The
One Microsoft Puerto Rico Retirement Plan (the Plan) is subject to the Employee Retirement Income Security Act of 1974 (ERISA). Therefore, in lieu of the required information outlined as Items 1-3 of the Form 11-K, the
statements of net assets available for benefits and the related statements of changes in net assets available for benefits as of and for the years ended December 31, 2017 and 2016, which have been prepared in accordance with the financial
reporting requirements of ERISA, are attached hereto as Appendix 1 and incorporated herein by this reference.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Administrative Committee and Participants of the One Microsoft Puerto Rico Retirement Plan:
Opinion on the Financial Statements
We have audited the
accompanying statements of net assets available for benefits of the One Microsoft Puerto Rico Retirement Plan (the Plan) as of December 31, 2017 and 2016, the related statement of changes in net assets available for benefits for the
years then ended, and the related notes (collectively referred to as the financial statements). In our opinion, such financial statements present fairly, in all material respects, the net assets available for benefits of the Plan as of
December 31, 2017 and 2016, and the changes in net assets available for benefits for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the
responsibility of the Plans management. Our responsibility is to express an opinion on the Plans financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Plan 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.
Report on Supplemental Schedules
The supplemental schedules
of (1) assets (held at end of year) as of December 31, 2017, and (2) delinquent participant contributions for the year ended December 31, 2017 have been subjected to audit procedures performed in conjunction with the audit of the
Plans financial statements. The supplemental schedules are the responsibility of the Plans management. Our audit procedures included determining whether the supplemental schedules reconcile to the financial statements or the underlying
accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of the information presented in the supplemental schedules. In forming our opinion on the supplemental schedules, we evaluated whether the
supplemental schedules, including their form and content, are presented in compliance with the Department of Labors Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. In our opinion,
such schedules are fairly stated, in all material respects, in relation to the financial statements as a whole.
/
S
/ D
ELOITTE
& T
OUCHE
LLP
Seattle, Washington
June 14, 2018
We have served as the auditor of the Plan since 1999.
1
NOTES TO FINANCIAL STATEMENTS
NOTE 1 DESCRIPTION OF THE PLAN AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Plan Description
The One Microsoft Puerto Rico Retirement
Plan (the Plan), a defined contribution retirement plan, is sponsored by Microsoft Operations Puerto Rico, LLC, Microsoft Caribbean, Inc., and Microsoft Retail Store-Puerto Rico, LLC (collectively, the Sponsors). The
Plan year is January 1 through December 31. The Plan is administered by the Administrative Committee (the Plan Administrator) and subject to the provisions of ERISA and Puerto Rico income tax laws. The Plans trustee and
recordkeeper is Banco Popular de Puerto RicoTrust Division. The information below summarizes certain aspects of the Plan as in effect during 2017 and 2016, and is intended to be a summary only. Plan participants should refer to the Summary
Plan Description (Plan Document) for more complete information.
Accounting Principles
The financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America
(GAAP).
Eligibility
Regular and retail
services employees of participating employers who are on the Sponsors payroll, have reached age 18, and are residents of Puerto Rico may enroll in the Plan at any time. Eligible employees may become a participant in the Plan immediately on
their hire date since there is no service requirement to become a Plan participant.
Eligible Compensation
Eligible compensation represents total compensation paid to participants that is included in income for income tax purposes. Eligible compensation
excludes car allowance, Christmas bonus, severance package, relocation package, signing bonus, rewards, and recognitions.
Contributions
Participant Contributions
Participants may contribute to
the Plan on a
pre-tax
basis using eligible compensation each pay period. Participants reaching age 50 or older by the end of the Plan year may also elect to make additional
catch-up
contributions to the Plan on a
pre-tax
basis. Such contributions are excluded from the participants taxable income for income tax purposes until received
as a withdrawal or distribution from the Plan. Additionally, participants may make contributions on an
after-tax
basis which may not exceed 10 percent of the aggregate compensation paid to the employee
during all the years he or she has been a Plan participant. Participants may also make rollover contributions representing distributions from other Puerto Rico qualified plans. All contributions are subject to certain Puerto Rico Internal Revenue
Code (PRIRC) limitations and the limitations set forth in the Plan Document.
