Microsoft’s Financial Reporting Strategy Harvard Case Solution & Analysis

Microsoft’s Financial Reporting Strategy Case Solution

Introduction

 Microsoft is one of the most renowned software developers in the word. It is present in almost every computer as the base operating system. Its software products range from operating systems such as windows, other applications such as web explorer and office suites and etc. it was founded in 1975. The founder of Microsoft is Bill gates and Paul Allen. After its foundation has been laid down, the company has been successful and leader in the software market since its inception.  At its early stage the company through an agreement provided operating system to IBM computers and since then the company has been providing operating systems and has no other strong competitor. Microsoft became a public listed company in the early 1986;at that time the share price was just $25.75, which increased to $13000 in 1999. The reason is that at that time the company had gained a highest market value in the US.

Moreover, thecompany achieved a steady growth rate. Since1986, it has beenoperating at most favorable financial position and has growth of 43% and 49% in revenues and operating income respectively. The company uses GAAP for its financial reporting, however there are some controversies present specially in its financial reporting system. It was thought that the company hadpolicies,which are used to exploit the reserves fund in order to show high earnings and more strong financial position. Another issue is that the company has adopted a policy in which the accruals are concealed for some period to show a better financial position and then afterwards releases. SECP initiate investigation against the company in 1990s followed by Federal Commission and Department of Justice.

Software Development and Capitalization

 As Microsoft adopted GAAP as its accounting framework, therefore it has to follow accounting treatments, which have been recommended for the capitalization of development cost of software. The standard that governs the accounting of this development cost is Statement of Financial Accounting standard number 86.For Microsoft the costs of leased, sold or marketed are immaterial and the cost for research and development is recognized as expense when incurred. The industry has several concerns over the accounting policy on software development costs, which are being considered as inappropriate, thus the accounting body issued a statement, which explained about this issue of software capitalization and research and development costs.

As per Financial Accounting Standard Board, the cost that has been incurred on the research in an attempt to internally produce computer software should be recognized as an expense and charged to the expense account. When this initial research goes into face of development then all costs that will incur in this phase should be charged to the expense account. In research and development phase, when it has been established that this computer software has come to a stage where it has technological feasibility, then the costs from this point can be capitalized.

The question whether the technological feasibility has been achieved or not is based on different factors including design and prototypes model etc. It can be extends as whether there is a market for the software so that it can be sold for revenue or there are resourced available to developed the software to make it saleable. The capitalized cost is subject to amortization based on current and future expected revenue. The costs recognized shall be reported at lower of cost (unamortized) or net realizable value (NRV). Microsoft has been incurring expenses about 11-17% of its revenue in its research and development......................

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