Item 8. Financial Statements and Supplementary Data

(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, 2020
Changes in Fair Value Recorded in Other Comprehensive Income
Commercial paper			Level 2			$	4,687			$	1			$	0			$	4,688			$	1,618			$	3,070			$	0
Certificates of deposit			Level 2				2,898				0				0				2,898				1,646				1,252				0
U.S. government securities			Level 1				92,067				6,495				(1	)			98,561				3,168				95,393				0
U.S. agency securities			Level 2				2,439				2				0				2,441				449				1,992				0
Foreign government bonds			Level 2				6,982				6				(3	)			6,985				1				6,984				0
Mortgage- and asset-backed securities			Level 2				4,865				41				(6	)			4,900				0				4,900				0
Corporate notes and bonds			Level 2				8,500				327				(17	)			8,810				0				8,810				0
Corporate notes and bonds			Level 3				58				0				0				58				0				58				0
Municipal securities			Level 2				313				57				(4	)			366				0				366				0
Municipal securities			Level 3				91				0				0				91				0				91				0
Total debt investments						$	122,900			$	6,929			$	(31	)		$	129,798			$	6,882			$	122,916			$	0
Changes in Fair Value Recorded in Net Income
Equity investments			Level 1															$	1,198			$	784			$	0			$	414
Equity investments			Other																2,551				0				0				2,551
Total equity investments																		$	3,749			$	784			$	0			$	2,965
Cash																		$	5,910			$	5,910			$	0			$	0
Derivatives, net (a)																			35				0				35				0
Total																		$	139,492			$	13,576			$	122,951			$	2,965

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

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, 2021 and 2020, equity investments without readily determinable fair values measured at cost with adjustments for observable changes in price or impairments were $3.3 billion and $1.4 billion, respectively.

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												Total Unrealized Losses
(In millions)		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Total Fair Value
June 30, 2021
U.S. government and agency securities		$	5,294			$	(111	)		$	0			$	0			$	5,294			$	(111	)
Foreign government bonds			3,148				(1	)			5				(1	)			3,153				(2	)
Mortgage- and asset-backed securities			1,211				(5	)			87				(1	)			1,298				(6	)
Corporate notes and bonds			1,678				(8	)			34				(1	)			1,712				(9	)
Municipal securities			58				(7	)			1				0				59				(7	)
Total		$	11,389			$	(132	)		$	127			$	(3	)		$	11,516			$	(135	)

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		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, 2020
U.S. government and agency securities		$	2,323			$	(1	)		$	0			$	0			$	2,323			$	(1	)
Foreign government bonds			500				(3	)			0				0				500				(3	)
Mortgage- and asset-backed securities			1,014				(6	)			0				0				1,014				(6	)
Corporate notes and bonds			649				(17	)			0				0				649				(17	)
Municipal securities			66				(4	)			0				0				66				(4	)
Total		$	4,552			$	(31	)		$	0			$	0			$	4,552			$	(31	)

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.

Debt Investment Maturities

(In millions)		Adjusted Cost Basis				Estimated Fair Value
June 30, 2021
Due in one year or less		$	22,612			$	22,676
Due after one year through five years			67,541				70,315
Due after five years through 10 years			25,212				26,327
Due after 10 years			2,601				2,690
Total		$	117,966			$	122,008

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.

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.

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.

In the past, option and forward contracts were used to hedge a portion of forecasted international revenue and were designated as cash flow hedging instruments. Principal currencies hedged included the Euro, Japanese yen, British pound, Canadian dollar, and Australian dollar.

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.

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.

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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 exchange-traded option and futures contracts and over-the-counter swap and option contracts. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.

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 and are included in “Other contracts” in the tables below.

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.

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, 2021, 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, 2021				June 30, 2020
Designated as Hedging Instruments
Foreign exchange contracts purchased		$	635			$	635
Foreign exchange contracts sold			6,081				6,754
Interest rate contracts purchased			1,247				1,295
Not Designated as Hedging Instruments
Foreign exchange contracts purchased			14,223				11,896
Foreign exchange contracts sold			23,391				15,595
Other contracts purchased			2,456				1,844
Other contracts sold			763				757

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Fair Values of Derivative Instruments

The following table presents our derivative instruments:

		Derivative			Derivative				Derivative				Derivative
(In millions)		Assets			Liabilities				Assets				Liabilities
		June 30, 2021							June 30, 2020
Designated as Hedging Instruments
Foreign exchange contracts		$	76			$	(8	)		$	44			$	(54	)
Interest rate contracts			40				0				93				0
Not Designated as Hedging Instruments
Foreign exchange contracts			227				(291	)			245				(334	)
Other contracts			56				(36	)			18				(11	)
Gross amounts of derivatives			399				(335	)			400				(399	)
Gross amounts of derivatives offset in the balance sheet			(141	)			142				(154	)			158
Cash collateral received			0				(42	)			0				(154	)
Net amounts of derivatives		$	258			$	(235	)		$	246			$	(395	)
Reported as
Short-term investments		$	78			$	0			$	35			$	0
Other current assets			137				0				199				0
Other long-term assets			43				0				12				0
Other current liabilities			0				(182	)			0				(334	)
Other long-term liabilities			0				(53	)			0				(61	)
Total		$	258			$	(235	)		$	246			$	(395	)

Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $395 million and $335 million, respectively, as of June 30, 2021, and $399 million and $399 million, respectively, as of June 30, 2020.

