NOTES TO FINANCIAL STATEMENTS
AS OF AND
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
1.
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DESCRIPTION OF THE PLAN
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The following description of the One Microsoft Puerto Rico Retirement Plan (the Plan) is provided for general information
purposes only. Plan participants should refer to the Plan Adoption Agreement (Plan Document) for a more complete description of the Plans information.
General
The Plan is a defined contribution retirement plan covering substantially all employees of Microsoft
Operations Puerto Rico, LLC, Microsoft Caribbean, Inc., and Microsoft Retail Store-Puerto Rico, LLC (collectively, the Sponsors). The Plan was established effective January 1, 1991. An employee may become a participant in the
Plan immediately on the hire date since there is no service requirement to become a Plan participant. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA) and Puerto Rico income tax laws.
The Plans trustee and recordkeeper is Banco Popular de Puerto Rico Trust Division.
Contributions
Contributions to the Plan include salary reduction contributions authorized by
participants, employer matching contributions made by the Sponsors, and participant rollovers from another plan. Participants may elect to contribute a percentage of their compensation, excluding bonuses and other allowances, to the Plan each
year, subject to the limitations, as defined in the Plan Document, and up to the maximum deferral amount specified by local law. Such contributions are excluded from the participants taxable income for income tax purposes until received as a
withdrawal or distribution from the Plan. The Sponsors makes an employer matching contribution to each participants account equal to 50% of the amount of the participants salary reduction contribution. The maximum contribution amount
eligible to be matched is 6% of eligible compensation as defined by the Plan. Participants may also contribute amounts representing distributions from other qualified defined contribution plans. Contributions are subject to certain Puerto Rico
Internal Revenue Code (PRIRC) limitations.
Beginning July 2016, the investment of new contributions or reallocation of
existing account holdings into Microsoft Corporation Common Stock within the Plan will be discontinued. Participants with existing Microsoft Corporation Common Stock as part of their account can retain those holdings, and dividends can continue to
be reinvested.
Participant Accounts
Individual accounts are maintained for each Plan participant. Each
participants account is credited with the participants contribution, the employer matching contributions, and Plan earnings. Participant accounts are also charged with withdrawals and an allocation of Plan losses. Allocations are based
on participant earnings or account balances, as defined by the Plan. The benefit to which a participant is entitled is the benefit that can be provided from the participants vested account.
4
Vesting
Contributions become vested as follows:
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Participant Contributions
Participants contributions and accumulated earnings vest immediately.
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Employer Matching Contributions
Participants become fully vested after two years of service, upon
attainment of age 65, or death or disability while employed by the Sponsors.
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Investments
Participants may direct the investment of their contributions and/or account balances into various investment options offered by the Plan. The Plan currently offers multiple investment options for participants from several registered investment
companies as well as Microsoft Corporation Common Stock.
Notes Receivable from Participants
Participants may borrow
from their accounts up to a maximum equal to the lesser of (a) 50% of the vested account balance, reduced by the current outstanding balance of all other loans from the Plan; or (b) $50,000, reduced by: (1) the current outstanding
balance of all other loans from the Plan, and (2) the excess (if any) of all Plan loans during the previous 12 months over the current outstanding balance of Plan loans with a minimum loan amount of $500.
Loan terms range from 1 to 5 years for general loans or up to 15 years for primary residence loans. Participants may not have more than
two loans outstanding at any point in time. The loans are secured by the balance in the participants account and bear interest at one percent over the prime rate, determined on a monthly basis. Principal and interest are paid ratably through
payroll deductions, made each pay period for the scheduled amount. If a participant terminates employment with the Sponsors, the loan balance is settled at the time of the distribution of the participants vested interest in his or her account.
However, the participant may pay off the outstanding loan balance prior to the distribution. As of December 31, 2015, outstanding participant loans have maturities with various dates through 2028, bearing interest at 4.25%.
Payment of Benefits
On termination of service due to death, disability, or retirement, a participant or his or her
beneficiary may elect to receive either a lump-sum amount equal to the value of the participants vested interest in his or her account or periodic installments over a period not to exceed 10 years. On termination of service due to other
reasons, a participant may receive the value of the vested interest in his or her account as a lump-sum distribution.
