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What Is an Annual Report?

Understanding annual reports, special considerations, mutual fund annual reports, the bottom line.

• Corporate Finance
• Financial statements: Balance, income, cash flow, and equity

Annual Report Explained: How to Read and Write Them

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

An annual report is a document that public corporations must provide annually to shareholders that describes their operations and financial conditions. The front part of the report often contains an impressive combination of graphics, photos, and an accompanying narrative, all of which chronicle the company's activities over the past year and may also make forecasts about the future of the company. The back part of the report contains detailed financial and operational information.

Key Takeaways

• An annual report is a corporate document disseminated to shareholders that spells out the company's financial condition and operations over the previous year.
• It was not until legislation was enacted after the stock market crash of 1929 that the annual report became a regular component of corporate financial reporting.
• Registered mutual funds must also distribute a full annual report to their shareholders each year.

Investopedia / Jake Shi

Annual reports became a regulatory requirement for public companies following the stock market crash of 1929 when lawmakers mandated standardized corporate financial reporting. The intent of the required annual report is to provide public disclosure of a company's operating and financial activities over the past year. The report is typically issued to shareholders and other stakeholders who use it to evaluate the firm's financial performance and to make investment decisions.

Typically, an annual report will contain the following sections:

• General corporate information
• Operating and financial highlights
• Letter to the shareholders from the CEO
• Narrative text, graphics, and photos
• Management's discussion and analysis (MD&A)
• Financial statements, including the balance sheet, income statement, and cash flow statement
• Notes to the financial statements
• Auditor's report
• Summary of financial data
• Accounting policies

Current and prospective investors, employees, creditors, analysts, and any other interested party will analyze a company using its annual report.

In the U.S., a more detailed version of the annual report is referred to as Form 10-K  and is submitted to the U.S. Securities and Exchange Commission (SEC). Companies may submit their annual reports electronically through the SEC's EDGAR database . Reporting companies must send annual reports to their shareholders when they hold annual meetings to elect directors. Under the proxy rules, reporting companies are required to post their proxy materials, including their annual reports, on their company websites.

The annual report contains key information on a company's financial position that can be used to measure:

• A company's ability to pay its debts as they come due
• Whether a company made a profit or loss in its previous fiscal year
• A company's growth over a number of years
• How much of earnings are retained by a company to grow its operations
• The proportion of operational expenses to revenue generated

The annual report also determines whether the information conforms to the generally accepted accounting principles (GAAP). This confirmation will be highlighted as an " unqualified opinion " in the auditor's report section.

Fundamental analysts also attempt to understand a company's future direction by analyzing the details provided in its annual report.

In the case of mutual funds, the annual report is a required document that is made available to a fund's shareholders on a fiscal-year basis. It discloses certain aspects of a mutual fund's operations and financial condition. In contrast to corporate annual reports, mutual fund annual reports are best described as "plain vanilla" in terms of their presentation.

A mutual fund annual report, along with a fund's prospectus and statement of additional information, is a source of multi-year fund data and performance, which is made available to fund shareholders as well as to prospective fund investors. Unfortunately, most of the information is quantitative rather than qualitative, which addresses the mandatory accounting disclosures required of mutual funds.

All mutual funds that are registered with the SEC are required to send a full report to all shareholders every year. The report shows how well the fund fared over the fiscal year. Information that can be found in the annual report includes:

• Table, chart, or graph of holdings by category (e.g., type of security, industry sector, geographic region, credit quality, or maturity)
• Audited financial statements, including a complete or summary (top 50) list of holdings
• Condensed financial statements
• Table showing the fund’s returns for one-, five- and 10-year periods
• Management’s discussion of fund performance
• Management information about directors and officers, such as name, age, and tenure
• Remuneration or compensation paid to directors, officers, and others

How Do You Write an Annual Report?

An annual report has a few sections and steps that must convey a certain amount of information, much of which is legally required for public companies. Most public companies hire auditing companies to write their annual reports. An annual report begins with a letter to the shareholders, then a brief description of the business and industry. Following that, the report should include the audited financial statements: balance sheet, income statement, and statement of cash flows. The last part will typically be notes to the financial statements, explaining certain facts and figures.

Is an Annual Report the Same As a 10-K Filing?

In general, an annual report is similar to the 10-K filing in that both report on the company's performance for the year. Both are considered to be the last financial filing of the year and summarize how the company did for that period. Annual reports are much more visually friendly. They are designed well and contain images and graphics. The 10-K filing only reports numbers and other qualitative information without any design elements or additional flair.

What Is a 10-Q Filing?

A 10-Q filing is a form that is filed with the Securities and Exchange Commission (SEC) that reports the quarterly earnings of a company. Most public companies have to file a 10-Q with the SEC to report their financial position for the quarter.

Public companies must produce annual reports to show their current financial conditions and operations. Annual reports can be used to examine a company's financial position and, possibly, understand what direction it will move in the future. These reports function differently for mutual funds; in this case, they are made available each fiscal year and are typically simpler.

U.S. Securities and Exchange Commission. " Speech By SEC Commissioner: Remarks Before the Securities Traders Association ."

U.S. Securities and Exchange Commission. " Annual Report ."

U.S. Securities and Exchange Commission. " How to Read a 10-K/10-Q ."

U.S. Securities and Exchange Commission. " Final Rule: Shareholder Reports and Quarterly Portfolio Disclosure of Registered Management Investment Companies ."

U.S. Securities and Exchange Commission. " Mutual Funds - The Next 75 Years ."

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Annual Report

The annual report to shareholders is a document used by most public companies to disclose corporate information to their shareholders. It is usually a state-of-the-company report, including an opening letter from the Chief Executive Officer, financial data, results of operations, market segment information, new product plans, subsidiary activities, and research and development activities on future programs. Reporting companies must send annual reports to their shareholders when they hold annual meetings to elect directors. Under the proxy rules, reporting companies are required to post their proxy materials, including their annual reports, on their company websites.

The annual report on Form 10-K , which must be filed with the SEC, may contain more detailed information about the company’s financial condition than the annual report and will include the annual financial statements of the company.  Companies sometimes elect to send their annual report on Form 10-K to their shareholders in lieu of, or in addition to, providing shareholders with a separate annual report to shareholders.

Some companies may submit their annual reports electronically in the SEC’s EDGAR database. You can learn how to use EDGAR to find annual and other reports filed by companies. If you know that a company has filed its annual report with the SEC, you can enter "ARS" in the type of form box in EDGAR.

If you are looking for the SEC's annual report, please click here .

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Start » strategy, what is an annual report , and how do you file it.

The U.S. Securities and Exchange Commission and many states require businesses to file annual reports. Use this guide to meet your reporting obligations.

Certain business entities must file annual reports (statements of information) with state governments, typically through the State Department. Public companies must give shareholders a yearly report detailing their operational and financial condition.

Additionally, public and certain private organizations may need to file a separate document with the U.S. Securities and Exchange Commission (SEC). So, which reports do you need to file or share with stakeholders? Explore the types of annual reports and learn how (and when) to file them.

What is an annual report for a small business?

A state-required annual report is a short document that explains who owns the company, what products or services it sells, and how to contact the people in charge. Many small businesses file an annual report with their formation state (where they initially registered their company) and any foreign states where they are registered to do business.

Wolters Kluwer said the following statutory business entities might need to file an information report:

• Business corporations .
• Nonprofit corporations.
• Limited liability companies (LLCs).
• Limited partnerships (LPs).
• Limited liability partnerships (LLPs).

The SEC requires publicly traded companies to share yearly reports with shareholders. Unlike state-mandated forms, this annual report is an in-depth accounting of a corporation’s finances and operations. Lastly, federal security laws mandate public corporations to file Form 10-K yearly.

[ Read more: S Corp vs. LLC: What’s the Difference? ]

State-mandated annual report filing

Most states require an annual report, also called a periodic report, statement of information, or annual registration. However, there are exceptions. For example, Arizona doesn’t require an LLC annual report, and if you formed your company in Indiana , you only need to send the report every two years.

Since rules and due dates differ, always check with your state’s business department. States usually send a reporting form to the business address on file. You can return it via postal mail along with any annual registration fees. Many also allow you to file your yearly report online.

Unlike state reporting requirements, a company’s annual report for shareholders is lengthy and tells a story about its financial health.

SCORE noted that state-mandated annual reports are “relatively short documents” and include:

• Your company’s name and address.
• Purpose of the business.
• Names and addresses of a corporation’s directors and officers.
• Registered agent’s name and address.
• Names and addresses of LLC members or managers.

Annual reports for shareholders

According to Investopedia , “Annual reports became a regulatory requirement for public companies following the stock market crash of 1929 when lawmakers mandated standardized corporate financial reporting.” These documents give a comprehensive view of your organization, allowing shareholders, stakeholders, and investors to understand your corporation’s financial position.

Unlike state reporting requirements, a company’s annual report for shareholders is lengthy and tells a story about its financial health. Harvard Business School Online said, “Usually, an annual report is split into two halves.” The first section shares “the company’s narrative,” and the second part “presents data” minus the “narrative components.”

Investor.gov stated that businesses must provide shareholders with annual reports when holding yearly meetings to elect the board of directors . Additionally, proxy rules require companies to “post their proxy materials, including their annual reports, on their company websites.”

An annual report template has the following sections:

• Summary of general business information.
• Annual performance highlights.
• CEO’s letter to the shareholders.
• Management’s discussion and analysis (MD&A).
• Financial statements .
• Supporting notes, photos, and graphics.
• Auditor’s report.
• Financial information summary.
• Review of accounting policies.

[ Read more: Which Type of Accounting Service Do You Need? ]

SEC rules for filing annual statements

Organizations required to report to the SEC — including all public and some private companies — must disclose financials yearly to the SEC. Section 12 of the Exchange Act defines a private reporting company as one that has more than $10 million in total assets and a class of equity securities with either 2,000 or more persons or 500 or more individuals who are not accredited investors, or one that “lists the securities on a U.S. Exchange.”

According to Form 10-K instructions

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What Is an Annual Report? What’s Included & When to File

Running a business can sometimes be exhilarating work, but it can also come with its fair share of tedium—thanks to the long list of tasks associated with compliance. Filing an annual report in your state of incorporation—and any additional states where you’re registered to do business—is one of those tasks. And like many business compliance tasks, the specific requirements to file vary from state to state.

What is an annual report?

An annual report is a brief overview of key facts about your company filed to the Secretary of State in any state where you are registered to do business. Typically, annual reports include business contact information and a record of the company’s activities (such as a merger or a dissolution) during a given reporting period.

States use annual reports to keep information about your company up-to-date and make sure that they are able to deliver routine government correspondence or contact you in the event of a legal action. In some cases, the Secretary of State also uses annual report information to assess your franchise tax obligations in a particular state.

An annual report can also be known as an annual statement, a statement of information , a periodic report , a biennial statement, or a decennial statement. Filing processes, fees, and frequency all vary by state—biennial statements are due every two years, as an example, and decennial statements are due every ten.

Annual report vs. annual shareholder report

Although both are sometimes referred to as annual reports, the annual information reports required of most business entities are distinct from the comprehensive annual shareholder reporting required of public companies. Annual shareholder reports are federally mandated disclosures designed to help stakeholders and potential investors evaluate a company’s performance and financial conditions and make informed investment decisions. They include quantitative and qualitative performance analysis, financial statements (including cash flow statements, income statements, and balance sheets), an auditor’s report, an overview of accounting policies, and details about the company’s operations.

Who’s required to file an annual report? Who isn’t?

Most states require limited liability companies (LLCs) , corporations, limited partnerships, and limited liability partnerships (LLPs) to file annual reports. In most cases, these business entities are required to submit an annual report in every state in which they are registered to do business.

Sole proprietorships and partnerships typically aren’t required to file annual reports, although jurisdictions may require annual renewals for certain types of business licenses.

What’s covered in an annual report?

Although specifics vary by state and business entity, annual reports typically include the following information about the company:

• Business name
• Primary office address
• A brief statement of business purpose
• Your EIN and any other state-issued registration numbers
• Registered agent information (if applicable)
• Addresses of offices in the state (if applicable)
• Fictitious name (if applicable)
• Number of authorized shares (for corporations that issue shares)
• The names and addresses of directors and officers (for a corporation), members and managers (for an LLC), and partners (for a partnership)

Some states will also request financial information, such as liabilities and assets located in the state.

Most states charge an annual reporting fee, which can range from $9 to over $1000 depending on the state, business entity type, and specifics about the company’s operations. Corporation or LLC fees, as an example, may be assessed based on the number of authorized shares or the number of LLC members.

When do you need to file an annual report?

Although there’s a lot of overlap in annual report content across states, due dates vary widely.

States require different filing frequencies and use different methods to establish filing deadlines. Depending on the state, you may be required to file annually, biannually, or once a decade. Your due dates might fall in a state-determined month (e.g. every January) or be based on when you originally registered to do business in the state.

These differences can make it tedious to track deadlines—especially if you have reporting obligations in multiple states. If you formed your business in New York in 2020 and registered to do business in ten other states after hiring remote employees , you might end up with six annual reports due in January, one each in June and July, one due every other December, and one due every tenth December.

Mosey ’s compliance platform can help you stay on top of these deadlines. With Mosey, you can automate filing annual reports in supported states, track requirements and recurring deadlines, receive alerts for key tasks, and manage state mail all in one place.

Penalties for not filing an annual report or filing late

Most states impose fees for filing a late annual report—and if you don’t file at all, consequences can be severe.

Failing to file an annual report in your state of incorporation can result in loss of good standing, affecting your ability to open business bank accounts or obtain financing. In some cases, it can even cause your business to be dissolved entirely.

If you don’t file a report in a state in which you are registered as a foreign entity, that state can revoke your ability to do business in the state.

Mosey features active monitoring and notifications to help you stay on top of annual report filing for your company. Import your incorporation date or foreign qualification date for each state and Mosey will calculate your annual report filing requirements and deadlines automatically. They will be added to your account for easy management and Mosey will alert you when they become upcoming tasks to complete. Mosey keeps it all organized by showing you the requirements, when they are due, and who is doing what. Mosey will even automate filing the annual report for you—just click a button and we’re on it.

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How to Quickly & Effectively Read an Annual Report

• 04 Jun 2020

Intelligent investing requires analyzing a vast amount of information about a company to determine its financial health. Armed with this information, an investor can better understand how much risk might be involved with backing a company based on how well it’s performed historically, in recent quarters, and toward its financial targets.

Exactly where this information comes from depends on the specific company that’s being invested in, but typically requires several financial statements, including a balance sheet, cash flow statement, and income statement.

In addition to these documents, most investors look forward to reviewing a company’s annual report—a collection of financial information and analysis that can prove invaluable in evaluating the health of a company.

If you’re not an investor, but an employee working within a corporation, the annual report can impart valuable information pertinent to your career. Understanding how your company is performing and the impact your actions have had on its business objectives can help you advocate for a promotion or other form of career advancement .

If you’re unfamiliar with what goes into an annual report, there’s some good news: You don’t need to be a financial expert to get value out of the document or understand the messaging in it.

Here’s an overview of the different information you’ll find in an annual report and how you can put it to use.

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What Is an Annual Report?

An annual report is a publication that a public corporation is required by law to publish annually. It describes the company’s operations and financial conditions so that current and potential shareholders can make informed decisions about investing in it.

The annual report is often split into two sections, or halves.

The first section typically includes a narrative of the company’s performance over the previous year, as well as forward-looking statements: Letters to shareholders from the chief executive officer, chief financial officer, and other key figures, as well as graphics, photos, and charts.

The second section strips the narrative out of the picture and presents a variety of financial documents and statements.

Unlike other pieces of financial data—and because they include editorial and storytelling—annual reports are typically professionally designed and used as marketing collateral. Annual reports are sent to shareholders every year before an annual shareholder meeting and election of the board of directors, and often accessible to the public via the company’s website.

Annual Report vs. 10-K Report

Annual reports aren’t the only documents public companies are required to publish yearly. The US Securities and Exchange Commission (SEC) requires public firms also to produce a 10-K report , which informs investors of a business’s financial status before they buy or sell shares.

While there’s similar data in both an annual and 10-K report, the two documents are separate.

10-K reports are organized per SEC guidelines and include full descriptions of a company’s fiscal activity, corporate agreements, risks, opportunities, current operations, executive compensation, and market activity. You can also find detailed discussions of operations for the year, as well as a full analysis of the industry and marketplace.

Because of this, 10-K reports are longer and denser than annual reports, and have strict filing requirements—they must be filed with the SEC between 60 to 90 days after the end of a company’s fiscal year.

If you need to review a 10-K report, you can find it on the SEC website .

What Information Is Contained In An Annual Report?

An annual report typically consists of:

• Letters to shareholders: These documents provide a broad overview of the company’s activities and performance over the course of the year, as well as a reflection on its general business environment. An annual report usually includes a shareholder letter from the CEO or president, and may also contain letters from other key figures, such as the CFO.
• Management’s discussion and analysis (MD&A): This is a detailed analysis of the company’s performance, as conducted by its executives.
• Audited financial statements: These are financial documents that detail the company’s financial performance. Commonly included statements include balance sheets, cash flow statements, income statements, and equity statements.
• A summary of financial data: This refers to any notes or discussions that are pertinent to the financial statements listed above.
• Auditor’s report: This report describes whether the company has complied with generally accepted accounting principles (GAAP) in preparing its financial statements.
• Accounting policies: This is an overview of the policies the company’s leadership team relied upon in preparing the annual report and financial statements.

What to Look for in an Annual Report

While all the information found in an annual report can be useful to potential investors, the financial statements are particularly valuable, as they provide data that isn’t obscured by any sort of narrative or opinion. Three of the most important financial statements you should evaluate are the balance sheet, cash flow statement, and income statement.

The balance sheet shows a company’s assets, liabilities, and owners’ equity accounts as of a specific date, illustrating its financial position and health.

The income statement shows a company’s revenue and expense accounts for a set period, allowing you to gauge its financial performance. Using trial balances from any two points in time, a business can create an income statement that tells the financial story of the activities for that period.

Cash flow statements provide a detailed picture of what happened to a business’s cash during an accounting period. A cash flow statement shows the different areas in which a company used or received cash, and reconciles the beginning and ending cash balances. Cash flows are important for valuing a business and managing liquidity, and essential to understanding where actual cash is being generated and used. The statement of cash flows gives more detail about the sources of cash inflows and the uses of cash outflows.

These three documents can help you understand the financial health and status of a company, and they’re all included in the annual report. When you read the annual report—including the editorial information—you can gain a better understanding of the business as a whole.

An annual report can help you learn more details about what type of company you work for and how it operates, including:

• Whether it’s able to pay debts as they come due
• Its profits and/or losses year over year
• If and how it’s grown over time
• What it requires to maintain or expand its business
• Operational expenses compared to generated revenues

All of these insights can help you excel in your role, be privy to conversations surrounding the future of the company, and develop into an effective leader .

Critical Information for Investors and Employees Alike

Being able to analyze annual reports can help you gain a clearer picture of where a company sits within its industry and the broader economy, illuminating opportunities and threats.

The best part about learning to read and understand financial information is that you don’t need to be a certified accountant to do so. Start by analyzing financial documents over a set period. Then, when the annual and 10-K reports are published, you can review and understand what leadership is saying about the operational and financial health of your company.

If you’re an investor, knowing how to read an annual report can give you more information from which to base your decision on whether to invest in a company. If you’re an employee within an organization, learning how to read and apply the information contained in an annual report is an essential financial accounting skill that can help you understand your company’s goals and capabilities and, ultimately, further your career.

Do you want to take your career to the next level? Explore Financial Accounting and our other online finance and accounting courses , which can teach you the key financial topics you need to understand business performance and potential. Download our free course flowchart to determine which best aligns with your goals.

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Microsoft Annual Report 2023

Annual report 2023, satya nadella.

Chief Executive Officer

Dear shareholders, colleagues, customers, and partners:

We are living through a time of historic challenge and opportunity. As I write this, the world faces ongoing economic, social, and geopolitical volatility. At the same time, we have entered a new age of AI that will fundamentally transform productivity for every individual, organization, and industry on earth, and help us address some of our most pressing challenges.

This next generation of AI will reshape every software category and every business, including our own. Forty-eight years after its founding, Microsoft remains a consequential company because time and time again—from PC/Server, to Web/Internet, to Cloud/Mobile—we have adapted to technological paradigm shifts. Today, we are doing so once again, as we lead this new era.

Amid this transformation, our mission to empower every person and every organization on the planet to achieve more remains constant. As a company, we believe we can be the democratizing force for this new generation of technology and the opportunity it will help unlock for every country, community, and individual, while mitigating its risks.

Here are just a few examples of how we are already doing this:

• Leading electronic health records vendor Epic is addressing some of the biggest challenges facing the healthcare industry today—including physician burnout—by deploying a wide range of copilot solutions built on Azure OpenAI Service and Dragon Ambient eXperience Copilot.
• Mercado Libre is reducing the time its developers spend writing code by more than 50 percent with GitHub Copilot, as the company works to democratize e-commerce across Latin America.
• Mercedes-Benz is making its in-car voice assistant more intuitive for hundreds of thousands of drivers using ChatGPT via the Azure OpenAI Service.
• Lumen Technologies is helping its employees be more productive, enabling them to focus on higher value-added activities, by deploying Microsoft 365 Copilot.
• Nonprofit The Contingent is matching foster families with children in need using Dynamics 365, Power BI, and Azure, with an eye on using AI to amplify its work across the US.
• And, Taiwan’s Ministry of Education has built an online platform to help elementary and high school students learn English using Azure AI.

To build on this progress, we remain convicted on three things: First, we will maintain our lead as the top commercial cloud while innovating in consumer categories, from gaming to professional social networks. Second, because we know that maximum enterprise value gets created during platform shifts like this one, we will invest to accelerate our lead in AI by infusing this technology across every layer of the tech stack. And, finally, we will continue to drive operating leverage, aligning our cost structure with our revenue growth.

As we make progress on these priorities, we delivered strong results in fiscal year 2023, including a record $211 billion in revenue and over $88 billion in operating income.

A NEW ERA OF AI

There are two breakthroughs coming together to define this new era of AI. The first is the most universal interface: natural language. The long arc of computing has, in many ways, been shaped by the pursuit of increasingly intuitive human-computer interfaces—keyboards, mice, touch screens. We believe we have now arrived at the next big step forward—natural language—and will quickly go beyond, to see, hear, interpret, and make sense of our intent and the world around us.

The second is the emergence of a powerful new reasoning engine. For years, we’ve digitized daily life, places, and things and organized them into databases. But in a world rich with data, what has been most scarce is our ability to reason over it. This generation of AI helps us interact with data in powerful new ways—from completing or summarizing text, to detecting anomalies and recognizing images—to help us identify patterns and surface insights faster than ever.

Together, these two breakthroughs will unlock massive new opportunity. And, in fact, just last month we announced our vision for Copilot , an everyday AI companion. We are building Copilot into all our most used products and experiences and allowing people to summon its power as a standalone app as well. Just like you boot up an OS to access applications or use a browser to visit websites today, our belief is that you will invoke a Copilot to do all those activities and more: to shop, to code, to analyze, to learn, to create.

As a company, any time we approach a transition like this, we do so responsibly. We believe AI should be as empowering across communities as it is powerful, and we’re committed to ensuring it is responsibly built and designed, with safety in mind from the outset.

OUR OPPORTUNITY

Every customer solution area and every layer of our tech stack will be reimagined for the AI era. And that’s exactly what we’ve already begun to do:

Infrastructure

Four years ago, we first invested in our AI supercomputer, with a goal of building the best cloud for training and inference. Today, it’s being used by our partner OpenAI to power its best-in-class foundation models and services, including one of the fastest-growing consumer apps ever—ChatGPT. NVIDIA, as well as leading AI startups like Adept and Inflection, is also using our infrastructure to build its own breakthrough models.

More broadly, organizations continue to choose our ubiquitous computing fabric—from cloud to edge—to run their mission-critical applications. We continued to see more cloud migrations to Azure this past fiscal year, as it remains early when it comes to the long-term cloud opportunity. And we also continue to lead in hybrid computing with Azure Arc, which now has 18,000 customers.

Data and AI

Every AI app starts with data, and having a comprehensive data and analytics platform is more important than ever. Our Intelligent Data Platform brings together operational databases, analytics, and governance so organizations can spend more time creating value and less time integrating their data estate. We also introduced Microsoft Fabric this year, which unifies compute, storage, and governance with a disruptive business model.

With Azure AI, we are making foundation models available as platforms to our customers. We offer the best selection of industry-leading frontier and open models. In January, we made the Azure OpenAI Service broadly available, bringing together advanced models, including ChatGPT and GPT-4, with the enterprise capabilities of Azure. More than 11,000 organizations across industries are already using it for advanced scenarios like content and code generation. Meta chose us this summer as its preferred cloud to commercialize its Llama family of models. And, with Azure AI Studio , we provide a full lifecycle toolchain customers can use to ground these models on their own data, create prompt workflows, and help ensure they are deployed and used safely.

Digital and app innovation

GitHub Copilot is fundamentally transforming developer productivity, helping developers complete coding tasks 55 percent faster. More than 27,000 organizations have chosen GitHub Copilot for Business, and to date more than 1 million people have used GitHub Copilot to code faster. We also announced our vision for the future of software development with GitHub Copilot X , which will bring the power of AI throughout the entire software development lifecycle. All up, GitHub surpassed $1 billion in annual recurring revenue for the first time this fiscal year.

We’re also applying AI across our low-code/no-code toolchain to help domain experts across an organization automate workflows, create apps and webpages, build virtual agents, or analyze data, using just natural language with copilots in Power Platform . More than 63,000 organizations have used AI-powered capabilities in Power Platform to date.

Business applications

We are bringing the next generation of AI to employees across every job function and every line of business with Dynamics 365 Copilot , which works across CRM and ERP systems to reduce burdensome tasks like manual data entry, content generation, and notetaking. In fact, our own support agents are using Copilot in Dynamics 365 Customer Service to resolve more cases faster and without having to call on peers to help. With our Supply Chain Platform , we’re helping customers apply AI to predict and mitigate disruptions. And, with our new Microsoft Sales Copilot , sellers can infuse their customer interactions with data from CRM systems—including both Salesforce and Dynamics—to close more deals.

All up, Dynamics surpassed $5 billion in revenue over the past fiscal year, with our customer experience, service, and finance and supply chain businesses each surpassing $1 billion in annual sales.

Across industries, we are rapidly becoming the partner of choice for any organization looking to generate real value from AI. In healthcare, for example, we introduced the world’s first fully automated clinical documentation application, DAX Copilot . The application helps physicians reduce documentation time by half, freeing them to spend more time face to face with patients. And Epic will integrate it directly into its electronic health records system.

And, in retail, we introduced new tools to help companies manage their day-to-day operations and digitize their physical stores.

Modern work

We are rapidly evolving Microsoft 365 into an AI-first platform that enables every individual to amplify their creativity and productivity, with both our established applications like Office and Teams, as well as new apps like Designer, Stream, and Loop. Microsoft 365 is designed for today’s digitally connected, distributed workforce.

This year, we also introduced a new pillar of customer value with Microsoft 365 Copilot , which combines next-generation AI with business data in the Microsoft Graph and Microsoft 365 applications to help people be more productive and unleash their creativity at work. Just last month, I was excited to announce that we will make Microsoft 365 Copilot generally available to our commercial customers later this year.

We continue to build momentum in Microsoft Teams across collaboration, chat, meetings, and calls. We introduced a new version of Teams that delivers up to two times faster performance, while using 50 percent less memory. We also introduced Teams Premium to meet enterprise demand for AI-powered features like intelligent meeting recaps. All up, Teams usage surpassed 300 million monthly active users this year.

With Microsoft Viva, we have created a new category for employee experience. Copilot in Viva offers leaders a new way to build high-performance teams by prioritizing both productivity and employee engagement. This year, Viva surpassed 35 million monthly active users.

As the rate and pace of cyberthreats continue to accelerate, security is a top priority for every organization. Our comprehensive, AI-powered solutions give defenders the advantage. With Security Copilot , we’re combining large language models with a domain-specific model informed by our threat intelligence and 65 trillion daily security signals, to transform every aspect of security operations center productivity.

All up, more than 1 million organizations now count on our comprehensive, AI-powered solutions to protect their digital estates, and our security business surpassed $20 billion in annual revenue, as we help protect customers across clouds and endpoint platforms. 

Search, advertising, and news

We are reshaping daily search and web habits with our new Bing and Microsoft Edge browser , which brings together search, browsing, chat, and AI into one unified experience to deliver better search, more complete answers, a new chat experience, and the ability to generate content. We think of these tools as an AI copilot for the web.

We are also bringing these breakthrough capabilities to businesses, with Bing Chat Enterprise , which offers commercial data protection, providing an easy on-ramp for any organization looking to get the benefit of next-generation AI today.

Although it’s early in our journey, Bing users engaged in more than 1 billion chats and created more than 750 million images over the past year as they apply these new tools to get things done. And Edge has taken share for nine consecutive quarters.

More broadly, we continue to expand our opportunity in advertising. This year, Netflix chose us as its exclusive technology and sales partner for its first ad-supported subscription offering, a validation of the differentiated value we provide to any publisher looking for a flexible partner to build and innovate with them.

The excitement around AI is creating new opportunities across every function—from marketing, sales, service, and finance, to software development and security. And LinkedIn is increasingly where people are going to learn, discuss, and uplevel their skills. We are using AI to help our members and customers connect to opportunities and tap into the experiences of experts on the platform. In fact, our AI-powered articles are already the fastest-growing traffic driver to the network.

All up, LinkedIn’s revenue surpassed $15 billion for the first time this fiscal year, a testament to how mission critical the platform has become to help more than 950 million members connect, learn, sell, and get hired.

In gaming, we are rapidly executing on our ambition to be the first choice for people to play great games whenever, wherever, and however they want. With Xbox Game Pass, we are redefining how games are distributed, played, and viewed. Content is the flywheel behind the service’s growth, and our pipeline has never been stronger. It was especially energizing to release Starfield this fall to broad acclaim, with more than 10 million players in the first month post-launch alone.

Earlier this month, we were thrilled to close our acquisition of Activision Blizzard, and we look forward to sharing more in the coming months about how, together , we will bring the joy of gaming to more people around the world.

Devices and creativity

Finally, we’re turning Windows into a powerful new AI canvas with Copilot , which rolled out as part of a Windows 11 update last month. It uniquely incorporates the context and intelligence of the web, your work data, and what you are doing in the moment on your PC to provide better assistance, while keeping your privacy and security at the forefront. Overall, the number of devices running Windows 11 more than doubled in the past year. And we are also transforming how Windows is experienced and managed with Azure Virtual Desktop and Windows 365, which together surpassed $1 billion in annual revenue for the first time.

OUR RESPONSIBILITY

As we pursue our opportunity, we are also working to ensure technology helps us solve problems—not create new ones. To do this, we focus on four enduring commitments that are central to our mission and that take on even greater importance in this new era. For us, these commitments are more than just words. They’re a guide to help us make decisions across everything we do—as we design and develop products, shape business processes and policies, help our customers thrive, build partnerships, and more —always asking ourselves critical questions to ensure our actions are aligned with them.

How can we expand opportunity?

First, we believe access to economic growth and opportunity should reach every person, organization, community, and country. And although AI can serve as a catalyst for opportunity and growth, we must first ensure everyone has access to the technologies, data, and skills they need to benefit.

To achieve this, we are focused on getting technology into the hands of nonprofits, social entrepreneurs, and other civil society organizations to help them digitally transform, so they can help address some of society’s biggest challenges. This year, we provided nonprofits with over $3.8 billion in discounted and donated technology. Nearly 325,000 nonprofits used our cloud. And to help them tap the potential of AI, we’re building new AI capabilities for fundraising, marketing, and program delivery.

AI will displace some jobs, but it will also create new ones. That’s why we aim to train and certify 10 million people by 2025 with the skills for jobs and livelihoods in an increasingly digital economy. Since July 2020, we’ve helped 8.5 million people, including 2.7 million this year. We’ve also focused on skilling women and underrepresented communities in cybersecurity, working across 28 countries and with nearly 400 US community colleges to scale our efforts.