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, 2021
Derivative assets		$	0			$	396			$	3			$	399
Derivative liabilities			0				(335	)			0				(335	)
June 30, 2020
Derivative assets			1				398				1				400
Derivative liabilities			0				(399	)			0				(399	)

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Gains (losses) on derivative instruments recognized in our consolidated income statements were as follows:

(In millions)
Year Ended June 30,		2021							2020							2019
		Revenue				Other Income (Expense), Net				Revenue				Other Income (Expense), Net				Revenue				Other Income (Expense), Net
Designated as Fair Value Hedging Instruments
Foreign exchange contracts
Derivatives		$	0			$	193			$	0			$	1			$	0			$	(130	)
Hedged items			0				(188	)			0				3				0				130
Excluded from effectiveness assessment			0				30				0				139				0				168
Interest rate contracts
Derivatives			0				(37	)			0				93				0				0
Hedged items			0				53				0				(93	)			0				0
Designated as Cash Flow Hedging Instruments
Foreign exchange contracts
Amount reclassified from accumulated other comprehensive income			0				17				0				0				341				0
Excluded from effectiveness assessment			0				0				0				0				(64	)			0
Not Designated as Hedging Instruments
Foreign exchange contracts			0				27				0				(123	)			0				(97	)
Other contracts			0				9				0				50				0				38

Gains (losses), net of tax, on derivative instruments recognized in our consolidated comprehensive income statements were as follows:

(In millions)
Year Ended June 30,		2021				2020				2019
Designated as Cash Flow Hedging Instruments
Foreign exchange contracts
Included in effectiveness assessment		$	34			$	(38	)		$	159

NOTE 6 — INVENTORIES

The components of inventories were as follows:

(In millions)
June 30,		2021				2020
Raw materials		$	1,190			$	700
Work in process			79				83
Finished goods			1,367				1,112
Total		$	2,636			$	1,895

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NOTE 7 — PROPERTY AND EQUIPMENT

The components of property and equipment were as follows:

(In millions)
June 30,		2021				2020
Land		$	3,660			$	1,823
Buildings and improvements			43,928				33,995
Leasehold improvements			6,884				5,487
Computer equipment and software			51,250				41,261
Furniture and equipment			5,344				4,782
Total, at cost			111,066				87,348
Accumulated depreciation			(51,351	)			(43,197	)
Total, net		$	59,715			$	44,151

During fiscal years 2021, 2020, and 2019, depreciation expense was $9.3 billion, $10.7 billion, and $9.7 billion, respectively. Depreciation expense declined in fiscal year 2021 due to the change in estimated useful lives of our server and network equipment. We have committed $9.5 billion for the construction of new buildings, building improvements, and leasehold improvements as of June 30, 2021.

During fiscal year 2020, we recorded an impairment charge of $186 million to Property and Equipment, primarily to leasehold improvements, due to the closing of our Microsoft Store physical locations.

NOTE 8 — BUSINESS COMBINATIONS

ZeniMax Media Inc.

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 $768 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.

The purchase price allocation as of the date of acquisition was based on a preliminary valuation and is subject to revision as more detailed analyses are completed and additional information about the fair value of assets acquired and liabilities assumed becomes available.

The major classes of assets and liabilities to which we have preliminarily allocated the purchase price were as follows:

(In millions)
Cash and cash equivalents		$	768
Goodwill			5,469
Intangible assets			1,968
Other assets			139
Other liabilities			(223	)
Total		$	8,121

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.

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Following are details of the purchase price allocated to the intangible assets acquired:

(In millions)		Amount				Weighted Average Life
Technology-based		$	1,341				4 years
Marketing-related			627				11 years
Total		$	1,968				6 years

GitHub, Inc.

On October 25, 2018, we acquired GitHub, Inc. (“GitHub”), a software development platform, in a $7.5 billion stock transaction (inclusive of total cash payments of $1.3 billion in respect of vested GitHub equity awards and an indemnity escrow). The acquisition is expected to empower developers to achieve more at every stage of the development lifecycle, accelerate enterprise use of GitHub, and bring Microsoft’s developer tools and services to new audiences. The financial results of GitHub have been included in our consolidated financial statements since the date of the acquisition. GitHub is reported as part of our Intelligent Cloud segment.

