Microsofts Financial Reporting Strategy Case Solution

Case Solution

Views Microsoft's overall financial reporting strategy by examining their control over two accounting issues--software capital and revenue recognition. For issues, the business selects accounting techniques that are relatively conservative. Also discusses the issue of controlling analysts' anticipation and Microsoft's inclination to provide experts with very conservative anticipation money for hard times. Offers a forum to talk about possible reasons for Microsoft's accounting and disclosure options in addition to discusses the Opportunities and Exchange Commission's recent analysis into Microsoft's accounting practices.

Excel Calculations

Yes

Questions Covered

1. This question addresses the effect of Microsoft’s software capitalization policy on its financial statements.  Ignore any potential tax effects.

a. Estimate the effect of capitalizing software costs on Microsoft’s fiscal 1997, 1998, and 1999 income statements and balance sheets.  Assume that 1) 60% of Microsoft’s research and development expenses were incurred after technological feasibility was established, 2) the average product life was two years, 3) the company had always capitalized these costs; and 4) the company begins amortizing capitalized software costs at the beginning of the following fiscal year.  

b. Briefly speculate as to why Microsoft chose to expense all software costs as incurred rather than capitalizing a portion of these costs.

2. This question addresses the effect of Microsoft’s revenue recognition policy on its financial statements.  Ignore any potential tax effects.

a. Estimate the amount of revenue that Microsoft would have reported in each year from fiscal 1997 through fiscal 1999 assuming Microsoft had not adopted its new revenue recognition policy in fiscal 1996.  

b. Briefly speculate as to why Microsoft decided to defer a portion of its revenues in fiscal 1996.  

3. What would be the combined effect of these two policies on Microsoft’s fiscal 1997, 1998, and 1999 financial statements?

4. Allegedly, Microsoft provides its analysts with intentionally pessimistic information.  What are the potential benefits to the company of being outwardly pessimistic about its future prospects?

5. Would you characterize Microsoft’s overall financial reporting strategy as aggressive or conservative?  Speculate as to why the company adopted this strategy and why the SEC was concerned about it