Finally, to help people learn more about AI, we launched the first online Professional Certificate on Generative AI in partnership with LinkedIn Learning, created AI tools for educators, and held our first AI Community Learning event in the US. These events will be replicated around the world and localized in 10 languages over the next year. We also partnered to launch a Generative AI Skills Grant Challenge to explore how nonprofit, social enterprise, and research or academic institutions can empower the workforce to use this new generation of AI.

How can we earn trust?

To create positive impact with technology, people need to be able to trust the technologies they use and the companies behind them. For us, earning trust spans the responsible use of AI, protecting privacy, and advancing digital safety and cybersecurity. 

Our commitment to responsible AI is not new. Since 2017, we’ve worked to develop our responsible AI practice, recognizing that trust is never given but earned through action.

We have translated our AI principles into a core set of implementation processes, as well as tools, training, and practices to support compliance. But internal programs aren’t enough. We also enable our customers and partners to develop and deploy AI safely, including through our AI customer commitments and services like Azure AI Studio, with its content safety tooling and access to our Responsible AI dashboard.

Building AI responsibly requires that we work with other industry leaders, civil society, and governments to advocate for AI regulations and governance globally. This year, we released our Governing AI Blueprint , which outlines concrete legal and policy recommendations for AI guardrails. We are signatories to the eight voluntary commitments developed with the US White House, and proud of the six additional commitments we’ve made to further strengthen and operationalize the principles of safety, security, and trust.

The era of AI heightens the importance of cybersecurity, and we deepened our work across the private and public sectors to improve cyber-resilience. We’ve continued to support Ukraine in defending critical infrastructure, detecting and disrupting cyberattacks and cyberinfluence operations, and providing intelligence related to these attacks. Our Microsoft Threat Analysis Center team produced more than 500 intelligence reports to help keep customers and the public informed. And we published our third annual Microsoft Digital Defense Report , sharing our learnings and security recommendations.

We also remain committed to creating safe experiences online and protecting customers from illegal and harmful content and conduct, while respecting human rights. We supported the Christchurch Call Initiative on Algorithmic Outcomes to address terrorist and violent and extremist content online. And through the World Economic Forum’s Global Coalition for Digital Safety, we co-led the development of new global principles for digital safety.

Protecting customers’ privacy and giving them control of their data is more important than ever. We’ve begun our phased rollout of the EU Data Boundary , supporting our commercial and public sector customers’ need for data sovereignty. And each month, more than 3 million people exercise their data protection rights through our privacy dashboard, making meaningful choices about how their data is used.

How can we protect fundamental rights?

In an increasingly digital world, we have a responsibility to promote and protect people’s fundamental rights and address the challenges technology creates. For us, this means upholding responsible business practices, expanding connectivity and accessibility, advancing fair and inclusive societies, and empowering communities.

In 2023, we worked diligently to anticipate harmful uses of our technology and put guardrails on the use of technologies that are consequential to people’s lives or legal status, create risk of harm, or threaten human rights. We will continue to assess the impact of our technologies, engage our stakeholders, and model and adopt responsible practices and respect for human rights—including across our global supply chain.

Today, our lives are more connected than ever. Access to education, employment, healthcare, and other critical services is increasingly dependent on technology. That’s why we’ve expanded our commitment to bring access to affordable high-speed internet to a quarter of a billion people around the world, including 100 million people in Africa, by the end of 2025. Since 2017, we’ve helped bring internet access to 63 million people, a key first step to ensuring communities will have access to AI and other digital technologies.

This year, we also continued working toward our five-year commitment to bridge the disability divide with a focus on helping close the accessibility knowledge gap. Seven hundred and fifty-thousand learners enriched their understanding of disability and accessibility in partnership with LinkedIn Learning , Teach Access , and the Microsoft disability community.

In addition, we’re stepping up efforts to combat online disinformation through new media content provenance technologies—enabling users to verify if an image or video was generated by AI. We continued our efforts to promote racial equity across Microsoft, our ecosystem, and our communities, including our work to advance justice reform through data-driven insights. And we provided support in response to eight humanitarian disasters, including committing $540 million of support to those who have been impacted by the War in Ukraine.

Finally, recognizing AI’s potential to advance human rights and humanitarian action, we worked on several AI for Humanitarian Action projects. Together with our partners, we’re building the capabilities to identify at-risk communities , estimate seasonal hunger, predict malnutrition, and assist in disease identification.

How can we advance sustainability?

Climate change is the defining issue of our generation, and addressing it requires swift, collective action and technological innovation. We are committed to meeting our own goals while enabling others to do the same. That means taking responsibility for our operational footprint and accelerating progress through technology.

We continue to see extreme weather impacting communities globally. To meet the urgent need, this must be a decade of innovation and decisive action—for Microsoft, our customers, and the world.

In our latest Environmental Sustainability Report , we shared our progress toward our 2030 sustainability targets across carbon, water, waste, and ecosystems. In 2022, our overall carbon emissions declined by 0.5 percent while our business grew. Addressing scope 3 emissions, which account for the vast majority of our emissions, is arguably our ultimate challenge—one we’ll continue to tackle through our supply chain, policy advances, and industry-wide knowledge-sharing.

We’ve provided just under 1 million people with access to clean water and sanitation, one of five pillars on our path to becoming water positive. And in our pursuit to be zero waste, we achieved a reuse and recycle rate of 82 percent for all our cloud hardware and diverted over 12,000 metric tons of solid operational waste from landfills and incinerators.

We also continue to take responsibility for the impacts of our direct operations on Earth’s ecosystems. We’ve contracted to protect 17,268 acres of land, over 50 percent more than the land we use to operate. Of that, 12,270 acres—the equivalent of approximately 7,000 soccer fields—were designated as permanently protected.

Technology is a powerful lever to help us avoid the most severe impacts of climate change. That’s why we’re accelerating our investment in more efficient datacenters, clean energy, enhancements to the Microsoft Cloud for Sustainability and Planetary Computer, and green software practices. To date, through our Climate Innovation Fund , we’ve allocated more than $700 million to a global portfolio of 50+ investments spanning sustainable solutions in energy, industrial, and natural systems.

Finally, we believe AI can be a powerful accelerant in addressing the climate crisis. We expanded our AI for Good Lab in Egypt and Kenya to improve climate resilience for the continent. And, together with our partners, we launched Global Renewables Watch , a first-of-its-kind living atlas that aims to map and measure utility-scale solar and wind installations, allowing users to evaluate progress toward a clean energy transition.

Although this new era promises great opportunity, it demands even greater responsibility from companies like ours. As we pursue our four commitments, we focus on transparency—providing clear reporting on how we run our business and how we work with customers and partners. Our annual Impact Summary shares more about our progress and learnings this year, and our Reports Hub provides detailed reports on our environmental data, political activities, workforce demographics, human rights work, and more.

OUR CULTURE

There’s never been a more important time to live our culture. The way we work and the speed at which we work are changing.

In an economy where yesterday’s exceptional is today’s expected, all of us at Microsoft will need to embrace a growth mindset and, more importantly, confront our fixed mindsets as our culture evolves. It will take everyday courage to reformulate what innovation, business models, and sales motions look like in this new era. As a high-performance organization, we aspire to help our employees maximize their economic opportunity, while simultaneously helping them learn and grow professionally and connect their own passion and purpose with their everyday work and the company’s mission.

To be successful, we need to be grounded in what our customers and the world need. We need to innovate and collaborate as One Microsoft. And we need to actively seek diversity and embrace inclusion to best serve our customers and create a culture where everyone can do their best work. To empower the world, we need to represent the world. To that end, we remain focused on increasing representation and strengthening our culture of inclusion. Even as we navigated challenges this year, our company continued to be the most globally diverse it’s ever been.

Giving also remains core to our culture. This year, more than 105,000 employees gave $242 million (including company match) to over 35,000 nonprofits in 116 countries. And our employees volunteered over 930,000 hours to causes they care about.

I am deeply grateful to our employees for their commitment to the company and their communities, and how they are living our mission and culture every day in a changing company and world.

In closing, this is Microsoft’s moment. We have an incredible opportunity to use this new era of AI to deliver meaningful benefits for every person and every organization on the planet.

On New Year’s Day, I saw a tweet from Andrej Karpathy, Tesla’s former director of AI who now works at OpenAI, about how GitHub Copilot was writing about 80 percent of his code, with 80 percent accuracy. Two days later, I saw a stunning example of work we’ve done with the government of India’s Ministry of Electronics and IT, which is applying an AI model so farmers in rural areas can interact with government resources in their native languages.

Think about that: A foundation model that was developed on the West Coast of the United States is already transforming the lives of both elite developers and rural farmers on the other side of the globe. We’ve not seen this speed of diffusion and breadth of impact in the tech industry before.

As a company, this is our moment to show up and responsibly build solutions that drive economic growth and benefit every community, country, industry, and person. If we do it well, the world will do well, and Microsoft will do well too. I’ve never been more confident that we will deliver on this promise together in the days, months, and years to come.

Satya Nadella Chairman and Chief Executive Officer October 16, 2023

Financial Review

Issuer purchases of equity securities, dividends, and stock performance, market and stockholders.

Our common stock is traded on the NASDAQ Stock Market under the symbol MSFT. On July 24, 2023, there were 83,883 registered holders of record of our common stock.

SHARE REPURCHASES AND DIVIDENDS

Share Repurchases

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

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

We repurchased the following shares of common stock under the share repurchase programs:

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

Our Board of Directors declared the following dividends:

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

STOCK PERFORMANCE

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Microsoft Corporation, the S&P 500 Index and the NASDAQ Computer Index

• $100 invested on 6/30/18 in stock or index, including reinvestment of dividends. Fiscal year ending June 30.

Note About Forward-Looking Statements

This report includes estimates, projections, statements relating to our business plans, objectives, and expected operating results that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including the following sections: “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially. We describe risks and uncertainties that could cause actual results and events to differ materially in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Quantitative and Qualitative Disclosures about Market Risk” in our fiscal year 2023 Form 10-K. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made. We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.

Embracing Our Future

Microsoft is a technology company whose mission is to empower every person and every organization on the planet to achieve more. We strive to create local opportunity, growth, and impact in every country around the world. We are creating the platforms and tools, powered by artificial intelligence (“AI”), that deliver better, faster, and more effective solutions to support small and large business competitiveness, improve educational and health outcomes, grow public-sector efficiency, and empower human ingenuity. From infrastructure and data, to business applications and collaboration, we provide unique, differentiated value to customers.

In a world of increasing economic complexity, AI has the power to revolutionize many types of work. Microsoft is now innovating and expanding our portfolio with AI capabilities to help people and organizations overcome today’s challenges and emerge stronger. Customers are looking to unlock value from their digital spend and innovate for this next generation of AI, while simplifying security and management. Those leveraging the Microsoft Cloud are best positioned to take advantage of technological advancements and drive innovation. Our investment in AI spans the entire company, from Microsoft Teams and Outlook, to Bing and Xbox, and we are infusing generative AI capability into our consumer and commercial offerings to deliver copilot capability for all services across the Microsoft Cloud.

We’re committed to making the promise of AI real – and doing it responsibly. Our work is guided by a core set of principles: fairness, reliability and safety, privacy and security, inclusiveness, transparency, and accountability.

What We Offer

Founded in 1975, we develop and support software, services, devices, and solutions that deliver new value for customers and help people and businesses realize their full potential.

We offer an array of services, including cloud-based solutions that provide customers with software, services, platforms, and content, and we provide solution support and consulting services. We also deliver relevant online advertising to a global audience.

Our products include operating systems, cross-device productivity and collaboration applications, server applications, business solution applications, desktop and server management tools, software development tools, and video games. We also design and sell devices, including PCs, tablets, gaming and entertainment consoles, other intelligent devices, and related accessories.

The Ambitions That Drive Us

To achieve our vision, our research and development efforts focus on three interconnected ambitions:

• Reinvent productivity and business processes.
• Build the intelligent cloud and intelligent edge platform.
• Create more personal computing.

Reinvent Productivity and Business Processes

At Microsoft, we provide technology and resources to help our customers create a secure, productive work environment. Our family of products plays a key role in the ways the world works, learns, and connects.

Our growth depends on securely delivering continuous innovation and advancing our leading productivity and collaboration tools and services, including Office 365, Dynamics 365, and LinkedIn. Microsoft 365 brings together Office 365, Windows, and Enterprise Mobility + Security to help organizations empower their employees with AI-backed tools that unlock creativity, increase collaboration, and fuel innovation, all the while enabling compliance coverage and data protection. Microsoft Teams is a comprehensive platform for work, with meetings, calls, chat, collaboration, and business process automation. Microsoft Viva is an employee experience platform that brings together communications, knowledge, learning, resources, and insights. Microsoft 365 Copilot combines next-generation AI with business data in the Microsoft Graph and Microsoft 365 applications.

Together with the Microsoft Cloud, Dynamics 365, Microsoft Teams, and our AI offerings bring a new era of collaborative applications that optimize business functions, processes, and applications to better serve customers and employees while creating more business value. Microsoft Power Platform is helping domain experts drive productivity gains with low-code/no-code tools, robotic process automation, virtual agents, and business intelligence. In a dynamic labor market, LinkedIn is helping professionals use the platform to connect, learn, grow, and get hired.

Build the Intelligent Cloud and Intelligent Edge Platform

As digital transformation and adoption of AI accelerates and revolutionizes more business workstreams, organizations in every sector across the globe can address challenges that will have a fundamental impact on their success. For enterprises, digital technology empowers employees, optimizes operations, engages customers, and in some cases, changes the very core of products and services. We continue to invest in high performance and sustainable computing to meet the growing demand for fast access to Microsoft services provided by our network of cloud computing infrastructure and datacenters.

Our cloud business benefits from three economies of scale: datacenters that deploy computational resources at significantly lower cost per unit than smaller ones; datacenters that coordinate and aggregate diverse customer, geographic, and application demand patterns, improving the utilization of computing, storage, and network resources; and multi-tenancy locations that lower application maintenance labor costs.

The Microsoft Cloud provides the best integration across the technology stack while offering openness, improving time to value, reducing costs, and increasing agility. Being a global-scale cloud, Azure uniquely offers hybrid consistency, developer productivity, AI capabilities, and trusted security and compliance. We see more emerging use cases and needs for compute and security at the edge and are accelerating our innovation across the spectrum of intelligent edge devices, from Internet of Things (“IoT”) sensors to gateway devices and edge hardware to build, manage, and secure edge workloads.

Our AI platform, Azure AI, is helping organizations transform, bringing intelligence and insights to the hands of their employees and customers to solve their most pressing challenges. Organizations large and small are deploying Azure AI solutions to achieve more at scale, more easily, with the proper enterprise-level and responsible AI protections.

We have a long-term partnership with OpenAI, a leading AI research and deployment company. We deploy OpenAI’s models across our consumer and enterprise products. As OpenAI’s exclusive cloud provider, Azure powers all of OpenAI’s workloads. We have also increased our investments in the development and deployment of specialized supercomputing systems to accelerate OpenAI’s research.

Our hybrid infrastructure offers integrated, end-to-end security, compliance, identity, and management capabilities to support the real-world needs and evolving regulatory requirements of commercial customers and enterprises. Our industry clouds bring together capabilities across the entire Microsoft Cloud, along with industry-specific customizations. Azure Arc simplifies governance and management by delivering a consistent multi-cloud and on-premises management platform.

Nuance, a leader in conversational AI and ambient intelligence across industries including healthcare, financial services, retail, and telecommunications, joined Microsoft in 2022. Microsoft and Nuance enable organizations to accelerate their business goals with security-focused, cloud-based solutions infused with AI.

We are accelerating our development of mixed reality solutions with new Azure services and devices. Microsoft Mesh enables organizations to create custom, immersive experiences for the workplace to help bring remote and hybrid workers and teams together.

The ability to convert data into AI drives our competitive advantage. The Microsoft Intelligent Data Platform is a leading cloud data platform that fully integrates databases, analytics, and governance. The platform empowers organizations to invest more time creating value rather than integrating and managing their data. Microsoft Fabric is an end-to-end, unified analytics platform that brings together all the data and analytics tools that organizations need.

GitHub Copilot is at the forefront of AI-powered software development, giving developers a new tool to write code easier and faster so they can focus on more creative problem-solving. From GitHub to Visual Studio, we provide a developer tool chain for everyone, no matter the technical experience, across all platforms, whether Azure, Windows, or any other cloud or client platform.

Windows also plays a critical role in fueling our cloud business with Windows 365, a desktop operating system that’s also a cloud service. From another internet-connected device, including Android or macOS devices, users can run Windows 365, just like a virtual machine.

Additionally, we are extending our infrastructure beyond the planet, bringing cloud computing to space. Azure Orbital is a fully managed ground station as a service for fast downlinking of data.

Create More Personal Computing

We strive to make computing more personal, enabling users to interact with technology in more intuitive, engaging, and dynamic ways.

Windows 11 offers innovations focused on enhancing productivity, including Windows Copilot with centralized AI assistance and Dev Home to help developers become more productive. Windows 11 security and privacy features include operating system security, application security, and user and identity security.

Through our Search, News, Mapping, and Browser services, Microsoft delivers unique trust, privacy, and safety features. In February 2023, we launched an all new, AI-powered Microsoft Edge browser and Bing search engine with Bing Chat to deliver better search, more complete answers, and the ability to generate content. Microsoft Edge is our fast and secure browser that helps protect users’ data. Quick access to AI-powered tools, apps, and more within Microsoft Edge’s sidebar enhance browsing capabilities.

We are committed to designing and marketing first-party devices to help drive innovation, create new device categories, and stimulate demand in the Windows ecosystem. The Surface family includes Surface Pro, Surface Laptop, and other Surface products.

Microsoft continues to invest in gaming content, community, and cloud services. We have broadened our approach to how we think about gaming end-to-end, from the way games are created and distributed to how they are played, including subscription services like Xbox Game Pass and new devices from third-party manufacturers so players can engage across PC, console, and mobile. In January 2022, we announced plans to acquire Activision Blizzard, Inc., a leader in game development and an interactive entertainment content publisher.

Our Future Opportunity

We are focused on helping customers use the breadth and depth of the Microsoft Cloud to get the most value out of their digital spend while leading the new AI wave across our solution areas. We continue to develop complete, intelligent solutions for our customers that empower people to be productive and collaborate, while safeguarding businesses and simplifying IT management. Our goal is to lead the industry in several distinct areas of technology over the long term, which we expect will translate to sustained growth. We are investing significant resources in:

• Transforming the workplace to deliver new modern, modular business applications, drive deeper insights, and improve how people communicate, collaborate, learn, work, and interact with one another.
• Building and running cloud-based services in ways that utilize ubiquitous computing to unleash new experiences and opportunities for businesses and individuals.
• Applying AI and ambient intelligence to drive insights, revolutionize many types of work, and provide substantive productivity gains using natural methods of communication.
• Tackling security from all angles with our integrated, end-to-end solutions spanning security, compliance, identity, and management, across all clouds and platforms.
• Inventing new gaming experiences that bring people together around their shared love for games on any devices and pushing the boundaries of innovation with console and PC gaming.
• Using Windows to fuel our cloud business, grow our share of the PC market, and drive increased engagement with our services like Microsoft 365 Consumer, Microsoft Teams, Microsoft Edge, Bing, Xbox Game Pass, and more.

Our future growth depends on our ability to transcend current product category definitions, business models, and sales motions.

Corporate Social Responsibility

Commitment to Sustainability

Microsoft’s approach to addressing climate change starts with the sustainability of our own business. In 2020, we committed to being a carbon negative, water positive, and zero waste company by 2030.

In May 2023, we released our Environmental Sustainability Report which looked back at our progress during fiscal year 2022. We continued to make progress on our goals, with our overall emissions declining by 0.5 percent. While our Scope 1 and Scope 2 emissions continued to decline, Scope 3 emissions increased by 0.5 percent. Scope 3 represented 96 percent of our total emissions, resulting primarily from the operations of our suppliers and the use of our products across our customers.

A few examples of our continued progress include:

• Signed new power purchase agreements, bringing our total portfolio of carbon-free energy to over 13.5 gigawatts.
• Contracted for water replenishment projects that are estimated to provide more than 15.6 million cubic meters in volumetric water benefit over the lifetime of these projects.
• Diverted 12,159 metric tons of solid waste from landfills and incinerators across our direct operational footprint.
• Protected 12,270 acres of land in Belize – more than the 11,206 acres of land that we use around the world.

Microsoft has a role to play in developing and advancing new climate solutions, but we recognize that no solution can be offered by any single company, organization, or government. Our approach helps to support the sustainability needs of our customers and the global community. Our Microsoft Cloud for Sustainability, an environmental sustainability management platform that includes Microsoft Sustainability Manager, enables organizations to record, report, and reduce their Scope 1, 2, and 3 emissions. These digital tools can interoperate with business systems and unify data intelligence for organizations.

Addressing Racial Injustice and Inequity

We are committed to addressing racial injustice and inequity in the United States for Black and African American communities and helping improve lived experiences at Microsoft, in employees’ communities, and beyond. Our Racial Equity Initiative focuses on three multi-year pillars, each containing actions and progress we expect to make or exceed by 2025.

• Strengthening our communities: using data, technology, and partnerships to help improve the lives of Black and African American people in the United States, including our employees and their communities.
• Engaging our ecosystem: using our balance sheet and relationships with suppliers and partners to foster societal change and create new opportunities.
• Increasing representation and strengthening inclusion: building on our momentum by adding a $150 million investment to strengthen inclusion and double the number of Black, African American, Hispanic, and Latinx leaders in the United States by 2025.

In fiscal year 2023, we collaborated with partners and worked within neighborhoods and communities to launch and scale a number of projects and programs, including:

• Working with 103 unique organizations in 165 cities and counties on our Justice Reform Initiative to empower communities and advance racial equity and fairness in the justice system.
• Increasing access to affordable broadband, devices, and digital literacy training across 14 geographies, including 11 cities and three states in the Black Rural south.
• Growing our Nonprofit Tech Acceleration for Black and African American Communities program, which uses data, technology, and partnerships to help more than 2,000 local organizations to modernize and streamline operations.
• Expanding our Technology Education and Learning Support (“TEALS”) program to reach nearly 400 high schools in 21 communities to increase computer science opportunities for Black and African American students.

We exceeded our 2020 goal to double the percentage of our transaction volumes with Black- and African American-owned financial institutions by 2023. We are also increasing investment activity with Black- and African American-owned asset managers, which now represent 45 percent of our external manager group, enabling increased funds into local communities. We also met our goal of creating a $100 million program focused on mission-driven banks. We enriched our supplier pipeline, achieving our goal to spend $500 million with double the number of Black- and African American-owned suppliers. We also increased the number of identified partners in the Black Partner Growth Initiative by more than 250 percent, surpassing our initial goal.

We have made meaningful progress on representation and inclusion at Microsoft. As of June 2023, we are 93 percent of the way to our 2025 commitment to double the number of Black and African American people managers in the U.S. (below director level), and 107 percent of the way for Black and African American directors (people managers and individual contributors). We are 28 percent of the way for Hispanic and Latinx people managers (below director level) and 74 percent of the way for Hispanic and Latinx directors.

Investing in Digital Skills

After helping over 80 million jobseekers around the world access digital skilling resources, we introduced a new Skills for Jobs initiative to support a more skills-based labor market, with greater flexibility and accessible learning paths to develop the right skills needed for the most in-demand jobs. Our Skills for Jobs initiative brings together learning resources, certification opportunities, and job-seeker tools from LinkedIn, GitHub, and Microsoft Learn, and is built on data insights drawn from LinkedIn’s Economic Graph.

We also launched a national campaign to help skill and recruit 250,000 people into the cybersecurity workforce by 2025, representing half of the country’s workforce shortage. To that end, we are making curriculum available free of charge to all of the nation’s higher education institutions, providing training for new and existing faculty, and providing scholarships and supplemental resources to 25,000 students. We have expanded the cyber skills initiative to 27 additional countries that show elevated cyberthreat risks coupled with significant gaps in their cybersecurity workforces, partnering with nonprofits and other educational institutions to train the next generation of cybersecurity workers.

Generative AI is creating unparalleled opportunities to empower workers globally, but only if everyone has the skills to use it. To address this, in June 2023 we launched a new AI Skills Initiative to help everyone learn how to harness the power of AI. This includes a new LinkedIn learning pathway offering new coursework on learning the foundations of generative AI. We also launched a new global grant challenge to uncover new ways of training workers on generative AI and are providing greater access to digital learning events and resources for everyone to improve their AI fluency.

HUMAN CAPITAL RESOURCES

Microsoft aims to recruit, develop, and retain world-changing talent from a diversity of backgrounds. To foster their and our success, we seek to create an environment where people can thrive and do their best work. We strive to maximize the potential of our human capital resources by creating a respectful, rewarding, and inclusive work environment that enables our global employees to create products and services that further our mission.

As of June 30, 2023, we employed approximately 221,000 people on a full-time basis, 120,000 in the U.S. and 101,000 internationally. Of the total employed people, 89,000 were in operations, including manufacturing, distribution, product support, and consulting services; 72,000 were in product research and development; 45,000 were in sales and marketing; and 15,000 were in general and administration. Certain employees are subject to collective bargaining agreements.

Our Culture

Microsoft’s culture is grounded in growth mindset. This means everyone is on a continuous journey to learn and grow, operating as one company instead of multiple siloed businesses.

Our employee listening systems enable us to gather feedback directly from our workforce to inform our programs and employee needs globally. Employees participate in our Employee Signals surveys, which cover a variety of topics such as thriving, inclusion, team culture, wellbeing, and learning and development. We also collect Daily Signals employee survey responses, giving us real-time insights into ways we can support our employees. In addition to Employee Signals and Daily Signals surveys, we gain insights through onboarding, exit surveys, internal Viva Engage channels, employee Q&A sessions, and our internal AskHR Service support.

Diversity and inclusion are core to our business model, and we hold ourselves accountable for driving global systemic change in our workforce and creating an inclusive work environment. We support multiple highly active Employee Resource Groups for women, families, racial and ethnic minorities, military, people with disabilities, and employees who identify as LGBTQIA+, where employees can go for support, networking, and community-building. As described in our 2022 Proxy Statement, annual performance and compensation reviews of our senior leadership team include an evaluation of their contributions to employee culture and diversity. To ensure accountability over time, we publicly disclose our progress on a multitude of workforce metrics including:

• Detailed breakdowns of gender, racial, and ethnic minority representation in our employee population, with data by job types, levels, and segments of our business.
• Our EEO-1 report (equal employment opportunity).
• Disability representation.
• Pay equity (see details below).

Total Rewards and Pay Equity

We develop dynamic, sustainable, market-driven, and strategic programs with the goal of providing a highly differentiated portfolio to attract, reward, and retain top talent and enable our employees to thrive. These programs reinforce our culture and values such as collaboration and growth mindset. Managers evaluate and recommend rewards based on, for example, how well we leverage the work of others and contribute to the success of our colleagues. We monitor pay equity and career progress across multiple dimensions. Our total compensation opportunity is highly differentiated and is market competitive.

In order to manage our costs in a dynamic, competitive environment, in fiscal year 2023 we announced that base salaries of salaried employees would remain at fiscal year 2022 levels. Pay increases continue to be available for rewards-eligible hourly and equivalent employees. We will continue our practice of investing in stock for all rewards-eligible employees, salaried and hourly, and investing in bonuses for all eligible employees.

Since 2016, we have reported on pay equity as part of our annual Diversity and Inclusion report. In 2022, we reported that all racial and ethnic minority employees in the U.S. combined earn $1.008 for every $1.000 earned by their white counterparts, that women in the U.S. earn $1.007 for every $1.000 earned by their counterparts who are men, and that women outside the U.S. earn $1.002 for every $1.000 earned by their counterparts outside the U.S. who are men. In this year’s report, we again expanded our pay equity data beyond the U.S. to report on 61 additional countries (up from 12 last year), representing 99.8% of our global Microsoft workforce.

In addition, we began reporting on unadjusted median pay in our annual report, comparing total pay amounts for all employees regardless of factors such as job title, level, or tenure. For employees who are eligible for rewards, the analysis showed that total pay for women is 89.6% of total pay for men in the U.S. and 86.2% outside of the U.S., and total pay for racial and ethnic minorities in the U.S. is 89.9% of total pay for white employees. As we continue to increase representation for women and racial and ethnic minorities at more senior levels, and continue to ensure pay equity for all, the gap between the medians will reduce.

Our intended result is a global performance and development approach that fosters our culture, and competitive compensation that ensures equitable pay by role while supporting pay for performance.

Wellbeing and Hybrid Work

Microsoft is committed to supporting our employees’ wellbeing while they are at work and in their personal lives. We have invested significantly in wellbeing, and offer a differentiated benefits package which includes many physical, emotional, and financial wellness programs including counseling through the Microsoft CARES Employee Assistance Program, mental wellbeing support, flexible fitness benefits, disability accommodations, savings and investment tools, adoption assistance, and back-up care for children and elders. Finally, our Occupational Health and Safety program helps ensure employees can stay safe while they are working.

We introduced Hybrid Workplace Flexibility Guidance to better support leaders, managers, and employees in hybrid work scenarios. Our ongoing survey data shows that 93% of employees value the flexibility related to work location, work site, and work hours, and 78% are satisfied with the quality of connection with co-workers. There is no one-size-fits-all approach to flexible work at Microsoft. As a company, we will continue to leverage data and research to inform decision making, balancing the needs of business, team, and individual.

Learning and Development

We offer a range of learning opportunities, including personalized opportunities on our internal and external learning portals, in-classroom learning, required learning on compliance and company culture, on-the-job advancement opportunities, and manager coaching. We also provide customized manager learning, new employee orientation, and tools for operating in a flexible hybrid work environment.

All Microsoft employees globally access our single Viva Learning tool for both required and personal choice learning. This includes courses focused on our core principles and compliance matters, such as Business Conduct, Privacy, Security Foundations, and Harassment Prevention. We also deliver skills training for employees based on their profession and role discipline.

We have over 27,000 people managers, all of whom must complete between 20-33 hours of compulsory training on leadership and management and are assigned additional targeted training on an ongoing basis related to people management, compliance, and culture.

OPERATING SEGMENTS

We operate our business and report our financial performance using three segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. Our segments provide management with a comprehensive financial view of our key businesses. The segments enable the alignment of strategies and objectives across the development, sales, marketing, and services organizations, and they provide a framework for timely and rational allocation of resources within businesses.

Additional information on our operating segments and geographic and product information is contained in Note 19 – Segment Information and Geographic Data of the Notes to Financial Statements.

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.

Office Commercial

Office Commercial is designed to increase personal, team, and organizational productivity through a range of products and services. Growth depends on our ability to reach new users in new markets such as frontline workers, small and medium businesses, and growth markets, as well as add value to our core product and service offerings to span productivity categories such as communication, collaboration, analytics, security, and compliance. Office Commercial revenue is mainly affected by a combination of continued installed base growth and average revenue per user expansion, as well as the continued shift from Office licensed on-premises to Office 365.

Office Consumer

Office Consumer is designed to increase personal productivity and creativity through a range of products and services. Growth depends on our ability to reach new users, add value to our core product set, and continue to expand our product and service offerings into new markets. Office Consumer revenue is mainly affected by the percentage of customers that buy Office with their new devices and the continued shift from Office licensed on-premises to Microsoft 365 Consumer subscriptions. Office Consumer Services revenue is mainly affected by the demand for communication and storage through Skype, Outlook.com, and OneDrive, which is largely driven by subscriptions, advertising, and the sale of minutes.