The allocation of the purchase price to goodwill was completed as of June 30, 2019. The major classes of assets and liabilities to which we allocated the purchase price were as follows:

(In millions)
Cash, cash equivalents, and short-term investments		$	234
Goodwill			5,497
Intangible assets			1,267
Other assets			143
Other liabilities			(217	)
Total		$	6,924

The goodwill recognized in connection with the acquisition is primarily attributable to anticipated synergies from future growth and is not expected to be deductible for tax purposes. We assigned the goodwill to our Intelligent Cloud segment.

Following are the details of the purchase price allocated to the intangible assets acquired:

(In millions)		Amount				Weighted Average Life
Customer-related		$	648				8 years
Technology-based			447				5 years
Marketing-related			170				10 years
Contract-based			2				2 years
Total		$	1,267				7 years

Transactions recognized separately from the purchase price allocation were approximately $600 million, primarily related to equity awards recognized as expense over the related service period.

Nuance Communications, Inc.

On April 11, 2021, we entered into a definitive agreement to acquire Nuance Communications, Inc. (“Nuance”) for $56.00 per share in an all-cash transaction valued at $19.7 billion, inclusive of Nuance’s net debt. 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 acquisition has been approved by Nuance’s shareholders, and we expect it to close by the end of calendar year 2021, subject to the satisfaction of certain regulatory approvals and other customary closing conditions.

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NOTE 9 — GOODWILL

Changes in the carrying amount of goodwill were as follows:

(In millions)			June 30, 2019				Acquisitions				Other				June 30, 2020				Acquisitions				Other				June 30, 2021
Productivity and Business Processes		$	24,277			$	7			$	(94	)		$	24,190			$	0			$	127			$	24,317
Intelligent Cloud			11,351				1,351				(5	)			12,697				505				54				13,256
More Personal Computing			6,398				96				(30	)			6,464				5,556	(a)			118	(a)			12,138
Total		$	42,026			$	1,454			$	(129	)		$	43,351			$	6,061			$	299			$	49,711

(a)	Includes goodwill of $5.5 billion related to ZeniMax. See Note 8 – Business Combinations for further information.

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.

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.

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.

No instances of impairment were identified in our May 1, 2021, May 1, 2020, or May 1, 2019 tests. As of June 30, 2021 and 2020, accumulated goodwill impairment was $11.3 billion.

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,										2021												2020
Technology-based		$	9,779			$	(7,007	)		$	2,772			$	8,160			$	(6,381	)		$	1,779
Customer-related			4,958				(2,859	)			2,099				4,967				(2,320	)			2,647
Marketing-related			4,792				(1,878	)			2,914				4,158				(1,588	)			2,570
Contract-based			446				(431	)			15				474				(432	)			42
Total		$	19,975	(a)		$	(12,175	)		$	7,800			$	17,759			$	(10,721	)		$	7,038

(a)	Includes intangible assets of $2.0 billion related to ZeniMax. See Note 8 – Business Combinations for further information.

No material impairments of intangible assets were identified during fiscal years 2021, 2020, or 2019. We estimate that we have no significant residual value related to our intangible assets.

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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,		2021								2020
Technology-based		$	1,628				4 years			$	531				6 years
Customer-related			96				4 years				303				5 years
Marketing-related			625				6 years				2				2 years
Contract-based			10				3 years				0				0 years
Total		$	2,359				5 years			$	836				5 years

Intangible assets amortization expense was $1.6 billion, $1.6 billion, and $1.9 billion for fiscal years 2021, 2020, and 2019, respectively.

The following table outlines the estimated future amortization expense related to intangible assets held as of June 30, 2021:

(In millions)
Year Ending June 30,
2022		$	1,683
2023			1,722
2024			1,415
2025			755
2026			498
Thereafter			1,727
Total		$	7,800

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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, 2021					June 30, 2020
2009 issuance of $3.8 billion (a)					2039					5.20%					5.24%			$	520			$	559
2010 issuance of $4.8 billion (a)					2040					4.50%					4.57%				486				1,571
2011 issuance of $2.3 billion (a)					2041					5.30%					5.36%				718				1,270
2012 issuance of $2.3 billion (a)			2022	–	2042			2.13%	–	3.50%			2.24%	–	3.57%				1,204				1,650
2013 issuance of $5.2 billion (a)			2023	–	2043			2.38%	–	4.88%			2.47%	–	4.92%				2,814				2,919
2013 issuance of €4.1 billion			2021	–	2033			2.13%	–	3.13%			2.23%	–	3.22%				4,803				4,549
2015 issuance of $23.8 billion (a)			2022	–	2055			2.38%	–	4.75%			2.47%	–	4.78%				12,305				15,549
2016 issuance of $19.8 billion (a)			2021	–	2056			1.55%	–	3.95%			1.64%	–	4.03%				12,180				16,955
2017 issuance of $17.0 billion (a)			2022	–	2057			2.40%	–	4.50%			2.52%	–	4.53%				10,695				12,385
2020 issuance of $10.0 billion (a)			2050	–	2060			2.53%	–	2.68%			2.53%	–	2.68%				10,000				10,000
2021 issuance of $8.2 billion (a)			2052	–	2062			2.92%	–	3.04%			2.92%	–	3.04%				8,185				0
Total face value																			63,910				67,407
Unamortized discount and issuance costs																			(511	)			(554	)
Hedge fair value adjustments (b)																			40				93
Premium on debt exchange (a)																			(5,293	)			(3,619	)
Total debt																			58,146				63,327
Current portion of long-term debt																			(8,072	)			(3,749	)
Long-term debt																		$	50,074			$	59,578

(a)	In March 2021 and June 2020, we exchanged a portion of our existing debt at a premium for cash and new debt with longer maturities. The premiums are amortized over the terms of the new debt.

