Microsoft Case

Syndicate 1

MICROSOFT’S FINANCIAL REPORTING STRATEGY ANALYSIS SUMMARY

Microsoft chooses conservative accounting strategy in order to manage their growth. Since going public, the company’s net income increased from the year before and its revenue never grew less than 15%. The company met or exceeded consensus analysts’ forecast of earnings in every quarter except one back in 1988. This growth is reflected in Microsoft’s stock price which increased steadily. • 1986 Stock Price • 1999 Stock Price • 1999 Book Value • 1999 Market Value : $25.75 per share : $13,000 per share : $28 Billion : $460 Billion (Approx.)

The SEC started to investigate on Microsoft’s certain accounting practices. The common belief was that the investigation is focused on the company’s deferral of revenue and undisclosed reserve accounts. One of the reasons that triggered the investigation was the company’s balance in the unearned revenue account at the end of 1999 fiscal year ($4.2 Billion) which approximately a full quarter’s worth of revenue.

Software Development Cost

Referring to SFAS No.86, cost incurred in creating a computer software product shall be charged to expense when incurred as research and development until technological feasibility has been established for the product. Thereafter, all software production cost shall be capitalized and reported at the lower of unamortized cost. GAAP regulation on booking software development cost: Dr Cr Research and Development Expense Cash

After technological feasible: Dr Cr Intangible Assets Cash Page 1 of 3

Syndicate 1 Dr Cr Amortization Expense Accumulated Amortization of Intangible Assets

Microsoft’s method of booking software development cost: Dr Cr Research and Development Expense Cash

Balance Sheet Assets Cash Cash Intangible Assets (Accum. Amort. of IA) Cash Liabilities & Equities Expense + Revenue

Income Statement

R&D Expense Amortization Expense R&D Expense

+ + +

The method used by Microsoft is not...