LinkedIn connects the world’s professionals to make them more productive and successful and transforms the way companies hire, market, sell, and learn. Our vision is to create economic opportunity for every member of the global workforce through the ongoing development of the world’s first Economic Graph, a digital representation of the global economy. In addition to LinkedIn’s free services, LinkedIn offers monetized solutions: Talent Solutions, Marketing Solutions, Premium Subscriptions, and Sales Solutions. Talent Solutions provide insights for workforce planning and tools to hire, nurture, and develop talent. Talent Solutions also includes Learning Solutions, which help businesses close critical skills gaps in times where companies are having to do more with existing talent. Marketing Solutions help companies reach, engage, and convert their audiences at scale. Premium Subscriptions enable professionals to manage their professional identity, grow their network, find jobs, and connect with talent through additional services like premium search. Sales Solutions help companies strengthen customer relationships, empower teams with digital selling tools, and acquire new opportunities. LinkedIn has over 950 million members and has offices around the globe. Growth will depend on our ability to increase the number of LinkedIn members and our ability to continue offering services that provide value for our members and increase their engagement. LinkedIn revenue is mainly affected by demand from enterprises and professional organizations for subscriptions to Talent Solutions, Sales Solutions, and Premium Subscriptions offerings, as well as member engagement and the quality of the sponsored content delivered to those members to drive Marketing Solutions.

Dynamics provides cloud-based and on-premises business solutions for financial management, enterprise resource planning (“ERP”), customer relationship management (“CRM”), supply chain management, and other application development platforms for small and medium businesses, large organizations, and divisions of global enterprises. Dynamics revenue is driven by the number of users licensed and applications consumed, expansion of average revenue per user, and the continued shift to Dynamics 365, a unified set of cloud-based intelligent business applications, including Power Apps and Power Automate.

Competition

Competitors to Office include software and global application vendors, such as Apple, Cisco Systems, Meta, Google, Okta, Proofpoint, Slack, Symantec, Zoom, and numerous web-based and mobile application competitors as well as local application developers. Apple distributes versions of its pre-installed application software, such as email and calendar products, through its PCs, tablets, and phones. Cisco Systems is using its position in enterprise communications equipment to grow its unified communications business. Meta offers communication tools to enable productivity and engagement within organizations. Google provides a hosted messaging and productivity suite. Slack provides teamwork and collaboration software. Zoom offers videoconferencing and cloud phone solutions. Okta, Proofpoint, and Symantec provide security solutions across email security, information protection, identity, and governance. Web-based offerings competing with individual applications have also positioned themselves as alternatives to our products and services. We compete by providing powerful, flexible, secure, integrated industry-specific, and easy-to-use productivity and collaboration tools and services that create comprehensive solutions and work well with technologies our customers already have both on-premises or in the cloud.

LinkedIn faces competition from online professional networks, recruiting companies, talent management companies, and larger companies that are focusing on talent management and human resource services; job boards; traditional recruiting firms; and companies that provide learning and development products and services. Marketing Solutions competes with online and offline outlets that generate revenue from advertisers and marketers, and Sales Solutions competes with online and offline outlets for companies with lead generation and customer intelligence and insights.

Dynamics competes with cloud-based and on-premises business solution providers such as Oracle, Salesforce, and SAP.

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.

Server Products and Cloud Services

Azure is a comprehensive set of cloud services that offer developers, IT professionals, and enterprises freedom to build, deploy, and manage applications on any platform or device. Customers can use Azure through our global network of datacenters for computing, networking, storage, mobile and web application services, AI, IoT, cognitive services, and machine learning. Azure enables customers to devote more resources to development and use of applications that benefit their organizations, rather than managing on-premises hardware and software. Azure revenue is mainly affected by infrastructure-as-a-service and platform-as-a-service consumption-based services, and per user-based services such as Enterprise Mobility + Security.

Azure AI offerings provide a competitive advantage as companies seek ways to optimize and scale their business with machine learning. Azure’s purpose-built, AI-optimized infrastructure allows advanced models, including GPT-4 services designed for developers and data scientists, to do more with less. Customers can integrate large language models and develop the next generation of AI apps and services.

Our server products are designed to make IT professionals, developers, and their systems more productive and efficient. Server software is integrated server infrastructure and middleware designed to support software applications built on the Windows Server operating system. This includes the server platform, database, business intelligence, storage, management and operations, virtualization, service-oriented architecture platform, security, and identity software. We also license standalone and software development lifecycle tools for software architects, developers, testers, and project managers. Server products revenue is mainly affected by purchases through volume licensing programs, licenses sold to original equipment manufacturers (“OEM”), and retail packaged products. CALs provide access rights to certain server products, including SQL Server and Windows Server, and revenue is reported along with the associated server product.

Nuance and GitHub include both cloud and on-premises offerings. Nuance provides healthcare and enterprise AI solutions. GitHub provides a collaboration platform and code hosting service for developers.

Enterprise Services

Enterprise Services, including Enterprise Support Services, Industry Solutions, and Nuance Professional Services, assist customers in developing, deploying, and managing Microsoft server solutions, Microsoft desktop solutions, and Nuance conversational AI and ambient intelligent solutions, along with providing training and certification to developers and IT professionals on various Microsoft products.

Azure faces diverse competition from companies such as Amazon, Google, IBM, Oracle, VMware, and open source offerings. Azure’s competitive advantage includes enabling a hybrid cloud, allowing deployment of existing datacenters with our public cloud into a single, cohesive infrastructure, and the ability to run at a scale that meets the needs of businesses of all sizes and complexities. Our AI offerings compete with AI products from hyperscalers such as Amazon Bedrock, Amazon CodeWhisperer, and Google AI, as well as products from other emerging competitors, many of which are also current or potential partners, including Meta’s LLaMA2 and other open source solutions. Our Enterprise Mobility + Security offerings also compete with products from a range of competitors including identity vendors, security solution vendors, and numerous other security point solution vendors. We believe our cloud’s global scale, coupled with our broad portfolio of identity and security solutions, allows us to effectively solve complex cybersecurity challenges for our customers and differentiates us from the competition.

Our server products face competition from a wide variety of server operating systems and applications offered by companies with a range of market approaches. Vertically integrated computer manufacturers such as Hewlett-Packard, IBM, and Oracle offer their own versions of the Unix operating system preinstalled on server hardware. Nearly all computer manufacturers offer server hardware for the Linux operating system, and many contribute to Linux operating system development. The competitive position of Linux has also benefited from the large number of compatible applications now produced by many commercial and non-commercial software developers. A number of companies, such as Red Hat, supply versions of Linux.

We compete to provide enterprise-wide computing solutions and point solutions with numerous commercial software vendors that offer solutions and middleware technology platforms, software applications for connectivity (both Internet and intranet), security, hosting, database, and e-business servers. IBM and Oracle lead a group of companies focused on the Java Platform Enterprise Edition that competes with our enterprise-wide computing solutions. Commercial competitors for our server applications for PC-based distributed client-server environments include CA Technologies, IBM, and Oracle. Our web application platform software competes with open source software such as Apache, Linux, MySQL, and PHP. In middleware, we compete against Java vendors.

Our database, business intelligence, and data warehousing solutions offerings compete with products from IBM, Oracle, SAP, Snowflake, and other companies. Our system management solutions compete with server management and server virtualization platform providers, such as BMC, CA Technologies, Hewlett-Packard, IBM, and VMware. Our products for software developers compete against offerings from Adobe, IBM, Oracle, and other companies, and also against open source projects, including Eclipse (sponsored by CA Technologies, IBM, Oracle, and SAP), PHP, and Ruby on Rails.

We believe our server products provide customers with advantages in performance, total costs of ownership, and productivity by delivering superior applications, development tools, compatibility with a broad base of hardware and software applications, security, and manageability.

Our Enterprise Services business competes with a wide range of companies that provide strategy and business planning, application development, and infrastructure services, including multinational consulting firms and small niche businesses focused on specific technologies.

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 (“Windows OEM”) 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 IoT.
• 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.

The Windows operating system is designed to deliver a more personal computing experience for users by enabling consistency of experience, applications, and information across their devices. Windows OEM revenue is impacted significantly by the number of Windows operating system licenses purchased by OEMs, which they pre-install on the devices they sell. In addition to computing device market volume, Windows OEM revenue is impacted by:

• The mix of computing devices based on form factor and screen size.
• Differences in device market demand between developed markets and growth markets.
• Attachment of Windows to devices shipped.
• Customer mix between consumer, small and medium businesses, and large enterprises.
• Changes in inventory levels in the OEM channel.
• Pricing changes and promotions, pricing variation that occurs when the mix of devices manufactured shifts from local and regional system builders to large multinational OEMs, and different pricing of Windows versions licensed.
• Constraints in the supply chain of device components.

Windows Commercial revenue, which includes volume licensing of the Windows operating system and Windows cloud services such as Microsoft Defender for Endpoint, is affected mainly by the demand from commercial customers for volume licensing and Software Assurance (“SA”), as well as advanced security offerings. Windows Commercial revenue often reflects the number of information workers in a licensed enterprise and is relatively independent of the number of PCs sold in a given year.

Patent licensing includes our programs to license patents we own for use across a broad array of technology areas, including mobile devices and cloud offerings.

Windows IoT extends the power of Windows and the cloud to intelligent systems by delivering specialized operating systems, tools, and services for use in embedded devices.

We design and sell devices, including Surface, HoloLens, and PC accessories. Our devices are designed to enable people and organizations to connect to the people and content that matter most using Windows and integrated Microsoft products and services. Surface is designed to help organizations, students, and consumers be more productive. Growth in Devices is dependent on total PC shipments, the ability to attract new customers, our product roadmap, and expanding into new categories.

Our gaming platform is designed to provide a variety of entertainment through a unique combination of content, community, and cloud services. Our exclusive game content is created through Xbox Game Studios, a collection of first-party studios creating iconic and differentiated gaming experiences. We continue to invest in new gaming studios and content to expand our intellectual property roadmap and leverage new content creators. These unique gaming experiences are the cornerstone of Xbox Game Pass, a subscription service and gaming community with access to a curated library of over 400 first- and third-party console and PC titles.

The gamer remains at the heart of the Xbox ecosystem. We are identifying new opportunities to attract gamers across a variety of different end points through our first- and third-party content and business diversification across subscriptions, ads, and digital stores. We’ve seen new devices from third-party manufacturers along with key PC and mobile end points that help us empower gamers to play in a way that is most convenient to them. We are focused on growing the platform and expanding to new ecosystems to engage as many gamers as possible.

Xbox enables people to connect and share online gaming experiences that are accessible on Xbox consoles, Windows-enabled devices, and other devices. Xbox is designed to benefit users by providing access to a network of certified applications and services and to benefit our developer and partner ecosystems by providing access to a large customer base. Xbox revenue is mainly affected by subscriptions and sales of first- and third-party content, as well as advertising. Growth of our Gaming business is determined by the overall active user base through Xbox enabled content, availability of games, providing exclusive game content that gamers seek, the computational power and reliability of the devices used to access our content and services, and the ability to create new experiences through first-party content creators.

Search and News Advertising

Our Search and news advertising business is designed to deliver relevant search, native, and display advertising to a global audience. Our Microsoft Edge browser and Bing Chat capabilities are key tools to enable user acquisition and engagement, while our technology platform enables accelerated delivery of digital advertising solutions. In addition to first-party tools, we have several partnerships with companies, such as Yahoo, through which we provide and monetize search offerings. Growth depends on our ability to attract new users, understand intent, and match intent with relevant content on advertising offerings.

Windows faces competition from various software products and from alternative platforms and devices, mainly from Apple and Google. We believe Windows competes effectively by giving customers choice, value, flexibility, security, an easy-to-use interface, and compatibility with a broad range of hardware and software applications, including those that enable productivity.

Devices face competition from various computer, tablet, and hardware manufacturers who offer a unique combination of high-quality industrial design and innovative technologies across various price points. These manufacturers, many of which are also current or potential partners and customers, include Apple and our Windows OEMs.

Xbox and our cloud gaming services face competition from various online gaming ecosystems and game streaming services, including those operated by Amazon, Apple, Meta, and Tencent. We also compete with other providers of entertainment services such as video streaming platforms. Our gaming platform competes with console platforms from Nintendo and Sony, both of which have a large, established base of customers. We believe our gaming platform is effectively positioned against, and uniquely differentiated from, competitive products and services based on significant innovation in hardware architecture, user interface, developer tools, online gaming and entertainment services, and continued strong exclusive content from our own first-party game franchises as well as other digital content offerings.

Our Search and news advertising business competes with Google and a wide array of websites, social platforms like Meta, and portals that provide content and online offerings to end users.

We have regional operations service centers that support our operations, including customer contract and order processing, billing, credit and collections, information processing, and vendor management and logistics. The center in Ireland supports the African, Asia-Pacific, European, and Middle East regions; and the centers in Arlington, Virginia, Atlanta, Georgia, Charlotte, North Carolina, Fargo, North Dakota, Fort Lauderdale, Florida, Redmond, Washington, Reno, Nevada, and Puerto Rico support the American regions.

In addition to our operations centers, we also operate datacenters throughout each of these regions. We continue to identify and evaluate opportunities to expand our datacenter locations and increase our server capacity to meet the evolving needs of our customers, particularly given the growing demand for AI services. Our datacenters depend on the availability of permitted and buildable land, predictable energy, networking supplies, and servers, including graphics processing units (“GPUs”) and other components.

Our devices are primarily manufactured by third-party contract manufacturers. For the majority of our products, we have the ability to use other manufacturers if a current vendor becomes unavailable or unable to meet our requirements. However, some of our products contain certain components for which there are very few qualified suppliers. Extended disruptions at these suppliers could impact our ability to manufacture devices on time to meet consumer demand.

RESEARCH AND DEVELOPMENT

Product and Service Development, and Intellectual Property

We develop most of our products and services internally through the following engineering groups.

• Cloud and AI – focuses on making IT professionals, developers, partners, independent software vendors, and their systems more productive and efficient through development of Azure AI platform and cloud infrastructure, server, database, CRM, ERP, software development tools and services (including GitHub), AI cognitive services, and other business process applications and services for enterprises.
• Strategic Missions and Technologies – focuses on incubating technical products and support solutions with transformative potential for the future of cloud computing and continued company growth across quantum computing, Azure Space & Missions Engineering, telecommunications, and Microsoft Federal Sales and Delivery.
• Experiences and Devices – focuses on delivering high value end-user experiences across our products, services, and devices, including Microsoft 365, Windows, Microsoft Teams, Search (including Microsoft Edge and Bing Chat) and other advertising-based services, and the Surface line of devices.
• Microsoft Security – focuses on delivering a comprehensive portfolio of services that protect our customers’ digital infrastructure through cloud platform and application security, data protection and governance, identity and network access, and device management.
• Technology and Research – focuses on fundamental research, product and business incubations, and forward-looking AI innovations that span infrastructure, services, and applications.
• LinkedIn – focuses on our services that transform the way professionals grow their network and find jobs and the way businesses hire, market, sell, and learn.
• Gaming – focuses on developing hardware, content, and services across a large range of platforms to help grow our user base through game experiences and social interaction.

Internal development allows us to maintain competitive advantages that come from product differentiation and closer technical control over our products and services. It also gives us the freedom to decide which modifications and enhancements are most important and when they should be implemented. We strive to obtain information as early as possible about changing usage patterns and hardware advances that may affect software and hardware design. Before releasing new software platforms, and as we make significant modifications to existing platforms, we provide application vendors with a range of resources and guidelines for development, training, and testing. Generally, we also create product documentation internally.

We protect our intellectual property investments in a variety of ways. We work actively in the U.S. and internationally to ensure the enforcement of copyright, trademark, trade secret, and other protections that apply to our software and hardware products, services, business plans, and branding. We are a leader among technology companies in pursuing patents and currently have a portfolio of over 70,000 U.S. and international patents issued and over 19,000 pending worldwide. While we employ much of our internally-developed intellectual property in our products and services, we also engage in outbound licensing of specific patented technologies that are incorporated into licensees’ products. From time to time, we enter into broader cross-license agreements with other technology companies covering entire groups of patents. We may also purchase or license technology that we incorporate into our products and services. At times, we make select intellectual property broadly available at no or low cost to achieve a strategic objective, such as promoting industry standards, advancing interoperability, supporting societal and/or environmental efforts, or attracting and enabling our external development community. Our increasing engagement with open source software will also cause us to license our intellectual property rights broadly in certain situations.

While it may be necessary in the future to seek or renew licenses relating to various aspects of our products and services, we believe, based upon past experience and industry practice, such licenses generally can be obtained on commercially reasonable terms. We believe our continuing research and product development are not materially dependent on any single license or other agreement with a third party relating to the development of our products.

Investing in the Future

Our success is based on our ability to create new and compelling products, services, and experiences for our users, to initiate and embrace disruptive technology trends, to enter new geographic and product markets, and to drive broad adoption of our products and services. We invest in a range of emerging technology trends and breakthroughs that we believe offer significant opportunities to deliver value to our customers and growth for the company. Based on our assessment of key technology trends, we maintain our long-term commitment to research and development across a wide spectrum of technologies, tools, and platforms spanning digital work and life experiences, cloud computing, AI, devices, and operating systems.

While our main product research and development facilities are located in Redmond, Washington, we also operate research and development facilities in other parts of the U.S. and around the world. This global approach helps us remain competitive in local markets and enables us to continue to attract top talent from across the world.

We plan to continue to make significant investments in a broad range of product research and development activities, and as appropriate we will coordinate our research and development across operating segments and leverage the results across the company.

In addition to our main research and development operations, we also operate Microsoft Research. Microsoft Research is one of the world’s largest corporate research organizations, often working in close collaboration with top universities around the world, and is focused on advancing the state-of-the-art in computer science and a broad range of other disciplines. Our investment in fundamental research provides us a unique perspective on future trends and contributes to our innovation.

DISTRIBUTION, SALES, AND MARKETING

We market and distribute our products and services through the following channels: OEMs, direct, and distributors and resellers. Our sales organization performs a variety of functions, including working directly with commercial enterprises and public-sector organizations worldwide to identify and meet their technology and digital transformation requirements; managing OEM relationships; and supporting system integrators, independent software vendors, and other partners who engage directly with our customers to perform sales, consulting, and fulfillment functions for our products and services.

We distribute our products and services through OEMs that pre-install our software on new devices and servers they sell. The largest component of the OEM business is the Windows operating system pre-installed on devices. OEMs also sell devices pre-installed with other Microsoft products and services, including applications such as Office and the capability to subscribe to Office 365.

There are two broad categories of OEMs. The largest category of OEMs are direct OEMs as our relationship with them is managed through a direct agreement between Microsoft and the OEM. We have distribution agreements covering one or more of our products with virtually all the multinational OEMs, including Dell, Hewlett-Packard, Lenovo, and with many regional and local OEMs. The second broad category of OEMs are system builders consisting of lower-volume PC manufacturers, which source Microsoft software for pre-installation and local redistribution primarily through the Microsoft distributor channel rather than through a direct agreement or relationship with Microsoft.

Many organizations that license our products and services transact directly with us through Enterprise Agreements and Enterprise Services contracts, with sales support from system integrators, independent software vendors, web agencies, and partners that advise organizations on licensing our products and services (“Enterprise Agreement Software Advisors” or “ESA”). Microsoft offers direct sales programs targeted to reach small, medium, and corporate customers, in addition to those offered through the reseller channel. A large network of partner advisors support many of these sales.

We also sell commercial and consumer products and services directly to customers, such as cloud services, search, and gaming, through our digital marketplaces and online stores. Additionally, our Microsoft Experience Centers are designed to facilitate deeper engagement with our partners and customers across industries.

Distributors and Resellers

Organizations also license our products and services indirectly, primarily through licensing solution partners (“LSP”), distributors, value-added resellers (“VAR”), and retailers. Although each type of reselling partner may reach organizations of all sizes, LSPs are primarily engaged with large organizations, distributors resell primarily to VARs, and VARs typically reach small and medium organizations. ESAs are also typically authorized as LSPs and operate as resellers for our other volume licensing programs. Microsoft Cloud Solution Provider is our main partner program for reselling cloud services.

We distribute our retail packaged products primarily through independent non-exclusive distributors, authorized replicators, resellers, and retail outlets. Individual consumers obtain these products primarily through retail outlets. We distribute our devices through third-party retailers. We have a network of field sales representatives and field support personnel that solicit orders from distributors and resellers and provide product training and sales support.

Our Dynamics business solutions are also licensed to enterprises through a global network of channel partners providing vertical solutions and specialized services.

LICENSING OPTIONS

We offer options for organizations that want to purchase our cloud services, on-premises software, and SA. We license software to organizations under volume licensing agreements to allow the customer to acquire multiple licenses of products and services instead of having to acquire separate licenses through retail channels. We use different programs designed to provide flexibility for organizations of various sizes. While these programs may differ in various parts of the world, generally they include those discussed below.

SA conveys rights to new software and upgrades for perpetual licenses released over the contract period. It also provides support, tools, training, and other licensing benefits to help customers deploy and use software efficiently. SA is included with certain volume licensing agreements and is an optional purchase with others.

Volume Licensing Programs

Enterprise Agreement

Enterprise Agreements offer large organizations a manageable volume licensing program that gives them the flexibility to buy cloud services and software licenses under one agreement. Enterprise Agreements are designed for medium or large organizations that want to license cloud services and on-premises software organization-wide over a three-year period. Organizations can elect to purchase perpetual licenses or subscribe to licenses. SA is included.

Microsoft Customer Agreement

A Microsoft Customer Agreement is a simplified purchase agreement presented, accepted, and stored through a digital experience. A Microsoft Customer Agreement is a non-expiring agreement that is designed to support all customers over time, whether purchasing through a partner or directly from Microsoft.

Microsoft Online Subscription Agreement

A Microsoft Online Subscription Agreement is designed for small and medium organizations that want to subscribe to, activate, provision, and maintain cloud services seamlessly and directly via the web. The agreement allows customers to acquire monthly or annual subscriptions for cloud-based services.

Microsoft Products and Services Agreement

Microsoft Products and Services Agreements are designed for medium and large organizations that want to license cloud services and on-premises software as needed, with no organization-wide commitment, under a single, non-expiring agreement. Organizations purchase perpetual licenses or subscribe to licenses. SA is optional for customers that purchase perpetual licenses.

Open Value agreements are a simple, cost-effective way to acquire the latest Microsoft technology. These agreements are designed for small and medium organizations that want to license cloud services and on-premises software over a three-year period. Under Open Value agreements, organizations can elect to purchase perpetual licenses or subscribe to licenses and SA is included.

Select Plus

A Select Plus agreement is designed for government and academic organizations to acquire on-premises licenses at any affiliate or department level, while realizing advantages as one organization. Organizations purchase perpetual licenses and SA is optional.

Partner Programs

The Microsoft Cloud Solution Provider Program offers customers an easy way to license the cloud services they need in combination with the value-added services offered by their systems integrator, managed services provider, or cloud reseller partner. Partners in this program can easily package their own products and services to directly provision, manage, and support their customer subscriptions.

The Microsoft Services Provider License Agreement allows hosting service providers and independent software vendors who want to license eligible Microsoft software products to provide software services and hosted applications to their end customers. Partners license software over a three-year period and are billed monthly based on consumption.

The Independent Software Vendor Royalty Program enables partners to integrate Microsoft products into other applications and then license the unified business solution to their end users.

Our customers include individual consumers, small and medium organizations, large global enterprises, public-sector institutions, Internet service providers, application developers, and OEMs. Our practice is to ship our products promptly upon receipt of purchase orders from customers; consequently, backlog is not significant.

AVAILABLE INFORMATION

Our Internet address is www.microsoft.com. At our Investor Relations website, www.microsoft.com/investor, we make available free of charge a variety of information for investors. Our goal is to maintain the Investor Relations website as a portal through which investors can easily find or navigate to pertinent information about us, including:

• Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we electronically file that material with or furnish it to the Securities and Exchange Commission (“SEC”) at www.sec.gov.
• Information on our business strategies, financial results, and metrics for investors.
• Announcements of investor conferences, speeches, and events at which our executives talk about our product, service, and competitive strategies. Archives of these events are also available.
• Press releases on quarterly earnings, product and service announcements, legal developments, and international news.
• Corporate governance information including our articles of incorporation, bylaws, governance guidelines, committee charters, codes of conduct and ethics, global corporate social responsibility initiatives, and other governance-related policies.
• Other news and announcements that we may post from time to time that investors might find useful or interesting.
• Opportunities to sign up for email alerts to have information pushed in real time.

We publish a variety of reports and resources related to our Corporate Social Responsibility programs and progress on our Reports Hub website, www.microsoft.com/corporate-responsibility/reports-hub, including reports on sustainability, responsible sourcing, accessibility, digital trust, and public policy engagement.

The information found on these websites is not part of, or incorporated by reference into, this or any other report we file with, or furnish to, the SEC. In addition to these channels, we use social media to communicate to the public. It is possible that the information we post on social media could be deemed to be material to investors. We encourage investors, the media, and others interested in Microsoft to review the information we post on the social media channels listed on our Investor Relations website.

Discussion & Analysis

Management’s discussion and analysis of financial condition and results of operations.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Microsoft Corporation. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying Notes to Financial Statements. This section generally discusses the results of our operations for the year ended June 30, 2023 compared to the year ended June 30, 2022. For a discussion of the year ended June 30, 2022 compared to the year ended June 30, 2021, please refer to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended June 30, 2022.

Microsoft is a technology company whose mission is to empower every person and every organization on the planet to achieve more. We strive to create local opportunity, growth, and impact in every country around the world. We are creating the platforms and tools, powered by artificial intelligence (“AI”), that deliver better, faster, and more effective solutions to support small and large business competitiveness, improve educational and health outcomes, grow public-sector efficiency, and empower human ingenuity.

We generate revenue by offering a wide range of cloud-based solutions, content, and other services to people and businesses; licensing and supporting an array of software products; delivering relevant online advertising to a global audience; and designing and selling devices. Our most significant expenses are related to compensating employees; supporting and investing in our cloud-based services, including datacenter operations; designing, manufacturing, marketing, and selling our other products and services; and income taxes.

Highlights from fiscal year 2023 compared with fiscal year 2022 included:

• Microsoft Cloud revenue increased 22% to $111.6 billion.
• Office Commercial products and cloud services revenue increased 10% driven by Office 365 Commercial growth of 13%.
• Office Consumer products and cloud services revenue increased 2% and Microsoft 365 Consumer subscribers increased to 67.0 million.
• LinkedIn revenue increased 10%.
• Dynamics products and cloud services revenue increased 16% driven by Dynamics 365 growth of 24%.
• Server products and cloud services revenue increased 19% driven by Azure and other cloud services growth of 29%.
• Windows original equipment manufacturer licensing (“Windows OEM”) revenue decreased 25%.
• Devices revenue decreased 24%.
• Windows Commercial products and cloud services revenue increased 5%.
• Xbox content and services revenue decreased 3%.
• Search and news advertising revenue excluding traffic acquisition costs increased 11%.

Industry Trends

Our industry is dynamic and highly competitive, with frequent changes in both technologies and business models. Each industry shift is an opportunity to conceive new products, new technologies, or new ideas that can further transform the industry and our business. At Microsoft, we push the boundaries of what is possible through a broad range of research and development activities that seek to identify and address the changing demands of customers and users, industry trends, and competitive forces.

Economic Conditions, Challenges, and Risks

The markets for software, devices, and cloud-based services are dynamic and highly competitive. Our competitors are developing new software and devices, while also deploying competing cloud-based services for consumers and businesses. The devices and form factors customers prefer evolve rapidly, influencing how users access services in the cloud and, in some cases, the user’s choice of which suite of cloud-based services to use. Aggregate demand for our software, services, and devices is also correlated to global macroeconomic and geopolitical factors, which remain dynamic. We must continue to evolve and adapt over an extended time in pace with this changing environment.

The investments we are making in cloud and AI infrastructure and devices will continue to increase our operating costs and may decrease our operating margins. We continue to identify and evaluate opportunities to expand our datacenter locations and increase our server capacity to meet the evolving needs of our customers, particularly given the growing demand for AI services. Our datacenters depend on the availability of permitted and buildable land, predictable energy, networking supplies, and servers, including graphics processing units (“GPUs”) and other components. Our devices are primarily manufactured by third-party contract manufacturers. For the majority of our products, we have the ability to use other manufacturers if a current vendor becomes unavailable or unable to meet our requirements. However, some of our products contain certain components for which there are very few qualified suppliers. Extended disruptions at these suppliers could impact our ability to manufacture devices on time to meet consumer demand.

Our success is highly dependent on our ability to attract and retain qualified employees. We hire a mix of university and industry talent worldwide. We compete for talented individuals globally by offering an exceptional working environment, broad customer reach, scale in resources, the ability to grow one’s career across many different products and businesses, and competitive compensation and benefits.

Our international operations provide a significant portion of our total revenue and expenses. Many of these revenue and expenses are denominated in currencies other than the U.S. dollar. As a result, changes in foreign exchange rates may significantly affect revenue and expenses. Fluctuations in the U.S. dollar relative to certain foreign currencies reduced reported revenue and expenses from our international operations in fiscal year 2023.

On January 18, 2023, we announced decisions we made to align our cost structure with our revenue and customer demand, prioritize our investments in strategic areas, and consolidate office space. As a result, we recorded a $1.2 billion charge in the second quarter of fiscal year 2023 (“Q2 charge”), which included employee severance expenses of $800 million, impairment charges resulting from changes to our hardware portfolio, and costs related to lease consolidation activities. First, we reduced our overall workforce by approximately 10,000 jobs through the third quarter of fiscal year 2023 related to the Q2 charge, which represents less than 5% of our total employee base. While we eliminated roles in some areas, we will continue to hire in key strategic areas. Second, we are allocating both our capital and talent to areas of secular growth and long-term competitiveness, while divesting in other areas. Third, we are consolidating our leases to create higher density across our workspaces, which impacted our financial results through the remainder of fiscal year 2023, and we may make similar decisions in future periods as we continue to evaluate our real estate needs.

Refer to Risk Factors in our fiscal year 2023 Form 10-K for a discussion of these factors and other risks.

Seasonality

Our revenue fluctuates quarterly and is generally higher in the second and fourth quarters of our fiscal year. Second quarter revenue is driven by corporate year-end spending trends in our major markets and holiday season spending by consumers, and fourth quarter revenue is driven by the volume of multi-year on-premises contracts executed during the period.

Change in Accounting Estimate

In July 2022, we completed an assessment of the useful lives of our server and network equipment. Due to investments in software that increased efficiencies in how we operate our server and network equipment, as well as advances in technology, we determined we should increase the estimated useful lives of both server and network equipment from four years to six years. This change in accounting estimate was effective beginning fiscal year 2023. Based on the carrying amount of server and network equipment included in property and equipment, net as of June 30, 2022, the effect of this change in estimate for fiscal year 2023 was an increase in operating income of $3.7 billion and net income of $3.0 billion, or $0.40 per both basic and diluted share.

Reportable Segments

We report our financial performance based on the following segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. The segment amounts included in MD&A are presented on a basis consistent with our internal management reporting. We have recast certain prior period amounts to conform to the way we internally manage and monitor our business.

Additional information on our reportable segments is contained in Note 19 – Segment Information and Geographic Data of the Notes to Financial Statements.

We use metrics in assessing the performance of our business and to make informed decisions regarding the allocation of resources. We disclose metrics to enable investors to evaluate progress against our ambitions, provide transparency into performance trends, and reflect the continued evolution of our products and services. Our commercial and other business metrics are fundamentally connected based on how customers use our products and services. The metrics are disclosed in the MD&A or the Notes to Financial Statements. Financial metrics are calculated based on financial results prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and growth comparisons relate to the corresponding period of last fiscal year.

In the first quarter of fiscal year 2023, we made updates to the presentation and method of calculation for certain metrics, most notably expanding our Surface metric into a broader Devices metric to incorporate additional revenue streams, along with other minor changes to align with how we manage our businesses.

Our commercial business primarily consists of Server products and cloud services, Office Commercial, Windows Commercial, the commercial portion of LinkedIn, Enterprise Services, and Dynamics. Our commercial metrics allow management and investors to assess the overall health of our commercial business and include leading indicators of future performance.

Productivity and Business Processes and Intelligent Cloud

Metrics related to our Productivity and Business Processes and Intelligent Cloud segments assess the health of our core businesses within these segments. The metrics reflect our cloud and on-premises product strategies and trends.

