Microsoftâ€™s Financial Reporting Strategy Case Solution
Firstly, Microsoft had a very simple and straight forward policy for it revenue recognition. This was changed to more conservative policy in the mid-1996. The simple policy of revenue recognition involved recognition of revenues when the software was sold. For foreign sales, the revenue for goods sold was recognized when it was shipped. The revenue from personal purchase of software by an individual customer was recognized when the software was installed with licensed registration. Microsoft also sold to original equipment manufacturer OEM and the revenue was recognized when the products by these OEMs were shipped under a license.
Microsoft integrated its different software in its primary operating system software as well as it changed its revenue recognition policy. The policy was altered and now the revenue is recognized along with some part is deferred for about 2 years. This deferred revenue was then recognized over the software life cycle that is two years. The additional software’s were internet explorer browser and other telephonic services. The Microsoft office 97 was also sold under this revenue recognition policy. About 80% revenue was recognized at the time of sales and then the remaining portion of revenue was deferred over 18 months of product life cycle.
The company also issued upgrades and bug-fixes. However,there was no clear standard to address the revenue recognition of these add-ons. The American Institute for Certified Public Accountants issued a statement to address this issue; and the statement of position that suggestedthe way to recognize revenues generated through sales of add-ons and upgrades including fixes and improvements. Thus if the product is sold with features of future upgrades and add-ons, then the revenue is to be recognized and some part is to be deferred.
Â Microsoftâ€™s market value of equity and its reported book value of equity
There were many factors that created difference in the market value of equity and its reported book value of equity. There were many intangible assets and there was no effective method for their recognition. These intangibles include customer loyalty, brand image and the human minds that is man or labor force. All these were however difficult to be recognized in the monetary term but they were a type of important asset to the company. These were the factors that were the source for the future earnings and growth. The combination of all these and other factors will bring revenue for the company. If these were separated from the company, the company would no longer exist. These factors define the total market value of the company. The goodwill that the company has earned from its long historic business activities is another element of success for the company. As a result, this significantly enhanced the companyâ€™s value.(Book value vs market value, n.d)
Â Historic values conflicting with market value
The reported values of the company are based on the accounting principles which have certain rules for their reporting as some assets are presents at their historic values less depreciation expense and amortizations expenses. The amount that the asset actually holds, or that the asset can obtain if sold at the market, is its fair value but the asset is shown at its traditional cost or book value on the balance sheet. However, there is an accounting principle for this, which is called revaluation model. By holding this, the assets are shown at their fair value, the price at which asset can be sold at the market. As per Microsoft it has adopted the policy of cost of the asset less its depreciation expense. Therefore, this is the reason that the market value is different from the book value……………….
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