filings.toolsItem 8. Unrealized Losses on Debt Investments
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Item 8. Unrealized Losses on Debt Investments
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, 2026 | ||||||||||||||||||||||||
| U.S. government and agency securities | $ | 19,100 | $ | **(**100 | ) | $ | 22,042 | $ | **(**1,054 | ) | $ | 41,142 | $ | **(**1,154 | ) | |||||||||
| Foreign government bonds | 74 | **(**1 | ) | 30 | **(**6 | ) | 104 | **(**7 | ) | |||||||||||||||
| Mortgage- and asset-backed securities | 905 | **(**5 | ) | 129 | **(**18 | ) | 1,034 | **(**23 | ) | |||||||||||||||
| Corporate notes and bonds | 5,066 | **(**31 | ) | 909 | **(**40 | ) | 5,975 | **(**71 | ) | |||||||||||||||
| Municipal securities | 0 | 0 | 122 | **(**19 | ) | 122 | **(**19 | ) | ||||||||||||||||
| Total | $ | 25,145 | $ | **(**137 | ) | $ | 23,232 | $ | **(**1,137 | ) | $ | 48,377 | $ | **(**1,274 | ) | |||||||||
| 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, 2025 | ||||||||||||||||||||||||
| U.S. government and agency securities | $ | 2,569 | $ | (51 | ) | $ | 34,608 | $ | (1,411 | ) | $ | 37,177 | $ | (1,462 | ) | |||||||||
| Foreign government bonds | 43 | (2 | ) | 106 | (7 | ) | 149 | (9 | ) | |||||||||||||||
| Mortgage- and asset-backed securities | 841 | (4 | ) | 189 | (23 | ) | 1,030 | (27 | ) | |||||||||||||||
| Corporate notes and bonds | 1,107 | (8 | ) | 3,105 | (98 | ) | 4,212 | (106 | ) | |||||||||||||||
| Municipal securities | 0 | 0 | 168 | (21 | ) | 168 | (21 | ) | ||||||||||||||||
| Total | $ | 4,560 | $ | (65 | ) | $ | 38,176 | $ | (1,560 | ) | $ | 42,736 | $ | (1,625 | ) | |||||||||
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
The following table outlines maturities of our debt investments as of June 30, 2026:
| (In millions) | Adjusted Cost Basis | Estimated Fair Value | ||||||
| June 30, 2026 | ||||||||
| Due in one year or less | $ | 28,764 | $ | 28,697 | ||||
| Due after one year through five years | 38,376 | 37,395 | ||||||
| Due after five years through 10 years | 3,493 | 3,586 | ||||||
| Due after 10 years | 1,537 | 1,406 | ||||||
| Total | $ | 72,170 | $ | 71,084 | ||||
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.
PART II
Item 8
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 Euro-denominated debt are hedged using foreign exchange forward contracts that are designated as cash flow hedging instruments.
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.
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.
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.
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 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, 2026, 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, 2026 | June 30, 2025 | ||||||
| Designated as Hedging Instruments | ||||||||
| Foreign exchange contracts purchased | $ | 1,492 | $ | 1,492 | ||||
| Interest rate contracts purchased | 1,179 | 1,150 | ||||||
| Not Designated as Hedging Instruments | ||||||||
| Foreign exchange contracts purchased | 12,052 | 15,214 | ||||||
| Foreign exchange contracts sold | 51,413 | 43,307 | ||||||
| Equity contracts purchased | 5,573 | 5,434 | ||||||
| Equity contracts sold | 2,546 | 2,189 | ||||||
| Other contracts purchased | 3,252 | 2,769 | ||||||
| Other contracts sold | 630 | 1,242 | ||||||
PART II
Item 8
Fair Values of Derivative Instruments
The following table presents our derivative instruments:
| Derivative | Derivative | Derivative | Derivative | |||||||||||||
| (In millions) | Assets | Liabilities | Assets | Liabilities | ||||||||||||
| June 30, 2026 | June 30, 2025 | |||||||||||||||
| Designated as Hedging Instruments | ||||||||||||||||
| Foreign exchange contracts | $ | 57 | $ | **(**65 | ) | $ | 89 | $ | (44 | ) | ||||||
| Interest rate contracts | 11 | 0 | 15 | 0 | ||||||||||||
| Not Designated as Hedging Instruments | ||||||||||||||||
| Foreign exchange contracts | 1,742 | **(**1,175 | ) | 248 | (809 | ) | ||||||||||
| Equity contracts | 346 | **(**181 | ) | 385 | (983 | ) | ||||||||||
| Other contracts | 20 | **(**9 | ) | 21 | (1 | ) | ||||||||||
| Gross amounts of derivatives | 2,176 | **(**1,430 | ) | 758 | (1,837 | ) | ||||||||||
| Gross amounts of derivatives offset in the balance sheets | **(**1,300 | ) | 1,301 | (258 | ) | 260 | ||||||||||
| Cash collateral received | 0 | **(**366 | ) | 0 | (99 | ) | ||||||||||
| Net amounts of derivatives | $ | 876 | $ | **(**495 | ) | $ | 500 | $ | (1,676 | ) | ||||||
| Reported as | ||||||||||||||||
| Short-term investments | $ | 192 | $ | 0 | $ | 10 | $ | 0 | ||||||||
| Other current assets | 681 | 0 | 201 | 0 | ||||||||||||
| Equity and other investments | 0 | 0 | 272 | 0 | ||||||||||||
| Other long-term assets | 3 | 0 | 17 | 0 | ||||||||||||
| Other current liabilities | 0 | **(**379 | ) | 0 | (1,639 | ) | ||||||||||
| Other long-term liabilities | 0 | **(**116 | ) | 0 | (37 | ) | ||||||||||
| Total | $ | 876 | $ | **(**495 | ) | $ | 500 | $ | (1,676 | ) | ||||||
Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $2.2 billion and $1.4 billion, respectively, as of June 30, 2026, and $452 million and $1.8 billion, respectively, as of June 30, 2025.