Metrics related to our More Personal Computing segment assess the performance of key lines of business within this segment. These metrics provide strategic product insights which allow us to assess the performance across our commercial and consumer businesses. As we have diversity of target audiences and sales motions within the Windows business, we monitor metrics that are reflective of those varying motions.

SUMMARY RESULTS OF OPERATIONS

Adjusted gross margin, operating income, net income, and diluted earnings per share (“EPS”) are non-GAAP financial measures. Current year non-GAAP financial measures exclude the impact of the Q2 charge, which includes employee severance expenses, impairment charges resulting from changes to our hardware portfolio, and costs related to lease consolidation activities. Prior year non-GAAP financial measures exclude the net income tax benefit related to transfer of intangible properties in the first quarter of fiscal year 2022. Refer to Note 12 – Income Taxes of the Notes to Financial Statements for further discussion. Refer to the Non-GAAP Financial Measures section below for a reconciliation of our financial results reported in accordance with GAAP to non-GAAP financial results.

Fiscal Year 2023 Compared with Fiscal Year 2022

Revenue increased $13.6 billion or 7% driven by growth in Intelligent Cloud and Productivity and Business Processes, offset in part by a decline in More Personal Computing. Intelligent Cloud revenue increased driven by Azure and other cloud services. Productivity and Business Processes revenue increased driven by Office 365 Commercial and LinkedIn. More Personal Computing revenue decreased driven by Windows and Devices.

Cost of revenue increased $3.2 billion or 5% driven by growth in Microsoft Cloud, offset in part by the change in accounting estimate.

Gross margin increased $10.4 billion or 8% driven by growth in Intelligent Cloud and Productivity and Business Processes and the change in accounting estimate, offset in part by a decline in More Personal Computing.

• Gross margin percentage increased slightly. Excluding the impact of the change in accounting estimate, gross margin percentage decreased 1 point driven by declines in Intelligent Cloud and More Personal Computing, offset in part by sales mix shift between our segments.
• Microsoft Cloud gross margin percentage increased 2 points to 72%. Excluding the impact of the change in accounting estimate, Microsoft Cloud gross margin percentage decreased slightly driven by a decline in Azure and other cloud services and sales mix shift to Azure and other cloud services, offset in part by improvement in Office 365 Commercial.

Operating expenses increased $5.3 billion or 10% driven by employee severance expenses, 2 points of growth from the Nuance and Xandr acquisitions, investments in cloud engineering, and LinkedIn.

Operating income increased $5.1 billion or 6% driven by growth in Productivity and Business Processes and Intelligent Cloud and the change in accounting estimate, offset in part by a decline in More Personal Computing.

Revenue, gross margin, and operating income included an unfavorable foreign currency impact of 4%, 4%, and 6%, respectively. Cost of revenue and operating expenses both included a favorable foreign currency impact of 2%.

Current year gross margin, operating income, net income, and diluted EPS were negatively impacted by the Q2 charge, which resulted in decreases of $152 million, $1.2 billion, $946 million, and $0.13, respectively. Prior year net income and diluted EPS were positively impacted by the net tax benefit related to the transfer of intangible properties, which resulted in an increase to net income and diluted EPS of $3.3 billion and $0.44, respectively.

SEGMENT RESULTS OF OPERATIONS

Revenue increased $5.9 billion or 9%.

• Office Commercial products and cloud services revenue increased $3.7 billion or 10%. Office 365 Commercial revenue grew 13% with seat growth of 11%, driven by small and medium business and frontline worker offerings, as well as growth in revenue per user. Office Commercial products revenue declined 21% driven by continued customer shift to cloud offerings.
• Office Consumer products and cloud services revenue increased $140 million or 2%. Microsoft 365 Consumer subscribers grew 12% to 67.0 million.
• LinkedIn revenue increased $1.3 billion or 10% driven by Talent Solutions.
• Dynamics products and cloud services revenue increased $750 million or 16% driven by Dynamics 365 growth of 24%.

Operating income increased $4.5 billion or 15%.

• Gross margin increased $5.8 billion or 12% driven by growth in Office 365 Commercial and LinkedIn, as well as the change in accounting estimate. Gross margin percentage increased. Excluding the impact of the change in accounting estimate, gross margin percentage increased slightly driven by improvement in Office 365 Commercial, offset in part by sales mix shift to cloud offerings.
• Operating expenses increased $1.3 billion or 7% driven by investment in LinkedIn and employee severance expenses.

Revenue, gross margin, and operating income included an unfavorable foreign currency impact of 5%, 5%, and 8%, respectively.

Revenue increased $12.9 billion or 17%.

• Server products and cloud services revenue increased $12.6 billion or 19% driven by Azure and other cloud services. Azure and other cloud services revenue grew 29% driven by growth in our consumption-based services. Server products revenue decreased 1%.
• Enterprise Services revenue increased $315 million or 4% driven by growth in Enterprise Support Services, offset in part by a decline in Industry Solutions (formerly Microsoft Consulting Services).

Operating income increased $4.7 billion or 14%.

• Gross margin increased $8.9 billion or 17% driven by growth in Azure and other cloud services and the change in accounting estimate. Gross margin percentage decreased slightly. Excluding the impact of the change in accounting estimate, gross margin percentage decreased 3 points driven by sales mix shift to Azure and other cloud services and a decline in Azure and other cloud services.
• Operating expenses increased $4.2 billion or 21% driven by investments in Azure, 4 points of growth from the Nuance acquisition, and employee severance expenses.

Revenue, gross margin, and operating income included an unfavorable foreign currency impact of 4%, 4%, and 6%, respectively. Operating expenses included a favorable foreign currency impact of 2%.

Revenue decreased $5.2 billion or 9%.

• Windows revenue decreased $3.2 billion or 13% driven by a decrease in Windows OEM. Windows OEM revenue decreased 25% as elevated channel inventory levels continued to drive additional weakness beyond declining PC demand. Windows Commercial products and cloud services revenue increased 5% driven by demand for Microsoft 365.
• Devices revenue decreased $1.8 billion or 24% as elevated channel inventory levels continued to drive additional weakness beyond declining PC demand.
• Gaming revenue decreased $764 million or 5% driven by declines in Xbox hardware and Xbox content and services. Xbox hardware revenue decreased 11% driven by lower volume and price of consoles sold. Xbox content and services revenue decreased 3% driven by a decline in first-party content, offset in part by growth in Xbox Game Pass.
• Search and news advertising revenue increased $617 million or 5%. Search and news advertising revenue excluding traffic acquisition costs increased 11% driven by higher search volume and the Xandr acquisition.

Operating income decreased $4.0 billion or 20%.

• Gross margin decreased $4.2 billion or 13% driven by declines in Windows and Devices. Gross margin percentage decreased driven by a decline in Devices.
• Operating expenses decreased $195 million or 2% driven by a decline in Devices, offset in part by investments in Search and news advertising, including 2 points of growth from the Xandr acquisition.

Revenue, gross margin, and operating income included an unfavorable foreign currency impact of 3%, 4%, and 6%, respectively. Operating expenses included a favorable foreign currency impact of 2%.

OPERATING EXPENSES

Research and Development

Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs and the amortization of purchased software code and services content.

Research and development expenses increased $2.7 billion or 11% driven by investments in cloud engineering and LinkedIn.

Sales and Marketing

Sales and marketing expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with sales and marketing personnel, and the costs of advertising, promotions, trade shows, seminars, and other programs.

Sales and marketing expenses increased $934 million or 4% driven by 3 points of growth from the Nuance and Xandr acquisitions and investments in commercial sales, offset in part by a decline in Windows advertising. Sales and marketing included a favorable foreign currency impact of 2%.

General and Administrative

General and administrative expenses include payroll, employee benefits, stock-based compensation expense, employee severance expense incurred as part of a corporate program, and other headcount-related expenses associated with finance, legal, facilities, certain human resources and other administrative personnel, certain taxes, and legal and other administrative fees.

General and administrative expenses increased $1.7 billion or 28% driven by employee severance expenses and a charge related to a non-public preliminary draft decision provided by the Irish Data Protection Commission. General and administrative included a favorable foreign currency impact of 2%.

OTHER INCOME (EXPENSE), NET

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

We use derivative instruments to manage risks related to foreign currencies, equity prices, interest rates, and credit; enhance investment returns; and facilitate portfolio diversification. Gains and losses from changes in fair values of derivatives that are not designated as hedging instruments are primarily recognized in other income (expense), net.

Interest and dividends income increased due to higher yields, offset in part by lower portfolio balances. Interest expense decreased due to a decrease in outstanding long-term debt due to debt maturities. Net recognized gains on investments decreased due to lower gains on equity securities and higher losses on fixed income securities. Net losses on derivatives increased due to losses related to managing strategic investments.

INCOME TAXES

Effective Tax Rate

Our effective tax rate for fiscal years 2023 and 2022 was 19% and 13%, respectively. The increase in our effective tax rate 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.

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 tax.

Our effective tax rate was lower than the U.S. federal statutory rate, 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 mix of income before income taxes between the U.S. and foreign countries impacted our effective tax rate as a result of the geographic distribution of, and customer demand for, our products and services. In fiscal year 2023, our U.S. income before income taxes was $52.9 billion and our foreign income before income taxes was $36.4 billion. In fiscal year 2022, our U.S. income before income taxes was $47.8 billion and our foreign income before income taxes was $35.9 billion.

Uncertain Tax Positions

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

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.

NON-GAAP FINANCIAL MEASURES

Adjusted gross margin, operating income, net income, and diluted EPS are non-GAAP financial measures. Current year non-GAAP financial measures exclude the impact of the Q2 charge, which includes employee severance expenses, impairment charges resulting from changes to our hardware portfolio, and costs related to lease consolidation activities. Prior year non-GAAP financial measures exclude the net income tax benefit related to transfer of intangible properties in the first quarter of fiscal year 2022. We believe these non-GAAP measures aid investors by providing additional insight into our operational performance and help clarify trends affecting our business. For comparability of reporting, management considers non-GAAP measures in conjunction with GAAP financial results in evaluating business performance. These non-GAAP financial measures presented should not be considered a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.

The following table reconciles our financial results reported in accordance with GAAP to non-GAAP financial results:

• Not meaningful.

LIQUIDITY AND CAPITAL RESOURCES

We expect existing cash, cash equivalents, short-term investments, cash flows from operations, and access to capital markets to continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities, such as dividends, share repurchases, debt maturities, material capital expenditures, and the transition tax related to the Tax Cuts and Jobs Act (“TCJA”), for at least the next 12 months and thereafter for the foreseeable future.

Cash, Cash Equivalents, and Investments

Cash, cash equivalents, and short-term investments totaled $111.3 billion and $104.8 billion as of June 30, 2023 and 2022, respectively. Equity investments were $9.9 billion and $6.9 billion as of June 30, 2023 and 2022, respectively. Our short-term investments are primarily intended to facilitate liquidity and capital preservation. They consist predominantly of highly liquid investment-grade fixed-income securities, diversified among industries and individual issuers. The investments are predominantly U.S. dollar-denominated securities, but also include foreign currency-denominated securities to diversify risk. Our fixed-income investments are exposed to interest rate risk and credit risk. The credit risk and average maturity of our fixed-income portfolio are managed to achieve economic returns that correlate to certain fixed-income indices. The settlement risk related to these investments is insignificant given that the short-term investments held are primarily highly liquid investment-grade fixed-income securities.

In general, and where applicable, we use quoted prices in active markets for identical assets or liabilities to determine the fair value of our financial instruments. This pricing methodology applies to our Level 1 investments, such as U.S. government securities, common and preferred stock, and mutual funds. If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then we use quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable either directly or indirectly. This pricing methodology applies to our Level 2 investments, such as commercial paper, certificates of deposit, U.S. agency securities, foreign government bonds, mortgage- and asset-backed securities, corporate notes and bonds, and municipal securities. Level 3 investments are valued using internally-developed models with unobservable inputs. Assets and liabilities measured at fair value on a recurring basis using unobservable inputs are an immaterial portion of our portfolio.

A majority of our investments are priced by pricing vendors and are generally Level 1 or Level 2 investments as these vendors either provide a quoted market price in an active market or use observable inputs for their pricing without applying significant adjustments. Broker pricing is used mainly when a quoted price is not available, the investment is not priced by our pricing vendors, or when a broker price is more reflective of fair values in the market in which the investment trades. Our broker-priced investments are generally classified as Level 2 investments because the broker prices these investments based on similar assets without applying significant adjustments. In addition, all our broker-priced investments have a sufficient level of trading volume to demonstrate that the fair values used are appropriate for these investments. Our fair value processes include controls that are designed to ensure appropriate fair values are recorded. These controls include model validation, review of key model inputs, analysis of period-over-period fluctuations, and independent recalculation of prices where appropriate.

Cash from operations decreased $1.5 billion to $87.6 billion for fiscal year 2023, mainly due to an increase in cash paid to employees and suppliers and cash used to pay income taxes, offset in part by an increase in cash received from customers. Cash used in financing decreased $14.9 billion to $43.9 billion for fiscal year 2023, mainly due to a $10.5 billion decrease in common stock repurchases and a $6.3 billion decrease in repayments of debt, offset in part by a $1.7 billion increase in dividends paid. Cash used in investing decreased $7.6 billion to $22.7 billion for fiscal year 2023, due to a $20.4 billion decrease in cash used for acquisitions of companies, net of cash acquired, and purchases of intangible and other assets, offset in part by a $8.2 billion decrease in cash from net investment purchases, sales, and maturities, and a $4.2 billion increase in additions to property and equipment.

Debt Proceeds

We issue debt to take advantage of favorable pricing and liquidity in the debt markets, reflecting our credit rating and the low interest rate environment. The proceeds of these issuances were or will be used for general corporate purposes, which may include, among other things, funding for working capital, capital expenditures, repurchases of capital stock, acquisitions, and repayment of existing debt. Refer to Note 11 – Debt of the Notes to Financial Statements for further discussion.

Unearned Revenue

Unearned revenue comprises mainly unearned revenue related to volume licensing programs, which may include Software Assurance (“SA”) and cloud services. Unearned revenue is generally invoiced annually at the beginning of each contract period for multi-year agreements and recognized ratably over the coverage period. Unearned revenue also includes payments for other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service. Refer to Note 1 – Accounting Policies of the Notes to Financial Statements for further discussion.

The following table outlines the expected future recognition of unearned revenue as of June 30, 2023:

If our customers choose to license cloud-based versions of our products and services rather than licensing transaction-based products and services, the associated revenue will shift from being recognized at the time of the transaction to being recognized over the subscription period or upon consumption, as applicable. Refer to Note 13 – Unearned Revenue of the Notes to Financial Statements for further discussion.

Material Cash Requirements and Other Obligations

Contractual Obligations

The following table summarizes the payments due by fiscal year for our outstanding contractual obligations as of June 30, 2023:

• Refer to Note 11 – Debt of the Notes to Financial Statements.
• Refer to Note 7 – Property and Equipment of the Notes to Financial Statements.
• Refer to Note 14 – Leases of the Notes to Financial Statements.
• Purchase commitments primarily relate to datacenters and include open purchase orders and take-or-pay contracts that are not presented as construction commitments above.

Income Taxes

As a result of the TCJA, we are required to pay a one-time transition tax on deferred foreign income not previously subject to U.S. income tax. Under the TCJA, the transition tax is payable in interest-free installments over eight years, with 8% due in each of the first five years, 15% in year six, 20% in year seven, and 25% in year eight. We have paid transition tax of $7.7 billion, which included $1.5 billion for fiscal year 2023. The remaining transition tax of $10.5 billion is payable over the next three years, with $2.7 billion payable within 12 months.

In fiscal year 2023, we paid cash tax of $4.8 billion due to the mandatory capitalization for tax purposes of research and development expenditures enacted by the TCJA and effective on July 1, 2022.

During fiscal years 2023 and 2022, we repurchased 69 million shares and 95 million shares of our common stock for $18.4 billion and $28.0 billion, respectively, through our share repurchase programs. All repurchases were made using cash resources. As of June 30, 2023, $22.3 billion remained of our $60 billion share repurchase program. Refer to Note 16 – Stockholders’ Equity of the Notes to Financial Statements for further discussion.

During fiscal year 2023 and 2022, our Board of Directors declared quarterly dividends of $0.68 per share and $0.62 per share, totaling $20.2 billion and $18.6 billion, respectively. We intend to continue returning capital to shareholders in the form of dividends, subject to declaration by our Board of Directors. Refer to Note 16 – Stockholders’ Equity of the Notes to Financial Statements for further discussion.

Other Planned Uses of Capital

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

We will continue to invest in sales, marketing, product support infrastructure, and existing and advanced areas of technology, as well as acquisitions that align with our business strategy. Additions to property and equipment will continue, including new facilities, datacenters, and computer systems for research and development, sales and marketing, support, and administrative staff. We expect capital expenditures to increase in coming years to support growth in our cloud offerings and our investments in AI infrastructure. We have operating and finance leases for datacenters, corporate offices, research and development facilities, Microsoft Experience Centers, and certain equipment. We have not engaged in any related party transactions or arrangements with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or the availability of capital resources.

CRITICAL ACCOUNTING ESTIMATES

Our consolidated financial statements and accompanying notes are prepared in accordance with GAAP. Preparing consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Critical accounting estimates are those estimates that involve a significant level of estimation uncertainty and could have a material impact on our financial condition or results of operations. We have critical accounting estimates in the areas of revenue recognition, impairment of investment securities, goodwill, research and development costs, legal and other contingencies, income taxes, and inventories.

Revenue Recognition

Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. When a cloud-based service includes both on-premises software licenses and cloud services, judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the cloud service and recognized over time. Certain cloud services, primarily Office 365, depend on a significant level of integration, interdependency, and interrelation between the desktop applications and cloud services, and are accounted for together as one performance obligation. Revenue from Office 365 is recognized ratably over the period in which the cloud services are provided.

Judgment is required to determine the stand-alone selling price (“SSP”) for each distinct performance obligation. We use a single amount to estimate SSP for items that are not sold separately, including on-premises licenses sold with SA or software updates provided at no additional charge. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services.

In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs. We typically have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we may use information such as the size of the customer and geographic region in determining the SSP.

Due to the various benefits from and the nature of our SA program, judgment is required to assess the pattern of delivery, including the exercise pattern of certain benefits across our portfolio of customers.

Our products are generally sold with a right of return, we may provide other credits or incentives, and in certain instances we estimate customer usage of our products and services, which are accounted for as variable consideration when determining the amount of revenue to recognize. Returns and credits are estimated at contract inception and updated at the end of each reporting period if additional information becomes available. Changes to our estimated variable consideration were not material for the periods presented.

Impairment of Investment Securities

We review debt investments quarterly for credit losses and impairment. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost. This determination requires significant judgment. In making this judgment, we employ a systematic methodology that considers available quantitative and qualitative evidence in evaluating potential impairment of our investments. In addition, we consider specific adverse conditions related to the financial health of, and business outlook for, the investee. If we have plans to sell the security or it is more likely than not that we will be required to sell the security before recovery, then a decline in fair value below cost is recorded as an impairment charge in other income (expense), net and a new cost basis in the investment is established. If market, industry, and/or investee conditions deteriorate, we may incur future impairments.

Equity investments without readily determinable fair values are written down to fair value if a qualitative assessment indicates that the investment is impaired and the fair value of the investment is less than carrying value. We perform a qualitative assessment on a periodic basis. We are required to estimate the fair value of the investment to determine the amount of the impairment loss. Once an investment is determined to be impaired, an impairment charge is recorded in other income (expense), net.

We allocate goodwill to reporting units based on the reporting unit expected to benefit from the business combination. We evaluate our reporting units on an annual basis and, if necessary, reassign goodwill using a relative fair value allocation approach. Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (May 1) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit.

Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated primarily through the use of a discounted cash flow methodology. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital.

The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions, and other factors. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit.

Research and Development Costs

Costs incurred internally in researching and developing a computer software product are charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established. We have determined that technological feasibility for our software products is reached after all high-risk development issues have been resolved through coding and testing. Generally, this occurs shortly before the products are released to production. The amortization of these costs is included in cost of revenue over the estimated life of the products.

Legal and Other Contingencies

The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. An estimated loss from a loss contingency such as a legal proceeding or claim is accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. In determining whether a loss should be accrued we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our consolidated financial statements.

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year, and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Accounting literature also provides guidance on derecognition of income tax assets and liabilities, classification of deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures. Judgment is required in assessing the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our consolidated financial statements.

Inventories

Inventories are stated at average cost, subject to the lower of cost or net realizable value. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. Net realizable value is the estimated selling price less estimated costs of completion, disposal, and transportation. We regularly review inventory quantities on hand, future purchase commitments with our suppliers, and the estimated utility of our inventory. These reviews include analysis of demand forecasts, product life cycle status, product development plans, current sales levels, pricing strategy, and component cost trends. If our review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis through a charge to cost of revenue.

STATEMENT OF MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS

Management is responsible for the preparation of the consolidated financial statements and related information that are presented in this report. The consolidated financial statements, which include amounts based on management’s estimates and judgments, have been prepared in conformity with accounting principles generally accepted in the United States of America.

The Company designs and maintains accounting and internal control systems to provide reasonable assurance at reasonable cost that assets are safeguarded against loss from unauthorized use or disposition, and that the financial records are reliable for preparing consolidated financial statements and maintaining accountability for assets. These systems are augmented by written policies, an organizational structure providing division of responsibilities, careful selection and training of qualified personnel, and a program of internal audits.

The Company engaged Deloitte & Touche LLP, an independent registered public accounting firm, to audit and render an opinion on the consolidated financial statements and internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States).

The Board of Directors, through its Audit Committee, consisting solely of independent directors of the Company, meets periodically with management, internal auditors, and our independent registered public accounting firm to ensure that each is meeting its responsibilities and to discuss matters concerning internal controls and financial reporting. Deloitte & Touche LLP and the internal auditors each have full and free access to the Audit Committee.

Satya Nadella Chief Executive Officer

Amy E. Hood Executive Vice President and Chief Financial Officer

Alice L. Jolla Corporate Vice President and Chief Accounting Officer

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to economic risk from foreign exchange rates, interest rates, credit risk, and equity prices. We use derivatives instruments to manage these risks, however, they may still impact our consolidated financial statements.

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 positions, including hedges. Principal currency exposures include the Euro, Japanese yen, British pound, Canadian dollar, and Australian dollar.

Interest Rate

Securities held in our fixed-income portfolio are subject to different interest rate risks based on their maturities. We manage the average maturity of the fixed-income portfolio to achieve economic returns that correlate to certain global fixed-income indices.

Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We manage credit exposures relative to broad-based indices to facilitate portfolio diversification.

Securities held in our equity investments portfolio are subject to price risk.

SENSITIVITY ANALYSIS

The following table sets forth the potential loss in future earnings or fair values, including associated derivatives, resulting from hypothetical changes in relevant market rates or prices:

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Income statements.

Refer to accompanying notes.

COMPREHENSIVE INCOME STATEMENTS

Balance sheets, cash flows statements, stockholders’ equity statements, note 1 — accounting policies.

Accounting Principles

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

We have recast certain prior period amounts to conform to the current period presentation. The recast of these prior period amounts had no impact on our consolidated balance sheets, consolidated income statements, or consolidated cash flows statements.

Principles of Consolidation

The consolidated financial statements include the accounts of Microsoft Corporation and its subsidiaries. Intercompany transactions and balances have been eliminated.

Estimates and Assumptions

Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Examples of estimates and assumptions include: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, and determining the standalone selling price (“SSP”) of performance obligations, variable consideration, and other obligations such as product returns and refunds; loss contingencies; product warranties; the fair value of and/or potential impairment of goodwill and intangible assets for our reporting units; product life cycles; useful lives of our tangible and intangible assets; allowances for doubtful accounts; the market value of, and demand for, our inventory; stock-based compensation forfeiture rates; when technological feasibility is achieved for our products; the potential outcome of uncertain tax positions that have been recognized in our consolidated financial statements or tax returns; and determining the timing and amount of impairments for investments. Actual results and outcomes may differ from management’s estimates and assumptions due to risks and uncertainties.

Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are recorded to other comprehensive income.

Product Revenue and Service and Other Revenue

Product revenue includes sales from operating systems, cross-device productivity and collaboration applications, server applications, business solution applications, desktop and server management tools, software development tools, video games, and hardware such as PCs, tablets, gaming and entertainment consoles, other intelligent devices, and related accessories.

Service and other revenue includes sales from cloud-based solutions that provide customers with software, services, platforms, and content such as Office 365, Azure, Dynamics 365, and Xbox; solution support; and consulting services. Service and other revenue also includes sales from online advertising and LinkedIn.

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.

Nature of Products and Services

Licenses for on-premises software provide the customer with a right to use the software as it exists when made available to the customer. Customers may purchase perpetual licenses or subscribe to licenses, which provide customers with the same functionality and differ mainly in the duration over which the customer benefits from the software. Revenue from distinct on-premises licenses is recognized upfront at the point in time when the software is made available to the customer. In cases where we allocate revenue to software updates, primarily because the updates are provided at no additional charge, revenue is recognized as the updates are provided, which is generally ratably over the estimated life of the related device or license.

Certain volume licensing programs, including Enterprise Agreements, include on-premises licenses combined with Software Assurance (“SA”). SA conveys rights to new software and upgrades released over the contract period and provides support, tools, and training to help customers deploy and use products more efficiently. On-premises licenses are considered distinct performance obligations when sold with SA. Revenue allocated to SA is generally recognized ratably over the contract period as customers simultaneously consume and receive benefits, given that SA comprises distinct performance obligations that are satisfied over time.

Cloud services, which allow customers to use hosted software over the contract period without taking possession of the software, are provided on either a subscription or consumption basis. Revenue related to cloud services provided on a subscription basis is recognized ratably over the contract period. Revenue related to cloud services provided on a consumption basis, such as the amount of storage used in a period, is recognized based on the customer utilization of such resources. When cloud services require a significant level of integration and interdependency with software and the individual components are not considered distinct, all revenue is recognized over the period in which the cloud services are provided.

Revenue from search advertising is recognized when the advertisement appears in the search results or when the action necessary to earn the revenue has been completed. Revenue from consulting services is recognized as services are provided.

Our hardware is generally highly dependent on, and interrelated with, the underlying operating system and cannot function without the operating system. In these cases, the hardware and software license are accounted for as a single performance obligation and revenue is recognized at the point in time when ownership is transferred to resellers or directly to end customers through retail stores and online marketplaces.

Refer to Note 19 – Segment Information and Geographic Data for further information, including revenue by significant product and service offering.

Significant Judgments

Judgment is required to determine the SSP for each distinct performance obligation. We use a single amount to estimate SSP for items that are not sold separately, including on-premises licenses sold with SA or software updates provided at no additional charge. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services.

Contract Balances and Other Receivables

Timing of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when revenue is recognized prior to invoicing, or unearned revenue when revenue is recognized subsequent to invoicing. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period. We record a receivable related to revenue recognized for multi-year on-premises licenses as we have an unconditional right to invoice and receive payment in the future related to those licenses.

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

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

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

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

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

Activity in the allowance for doubtful accounts was as follows:

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

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

Assets Recognized from Costs to Obtain a Contract with a Customer

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

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

Cost of Revenue

Cost of revenue includes: manufacturing and distribution costs for products sold and programs licensed; operating costs related to product support service centers and product distribution centers; costs incurred to include software on PCs sold by original equipment manufacturers (“OEM”), to drive traffic to our websites, and to acquire online advertising space; costs incurred to support and maintain cloud-based and other online products and services, including datacenter costs and royalties; warranty costs; inventory valuation adjustments; costs associated with the delivery of consulting services; and the amortization of capitalized software development costs. Capitalized software development costs are amortized over the estimated lives of the products.

Product Warranty

We provide for the estimated costs of fulfilling our obligations under hardware and software warranties at the time the related revenue is recognized. For hardware warranties, we estimate the costs based on historical and projected product failure rates, historical and projected repair costs, and knowledge of specific product failures (if any). The specific hardware warranty terms and conditions vary depending upon the product sold and the country in which we do business, but generally include parts and labor over a period generally ranging from 90 days to three years. For software warranties, we estimate the costs to provide bug fixes, such as security patches, over the estimated life of the software. We regularly reevaluate our estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary.

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

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

Stock-Based Compensation

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

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

Employee Severance

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

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

Financial Instruments

Investments

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

Debt investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding credit losses and impairments, are recorded in other comprehensive income. Fair value is calculated based on publicly available market information or other estimates determined by management. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost. To determine credit losses, we employ a systematic methodology that considers available quantitative and qualitative evidence. In addition, we consider specific adverse conditions related to the financial health of, and business outlook for, the investee. If we have plans to sell the security or it is more likely than not that we will be required to sell the security before recovery, then a decline in fair value below cost is recorded as an impairment charge in other income (expense), net and a new cost basis in the investment is established. If market, industry, and/or investee conditions deteriorate, we may incur future impairments.

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

Derivatives

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

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

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

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

Fair Value Measurements

We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

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

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

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

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

Property and Equipment

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

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

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

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

Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (May 1) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.

Intangible Assets

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

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:

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

NOTE 3 — OTHER INCOME (EXPENSE), NET

Net Recognized Gains (Losses) on Investments

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

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

NOTE 4 — INVESTMENTS

Investment Components

The components of investments were as follows:

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

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

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:

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

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.

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

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

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 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.

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.

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

Credit-Risk-Related Contingent Features

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

The following table presents the notional amounts of our outstanding derivative instruments measured in U.S. dollar equivalents:

Fair Values of Derivative Instruments

The following table presents our derivative instruments:

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

The following table presents the fair value of our derivatives instruments on a gross basis:

Gains (losses) on derivative instruments recognized in other income (expense), net were as follows:

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

NOTE 6 — INVENTORIES

The components of inventories were as follows:

NOTE 7 — PROPERTY AND EQUIPMENT

The components of property and equipment were as follows:

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

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

NOTE 8 — BUSINESS COMBINATIONS

Nuance Communications, Inc.

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

The allocation of the purchase price to goodwill was completed as of December 31, 2022. The major classes of assets and liabilities to which we have allocated the purchase price were as follows:

• Goodwill was assigned to our Intelligent Cloud segment and was primarily attributed to increased synergies that are expected to be achieved from the integration of Nuance. None of the goodwill is expected to be deductible for income tax purposes.
• Includes $986 million of convertible senior notes issued by Nuance in 2015 and 2017, substantially all of which have been redeemed.

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

ZeniMax Media Inc.

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

The allocation of the purchase price to goodwill was completed as of December 31, 2021. The major classes of assets and liabilities to which we have allocated the purchase price were as follows:

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

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

Activision Blizzard, Inc.

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

NOTE 9 — GOODWILL

Changes in the carrying amount of goodwill were as follows:

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 10 — INTANGIBLE ASSETS

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

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:

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:

NOTE 11 — DEBT

The components of debt were as follows:

• 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:

NOTE 12 — INCOME TAXES

Provision for Income Taxes

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

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

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

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:

• 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.

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:

NOTE 13 — UNEARNED REVENUE

Unearned revenue by segment was as follows:

Changes in unearned revenue were as follows:

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 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:

Supplemental cash flow information related to leases was as follows:

Supplemental balance sheet information related to leases was as follows:

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

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.

NOTE 16 — STOCKHOLDERS’ EQUITY

Shares Outstanding

Shares of common stock outstanding were as follows:

NOTE 17 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

NOTE 18 — EMPLOYEE STOCK AND SAVINGS PLANS

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

Stock-based compensation expense and related income tax benefits were as follows:

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.

Activity for All Stock Plans

The fair value of stock awards was estimated on the date of grant using the following assumptions:

During fiscal year 2023, the following activity occurred under our stock plans:

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

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

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:

As of June 30, 2023, 74 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 $1.6 billion, $1.4 billion, and $1.2 billion in fiscal years 2023, 2022, and 2021, respectively, and were expensed as contributed.

NOTE 19 — SEGMENT INFORMATION AND GEOGRAPHIC DATA

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

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

• 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.

