accounting microsoft deferred revenue
Microsoft Financial Reporting
2. Effects of the revenue recognition strategy on Financial Statements
a. Income Statement: Resulted in lower than reported earnings. Microsoft understated revenues in '97, '98, and '99 by $858M, $1,470M, and $1,351M, respectively
b. Balance Sheet: The "Unearned revenue" category in Liabilities would be eliminated completely (e.g. reduction of $1,418M in '97). Since Revenue would be booked 100% in the current period, Retained earnings would increase by the same amount that Unearned revenue decreases.
c. Cash Flow: No effect on cash flow as the earnings weren't "earned," but the cash was received. In fact, the current cash flow statements adjust for this accounting practice, using the lines "Unearned revenue" and "Recognition of unearned revenue from prior periods."
3. We believe MSFT decided to defer this revenue for two reasons:
a. In 1996, with customers' increasing dependence on the Internet, Microsoft was entering a period of extreme volatility. By deferring some portion of revenues, it allowed Microsoft to stretch the company's revenue over 18-24 months, artificially inflating future revenues and smoothing out earnings in general
b. It also made some accounting sense for Microsoft to defer a portion of revenue based on the future services and support that the company was to offer with their products. Given that they were changing their product mix (e.g. adding Explorer for free) and the way they delivered value over the life of the product (e.g. updates over the web), Microsoft could partially justify the change along the line of reasoning laid out in AICPA SOP 97-2
4. Overall, Microsoft's reporting and disclosure strategy was very conservative, electing to defer revenues when possible. There were several notable aspects to MSFT's reporting & disclosure strategy:
a. Under-promise & over-deliver: Microsoft had a history of setting...
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