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, 2026 | ||||||||||||||||
| Derivative assets | $ | 0 | $ | 2,168 | $ | 8 | $ | 2,176 | ||||||||
| Derivative liabilities | 0 | **(**1,430 | ) | 0 | **(**1,430 | ) | ||||||||||
| June 30, 2025 | ||||||||||||||||
| Derivative assets | 1 | 474 | 283 | 758 | ||||||||||||
| Derivative liabilities | 0 | (1,832 | ) | (5 | ) | (1,837 | ) | |||||||||
PART II
Item 8
Gains (losses) on derivative instruments recognized in other income (expense), net were as follows:
| (In millions) | ||||||||||||
| Year Ended June 30, | 2026 | 2025 | 2024 | |||||||||
| Designated as Fair Value Hedging Instruments | ||||||||||||
| Interest rate contracts | ||||||||||||
| Derivatives | $ | **(**5 | ) | $ | 5 | $ | (23 | ) | ||||
| Hedged items | **(**25 | ) | (45 | ) | (25 | ) | ||||||
| Designated as Cash Flow Hedging Instruments | ||||||||||||
| Foreign exchange contracts | ||||||||||||
| Amount reclassified from accumulated other comprehensive loss | **(**63 | ) | 103 | (48 | ) | |||||||
| Not Designated as Hedging Instruments | ||||||||||||
| Foreign exchange contracts | 592 | (938 | ) | 367 | ||||||||
| Equity contracts | 1,864 | (266 | ) | (177 | ) | |||||||
| Other contracts | **(**1 | ) | 21 | (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, | 2026 | 2025 | 2024 | |||||||||
| Designated as Cash Flow Hedging Instruments | ||||||||||||
| Foreign exchange contracts | ||||||||||||
| Included in effectiveness assessment | $ | **(**42 | ) | $ | 77 | $ | (14 | ) | ||||
NOTE 6 — PROPERTY AND EQUIPMENT
The components of property and equipment were as follows:
| (In millions) | ||||||||
| June 30, | 2026 | 2025 | ||||||
| Land | $ | 10,546 | $ | 9,338 | ||||
| Buildings and improvements | 182,749 | 137,921 | ||||||
| Leasehold improvements | 16,348 | 12,117 | ||||||
| Servers, network equipment, and software | 215,874 | 132,836 | ||||||
| Furniture and equipment | 6,250 | 6,407 | ||||||
| Total, at cost | 431,767 | 298,619 | ||||||
| Accumulated depreciation | **(**118,691 | ) | (93,653 | ) | ||||
| Total, net | $ | 313,076 | $ | 204,966 | ||||
During fiscal years 2026, 2025, and 2024, depreciation expense was $34.3 billion, $22.0 billion, and $15.2 billion, respectively.
As of June 30, 2026, 2025, and 2024, purchases of property and equipment remaining in accounts payable were $26.7 billion, $6.9 billion, and $4.3 billion, respectively. As of June 30, 2026, we have committed $34.6 billion for the construction of new buildings, building improvements, and leasehold improvements, primarily related to datacenters.
NOTE 7 — BUSINESS COMBINATIONS
Activision Blizzard, Inc.
On October 13, 2023, we completed our acquisition of Activision Blizzard, Inc. (“Activision Blizzard”) for a total purchase price of $75.4 billion, consisting primarily of 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 financial results of Activision Blizzard have been included in our consolidated financial statements since the date of the acquisition. Activision Blizzard is reported as part of our More Personal Computing segment.
PART II
Item 8
The allocation of the purchase price to the assets acquired and liabilities assumed was completed as of September 30, 2024. The major classes of assets and liabilities to which we have allocated the purchase price were as follows:
| (In millions) | ||||
| Cash and cash equivalents | $ | 12,976 | ||
| Goodwill | 51,001 | |||
| Intangible assets | 21,969 | |||
| Other assets | 2,503 | |||
| Long-term debt | (2,799 | ) | ||
| Long-term income taxes | (1,946 | ) | ||
| Deferred income taxes | (4,676 | ) | ||
| Other liabilities | (3,620 | ) | ||
| Total purchase price | $ | 75,408 | ||
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 Activision Blizzard. Substantially all of the goodwill is expected to be non-deductible for income tax purposes.
Following are the details of the purchase price allocated to the intangible assets acquired:
| (In millions, except average life) | Amount | Weighted Average Life | ||||||
| Marketing-related | $ | 11,619 | 24 years | |||||
| Technology-based | 9,689 | 4 years | ||||||
| Customer-related | 661 | 4 years | ||||||
| Fair value of intangible assets acquired | $ | 21,969 | 15 years | |||||
Following are the supplemental consolidated financial results of Microsoft Corporation on an unaudited pro forma basis, as if the acquisition had been consummated on July 1, 2022:
| (In millions, except per share amounts) | ||||||||
| Year Ended June 30, | 2024 | 2023 | ||||||
| Revenue | $ | 247,442 | $ | 219,790 | ||||
| Net income | 88,308 | 71,383 | ||||||
| Diluted earnings per share | 11.82 | 9.55 | ||||||
These pro forma results were based on estimates and assumptions, which we believe are reasonable. They are not the results that would have been realized had we been a combined company during the periods presented and are not necessarily indicative of our consolidated results of operations in future periods. The pro forma results include adjustments related to purchase accounting, primarily amortization of intangible assets. Acquisition costs and other nonrecurring charges were immaterial and are included in the earliest period presented.
NOTE 8 — GOODWILL
Changes in the carrying amount of goodwill were as follows:
| (In millions) | June 30, 2024 | Acquisitions | Other | June 30, 2025 | Acquisitions | Other | June 30, 2026 | |||||||||||||||||||||
| Productivity and Business Processes | $ | 31,361 | $ | 0 | $ | 96 | $ | 31,457 | $ | 67 | $ | 46 | $ | 31,570 | ||||||||||||||
| Intelligent Cloud | 25,648 | 0 | 41 | 25,689 | 36 | 16 | 25,741 | |||||||||||||||||||||
| More Personal Computing | 62,211 | 0 | 152 | 62,363 | 5 | **(**28 | ) | 62,340 | ||||||||||||||||||||
| Total | $ | 119,220 | $ | 0 | $ | 289 | $ | 119,509 | $ | 108 | $ | 34 | $ | 119,651 | ||||||||||||||
PART II
Item 8
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, 2026, May 1, 2025, or May 1, 2024 tests. As of June 30, 2026 and 2025, accumulated goodwill impairment was $11.3 billion.
