Microsoft Accounting Strategy
Microsoft’s Financial Reporting Strategy
The case at hand is primarily to discuss the financial reporting strategy adopted by Microsoft Inc. for the period 1996-1999 and the subsequent litigation that arose out of the accounting practice followed by Microsoft.
Microsoft’s primary operations has been developing and manufacturing of the software products. As a company, it has shown a very stable growth in terms of revenues and profits, thus enabling better than industry share price increase over more than a decade (1986-1999). With respect to the primary operation of software development and the task to financial reporting the two areas that were required to be established were –
a) Treatment of Software Development costs.
b) Revenue recognition policy.
As per the statement (SFAS no 86)issued by Financial Accounting Standards board (FASB) in 1985, the cost that is incurred for the research and development of software is to be considered as “expense” till the work product’s technical feasibility is determined or the working model is complete, at which point, all further costs will need to be capitalized and reported by following general principle of amortization. Microsoft considered that the statement SFAS no 86, didn’t materially affect the company and hence there was no change required to the company’s accounting practice. This is because Microsoft’s main operating costs involved research and development costs and the production costs were comparatively insignificant.
As matter of Microsoft’s accounting policy, prior to 1996, it recognized revenues when the product was shipped to distributors, resellers or original equipment manufacturers or in case of corporate license programs, the revenue was recognized when the users installed the product. However with launch of integrated Internet technology products in 1996, Microsoft had a change in its accounting practice. Microsoft considered that the new Internet technology products were tightly integrated with
The case at hand is primarily to discuss the financial reporting strategy adopted by Microsoft Inc. for the period 1996-1999 and the subsequent litigation that arose out of the accounting practice followed by Microsoft.
Microsoft’s primary operations has been developing and manufacturing of the software products. As a company, it has shown a very stable growth in terms of revenues and profits, thus enabling better than industry share price increase over more than a decade (1986-1999). With respect to the primary operation of software development and the task to financial reporting the two areas that were required to be established were –
a) Treatment of Software Development costs.
b) Revenue recognition policy.
As per the statement (SFAS no 86)issued by Financial Accounting Standards board (FASB) in 1985, the cost that is incurred for the research and development of software is to be considered as “expense” till the work product’s technical feasibility is determined or the working model is complete, at which point, all further costs will need to be capitalized and reported by following general principle of amortization. Microsoft considered that the statement SFAS no 86, didn’t materially affect the company and hence there was no change required to the company’s accounting practice. This is because Microsoft’s main operating costs involved research and development costs and the production costs were comparatively insignificant.
As matter of Microsoft’s accounting policy, prior to 1996, it recognized revenues when the product was shipped to distributors, resellers or original equipment manufacturers or in case of corporate license programs, the revenue was recognized when the users installed the product. However with launch of integrated Internet technology products in 1996, Microsoft had a change in its accounting practice. Microsoft considered that the new Internet technology products were tightly integrated with