Microsoft Accounting Case Solution Essay

925 Words Sep 27th, 2010 4 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?

The most obvious reason for the difference between the market value of equity and the book value of equity is the inability to record certain intangible assets such as brand value, customer loyalty, and perhaps most importantly, human capital. These intangible assets are likely to provide tremendous earnings growth in the future which determines the company’s market value. Notice also that the company’s choice of conservative accounting policies has the effect of depressing the company’s book value of equity.

2. What effect did Microsoft’s
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Still, the company’s policy on revenue recognition is more consistent with accrual accounting than is the company’s policy on software development expenses.

4. Describe Microsoft’s overall financial reporting strategy in 1997-99. Why did the company adopt this strategy and why was the SEC concerned about it?

1. Hiding profits—Microsoft’s phenomenal success may have provided them with an incentive to hide their success from regulators and competitors. Given the company’s history with regulatory intervention, there is likely a strong incentive for them to dampen their performance. However, it should be noted that the company’s software capitalization policy occurred prior to any serious regulatory intervention. 2. Signaling—By selecting conservative accounting policies and still reporting strong earnings numbers, Microsoft is able to signal their financial strength. In other words, they are able to demonstrate their ability to take the “hit” to earnings and still provide strong results. 3. “Competitive weapon”—As an industry leader, Microsoft has the ability to influence the accounting policies and practices that develop within the industry. In fact the AICPA’s subsequent SOP on software revenue

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