Effective July 2016, the investment of new contributions
or transfer of existing account holdings into Microsoft Common Stock within the Plan was discontinued. Participant accounts with existing Microsoft Common Stock can retain those holdings, and dividends on Microsoft Common Stock can continue to be
reinvested.
4
Employer Contributions
The Sponsors make an employer matching contribution to each participants account equal to 50 percent of the amount of the participants
contribution. The maximum participant contribution amount eligible to be matched is 6 percent of eligible compensation as defined by the Plan.
Participant
Accounts
Each participants account is credited with (a) participant contributions and employer contributions and (b) the
allocation of Plan earnings and expenses, based on participant earnings or account balances, as defined. The benefit to which a participant is entitled is the benefit that can be provided from the participants vested account. All amounts in
participant accounts are participant-directed. Participants may invest in various financial instruments including common stock and mutual funds.
Vesting
Participants are fully vested in Plan accounts at all times.
Distributions
Active participants may take a withdrawal
from the Plan in the event of a financial hardship. A hardship withdrawal is limited to
pre-tax
and
catch-up
contribution accounts. A hardship withdrawal will generally
result in a twelve-month suspension of
pre-tax
and
after-tax
contributions to the Plan. Active participants may also take a withdrawal from their rollover and
after-tax
account types within the Plan without meeting one of the hardship criteria.
After reaching age 59
1
⁄
2
, active participants may withdraw all, or any portion, of the balance in their accounts. Distributions, in full or any portion, may also occur if the
participant terminates employment, retires, becomes permanently disabled, or dies. Distributions of investments are in the form of cash and are normally made in a
lump-sum,
unless periodic payments are elected
(monthly, quarterly, semiannual, or annual installments of substantially equal amounts over a period not to exceed 10 years). There were no participants who elected to withdraw from the Plan that had not yet been paid as of December 31, 2017 or
2016.
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. Participants are responsible for fees associated with
certain transactions such as loan originations and maintenance. 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 in the financial statements.
Consequently, management fees and operating expenses are reflected as a reduction of investment return for such investments.
Plan Amendment and Termination
The Sponsors have the right to amend or terminate the Plan. If the Plan is terminated, all account balances will be distributed in the form and
manner determined by the Plan Administrator.
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 changes could materially affect the amounts reported in the financial statements.
5
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and changes therein. Actual results and outcomes may differ from managements estimates and assumptions. The Plan has no contingent assets or liabilities for any periods presented in these financial statements.
Valuation of Investments
Investments are recorded at fair
value. Security transactions are accounted for as of the trade date. Dividend income is recorded on the
ex-dividend
date, and interest income is recorded as earned.
Participant Loans
Participant loans are measured at their
unpaid principal balance plus any accrued but unpaid interest, and participant loans deemed distributed due to default are included in benefits paid to participants on the statements of changes in net assets available for benefits.
NOTE 2 PARTICIPANT LOANS
Participants
may borrow from their accounts up to a maximum equal to the lesser of (a) 50 percent of the vested account balance; 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. The minimum amount that a participant can borrow is $500.
Loan terms range from one to five 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, 2017, outstanding participant loans have maturities with various dates through 2031, bearing interest ranging from 4.25 percent
to 5.25 percent.
Loan repayments are made through
after-tax
payroll deductions. Terminated employees
generally have 90 days to elect to continue to make loan repayments or pay off the loan in full. Failure of the terminated employee to establish a loan repayment service or payoff the loan in full during this
90-day
window generally results in a default of the loan, which is taxable income to the participant.
NOTE 3 TAX STATUS
The Puerto Rico
Treasury Department (PRTD) has determined and informed the Plans management by a letter dated June 2, 2014, that the Plan is qualified as a
tax-exempt
plan under the appropriate sections
of the PRIRC. The determination letter covered Plan amendments adopted through April 1, 2013. The Plan Administrator believes that the Plan is currently designed and operated in compliance with the applicable requirements of the PRIRC.
Therefore, the Plan is
tax-exempt
as of the financial statement date and no provision for income taxes has been recorded in the financial statements.
6
NOTE 4
PARTY-IN-INTEREST
TRANSACTIONS
Exempt
Party-In-Interest
Transactions
Microsoft Corporation is the parent company of the Sponsors.
