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NOTE 10 — INTANGIBLE ASSETS

The components of intangible assets, all of which are finite-lived, were as follows:

(In millions)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount



June 30,						2023							2022

Technology-based	$	11,245	$	(7,589	)	$	3,656	$	11,277	$	(6,958	)	$	4,319
Customer-related		7,281		(4,047	)		3,234		7,342		(3,171	)		4,171
Marketing-related		4,935		(2,473	)		2,462		4,942		(2,143	)		2,799
Contract-based		29		(15	)		14		16		(7	)		9


Total	$	23,490	$	(14,124	)	$	9,366	$	23,577	$	(12,279	)	$	11,298

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

The components of intangible assets acquired during the periods presented were as follows:

(In millions)	Amount			Amount



Year Ended June 30,	2023			2022

Technology-based	$	522	7 years	$	2,611	4 years
Customer-related		0	0 years		2,837	9 years
Marketing-related		7	5 years		233	4 years
Contract-based		12	3 years		0	0 years


Total	$	541	6 years	$	5,681	7 years

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

The following table outlines the estimated future amortization expense related to intangible assets held as of June 30, 2023:

(In millions)



Year Ending June 30,

2024	$	2,363
2025		1,881
2026		1,381
2027		929
2028		652
Thereafter		2,160


Total	$	9,366

NOTE 12 — INCOME TAXES

Provision for Income Taxes

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

(In millions)



Year Ended June 30,	2023			2022			2021

Current Taxes

U.S. federal	$	14,009		$	8,329		$	3,285
U.S. state and local		2,322			1,679			1,229
Foreign		6,678			6,672			5,467


Current taxes	$	23,009		$	16,680		$	9,981

Deferred Taxes

U.S. federal	$	(6,146	)	$	(4,815	)	$	25
U.S. state and local		(477	)		(1,062	)		(204	)
Foreign		564			175			29


Deferred taxes	$	(6,059	)	$	(5,702	)	$	(150	)


Provision for income taxes	$	16,950		$	10,978		$	9,831

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

(In millions)



Year Ended June 30,	2023		2022		2021

U.S.	$	52,917	$	47,837	$	34,972
Foreign		36,394		35,879		36,130


Income before income taxes	$	89,311	$	83,716	$	71,102

Effective Tax Rate

The items accounting for the difference between income taxes computed at the U.S. federal statutory rate and our effective rate were as follows:




Year Ended June 30,	2023		2022		2021

Federal statutory rate		21.0%		21.0%		21.0%
Effect of:
Foreign earnings taxed at lower rates		(1.8)%		(1.3)%		(2.7)%
Impact of intangible property transfers		0%		(3.9)%		0%
Foreign-derived intangible income deduction		(1.3)%		(1.1)%		(1.3)%
State income taxes, net of federal benefit		1.6%		1.4%		1.4%
Research and development credit		(1.1)%		(0.9)%		(0.9)%
Excess tax benefits relating to stock-based compensation		(0.7)%		(1.9)%		(2.4)%
Interest, net		0.8%		0.5%		0.5%
Other reconciling items, net		0.5%		(0.7)%		(1.8)%


Effective rate		19.0%		13.1%		13.8%

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

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

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

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

(In millions)



June 30,	2023			2022

Deferred Income Tax Assets

Stock-based compensation expense	$	681		$	601
Accruals, reserves, and other expenses		3,131			2,874
Loss and credit carryforwards		1,441			1,546
Amortization (a)		9,440			10,183
Leasing liabilities		5,041			4,557
Unearned revenue		3,296			2,876
Book/tax basis differences in investments and debt		373			0
Capitalized research and development (a)		6,958			473
Other		489			461


Deferred income tax assets		30,850			23,571
Less valuation allowance		(939	)		(1,012	)


Deferred income tax assets, net of valuation allowance	$	29,911		$	22,559


Deferred Income Tax Liabilities

Book/tax basis differences in investments and debt	$	0		$	(174	)
Leasing assets		(4,680	)		(4,291	)
Depreciation		(2,674	)		(1,602	)
Deferred tax on foreign earnings		(2,738	)		(3,104	)
Other		(89	)		(103	)


Deferred income tax liabilities	$	(10,181	)	$	(9,274	)


Net deferred income tax assets	$	19,730		$	13,285


Reported As

Other long-term assets	$	20,163		$	13,515
Long-term deferred income tax liabilities		(433	)		(230	)