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

As of June 30, 2021 and 2020, the estimated fair value of long-term debt, including the current portion, was $70.0 billion and $77.1 billion, respectively. The estimated fair values are based on Level 2 inputs.

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 2021, 2020, and 2019 was $2.0 billion, $2.4 billion, and $2.4 billion, respectively.

The following table outlines maturities of our long-term debt, including the current portion, as of June 30, 2021:

(In millions)
Year Ending June 30,
2022		$	8,075
2023			2,750
2024			5,250
2025			2,250
2026			3,000
Thereafter			42,585
Total		$	63,910

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NOTE 12 — INCOME TAXES

Tax Cuts and Jobs Act

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted into law, which significantly changed existing U.S. tax law and included numerous provisions that affect our business. We recorded a provisional net charge of $13.7 billion related to the enactment of the TCJA in fiscal year 2018 and adjusted the provisional net charge by recording additional tax expense of $157 million in fiscal year 2019 pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 118.

In fiscal year 2019, in response to the TCJA and recently issued regulations, we transferred certain intangible properties held by our foreign subsidiaries to the U.S. and Ireland. The transfers of intangible properties resulted in a $2.6 billion net income tax benefit recorded in the fourth quarter of fiscal year 2019, as the value of future tax deductions exceeded the current tax liability from foreign jurisdictions and U.S. global intangible low-taxed income (“GILTI”) tax.

Provision for Income Taxes

The components of the provision for income taxes were as follows:

(In millions)
Year Ended June 30,		2021				2020				2019
Current Taxes
U.S. federal		$	3,285			$	3,537			$	4,718
U.S. state and local			1,229				763				662
Foreign			5,467				4,444				5,531
Current taxes		$	9,981			$	8,744			$	10,911
Deferred Taxes
U.S. federal		$	25			$	58			$	(5,647	)
U.S. state and local			(204	)			(6	)			(1,010	)
Foreign			29				(41	)			194
Deferred taxes		$	(150	)		$	11			$	(6,463	)
Provision for income taxes		$	9,831			$	8,755			$	4,448

U.S. and foreign components of income before income taxes were as follows:

(In millions)
Year Ended June 30,		2021				2020				2019
U.S.		$	34,972			$	24,116			$	15,799
Foreign			36,130				28,920				27,889
Income before income taxes		$	71,102			$	53,036			$	43,688

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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,		2021				2020				2019
Federal statutory rate			21.0%				21.0%				21.0%
Effect of:
Foreign earnings taxed at lower rates			(2.7)%				(3.7)%				(4.1)%
Impact of the enactment of the TCJA			0%				0%				0.4%
Impact of intangible property transfers			0%				0%				(5.9)%
Foreign-derived intangible income deduction			(1.3)%				(1.1)%				(1.4)%
State income taxes, net of federal benefit			1.4%				1.3%				0.7%
Research and development credit			(0.9)%				(1.1)%				(1.1)%
Excess tax benefits relating to stock-based compensation			(2.4)%				(2.2)%				(2.2)%
Interest, net			0.5%				1.0%				1.0%
Other reconciling items, net			(1.8)%				1.3%				1.8%
Effective rate			13.8%				16.5%				10.2%

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.

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. The decrease from the federal statutory rate in fiscal year 2020 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, and tax benefits relating to stock-based compensation. The decrease from the federal statutory rate in fiscal year 2019 is primarily due to a $2.6 billion net income tax benefit related to intangible property transfers, and 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, Singapore, and Puerto Rico. In fiscal year 2021 and 2020, our foreign regional operating centers in Ireland and Puerto Rico, which are taxed at rates lower than the U.S. rate, generated 82% and 86% of our foreign income before tax. In fiscal years 2019, our foreign regional operating centers in Ireland, Singapore, and Puerto Rico, which are taxed at rates lower than the U.S. rate, generated 82% of our foreign income before tax, respectively. 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 2021, 2020, and 2019, there were no individually significant other reconciling items.

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The decrease in our effective tax rate for fiscal year 2021 compared to fiscal year 2020 was primarily due to tax benefits from the India Supreme Court decision on withholding taxes, an agreement between the U.S. and India tax authorities related to transfer pricing, final TCJA regulations, and an increase in tax benefits relating to stock-based compensation. The increase in our effective tax rate for fiscal year 2020 compared to fiscal year 2019 was primarily due to a $2.6 billion net income tax benefit in the fourth quarter of fiscal year 2019 related to intangible property transfers.

