Microsoft Financial Reporting Strategy
Microsoft’s Financial Reporting Strategy
Q1. What are the factors that likely explain the equity and its reported book value of equity?
Question
1
2
3
4
5
6
1999
Market Capitalisation: USD 460 Billion
Book Value: USD 28 Billion
MVE more than 16 times of BVE!
Factor 1
Question
1
2
3
4
5
6
Intangible Assets
• BVE does not reflect certain intangible assets’ value such as brand, customer loyalty, and human capital
– Likely to provide tremendous earnings growth in the future
– Investors factor these into consideration during valuation Factor 2
Question
1
2
3
4
5
6
High Expected Growth (1985 to 1999)
• Revenue: USD 140 Million to USD 20 Billion
• Net income: USD 24 Million to USD 8 Billion
• Beat analysts’ expectations for 52 out of 53 quarters
Factor 3
Question
1
2
3
4
5
6
Conservative Accounting Policies
• Software Development Costs – Q2
• Revenue Recognition – Q3
• Depressing the company’s book value of equity
Q2. capitalization policy have on its financial statements? Ignore any potential tax effects.
Q2a. expenses were incurred after technological feasibility was established, that the average product life was two years, and that the company begins amortizing software costs on and balance sheets.
Software Development Costs
Question
1
2
3
4
5
6
• GAAP Requirements:
1. Charged to expense until “technological feasibility” has been established for the product
2. Thereafter, software production costs shall be capitalized and subsequently reported at lower of unamortized cost/NRV
• Straight-line amortization over remaining economic life of the product
Software Development Costs
Question
1
2
3
4
5
6
• Microsoft’s software capitalization policy:
– R&D costs expensed as incurred
– Range from anywhere between 11% to 17% of revenue Software Development Costs
Question
Year 1
1
2a
3
4
5
6
40%
Expensed
Year 2
60%
Capitalised
Q1. What are the factors that likely explain the equity and its reported book value of equity?
Question
1
2
3
4
5
6
1999
Market Capitalisation: USD 460 Billion
Book Value: USD 28 Billion
MVE more than 16 times of BVE!
Factor 1
Question
1
2
3
4
5
6
Intangible Assets
• BVE does not reflect certain intangible assets’ value such as brand, customer loyalty, and human capital
– Likely to provide tremendous earnings growth in the future
– Investors factor these into consideration during valuation Factor 2
Question
1
2
3
4
5
6
High Expected Growth (1985 to 1999)
• Revenue: USD 140 Million to USD 20 Billion
• Net income: USD 24 Million to USD 8 Billion
• Beat analysts’ expectations for 52 out of 53 quarters
Factor 3
Question
1
2
3
4
5
6
Conservative Accounting Policies
• Software Development Costs – Q2
• Revenue Recognition – Q3
• Depressing the company’s book value of equity
Q2. capitalization policy have on its financial statements? Ignore any potential tax effects.
Q2a. expenses were incurred after technological feasibility was established, that the average product life was two years, and that the company begins amortizing software costs on and balance sheets.
Software Development Costs
Question
1
2
3
4
5
6
• GAAP Requirements:
1. Charged to expense until “technological feasibility” has been established for the product
2. Thereafter, software production costs shall be capitalized and subsequently reported at lower of unamortized cost/NRV
• Straight-line amortization over remaining economic life of the product
Software Development Costs
Question
1
2
3
4
5
6
• Microsoft’s software capitalization policy:
– R&D costs expensed as incurred
– Range from anywhere between 11% to 17% of revenue Software Development Costs
Question
Year 1
1
2a
3
4
5
6
40%
Expensed
Year 2
60%
Capitalised