Net deferred income tax assets	$	19,730		$	13,285

(a)

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

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

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

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

Uncertain Tax Positions

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

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

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

(In millions)



Year Ended June 30,	2023			2022			2021

Beginning unrecognized tax benefits	$	15,593		$	14,550		$	13,792
Decreases related to settlements		(329	)		(317	)		(195	)
Increases for tax positions related to the current year		1,051			1,145			790
Increases for tax positions related to prior years		870			461			461
Decreases for tax positions related to prior years		(60	)		(246	)		(297	)
Decreases due to lapsed statutes of limitations		(5	)		0			(1	)


Ending unrecognized tax benefits	$	17,120		$	15,593		$	14,550

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

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

NOTE 9 — GOODWILL

Changes in the carrying amount of goodwill were as follows:

(In millions)		June 30, 2021		Acquisitions		Other			June 30, 2022		Acquisitions		Other			June 30, 2023



Productivity and Business Processes	$	24,317	$	599	$	(105	)	$	24,811	$	11	$	(47	)	$	24,775
Intelligent Cloud		13,256		16,879		47			30,182		223		64			30,469
More Personal Computing		12,138		648		(255	)		12,531		0		111			12,642


Total	$	49,711	$	18,126	$	(313	)	$	67,524	$	234	$	128		$	67,886

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, 2023, May 1, 2022, or May 1, 2021 tests. As of June 30, 2023 and 2022, accumulated goodwill impairment was $11.3 billion.

NOTE 2 — EARNINGS PER SHARE

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

The components of basic and diluted EPS were as follows:

(In millions, except earnings per share)



Year Ended June 30,	2023		2022		2021

Net income available for common shareholders (A)	$	72,361	$	72,738	$	61,271


Weighted average outstanding shares of common stock (B)		7,446		7,496		7,547
Dilutive effect of stock-based awards		26		44		61


Common stock and common stock equivalents (C)		7,472		7,540		7,608


Earnings Per Share

Basic (A/B)	$	9.72	$	9.70	$	8.12
Diluted (A/C)	$	9.68	$	9.65	$	8.05

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

NOTE 11 — DEBT

The components of debt were as follows:

(In millions, issuance by calendar year)							Effective Interest Rate						June 30, 2022



2009 issuance of $3.8 billion			2039			5.20%			5.24%	$	520		$	520
2010 issuance of $4.8 billion			2040			4.50%			4.57%		486			486
2011 issuance of $2.3 billion			2041			5.30%			5.36%		718			718
2012 issuance of $2.3 billion			2042			3.50%			3.57%		454			1,204
2013 issuance of $5.2 billion	2023	–	2043	3.63%	–	4.88%	3.73%	–	4.92%		1,814			2,814
2013 issuance of €4.1 billion	2028	–	2033	2.63%	–	3.13%	2.69%	–	3.22%		2,509			2,404
2015 issuance of $23.8 billion	2025	–	2055	2.70%	–	4.75%	2.77%	–	4.78%		9,805			10,805
2016 issuance of $19.8 billion	2023	–	2056	2.00%	–	3.95%	2.10%	–	4.03%		9,430			9,430
2017 issuance of $17.0 billion	2024	–	2057	2.88%	–	4.50%	3.04%	–	4.53%		8,945			8,945
2020 issuance of $10.0 billion	2050	–	2060	2.53%	–	2.68%	2.53%	–	2.68%		10,000			10,000
2021 issuance of $8.2 billion	2052	–	2062	2.92%	–	3.04%	2.92%	–	3.04%		8,185			8,185


Total face value											52,866			55,511
Unamortized discount and issuance costs											(438	)		(471	)
Hedge fair value adjustments (a)											(106	)		(68	)
Premium on debt exchange											(5,085	)		(5,191	)


Total debt											47,237			49,781
Current portion of long-term debt											(5,247	)		(2,749	)


Long-term debt										$	41,990		$	47,032

(a)

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

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

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

The following table outlines maturities of our long-term debt, including the current portion, as of June 30, 2023:

(In millions)



Year Ending June 30,

2024	$	5,250
2025		2,250
2026		3,000
2027		8,000
2028		0
Thereafter		34,366


Total	$	52,866

NOTE 17 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes the changes in accumulated other comprehensive income (loss) by component:

(In millions)