Forfeited
Accounts
When certain terminations of participation in the Plan occur, the nonvested portion of the participants account, as defined by the Plan, represents a forfeiture. The Plan Document permits the use of forfeitures to
reduce future employer matching contributions. There were no forfeited nonvested accounts as of December 31, 2015 or 2014.
2.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Basis of Accounting
The financial statements and accompanying notes have been prepared in accordance with accounting
principles generally accepted in the United States of America (U.S. GAAP).
5
Use of Estimates
The preparation of financial statements in conformity
with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and changes therein and disclosure of contingent assets and liabilities. Actual results and outcomes could differ from
managements estimate and assumptions. The Plan has no contingent assets or liabilities for any periods presented in these financial statements.
Risks and Uncertainties
The Plan utilizes various investment instruments, including common stock and mutual funds.
Investment securities, in general, are exposed to various risks, such as interest rate risk, credit risk, and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes
in the values of investment securities will occur in the near term and that such change could materially affect the amounts reported in the financial statements.
Included in investments as of December 31, 2015 and 2014, are shares of Microsoft Corporation Common Stock valued at $2,300,730 and
$1,966,838, respectively. This investment represents 16 percent of total investments as of December 31, 2015 and 2014. A significant decline in the market value of Microsoft Corporation Common Stock would significantly affect net assets
available for benefits.
Investment Valuation and Income Recognition
The Plans investments are stated at
fair value. Fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. See Note 3 for discussion on fair
value measurements.
Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the
accrual basis. Dividends are recorded on the ex-dividend date. Net increase (decrease) in fair value of investments includes the Plans gains and losses on investments bought and sold as well as held during the year.
Notes Receivable from Participants
Notes receivable from participants are measured at their unpaid principal balance plus
any accrued but unpaid interest. Interest earned on notes receivable from participants amounted to $17,150 and $17,513 for the years ended December 31, 2015 and 2014, respectively, and is included as additions in the accompanying statements of
changes in net assets available for benefits.
Administrative Expenses
The Plans administrative expenses
are paid by the Sponsors as provided in the Plan Document. All investment management and transaction fees directly related to the Plan investments are paid by the Plan. Management fees and operating expenses charged to the Plan for investments are
deducted from income earned on a daily basis and are not separately reflected. Consequently, management fees and operating expenses are reflected as a reduction of investment return for such investments.
Payment of Benefits
Benefit payments to participants are recorded upon distribution. There were no participants who
elected to withdraw from the Plan that had not yet been paid as of December 31, 2015. Amounts allocated to accounts of participants who elected to withdraw from the Plan but had not yet been paid as of December 31, 2014, amounted to
$17,444.
6
Excess Contributions Payable
The Plan is required to return
contributions received during the Plan year in excess of the maximum deferral amount specified by PRIRC. There were no such payables as of December 31, 2015 and 2014.
7
Recently Adopted Accounting Guidance
Accounting standards adopted in
2015 are described below.
In July 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2015-12,
Plan Accounting
:
(Topic 960, Topic 962, and Topic 965): (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient
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Under this ASU, investments need to be disaggregated only by general type within the statement of net assets available for benefits or within the notes. Additionally, investments representing 5 percent or more of net assets available for benefits no
longer need to be listed individually, and presentation of net appreciation or depreciation of investments is required only in the aggregate. Employee benefit plans are also no longer required to disclose the investment strategies of plan
investments that are both measured at fair value using the net asset value (NAV) practical expedient permitted by Accounting Standards Codification (ASC) 820-10 and in a fund entity that directly files Form 5500 with the U.S.
Department of Labor. The ASU is effective for the Plan beginning January 1, 2016, with early adoption permitted.
Plan
management has elected to early adopt this ASU in the current year and has implemented the guidance within these financial statements, including retrospective application to all prior periods presented. The primary impact of adoption resulted in
application of the simplified disclosure guidance in Note 3 Fair Value Measurements, and the removal of a separate note disclosing the balances of investments and net appreciation in the fair value of investments. There was no impact to total
investments disclosed in the Plans financial statements or the notes.