The components of the deferred income tax assets and liabilities were as follows:

(In millions)
June 30,		2021				2020
Deferred Income Tax Assets
Stock-based compensation expense		$	502			$	461
Accruals, reserves, and other expenses			2,960				2,721
Loss and credit carryforwards			1,090				865
Amortization			6,346				6,737
Leasing liabilities			4,060				3,025
Unearned revenue			2,659				1,553
Other			543				354
Deferred income tax assets			18,160				15,716
Less valuation allowance			(769	)			(755	)
Deferred income tax assets, net of valuation allowance		$	17,391			$	14,961
Deferred Income Tax Liabilities
Book/tax basis differences in investments and debt		$	(2,605	)		$	(2,642	)
Leasing assets			(3,834	)			(2,817	)
Depreciation			(1,010	)			(376	)
Deferred GILTI tax liabilities			(2,815	)			(2,581	)
Other			(144	)			(344	)
Deferred income tax liabilities		$	(10,408	)		$	(8,760	)
Net deferred income tax assets		$	6,983			$	6,201
Reported As
Other long-term assets		$	7,181			$	6,405
Long-term deferred income tax liabilities			(198	)			(204	)
Net deferred income tax assets		$	6,983			$	6,201

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.

As of June 30, 2021, we had federal, state, and foreign net operating loss carryforwards of $304 million, $1.3 billion, and $2.0 billion, respectively. The federal and state net operating loss carryforwards will expire in various years from fiscal 2022 through 2041, 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.

The valuation allowance disclosed in the table above relates to the foreign net operating loss carryforwards and other net deferred tax assets that may not be realized. In fiscal year 2020, we removed $2.0 billion of foreign net operating losses and corresponding valuation allowances as a result of the liquidation of a foreign subsidiary. There was no impact to our consolidated financial statements.

Income taxes paid, net of refunds, were $13.4 billion, $12.5 billion, and $8.4 billion in fiscal years 2021, 2020, and 2019, respectively.

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Uncertain Tax Positions

Gross unrecognized tax benefits related to uncertain tax positions as of June 30, 2021, 2020, and 2019, were $14.6 billion, $13.8 billion, and $13.1 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 2021, 2020, and 2019 by $12.5 billion, $12.1 billion, and $12.0 billion, respectively.

As of June 30, 2021, 2020, and 2019, we had accrued interest expense related to uncertain tax positions of $4.3 billion, $4.0 billion, and $3.4 billion, respectively, net of income tax benefits. The provision for income taxes for fiscal years 2021, 2020, and 2019 included interest expense related to uncertain tax positions of $274 million, $579 million, and $515 million, respectively, net of income tax benefits.

The aggregate changes in the gross unrecognized tax benefits related to uncertain tax positions were as follows:

(In millions)
Year Ended June 30,		2021				2020				2019
Beginning unrecognized tax benefits		$	13,792			$	13,146			$	11,961
Decreases related to settlements			(195	)			(31	)			(316	)
Increases for tax positions related to the current year			790				647				2,106
Increases for tax positions related to prior years			461				366				508
Decreases for tax positions related to prior years			(297	)			(331	)			(1,113	)
Decreases due to lapsed statutes of limitations			(1	)			(5	)			0
Ending unrecognized tax benefits		$	14,550			$	13,792			$	13,146

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.

As of June 30, 2021, 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 and 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.

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 2020, 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.

NOTE 13 — UNEARNED REVENUE

Unearned revenue by segment was as follows:

(In millions)
June 30,		2021				2020
Productivity and Business Processes		$	22,120			$	18,643
Intelligent Cloud			17,710				16,620
More Personal Computing			4,311				3,917
Total		$	44,141			$	39,180

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Item 8

Changes in unearned revenue were as follows:

(In millions)
Year Ended June 30, 2021
Balance, beginning of period			$	39,180
Deferral of revenue				94,565
Recognition of unearned revenue				(89,604	)
Balance, end of period			$	44,141

Revenue allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods, was $146 billion as of June 30, 2021, of which $141 billion is related to the commercial portion of revenue. We expect to recognize approximately 50% of this revenue over the next 12 months and the remainder thereafter.

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 1 year to 15 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.