Year Ended June 30,	2023			2022			2021

Derivatives

Balance, beginning of period	$	(13	)	$	(19	)	$	(38	)
Unrealized gains (losses), net of tax of $9, $(15), and $9		34			(57	)		34
Reclassification adjustments for (gains) losses included in other income (expense), net		(61	)		79			(17	)
Tax expense (benefit) included in provision for income taxes		13			(16	)		2


Amounts reclassified from accumulated other comprehensive income (loss)		(48	)		63			(15	)


Net change related to derivatives, net of tax of $(4), $1, and $7		(14	)		6			19


Balance, end of period	$	(27	)	$	(13	)	$	(19	)


Investments

Balance, beginning of period	$	(2,138	)	$	3,222		$	5,478
Unrealized losses, net of tax of $(393), $(1,440), and $(589)		(1,523	)		(5,405	)		(2,216	)
Reclassification adjustments for (gains) losses included in other income (expense), net		99			57			(63	)
Tax expense (benefit) included in provision for income taxes		(20	)		(12	)		13


Amounts reclassified from accumulated other comprehensive income (loss)		79			45			(50	)


Net change related to investments, net of tax of $(373), $(1,428), and $(602)		(1,444	)		(5,360	)		(2,266	)
Cumulative effect of accounting changes		0			0			10


Balance, end of period	$	(3,582	)	$	(2,138	)	$	3,222


Translation Adjustments and Other

Balance, beginning of period	$	(2,527	)	$	(1,381	)	$	(2,254	)
Translation adjustments and other, net of tax of $0, $0, and $(9)		(207	)		(1,146	)		873


Balance, end of period	$	(2,734	)	$	(2,527	)	$	(1,381	)


Accumulated other comprehensive income (loss), end of period	$	(6,343	)	$	(4,678	)	$	1,822

NOTE 19 — SEGMENT INFORMATION AND GEOGRAPHIC DATA

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

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

Our reportable segments are described below.

Productivity and Business Processes

Our Productivity and Business Processes segment consists of products and services in our portfolio of productivity, communication, and information services, spanning a variety of devices and platforms. This segment primarily comprises:

•

Office Commercial (Office 365 subscriptions, the Office 365 portion of Microsoft 365 Commercial subscriptions, and Office licensed on-premises), comprising Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, Microsoft Viva, and Microsoft 365 Copilot.

•

Office Consumer, including Microsoft 365 Consumer subscriptions, Office licensed on-premises, and other Office services.

•

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

•

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

Intelligent Cloud

Our Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that can power modern business and developers. This segment primarily comprises:

•

Server products and cloud services, including Azure and other cloud services; SQL Server, Windows Server, Visual Studio, System Center, and related Client Access Licenses (“CALs”); and Nuance and GitHub.

•

Enterprise Services, including Enterprise Support Services, Industry Solutions (formerly Microsoft Consulting Services), and Nuance professional services.

More Personal Computing

Our More Personal Computing segment consists of products and services that put customers at the center of the experience with our technology. This segment primarily comprises:

•

Windows, including Windows OEM licensing and other non-volume licensing of the Windows operating system; Windows Commercial, comprising volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings; patent licensing; and Windows Internet of Things.

•

Devices, including Surface, HoloLens, and PC accessories.

•

Gaming, including Xbox hardware and Xbox content and services, comprising first- and third-party content (including games and in-game content), Xbox Game Pass and other subscriptions, Xbox Cloud Gaming, advertising, third-party disc royalties, and other cloud services.

•

Search and news advertising, comprising Bing (including Bing Chat), Microsoft News, Microsoft Edge, and third-party affiliates.

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 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 and operating income were as follows during the periods presented:

(In millions)



Year Ended June 30,		2023		2022		2021

Revenue

Productivity and Business Processes	$	69,274	$	63,364	$	53,915
Intelligent Cloud		87,907		74,965		59,728
More Personal Computing		54,734		59,941		54,445


Total	$	211,915	$	198,270	$	168,088


Operating Income

Productivity and Business Processes	$	34,189	$	29,690	$	24,351
Intelligent Cloud		37,884		33,203		26,471
More Personal Computing		16,450		20,490		19,094


Total	$	88,523	$	83,383	$	69,916

No sales to an individual customer or country other than the United States accounted for more than 10% of revenue for fiscal years 2023, 2022, or 2021. Revenue, classified by the major geographic areas in which our customers were located, was as follows:

(In millions)



Year Ended June 30,	2023		2022		2021

United States (a)	$	106,744	$	100,218	$	83,953
Other countries		105,171		98,052		84,135


Total	$	211,915	$	198,270	$	168,088

(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.