In May 2015, the FASB issued ASU 2015-07,
Fair Value
Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or its Equivalent)
. Under this ASU, investments for which the practical expedient is used to measure fair value at NAV must be
removed from the fair value hierarchy. Instead, those investments must be included as a reconciling line item so that the total fair value amount of investments in the disclosure is consistent with the amount on the statement of net assets available
for benefits. Further, the ASU requires entities to provide certain disclosures only for investments for which they elect to use the NAV practical expedient to determine fair value. The ASU is effective for the Plan beginning January 1, 2016,
with early adoption permitted.
Plan management has elected to early adopt this ASU in the current year and has implemented the
guidance within these financial statements, including retrospective application to all prior periods presented. The primary impact of adoption resulted in application of new disclosure guidance in Note 3 Fair Value Measurements, which
includes separate presentation of the investments valued using the NAV practical expedient. There was no impact to total investments disclosed in the Plans financial statements or the footnotes.
3.
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FAIR VALUE MEASUREMENTS
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FASB ASC No. 820,
Fair Value Measurements and Disclosures
, provides a framework for measuring fair value. That framework
provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value, as follows: Level 1, which refers to securities valued using unadjusted quoted prices for identical assets from active markets;
Level 2, which refers to securities not traded on an active market but for which observable market inputs are readily available; and Level 3, which refers to securities valued based on significant unobservable inputs. Assets and
liabilities are classified in their entirety based on the lowest level input that is significant to the fair value measurement.
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The Plans policy is to recognize significant transfers between levels at the end of
the reporting period.
Asset Valuation Techniques
Valuation technologies maximize the use of relevant observable
inputs and minimize the use of unobservable inputs. The following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in methodology used as of December 31, 2015 and 2014.
Microsoft Corporation Common Stock
Microsoft Corporation Common Stock is valued at the closing price reported on the
NASDAQ Exchange, the active market on which the securities are traded, on the last business day of the Plan year. Accordingly, Microsoft Corporation Common Stock is classified as Level 1.
Mutual Funds
Mutual funds are valued at the daily closing price as reported by the fund. Mutual funds held by the
Plan are open-ended mutual funds that are registered with the Securities and Exchange Commission. These funds are required to publish their daily net asset value and to transact at that price. The mutual funds held by the Plan are deemed to be
actively traded. Accordingly, the mutual funds are classified as Level 1.
Time Deposits
Time deposits generally
expose the Plan to limited credit risk and have short-term maturities and carry interest rates that approximate fair value. Accordingly, time deposits are classified as Level 1.
Cash Equivalents
Cash equivalents are held primarily in a short-term money market funds that are registered with the
Securities and Exchange Commission. These funds primarily invest in short-term U.S. Treasury Obligations and time deposits. Our money market funds are valued using the NAV provided by the trustee in order to estimate fair value. The money market
fund prices its units at NAV on a daily basis and the NAV is maintained at $1 a unit. The interests in the money market fund are currently redeemable at NAV on a daily basis.
As of December 31, 2015 and 2014, the Plan did not hold any financial instruments classified as Level 2 or Level 3.
9
The following tables present the fair value of the Plans investments that are
measured at fair value on a recurring basis as of December 31, 2015 and 2014:
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December 31, 2015
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Level 1
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Total
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Microsoft Corporation Common Stock
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$
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2,300,731
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$
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2,300,731
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Mutual funds
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10,683,776
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10,683,776
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Time deposits
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235,947
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235,947
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$
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13,220,454
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13,220,454
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Cash equivalents measured at NAV
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933,257
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Total Investments
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$
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14,153,711
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December 31, 2014
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Level 1
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Total
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Microsoft Corporation Common Stock
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$
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1,966,838
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$
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1,966,838
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Mutual funds
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9,508,980
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9,508,980
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Time deposits
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93,151
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93,151
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$
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11,568,969
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11,568,969
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Cash equivalents measured at NAV
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926,123
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Total Investments
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$
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12,495,092
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Transfers Between Levels
The availability of observable market data is
monitored to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value
level to another. In such instances, the transfer is reported at the end of the reporting period. No significant transfers occurred between levels for the years ended December 31, 2015 and 2014.
4.
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RELATED PARTY TRANSACTIONS
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Certain general and administrative expenses are paid by the Sponsors on behalf of the Plan. During the years ended December 31,
2015 and 2014, these expenses amounted to $52,028 and $48,185, respectively.
