Financial Reporting Strategy

1442 WordsMay 26, 20156 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 mentioned, provides a formidable amount of earning growth in the future, which determines the company’s market value. We also note that the company’s choice of cautious (conventional) accounting policies has the effect of discouraging the company’s book…show more content…
Why do you think Microsoft decided to defer a portion of its revenues in fiscal 1996? We think that Microsoft decided to defer a portion of its revenues in fiscal 1996 because that decision came at a time when they had an enormous spurt growth in revenues, which suggested Microsoft’s decision to hold back revenues was to a certain extent to “slow down” the company’s revenue growth. The decision to hold back revenue had the effect of lowering reported revenue growth in the first quarter of 1996 from 88% to 64%, and increasing revenue growth in the first quarter of 1997 from 4% to 15%. The first quarter of 1997 signified the lowest quarterly revenue growth in the Microsoft’s history. While the timing of the company’s decision to defer revenues appears particularly opportune, the introduction of Windows 95 to the market provides a legitimate reason for the decision. What we read in the case, the company expected to integrate its Internet technologies into both Windows 95 and Office 97 “at no additional cost to customers.” By doing so, sales of the two products were improved by the implicit promises and a portion of those revenues should be deferred into the future. It seems as if the development costs of providing these enhancements have already been incurred and
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