Microsoft Corporation 2012 Annual Report

Goodwill

NOTE 10 — GOODWILL

Changes in the carrying amount of goodwill by segment were as follows:

  Balance as
of June 30,
2010		   Acquisitions       Other   Balance as
of June 30,
2011		   Acquisitions       Other   Balance as
of June 30,
2012
(In millions)                          
Windows & Windows Live Division $        77   $   0   $   12   $        89   $       0   $         0   $       89
Server and Tools 1,118   13   8   1,139   7   (2)   1,144
Online Services Division 6,373   0   0   6,373   54   (6,204)   223
Microsoft Business Division 4,024   4   139   4,167   2,843   (117)   6,893
Entertainment and Devices Division 802   30   (19)   813   4,294   (4)   5,103
Total $ 12,394   $ 47   $ 140   $ 12,581   $ 7,198   $ (6,327)   $ 13,452

The measurement periods for purchase price allocations end as soon as information on the facts and circumstances becomes available, but do not exceed 12 months. Adjustments in purchase price allocations may require a recasting of the amounts allocated to goodwill retroactive to the periods in which the acquisitions occurred.

Any change in the goodwill amounts resulting from foreign currency translations are presented as "other" in the above table. Also included within "other" are business dispositions and transfers between business segments due to reorganizations, as applicable. For fiscal year 2012, a $6.2 billion goodwill impairment charge is included in "other," as discussed further below. This goodwill impairment charge also represents our accumulated goodwill impairment as of June 30, 2012.

Goodwill Impairment

We tested goodwill for impairment as of May 1, 2012 at the reporting unit level 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.

Upon completion of the annual test, OSD goodwill was determined to be impaired. The impairment was the result of the OSD unit experiencing slower than projected growth in search queries and search advertising revenue per query, slower growth in display revenue, and changes in the timing and implementation of certain initiatives designed to drive search and display revenue growth in the future. Although revenues increased compared to the prior year, the industry is highly competitive and certain operational challenges have affected our expectations such that future growth and profitability are lower than previous estimates. In addition, in the current year, we added a business-specific risk factor to the weighted average cost of capital used to calculate the discounted cash flows of OSD in estimating the fair value of the business. This business-specific risk factor reflects the increased uncertainty in forecasting the future performance of OSD.

Because our annual test indicated that OSD's carrying value exceeded its estimated fair value, a second phase of the goodwill impairment test ("Step 2") was performed specific to OSD. Under Step 2, the fair value of all OSD assets and liabilities were estimated, including tangible assets, existing technology, trade names, and partner relationships for the purpose of deriving an estimate of the implied fair value of goodwill. The implied fair value of the goodwill was then compared to the recorded goodwill to determine the amount of the impairment. Assumptions used in measuring the value of these assets and liabilities included the discount rates, royalty rates, and obsolescence rates used in valuing the intangible assets, and pricing of comparable transactions in the market in valuing the tangible assets.

No other instances of impairment were identified in our May 1, 2012 test.