NOTE 9 — 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, | 2026 | 2025 | ||||||||||||||||||||||
| Marketing-related | $ | 16,506 | $ | **(**4,690 | ) | $ | 11,816 | $ | 16,502 | $ | (3,901 | ) | $ | 12,601 | ||||||||||
| Technology-based | 22,779 | **(**18,136 | ) | 4,643 | 22,560 | (14,959 | ) | 7,601 | ||||||||||||||||
| Customer-related | 4,171 | **(**2,520 | ) | 1,651 | 4,278 | (2,050 | ) | 2,228 | ||||||||||||||||
| Contract-based | 623 | **(**124 | ) | 499 | 217 | (43 | ) | 174 | ||||||||||||||||
| Total | $ | 44,079 | $ | **(**25,470 | ) | $ | 18,609 | $ | 43,557 | $ | (20,953 | ) | $ | 22,604 | ||||||||||
No material impairments of intangible assets were identified during fiscal years 2026, 2025, or 2024. We estimate that we have no significant residual value related to our 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, | 2026 | 2025 | ||||||||||||||
| Marketing-related | $ | 12 | 10 years | $ | 13 | 10 years | ||||||||||
| Technology-based | 387 | 5 years | 912 | 9 years | ||||||||||||
| Customer-related | 0 | 0 years | 0 | 0 years | ||||||||||||
| Contract-based | 405 | 5 years | 171 | 5 years | ||||||||||||
| Total | $ | 804 | 5 years | $ | 1,096 | 9 years | ||||||||||
Intangible assets amortization expense was $4.7 billion, $6.0 billion, and $4.8 billion for fiscal years 2026, 2025, and 2024, respectively.
PART II
Item 8
The following table outlines the estimated future amortization expense related to intangible assets held as of June 30, 2026:
| (In millions) | ||||
| Year Ending June 30, | ||||
| 2027 | $ | 3,097 | ||
| 2028 | 2,141 | |||
| 2029 | 1,944 | |||
| 2030 | 1,477 | |||
| 2031 | 1,128 | |||
| Thereafter | 8,822 | |||
| Total | $ | 18,609 | ||
NOTE 10 — DEBT
The components of long-term debt were as follows:
| (In millions, issuance by calendar year) | Maturities (calendar year) | Stated Interest Rate | Effective Interest Rate | June 30, 2026 | June 30, 2025 | |||||||||||||||||||
| 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 | 454 | |||||||||||||||||||
| 2013 issuance of $5.2 billion | 2043 | 3.75**%** | – | 4.88**%** | 3.83**%** | – | 4.92**%** | 314 | 314 | |||||||||||||||
| 2013 issuance of €4.1 billion | 2028 | – | 2033 | 2.63**%** | – | 3.13**%** | 2.69**%** | – | 3.22**%** | 2,630 | 2,700 | |||||||||||||
| 2015 issuance of $23.8 billion | 2035 | – | 2055 | 3.50**%** | – | 4.75**%** | 3.60**%** | – | 4.78**%** | 4,555 | 7,555 | |||||||||||||
| 2016 issuance of $19.8 billion | 2026 | – | 2056 | 2.40**%** | – | 3.95**%** | 2.46**%** | – | 4.03**%** | 7,930 | 7,930 | |||||||||||||
| 2017 issuance of $17.1 billion | 2026 | – | 2057 | 3.30**%** | – | 4.50**%** | 3.38**%** | – | 5.49**%** | 6,833 | 6,833 | |||||||||||||
| 2020 issuance of $10.1 billion | 2030 | – | 2060 | 1.35**%** | – | 2.68**%** | 2.53**%** | – | 5.43**%** | 10,111 | 10,111 | |||||||||||||
| 2021 issuance of $8.2 billion | 2052 | – | 2062 | 2.92**%** | – | 3.04**%** | 2.92**%** | – | 3.04**%** | 8,185 | 8,185 | |||||||||||||
| 2023 issuance of $0.1 billion | 2026 | – | 2050 | 1.35**%** | – | 4.50**%** | 5.16**%** | – | 5.49**%** | 56 | 56 | |||||||||||||
| 2024 issuance of $3.3 billion | 2026 | – | 2050 | 1.35**%** | – | 4.50**%** | 5.16**%** | – | 5.49**%** | 3,344 | 3,344 | |||||||||||||
| Total face value | 46,136 | 49,206 | ||||||||||||||||||||||
| Unamortized discount and issuance costs | **(**1,081 | ) | (1,155 | ) | ||||||||||||||||||||
| Hedge fair value adjustments (a) | **(**11 | ) | (36 | ) | ||||||||||||||||||||
| Premium on debt exchange | **(**4,750 | ) | (4,864 | ) | ||||||||||||||||||||
| Total debt | 40,294 | 43,151 | ||||||||||||||||||||||
| Current portion of long-term debt | **(**9,227 | ) | (2,999 | ) | ||||||||||||||||||||
| Long-term debt | $ | 31,067 | $ | 40,152 | ||||||||||||||||||||
(a)
Refer to Note 5 – Derivatives for further information on the interest rate swaps related to fixed-rate debt.
As of June 30, 2026 and 2025, the estimated fair value of long-term debt, including the current portion, was $36.5 billion and $40.4 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 2026, 2025, and 2024 was $1.5 billion, $1.6 billion, and $1.7 billion, respectively.