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:

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:

• 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:

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:

Auditor's Report

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Microsoft Corporation

Opinion on the Financial Statements

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

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

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.

Revenue Recognition – Refer to Note 1 to the financial statements

Critical Audit Matter Description

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

Significant judgment is exercised by the Company in determining revenue recognition for these customer agreements, and includes the following:

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

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

How the Critical Audit Matter Was Addressed in the Audit

Our principal audit procedures related to the Company’s revenue recognition for these customer agreements included the following:

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

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

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

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

Our principal audit procedures to evaluate management’s estimates of uncertain tax positions related to unresolved transfer pricing issues included the following:

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

/s/    DELOITTE & TOUCHE LLP

Seattle, Washington

July 27, 2023

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

Controls & Procedures

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

CONTROLS AND PROCEDURES

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

REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

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

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

Opinion on Internal Control over Financial Reporting

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

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

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Seattle, Washington July 27, 2023

Directors & Officers

DIRECTORS AND EXECUTIVE OFFICERS OF MICROSOFT CORPORATION

Satya Nadella Chairman and Chief Executive Officer, Microsoft Corporation

Sandra E. Peterson 2,3 Lead Independent Director, Microsoft Corporation

John W. Stanton 1,4 Founder and Chairman, Trilogy Partnerships

Reid G. Hoffman 4 Partner, Greylock Partners

Penny S. Pritzker 4 Founder and Chairman, PSP Partners, LLC

John W. Thompson 3,4 Partner, Lightspeed Venture Partners

Hugh F. Johnston 1 Vice Chairman and Executive Vice President and Chief Financial Officer, PepsiCo, Inc.

Carlos A. Rodriguez 1,2 Executive Chair, ADP, Inc.

Emma N. Walmsley 2,4 Chief Executive Officer, GSK plc

Teri L. List 1,3 Former Executive Vice President and Chief Financial Officer, The Gap, Inc.

Charles W. Scharf 2,3 Chief Executive Officer and President, Wells Fargo & Company

Padmasree Warrior 2 Founder, President and Chief Executive Officer, Fable Group, Inc.

Board Committees

• Audit Committee
• Compensation Committee
• Governance and Nominating Committee
• Environmental, Social, and Public Policy Committee

Executive Officers

Satya Nadella Chairman and Chief Executive Officer

Judson B. Althoff Executive Vice President and Chief Commercial Officer

Bradford L. Smith Vice Chair and President

Christopher C. Capossela Executive Vice President and Chief Marketing Officer

Christopher D. Young Executive Vice President, Business Development, Strategy, and Ventures

Kathleen T. Hogan Executive Vice President and Chief Human Resources Officer

Investor Relations

You can contact Microsoft Investor Relations by calling toll-free at (800) 285-7772 or outside the United States, call (425) 706-4400. We can be contacted between the hours of 9:00 a.m. to 5:00 p.m. Pacific Time to answer investment-oriented questions about Microsoft.

For access to additional financial information, visit the Investor Relations website online at: www.microsoft.com/investor

Our e-mail is [email protected]

Our mailing address is:

Investor Relations Microsoft Corporation One Microsoft Way Redmond, Washington 98052-6399

Attending the Annual Meeting

The 2023 Annual Shareholders Meeting will be held as a virtual-only meeting. Any shareholder can join the Annual Meeting, while shareholders of record as of September 29 2023, will be able to vote and submit questions during the meeting.

Date: Thursday, December 7, 2023 Time: 8:30 a.m. Pacific Time Virtual Shareholder Meeting: www.virtualshareholdermeeting.com/MSFT23

Submit Your Question

We invite you to submit any questions via the proxy voting site at www.proxyvote.com . We will include as many of your questions as possible during the Q&A session of the meeting and will provide answers to questions on the Microsoft Investor Relations website under the Annual Meeting page.

Registered Shareholder Services

Computershare, our transfer agent, can help you with a variety of shareholder related services including:

• Change of address
• Lost stock certificates
• Transfer of stock to another person
• Additional administrative services

Computershare also administers a direct stock purchase plan and a dividend reinvestment program for the company.

Contact Computershare directly to find out more about these services and programs at 800-285-7772, option 1, or visit online at: https://www.computershare.com/Microsoft

You can e-mail the transfer agent at: [email protected]

You can also send mail to the transfer agent at:

Computershare P.O. Box 505000 Louisville, KY 40233-5000

Shareholders can sign up for electronic alerts to access the annual report and proxy statement online. The service gets you the information you need faster and also gives you the power and convenience of online proxy voting. To sign up for this free service, visit the Annual Report site on the Investor Relations website at: http://www.microsoft.com/investor/AnnualReports/default.aspx

Environmental, Social, and Governance (ESG)/Corporate Social Responsibility

Many of our shareholders are focused on environmental, social, and governance topics. To meet the expectations of our stakeholders and to and maintain their trust, we are committed to conducting our business in ways that are principled, transparent, and accountable. Microsoft has made a broad range of environmental and social commitments to make a significant positive impact on important global issues. Microsoft’s Board of Directors provides insight, feedback, and oversight across a broad range of environmental and social matters. In particular, among the responsibilities of the Board’s Environmental, Social, and Public Policy Committee is to review and provide guidance to the Board and management about the Company’s policies and programs that relate to corporate social responsibility.

For more about Microsoft’s CSR commitments and performance, please visit: www.microsoft.com/transparency .

Annual report – definition and meaning

An annual report is a document that public companies issue to provide shareholders with important corporate information. Potential investors, analysts, and financial journalists also read annual reports. In fact, when a major company like Apple Inc. issues its report, a wide range of people examine it.

The majority of jurisdictions instruct companies to prepare and disclose annual reports. Many firms file their annual reports at the company’s registry.

The main aim of the annual report is to provide a summary of how well (or badly) a company has performed over the past 12 months. Additionally, the document provides a glimpse of things to come.

Creating a compelling annual report today is a real art. In fact, some people call it a science. There are even agencies that specialize in preparing annual reports.

Annual report – public companies

In most cases, ** public companies usually have to report at more frequent intervals. However, this also depends on the guidelines of the stock exchange where investors buy and sell the company’s shares.

** You can buy and sell public company shares on a stock exchange , but not the shares of a private company.

An annual report usually begins with an opening letter from the Chief Executive Officer, followed by financial data, results of continuing operations, and information about its market. The report authors also write about products that are in the pipeline, as well as the company’s subsidiary activities.

Additionally, many companies, especially the larger ones, include details on their research and development.

Typically, the cover and first few pages of the report contain graphics, photos, and accompanying narrative. The annual report’s first few pages detail what the company has achieved over the past year.

Comprehensive financial and operational information appears in the latter half of the report.

Every year, companies send their annual reports to shareholders. They send the reports when the companies hold their AGMs to elect directors and discuss strategy. AGM stands for A nnual G eneral M eeting.

According to the dictionary Merriam-Webster , an annual report is:

“A usually lengthy report issued yearly by an organization giving an account of its internal workings and especially its finances.”

The Wall Street Crash

The Wall Street Crash , which occurred in 1929, was the greatest stock market collapse in US history. After the crash, the US Government passed legislation forcing public companies to publish an annual report.

In the US, companies submit a more comprehensive report, a Form 10-K , to the SEC. SEC stands for the S ecurities and E xchange C ommission.

American companies must file the Form 10-K no more than ninety days after the fiscal year. Additionally, public companies must file a Form 10-Q every quarter.

US companies can submit their annual reports electronically via the SEC’s EDGAR database. This database is also a useful tool, especially when you are researching public companies.

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Home > Finance Glossary > Annual Reports

Annual Reports

Among the various financial reports that a public corporation is required to issue to shareholders, the Annual Report is perhaps the best known.

An annual report is used by shareholders, prospective investors, and lending institutions for a wide variety of tasks. Prior to the stock market crash of 1929 , annual reports were not required.

Congress passed laws after 1929 that mandated standard corporate reporting.

Annual reports are also used by non-public entities to convey information to investors or lenders. Registered Mutual Funds are also required to issue annual reports to shareholders.

There are benefits to following standardized accounting and reporting policies that regulators require. For this reason, many businesses choose to voluntarily produce an annual report each year.

In this FAQ, we will discuss what an annual report is, why it is important, and the basic information required in an annual report. 

What is an Annual Report?

An annual report is a corporate document issued to shareholders as required by regulators. Its purpose is to communicate the financial status of the company and to comment on operations over the prior year.

An annual report is one component of corporate financial reporting that spans a number of required forms and filings. The detailed annual report that is filed by public companies with the Securities and Exchange Commission (SEC) in the United States is referred to as the 10-K.

The SEC requires public companies and registered mutual funds to submit their annual reports electronically. Public companies must also post proxy materials, including the annual report, on their websites. 

The intention of the annual report is to force public corporations to be transparent with their shareholders. The annual report will always contain pertinent information on the financial health of a business, including its liquidity, profit and loss details, growth, and debt obligations. 

The annual report also contains an Auditor’s Opinion, which is the letter from a qualified auditor that the business conforms to US GAAP .

This type of opinion is referred to as an unqualified opinion, and it confirms that a business has recorded and presented information fairly, accurately, and in accordance with US GAAP. 

Why Is an Annual Report Important?

An annual report contains transparent information on the financial status of a business. It contains information on a business’ ability to generate profit and will also communicate to readers that the accounting is performed according to US GAAP and in accordance with US law. 

This is perhaps one of the most beneficial aspects of an annual report, and it is behind the intention of the annual report, which is to force public corporations to be transparent with its investors.

It is also a forum for which CEOs communicate to investors, usually in the form of a “letter to shareholders.” This is a letter written by the organization’s executive team to provide an overview and summarize the business’ operations over the past year.

Another benefit afforded to investors by the annual report is that it mandates Management Discussion and Analysis (MD&A), which addresses the business’ performance over the last year.

The presentation is both quantitative and qualitative and usually contains useful information regarding the outlook of the business and the market for the coming year.

How to Make an Annual Report

Because it is a standardized presentation, an annual report is almost always composed of the same components.

Making an annual report requires that a firm engages an independent auditor and produces US GAAP financial statements. 

General Information

This section contains general corporate information, usually the executive team, contact information, and address.

Sometimes it will also include service providers like the auditor, tax service provider, or legal counsel. 

Operating and Financial Highlights

This section highlights key operating metrics and financial information. Usually, this is a summarized section on EPS.

Letter to the Shareholders

This letter is essentially communication from the firm’s CEO and executive team on the prior year’s activities.

Management Discussion and Analysis

This is information regarding management’s view on how the business operated the prior year. 

It also contains analysis on the potential challenges the business may face in the coming year, market conditions updates, and any other pertinent information to the business’ operations.

Financial Statements

Financial statements must be prepared in conformity with US GAAP and must include a balance sheet, income statement , cash flow statement , and statement of changes in equity. 

Notes to the Financial Statements

The notes to the financial statements describe any assumptions that were made in the course of creating the financials, any accounting policies pertinent to the production financial statements, and any schedules impacting values on the face of the financials.

Notes also disclose any material risk, and AICPA creates standards that the notes must follow. 

Independent Auditors Report

This is the official opinion of the independent auditor and will confirm that business has presented the information fairly and in accordance with US GAAP and applicable law.

Summary of Financial Data and Accounting Policies

Usually, annual reports will contain a brief summary of the financial data presented in the financial statements as well as the pertinent accounting policies the business followed in the production of the financial statements.

Using Datarails to Build Your Annual Report

Every finance department knows how challenging creating and issuing an annual report can be. Regardless of the budgeting approach your organization adopts, it requires big data to ensure accuracy, timely execution, and of course, monitoring.

Datarails is an enhanced FP&A software that can help your team create and monitor budgets faster and more accurately than ever before.

By replacing spreadsheets with real-time data and integrating fragmented workbooks and data sources into one centralized location, you can work in the comfort of excel with the support of a much more sophisticated data management system behind you.

This takes budgeting from time-consuming to rewarding. 

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How to Create a Standout Nonprofit Annual Report + Template

For nonprofits like yours, a thoughtfully written and well-designed annual report can be an invaluable fundraising tool. It can be used to cultivate new relationships with donors, sponsors, volunteers, and other community members. Plus, it helps recognize and  retain  those who have helped you make progress toward your goals over the past year.

With so much at stake, it’s critical to take the creation of your annual report seriously and seek guidance on how to make it a useful resource for your organization’s community. To help you get started, this guide will cover all you need to know about nonprofit annual reports, including:

What is a nonprofit annual report?

Nonprofit annual report template & elements to include, choosing a format for your annual report, nonprofit annual report best practices, our favorite nonprofit annual report examples.

These tips and strategies will put you well on your way to creating a digestible, engaging annual report that inspires your audience to continue supporting your organization’s work. Let’s dive in!

An annual report is a document designed to highlight your nonprofit’s major accomplishments, build confidence in your organization, inspire readers to support your mission, and thank the donors and volunteers who make your work possible. 

Nonprofits typically compile and release these reports every year, although they aren’t always mandatory. On a national level, the only document you’re required to file to maintain your organization’s 501(c)(3) status is an annual tax return via  IRS Form 990 . However, some state governments request a copy of nonprofits’ annual reports to maintain their charitable solicitation registration in that state, so make sure to stay up-to-date on  your state’s filing requirements .

Benefits of Creating an Annual Report

Even if your nonprofit isn’t required to file its annual report with your state, there are advantages to compiling one.  For most nonprofits, the ultimate goal—and the ultimate benefit—of their annual report is simple: retaining current supporters and acquiring new ones.

To accomplish this goal, your annual report must fulfill several smaller purposes, each of which benefits your organization’s long-term health:

• Educate your audience about your mission.
• Demonstrate the impact your organization has made.
• Build trust through financial transparency.
• Show appreciation for your current supporters.

Additionally, although annual reports reflect on the past year, they can also establish a framework for your nonprofit to move forward and achieve more in the year to come!

Annual Reports & Prospect Research

It’s common for nonprofits to include the names of their major donors and the projects they contributed to somewhere in their annual reports. This information can help feed charitable giving databases that you can use for prospect research.  DonorSearch , for example, culls hundreds of annual reports to collect data on major donors’ giving history.

While your annual report can cultivate better relationships with existing donors and encourage others to support your cause, you can also use the information from other nonprofit reports to fuel your prospect research. Prospect research professionals can find a wealth of ideal prospects for your nonprofit just by looking at the annual reports of similar organizations. 

Let’s say that your nonprofit works to reduce food insecurity for children in your area. If a local hospital highlighted a major donor in their annual report who contributed to the hospital’s pediatric intensive care unit, your organization might want to target that person as a potential major donor, since you can infer that they’re likely interested in helping children.

If you’re creating your nonprofit’s first-ever annual report or looking to switch up your format, it can be useful to work off of a template. The template below is a representation of a page of your annual report or a shortened digital version you can deliver via email. The use of graphics and images provides a suggestion for how to effectively divide up the space and produce a more visually appealing layout:

This template includes the four most essential elements of a nonprofit annual report, which we’ll discuss in more detail in the following sections.

1. Clear Mission Statement

Dedicated, long-time supporters and individuals who are brand new to your organization’s community will both read your annual report. Each of these groups of readers should be confident in their understanding of your organization’s mission before diving into the data, which is why you should write out your mission statement at the beginning of the report.

Keep your mission statement to one or two sentences to help it stick in readers’ minds, and ensure it includes the most important details about why your organization does what it does every day. One nonprofit that does this particularly well is the  American Red Cross , whose mission statement reads, “The American Red Cross prevents and alleviates human suffering in the face of emergencies by mobilizing the power of volunteers and the generosity of donors.”

You can also include your vision statement alongside your mission statement. Your vision statement is a sentence that describes the future state your nonprofit is working toward—i.e., what you hope the world will look like when your mission is accomplished.

2. Major Achievements From the Past Year

The majority of your annual report should focus on the activities and projects your organization completed over the past year, from hosting fundraising events to coordinating volunteer efforts to delivering services in your community. Reflect on your organization’s audience and what would be most interesting to them, but make sure to share your biggest accomplishments!

First, use your  fundraising tools  to break down your achievements into statistics your readers can easily understand. You might report the total amount your donors gave, the number of hours your volunteers worked, or how many social media followers you gained. Then, format that data using graphs and visualizations to make it easier for readers to understand, and supplement the numbers with photos and true stories about your work to further emphasize your impact.

3. Financial Information

It’s no secret that your donors want to know how your nonprofit is using their money to further your mission. Being honest and transparent about your spending and fundraising builds trust with your existing supporters. Plus, it shows potential donors that your nonprofit can manage funds responsibly and effectively, which can make them more likely to give.

However, some high-impact donors who are very financially literate will want to see detailed records of your nonprofit’s financial status, while others would prefer an easy-to-follow, summarized version of the data. To accommodate both of these preferences, include graphical representations of key financial information in the body of your annual report, then attach detailed  financial statements  as appendices for donors who want to learn more.

4. List of Major Contributions

In addition to showcasing your nonprofit’s success, your annual report is also about thanking those who helped you achieve those goals. The best way to do this is by listing out and thanking your  major donors , board members, and organizational leadership.

Additionally, include a general statement of thanks to your volunteers and donors at all levels. Although you should have a more personalized thank-you cadence for each supporter when they contribute, a general shoutout will make them feel appreciated and seen by your organization!

Once you add each of the elements listed above to your annual report, you’ll need to decide how to present the information to your nonprofit’s community. While most organizations publicize their annual reports on a dedicated page of their websites, how you further publicize it will depend on your audience’s preferences.

A combination of hard-copy and digital annual report materials will generally reach the widest audience. Here are some popular formats in each category to consider:

Hard Copy Annual Reports

• Traditional bound book:  These can be anywhere from a few to 100 pages long and are great for compiling a large amount of information in a substantial, tangible way. No matter how long your report is, make sure to keep the content engaging and break up the text with plenty of visuals.
• Postcard:  If you’d like to maximize digestibility, postcards are a good choice. With well-designed infographics, pictures, and statistics, supporters can very quickly understand how your organization did last year. Because of space limitations, you’ll have to sacrifice some copy, so if you want to tell detailed stories or include a long list of donors, choose a longer-form option.
• Brochure:  Still considered a quick read, brochures are a middle ground between a postcard and a book. The folds in a brochure create natural divides to easily section your information and design.

Digital Annual Reports

• PDF:  If you want the space that a book offers but don’t want to spend the money or use tons of paper to print it, PDFs are a good solution. You can make them as long or short as you like, embed other digital content like links, videos, and PowerPoint presentations, and easily upload them to your website or attach them to an email.
• Video:  Video annual reports show, rather than tell, your audience what your organization has accomplished. Make sure your final video comes across as professional in its editing and  production , and recruit outside help if necessary.
• Interactive website:  Consider building a webpage or mini-site that houses an interactive version of your annual report. Your audience could click through a photo gallery, expand graphs for a more detailed view, and play multiple short videos, making for an immersive experience.

If you use multiple formats, think about who the primary audience is for each type. Newer, lower-level supporters will likely be happy with condensed versions of your annual report like videos or postcards, while important stakeholders will want to see more comprehensive information in a book or PDF.

Now that you know what to include in your annual report and your options for formatting it, you’re likely ready to dive into creating your own. As you compile the report, keep these six best practices in mind.

1. Start With a Clear Plan

The first step for every successful project at your nonprofit is creating a plan, and your annual report is no exception. You’ll likely need the help of multiple team members or departments to assemble all of the information, as well as compile and design the document. 

First, determine your report’s audience. This will likely include your current supporters as well as prospective donors,  corporate sponsors , and grantmaking foundations. If you have to file your annual report with your state government, they’re also part of your audience.

Then, consider your purpose and strategy. At its core, your annual report should persuade your audience to support your cause. However, you might have smaller objectives, such as highlighting a new project or attracting more local sponsors, that align with your nonprofit’s strategic plan. Because it’s difficult to cover everything your organization has done in a year in a single document,  focus your report on three to five core themes that point readers back to your objectives.

Finally, turn to the action aspect of your plan. This part of your strategy may include: 

• Delegating responsibilities and creating timelines for team members.
• Interviewing supporters, leaders, and beneficiaries.
• Compiling and formatting financial data.
• Collecting  key metrics  from fundraising campaigns.

When your nonprofit has a clear plan, the process of creating your report will go more smoothly, and the end result will be more impactful.

2. Highlight Your Supporters

As we’ve mentioned before, your annual report is a chance to showcase the good your nonprofit has done. That being said, it’s easy for nonprofits to simply celebrate  their  accomplishments and forget to mention the support that made them possible.

Rather than focusing solely on your achievements, highlight how different projects and programs were realized because of your supporters’ contributions.  Every form of support your organization received was essential to your success, so thank them for their monetary gifts, in-kind donations, volunteer time, event participation, advocacy for your cause, and more.

By showing donors and volunteers that your accomplishments were possible because of their support, they’ll know that you’re aware of everything they do. Plus, it demonstrates to potential donors that your nonprofit is built on the support of passionate people and encourages them to join that community.

3. Recognize High-Impact Contributors

In addition to discussing your supporters’ accomplishments generally, set aside space in your annual report to draw extra attention to the supporters who went above and beyond for your cause. Besides the customary list of major donors and the initiatives they supported, consider including stories about some of these donors or other individuals who have been especially impactful to your cause, such as a loyal volunteer or a long-serving board member.

High-impact supporters like this deserve much more recognition than a simple, generic thank-you message, and your annual report is a great place to publicly show your gratitude. When donors feel appreciated and valued in this way, they’re more likely to continue engaging with your nonprofit long-term.

4. Engage Readers With Compelling Visuals

Compiling all of your efforts and data from the past year and condensing them into a single document provides a lot of information for current and prospective supporters to read! This is where strategically placed visuals come in.

Along with capturing and keeping readers’ attention, annual report visuals have many benefits, such as:

• Breaking up blocks of text to make the report more skimmable.
• Transforming complex data into easy-to-understand graphs.
• Translating your mission statement into a tangible need that your audience can develop a passion for.

Incorporate a combination of graphical data visualizations and relevant photos into your report, and make sure to get subjects’ consent if the pictures include any people. For online reports, make some of your visuals interactive for increased engagement.

5. Be Truthful & Transparent

While your annual report is primarily about highlighting your success, it’s important to be honest about your organization’s progress. Sometimes your projects won’t go as planned—and that’s okay! 

By briefly mentioning your missteps and how you plan to correct the issue in the future, you’ll show your audience that you’re proactive in solving problems.  Make sure to address:

• The causes of your setbacks (if you know what they are).
• The changes you plan to make in the future based on the information you currently have.
• How you’ll gather and incorporate feedback from your supporters as you address these issues.

Touching on setbacks will paint a full picture of the previous year’s progress and demonstrate to donors that despite your challenges, you were still able to make significant strides in furthering your mission.

6. Inspire Your Audience to Take Action

Once you’ve effectively conveyed your mission and achievements in your annual report, many readers might be wondering, “What’s next?”

Dedicate space in your annual report to let readers know how they can support your cause. At minimum, include a link or QR code to your online donation page depending on what format you choose. You might also direct readers to other ways they can get involved, such as:

• Signing up to volunteer
• Registering for the first fundraising event of the new year
• Taking advantage of  corporate philanthropy programs  like employer matching gifts or volunteer grants

Additionally, mention other places where readers can learn more. Include your organization’s website URL, phone number, mailing and email addresses, and social media handles so your audience can stay in touch with you.

To show you these strategies in practice, we’ve compiled a list of our top five nonprofit annual reports. If you still aren’t sure where to start with creating your organization’s annual report, these examples might just spark some inspiration!

The Nature Conservancy

The Nature Conservancy  (TNC) describes itself as “a global environmental nonprofit working to create a world where people and nature can thrive.” For their 2022 annual report, they chose two eco-friendly formats: an interactive website and a PDF that their international community of readers can download in English, Spanish, or Mandarin.

Some highlights of TNC’s report include:

• A concise explanation of their “2030 Goals” strategic plan with accompanying graphics.
• Articles on each of their key projects that highlight their donors and partners, along with relevant photos and opportunities to learn more.
• Multiple formats for their financial data, including a summary bar graph, a letter from the CFO, and a detailed accounting report.

Read The Nature Conservancy’s full annual report .

National FFA Organization

The  National FFA Organization  (FFA stands for Future Farmers of America) is “the premier youth organization preparing members for leadership and careers in the science, business and technology of agriculture.” FFA compiles a digital annual report that can be viewed as a downloadable PDF or on a dedicated mini-site.

Some highlights of FFA’s 2022 annual report include:

• An organized three-part structure based on the pillars of the nonprofit’s 2022-2025 strategic plan: Evolve, Engage, and Empower.
• A timeline highlighting the most important activity or achievement of each month.
• Branded graphics that compile and summarize statistics about all of the nearly 9,000 local FFA chapters.

Read the National FFA Organization’s full annual report.

World Vision International

World Vision International  (WVI) is a faith-based nonprofit organization that works to respond to poverty, provide emergency relief, and promote social justice around the world. Its eye-catching 2022 annual report is available as a downloadable PDF on their website.

Some highlights of WVI’s annual report include:

• Large photos of smiling beneficiaries—several of which are accompanied by testimonials—to put a face to the impact data featured.
• A strong emphasis on the impact of supporters’ participation in the child sponsorship program.
• Graphs showing the organization’s increase in total revenue over the past six years and a detailed but easily readable summary of annual expenditures.

Read World Vision International’s full annual report .

Smithsonian Institution

The Smithsonian Institution’s  mission is to promote “the increase and diffusion of knowledge,” which it does through the 21 museums and one zoo under its control. Because there are so many cultural organizations within this one nonprofit, it produces an extremely comprehensive annual report book each year.

Some highlights of this organization’s 2022 annual report include:

• The statistics in the first spread of the book that highlight the audience’s impact right off the bat.
• First-person perspectives from staff members at many of the Smithsonian’s cultural organizations.
• A thorough and well-organized list of corporate sponsors and major donors.

Read the Smithsonian Institution’s full annual report .

Boston Children’s Hospital

Some large nonprofits, such as higher education or healthcare organizations, may benefit from producing multiple annual reports each year that each focus on one of their areas of work.  Boston Children’s Hospital , one of the largest pediatric hospitals in the United States, creates separate reports for each of its individual programs to better highlight the progress and supporters of each one. A few examples include:

• Neighborhood Partnerships
• Family Advisory Council
• Office of Community Health

Not only do all of these reports include high-quality data presentations and storytelling, but their visual design appeals to each program’s audience. For example, the Office of Community Health uses a dark color scheme when discussing serious health data, while the bright colors in the Neighborhood Partnerships report give it a welcoming feel. However, all of the reports still feature the Boston Children’s Hospital logo to unify them.

Final Thoughts

An annual report is an effective tool for closing out your nonprofit’s year. It empowers you to highlight your achievements and recognize everyone who has helped you along the way. With the tips and strategies in this guide, you can create an effective annual report that donors look forward to receiving every year.

Remember that annual reports from other nonprofits also provide value to your work. The information within those reports can offer deeper insights that you can use to identify and build relationships with prospective donors.

To learn more about boosting your nonprofit’s fundraising performance, check out these resources:

• Major Gifts: A Guide to Securing Large Donations . Dive deeper into the process of securing major gifts from the donors you’ll feature in the list of major contributors in your annual report.
• Your Annual Fund: A Definitive Guide to Boost Your Strategy . Your nonprofit’s annual fund provides a financial foundation for all of the initiatives you report each year. Discover the best strategies to fill this fund.
• Fundraising Intelligence: Using AI to Enhance Philanthropy . Explore how to leverage AI-powered tools to fundraise and report on your organization’s activities more intelligently.

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When Do Annual Reports Come Out? And What is the Distribution Requirement?

Companies conduct business operations to generate revenues and profits. However, they need finance to do so. Usually, this finance comes from equity holders and creditors. These parties provide funds that companies can use to perform various business activities. In exchange, companies repay those parties in several ways. These parties fall under the definition of a stakeholder.

On top of that, stakeholders may also include other parties. These consist of debtors, management, employees, the government, and other similar entities. These parties may be internal or external to the company. Essentially, stakeholders have an interest in the business or the company. For these parties, how a company performs and conducts its operations is critical for decision-making.

Stakeholders need information from a company on which they can base their decisions. Usually, this information comes from the financial statements. However, companies provide those statements as a part of their annual report. This report contains other necessary information as well. It is crucial to understand when it comes out and how companies distribute them. Before that, one must know what an annual report is.

What is an Annual Report?

An annual report is a written document that companies present to stakeholders. Public companies must prepare and distribute these reports regularly. However, the same criteria do not apply to other entities. Nonetheless, they may present annual reports voluntarily. These reports are crucial in providing additional details about a company and its operations. They include qualitative and quantitative information.

An annual report describes a company’s operations and financial conditions. It presents an image of that company from the management’s perspective. Usually, it includes graphics, photos, narratives, and other similar items. These items are a part of the front section of the annual report. On top of that, the annual report may also contain the financial statements to which it relates. Apart from that, the back also includes other financial and operational information.

An annual report includes a comprehensive report of a company’s activities. Usually, it presents that information for the preceding year or a defined period. Its primary purpose is to provide various users with crucial details about operations and financial activities. Apart from that, it also includes the views of management personnel. It is a critical document for investors and other stakeholders.

Overall, an annual report is a formal document that companies publish regularly. Once they publish it, companies send them to various stakeholders. Usually, the distribution criteria for annual reports differ based on several factors. However, it will always include critical parties, such as investors, government bodies, etc. The annual report can help companies attract new investors while conforming to rules and regulations.

What Does an Annual Report Include?

There are several components of the annual report that companies must include. Sometimes, companies must follow specific rules and requirements when reporting the annual report components. However, they may also consist of other areas according to their needs. Companies may alter the annual report format based on those needs as well. However, most annual reports contain similar information.

Usually, annual reports include the following areas.

• General corporate details.
• Highlights of financial and operating activities.
• Letter from the CEO and Chairman to the shareholders.
• Management discussion and analysis (MD&A).
• Narrative documents, charts and images.
• Financial statements (Balance sheet, income statement, cash flow statement, statement of changes in equity, notes to the financial statements).
• Auditor’s report.
• Summary of accounting policies and any changes to them.
• Summary of financial data.

When Do Annual Reports Come Out?

An annual report provides various benefits to several crucial stakeholders. It offers an opportunity to highlight achievements, expectations and goals. Similarly, it delivers information on its financial position and performance. Annual reports also tell various parties about plans and strategies to grow. Based on this information, stakeholders can make critical decisions.

For several reasons, knowing when annual reports come out is crucial. Some users may not be aware of when to expect these reports. Therefore, they may miss out on opportunities to benefit from the information provided. These users always wonder when annual reports come out or are available for distribution. The answer to that question lies in the name of these reports.

As the name suggests, annual reports come out annually. Companies prepare and distribute them each year. However, it does not imply that these will be available in December or January. In this context, a year refers to the financial year-end for a company. This date will differ based on various factors. Usually, the tax year-end is the same as the fiscal year. In most jurisdictions, it is around December.

However, the fiscal year-end for companies may differ in some areas. In some jurisdictions, it may also fall around March or June. Depending on that date, stakeholders can expect the annual reports to come out soon. Once the fiscal year ends, companies start working on these reports. Once they prepare and finalize it, they will release it to the public. In most cases, annual reports come out between 1-3 months after the fiscal year-end.

What is the Distribution Requirement for Annual Reports?

The annual report does not constitute a part of the internal documentation process for companies. Usually, the information provided within this report is available internally through other means. Instead, it is a way to inform stakeholders about activities. Companies must distribute their annual reports to various stakeholder classes. These fall under the distribution requirements for those reports.

The primary stakeholders to whom companies must distribute annual reports include the following parties.

Board members

Board members are one of the primary parties who require the annual reports. Usually, these members receive a copy before other people. In some cases, some board members may be an active part of the company’s operations. However, others may also come from the outside. Distributing the annual report to them is crucial.

The management and executive team

Managers usually receive the information reported in the annual reports through management reports. Some may also play an active role in preparing and compiling these reports. Nonetheless, companies distribute a company of annual reports to them. Even those involved in the process must get to check the finalized statement.