The components of lease expense were as follows:

(In millions)
Year Ended June 30,		2021					2020				2019
Operating lease cost		$	2,127			$	2,043			$	1,707
Finance lease cost:
Amortization of right-of-use assets		$	921			$	611			$	370
Interest on lease liabilities			386				336				247
Total finance lease cost		$	1,307			$	947			$	617

Supplemental cash flow information related to leases was as follows:

(In millions)
Year Ended June 30,		2021					2020				2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases		$	2,052			$	1,829			$	1,670
Operating cash flows from finance leases			386				336				247
Financing cash flows from finance leases			648				409				221
Right-of-use assets obtained in exchange for lease obligations:
Operating leases			4,380				3,677				2,303
Finance leases			3,290				3,467				2,532

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Item 8

Supplemental balance sheet information related to leases was as follows:

(In millions, except lease term and discount rate)
June 30,		2021				2020
Operating Leases
Operating lease right-of-use assets		$	11,088			$	8,753
Other current liabilities		$	1,962			$	1,616
Operating lease liabilities			9,629				7,671
Total operating lease liabilities		$	11,591			$	9,287
Finance Leases
Property and equipment, at cost		$	14,107			$	10,371
Accumulated depreciation			(2,306	)			(1,385	)
Property and equipment, net		$	11,801			$	8,986
Other current liabilities		$	791			$	540
Other long-term liabilities			11,750				8,956
Total finance lease liabilities		$	12,541			$	9,496
Weighted Average Remaining Lease Term
Operating leases			8 years				8 years
Finance leases			12 years				13 years
Weighted Average Discount Rate
Operating leases			2.2%				2.7%
Finance leases			3.4%				3.9%

The following table outlines maturities of our lease liabilities as of June 30, 2021:

(In millions)
Year Ending June 30,		Operating Leases				Finance Leases
2022		$	2,125			$	1,179
2023			1,954				1,198
2024			1,751				1,211
2025			1,463				1,537
2026			1,133				1,220
Thereafter			4,111				8,856
Total lease payments			12,537				15,201
Less imputed interest			(946	)			(2,660	)
Total		$	11,591			$	12,541

As of June 30, 2021, we have additional operating and finance leases, primarily for datacenters, that have not yet commenced of $5.4 billion and $7.3 billion, respectively. These operating and finance leases will commence between fiscal year 2022 and fiscal year 2026 with lease terms of 1 year to 15 years.

During fiscal year 2020, we recorded an impairment charge of $161 million to operating lease right-of-use assets due to the closing of our Microsoft Store physical locations.

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Item 8

NOTE 15 — CONTINGENCIES

Patent and Intellectual Property Claims

There were 63 patent infringement cases pending against Microsoft as of June 30, 2021, none of which are material individually or in aggregate.

Antitrust, Unfair Competition, and Overcharge Class Actions

Antitrust and unfair competition class action lawsuits were filed against us in British Columbia, Ontario, and Quebec, Canada. All three have been certified on behalf of Canadian indirect purchasers who acquired licenses for Microsoft operating system software and/or productivity application software between 1998 and 2010.

The trial of the British Columbia action commenced in May 2016. Following a mediation, the parties agreed to a global settlement of all three Canadian actions and submitted the proposed settlement agreement to the courts in all three jurisdictions for approval. The final settlement and form of notice have been approved by the courts in British Columbia, Ontario, and Quebec. The ten-month claims period commenced on November 23, 2020 and will close on September 23, 2021.

Other Antitrust Litigation and Claims

China State Administration for Market Regulation Investigation

In 2014, Microsoft was informed that China’s State Agency for Market Regulation (“SAMR”) (formerly State Administration for Industry and Commerce) had begun a formal investigation relating to China’s Anti-Monopoly Law, and the SAMR conducted onsite inspections of Microsoft offices in Beijing, Shanghai, Guangzhou, and Chengdu. In 2019, the SAMR presented preliminary views as to certain possible violations of China’s Anti-Monopoly Law.

Product-Related Litigation

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.

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 the defendants have moved to strike. In August 2018, the trial court issued an order striking portions of the plaintiffs’ expert reports. A hearing on general causation is scheduled for January and February of 2022.

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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.

As of June 30, 2021, we accrued aggregate legal liabilities of $339 million. While we intend to defend these matters vigorously, adverse outcomes that we estimate could reach approximately $500 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.

NOTE 16 — STOCKHOLDERS’ EQUITY

Shares Outstanding

Shares of common stock outstanding were as follows:

(In millions)
Year Ended June 30,		2021				2020				2019
Balance, beginning of year			7,571				7,643				7,677
Issued			49				54				116
Repurchased			(101	)			(126	)			(150	)
Balance, end of year			7,519				7,571				7,643

Share Repurchases

On September 20, 2016, our Board of Directors approved a share repurchase program authorizing up to $40.0 billion in share repurchases. This share repurchase program commenced in December 2016 and was completed in February 2020.

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, following completion of the program approved on September 20, 2016, has no expiration date, and may be terminated at any time. As of June 30, 2021, $8.7 billion remained of this $40.0 billion share repurchase program.

PART II

Item 8

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,		2021								2020								2019
First Quarter			25			$	5,270				29			$	4,000				24			$	2,600
Second Quarter			27				5,750				32				4,600				57				6,100
Third Quarter			25				5,750				37				6,000				36				3,899
Fourth Quarter			24				6,200				28				5,088				33				4,200
Total			101			$	22,970				126			$	19,688				150			$	16,799

Shares repurchased during fiscal year 2021 and the fourth quarter of fiscal year 2020 were under the share repurchase program approved on September 18, 2019. Shares repurchased during the third quarter of fiscal year 2020 were under the share repurchase programs approved on both September 20, 2016 and September 18, 2019. All other shares repurchased were under the share repurchase program approved on September 20, 2016. The above table excludes shares repurchased to settle employee tax withholding related to the vesting of stock awards of $4.4 billion, $3.3 billion, and $2.7 billion for fiscal years 2021, 2020, and 2019, respectively. All share repurchases were made using cash resources.