PART II
Item 8
The following table outlines maturities of our long-term debt, including the current portion, as of June 30, 2026:
| (In millions) | ||||
| Year Ending June 30, | ||||
| 2027 | $ | 9,250 | ||
| 2028 | 0 | |||
| 2029 | 2,001 | |||
| 2030 | 0 | |||
| 2031 | 500 | |||
| Thereafter | 34,385 | |||
| Total | $ | 46,136 | ||
NOTE 11 — INCOME TAXES
Provision for Income Taxes
The components of the provision for income taxes were as follows:
| (In millions) | ||||||||||||
| Year Ended June 30, | 2026 | 2025 | 2024 | |||||||||
| Current Taxes | ||||||||||||
| U.S. federal | $ | 2,461 | $ | 14,086 | $ | 12,165 | ||||||
| U.S. state and local | 2,713 | 3,342 | 2,366 | |||||||||
| Foreign | 12,587 | 11,423 | 9,858 | |||||||||
| Current taxes | $ | 17,761 | $ | 28,851 | $ | 24,389 | ||||||
| Deferred Taxes | ||||||||||||
| U.S. federal | $ | 12,780 | $ | (6,250 | ) | $ | (4,791 | ) | ||||
| U.S. state and local | 1,113 | (1,087 | ) | (379 | ) | |||||||
| Foreign | 531 | 281 | 432 | |||||||||
| Deferred taxes | $ | 14,424 | $ | (7,056 | ) | $ | (4,738 | ) | ||||
| Provision for income taxes | $ | 32,185 | $ | 21,795 | $ | 19,651 | ||||||
U.S. and foreign components of income before income taxes were as follows:
| (In millions) | ||||||||||||
| Year Ended June 30, | 2026 | 2025 | 2024 | |||||||||
| U.S. | $ | 103,591 | $ | 69,212 | $ | 62,886 | ||||||
| Foreign | 62,343 | 54,415 | 44,901 | |||||||||
| Income before income taxes | $ | 165,934 | $ | 123,627 | $ | 107,787 | ||||||
PART II
Item 8
Effective Tax Rate
We adopted Accounting Standards Update 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”) prospectively. The items accounting for the difference between income taxes computed at the U.S. federal statutory rate and our effective rate for the year ended June 30, 2026, pursuant to the requirements of ASU 2023-09, were as follows:
| (In millions, except percentages) | ||||||||
| Year Ended June 30, | 2026 | |||||||
| Federal statutory tax rate | $ | 34,846 | 21.0**%** | |||||
| Effect of: | ||||||||
| State and local income tax, net of federal income tax effect (a) | 2,573 | 1.6**%** | ||||||
| Foreign tax effects: | ||||||||
| Ireland: | ||||||||
| Statutory tax rate difference | **(**4,301 | ) | (2.6)% | |||||
| Other | 809 | 0.5**%** | ||||||
| Other foreign jurisdictions (b) | 3,248 | 2.0**%** | ||||||
| Effect of cross-border tax laws: | ||||||||
| Global intangible low-taxed income (GILTI) (c) | 5,068 | 3.1**%** | ||||||
| Foreign-derived intangible income deduction | **(**603 | ) | (0.4)% | |||||
| Other | 799 | 0.5**%** | ||||||
| Tax credits: | ||||||||
| Research and development credit | **(**1,453 | ) | (0.9)% | |||||
| Foreign tax credits | **(**9,151 | ) | (5.5)% | |||||
| Other | **(**14 | ) | (0.0)% | |||||
| Changes in unrecognized tax benefits (d) | 1,094 | 0.7**%** | ||||||
| Other reconciling items, net | **(**730 | ) | (0.6)% | |||||
| Effective rate | $ | 32,185 | 19.4**%** | |||||
(a)
In fiscal year 2026, state and local income taxes in California, Illinois, Minnesota, New Jersey, New York, and New York City made up the majority (greater than 50%) of the tax effect in this category.
(b)
Under ASU 2023-09, Foreign tax effects include foreign withholding taxes while the related foreign tax credits are included in the Tax credits category. Prior to adoption of ASU 2023-09, foreign withholding taxes were presented net of foreign tax credits.
(c)
Under ASU 2023-09, we elected to present the effect of cross-border tax laws gross and present the foreign tax credits related to GILTI within the Tax credits category.
(d)
Includes changes in unrecognized tax benefits on an aggregated basis for all jurisdictions, including interest and penalties.
As previously disclosed for the years ended June 30, 2025 and 2024, prior to the adoption of ASU 2023-09, 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, | 2025 | 2024 | ||||||
| Federal statutory rate | 21.0% | 21.0% | ||||||
| Effect of: | ||||||||
| Foreign earnings taxed at lower rates | (1.5)% | (1.4)% | ||||||
| Foreign-derived intangible income deduction | (1.0)% | (1.1)% | ||||||
| State income taxes, net of federal benefit | 1.5% | 1.5% | ||||||
| Research and development credit | (1.1)% | (1.1)% | ||||||
| Excess tax benefits relating to stock-based compensation | (0.9)% | (1.1)% | ||||||
| Interest, net | 1.0% | 1.1% | ||||||
| Other reconciling items, net | (1.4)% | (0.7)% | ||||||
| Effective rate | 17.6% | 18.2% | ||||||
PART II
Item 8
The decrease from the federal statutory rate in fiscal years 2026, 2025, and 2024 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. In fiscal years 2026, 2025, and 2024, our foreign regional operating center in Ireland, which is taxed at a rate lower than the U.S. rate, generated 81%, 81%, and 83%, respectively, of our foreign income before tax. For fiscal year 2026, other reconciling items, net consists primarily of excess tax benefits related to stock-based compensation, impacts of tax law changes, and changes in valuation allowances. For fiscal year 2025 and 2024, other reconciling items, net consists primarily of individually immaterial reconciling items such as GILTI net of related foreign tax credit, and in fiscal year 2024, includes tax benefits from tax law changes. In fiscal year 2024, tax benefits from tax law changes primarily relate to the delay of the effective date of final foreign tax credit regulations. In fiscal years 2026, 2025, and 2024, there were no individually significant other reconciling items.
The increase in our effective tax rate for fiscal year 2026 compared to fiscal year 2025 was primarily due to changes in the mix of our earnings and tax expenses between the U.S. and foreign countries. The decrease in our effective tax rate for fiscal year 2025 compared to fiscal year 2024 was due to changes in the mix of our earnings and tax expenses between the U.S. and foreign countries.
The components of the deferred income tax assets and liabilities were as follows:
| (In millions) | ||||||||
| June 30, | 2026 | 2025 | ||||||
| Deferred Income Tax Assets | ||||||||
| Stock-based compensation expense | $ | 945 | $ | 909 | ||||
| Accruals, reserves, and other expenses | 5,509 | 5,050 | ||||||
| Loss and credit carryforwards | 2,124 | 2,114 | ||||||
| Amortization | 3,843 | 4,118 | ||||||
| Leasing liabilities | 22,275 | 12,874 | ||||||
| Unearned revenue | 5,515 | 4,324 | ||||||
| Book/tax basis differences in investments and debt | 0 | 303 | ||||||
| Capitalized research and development | 15,305 | 16,891 | ||||||
| Other | 545 | 529 | ||||||
| Deferred income tax assets | 56,061 | 47,112 | ||||||
| Less valuation allowance | **(**1,332 | ) | (1,169 | ) | ||||
| Deferred income tax assets, net of valuation allowance | $ | 54,729 | $ | 45,943 | ||||
| Deferred Income Tax Liabilities | ||||||||
| Book/tax basis differences in investments and debt | $ | **(**2,972 | ) | $ | 0 | |||
| Leasing assets | **(**21,474 | ) | (12,696 | ) | ||||
| Depreciation | **(**17,675 | ) | (5,699 | ) | ||||
| Deferred tax on foreign earnings | **(**396 | ) | (1,148 | ) | ||||
| Other | **(**152 | ) | (127 | ) | ||||
| Deferred income tax liabilities | $ | **(**42,669 | ) | $ | (19,670 | ) | ||
| Net deferred income tax assets | $ | 12,060 | $ | 26,273 | ||||
| Reported As | ||||||||
| Other long-term assets | $ | 15,114 | $ | 29,108 | ||||
| Long-term deferred income tax liabilities | **(**3,054 | ) | (2,835 | ) | ||||
| Net deferred income tax assets | $ | 12,060 | $ | 26,273 | ||||
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.