Investors and donors

Companies may have hundreds of investors or donors. Distributing the annual reports to those parties may not be possible. However, companies focus on their substantial investors and donors. These parties are the primary stakeholders who use the annual report for decision-making. Investors also need this report to understand how much returns they have received from operations.

The government

The government will always require a copy of the annual report. Therefore, they are an essential part of the distribution requirements for annual reports. Usually, companies provide a copy of these reports to a specific body. For example, companies in the US send their annual report to the SEC and IRS. In other areas, these parties will differ. Companies must refer to their local Companies Act to understand the distribution requirements.

Other parties

The above includes the primary stakeholders to whom companies provide their annual reports. However, some companies may also go beyond these. Usually, companies offer their annual reports through their websites. This way, they can provide these reports to a broad range of users and stakeholders. However, these parties may not be the focus for some companies.

Conclusion:

An annual report is a document that companies prepare to report to shareholders. This report includes various components, although they may differ. Essentially, companies prepare and present their annual reports annually. However, the exact date may vary depending on several factors. The distribution requirement for annual reports must include substantial stakeholders.

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IRS Advisory Council issues 2023 Annual Report

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IR-2023-207, Nov. 9, 2023

WASHINGTON — The Internal Revenue Service Advisory Council (IRSAC) today issued its annual report for 2023 PDF , including recommendations to the IRS on new and continuing issues in tax administration.

The 2023 Public Report includes recommendations on 23 issues covering a broad range of topics including:

• Section 302, Escrow and Certification Procedure
• Timely Obtaining Employer ID Numbers (EINs) to Comply with the Corporate Transparency Act Requirements
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Commissioner Danny Werfel and IRS executives thanked 11 members of the council whose terms end this year:

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• Jeremiah Coder – Coder served on the Large Business & International Subgroup.
• Steven Klitzner – Klitzner served as Chair of the Small Business/Self Employed Subgroup.
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• Phillip Poirier – Poirier served as Chair of the Wage & Investment Subgroup.
• Seth Poloner – Poloner served on the Information Reporting Subgroup.
• Nancy Ruoff – Ruoff served as Chair of the Tax Exempt/Government Entities Subgroup.
• Paul Sterbenz – Sterbenz served on the Information Reporting Subgroup.
• Kathryn Tracy – Tracy served on the Wage & Investment Subgroup.

The full 2023 IRSAC Public Report PDF is available at IRS.gov.

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Financial Reporting Manual

Dec. 11, 2017

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TOPIC 4 - Independent Accountants' Involvement

4100 qualifications of accountants.

(Last updated: 6/30/2009)

4110 PCAOB Registration

4110.1 PCAOB Rule 2100 requires each firm (domestic or foreign) to register with the PCAOB that:

• prepares or issues any audit report with respect to any issuer; or
• plays a substantial role in the preparation or furnishing of an audit report with respect to any issuer.

4110.2 A public accounting firm not registered with the PCAOB may be able to perform some audit services for an issuer if the firm does not play a substantial role in the preparation or furnishing of the audit report as defined by PCAOB Rule 1001(p)(ii).

4110.3 In accordance with PCAOB Rule 2107(b)(1), a firm that was once registered and then later withdrew may reissue or give consent to the use of a prior report that it issued while registered. However, the firm cannot update or dual-date a previously issued report after the firm is no longer registered, as that involves additional audit work.

4110.4 Issuer financial statements audited by a nonregistered firm are considered to be “not audited,” and any 10-K, proxy statement, or registration statement containing or incorporating by reference such financial statements is deemed substantially deficient. In addition, the 10-K is deemed not timely filed. The 10-K or filing should be amended immediately to remove the nonregistered auditor’s report and label the columns of the financial statements as “not audited.” The issuer would then need to file another amendment to file financial statements audited by a registered firm.

4110.5 The following chart outlines the application of certain PCAOB requirements in various filings with the SEC.

(Last updated: 10/30/2020)

4110.6 For purposes of Item 5 of the table above, a non-issuer entity could also be a bidder in a Schedule TO or an acquirer in a proxy statement.

4110.7 As noted in the table above, subsidiary guarantors are considered issuers whose financial statements filed under S-X 3-10 must be audited by a PCAOB-registered firm using PCAOB standards.  However, relief from these requirements may be available for recently-acquired subsidiary guarantors in certain circumstances.  Registrants should consult with CF-OCA prior to filing any S-X 3-10(g) financial statements that are not audited by a PCAOB- registered firm.  (Last updated: 3/31/2011)

4110.8 The audited balance sheet of a non-issuer general partner that is included in a transactional filing or registration statement of a limited partnership issuer is not required to be audited by a PCAOB registered firm. The audit report also is not required to refer to PCAOB standards.

4115 Involuntary PCAOB Deregistration

(Last updated: 9/30/2009)

4115.1 If the PCAOB revokes the registration of an audit firm, audit reports issued by that firm may no longer be included in a registrant’s filings made on or after the date the firm’s registration is revoked, even if the report was previously issued before the date of revocation. Financial statements previously audited by a firm whose registration has been revoked would generally need to be reaudited by a PCAOB registered firm prior to inclusion in future filings or if included in a registration statement that has not yet been declared effective.

(Last updated: 6/30/2011)

4115.2 In providing the information that Item 304 of Regulation S-K requires regarding a change in accountants for a firm whose registration is revoked by the PCAOB, a company should indicate that the PCAOB has revoked the registration of its prior auditor. If a company previously explained the PCAOB registration revocation in its Item 4.01 Form 8-K, it need not repeat this disclosure in its Form 10-K.

4120 Duly Registered and in Good Standing Under the Laws of the Accountant’s Place of Residence or Principal Office [S-X 2-01]

(Last updated: 9/30/2011)

4120.1 The SEC will not recognize any person as a certified public accountant unless duly registered (licensed to practice) and in good standing under the laws of the place of the accountant’s residence or principal office. [S-X 2-01(a)] However, S-X 2-01(a) does not affect the applicability of any other registration, licensing or qualification requirements that may apply in any State or competent jurisdiction.

4120.2 The staff may question the location from which the audit report was rendered if there does not appear to be a logical relationship between that location and the location of the registrant’s corporate offices, its principal operations, its principal assets, or where the audit work was principally conducted. The staff will consider all relevant factors in questioning the location from which the audit report was rendered.

4120.3 An auditor whose report is included in a domestic registrant’s filings should be an expert in U.S. GAAP and the standards of the PCAOB (U.S. GAAS for non-issuers).

4130 Independence [S-X 2-01(b) and (c), SOX 201]

4130.1 Questions regarding independence should be directed to OCA. Auditor reports on financial statements that refer to PCAOB standards must comply with the independence rules of both the SEC and the PCAOB. The SEC’s independence rules are promulgated in S-X 2-01. The PCAOB has also issued certain independence and ethics rules, which are part of its adopted standards. See https://pcaobus.org/. Compliance with these rules is required to issue a PCAOB opinion.

4130.2 S-X 2-01 is designed to ensure that auditors are qualified and independent both in fact and in appearance. Accordingly, the rule sets forth restrictions, including but not limited to, on financial, employment, and business relationships between an accountant and an audit client and restrictions on an accountant providing certain non-audit services to an audit client. These restrictions are prescribed in paragraphs (c)(1) to (c)(8) of S-X 2-01. The general standard of independence is set forth in S-X 2-01(b). The rule does not purport to, and the SEC could not, consider all the circumstances that raise independence concerns, and these are subject to the general standard in paragraph 2-01(b). In considering this standard, the SEC looks in the first instance to whether a relationship or the provision of a service: (a) creates a mutual or conflicting interest between the accountant and the audit client; (b) places the accountant in the position of auditing his or her own work; (c) results in the accountant acting as management or an employee of the audit client; or (d) places the accountant in a position of being an advocate for the audit client. See also OCA: Application of the Commission’s Rules on Auditor Independence Frequently Asked Questions available here . (Last updated: 10/30/2020)

4130.3 SEC Independence rules also apply to Regulation A, except for Tier 1 offerings where the AICPA independence standards may be applied and Regulation D filings, and when separately audited financial statements of an equity investee is included in a filing under Rule 3-09 of Regulation S-X. [Form 1-A Part F/S and Section O. Other Independence in OCA: Application of the Commission’s Rules on Auditor Independence Frequently Asked Questions .] (Last updated: 10/30/2020)

4140 Principal Auditor [S-X 2-05, PCAOB AS 1205]

4140.1 When an independent auditor uses the work and reports of other independent auditors to audit the financial statements of one or more subsidiaries, divisions, branches, components, or investments included in the financial statements presented, such independent auditor must decide whether it may serve as the principal auditor. Generally, the principal auditor is expected to have audited or assumed responsibility for reporting on at least 50% of the assets and revenues of the consolidated entity. If it is impracticable for a principal auditor to assume that extent of responsibility for one or more of the periods presented, the staff will evaluate whether to accept the audit reports as sufficient for reliance in filings with the SEC depending on the facts and circumstances.

4140.2 A principal auditor must decide whether to make reference in its report to the audit performed by another auditor. If the principal auditor decides to assume responsibility for the work of the other auditor insofar as that work relates to the principal auditor’s expression of an opinion on the financial statements taken as a whole, no reference should be made to the other auditor’s work or report.

4140.3 If a principal auditor decides not to assume responsibility for the work of the other auditor insofar as that work relates to the principal auditor’s expression of an opinion on the financial statements taken as a whole, the principal auditor’s report should make reference to the audit of the other auditor and should indicate clearly the division of responsibility between the principal auditor and the other auditor in expressing his opinion on the financial statements. Regardless of the principal auditor’s decision, the other auditor remains responsible for the performance of its own work and for its own report.

4140.4 If a principal auditor makes reference to the work of the other auditor in the principal auditor’s report on either the financial statements or ICFR, the separate report of the other auditor shall be filed. [S-X 2-05]

(Last updated: 9/30/2012)

4140.5 If a principal auditor makes reference to the work of the other auditor in the principal auditor’s report, the other auditor must comply with all requirements with which the principal auditor must comply, with the exception of PCAOB registration when the other auditor does not meet the “substantial role” threshold defined in PCAOB Rule 1001(p)(ii) in the audit of the issuer. The other auditor must register with the PCAOB if it meets the “substantial role” threshold defined in PCAOB Rule 1001(p)(ii) in the audit of the issuer, regardless of whether the principal auditor refers to the work of the other auditor.  (Last updated: 9/30/2012)

4200 ACCOUNTANTS’ REPORTS [S-X 2-02]

4210 general – audit reports.

4210.1 The accountant’s report must be dated, electronically signed [S-T 302(a)], indicate the city and state where issued, and identify the financial statements covered.

4210.2 The report should refer to any supplemental schedules presented pursuant to S-X Article 12 (or a separate report on those schedules may be included with the schedules).

4210.3 The report must contain clear statements as to the scope of the audit. It must include representations that the audit is conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States) for issuers or applicable professional standards (that is, U.S. GAAS as issued by the AICPA) for non-issuers (with certain exceptions noted in Section 4210.4). (Last updated: 10/30/2020)

4210.4 Audit reports on non-issuer financial statements may, but are not required to, refer to PCAOB standards, except in certain cases. An audit of non-issuer financial statements must be conducted in accordance with PCAOB standards if the issuer’s principal auditor makes reference to the work performed by the non-issuer auditor. (Last updated: 9/30/2012)

4210.5 The report must contain a clear statement as to the auditor’s opinion that the financial statements are presented in conformity with GAAP, and any exceptions taken. All financial statements must be prepared in accordance with U.S. GAAP for domestic issuers. Foreign private issuers may present their financial statements in accordance with IFRS as issued by the IASB without a reconciliation to U.S. GAAP, or in accordance with non-IFRS home-country GAAP reconciled to U.S. GAAP as permitted by Form 20-F.

4210.6 Auditors’ reports must refer to each period for which audited financial statements are required, except that audit reports opining on only the most recently completed fiscal year are permitted in an annual report to shareholders. Including an audit report on only the current period precludes the incorporation by reference of those financial statements into the Form 10-K or other filings unless the audit reports for previous years are separately included or incorporated by reference from another document. [Proxy Rules 14a-3(b)(1), Note 1]

4210.7 See Section 4320 for further requirements regarding ICFR audit reports, including PCAOB standard requirements.

4220 Qualified Audit Reports

The audit report that an independent auditor issues under PCAOB standards (or U.S. GAAS for non-issuers) may indicate that the financial statements do not satisfy the requirements of the SEC's rules or the audit procedures applied omitted certain procedures deemed necessary by the auditor. There may be rare instances when the staff will not object to an audit report on the financial statements that contains a qualification. However, a waiver from CF-OCA would need to be requested and obtained before filing. Examples of audit reports on the financial statements that represent a substantial deficiency in the filing are set forth in 4220.1 through 4220.4. In substantial deficiency situations, the related filing, e.g. Form 10-K, is deemed not timely filed and would impact compliance with certain rule and form eligibility requirements – such as, Regulation S, Rule 144, Form S-3 and Form S-8. (Last updated: 10/30/2020)

4220.1 Disclaimer of Opinion

S-X Article 2 requires the clear expression of an opinion on the financial statements. A report that states that the auditor is disclaiming an opinion on the financial statements for any reason does not satisfy the requirements of S-X Article 2.

4220.2 Adverse Opinion

An audit report that states that the financial statements taken as a whole are not presented fairly in conformity with GAAP does not satisfy the requirements of S-X Article 2.

4220.3 Scope Qualifications [SAB Topic 1E.2]

• A qualification with respect to the scope of the audit of the financial statements results in a finding by the staff that the audit of the financial statements required by SEC rules has not been performed.
• Sometimes an auditor is not present for observation of inventory. In that case, the auditor must be able to satisfy himself or herself through alternative procedures. No language in the report should imply a qualification as to scope or conclusions. [FRC 607.01]

4220.4 Qualifications as to Accounting Principles or Disclosures [SAB Topic 1E.2]

Audit reports that express a qualified or "except for" opinion due to a departure from GAAP do not meet the requirements of S-X Article 2. Financial statements not in conformity with GAAP are presumed to be inaccurate or misleading, notwithstanding explanatory disclosures in footnotes or in the accountant's report. [FRC 607.01]

4220.5 In the case of an auditor's issuance of an adverse opinion on a company's ICFR, the auditor should determine the effect an adverse opinion on ICFR has on the auditor's opinion on the financial statements. An auditor should disclose whether or not an adverse opinion on ICFR affected its audit opinion on the financial statements. [AS 2201, paragraph 92]

4230 Other Report Modifications

4230.1 Going Concern Modifications [AS 2415]

• Going concern modifications are required by PCAOB standards and U.S. GAAS in certain circumstances.
• Filings that include reports having going concern modifications must also include appropriate and prominent disclosure of the financial difficulties giving rise to that uncertainty. Discussion of a viable plan that has the capability of removing the threat to the continuation of the business must be included. The plan may include a "best efforts" offering so long as the amount of minimum proceeds necessary to remove the threat is disclosed. The plan should enable the issuer to remain viable for at least the 12 months following the date of the financial statements being reported on. If management has no viable plan, the use of going concern financial statements may be inappropriate and liquidation-basis financial statements may be necessary or the classification and amounts of assets and liabilities may need to be adjusted. [FRC 607.02] AU 341 does not apply to an audit of financial statements based on the assumption of liquidation.
• Going concern opinions that do not use the words "substantial doubt" when referencing a going concern matter do not comply with PCAOB standards/U.S. GAAS.
• Going concern opinions that use conditional language in expressing a conclusion concerning the existence of substantial doubt about the entity's ability to continue as a going concern are not appropriate.
• A disclaimer of opinion, "except for" opinion, or an adverse opinion resulting from going concern matters is permitted by AS 2415, but none of these types of opinion comply with the requirements of S-X Article 2.

4230.2 Changes in Accounting Principles [ASC 250, AS 2820, S-X 10-01]

• A change in accounting principle that has a material effect on the financial statements should be recognized in the auditor's report. [AS 2820, paragraph 8]
• The correction of a material misstatement in previously issued financial statements should be recognized in the auditor's report on the audited financial statements through the addition of an explanatory paragraph. [AS 2820, paragraph 9]
• Preferability letters must be included in Form 10-Q or Form 10-K as Exhibit 18 and need only be filed once in the first applicable 1934 Act filing following the change. Preferability letters are not required in 1933 Act filings. A preferability letter generally is required in Form 10-K only when a change in accounting occurs in the fourth quarter. Even though the independent accountant referred to the change in its audit report as required by PCAOB standards and concluded as to the preferability of the change, S-K 601 requires that a preferability letter be included as an exhibit to the Form 10-K (unless it was previously filed).
• The staff has objected to the change from one acceptable method to another acceptable method if the registrant and its independent accountants cannot demonstrate that the new method is preferable. Conforming to industry practice may not justify a change if industry practice is not the preferable method.
• Preferability letters are not required after a business combination where changes in the acquired entity's accounting are made to conform to those of the acquiring entity.
• A preferability letter is not required for a change in estimate effected by a change in accounting principle.
• A preferability letter is not required for changes that are mandatory or will be mandatory.

4230.3 Clarification in Audit Report Regarding No Audit of Internal Control Over Financial Reporting [SOX 404(b), S-K 308(b), AS 3105]

In a financial statement audit of an issuer or non-issuer that has determined it is not yet required to obtain, nor did it request the auditor to perform, an audit of internal control over financial reporting under SOX 404(b) and S-K 308(b), a firm may, but is not required to, expand its audit report to clarify this fact. A firm may include a statement that the purpose and extent of the auditor's consideration of internal control over financial reporting was to determine that the nature, timing, and extent of tests to be performed are appropriate in the circumstances, but was not sufficient to express an opinion on the effectiveness of internal control over financial reporting. If a firm chooses to expand its report to clarify this point, the scope paragraph in the audit report should follow the suggested language in AS 3105.59 to .60.

4300 REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING [SOX 404, AS 2201 and S-K 308, SEC Interpretive Guidance, ICFR FAQs, PCAOB Staff Guidance]

4310 management's annual report on internal control over financial reporting [s-k 308].

4310.1 S-K 308(a) requires management to provide its report on ICFR containing its assessment of the effectiveness of ICFR as of the end of the most recent fiscal year in its annual report on Form 10-K, 20-F, or 40-F (including transition reports filed on such forms upon a change in fiscal year-end). If the registrant is a non-EGC accelerated filer or a large accelerated filer, S-K 308(b) requires management to provide the registered public accounting firm's attestation report on the registrant's ICFR. Filings without the required report or reports are deficient and considered not timely, except for the limited situation described in Section 4310.6 below. Non-accelerated filers (both domestic and foreign) and EGCs (both domestic and foreign) are not required to include an auditor attestation report under S-K 308(b).

NOTE: Management's report on ICFR and the accompanying attestation report are not required in registration statements (whether under the 1933 Act or 1934 Act) or Forms 11-K. (Last updated: 6/30/2013)

4310.2 A non-EGC that enters accelerated filer status at the end of a fiscal year (based upon its public float as of the end of its second fiscal quarter) is required to include an auditor attestation report in the Form 10-K for that year. Similarly, a company that exits accelerated filer status at the end of its fiscal year (based upon its public float as of the end of its second fiscal quarter) would not be required to include an auditor attestation report in the Form 10-K for that year. (Last updated: 6/30/2013)

4310.3 The staff's Management's Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, Frequently Asked Questions ("ICFR FAQs") is available at http://www.sec.gov/info/accountants/controlfaq.htm .

4310.4 [Reserved]

4310.5 [Reserved]

4310.6 Pursuant to S-K 308, a newly public company need not provide management's report on ICFR until it either had been required to file or had filed a Form 10-K with the Commission for the prior fiscal year. A company that historically reported under the Exchange Act as a voluntary filer or because of registered debt, and therefore filed annual reports up to and through the date of its IPO, in which it was required to comply with the disclosures required by Item 308(a) of Regulation S-K, is therefore required to provide management's report on ICFR in its first annual report following the IPO.

Only "accelerated filers" that are not EGCs and "large accelerated filers" are required to provide an auditor's attestation report on ICFR under Item 308(b) of Regulation S-K. The definitions of "accelerated filer" and "large accelerated filer" require that the issuer has been subject to reporting under Section 13(a) or 15(d) and has filed at least one annual report. Newly public companies and companies that historically reported under the Exchange Act as voluntary filers or because of registered debt do not satisfy the definitions of "accelerated filer" or "large accelerated filer" for purposes of their first annual report following their IPO, and therefore are not required to include an auditor's attestation report on ICFR under S-K 308(b) in that first annual report.

A registrant should include a statement in its first annual report in substantially the following form:

"This annual report does not include a report of management's assessment regarding internal control over financial reporting or an attestation report of the company's registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies." [Instruction 1 to S-K 308] (Last updated: 6/30/2013)

4310.7 The framework on which management bases its evaluation of ICFR must be a suitable, recognized control framework. Many companies follow the COSO framework, but other frameworks are also acceptable. In assessing effectiveness, management evaluates whether its ICFR system addresses the elements of internal control that its chosen framework describes as necessary for an internal control system to be effective. There are no specifically required methods or procedures for evaluating ICFR, so it will vary from company to company. Management will have to use its best judgment. The evaluation must be based on procedures sufficient to evaluate both the design and operating effectiveness of ICFR. In June 2007, the SEC issued interpretative guidance regarding management's report on ICFR. [ Release No. 33-8810 ] An evaluation following this interpretative guidance is one way to satisfy the evaluation requirements of ICFR.

Under any method of evaluating ICFR, management must attain a level of "reasonable assurance" when making conclusions about the effectiveness of ICFR. While "reasonable assurance" is a high level of assurance, it does not mean absolute assurance. The term "reasonable assurance" relates to similar language in the Foreign Corrupt Practices Act. 1934 Act Section 13(b)(7) defines “reasonable assurance” as the degree of assurance that would satisfy prudent officials in the conduct of their own affairs. There is a range of judgments that an issuer might make as to what is reasonable in implementing SOX 404 and the SEC's rules.

4310.8 S-K 308 does not specify the exact content of management's annual report on ICFR. Management should tailor the wording of the report to fit its company's particular circumstances. However, management's annual report on ICFR must state or disclose the following:

• Management's responsibility for establishing and maintaining adequate ICFR for the company.
• The framework used by management as criteria for evaluating the effectiveness of ICFR.
• Management's assessment of the effectiveness of the company's ICFR at year end, including a statement as to whether or not ICFR is effective.
• Any material weaknesses in the company's ICFR identified by management (See Section 4320.8 for definition of material weakness).
• The fact that the company's independent public accountant, who audited the financial statements included in the annual report, has issued an attestation report on the company's ICFR (if applicable).

4310.9 Management must reach one of two conclusions for its assessment of ICFR – ICFR is either effective or not effective. Management cannot conclude that its ICFR is effective if there are one or more material weaknesses. Additionally, management cannot qualify its conclusion by stating that its ICFR is effective with certain qualifications or exceptions.  However, management may state that its controls are ineffective for specific reasons. Because of the substantial overlap between ICFR and DCP, if management concludes that ICFR is ineffective, it must also consider the impact of the material weakness on its conclusions related to DCP. (Last updated: 9/30/2010)

4310.10 In certain circumstances, management may encounter difficulty in assessing certain aspects of ICFR. Management must still conclude whether ICFR is effective or not since management is not permitted to issue a report with a scope limitation (except under the limited circumstances described in Section 4310.11). Therefore, management must determine whether an inability to assess certain aspects of ICFR is significant enough to conclude that ICFR is not effective.

4310.11 If management does not have the ability to assess certain aspects of ICFR, management must conclude whether ICFR is effective or not, taking into consideration any scope limitation. Scope limitations are not permitted in management’s report, except for the following limited exceptions (see 4310.3 for link to FAQs referenced):

• A variable interest entity in existence prior to December 15, 2003 that is consolidated AND the registrant does not have the right or authority to assess the internal controls of the consolidated variable-interest entity and also lacks the ability, in practice, to make that assessment. A similar exception is available for an entity accounted for via proportionate consolidation in accordance with ASC 810-10-45-14 if management does not have the ability to assess ICFR. [ICFR FAQ 1]
• Equity method investments. [ICFR FAQ 2]
• A current year acquisition (includes initial consolidation resulting from becoming the primary beneficiary of a variable interest entity) when it is not possible to conduct an assessment of the acquired business's ICFR in the period between the consummation date and the date of management’s assessment. The exclusion may not extend beyond one year from the date of the acquisition nor may it be omitted from more than one annual management report on ICFR. [ICFR FAQ 3]     (Last updated: 9/30/2010)
• A reverse acquisition between an issuer and a private operating company when it is not possible to conduct an assessment of the private operating company or accounting acquirer's ICFR in the period between the consummation date of a reverse acquisition and the date of management’s assessment of ICFR. See the Division of Corporation Finance's C&DIs for Regulation S-K, Question 215.02.

For foreign private issuers who file their financial statements in their home country GAAP, management's evaluation of ICFR should consider, in addition to controls related to preparation of the primary financial statements, controls related to the preparation of the U.S. GAAP reconciliation because the reconciliation is a required element of the financial statements. [ICFR FAQ 12] (Last updated: 9/30/2010)

4310.12 Management should consider disclosing the following with respect to a material weakness:

• Describe the nature of the material weakness;
• Describe its impact on the financial reporting and ICFR, if any; and
• Describe management's current plans or action already undertaken, if any, for remediating the material weakness.

4310.13 Management must communicate all significant deficiencies and material weaknesses it detects to the audit committee and external auditor. The SOX 302 certifications include an affirmative statement to this effect. Management must also provide written representations to the auditor regarding its internal controls.

4310.14 S-K 308 does not specify where management's internal control report must appear in the annual report on Form 10-K, but it should be located in close proximity to the corresponding attestation report issued by the company's auditor. [ Release No. 33-8238 ] Management's report is not required to have a title. Management's report does not need to be dated or signed, but may include the date and/or the names or signatures of management.

4310.15 Our rules do not address whether the assessment of ICFR covers supplementary financial information, Regulation S-X schedules, or ASC 932 oil and gas disclosures. Internal controls over supplementary information do not need to be included in an assessment of ICFR, although adequate internal controls over the preparation of supplementary information are required. [ICFR FAQ 11]

4310.16 There is no requirement for a company to reevaluate the effectiveness of its internal controls and/or reissue a revised management’s report on ICFR when a company restates its financial statements to correct errors in the financial statements. However, a company may need to consider whether or not its original disclosures in management’s report continue to be appropriate in light of these errors, and should modify or supplement its original disclosure to include any other material information that is necessary for such disclosures not to be misleading in light of the restatement. The company should also disclose any material changes to ICFR, as required by S-K 308(c).

4310.17 If a company's management concludes that its original assessment of ICFR was incorrect, it should consider whether or not to revise its original report on ICFR. A company should also reevaluate the appropriateness of its prior disclosures regarding the effectiveness of the company's DCP and make any necessary revisions. For example, a company disclosed that its Chief Financial Officer and Chief Executive Officer concluded its DCP were effective in its original Form 10-K. Subsequently, the company filed a Form 10-K/A to restate its financial statements for errors. In the Form 10-K/A, the company revised its disclosures to state that the Chief Financial Officer and Chief Executive Officer concluded its DCP were not effective, and the reasons why they were not effective.

4320 Auditor's Report on ICFR  [AS 2201, S-X 2-02(f)]

4320.1 AS 2201 requires an auditor to perform an audit of a company's ICFR that is integrated with an audit of the financial statements. A report on the audit of ICFR, which may be combined with or separate from the report on the financial statements, must include the following:

• A title that includes the word independent ;
• A statement that management is responsible for maintaining effective internal control over financial reporting and for assessing the effectiveness of internal control over financial reporting;
• An identification of management’s report on internal control;
• A statement that the auditor’s responsibility is to express an opinion on the company’s internal control over financial reporting based on his or her audit;
• A definition of internal control over financial reporting as stated in AS 2201, paragraph A5;
• A statement that the audit was conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States);
• A statement that the standards of the Public Company Accounting Oversight Board require that the auditor plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects;
• A statement that an audit includes obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal controls based on the assessed risk and performing such other procedures as the auditor considered necessary in the circumstances;
• A statement that the auditor believes the audit provides a reasonable basis for his or her opinion;
• A paragraph stating that, because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements and that projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate;
• The auditor’s opinion on whether the company maintained, in all material respects, effective internal control over financial reporting as of the specified date, based on the control criteria;
• The manual or printed signature of the auditor’s firm;
• The city and state (or city and country, in the case of non-U.S. auditors) from which the auditor’s report has been issued; and
• The date of the audit report.

4320.2 In addition, S-X 2-02(f) requires the audit report on ICFR to identify the period covered by the report.

4320.3 If the audit report on ICFR is separate from the audit report on the financial statements, both reports must be dated the same. See paragraphs 87-88 of AS 2201 for sample Illustrative Reports on Internal Control Over Financial Reporting.

4320.4 AS 2201 requires the auditor to modify its report on ICFR if any one of the following five conditions exists:

• Elements of management’s annual report on internal control are incomplete or improperly presented;
• There is a restriction on the scope of the engagement;
• The auditor decides to refer to the report of other auditors as the basis, in part, for the auditor's own report;
• There is other information contained in management's annual report on internal control over financial reporting; or
• Management's annual certification pursuant to SOX 302 is misstated. [AS 2201, paragraphs C1-C15]

The report modification may be in one of the following forms, depending on the condition:

• an explanatory paragraph;
• an adverse opinion; or
• a disclaimer of opinion.

4320.5 The auditor's report on ICFR should clearly state whether or not it is the auditor's opinion that a company maintained, in all material respects, effective ICFR at year end. It is not appropriate for the report to state that ICFR is effective with certain qualifications or exceptions. For example, language indicating that the company maintained effective ICFR, except for a certain weakness in a control, is not acceptable. Language indicating that the company maintained ICFR that are "sufficiently effective" or "adequate" is also not appropriate.

4320.6 The auditor must express an adverse opinion on the company’s ICFR when one or more material weaknesses in ICFR exist, unless there is a restriction on the scope of the engagement. See Section 4320.12. An adverse opinion on ICFR must include:

• The definition of a material weakness; and
• A statement that a material weakness has been identified and an identification of the material weakness described in management's assessment.