Dividends

Our Board of Directors declared the following dividends:

Declaration Date	Record Date					Payment Date			Dividend Per Share					Amount
Fiscal Year 2021														(In millions)
September 15, 2020			November 19, 2020				December 10, 2020			$	0.56			$	4,230
December 2, 2020			February 18, 2021				March 11, 2021				0.56				4,221
March 16, 2021			May 20, 2021				June 10, 2021				0.56				4,214
June 16, 2021			August 19, 2021				September 9, 2021				0.56				4,211
Total										$	2.24			$	16,876
Fiscal Year 2020
September 18, 2019			November 21, 2019				December 12, 2019			$	0.51			$	3,886
December 4, 2019			February 20, 2020				March 12, 2020				0.51				3,876
March 9, 2020			May 21, 2020				June 11, 2020				0.51				3,865
June 17, 2020			August 20, 2020				September 10, 2020				0.51				3,856
Total										$	2.04			$	15,483

The dividend declared on June 16, 2021 was included in other current liabilities as of June 30, 2021.

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Item 8

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,		2021				2020				2019
Derivatives
Balance, beginning of period		$	(38	)		$	0			$	173
Unrealized gains (losses), net of tax of $9, $(10), and $2			34				(38	)			160
Reclassification adjustments for gains included in earnings			(17	)			0				(341	)
Tax expense included in provision for income taxes			2				0				8
Amounts reclassified from accumulated other comprehensive income (loss)			(15	)			0				(333	)
Net change related to derivatives, net of tax of $7, $(10), and $(6)			19				(38	)			(173	)
Balance, end of period		$	(19	)		$	(38	)		$	0
Investments
Balance, beginning of period		$	5,478			$	1,488			$	(850	)
Unrealized gains (losses), net of tax of $(589), $1,057, and $616			(2,216	)			3,987				2,331
Reclassification adjustments for (gains) losses included in other income (expense), net			(63	)			4				93
Tax expense (benefit) included in provision for income taxes			13				(1	)			(19	)
Amounts reclassified from accumulated other comprehensive income (loss)			(50	)			3				74
Net change related to investments, net of tax of $(602), $1,058, and $635			(2,266	)			3,990				2,405
Cumulative effect of accounting changes			10				0				(67	)
Balance, end of period		$	3,222			$	5,478			$	1,488
Translation Adjustments and Other
Balance, beginning of period		$	(2,254	)		$	(1,828	)		$	(1,510	)
Translation adjustments and other, net of tax effects of $(9), $1, and $(1)			873				(426	)			(318	)
Balance, end of period		$	(1,381	)		$	(2,254	)		$	(1,828	)
Accumulated other comprehensive income (loss), end of period		$	1,822			$	3,186			$	(340	)

NOTE 18 — EMPLOYEE STOCK AND SAVINGS PLANS

We grant stock-based compensation to employees and directors. As of June 30, 2021, an aggregate of 251 million shares were authorized for future grant under our stock plans. 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,		2021				2020				2019
Stock-based compensation expense		$	6,118			$	5,289			$	4,652
Income tax benefits related to stock-based compensation			1,065				938				816

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.

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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.

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,						2021						2020						2019
Dividends per share (quarterly amounts)			$	0.51	–	0.56			$	0.46	–	0.51			$	0.42	–	0.46
Interest rates				0.01%	–	1.5%				0.1%	–	2.2%				1.8%	–	3.1%

During fiscal year 2021, the following activity occurred under our stock plans:

Shares						Weighted Average Grant-Date Fair Value
(In millions)
Stock Awards
Nonvested balance, beginning of year			126			$	105.23
Granted (a)			40				221.13
Vested			(58	)			99.41
Forfeited			(8	)			129.92
Nonvested balance, end of year			100			$	152.51

(a)	Includes 2 million of PSUs granted at target and performance adjustments above target levels for fiscal years 2021, 2020, and 2019.

As of June 30, 2021, there was approximately $12.0 billion of total unrecognized compensation costs related to stock awards. 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 $221.13, $140.49, and $107.02 for fiscal years 2021, 2020, and 2019, respectively. The fair value of stock awards vested was $13.4 billion, $10.1 billion, and $8.7 billion, for fiscal years 2021, 2020, and 2019, respectively.

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. Under the terms of the ESPP that were approved in 2012, the plan will terminate on December 31, 2022. We intend to request shareholder approval for a successor ESPP with a January 1, 2022 effective date and ten-year expiration of December 31, 2031 at our 2021 Annual Shareholders Meeting. No additional shares will be requested at this meeting. Employees purchased the following shares during the periods presented:

(Shares in millions)
Year Ended June 30,		2021				2020				2019
Shares purchased			8				9				11
Average price per share		$	207.88			$	142.22			$	104.85

As of June 30, 2021, 88 million shares of our common stock were reserved for future issuance through the ESPP.

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Item 8

Savings Plan

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 contribute fifty cents for each dollar a participant contributes into the plans, with a maximum employer contribution of 50% of the IRS contribution limit for the calendar year. Employer-funded retirement benefits for all plans were $1.2 billion, $1.0 billion, and $877 million in fiscal years 2021, 2020, and 2019, respectively, and were expensed as contributed.

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.

Our reportable segments are described below.

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, and Skype for Business.

	•	Office Consumer, including Microsoft 365 Consumer subscriptions and Office licensed on-premises, and Office Consumer Services, including Skype, Outlook.com, and OneDrive.

	•	LinkedIn, including Talent Solutions, Marketing Solutions, Premium Subscriptions, Sales Solutions, and Learning Solutions.

	•	Dynamics business solutions, including Dynamics 365, comprising a set of intelligent, cloud-based applications across ERP, CRM, Customer Insights, Power Apps, and Power Automate; and on-premises ERP and CRM applications.

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; SQL Server, Windows Server, Visual Studio, System Center, and related Client Access Licenses (“CALs”); and GitHub.

	•	Enterprise Services, including Premier Support Services and Microsoft Consulting Services.

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; Windows Internet of Things; and MSN advertising.

	•	Devices, including Surface and PC accessories.

PART II

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	•	Gaming, including Xbox hardware and Xbox content and services, comprising digital transactions, Xbox Game Pass and other subscriptions, video games, third-party video game royalties, cloud services, and advertising.

	•	Search advertising.

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.

In addition, certain costs incurred at a corporate level that are identifiable and that benefit our segments are allocated to them. These allocated costs include legal, including settlements and fines, information technology, human resources, finance, excise taxes, field selling, shared facilities services, and customer service and support. Each allocation is measured differently based on the specific facts and circumstances of the costs being allocated. Certain corporate-level activity is not allocated to our segments.

Segment revenue and operating income were as follows during the periods presented:

(In millions)
Year Ended June 30,			2021				2020				2019
Revenue
Productivity and Business Processes		$	53,915			$	46,398			$	41,160
Intelligent Cloud			60,080				48,366				38,985
More Personal Computing			54,093				48,251				45,698
Total		$	168,088			$	143,015			$	125,843
Operating Income
Productivity and Business Processes		$	24,351			$	18,724			$	16,219
Intelligent Cloud			26,126				18,324				13,920
More Personal Computing			19,439				15,911				12,820
Total		$	69,916			$	52,959			$	42,959

No sales to an individual customer or country other than the United States accounted for more than 10% of revenue for fiscal years 2021, 2020, or 2019. Revenue, classified by the major geographic areas in which our customers were located, was as follows:

(In millions)
Year Ended June 30,		2021				2020				2019
United States (a)		$	83,953			$	73,160			$	64,199
Other countries			84,135				69,855				61,644
Total		$	168,088			$	143,015			$	125,843

(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.

PART II

Item 8

Revenue from external customers, classified by significant product and service offerings, was as follows:

(In millions)
Year Ended June 30,		2021				2020				2019
Server products and cloud services		$	52,589			$	41,379			$	32,622
Office products and cloud services			39,872				35,316				31,769
Windows			23,227				22,294				20,395
Gaming			15,370				11,575				11,386
LinkedIn			10,289				8,077				6,754
Search advertising			8,528				7,740				7,628
Enterprise Services			6,943				6,409				6,124
Devices			6,791				6,457				6,095
Other			4,479				3,768				3,070
Total		$	168,088			$	143,015			$	125,843

Our commercial cloud revenue, which includes Azure, Office 365 Commercial, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties, was $69.1 billion, $51.7 billion and $38.1 billion in fiscal years 2021, 2020, and 2019, respectively. These amounts are primarily included in Server products and cloud services, Office products and cloud services, and LinkedIn in the table above.

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.

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,		2021				2020				2019
United States		$	76,153			$	60,789			$	55,252
Ireland			13,303				12,734				12,958
Other countries			38,858				29,770				25,422
Total		$	128,314			$	103,293			$	93,632

PART II

Item 8

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Microsoft Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Microsoft Corporation and subsidiaries (the "Company") as of June 30, 2021 and 2020, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2021, 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, 2021, 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 29, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.

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.

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.

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.

PART II

Item 8

Revenue Recognition – Refer to Note 1 to the financial statements

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.

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.

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.

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.

PART II

Item 8

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

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.

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.

How the Critical Audit Matter Was Addressed in the Audit

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.

/s/ DELOITTE & TOUCHE LLP

Seattle, Washington

July 29, 2021

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

PART II

Item 9, 9A