PART II
Item 8
As of June 30, 2026, we had federal, state, and foreign net operating loss carryforwards of $369 million, $715 million, and $2.9 billion, respectively. The federal and state net operating loss carryforwards have varying expiration dates ranging from fiscal year 2027 to 2046 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, 2026, we had $613 million federal capital loss carryforwards for U.S. tax purposes. The federal capital loss carryforwards will expire in fiscal year 2030 if not utilized.
The valuation allowance disclosed in the table above relates to the foreign net operating loss carryforwards, federal capital loss carryforwards, and foreign tax credits carryforwards that may not be realized.
Income taxes paid, net of refunds, pursuant to the disclosure requirements of ASU 2023-09 in fiscal year 2026 were as follows:
| (In millions) | ||||
| Year Ended June 30 | 2026 | |||
| U.S. federal | $ | 6,246 | ||
| U.S. state and local | 2,917 | |||
| Foreign | ||||
| Ireland | 6,495 | |||
| Other | 5,530 | |||
| Income taxes paid, net of refunds | $ | 21,188 | ||
Income taxes paid, net of refunds, were $28.7 billion, and $23.4 billion in fiscal years 2025 and 2024, respectively.
Uncertain Tax Positions
Gross unrecognized tax benefits related to uncertain tax positions as of June 30, 2026, 2025, and 2024, were $25.8 billion, $24.7 billion, and $22.8 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 2026, 2025, and 2024 by $21.6 billion, $21.2 billion, and $19.6 billion, respectively.
As of June 30, 2026, 2025, and 2024, we had accrued interest expense related to uncertain tax positions of $9.4 billion, $8.2 billion, and $6.8 billion, respectively, net of income tax benefits. The provision for income taxes for fiscal years 2026, 2025, and 2024 included interest expense related to uncertain tax positions of $1.4 billion, $1.3 billion, and $1.5 billion, 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, | 2026 | 2025 | 2024 | |||||||||
| Beginning unrecognized tax benefits | $ | 24,729 | $ | 22,760 | $ | 17,120 | ||||||
| Decreases related to settlements | **(**221 | ) | (240 | ) | (76 | ) | ||||||
| Increases for tax positions related to the current year | 1,517 | 2,066 | 1,903 | |||||||||
| Increases for tax positions related to prior years | 263 | 468 | 4,289 | |||||||||
| Decreases for tax positions related to prior years | **(**404 | ) | (300 | ) | (464 | ) | ||||||
| Decreases due to lapsed statutes of limitations | **(**53 | ) | (25 | ) | (12 | ) | ||||||
| Ending unrecognized tax benefits | $ | 25,831 | $ | 24,729 | $ | 22,760 | ||||||
We remain under audit by the IRS for tax years 2014 to 2017. With respect to the audit for tax years 2004 to 2013, on September 26, 2023, we received Notices of Proposed Adjustment (“NOPAs”) from the IRS. The primary issues in the NOPAs relate to intercompany transfer pricing. In the NOPAs, the IRS is seeking an additional tax payment of $28.9 billion plus penalties and interest. As of June 30, 2026, we believe our allowances for income tax contingencies are adequate. We disagree with the proposed adjustments and will vigorously contest the NOPAs through the IRS’s administrative appeals office and, if necessary, judicial proceedings.
PART II
Item 8
We are subject to income tax in many jurisdictions outside the U.S., some of which are currently under audit by local tax authorities. The resolution of these audits is not expected to be material to our consolidated financial statements. Our operations in Ireland remain subject to examination for tax years 2021 and thereafter.
NOTE 12 — UNEARNED REVENUE
Unearned revenue by segment was as follows:
| (In millions) | ||||||||
| June 30, | 2026 | 2025 | ||||||
| Productivity and Business Processes | $ | 57,936 | $ | 50,567 | ||||
| Intelligent Cloud | 14,942 | 14,022 | ||||||
| More Personal Computing | 2,834 | 2,676 | ||||||
| Total | $ | 75,712 | $ | 67,265 | ||||
Changes in unearned revenue were as follows:
| (In millions) | ||||
| Year Ended June 30, 2026 | ||||
| Balance, beginning of period | $ | 67,265 | ||
| Deferral of revenue | 194,184 | |||
| Recognition of unearned revenue | **(**185,737 | ) | ||
| Balance, end of period | $ | 75,712 | ||
Revenue allocated to remaining performance obligations, which includes unearned revenue and amounts expected to be invoiced and recognized as revenue in future periods, was $684 billion as of June 30, 2026. Revenue allocated to remaining performance obligations related to the commercial portion of revenue was $678 billion as of June 30, 2026, with a weighted average duration of approximately 2.3 years. We expect to recognize approximately 30% of both our total company remaining performance obligation revenue and commercial remaining performance obligation revenue over the next 12 months and the remainder thereafter.