5.
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CONTRIBUTIONS TO PARTICIPANTS
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During the year ended December 31, 2015, an operational failure limited the ability of the Plan to withhold the full amount of
elective deferrals (pre-tax contributions) from some Plan participants in one or more payroll cycles. As the Plan is a Puerto Rico qualified-only profit sharing plan with a cash-or-deferred arrangement, it is subject to the requirements of the PRIRC
and the requirements of ERISA. Therefore, the correction for the operational failure that occurred during the year needs to comply with both the PRIRC and ERISA. Missed elective deferrals and corresponding employer matching contributions as of
December 31, 2015 amounted to $36,078 and $4,668, respectively.
10
In order to meet with the applicable rules, it is required that the employer make a
qualified nonelective contribution (QNEC) equal to 50% of the employees missed deferral plus applicable employer matching contributions that may not have been made, adjusted for earnings. However, a QNEC may not be made until after
corrections for other failures, such as an annual discrimination testing failure, have been made. The QNEC is added to the total amount of elective deferrals made by the employee during the year and may not exceed $15,000, the PRIRCs
limit for elective deferrals, nor may the participants total deferral rate exceed the maximum permitted deferral rate for the participants group. Some participants may have adjusted their elective deferral percentage to compensate for
the operational failure.
In May 2016, the Plan made the applicable QNEC and employer matching contribution amounting to $5,794, and
$5,526, respectively. The employer matching contribution included approximately $858 in earnings that were allocated to participant accounts.
Given the nature of the operational failure there are no ERISA and PRIRC non-compliance implications.
6.
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EXEMPT PARTY-IN-INTEREST TRANSACTIONS
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Microsoft Corporation is the parent company of the Sponsors. Accordingly, transactions in Microsoft Corporation Common Stock qualify as
exempt party-in-interest transactions. As of December 31, 2015 and 2014, the Plan held 40,524 and 42,343 shares, respectively, of Microsoft Corporation Common Stock with a cost basis of $1,516,694 and $1,247,424, respectively. During the years
ended December 31, 2015 and 2014, the Plan recorded Microsoft Corporation Common Stock dividend income of $53,264 and $50,164, respectively.
Although they have not expressed any intention to do so, the Sponsors have the right under the Plan to discontinue their contributions
at any time and to terminate the Plan subject to the provisions set forth in ERISA. In the event that the Plan is terminated, participants would become 100% vested in their accounts and all accounts would be distributed in the form and manner
determined by the Plan Document.
The Plan constitutes a qualified plan, exempt from income taxes under PRIRC. The Puerto Rico Treasury Department has determined and
informed the Plans management by a letter dated June 2, 2014 that the Plan and related trust were designed in accordance with the applicable regulations of the PRIRC. The Sponsors and the Plan administrator believe that the Plan is
currently designed and operated in compliance with the applicable requirements of the PRIRC and the Plan and related trust continue to be
tax-exempt.
Therefore, no provision for income taxes has been included
in the Plans financial statements.
11
9.
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NONEXEMPT PARTY-IN-INTEREST TRANSACTION
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The Plan remitted various participant contributions totaling $527,219 to the trustee later than required by Department of Labor
Regulation 2510.3-102
during the year ended December 31, 2015. In addition, late contributions of $337,531 and $142,594 corresponding to the years ended December 31, 2014 and 2013, respectively,
remained uncorrected as of December 31, 2015. Participant accounts will be credited with the amount of investment income that would have been earned had the participant contributions been remitted on a timely basis.
Subsequent events were evaluated through June 28, 2016, the date the financial statements were issued.
Late contributions of $931,163 from previous years, as described in Note 9, were corrected in May 2016. This correction resulted in
earnings of $1,276 that were credited to participant accounts in May 2016. These earnings consist of interest income that would have been earned on participant contributions had they been remitted on a timely basis.
* * * * * *
12
ONE MICROSOFT PUERTO RICO RETIREMENT PLAN
Employer ID No: 98-0459037
Plan No: 001
** Cost information is not required for participant-directed investments and therefore is not included.
See accompanying Report of Independent Registered Public Accounting Firm