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

(In millions)



Year Ended June 30,	2023		2022		2021

Server products and cloud services	$	79,970	$	67,350	$	52,589
Office products and cloud services		48,728		44,862		39,872
Windows		21,507		24,732		22,488
Gaming		15,466		16,230		15,370
LinkedIn		15,145		13,816		10,289
Search and news advertising		12,208		11,591		9,267
Enterprise Services		7,722		7,407		6,943
Devices		5,521		7,306		7,143
Dynamics		5,437		4,687		3,754
Other		211		289		373


Total	$	211,915	$	198,270	$	168,088

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

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,	2023		2022		2021

United States	$	114,380	$	106,430	$	76,153
Ireland		16,359		15,505		13,303
Other countries		56,500		44,433		38,858


Total	$	187,239	$	166,368	$	128,314

The components of investments were as follows:

(In millions)		Adjusted Cost Basis		Unrealized Gains		Unrealized Losses			Recorded Basis		Cash and Cash Equivalents		Short-term Investments		Equity Investments



June 30, 2023

Changes in Fair Value Recorded in Other Comprehensive Income

Commercial paper	Level 2	$	16,589	$	0	$	0		$	16,589	$	12,231	$	4,358	$	0
Certificates of deposit	Level 2		2,701		0		0			2,701		2,657		44		0
U.S. government securities	Level 1		65,237		2		(3,870	)		61,369		2,991		58,378		0
U.S. agency securities	Level 2		2,703		0		0			2,703		894		1,809		0
Foreign government bonds	Level 2		498		1		(24	)		475		0		475		0
Mortgage- and asset-backed securities	Level 2		824		1		(39	)		786		0		786		0
Corporate notes and bonds	Level 2		10,809		8		(583	)		10,234		0		10,234		0
Corporate notes and bonds	Level 3		120		0		0			120		0		120		0
Municipal securities	Level 2		285		1		(18	)		268		7		261		0
Municipal securities	Level 3		103		0		(16	)		87		0		87		0


Total debt investments		$	99,869	$	13	$	(4,550	)	$	95,332	$	18,780	$	76,552	$	0


Changes in Fair Value Recorded in Net Income

Equity investments	Level 1								$	10,138	$	7,446	$	0	$	2,692
Equity investments	Other									7,187		0		0		7,187


Total equity investments									$	17,325	$	7,446	$	0	$	9,879


Cash									$	8,478	$	8,478	$	0	$	0
Derivatives, net (a)										6		0		6		0


Total									$	121,141	$	34,704	$	76,558	$	9,879

(In millions)		Adjusted Cost Basis		Unrealized Gains		Unrealized Losses			Recorded Basis		Cash and Cash Equivalents		Short-term Investments		Equity Investments



June 30, 2022

Changes in Fair Value Recorded in Other Comprehensive Income

Commercial paper	Level 2	$	2,500	$	0	$	0		$	2,500	$	2,498	$	2	$	0
Certificates of deposit	Level 2		2,071		0		0			2,071		2,032		39		0
U.S. government securities	Level 1		79,696		29		(2,178	)		77,547		9		77,538		0
U.S. agency securities	Level 2		419		0		(9	)		410		0		410		0
Foreign government bonds	Level 2		506		0		(24	)		482		0		482		0
Mortgage- and asset-backed securities	Level 2		727		1		(30	)		698		0		698		0
Corporate notes and bonds	Level 2		11,661		4		(554	)		11,111		0		11,111		0
Corporate notes and bonds	Level 3		67		0		0			67		0		67		0
Municipal securities	Level 2		368		19		(13	)		374		0		374		0
Municipal securities	Level 3		103		0		(6	)		97		0		97		0


Total debt investments		$	98,118	$	53	$	(2,814	)	$	95,357	$	4,539	$	90,818	$	0


Changes in Fair Value Recorded in Net Income

Equity investments	Level 1								$	1,590	$	1,134	$	0	$	456
Equity investments	Other									6,435		0		0		6,435


Total equity investments									$	8,025	$	1,134	$	0	$	6,891


Cash									$	8,258	$	8,258	$	0	$	0
Derivatives, net (a)										8		0		8		0


Total									$	111,648	$	13,931	$	90,826	$	6,891

(a)

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

NOTE 13 — UNEARNED REVENUE

Unearned revenue by segment was as follows:

(In millions)



June 30,	2023		2022

Productivity and Business Processes	$	27,572	$	24,558
Intelligent Cloud		21,563		19,371
More Personal Computing		4,678		4,479