NOTE 13 — LEASES
We have operating and finance leases for datacenters, corporate offices, research and development facilities, and certain equipment. Our leases have remaining lease terms of less than 1 year to 20 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, | 2026 | 2025 | 2024 | |||||||||
| Operating lease cost | $ | 6,968 | $ | 5,524 | $ | 3,555 | ||||||
| Finance lease cost: | ||||||||||||
| Amortization of right-of-use assets | $ | 5,403 | $ | 3,408 | $ | 1,800 | ||||||
| Interest on lease liabilities | 2,547 | 1,417 | 734 | |||||||||
| Total finance lease cost | $ | 7,950 | $ | 4,825 | $ | 2,534 | ||||||
PART II
Item 8
Supplemental cash flow information related to leases was as follows:
| (In millions) | ||||||||||||
| Year Ended June 30, | 2026 | 2025 | 2024 | |||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||
| Operating cash flows from operating leases | $ | 6,443 | $ | 4,931 | $ | 3,550 | ||||||
| Operating cash flows from finance leases | 2,547 | 1,372 | 734 | |||||||||
| Financing cash flows from finance leases | 3,101 | 2,283 | 1,286 | |||||||||
| Right-of-use assets obtained in exchange for lease obligations: | ||||||||||||
| Operating leases | 4,555 | 7,826 | 6,703 | |||||||||
| Finance leases | 24,608 | 20,511 | 11,633 | |||||||||
Supplemental balance sheet information related to leases was as follows:
| (In millions, except lease term and discount rate) | ||||||||
| June 30, | 2026 | 2025 | ||||||
| Operating Leases | ||||||||
| Operating lease right-of-use assets | $ | 24,177 | $ | 24,823 | ||||
| Other current liabilities | $ | 5,393 | $ | 5,424 | ||||
| Operating lease liabilities | 16,532 | 17,437 | ||||||
| Total operating lease liabilities | $ | 21,925 | $ | 22,861 | ||||
| Finance Leases | ||||||||
| Property and equipment, at cost | $ | 82,712 | $ | 53,876 | ||||
| Accumulated depreciation | **(**15,431 | ) | (9,861 | ) | ||||
| Property and equipment, net | $ | 67,281 | $ | 44,015 | ||||
| Other current liabilities | $ | 4,290 | $ | 3,172 | ||||
| Other long-term liabilities | 62,304 | 43,000 | ||||||
| Total finance lease liabilities | $ | 66,594 | $ | 46,172 | ||||
| Weighted Average Remaining Lease Term | ||||||||
| Operating leases | 6 years | 6 years | ||||||
| Finance leases | 13 years | 13 years | ||||||
| Weighted Average Discount Rate | ||||||||
| Operating leases | 3.7**%** | 3.5% | ||||||
| Finance leases | 4.5**%** | 4.2% | ||||||
The following table outlines maturities of our lease liabilities as of June 30, 2026:
| (In millions) | ||||||||
| Year Ending June 30, | Operating Leases | Finance Leases | ||||||
| 2027 | $ | 6,082 | $ | 7,121 | ||||
| 2028 | 4,334 | 7,294 | ||||||
| 2029 | 3,146 | 6,668 | ||||||
| 2030 | 2,612 | 6,570 | ||||||
| 2031 | 2,316 | 6,543 | ||||||
| Thereafter | 6,216 | 55,490 | ||||||
| Total lease payments | 24,706 | 89,686 | ||||||
| Less imputed interest | **(**2,781 | ) | **(**23,092 | ) | ||||
| Total | $ | 21,925 | $ | 66,594 | ||||
As of June 30, 2026, we had additional leases, primarily for datacenters, that had not yet commenced of $329.1 billion, with some arrangements subject to certain contractual conditions being met. These leases will commence between fiscal year 2027 and fiscal year 2033 with lease terms of 1 year to 20 years.
PART II
Item 8
NOTE 14 — CONTINGENCIES
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 October 2024, the IDPC provided LinkedIn with a final decision alleging GDPR violations and assessing a fine. In November 2024, LinkedIn appealed the final decision. A preliminary hearing was held in December 2025. The court issued a ruling on the standard of appeal, which the IDPC may appeal.
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, 2026, we accrued aggregate legal liabilities of $553 million. While we intend to defend these matters vigorously, adverse outcomes that we estimate could reach approximately $400 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 15 — STOCKHOLDERS’ EQUITY
Shares Outstanding
Shares of common stock outstanding were as follows:
| (In millions) | ||||||||||||
| Year Ended June 30, | 2026 | 2025 | 2024 | |||||||||
| Balance, beginning of year | 7,434 | 7,434 | 7,432 | |||||||||
| Issued | 29 | 31 | 34 | |||||||||
| Repurchased | **(**36 | ) | (31 | ) | (32 | ) | ||||||
| Balance, end of year | 7,427 | 7,434 | 7,434 | |||||||||
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 and was completed in April 2025.
On September 16, 2024, our Board of Directors approved a share repurchase program authorizing up to $60.0 billion in share repurchases. This share repurchase program commenced in April 2025, following completion of the program approved on September 14, 2021, has no expiration date, and may be terminated at any time. As of June 30, 2026, $40.6 billion remained of this $60.0 billion share repurchase program.
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, | 2026 | 2025 | 2024 | |||||||||||||||||||||
| First Quarter | 8 | $ | 3,955 | 7 | $ | 2,800 | 11 | $ | 3,560 | |||||||||||||||
| Second Quarter | 12 | 5,964 | 8 | 3,500 | 7 | 2,800 | ||||||||||||||||||
| Third Quarter | 7 | 3,400 | 8 | 3,500 | 7 | 2,800 | ||||||||||||||||||
| Fourth Quarter | 9 | 3,400 | 8 | 3,200 | 7 | 2,800 | ||||||||||||||||||
| Total | 36 | $ | 16,719 | 31 | $ | 13,000 | 32 | $ | 11,960 | |||||||||||||||
PART II
Item 8
All share repurchases were made using cash resources. Shares repurchased during fiscal year 2026 were under the share repurchase program approved on September 16, 2024. Shares repurchased during the fourth quarter of fiscal year 2025 were under the share repurchase programs approved on September 14, 2021 and September 16, 2024. All other shares repurchased were under the share repurchase program approved on September 14, 2021. The above table excludes shares repurchased to settle employee tax withholding related to the vesting of stock awards of $5.6 billion, $5.4 billion, and $5.3 billion for fiscal years 2026, 2025, and 2024, respectively.
Dividends
Our Board of Directors declared the following dividends:
| Declaration Date | Record Date | Payment Date | Dividend Per Share | Amount | ||||||||||||
| Fiscal Year 2026 | (In millions) | |||||||||||||||
| September 15, 2025 | November 20, 2025 | December 11, 2025 | $ | 0.91 | $ | 6,762 | ||||||||||
| December 2, 2025 | February 19, 2026 | March 12, 2026 | 0.91 | 6,756 | ||||||||||||
| March 10, 2026 | May 21, 2026 | June 11, 2026 | 0.91 | 6,758 | ||||||||||||
| June 10, 2026 | August 20, 2026 | September 10, 2026 | 0.91 | 6,759 | ||||||||||||
| Total | $ | 3.64 | $ | 27,035 | ||||||||||||
| Fiscal Year 2025 | ||||||||||||||||
| September 16, 2024 | November 21, 2024 | December 12, 2024 | $ | 0.83 | $ | 6,170 | ||||||||||
| December 3, 2024 | February 20, 2025 | March 13, 2025 | 0.83 | 6,169 | ||||||||||||
| March 11, 2025 | May 15, 2025 | June 12, 2025 | 0.83 | 6,169 | ||||||||||||
| June 10, 2025 | August 21, 2025 | September 11, 2025 | 0.83 | 6,168 | ||||||||||||
| Total | $ | 3.32 | $ | 24,676 | ||||||||||||
The dividend declared on June 10, 2026 was included in other current liabilities as of June 30, 2026.
