Microsoft Accounting Strategy - 1073 Words

Microsoft’s Financial Reporting Strategy The case at hand is primarily to discuss the financial reporting strategy adopted by Microsoft Inc. for the period 1996-1999 and the subsequent litigation that arose out of the accounting practice followed by Microsoft. Microsoft’s primary operations has been developing and manufacturing of the software products. As a company, it has shown a very stable growth in terms of revenues and profits, thus enabling better than industry share price increase over more than a decade (1986-1999). With respect to the primary operation of software development and the task to financial reporting the two areas that were required to be established were – a) Treatment of Software Development costs. b) Revenue†¦show more content†¦Hence since the â€Å"technical feasibility† could be justified either ways using discretion, Microsoft chose to indicate that a larger proportion of the costs were incurred prior to establishing technical feasibility and hence the other costs related to the development are not materially significant, hence the entire costs is shown as expense. Thus using the justification that technological feasibility of product occurred sufficiently late in the development process and useful life of the product is short-lived, Microsoft was able to argue in favor of not â€Å"capitalizing† the costs and expensing them instead and use this for reporting higher expenses (and thus lower profits). b) The argument for Microsoft deferring to recognize a part of revenue at the point of sales was that say when a customer is buying software in 1996, they re also buying the right to upgrades and customer support in 1997 and 1998. Hence a part of the sales needs to be considered as â€Å"Unearned revenue†. However the real reason for stashing a huge reserved as â€Å"Unearned revenue† appears to be meeting revenue and profit guidance. Microsoft has been the dominant player in the IT sector and hence it was able to stash enough reserves over good quarters by keeping a part of its sales as â€Å"Unearned revenue† that it could easily tide over a few bad quarters. The below graph gives a pictorialShow MoreRelatedFinancial Reporting Strategy1442 Words   |  6 Pages Microsoft’s Financial Reporting Strategy 1. What are the factors that likely explain the difference between Microsoft’s market value of equity and its reported book value of equity? One of the factors that explain the difference between Microsoft’s market value of equity and its reported book value of equity is the lack of effectiveness to record certain intangible assets such as stock of knowledge (i.e., human capital) customer loyalty, and brand value. These former intangible assets mentionedRead MoreMicrosoft Accounting Case Solution921 Words   |  4 Pages*Microsoft’s Financial Reporting Strategy 1. 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