Microsoft Financial Reporting Strategy
Financial Accounting:
This case introduces two controversial financial accounting topics that arise in the software industry: revenue recognition and the capitalization of software development costs.

Financial Accounting from a management perspective: With respect to revenue recognition, Microsoft argues that it will provide additional services throughout the life of the software it is selling, so it should defer revenue recognition on a part of the sale price.

With respect to software development costs, accounting rules give companies wide latitude as to what they can capitalize. Microsoft chooses to expense almost all software development costs, so for both revenue recognition and capitalization, Microsoft appears to choose very conservative accounting policies. However, Microsoft also changed its revenue recognition policies to increase revenues, presumably during a period when revenue growth was less than expected.

Sometimes financial statement users think of conservative accounting policies as less controversial than aggressively liberal accounting policies. However, this case illustrates that either accounting policy makes it more difficult to compare firms with companies that choose middle-of-the-road accounting methods.

The case also highlights the relationship between managers, analysts, and capital markets. It also illustrates the role financial accounting plays in these interactions.

Cost accounting and managerial accounting: None.

Question 1
The difference between Microsoft’s market value and book value is primarily due to unrecorded intangible assets such as brand value, customer loyalty, human capital, and commercial advantages such as long-term contracts and market dominance. These intangible assets confer Microsoft a tremendous edge over its competitors in future earnings growth.

The market value