PART II
Item 8
NOTE 16 — 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, | 2026 | 2025 | 2024 | |||||||||
| Derivatives | ||||||||||||
| Balance, beginning of period | $ | **(**8 | ) | $ | (3 | ) | $ | (27 | ) | |||
| Unrealized gains (losses), net of tax of $(11), $20, and $(4) | **(**42 | ) | 77 | (14 | ) | |||||||
| Reclassification adjustments for (gains) losses included in other income (expense), net | 63 | (103 | ) | 48 | ||||||||
| Tax expense (benefit) included in provision for income taxes | **(**13 | ) | 21 | (10 | ) | |||||||
| Amounts reclassified from accumulated other comprehensive loss | 50 | (82 | ) | 38 | ||||||||
| Net change related to derivatives, net of tax of **$**2, $(1), and $6 | 8 | (5 | ) | 24 | ||||||||
| Balance, end of period | $ | 0 | $ | (8 | ) | $ | (3 | ) | ||||
| Investments | ||||||||||||
| Balance, beginning of period | $ | **(**1,051 | ) | $ | (2,625 | ) | $ | (3,582 | ) | |||
| Unrealized gains, net of tax of **$**57, $411, and $247 | 232 | 1,560 | 915 | |||||||||
| Reclassification adjustments for (gains) losses included in other income (expense), net | **(**21 | ) | 17 | 53 | ||||||||
| Tax expense (benefit) included in provision for income taxes | 4 | (3 | ) | (11 | ) | |||||||
| Amounts reclassified from accumulated other comprehensive loss | **(**17 | ) | 14 | 42 | ||||||||
| Net change related to investments, net of tax of **$**53, $414, and $258 | 215 | 1,574 | 957 | |||||||||
| Balance, end of period | $ | **(**836 | ) | $ | (1,051 | ) | $ | (2,625 | ) | |||
| Translation Adjustments and Other | ||||||||||||
| Balance, beginning of period | $ | **(**2,288 | ) | $ | (2,962 | ) | $ | (2,734 | ) | |||
| Translation adjustments and other, net of tax of **$**0, $8, and $0 | **(**160 | ) | 674 | (228 | ) | |||||||
| Balance, end of period | $ | **(**2,448 | ) | $ | (2,288 | ) | $ | (2,962 | ) | |||
| Accumulated other comprehensive loss, end of period | $ | **(**3,284 | ) | $ | (3,347 | ) | $ | (5,590 | ) | |||
NOTE 17 — 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, | 2026 | 2025 | 2024 | |||||||||
| Stock-based compensation expense | $ | 12,405 | $ | 11,974 | $ | 10,734 | ||||||
| Income tax benefits related to stock-based compensation | 2,089 | 2,027 | 1,826 | |||||||||
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.
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.
PART II
Item 8
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, | 2026 | 2025 | 2024 | ||||||||||||||||
| Dividends per share (quarterly amounts) | $ | 0.83 – 0.91 | $ | 0.75 – 0.83 | $ | 0.68 – 0.75 | |||||||||||||
| Interest rates | 3.4**% –** 4.5**%** | 3.4% – 5.5% | 3.8% – 5.6% | ||||||||||||||||
During fiscal year 2026, the following activity occurred under our stock plans:
| Shares | Weighted Average Grant-Date Fair Value | |||||||
| (In millions) | ||||||||
| Stock Awards | ||||||||
| Nonvested balance, beginning of year | 82 | $ | 347.44 | |||||
| Granted (a) | 41 | 471.00 | ||||||
| Vested | **(**35 | ) | 342.98 | |||||
| Forfeited | **(**10 | ) | 384.57 | |||||
| Nonvested balance, end of year | 78 | 409.94 | ||||||
(a)
Includes 1 million of PSUs granted at target and performance adjustments above target levels for each of the fiscal years 2026, 2025, and 2024.
As of June 30, 2026, total unrecognized compensation costs related to stock awards were $24.8 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 $471.00, $413.90, and $339.46 for fiscal years 2026, 2025, and 2024, respectively. The fair value of stock awards vested was $16.3 billion, $16.2 billion, and $16.0 billion, for fiscal years 2026, 2025, and 2024, respectively. As of June 30, 2026, an aggregate of 292 million shares were authorized for future grant under our stock plans.
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.
Employees purchased the following shares during the periods presented:
| (Shares in millions) | ||||||||||||
| Year Ended June 30, | 2026 | 2025 | 2024 | |||||||||
| Shares purchased | 5 | 6 | 6 | |||||||||
| Average price per share | $ | 382.92 | $ | 385.10 | $ | 339.46 | ||||||
As of June 30, 2026, 57 million shares of our common stock were reserved for future issuance through the ESPP.
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 $1.8 billion, $1.8 billion, and $1.7 billion in fiscal years 2026, 2025, and 2024, respectively, and were expensed as contributed.
PART II
Item 8
NOTE 18 — SEGMENT INFORMATION AND GEOGRAPHIC DATA
In its operation of the business, management, including our chief operating decision maker (“CODM”), who is also our Chief Executive Officer, reviews certain financial information, including segmented internal profit and loss statements. The primary profitability measure used by the CODM to review segment operating results is operating income. The CODM uses operating income to allocate resources during our annual planning process and throughout the year, as well as to assess the performance of our segments, primarily by monitoring actual results compared to prior periods and expected results. During the periods presented, we reported our financial performance based on the following three 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:
Microsoft 365 Commercial products and cloud services, including Microsoft 365 Commercial cloud, comprising Microsoft 365 Commercial, Enterprise Mobility + Security, the cloud portion of Windows Commercial, the per-user portion of Power BI, Exchange, SharePoint, Microsoft Teams, Microsoft 365 Security and Compliance, and Microsoft 365 Copilot; and Microsoft 365 Commercial products, comprising Windows Commercial on-premises and Office licensed on-premises.
Microsoft 365 Consumer products and cloud services, including Microsoft 365 Consumer subscriptions, Office licensed on-premises, and other consumer services.
LinkedIn, including Talent Solutions, Marketing Solutions, Premium Subscriptions, and Sales Solutions.
Dynamics products and cloud services, including Dynamics 365, comprising a set of intelligent, cloud-based applications across ERP, CRM, 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 power modern business and developers. This segment primarily comprises:
Server products and cloud services, including Azure and other cloud services, comprising cloud and AI consumption-based services, GitHub cloud services, Health and Life Sciences cloud services (formerly Nuance Healthcare cloud services), virtual desktop offerings, and other cloud services; and Server products, comprising SQL Server, Windows Server, Visual Studio, System Center, related Client Access Licenses, and other on-premises offerings.
