Microsoft Financial Reporting Strategy

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Group Case Study “Microsoft’s Financial Reporting Strategy” Microsoft’s Financial Reporting Strategy ABSTRACT 2 This case study examines the factors explaining the difference between Microsoft’s market value of equity to book value of equity and overall financial reporting strategies employed at the firm. We analyzed financial information dating from 1985 to 1999 and 2011 annual report provided by Microsoft. We found factors explaining market value of equity are perceived risk and future cash flows. Additionally, we concluded the firm’s financial reporting practices were used to create a distorted impression of business performance to seek certain results. Factors Explaining the Difference between Market and Book Value of Equity: The…show more content…
This question drew significant attention and discussion at the time by investors, analyst, and the Securities Exchange Commission. The authors of the book titled Financial Numbers Game: Detecting Creative Accounting Practices wrote this about Microsoft, “whether the company …. was being overly conservative in its revenue recognition practice cannot be known. However, what is known is the company was being more conservative than what accounting regulators deemed appropriate” (Mulford & Comiskey, 2002). Microsoft’s Financial Reporting Strategy 5 Analyzing the case study we assessed the firm held back the recognition of revenue to live up to investor expectations and keep earnings rising smoothly. This objective was facilitated “quarter after quarter …of not disappointing Wall Street.” Which at the time was “the most simplest, most visible, most merciless measure of corporate success in the 1990s [was] this one: Did you make earnings last quarter?” (unknown). Revenue Recognition Scenario Assuming 100% Revenue Recognition: Impact on Net Income ($'s in millions) $10,000 $8,000 Net Income $6,000 $4,000 $2,000 $0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Net income, as reported Plus: unearned revenue, net taxes Adjusted net income Year Effects of Software Capitalization: Under GAAP, software development cost can be capitalized once technological feasibility is established. However, Microsoft took a conservative position to not capitalize
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