Accordingly, transactions in Microsoft Common Stock qualify as exempt
party-in-interest
transactions. As of December 31, 2017 and 2016, the Plan held 35,700 shares
of Microsoft Common Stock valued at $3,053,778 and 36,401 shares valued at $2,261,958, respectively. During the years ended December 31, 2017 and 2016, the Plan recorded Microsoft Common Stock dividend income of $57,296 and $57,848,
respectively.
Nonexempt
Party-In-Interest
Transactions
The Plan remitted various participant contributions to the trustee later than required by the Department of Labor Regulation
2510.3-102.
This regulation requires remittances to be made within three business days; however, in certain instances the remittances took four days or longer. To remediate these late remittances, the impacted
participant accounts were credited by an amount representing investment income that would have been earned had the participant contributions been remitted on a timely basis. During 2017, late contributions from prior periods comprising $142,814 from
2015 and $3,314 from 2016 were remediated, resulting in credits to participant accounts in 2017 of $40 and $1, respectively. During 2017, late contributions of $119,327 were made, of which $114,042 were remediated in 2017 and $5,285 were remediated
in 2018, resulting in credits to participant accounts of $61 in 2017 and $1 in 2018.
NOTE 5 FINANCIAL INSTRUMENTS
The Plan accounts for certain assets 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. The Plan categorizes each of its 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 1inputs are based upon unadjusted quoted prices for identical instruments in active markets. The
Plans Level 1 investments primarily include mutual funds, Microsoft common stock, and money market funds.
|
|
|
|
Level 2inputs 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 and commodities. As of December 31, 2017 and 2016, the Plan did not hold any financial instruments categorized as Level 2.
|
|
|
|
Level 3inputs are generally unobservable and typically reflect managements estimates of assumptions
that market participants would use in pricing the asset. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. As of December 31, 2017 and 2016, the Plan did not
hold any financial instruments categorized as Level 3.
|
Mutual funds are valued at the closing price as reported by the fund.
Common stocks are valued at the closing price reported on the active markets on which the individual securities are traded. Money market funds are valued at the Net Asset Value (NAV) on the active markets on which the funds are traded.
The Plans money market funds had historically been valued using the NAV provided by the trustee to estimate fair value. During the year ended
December 31, 2017, the Plan determined the money market funds meet the definition of Level 1 securities in the fair value hierarchy as these investments are traded on active markets.
7
Financial Instruments Measured at Fair Value
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Level 1
|
|
|
Total
|
|
|
|
|
|
|
Mutual funds
|
|
$
|
17,871,255
|
|
|
$
|
17,871,255
|
|
Microsoft Common Stock
|
|
|
3,053,778
|
|
|
|
3,053,778
|
|
Money market funds
|
|
|
727,767
|
|
|
|
727,767
|
|
Time deposits
|
|
|
6,988
|
|
|
|
6,988
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
21,659,788
|
|
|
|
21,659,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Level 1
|
|
|
Total
|
|
|
|
|
|
|
Mutual funds
|
|
$
|
13,537,055
|
|
|
$
|
13,537,055
|
|
Microsoft Common Stock
|
|
|
2,261,958
|
|
|
|
2,261,958
|
|
Time deposits
|
|
|
2,522
|
|
|
|
2,522
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,801,535
|
|
|
|
15,801,535
|
|
|
|
|
|
|
|
|
|
|
Money market funds measured at NAV
|
|
|
|
|
|
|
693,737
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
|
|
|
|
$
|
16,495,272
|
|
|
|
|
|
|
|
|
|
|
NOTE 6 RELATED PARTY TRANSACTIONS
Certain general and administrative expenses are paid by the Sponsors on behalf of the Plan. During the years ended December 31, 2017 and 2016,
these expenses amounted to $80,847 and $54,775, respectively.
NOTE 7 SUBSEQUENT EVENTS
The Plan was amended in January 2018 to allow financial hardship
in-service
withdrawals of up to $100,000 from
the participants vested balance by reason of Hurricane María as provided in the PRTDs Administrative Determination
No. 17-29.
In-service
withdrawals related to the amendment from January 1, 2018 through June 14, 2018 were $1,415,520.
8