Enterprise and partner services, including Enterprise Support Services, Industry Solutions, Microsoft Partner Network, and Learning Experience.
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 and Devices, including Windows OEM licensing (Windows Pro and non-Pro licenses sold through the OEM channel) and Devices, comprising Surface and PC accessories.
XBOX (formerly 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, and other cloud services.
Search advertising (formerly Search and news advertising), comprising Bing, Copilot, Microsoft News, Microsoft Edge, and third-party affiliates.
PART II
Item 8
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 our investments in AI infrastructure and training, as well as marketing of products and services, from which multiple segments benefit and are generally allocated based on relative gross margin.
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.
Segment revenue, cost of revenue, operating expenses, and operating income were as follows during the periods presented:
| (In millions) | ||||||||||||
| Year Ended June 30, | 2026 | 2025 | 2024 | |||||||||
| Productivity and Business Processes | ||||||||||||
| Revenue | $ | 139,996 | $ | 120,810 | $ | 106,820 | ||||||
| Cost of revenue | 25,017 | 22,422 | 19,611 | |||||||||
| Operating expenses | 31,100 | 28,615 | 27,548 | |||||||||
| Operating income | $ | 83,879 | $ | 69,773 | $ | 59,661 | ||||||
| Intelligent Cloud | ||||||||||||
| Revenue | $ | 137,791 | $ | 106,265 | $ | 87,464 | ||||||
| Cost of revenue | 57,876 | 40,171 | 29,611 | |||||||||
| Operating expenses | 22,943 | 21,505 | 20,040 | |||||||||
| Operating income | $ | 56,972 | $ | 44,589 | $ | 37,813 | ||||||
| More Personal Computing | ||||||||||||
| Revenue | $ | 54,052 | $ | 54,649 | $ | 50,838 | ||||||
| Cost of revenue | 23,481 | 25,238 | 24,892 | |||||||||
| Operating expenses | 16,185 | 15,245 | 13,987 | |||||||||
| Operating income | $ | 14,386 | $ | 14,166 | $ | 11,959 | ||||||
| Total | ||||||||||||
| Revenue | $ | 331,839 | $ | 281,724 | $ | 245,122 | ||||||
| Cost of revenue | 106,374 | 87,831 | 74,114 | |||||||||
| Operating expenses | 70,228 | 65,365 | 61,575 | |||||||||
| Operating income | $ | 155,237 | $ | 128,528 | $ | 109,433 | ||||||
No sales to an individual customer or country other than the United States accounted for more than 10% of revenue for fiscal years 2026, 2025, or 2024. Revenue, classified by the major geographic areas in which our customers were located, was as follows:
| (In millions) | ||||||||||||
| Year Ended June 30, | 2026 | 2025 | 2024 | |||||||||
| United States (a) | $ | 170,794 | $ | 144,546 | $ | 124,704 | ||||||
| Other countries | 161,045 | 137,178 | 120,418 | |||||||||
| Total | $ | 331,839 | $ | 281,724 | $ | 245,122 | ||||||
(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, classified by significant product and service offerings, was as follows:
| (In millions) | ||||||||||||
| Year Ended June 30, | 2026 | 2025 | 2024 | |||||||||
| Server products and cloud services | $ | 129,425 | $ | 98,435 | $ | 79,828 | ||||||
| Microsoft 365 Commercial products and cloud services | 101,997 | 87,767 | 76,969 | |||||||||
| XBOX | 21,790 | 23,455 | 21,503 | |||||||||
| 19,817 | 17,812 | 16,372 | ||||||||||
| Windows and Devices | 17,084 | 17,314 | 17,026 | |||||||||
| Search advertising | 15,176 | 13,878 | 12,306 | |||||||||
| Microsoft 365 Consumer products and cloud services | 9,175 | 7,404 | 6,648 | |||||||||
| Dynamics products and cloud services | 9,006 | 7,827 | 6,831 | |||||||||
| Enterprise and partner services | 8,260 | 7,760 | 7,594 | |||||||||
| Other | 109 | 72 | 45 | |||||||||
| Total | $ | 331,839 | $ | 281,724 | $ | 245,122 | ||||||
Our Microsoft Cloud revenue, which includes Microsoft 365 Commercial cloud, Azure and other cloud services, the commercial portion of LinkedIn, and Dynamics 365, was $214.4 billion, $168.9 billion, and $137.7 billion in fiscal years 2026, 2025, and 2024, respectively. These amounts are included in Server products and cloud services, Microsoft 365 Commercial products and cloud services, LinkedIn, and Dynamics products and cloud services 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, | 2026 | 2025 | 2024 | |||||||||
| United States | $ | 300,354 | $ | 230,069 | $ | 186,106 | ||||||
| Other countries | 175,159 | 141,833 | 115,263 | |||||||||
| Total | $ | 475,513 | $ | 371,902 | $ | 301,369 | ||||||
PART II
Item 8
REPORT OF INDEPENDENT REGIST****ERED 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, 2026 and 2025, 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, 2026, 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, 2026 and 2025, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2026, 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, 2026, 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, 2026, 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 certain 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 certain 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 certain 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 certain customer agreements for reasonableness.
We selected a sample of customer agreements and performed the following procedures:
o
Obtained and read contract source documents for each selection, including master agreements, and other documents that were part of the agreement.
o
Tested management's identification and treatment of contract terms.
o
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 11 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. During fiscal year 2024, the Company received Notices of Proposed Adjustments (“NOPAs”) for the tax years 2004 to 2013, primarily related to intercompany transfer pricing. 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 certain transfer pricing issues that remain unresolved with the IRS, evaluating management’s estimates relating to their determination of uncertain tax positions required 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 management’s methods and assumptions used in the measurement and disclosure of uncertain tax positions, which included testing the effectiveness of the related internal controls.
We tested the reasonableness of management’s judgments regarding the future resolution of uncertain tax positions, as follows:
o
We evaluated whether management had appropriately considered new information that could significantly change the measurement of the uncertain tax positions.
o
We evaluated the reasonableness of management’s estimates by considering how changes in tax law, including statutes, regulations, and recent case law, impacted management’s judgments.
We evaluated the appropriateness of the disclosures in relation to the underlying facts, judgments, and conclusions.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
July 29, 2026
We have served as the Company's auditor since 1983.
PART II
Item 9, 9A
Previous: Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK · Next: Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE