and Business Processes##$##69,274##$##63,364##$##53,915 Intelligent Cloud####87,907####74,965####59,728 More Personal Computing####54,734####59,941####54,445 Total##$##211,915##$##198,270##$##168,088 Operating Income############ Productivity and Business Processes##$##34,189##$##29,690##$##24,351 Intelligent Cloud####37,884####33,203####26,471 More Personal Computing####16,450####20,490####19,094 Total##$##88,523##$##83,383##$##69,916


MSFT More Personal Computing

No sales to an individual customer or country other than the United States accounted for more than 10% of revenue for fiscal years 2023, 2022, or 2021. Revenue, classified by the major geographic areas in which our customers were located, was as follows: (In millions)############ Year Ended June 30,####2023####2022####2021 United States (a)##$##106,744##$##100,218##$##83,953 Other countries####105,171####98,052####84,135 Total##$##211,915##$##198,270##$##168,088


MSFT More Personal Computing

(a)Includes billings to OEMs and certain multinational organizations because of the nature of these businesses and the impracticability of determining the geographic source of the revenue.


MSFT More Personal Computing

Revenue, classified by significant product and service offerings, was as follows: (In millions)############ Year Ended June 30,####2023####2022####2021 Server products and cloud services##$##79,970##$##67,350##$##52,589 Office products and cloud services####48,728####44,862####39,872 Windows####21,507####24,732####22,488 Gaming####15,466####16,230####15,370 LinkedIn####15,145####13,816####10,289 Search and news advertising####12,208####11,591####9,267 Enterprise Services####7,722####7,407####6,943 Devices####5,521####7,306####7,143 Dynamics####5,437####4,687####3,754 Other####211####289####373 Total##$##211,915##$##198,270##$##168,088


MSFT More Personal Computing

Our Microsoft Cloud revenue, which includes Azure and other cloud services, Office 365 Commercial, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties, was $111.6 billion, $91.4 billion, and $69.1 billion in fiscal years 2023, 2022, and 2021, respectively. These amounts are primarily included in Server products and cloud services, Office products and cloud services, LinkedIn, and Dynamics in the table above.


MSFT More Personal Computing

Assets are not allocated to segments for internal reporting presentations. A portion of amortization and depreciation is included with various other costs in an overhead allocation to each segment. It is impracticable for us to separately identify the amount of amortization and depreciation by segment that is included in the measure of segment profit or loss.


MSFT More Personal Computing

Long-lived assets, excluding financial instruments and tax assets, classified by the location of the controlling statutory company and with countries over 10% of the total shown separately, were as follows: (In millions)############ June 30,####2023####2022####2021 United States##$##114,380##$##106,430##$##76,153 Ireland####16,359####15,505####13,303 Other countries####56,500####44,433####38,858 Total##$##187,239##$##166,368##$##128,314


MSFT REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Microsoft Corporation


MSFT Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Microsoft Corporation and subsidiaries (the "Company") as of June 30, 2023 and 2022, the related consolidated statements of income, comprehensive income, cash flows, and stockholders' equity, for each of the three years in the period ended June 30, 2023, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2023, in conformity with accounting principles generally accepted in the United States of America.


We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated July 27, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting.


MSFT Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.


MSFT Basis for Opinion

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.


MSFT Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.


MSFT Critical Audit Matters

Revenue Recognition – Refer to Note 1 to the financial statements


MSFT Critical Audit Matter Description

The Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company offers customers the ability to acquire multiple licenses of software products and services, including cloud-based services, in its customer agreements through its volume licensing programs.


MSFT Critical Audit Matter Description

Significant judgment is exercised by the Company in determining revenue recognition for these customer agreements, and includes the following: •Determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus together, such as software licenses and related services that are sold with cloud-based services. •The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation. •Identification and treatment of contract terms that may impact the timing and amount of revenue recognized (e.g., variable consideration, optional purchases, and free services). •Determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately.


MSFT Critical Audit Matter Description

Given these factors and due to the volume of transactions, the related audit effort in evaluating management's judgments in determining revenue recognition for these customer agreements was extensive and required a high degree of auditor judgment.


MSFT How the Critical Audit Matter Was Addressed in the Audit

Our principal audit procedures related to the Company's revenue recognition for these customer agreements included the following: ##We tested the effectiveness of controls related to the identification of distinct performance obligations, the determination of the timing of revenue recognition, and the estimation of variable consideration. ##We evaluated management's significant accounting policies related to these customer agreements for reasonableness. ##We selected a sample of customer agreements and performed the following procedures: -##Obtained and read contract source documents for each selection, including master agreements, and other documents that were part of the agreement. -##Tested management's identification and treatment of contract terms. -##Assessed the terms in the customer agreement and evaluated the appropriateness of management's application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions. ##We evaluated the reasonableness of management's estimate of stand-alone selling prices for products and services that are not sold separately. ##We tested the mathematical accuracy of management's calculations of revenue and the associated timing of revenue recognized in the financial statements.


Income Taxes – Uncertain Tax Positions – Refer to Note 12 to the financial statements


MSFT Critical Audit Matter Description

The Company's long-term income taxes liability includes uncertain tax positions related to transfer pricing issues that remain unresolved with the Internal Revenue Service ("IRS"). The Company remains under IRS audit, or subject to IRS audit, for tax years subsequent to 2003. While the Company has settled a portion of the IRS audits, resolution of the remaining matters could have a material impact on the Company's financial statements.


MSFT Critical Audit Matter Description

Conclusions on recognizing and measuring uncertain tax positions involve significant estimates and management judgment and include complex considerations of the Internal Revenue Code, related regulations, tax case laws, and prior-year audit settlements. Given the complexity and the subjective nature of the transfer pricing issues that remain unresolved with the IRS, evaluating management's estimates relating to their determination of uncertain tax positions required extensive audit effort and a high degree of auditor judgment, including involvement of our tax specialists.


Our principal audit procedures to evaluate management's estimates of uncertain tax positions related to unresolved transfer pricing issues included the following: •We evaluated the appropriateness and consistency of management's methods and assumptions used in the identification, recognition, measurement, and disclosure of uncertain tax positions, which included testing the effectiveness of the related internal controls. •We read and evaluated management's documentation, including relevant accounting policies and information obtained by management from outside tax specialists, that detailed the basis of the uncertain tax positions. •We tested the reasonableness of management's judgments regarding the future resolution of the uncertain tax positions, including an evaluation of the technical merits of the uncertain tax positions. •For those uncertain tax positions that had not been effectively settled, we evaluated whether management had appropriately considered new information that could significantly change the recognition, measurement or disclosure of the uncertain tax positions. •We evaluated the reasonableness of management's estimates by considering how tax law, including statutes, regulations and case law, impacted management's judgments.


MSFT July 27, 2023

We have served as the Company's auditor since 1983.


MSFT 9A

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE


MSFT 9A

Not applicable.


MSFT CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.


MSFT REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our consolidated financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use, or disposition of company assets that could have a material effect on our consolidated financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our consolidated financial statements would be prevented or detected.


Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of June 30, 2023. There were no changes in our internal control over financial reporting during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Deloitte & Touche LLP has audited our internal control over financial reporting as of June 30, 2023; their report is included in Item 9A.


To the Stockholders and the Board of Directors of Microsoft Corporation


MSFT Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Microsoft Corporation and subsidiaries (the "Company") as of June 30, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.


We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended June 30, 2023, of the Company and our report dated July 27, 2023, expressed an unqualified opinion on those financial statements.