Total	$	53,813	$	48,408

Changes in unearned revenue were as follows:

(In millions)



Year Ended June 30, 2023

Balance, beginning of period	$	48,408
Deferral of revenue		123,935
Recognition of unearned revenue		(118,530	)


Balance, end of period	$	53,813

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

NOTE 3 — OTHER INCOME (EXPENSE), NET

The components of other income (expense), net were as follows:

(In millions)



Year Ended June 30,	2023			2022			2021

Interest and dividends income	$	2,994		$	2,094		$	2,131
Interest expense		(1,968	)		(2,063	)		(2,346	)
Net recognized gains on investments		260			461			1,232
Net gains (losses) on derivatives		(456	)		(52	)		17
Net gains (losses) on foreign currency remeasurements		181			(75	)		54
Other, net		(223	)		(32	)		98


Total	$	788		$	333		$	1,186

Net Recognized Gains (Losses) on Investments

Net recognized gains (losses) on debt investments were as follows:

(In millions)



Year Ended June 30,	2023			2022			2021

Realized gains from sales of available-for-sale securities	$	36		$	162		$	105
Realized losses from sales of available-for-sale securities		(124	)		(138	)		(40	)
Impairments and allowance for credit losses		(10	)		(81	)		(2	)


Total	$	(98	)	$	(57	)	$	63

Net recognized gains (losses) on equity investments were as follows:

(In millions)



Year Ended June 30,	2023			2022			2021

Net realized gains on investments sold	$	75		$	29		$	123
Net unrealized gains on investments still held		303			509			1,057
Impairments of investments		(20	)		(20	)		(11	)


Total	$	358		$	518		$	1,169

NOTE 14 — LEASES

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

The components of lease expense were as follows:

(In millions)



Year Ended June 30,	2023			2022		2021

Operating lease cost	$	2,875	$	2,461	$	2,127


Finance lease cost:
Amortization of right-of-use assets	$	1,352	$	980	$	921
Interest on lease liabilities		501		429		386


Total finance lease cost	$	1,853	$	1,409	$	1,307

Supplemental cash flow information related to leases was as follows:

(In millions)



Year Ended June 30,	2023			2022		2021

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	2,706	$	2,368	$	2,052
Operating cash flows from finance leases		501		429		386
Financing cash flows from finance leases		1,056		896		648

Right-of-use assets obtained in exchange for lease obligations:
Operating leases		3,514		5,268		4,380
Finance leases		3,128		4,234		3,290

Supplemental balance sheet information related to leases was as follows:

(In millions, except lease term and discount rate)



June 30,	2023			2022

Operating Leases

Operating lease right-of-use assets	$	14,346		$	13,148


Other current liabilities	$	2,409		$	2,228
Operating lease liabilities		12,728			11,489


Total operating lease liabilities	$	15,137		$	13,717


Finance Leases

Property and equipment, at cost	$	20,538		$	17,388
Accumulated depreciation		(4,647	)		(3,285	)


Property and equipment, net	$	15,891		$	14,103


Other current liabilities	$	1,197		$	1,060
Other long-term liabilities		15,870			13,842


Total finance lease liabilities	$	17,067		$	14,902


Weighted Average Remaining Lease Term

Operating leases		8 years			8 years
Finance leases		11 years			12 years

Weighted Average Discount Rate

Operating leases		2.9%			2.1%
Finance leases		3.4%			3.1%

The following table outlines maturities of our lease liabilities as of June 30, 2023:

(In millions)



Year Ending June 30,	Operating Leases			Finance Leases

2024	$	2,784		$	1,747
2025		2,508			2,087
2026		2,142			1,771
2027		1,757			1,780
2028		1,582			1,787
Thereafter		6,327			11,462


Total lease payments		17,100			20,634
Less imputed interest		(1,963	)		(3,567	)


Total	$	15,137		$	17,067

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

NOTE 15 — CONTINGENCIES

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 were stricken by the court. A hearing on general causation took place in September of 2022. In April of 2023, the court granted defendants’ motion to strike the testimony of plaintiffs’ experts that cell phones cause brain cancer and entered an order excluding all of plaintiffs’ experts from testifying.

Irish Data Protection Commission Matter

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

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

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(In millions)



June 30,	2023		2022

Raw materials	$	709	$	1,144
Work in process		23		82
Finished goods		1,768		2,516


Total	$	2,500	$	3,742