4320.7 The auditor should determine the effect an adverse opinion on ICFR has on the auditor’s opinion on the financial statements. Also, the auditor should disclose whether or not the adverse opinion on ICFR affected its audit opinion on the financial statements. [AS 2201, paragraph 92]

4320.8 A material weakness is a deficiency, or combination of deficiencies, in ICFR such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. [S-X 1-02(a)(4); AS 2201, paragraph A7]

4320.9 A deficiency or combination of deficiencies is an indicator of a material weakness if the auditor determines that the deficiency or combination of deficiencies might prevent prudent officials in the conduct of their own affairs from concluding that they have reasonable assurance that transactions are recorded as necessary to permit the preparation of the financial statements in conformity with GAAP. [AS 2201, paragraph 70]

4320.10 AS 2201 lists four indicators of a material weakness in ICFR, which are:

• Identification of fraud, whether or not material, on the part of senior management;
• Restatement of previously issued financial statements to reflect the correction of a material misstatement;
• Identification by the auditor of a material misstatement of financial statements in the current period in circumstances that indicate that the misstatement would not have been detected by the company’s internal control over financial reporting; and
• Ineffective oversight of the company’s external financial reporting and internal control over financial reporting by the company’s audit committee. [AS 2201, paragraph 69]

4320.11 If the material weakness was not included in management’s assessment, the auditor’s report on ICFR should be modified to state that a material weakness has been identified but not included in management’s assessment. Also, the auditor’s report should include a description of the material weakness, which should provide the users of the audit report with specific information about the nature of the material weakness and its actual and potential effect on the presentation of the company’s financial statements issued during the existence of the weakness. If the material weakness was included in management’s assessment but the auditor concludes that management’s disclosure of the material weakness is not fairly presented in all material respects, the auditor’s report should describe this conclusion as well as the information necessary to fairly describe the material weakness. [AS 2201, paragraph 91]

4320.12 Any report modification due to a scope limitation would result in a disclaimer of opinion on the audit of ICFR. Reports that result in a disclaimer of opinion are expected to be rare. [S-X 2-02(f)] Reports on audits of ICFR that disclaim an opinion due to a scope limitation should be discussed with CF-OCA in advance of filing. (Last updated: 9/30/2011)

4320.13 When disclaiming an opinion due to a scope limitation, the auditor must state that the scope of the audit was not sufficient to warrant the expression of an opinion. Also, the auditor’s report on ICFR should provide the substantive reasons for the disclaimer in a separate paragraph. [AS 2201, paragraph C4]

4320.14 When the auditor plans to disclaim an opinion on the audit of ICFR due to a scope limitation and the limited procedures performed by the auditor cause the auditor to conclude that a material weakness existed, the auditor’s report on ICFR should include the definition of a material weakness and a description of any material weakness identified, as described in 4320.6. [AS 2201, paragraph C5]

4320.15 If management discloses additional information in the report (e.g., its plans to implement new controls, corrective actions taken after the date of assessment, or a statement that management believes the cost of correcting a material weakness would exceed the benefits to be derived from implementing new controls), the auditor is required to modify its report regarding any additional information and disclaim an opinion on this information. [AS 2201, paragraphs C1 and C12-14]

4320.16 The auditor should inquire about and examine relevant documents for events which occurred subsequent to the date as of which ICFR is being audited but before the date of the auditor’s report. Such subsequent events could include changes in internal controls or other factors. If the auditor obtains knowledge about subsequent events that materially and adversely affect the effectiveness of the company’s ICFR as of the date specified in the assessment, the auditor should issue an adverse opinion on ICFR. If the auditor is unable to determine the effect of the subsequent event on the effectiveness of ICFR, the auditor should disclaim an opinion. [AS 2201, paragraphs 93-96]

4320.17 The auditor may obtain knowledge about subsequent events with respect to conditions that did not exist at the date specified in the assessment but arose subsequent to that date and before issuance of the auditor’s report. If a subsequent event of this type has a material effect on the company’s ICFR, the auditor should include an explanatory paragraph in its report on ICFR describing the event and its effects or directing the reader to the event and its effects as disclosed in management’s report on ICFR. [AS 2201, paragraph 97]

4320.18 An audit report on ICFR may be based, in part, on the work of another auditor when another auditor has audited the financial statements and ICFR of a subsidiary, division, branch or component of a company. The principal auditor should determine whether or not it will make reference in its report on ICFR to the audit of ICFR performed by another auditor. The auditor’s decision to make reference or not is based on factors analogous to those in AU 1205 when a principal auditor decides to make reference to the report of another auditor when reporting on a company’s financial statements. As a result, the decision to make reference to another auditor’s report on ICFR may differ from the decision to make reference to another auditor in the principal auditor’s report on the financial statements. When the auditor decides to make reference to the report of the other auditor in its report on ICFR, the principal auditor’s report on ICFR should refer to the report of the other auditor when describing the scope of the audit and expressing an opinion on ICFR. [AS 2201, paragraphs C8-C11]

4320.19 If the auditor makes reference to another auditor’s report on ICFR, the separate report of the other auditor on ICFR must also be included in the filing. [S-X 2-05]

4320.20 AS 6115 establishes requirements and provides guidance that apply when an auditor is engaged to report on whether a previously reported material weakness in internal control over financial reporting continues to exist as of a date specified by management.

4320.21 The auditor’s objective in an engagement to report on whether a previously reported material weakness continues to exist is to obtain reasonable assurance about whether the previously reported material weakness exists as of a date specified by management and to express an opinion thereon.  The auditor’s opinion relates to the existence of a specifically identified material weakness as of a specified date and does not relate to the effectiveness of the company’s ICFR overall.

4400 REVIEW AND COMPILATION REPORTS

4410 review reports on interim or pro forma data [as 4105, at section 401].

4410.1 Prior to filing, interim financial statements included in quarterly or transition reports on Form 10-Q must be reviewed by an independent registered public accountant using PCAOB standards and procedures for conducting such reviews, as may be modified or supplemented by the SEC. If the company states in any filing that interim financial statements have been reviewed by an independent public accountant, a report of the accountant on the review must be filed with the interim financial statements. [S-X 10-01(d)] Otherwise, the report is not required to be included in Form 10-Q.

4410.2 If a Form 10-Q that contains a review report on pro forma data or interim financial statements is incorporated by reference into a registration statement, the auditor must acknowledge use of its review report in a letter filed as Exhibit 15 to the registration statement. [S-K 601]

4410.3 If the review was not performed by a registered public accounting firm, the Form 10-Q is considered substantially deficient and not timely filed. In addition, the Form 10-Q must include the following disclosures:

• Identify the report as deficient;
• Label the columns of the financial statements as “not reviewed”; and
• Describe how the registrant will remedy the deficiency

When the review is completed by a registered accounting firm, the registrant must file an amendment to remove the references to the deficiency and the financial statements as “not reviewed.”

4420 Selected Quarterly Financial Data [AS 4105]

4420.1 Selected quarterly financial data is required for all registrants except foreign private issuers, mutual life insurance companies, and smaller reporting companies, and in initial registration statements. If it is required to be presented, it must be reviewed by the independent registered accountant. [S-K 302]

4420.2 No reference in the audit report to the quarterly data accompanying the annual financial statements is necessary if the auditor’s review conformed with applicable standards and the auditor is not aware that the interim information is materially affected by a departure from GAAP. Otherwise, the auditor must discuss the departures that exist.

4430 Compilation Reports

Compilation reports are not appropriate in any filings, including Regulation A filings, because the association of the accountant provides no basis for reliance. In addition, the presence of a compilation report may indicate a violation of SEC independence standards under S-X 2-01(c)(4)(i)(B).

4500 CHANGE IN ACCOUNTANTS [S-K 304, ITEM 4.01 FORM 8-K]

4510 change in accountants.

4510.1 If a change in accountant for a registrant or a significant subsidiary on whose report the principal accountant relied occurred within 24 months prior to or in any period subsequent to the date of the most recent financial statements, the registrant should provide the required information in:

• An Item 4.01 Form 8-K within 4 business days of the change;
• Proxy statements, even though previously disclosed in Form 8-K, if required by Item 9 of Schedule 14A; and
• Forms 10-K and 20-F, and registration statements, unless the change was previously disclosed.

NOTE: The disclosures about disagreements required by S-K 304(b) must always be provided, where required, even if previously disclosed. [Instruction 1 to S-K 304; Instruction 2 to Item 16F of Form 20-F for registrants with fiscal years ending on or after December 15, 2009]

4510.2 Disclosure of the following items should be provided:

• Whether the accountant resigned, declined to stand for reelection or was discharged (one of these must be specifically stated in the filing);
• The date of resignation or discharge;
• Whether the decision was recommended or approved by the Board of Directors or a committee thereof;
• Whether the accountant had issued a report in the last two fiscal years containing a disclaimer or adverse opinion, or that was qualified or modified. A modified opinion includes an opinion that expresses substantial doubt about a company’s ability to continue as a going concern;
• Whether in connection with audits of the two most recent years through the date of resignation or discharge there were any disagreements with the former accountant on any matter which, if not resolved to the satisfaction of the accountant, would have caused the accountant to make reference in its report to the matter. Among other items specified in S-K 304(a)(1)(iv), the filing should describe the subject matter of any such disagreement. Disagreements required to be reported include both those resolved to the satisfaction of the accountant and those not resolved to the satisfaction of the accountant.
• If there were any reportable events described under S-K 304(a)(1)(v) during the two most recent years and any interim period preceding the former accountant’s resignation or discharge, provide the disclosures required by S-K 304(a)(1)(iv). If the event led to a disagreement, then it should be reported as described under Section 4510.2(e) and need not be repeated.

4510.3 If the registrant amends the Item 4.01 Form 8-K disclosures for any reason, it must also file an updated letter from the auditor addressing the revised disclosures as Exhibit 16.

4520 Unusual Issues Involving Changes in Accountants

4520.1 [Reserved]

4520.2 Predecessor Auditor Refuses to Furnish Exhibit 16 Letter

If the predecessor auditor refuses to furnish an Exhibit 16 letter stating whether it agrees with the registrant’s statements, the registrant should indicate that fact in the Item 4.01 Form 8-K or by amendment to the original Form 8-K. See the Division of Corporation Finance’s C&DIs for Exchange Act Form 8-K, Question 214.01.

4520.3 Reverse Acquisition

• Unless the same accountant reported on the most recent financial statements of both the registrant and the accounting acquirer, a reverse acquisition always results in a change in accountants. An Item 4.01 Form 8-K should be filed within four business days of the change in accountants, which often occurs on the date the reverse merger is consummated. The accountant that will no longer be associated with the registrant’s financial statements is the predecessor accountant. If a decision has not been made as to which accountant will continue as the successor auditor as of the date of filing the Item 2.01 Form 8-K, an Item 4.01 Form 8-K must be filed within four business days of the date the decision is made.
• The disclosures required by S-K 304 with respect to any changes in the accounting acquirer’s auditor which occurred within 24 months prior to, or in any period subsequent to, the date of the acquirer’s financial statements must be provided in the filing. See Section 12230.

4520.4 Form 11-K Plans

Staff practice is not to object if a change in accountants for an employee stock purchase plan or similar plan filing a Form 11-K does not result in the filing of an Item 4.01 Form 8-K.

4530 Additional Guidance

(Last updated: 12/31/2010)

4530.1 Guidance regarding changes in accountants can be found in the Division of Corporation Finance’s Compliance and Disclosure Interpretations. Questions are grouped into the following categories and sections:

• Subsequent interim period
• No reportable events
• Remediation of internal control deficiencies
• Material weakness or significant deficiency in ICFR
• Going concern
• Explanatory paragraph in report on ICFR
• Revocation of accountant’s PCAOB registration
• Time period preceding resignation, declination or dismissal
• New principal accountant related to former principal accountant
• Business combination between principal accountant and another accounting firm
• Former accountant declines to provide agreement letter
• Requirement to use Form 8-K

4600 NON RELIANCE ON PREVIOUSLY ISSUED IFINANCIAL STATEMENTS OR RELATED AUDIT REPORT OR COMPLETED INTERIM REVIEW [ITEM 4.02 FORM 8-K]

4610 non-reliance on previously issued financial statements [item 4.02(a) form 8-k].

4610.1 An Item 4.02(a) Form 8-K should be filed when a registrant’s board of directors, committee of the board, or board authorized officer(s) concludes any previously issued financial statements should no longer be relied upon due to an accounting error.

4610.2 [Reserved]

4610.3 The staff believes that filing an Item 4.02(a) Form 8-K without also filing an Item 4.02(b) Form 8-K would be acceptable unless the auditor’s conclusion that the financial statements can no longer be relied on relates to a different error or matter from that which triggered the registrant’s filing under Item 4.02(a) Form 8-K. See the Division of Corporation Finance’s C&DIs for Exchange Act Form 8-K, Question 115.01.

4610.4 The Form 8-K should disclose:

• The date that the registrant concluded the financial statements should no longer be relied upon and identify the financial statements and years or periods covered that should no longer be relied upon;
• A description of the facts underlying the conclusion to the extent known to the registrant at the time of filing; and
• Whether the audit committee, or the board of directors in the absence of an audit committee, or authorized officer(s), discussed the disclosed matters with the registrant’s independent accountant.

4620 Non-Reliance on Previously Issued Audit Report or Completed Interim Review [Item 4.02(b) Form 8-K]

4620.1 An Item 4.02(b) Form 8-K should be filed if the registrant’s current or former independent accountant advises or notifies it must disclose or take action to prevent future reliance on a previously issued audit report or completed interim review related to previously issued financial statements.

4620.2 The filing of an Item 4.02(b) Form 8-K may, but does not necessarily, result in non-reliance on previously issued financial statements, and require the filing of an Item 4.02(a) Form 8-K. It would depend upon the underlying reasons that the accountant advised a registrant that its audit report or completed interim review should no longer be relied on.

4620.3 [Reserved]

4620.4 The Form 8-K should disclose:

• The date on which the accountant advised or notified the registrant;
• The specific financial statements that should no longer be relied upon;
• A brief description of the information provided by the accountant; and
• A statement of whether the audit committee, or the board of directors in the absence of an audit committee, or authorized officer or officers, discussed the matters disclosed in the filing under Item 4.02(b) of Form 8-K with the accountant.

4620.5 The Form 8-K should include any written notice received from the accountant as Exhibit 7.

4620.6 A registrant should provide the accountant with a copy of the disclosures the registrant is making in response to the Item 4.02(b) Form 8-K no later than the day that the disclosures are filed with the SEC.

4620.7 A registrant should request the accountant furnish the registrant as promptly as possible a letter addressed to the SEC stating whether the independent accountant agrees with the statements made by the registrant in response to the Item 4.02(b) Form 8-K and, if not, stating with what it does not agree. If the letter is not available on the date the 8-K is filed, a company should amend its previously filed Form 8-K to file the independent accountant’s letter as Exhibit 7 no later than two business days after the registrant’s receipt of the letter.

4630 Other – Prior Disclosures Regarding Disclosure Controls and Procedures

A registrant should consider whether the disclosures provided under S-K 307 in prior filings need to be modified, supplemented or corrected in order to explain whether management’s previously discussed conclusions regarding the effectiveness of DCP continue to be appropriate in light of the restated financial statements or non-reliance on a previously issued audit report or completed interim review. [Release No. 33-8810]

4700 “TO BE ISSUED” ACCOUNTANT’S REPORTS

4710 contingent upon future event or transaction.

If audited financial statements are required in a filing, the audit report should be signed and unrestricted. Generally, the staff will not make a review determination on or commence a review of a filing that does not meet that requirement. In some circumstances, however, a transaction that will occur at or immediately before the effectiveness of a registration statement is retrospectively reflected in the annual financial statements. If the transaction prevents the auditor from expressing an opinion on the financial statements at the time of filing, the staff has accepted the filing of a “draft report” in the form that it will be expressed at effectiveness. Such transactions may include, but are not limited to:

• stock splits; and
• reorganizations in which the entities comprising an IPO registrant will not be legally transferred to the registrant until immediately before effectiveness.

Another transaction where the staff has accepted the filing of a “draft report” in the form that it will be expressed at effectiveness is if there is a component that qualifies as a discontinued operation before an initial registration statement is filed but after the date of the latest balance sheet included in the initial filing. A “to-be-issued” report in this circumstance may be included when:

• The disposal of the discontinued operation has occurred;
• The audit of the financial statements, including the retrospective revision, is complete; and
• The registrant has consulted with CF to confirm that the use of the “to-be-issued” audit report is appropriate.

In these cases, the draft report should be accompanied by a signed preface of the auditor stating that it expects to be in a position to issue the report in the form presented at effectiveness. No registration statement can be declared effective until the preface is removed and the accountant’s report finalized.

4720 Contingent upon Future Underwriting Agreement

(Last updated: 6/30/2010)

An auditor may conclude that it is appropriate to include an explanatory paragraph about the registrant’s ability to continue as a going concern in the auditor’s report. The auditor may believe that upon the receipt of the proceeds from the offering that the explanatory paragraph could be removed. As the receipt of the proceeds occurs upon closing - not at effectiveness – the auditor’s report should include the explanatory paragraph that the auditor believed was appropriate at the time of effectiveness.  It would not be appropriate for the report to indicate that the explanatory paragraph would be removed at closing as that event takes place after effectiveness.

4800 OTHER MATTERS

4810 consents to the use of audit reports.

4810.1 Registrants must file a copy of the auditor’s consent to the use of its audit report or an acknowledgement letter regarding the use of its review report in any filing under the 1933 Act as an exhibit. The primary purpose of obtaining a consent or acknowledgement letter is to assure that the auditor is aware of the use of its report and the context in which it is used.

4810.2 The consent or acknowledgement letter must indicate the date and a conformed EDGAR signature. A manually signed consent or acknowledgement letter must be kept on file by the registrant.

4810.3 A new consent or acknowledgement letter is required:

• Whenever any change, other than typographical, is made to the financial statements;
• For an amendment if there have been intervening events since the prior filing that are material to the company; and
• Prior to the effectiveness of a registration statement if an extended period of time passes since the last filing.  An extended time is generally any period which is more than 30 days. (Last updated: 12/31/2010)

4810.4 1934 Act Reports

• Filing of a consent to the use of an audit report (or acknowledgment letter) is not required in 1934 Act reports, other than an annual report on Form 40-F, unless the 1934 Act report is automatically incorporated by reference into a previously filed 1933 Act filing, such as a Form S-3 or Form S-8. In addition, a consent is required in a registration statement on Form 20-F [Item 10.G of 20-F] and in registration statements and annual reports on Form 40-F.   (Last updated: 12/31/2010)
• Periodic reports on Forms 10-K and 20-F, and 1934 Act registration statements on Form 10 or Form 20-F must include a signed audit report. The signature must be a conformed EDGAR signature. [S-T 302] The original manually signed report must be kept on file by the registrant.
• Definitive proxy statements that include financial statements must have a manually signed audit report.
• A reissuance of the auditor’s report is required when a previously filed 1934 Act filing is amended to include restated financial statements or retrospectively adjusted financial statements.
• A registrant need not file an updated consent on the annual financial statements when the registrant forward incorporates a Form 10-Q into a pre-effective Form S-3. However, the auditor’s Section 11 liability extends through the effective date of the registration statement regardless of the inclusion of the updated consent. (Last updated: 9/30/2009)

4810.5 Waivers [Regulation C, Rule 437]

• In rare circumstances, such as situations involving hostile takeover attempts, a consent may be waived if the registrant submits a request to CF-OCA for a waiver and provides an affidavit complying with Rule 437 of Regulation C
• A registrant offering its own securities in a hostile exchange offer for a target's stock may seek and not be able to obtain the target's cooperation in providing either its audited financial statements or the target auditor's consent to the use of its report in the required registration statement. The acquirer/registrant should use its best efforts to obtain the target's permission and cooperation for the filing or incorporation by reference of the target's financial statements and the target auditor's consent to the inclusion of its report on the financial statements. At a minimum, a registrant is expected to write to the target requesting these items and to allow a reasonable amount of time for a response prior to effectiveness of the filing.
• If a registrant uses its best efforts but is unsuccessful in obtaining the target's permission and cooperation for the filing or incorporation by reference of its financial statements and its auditor's consent to the inclusion of its report on the financial statements, the registrant may request a waiver of the consent. The affidavit included in the request should document the specific actions taken by the registrant to obtain the cooperation of the other party for the filing as well as the efforts to obtain the auditor's consent. Correspondence evidencing the registrant's request for these items should accompany the affidavit.
• Depending on the facts and circumstances, the staff may agree to waive the requirement to include or incorporate by reference the target auditor’s audit report in the event the target is unwilling to cooperate. In that situation, disclosure should be made that, although an audit report was issued on the target’s financial statements and is included in the target’s filings, the auditor has not permitted use of its report in the registrant’s registration statement. The auditor should not be named. Any legal or practical implication for shareholders of the registrant and the target resulting from the inability to obtain the cooperation of the target or consent of the target’s auditor should be explained. No disclosure in the registration statement should expressly or implicitly disclaim the registrant’s liability for the target’s financial statements. In the event that circumstances change, the registration statement should be amended to include the audited financial statements and the auditor’s consent required by the form.

4810.6 The consent of the independent accountant is not required for a report on financial statements which is not a part of a 1933 Act registration statement under Rule 412(c) of Regulation C, like superseded financial statements.

4820 Accountant's Inability to Reissue Reports [AI 23, Interpretation 15; Regulation C, Rule 437]

4820.1 When an accounting firm ceases operations, it may be unable to reissue a prior report or give consent to the use of a prior report. A company should submit a consent waiver request under Regulation C, Rule 437 with CF-OCA if the auditor does not reissue or give consent to the use of its prior report. The guidance in Section 4810.5 regarding consent waiver requests should be followed. If the firm still exists, although it is not practicing public accounting, and has the ability to reissue or give consent to the use its prior report, a waiver may not be granted.

NOTE: The footnote to Interpretation 15 of AI 23 states a firm is considered to have ceased operations when it no longer issues audit opinions either in its own name or in the name of a successor firm. A firm may cease operations with respect to public entities and still issue audit opinions with respect to non-public entities.

4820.2 If the waiver request is granted, certain disclosures should be made in any filings or reports that include the ceased firm's audit report. The predecessor auditor’s latest signed and dated report on the financial statements should be reprinted with a legend indicating that the report is a copy of the previously issued report and that the ceased firm has not reissued the report. [AI 23.65]

4830 Successor Auditor Reports [AI 23]

4830.1 If the prior period financial statements audited by the predecessor auditor are unchanged, the successor auditor should indicate in the introductory paragraph of his or her report that the financial statements of the prior period were audited by another auditor, the date of the predecessor auditor's report, the type of report issued by the predecessor auditor, and if the report was other than a standard report, the substantive reasons for it. The successor auditor ordinarily should indicate in its report that the other auditor has ceased operations. The successor auditor should not name the predecessor auditor in the report. [AI 23.61]

4830.2 If the financial statements audited by the ceased firm are restated, the successor auditor will need to either reaudit the financial statements, or in certain cases, audit only the restatement adjustments. The successor's auditor's report should state that the predecessor auditor reported on the prior financial statements before restatement. [AI 23.66]

4830.3 A full reaudit generally is necessary when the restatement adjustments include, but are not limited to:

• Corrections of an error;
• Reflection of a change in reporting entity;
• with significant impact on previously reported amounts, or
• that affect previously reported net income or net assets;
• Reporting discontinued operations; and
• Changes affecting previously reported net income or net assets. [AI 23.70]

4830.4 If the successor auditor is engaged to audit only the restatement adjustments to the prior period financial statements that were audited by a predecessor auditor, the successor auditor must be able to form an opinion that the adjustments are appropriate and have been properly applied. In determining whether he or she can form such an opinion, the successor auditor should consider the extent of the adjustments, the reason for the adjustments, and the cooperation of the predecessor auditor. [PCAOB Staff Questions and Answers, "Adjustments to Prior-Period Financial Statements Audited by a Predecessor Auditor", Question 4]

4830.5 If the successor auditor is able to satisfy him or herself as to the appropriateness of the restatement adjustments, he or she may report on the restatement adjustments pursuant to the guidance in AS 3105.58. [AI 23.71]

4830.6 A successor auditor may audit the restatement adjustments in prior period financial statements audited by a predecessor auditor that has not ceased operations, so long as the auditor is independent and registered with the PCAOB.

4830.7 An auditor that is subsequently determined to be no longer independent of its client may reissue previously issued reports and consents to the use of those previously issued reports, as long as it was independent at the time of original issuance of the report. An auditor may perform the normal subsequent events procedures required by AS 4101 prior to reissuing a report. Situations in which other audit work would be necessary to reissue the report should be discussed with OCA prior to filing.

4840 Accountant's Refusal to Reissue Reports

4840.1 The staff is not in a position to evaluate the reasons for an accountant's refusal to reissue its report and will not intervene in disputes between registrants and their auditors. Moreover, the staff will not waive the requirements for the audit report, the accountant's consent to the use of its audit report, or the naming of the accountant as an expert in filings. If a registrant is unable to reuse the previously issued audit report in a current filing, the registrant must engage another accountant to reaudit those financial statements.

4850 Illegal Acts

Section 10A of the 1934 Act requires that auditors report in a timely manner certain uncorrected illegal acts to a registrant's board of directors. It further requires the registrant, or the auditor if the registrant fails to do so, to provide information regarding the illegal act to OCA. For additional information, see Notices required under Section 10A-1 of Exchange Act . (Last updated: 10/30/2020)

4860 Signatures

Wherever a signature is required, typed signatures or duplicated or facsimile versions of the manually signed document may be used. In any of these cases, each signatory must manually sign the document authenticating, acknowledging or otherwise adopting the signature that appears in the filing before or at the time that the filing is made, and the manually signed document must be retained by the filer for five years. A copy of this document must be furnished to the SEC upon request. [S-T 302] In certain instances, an auditor may reissue its audit report. If the reissued report is included in a filing, it must be manually signed as described above. (Last updated: 12/31/2010)

4870 Selected Financial Data

4870.1 An auditor may be engaged to report on selected financial data using the guidance of AS 3315. Unless the auditor reports on selected financial data using the guidelines in AS 3315, the information should not be labeled or described as audited. However, it would be acceptable to state that the information is derived from audited financial statements.

4870.2 If an auditor was engaged to report on the selected financial data, the form of report specified by AS 3315 should be included in the filing and the auditor's consent to the report should make reference to its applicability to the selected financial data.

[1] This table describes the staff’s application of PCAOB registration requirements for an auditor whose report is included in a filing with the SEC. There are instances, not included in the table, when a principal auditor will use the work of another auditor and take responsibility for the other auditor’s work. In these instances, the other auditor’s report is not included in the filing with the SEC. The determination of whether the other auditor must be registered with the PCAOB is made by reference to the Sarbanes-Oxley Act and the PCAOB’s rules. In all such instances the principal auditor is responsible for performing the audit in accordance with PCAOB standards.

[2] The term ‘issuer’ means an issuer (as defined in Section 3 of the 1934 Act), the securities of which are registered under Section 12 of that Act, or that is required to file reports under Section 15(d) of that Act, or that files or has filed a registration statement that has not yet become effective under the 1933 Act, and that it has not withdrawn. See Section 2(a)(7) of the Sarbanes Oxley Act and PCAOB Rule 1001.

[3] The auditor of the financial statements of the non-issuer entity must be registered if, in performing the audit, the auditor played a “substantial role” in the audit of the issuer, as that term is defined in PCAOB Rule 1001(p)(ii). If the “substantial role” test is not met, the firm is not required to be registered. The inclusion or exclusion of such a report under S-X 2-05 does not affect this determination.

[4] S-X 2-02 requires that the auditor’s report state the applicable professional standards under which the audit was conducted. Under S-X 1-02 an audit of the financial statements of an issuer means an examination by an independent accountant in accordance with the standards of the PCAOB. In the situation identified in the chart above, the view of the SEC staff is that the applicable professional standards in S-X 2-02, as applied to the other auditor’s report, relates to an issuer and, therefore, the other auditor’s report must refer to the standards of the PCAOB.

[5] If a principal auditor is making reference to another auditor’s report on the financial statements of the non-issuer entity, the other auditor’s report must refer to the standards of the PCAOB. See footnote 4 above. If a principal auditor does not make reference to another auditor’s report on the financial statements of the non-issuer entity, the other auditor’s report need not refer to the standards of the PCAOB.

[6] The entity is itself an issuer and so must comply with the rules applicable to issuers.

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File Your Delaware Annual Report

Like many states, Delaware requires that every corporation incorporated in the state file a Delaware annual report. Delaware annual report filing is due by March 1 every year, along with an annual Delaware Franchise Tax payment for all corporations.

When you file your Delaware annual franchise taxes with us or online with the state of Delaware, your annual report is automatically generated and filed based on the information you enter. The Delaware annual report must include the following basic internal details about the corporation:

• The physical address of the company's location
• The name and address of one officer
• The names and addresses of all Directors
• Authorization by an officer to file the report

In addition to the above, companies that have more than 5,000 shares must provide the Total Gross Assets and Total Issued Shares to have the option to recalculate their Delaware Franchise Tax using the assumed par value capital method by providing the total gross assets (as listed on the company's federal tax return, Form 1120, schedule L) as well as the total number of issued shares (found on the company's stock transfer ledger).

Many Delaware corporations report the same information on their annual report each year. While it may be tempting to write "same as last year" on the report, the state of Delaware requires the details be listed every year in order to keep the corporation in compliance.

Annual Report Modifications

Occasionally, details listed on your Delaware annual report will change -- perhaps a Director resigned or the corporation's physical address has changed. When these types of changes occur, an amended annual report will need to be filed with the State of Delaware. The state will not allow for a partially-amended report to be submitted, with just the new details filled out. Instead, a new Delaware annual report must replace the old one. The state accepts amended reports for up to a year after the original filing.

Harvard Business Services, Inc. can help obtain a copy of a previously filed annual report or file an amended report for a company. Our experienced staff is available via phone (800-345-2677), email or live chat.

Delaware Annual Report FAQ

When are delaware corporations annual report due.

In the state of Delaware, a corporations Annual Report are due by March 1st. The Annual Report and payment is done simultaneously and due at the same time each year for the life of the company. Failure to complete and submit the report by the due date will result in a late penalty.

What are the Delaware annual report requirements?

The state of Delaware asks that a few basic internal details about the company be included in the annual report. The Delaware annual report requirements are:

• Principal place of business -- the physical location of where the company is located
• Name and address of one officer -- typically a President, Vice President, Secretary or Treasurer
• Names and addresses of all directors -- if none elected yet, then the report can reflect zero
• Authorization -- by an officer or director with signatory authority to file the annual report

My corporation has more than 5,000 shares authorized and I received a bill for an outrageous amount, what does this mean? Please help!

If you have received your annual Delaware Franchise Tax Notice and it is an outrageous amount, there is no need to worry. Using the Assumed Par Value Capital Method the State of Delaware allows you to recalculate your Franchise tax to pay the lesser amount. To do this you will need to provide two additional items on the annual report:

• Total gross assets, which are reported on the company’s Federal Tax Return Form 1120
• Total issued shares, which can be found in the company’s stock transfer ledger

What if the information has not changed from the prior year's Delaware annual report filing? 

For a lot of companies, the information that has to be reported on their Delaware annual report is the same each year. Our clients are always asking if they need to fill out an annual report if the information is identical to the prior year. As per the Delaware Code, the details must still be provided on the annual report each and every year to keep the company in compliance. It is unacceptable to file an annual report marked “same as last year.” Therefore, regardless of whether there are any changes within the company throughout the year or not, a brand new report is required to be filed every year.

How Do I Get the Previous Year's Annual Report for My Delaware Corporation?

You can obtain this through the Delaware Division of Corporations or simply contact Harvard Business Services and you can request a copy from our team for a small fee.

What does "Principal Place of Business" mean? Can I use the address of Harvard Business Services, Inc.?

The Principal Place of Business is the physical location where the company is located. The actual street address, city, state and postal code must be indicated, as a Post Office Box address is not acceptable. The address of Harvard Business Services, Inc. may not be used as your corporation’s address on your Delaware corporation annual report, even if a Mail Forwarding service has been established.

Where does the annual Delaware franchise tax report information get filed?

Our clients want to know what happens with the details listed on the actual annual report. The report is filed with the Delaware Secretary of State’s office, just like the company’s original Certificate of Incorporation. It remains part of the company’s official filing history, just like any other type of filing the company had done and every type of corporate document the company ever obtained. Every annual franchise tax report that is paid and filed for the company is always kept on record.

Are Delaware Annual Reports Public?

Every annual report and the information listed becomes part of the official filing history of the company. The Delaware annual reports are electronically stored with the secretary of state’s office and the reported details cannot be viewed publicly. Therefore, it is not possible to see a filed annual report online with the State of Delaware.

How can a copy of a filed annual report be obtained?

Perhaps the details of the company officer and/or directors need to be provided for banking or contract purposes. The state of Delaware does not maintain an online database that allows anyone to view a copy of documents on file for a company. Therefore, in order to obtain a copy of a filed annual report, the document must be requested from the secretary of state’s office for a fee. The document is issued in black and white, just like all other state documents, so it can be printed and used immediately. Even though a copy of a filed annual report can be obtained, any information regarding a company’s total gross assets and total issued shares will not be disclosed. Therefore, for the specific companies that must provide this information on their annual report, those details will still remain private.

Who are my officers and/or Directors?

The officers and Directors of a company are elected to manage the affairs of the corporation. The details of the officers and Directors are kept internally within the corporate record books. An officer would typically be the President, Vice President, Secretary or Treasurer of the company. For Delaware Franchise Tax filing purposes, only one officer's name and address is required to be filed on the annual report. However, all Directors' names and addresses are required to be listed on the annual report. A physical street address, including city, state and postal code, must be listed for each officer or Director. A Post Office Box address is not acceptable, and the address of Harvard Business Services, Inc. may not be used.

