Research and development expenses increased $ 970 million or 9%, due mainly to increased investment in new products and services in our Devices engineering group, including $ 275 million of NDS expenses, and increased investment in our Applications and Services engineering group.
Certain forecasted transactions, assets, and liabilities are exposed to foreign currency risk. As of June 30, 2014 and June 30, 2013, the total notional amounts of these foreign exchange contracts sold were $ 4. Principal currencies hedged include the euro, Japanese yen, British pound, and Canadian dollar. 9 billion and $ 5. We monitor our foreign currency exposures daily to maximize the economic effectiveness of our foreign currency hedge positions. Option and forward contracts are used to hedge a portion of forecasted international revenue for up to three years in the future and are designated as cash flow hedging instruments.
Therefore, beginning in fiscal year 2014, we reported our financial performance based on our new segments described in Note 21 – Segment Information and Geographic Data. As a result, information that our chief operating decision maker regularly reviews for purposes of allocating resources and assessing performance changed. This change impacted Note 10 – Goodwill, Note 14 – Unearned Revenue, and Note 21 – Segment Information and Geographic Data, with no impact on our consolidated financial statements. We have recast certain prior period amounts to conform to the way we internally managed and monitored segment performance during fiscal year 2014. During the first quarter of fiscal year 2014, we changed our organizational structure as part of our transformation to a devices and services company.
For options designated as fair value hedges, changes in the time value are excluded from the assessment of hedge effectiveness and are recognized in earnings. For derivative instruments designated as fair value hedges, the gains (losses) are recognized in earnings in the periods of change together with the offsetting losses (gains) on the hedged items attributed to the risk being hedged.
Dynamics CRM Online is designed to provide customer relationship management and supply chain management for small and mid-size businesses, large organizations, and divisions of global enterprises. Revenue is largely driven by the number of information workers licensed.
We plan to continue to make significant investments in a broad range of research and development efforts. These amounts represented 13% of revenue in each of those years. 4 billion, $ 10. During fiscal years 2014, 2013, and 2012, research and development expense was $ 11. 4 billion, and $ 9.
All of these new services and experiences will be underpinned by significant investments in our cloud strategy — including building more datacenters and increasing capacity in existing regions; expanding our hybrid cloud offerings with new releases of StorSimple, InMage and other products; and launching new cloud capabilities, such as Azure Machine Learning, an offering that has the potential to be game-changing in helping people mine data for predictions.
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. A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel 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.
For the cases in which Microsoft obtained injunctions, if Motorola were to prevail following all appeals, Motorola could have a claim against Microsoft for damages caused by an erroneously granted injunction. One judgment has been affirmed on appeal (and Motorola has further appealed), and the other two appeals are pending. In lawsuits Microsoft filed in Germany in 2011 and 2012, Microsoft asserts that Motorola Android devices infringe Microsoft patents and is seeking damages and injunctions. In actions filed separately by Motorola to invalidate these patents, the Federal Patent Court in 2013 and 2014 held the Microsoft patents invalid, and Microsoft appealed. In 2012, regional courts in Germany issued injunctions on three of the Microsoft patents, which Motorola appealed.
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 OEMs, to drive traffic to our websites, and to acquire online advertising space (“traffic acquisition costs”); costs incurred to support and maintain Internet-based 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 research and development costs. Capitalized research and development costs are amortized over the estimated lives of the products.
The contractual relationship with Nokia related to those initiatives terminated in conjunction with the acquisition. NDS has been included in our consolidated results of operations starting on the acquisition date. Prior to the acquisition of NDS, financial results associated with our joint strategic initiatives with Nokia were reflected in our D&C Licensing segment. With the creation of the new Phone Hardware segment, the D&C Hardware segment was renamed Computing and Gaming Hardware in the fourth quarter of fiscal year 2014. On April 25, 2014, we acquired substantially all of NDS. We report the financial performance of the acquired business in our new Phone Hardware segment. See Note 9 – Business Combinations for additional details.
These pro forma results were based on estimates and assumptions, which we believe are reasonable. The pro forma results include adjustments primarily related to purchase accounting adjustments and the elimination of related party transactions between Microsoft and NDS. They are not the results that would have been realized had we been a combined company during the periods presented and are not necessarily indicative of our consolidated results of operations in future periods. Acquisition costs and other non-recurring charges incurred are included in the earliest period presented.