Looks into Microsoft’s general reporting plan by scrutinizing the organization’s approach towards two accounting problems – software capitalization and revenue identification/recognition.The company takes a traditional approach when dealing with both the problems. Also looks into the concern of the company dealing with the analysts’ hopes and Microsoft’s trend of offering the evaluators with highly traditional future outlooks. Allows the students to talk about why Microsoft has adopted the said accounting and disclosure methods and also gives an insight into the Securities and Exchange Commission's present inquiry into the methods adopted by Microsoft for accounting purposes.
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.