Case Summary:
In 1986 operating and revenue income grew an average of 43% 49% per year
June 1999, the company had
cash/short term investments of $17Billion
Assets $37 billion
Equity of $28 bullion
net income and revenue constantly grew. Revenue was never less than 15% increase from the previous year
company conservative in accounting practices
Software development costs
Revenue Recognition
Software development costs
GAAP treats Software and development similar to R&D
Costs are expenses in computer software until technology feasibility has been reached (ie. Working model or detail design)
Thereafter, software costs will be capatilised and reported at the lower of the unamortised cost or net realisable value
Capatilised costs are amortised based on current and future revenue for each product with an annual minimum to the straight line
Microsoft expensed all R&D as incurred
during 1986-1999 microsoft annual outlays for R&D was 11-17% of revenues
Revenue Recognition
Prior to 1996 revenue was recognised when product shipped
In 1996 20% of revemue of windows was recognised over the product life cycle (2 years) - ratable revenue recognition
unearned portion of revenue from windows was $425MM for 96 and $860MM for 97
In 97 20% of office revenue is recognised ratably over the estimated 18 montsh cycle.
unearned portion of office totaled $300MM in 97 (enf of fiscal year June 30)
The balance in the revenue account grew steadily
In Q4 99 microsoft change its revenue recognition
% of revenue deferred was decreased for both OS and office, the effect for which was to increase reported revenue.
In addition the product lifecyle was increased in order to decrease revenue being reported
It is believed Microsoft is using unrealisitc assumptions for liabilities during the good times by accruals and then reaching in those during the bad times to ensure net income is always...