Who is authorized to sign and file the annual report?

Your annual Delaware Franchise Tax report can be signed and filed by an officer or director of the company; however, one of the people listed in the officer and director section of the annual report is required to be the authorized signatory.

Where can I locate the Delaware State File Number for my company?

The Delaware State File Number is seven digits in length and typically begins with a 0, 2, 3, 4 or 5. On the annual report worksheet, the number can be found on the upper left hand side of the page.

How can I determine my company’s total gross assets?

The State of Delaware Title 8 Chapter 5 § 503 (i) states:

"such total assets and total gross assets shall be those 'total assets' reported to the United State on U.S. Form 1120 Schedule L, relative to the company’s fiscal year ending in the calendar year prior to filing with the Secretary of State pursuant to this section. If such schedule is no longer in use, the Secretary of State shall designate a replacement. The Secretary of State may at any time require a true and correct copy of such schedule to be filed with the Secretary of State’s office.

No corporation shall consolidate with its assets of another entity for purposes of this section. If such schedule or its replacement reports on a consolidated basis, the reporting corporation shall submit to the Secretary of State a reconciliation of its reported total assets or total gross assets to the consolidated total assets reports on the schedule.

Where can I find out how many shares my company has issued?

Typically, all information regarding a company’s stock structure can be found in the stock transfer ledger . This reference will indicate how many shares are authorized, issued, to whom the shares were issued, for how much, and other relevant information. For Delaware Franchise Tax calculation purposes of maximum stock companies (over 5,000 authorized shares), only the number of issued shares are required to be provided.

Do I still have to pay a Franchise Tax if my company has not conducted any business?

All companies that are incorporated in the state of Delaware are required to pay an annual Franchise Tax and file an annual report in order to maintain their corporate existence and good standing status . The annual Franchise Tax is due, regardless of whether or not the company has conducted any business, had any profit or loss, opened a bank account or filed a federal tax return.

I no longer want my company; do I still owe Delaware Franchise Tax Fees?

In order to formally and legally close a corporation, a Certificate of Dissolution must be filed. At the time of filing the dissolution, all past and currently due Franchise Tax Fees must be paid. Once the dissolution filing has been approved by the state of Delaware, no further Franchise Tax Fees will be imposed upon the corporation.

The HBS Blog offers insight on Delaware corporations and LLCs as well as information on entrepreneurship, startups and general business topics. 

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Harvard can provide assistance throughout the life of your company. These custom services are the most popular with our clients:

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U.S. Department of the Treasury

Financial stability oversight council releases 2023 annual report.

WASHINGTON – The Financial Stability Oversight Council (Council) today unanimously approved its 2023 annual report.  The annual report reviews financial market developments, describes potential emerging threats to U.S. financial stability, identifies vulnerabilities in the financial system, and makes recommendations to mitigate those threats and vulnerabilities.  Overall, the Council finds that the U.S. financial system remains resilient, and the U.S. banking system remains sound.  The report also details the activities of the Council and summarizes significant regulatory developments.  The report was developed collaboratively by Council members and their agencies and staffs. "The resilience of the U.S. financial system in the face of this year's global economic uncertainty and the banking sector distress of the Spring is a testament to the reforms implemented in the aftermath of the global financial crisis,” Secretary of the Treasury Janet L. Yellen said. “Events over the past year continue to underscore the importance of the Council’s ongoing efforts to enhance the resilience of the financial system and monitor a wide range of vulnerabilities.”  The Council’s recommendations in the annual report include the following:

• Banking:  The banking system is critical to the supply of credit and financial services to households and businesses and is central to the stability of the U.S. financial system. There are key lessons to be learned from the turmoil in the Spring that can contribute to reducing financial stability risks emanating from this sector.  The Council supports member agencies’ plans to review whether capital measures appropriately reflect an institution’s ability to absorb losses, as well as agencies’ proposed measures to improve resolvability at large, complex, or interconnected banks, such as by requiring long-term debt and improved resolution plans.  In addition, the Council recommends that banking agencies closely monitor uninsured deposit levels and depositor composition and collect additional data as necessary.  
• Cybersecurity:  Cybersecurity risk is pervasive throughout the economy, and reducing cyber vulnerability is particularly critical within the financial system.  Ransomware, malware, denial-of-service attacks, and data breaches can disrupt the operations of financial institutions, including those that are systemically important.  Such incidents have the potential to disrupt financial market functioning and pose a risk to financial stability.  Sharing timely and actionable cybersecurity information can reduce the risk of disruptive cybersecurity incidents and mitigate the impacts of those that do occur.  The Council supports ongoing partnerships between state and federal agencies and private firms and recommends they continue to promote information sharing related to cyber risk and undertake additional work to mitigate cyber-related financial stability risks.  The Council also supports the G7 Cyber Expert Group’s international efforts to help financial institutions better understand cybersecurity risks and improve the cyber resilience of the financial system.  
• Artificial Intelligence (AI):  For the first time, the Council has identified the use of AI in financial services as a vulnerability in the financial system.  Financial institutions have rapidly adopted innovative technologies in recent years, and the use of AI in financial services has increased.  AI offers potential benefits, such as reducing costs and improving efficiencies, identifying more complex relationships, and improving performance and accuracy.  However, the use of AI can introduce certain risks, including safety-and-soundness risks like cyber and model risks.  The Council notes that existing requirements and guidance may apply to AI and recommends monitoring the rapid developments in AI to ensure that oversight structures account for emerging risks to the financial system while also facilitating efficiency and innovation.  The Council recommends financial institutions, market participants, and regulatory and supervisory authorities deepen expertise and capacity to monitor AI innovation and usage and identify emerging risks.    
• Nonbank Financial Intermediation:  The evolving participation of nonbank financial institutions in the provision of financial services is an important area to monitor for vulnerabilities and potential risks to the broader financial system.  This year’s report discusses the activities of nonbank mortgage servicers and the rise in private credit in contributing to financial system vulnerabilities.  The Council supports ongoing efforts to better assess and address the risks associated with both of these activities.  The Council also supports the initiatives undertaken by the Securities and Exchange Commission (SEC) and other agencies to address risks presented by a variety of investment funds, including the use of leverage by certain hedge funds and the liquidity and maturity transformation that money market funds and open-end funds engage in.  These include data collection improvements to Form PF, as well as actions taken this year by the SEC to address the liquidity mismatch in money market funds (MMFs) and to reduce the risk of investor outflows from MMFs during periods of market stress.  The Council supports the SEC’s continued engagement regarding potential reforms of open-end funds. The Council’s Hedge Fund Working Group will also continue to evaluate potential risks to financial stability posed by hedge funds.    
• Climate-related Financial Risk:  More severe and frequent climate-related events are imposing significant costs on the public and the economy, with economic costs from climate change expected to grow.  The Council and its member agencies have significantly increased their capacity to evaluate and address climate-related financial risks. The Council’s Climate-related Financial Risk Committee (CFRC) is developing a framework to identify and assess these risks, and the Council recommends enhanced coordination of data and risk assessment through the CFRC.  The Council also recommends state and federal agencies continue to coordinate to identify, prioritize, and procure data necessary for monitoring climate-related financial risks.  At the same time, financial regulators should continue to promote consistent, comparable, and decision-useful disclosures that allow investors and financial institutions to consider climate-related financial risks in their investment and lending decisions.  
• Digital Assets:  The Council notes that financial stability vulnerabilities may arise from crypto-asset price volatility, the market’s high use of leverage, the level of interconnectedness within the industry, operational risks, and the risk of runs on crypto-asset platforms and stablecoins. Vulnerabilities may also arise from token ownership concentration, cybersecurity risks, and the proliferation of platforms acting outside of or out of compliance with applicable laws and regulations.  The Council emphasizes the importance of agencies’ continuing to enforce existing rules and regulations applicable to the crypto-asset ecosystem.  The Council reiterates its recommendation that Congress pass legislation to provide for the regulation of stablecoins and of the spot market for crypto-assets that are not securities.

In addition, the Council identified certain vulnerabilities related to the nonfinancial corporate credit sector and commercial real estate sectors. The Council recommends supervisors and financial institutions continue to monitor credit risks and exposures to these sectors.

The full report can be viewed here .

Secretary Yellen’s remarks on the report during the open session can be viewed here .

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Cecc releases 2023 annual report.

(WASHINGTON, DC)—U.S. Representative Christopher Smith (R-NJ) and Senator Jeff Merkley (D-OR), Chair and Cochair of the bipartisan and bicameral Congressional-Executive Commission on China (CECC) issued today the Commission’s 2023 Annual Report on human rights conditions and rule of law developments in the People’s Republic of China (PRC).

The full report and an executive summary are available for download on the CECC’s website.

“The Annual Report sets the standard in terms of documenting the People’s Republic of China’s failure to abide by human rights norms and in holding Xi Jinping and the Chinese Communist Party accountable for their repeated and sustained atrocities and crimes against humanity – up to and including that most pernicious of human rights violations, genocide,” said CECC Chair Smith.  The CECC staff does great work on the Annual Report and throughout the year, maintaining a state-of-the-art political prisoner database and organizing cutting-edge hearings that lead to heightened awareness and actionable legislation. The annual report will continue to guide Congress and the Administration on PRC policy, and I hope provide corporations with clarity, so that they are no longer complicity in the subsidization of tyranny.  Above all, it is my hope that the long-suffering people in Communist China know through our report that they have not been forgotten, and that they, and we, can look forward to that day when oppression ends.”

“The people of China deserve to enjoy the full range of human rights to which they are entitled under international law. As the Congressional-Executive Commission on China documents in this report, the Chinese government continues to deny them their ability to exercise these rights,” said CECC Cochair Merkley . “This report highlights the new ways that Chinese authorities are violating their citizens’ basic rights, including the use of digital and biometric surveillance and transnational repression of Americans and others, and calls attention to the prisoners of conscience for whom we must continue to raise our voices. I urge Congress and the Biden Administration to act on the CECC’s policy recommendations.” 

The 2023 Annual Report reflects the view of CECC commissioners that the failure of the government of the People’s Republic of China (PRC) and the Chinese Communist Party (CCP) to fulfill its obligations under international treaties, along with its systematic violation of human rights, pose a challenge to the rules-based international order and to the safety and security of U.S. citizens and residents. These challenges require robust efforts by the U.S. and its allies to address genocide; stanch the import of forced labor made goods; circumvent censorship of the free flow of news and information; stop malign influence operations targeting U.S. citizens and their families; and shine a light on the arbitrary detention and torture of political prisoners in China and Hong Kong. All of these issues are documented in great detail in the 2023 Annual Report’s 20 chapters. 

The 2023 Annual Report includes a new chapter entitled “Technology-Enhanced Authoritarianism,” recognizing the role that new technologies play in surveillance, censorship, and repression of fundamental freedoms in the PRC and around the world.       

Among other issues documented in the 2023 Annual Report are:

• Harassment and intimidation campaigns by PRC agents (transnational repression) targeting U.S. citizens and residents.   

• The complicity of global brands and businesses in forced labor and the creation of mass biometric surveillance systems in the PRC.  

• National security laws being used as a pretext to prevent the exercise of rights and to jail Chinese and Hong Kong rights defenders.  

• Ongoing genocide in the Xinjiang Uyghur Autonomous Region and PRC propaganda efforts to quell international concern.

• Efforts to destroy the language and culture of ethnic groups, including Tibetans and Uyghurs.

• The vulnerability of North Koreans women to trafficking and forced repatriation.

• Multiple protests against labor restrictions, censorship, and harsh implementation of the “zero-COVID” pandemic policy.

• Tightening control exerted over a wide range of civil society organizations and advocacy deemed politically threatening, including harsh crackdowns on religious believers and communities.

The report also includes recommendations for congressional and executive branch action. The CECC Chairs and Commissioners have championed bipartisan legislative and advocacy efforts to bolster U.S. human rights diplomacy that emerged from the research of the Annual Report. In the 117th Congress legislative initiatives include the--

• Transnational Repression Policy Act (S. 831 / H.R. 3654)

• Uyghur Genocide Accountability and Sanctions Act (H.R. 8124 / S. 1770)

• Hong Kong Economic Trade Office Certification Act (S. 490 / H.R. 1103)

• Stop Organ Harvesting Act (H.R. 1154 / S. 761)

In addition, robust implementation of the Uyghur Forced Labor Prevention Act —which was led by the Commission’s Chairs and former Chairs—remains a priority of Commission reporting, advocacy, and legislative initiatives, including championing additional funding for enforcement efforts and stopping U.S. Government procurement of seafood processed by forced labor or Uyghurs and North Koreans. The UFLPA is the strongest action taken anywhere in the world to address the importation of goods made by the slave labor of ethnic minorities in China.

The Commission continues to maintain a Political Prisoner Database that provides detailed information on thousands of political prisoner cases, including individuals in Hong Kong. The Commission continued to highlight political prisoner cases and advocate for their release via public statements and social media. A list of 16 representative cases highlighted in this year’s report can be found in the 2023 Annual Report.

Chair Smith and Cochair Merkley commend the outstanding work of the capable and professional CECC’s research staff in producing the Commission’s 22nd Annual Report. 

• 2023CECC Executive Summary FINAL_5124.pdf »
• 2023 CECC Annual Report.pdf »

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World Migration Report 2024 Reveals Latest Global Trends and Challenges in Human Mobility 

• International remittances surged by 650 per cent, from USD 128 billion to USD 831 billion between 2000 and 2022. 
• Migrant remittances surpass foreign direct investment in boosting the GDP of developing nations. 
• 281 million international migrants globally; number of those displaced hit a record high by the end of 2022 at 117 million.  

Dhaka/Geneva, 7 May – The International Organization for Migration (IOM) today launched the World Migration Report 2024 , which reveals significant shifts in global migration patterns, including a record number of displaced people and a major increase in international remittances.  

IOM Director General Amy Pope formally released the report in Bangladesh, which stands at the forefront of migration challenges, including emigration, immigration and displacement.   

“The World Migration Report 2024 helps demystify the complexity of human mobility through evidence-based data and analysis,” IOM Director General Amy Pope said at the launch. “In a world grappling with uncertainty, understanding migration dynamics is essential for informed decision-making and effective policy responses, and the World Migration Report advances this understanding by shedding light on longstanding trends and emerging challenges.” 

The report highlights that international migration remains a driver of human development and economic growth, highlighted by a more than 650 per cent increase in international remittances from 2000 to 2022, rising from USD 128 billion to USD 831 billion. The growth continued despite predictions from many analysts that remittances would decrease substantially because of COVID-19.  

Of that 831 billion in remittances, 647 billion were sent by migrants to low– and middle-income countries. These remittances can constitute a significant portion of those countries' GDPs, and globally, these remittances now surpass foreign direct investment in those countries. 

Highlighting key findings, the report reveals that while international migration continues to drive human development, challenges persist. With an estimated 281 million international migrants worldwide, the number of displaced individuals due to conflict, violence, disaster, and other reasons has surged to the highest levels in modern-day records, reaching 117 million, underscoring the urgency of addressing displacement crises.  

Migration, an intrinsic part of human history, is often overshadowed by sensationalized narratives. However, the reality is far more nuanced than what captures headlines. Most migration is regular, safe, and regionally focused, directly linked to opportunities and livelihoods. Yet, misinformation and politicization have clouded public discourse, necessitating a clear and accurate portrayal of migration dynamics.  

By choosing Dhaka as the report's launch site, IOM not only highlights the country's efforts in supporting vulnerable migrants and fostering pathways for regular migration but also recognizes Bangladesh's important role in shaping global migration discourse and policy.  

As a Global Compact for Safe, Orderly, and Regular Migration Champion country, Bangladesh has demonstrated a strong commitment to addressing migration issues and implementing policies that safeguard migrants' rights. This proactive engagement aligns with IOM's strategic objectives, making Bangladesh an ideal location to launch the 2024 World Migration Report.  

IOM’s World Migration Report, with its innovative digital tools and comprehensive analysis, aims to help dispel myths, provide critical insights, and inspire meaningful action in addressing the challenges and opportunities of human mobility.  

"We hope the report inspires collaborative efforts to harness the potential of migration as a driver for human development and global prosperity," DG Pope said. 

“As one of the GCM champion countries, Bangladesh will not only continue to act upon the pledges it has made for its domestic context but would also take up emerging issues and challenges pertaining to migration and development for informed deliberations at the international level,” said Dr. Hasan Mahmud, Honourable Foreign Minister, Government of the People’s Republic of Bangladesh.

Notes to editors: 

This launch is part of IOM Director General’s first three-day visit to Bangladesh. 

For more information, please contact: 

Marie McAuliffe, World Migration Report Editor at [email protected]  

For media requests: Florence Kim at [email protected]  

RELATED NEWS

Iom's world migration report shows global displacement rising despite covid-19 mobility limits, iom’s world migration report 2020  wins  international  design  awards , world migration report launches dynamic new data visualization platform, world migration report 2020 launched.

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Money blog: 600 new skyscrapers 'on way' for London, report finds

A reader seeks help as her employer of 24 years is bringing in a new clock-in system to pay her by the minute. Read this and all the latest personal finance and consumer news in the Money blog - and share your own problem or dispute below.

Monday 13 May 2024 19:57, UK

• Gen Z would rather deliver parcels than work in restaurants, Michel Roux Jr claims
• 600 new skyscrapers on way for London, report finds
• Money Problem: My workplace is bringing in new clock-in system to pay us by the minute - is this allowed?
• Free childcare applications open for new age band

Essential reads

• How to make sure your car passes its MOT
• 'Loud budgeting': The money-saving trend that has nothing to do with giving up your daily coffee
• How to avoid a holiday data roaming charge (while still using the internet)
• Best of the Money blog - an archive

Ask a question or make a comment

Young homebuyers are being forced to gamble with their retirement prospects by taking on ultra-long mortgages, according to a former pensions minister.

Sir Steve Webb described data - supplied by the Financial Conduct Authority to the Bank of England - as "shocking".

It suggests that more than one million new mortgages have been issued over the past three years with end dates beyond the state pension age.

The ex-Liberal Democrat MP, who is now a partner at the consultancy firm LCP, voiced fears that borrowers could be forced to raid their pension savings to clear their mortgage in a worst-case scenario.

Sir Steve saw the potential for harm in any case, as longer-term mortgages deprive people of a period running up to retirement when they could be mortgage-free and boosting their pension.

What does the data say? 

• 42% of new mortgages in the fourth quarter of 2023 - or 91,394 - had terms going beyond the state pension age;
• In the final quarter of last year, people aged 30 to 39 accounted for 30,943 new mortgages lasting beyond state pension age;
• People aged 40 to 49 accounted for 32,305;
• Under-30s made up 3,676 of these mortgages;
• People aged 50 to 59 accounted for 18,854, and there were 661 who were over 70.

Mortgage rates have been rising since the end of 2021 when the Bank of England began action to tackle rising inflation.

Taking home loans with longer maturity dates tends to be more attractive when interest rates are high, as monthly repayments are lower.

You can read more on this story below...

Waitrose has become the only supermarket to receive a royal warrant from the King. 

The recognition means the company has regularly provided the royal household with products for at least five years. 

It also means it can use the King's coat of arms on packaging, as part of advertising or on any stationary it creates. 

Waitrose was first granted a royal warrant in 1928 for supplying King George V with groceries and cleaning materials.

"We are honoured and proud that His Majesty has granted us his warrant," James Bailey, executive director of Waitrose, said. 

"It means the world to all of us, and our farmers and suppliers. There couldn’t be a more powerful symbol of our commitment to service and quality, and our determination to have the highest environmental and animal welfare standards." 

Waitrose was previously granted a royal warrant by the late Queen in 2002 and the King when he was Prince of Wales in 2010.

The Queen has also granted her first royal warrants, picking seven companies, including luxury department store Fortnum & Mason and the florist that supplied her coronation flowers, Shane Connolly & Company. 

The royal nod could be bad news for customers, however, with a brand finance expert telling Sky News that having a royal warrant allows firms to charge a price premium.

David Haigh said his company's research estimated this to be "between 10% and 25%".

A royal warrant says a company or a product is luxurious, high quality and sustainable, he explained. 

He estimates the scheme is "worth billions to UK companies and… therefore it's a very high value to the UK economy".

"And one of the reasons for that is that a lot of foreign tourists and buyers have a preference for royal warrant holder products. We found that 100% of Chinese buyers would pay in excess of 10% for a royal warrant holder product."

Read more on the Queen's choices here :

Gordon Ramsay's restaurants tripled losses to £3.4m last year, as the chef warned businesses in the industry were facing a "challenging" climate. 

The chef's group spent millions opening five new restaurants in 2023, including a Lucky Cat in Manchester, a Bread Street Kitchen in Battersea Power Station and a Street Pizza in Edinburgh. 

Sales at his wide-ranging establishments rose, however, by 21% to £95.6m in the year to August, according to The Telegraph. 

"It's been a really hard-fought year, but at the same time an exciting year, and in tough times it amazes me how strong and vibrant our industry is," Ramsay told the news outlet. 

"It's challenging out there and businesses are battling to stay afloat, rising costs, rent and food costs, multiple strikes. It's a battle" 

He was optimistic, however, saying there hasn't been "so much passion and vibrancy" in the industry since he opened his first restaurant in 1998.

"We've still got something wonderful to celebrate, and I truly believe the industry has never been so exciting."

Once the UK's favourite alcoholic beverage, beer's popularity seems to be fading among the younger drinking generation... 

In fact, only 30% of people aged 18 to 24 ever drink it, according to a study commissioned by the Society of Independent Brewers. 

Instead, younger drinkers say they prefer drinking spirits, wine and cider. 

Pub visits appear to be suffering as well, with almost a quarter of the 2,000 people surveyed saying they have never visited their local. 

SIBA's 2024 Craft Beer Report paints a more positive picture for small and independent brewers, however, with more than 55% of beer consumers saying they now drink "local craft beer". 

It also found average beer production volumes among independent breweries has risen by 14% since last year - a return to pre-pandemic levels for the first time in 4 years. 

"Demand for local, independently brewed beer in the UK is strong, with independent brewers reporting production volumes up by 14%, meaning they have returned to 2019 volumes again," Andy Slee, SIBA's chief executive, said. 

But, he said, it's time for "cautious optimism" only, with the industry still plagued with a number of issues. 

"The short-term issue for small independent breweries isn't demand; it's profitability, rising costs and financial pressures such as lingering COVID debt," he said. 

"Far too many breweries are simply trying to survive rather than thrive, so while there are many positives signs highlighted in the report, for now it's cautious optimism."

Earlier this year, our Money reporter Emily Mee explored whether the UK's big night out culture was dying out. 

Nightlife experts warned we're losing one club every two days at the moment - and if we stay on this trajectory, we will have none left by 2030.

You can read more about her findings here...

A total of 583 skyscrapers are "queuing up in the pipeline" to be built across central London, a development thinktank has said. 

That is more than double the 270 built in the past decade. 

In the eastern borough of Tower Hamlets alone, 71 tall buildings were completed in that time that time, the report by New London Architecture found. 

A further 24 were in the City of London and 27 in Canary Wharf and Isle of Dogs. 

The report said the rapid change has been fuelled by a "burgeoning demand" for office and residential space, overseas investment and a supporting planning environment. 

"Tall buildings have changed the face of London substantially over the last 20 years and will continue to do so - the pipeline that NLA has tracked means there is at least 10 years' supply that has already been defined," Peter Murray, the organisation's co-founder, said. 

"London's population continues to grow, passing the 10 million mark at the end of this decade.

"We'll still need tall buildings; and NLA will continue to keep a close watch on what's going on." 

Restaurants might only be able to open three or four days a week due to staffing problems, Michel Roux Jr has warned. 

Speaking to The Telegraph as he gears up to open his new restaurant Chez Rouz, the Michelin starred chef admitted the industry needs to change to accommodate flexible working hours. 

"Just because I worked 80 hours a week or more doesn't mean the next generation should," he said. 

"Quite the contrary. That is something that we have to address in our industry."

But, he warned that the move will come at a cost... 

"It will mean ultimately that going out is going to be more expensive, and that maybe your favourite restaurant is no longer open seven days a week - it's only open three or four days a week," he said. 

The industry is known for its long, unsociable working hours, and Roux Jr explained that the real issue hit after the pandemic, with people no longer wanting to work weekends. 

"People don't want to work unsociable hours and would rather work delivering parcels as and when they want to. It's as simple as that," he added. 

Earlier this year, Roux Jr said goodbye to his famous restaurant Le Gavroche in London. 

It had been opened by his father Albert Roux and uncle Michel Roux in 1967. 

Now, he said it's "brave" to open a new restaurant, with the market "very, very tough". 

"I really feel for anyone that is brave enough to open up a restaurant now. It's incredibly difficult," he added. 

Chez Rouz at The Langham in Marylebone, central London, is due to open on 22 May. 

By James Sillars , business news reporter

A pause for breath on the FTSE 100 after a 3% gain over the course of past week that took the index to a fresh record closing high.

The rally of recent weeks - significant for London's standing and pension pots alike - has been broad based and reflects several factors.

A major driver has been sterling's weakness versus the US dollar.

The US currency has been strong as the Federal Reserve, its central bank, has hinted it will be some time yet before it begins to cut interest rates.

Language out of the Bank of England last week sparked a flurry of bets that UK rates could be cut as early as next month.

A weaker pound boosts dollar-earning constituents on the FTSE 100 because they get more for their money when dollars are converted to pounds.

Also at play is the view that UK stocks represent good value, as they are cheaper compared to many of their international peers.

A few moments ago, the FTSE 100 was trading 6 points lower at 8,423.

A major talking point is the possibility of the Chinese fast fashion firm Shein listing in London.

According to Reuters, the company has shifted its focus to the UK after receiving a lukewarm reception in the United States.

The news agency, citing two sources, reported that Shein was stepping up its preparations for an initial public offering in London that would be expected to be one of the biggest carried out globally this year.

By Emily Mee , Money team

No one likes the date in their calendar when their MOT rolls around. 

But to make things a little less stressful, consumer expert Scott Dixon - known as The Complaints Resolver - has given us some tips on what to look out for to help your vehicle pass with flying colours. 

Some of the most common failures are faulty steering, brakes, suspension, worn or damaged tyres, cracked windscreens and faulty lights. 

Mr Dixon recommends you get your car serviced a couple of weeks before your MOT, in case there are any complex or costly issues. 

This will give you time to get them fixed and get your car through first time without any advisories. 

Aside from taking your car for a service, there are also some easy checks you can run yourself... 

Listen for unusual clunks while you're driving - this could be a sign of a damaged suspension. 

You could also check by pushing the car down on each corner. It should return to normal without bouncing a few times. 

Another option is to look with a torch under the wheel arch, as this should reveal any obvious defects. 

Blown bulbs are a common MOT failure, but they're cheap to fix. 

Walk around your car and check all the bulbs are working - this includes the headlights, sidelights, brake lights, indicators and the number plate bulb.

Mr Dixon says it's "not an easy job" to change the lightbulbs yourself on most modern cars, as the MOT will also check the positioning of the light. Therefore he recommends getting this done professionally. 

Squealing or grinding noises may be a sign your brake pads need replacing. 

You should also check whether your car stops in a straight line, or whether it pulls in different directions. 

Don't forget about the handbrake, too. Test it out on a slope and see if it securely holds the car. If it doesn't, you should get it adjusted. 

It's easy to check if your wipers work okay, but you should also make sure to inspect the blades for tears and rips. 

They should be able to clean the windows with no smears. 

Mr Dixon says you don't need to pay Halfords to change your wiper blade as you can "do it yourself in seconds". All you need to do is look for a YouTube tutorial. 

He also recommends buying the Bosch wiper blades, as he says these are good quality and will also be a sign you've looked after your car well when you come to sell it. 

One thing to look out for is tread depth. You can do this by looking for the "wear bar" that sits between the tread. 

If it's close to 1.6mm and is low, you should get the tyre replaced so it's not flagged as an advisory. 

Also check for perished tyre walls, which can happen when a vehicle is standing for any length of time. 

Uneven tyre wear is another potential issue, and if there are signs of this you should get the tyre replaced and tracking and suspension checked. 

These must be in good condition and working order, with no tears or knots. 

Registration plates

Your number plates should be clean and visible with a working light bulb at the rear. You may need to give them a wipe and replace the bulb if necessary. 

This should be in good condition, without damage such as loose bumpers or sharp edges. 

Mr Dixon advises against using automatic car washes during your car's lifetime, saying they "wreck your car". 

"It's not just your paintwork but they can also damage the wiper blades and the bodywork," he says. 

Check for warning lights

You'll need to take your vehicle to a trusted garage or mechanic for this. 

Exhaust emissions

Some diesel vehicles can fail their MOTs based on emissions. To avoid this, you can buy a fuel treatment pack and take your car for a good run to clear the fuel lines and tank.

Driving for at least 30 to 50 minutes at a sustained speed on a motorway or A-road should help to clear the filter. 

You should make sure the driver's view of the road isn't obstructed, so check for stone chips at eye level and remove any obstructions such as air fresheners and mobile phone cradles. 

What else should you think about? 

Make sure your car is clean beforehand, as a tester can refuse to do your MOT if the vehicle is filthy and full of rubbish. 

Giving your car a clean can also give you a chance to inspect it, Mr Dixon says. 

Another thing to do is to check last year's MOT for any advisories that might crop up this time. 

These potential issues will still be there - so it's best not to ignore them. 

You can check your vehicle's MOT history using  https://car-check.co.uk . 

Every Monday we get an expert to answer your money problems or consumer disputes. Find out how to submit yours at the bottom of this post. Today's question is...

I have worked at a bank for 24 years - the facilities are outsourced. This new company is bringing in a system where the staff have to click in and out and are then paid by the minute? Is this allowed? Amber

Ian Jones, director and principal solicitor at Spencer Shaw Solicitors, has picked this one up...

Your rights depend on your contract and what it says about payment. Does it specify an annual salary, or payment by time? Does it allow for changes to how payment is calculated?

If the contract does not allow for this type of payment, your employer may be trying to vary the contract of employment unlawfully.

If you're directly employed by the bank, and your pay arrangements are changing because of a new monitoring system, this would be an internal contract variation. If you work in the facilities department and the new contractor is taking over as your employer, the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) 2006 may apply. 

In this case, your current terms, conditions and previous service will transfer to the new employer.

TUPE may make the issue sound more complicated but, in practice, either way the changes will be valid only if the employee agrees to them.

If you have not agreed to the change, then this could be a breach of contract. This could give rise to a successful claim in the civil courts or the employment tribunal. 

If the breach is serious (for example, you're paid less than agreed in the original contract) and you resign in response, this could amount to constructive dismissal for which a claim can be made in the employment tribunal. 

It would be sensible to get the contract reviewed by a solicitor for advice. But act swiftly - if you continue working for the employer, you are effectively waiving the breach and accepting the change to your contract.

To make it possible to pay by the minute, employees may be monitored while at work. When collecting and processing data and using it to make a decision, the employer must comply with data protection laws. If not, the employee could be entitled to compensation, depending on the breach, or the employer could be at risk of a sanction by the regulator the Information Commissioner's Office.

This feature is not intended as financial advice - the aim is to give an overview of the things you should think about.  Submit your dilemma or consumer dispute via:

• The form above - make sure you leave a phone number or email address
• Email [email protected] with the subject line "Money blog"
• WhatsApp us  here .

Please make sure you leave your contact details as we cannot follow up consumer disputes without them.

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Hundreds injured after insulin pump software issue, FDA says

(CNN) - The Food and Drug Administration reports hundreds of people were injured by a malfunctioning insulin pump.

The problem was with T-Connect, the software that connects the T-Slim insulin pump to iPhones.

A glitch in the code caused the app to crash and relaunch, which can also drain the pump’s battery sooner than expected.

On March 26, Tandem Diabetics Care told affected owners to update their mobile phone apps to an updated version that corrects the issue.

About 85,000 people were running the problematic software at that time.

The FDA is now reporting the technical issue left to 224 injuries.

No deaths have been attributed to the problem.

Copyright 2024 CNN Newsource. All rights reserved.

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