Microsoft’s Financial Reporting Strategy Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Microsoft’s Financial Reporting Strategy Case Study Solution

Financial Reporting Strategy

Microsoft overall financial strategy was very conservative with respect to revenues and cash balance. The company keep its cash and short-term investment accounts large enough, is that the company could easily pay its payrolls and other operating expenses. The owners did not believe on the company’s past growth andkeep their views as pessimism about future growth. In addition to this, in this fast-competitive environment, the management believe that innovation and quick improvement will lead toward increased revenues, which was very essential for smooth growth. In addition to this, the companyadopted the GAAP financial reporting standards, which require to follow the accounting principles prescribed by the FASB. Thus, the revenues will be recognized on the basis of 80/20 percent and the software development cost were considered and treatment as like Research and Development cost. Moreover, the overall financial reporting strategy is to present overly pessimistic expectations for the future concerns and returns of the company in order to exceed or fulfil the analyst expectation and retain the core competitive advantage of securing high returns as compared to the analyst expected returns. This is an attempt to secure its stock price’s increasing worth in the market, which could be affected by the low performance as compared to the expected performance.

Charles Pancerzewski, the formerly internal auditing head at Microsoft, filed a lawsuit against the company and charged the claim of manipulating the reported earning and firing the auditors, who raise questions about this practices, in 1997. The suit was settled in 1998 and the settlement’s terms were not disclosed to the general public. The trail focused on the anti-competitive effects, which had been made by incorporating with he internet explorer and the web browsers into Windows 95(Hillegeist, 2000).

Question: 7

Concept’s Learned

From the case, it has been learned that revenues should be recognized on the basis of the value delivered and should incorporate the unearned value, which should be made during the product lifecycle. This strategy will hep the companies to fairly recognize the revenues and fulfilling the matching principal of accounting. In addition to this, it has been learned that the unlawful acts will case toward a lawsuit against the company. The financial reporting strategy should de formulated in such a way that could satisfy the analyst and could lead toward sustainablefuture growth and competitive advantage.

Conclusion

It is concluded after evaluating the whole case with the help of stated figure and facts thatthe financialstrategy should be formulated according to the rules prescribe by the GAAP standards. Primarily in 1986, the company’s financial performance was yielding an average growth rate of 43%, which never accounted for less than 15%. The new revenue recognition policy was applied in the 1996. The total revenues were recognized on the basis of 80/20 percent, which accounted for retaining 20% of revenues as the unearned revenues. Microsoft adopted conservative accounting choices with the inclusion of having conservative future earning expectation. The company’s management always pessimistic about its future growth and did not believe that its future growth would same as its previous growth. Moreover, the overall financial reporting strategy is to present overly pessimistic expectations for the future concerns and returns of the company in order to exceed or fulfil the analyst expectation and retain the core competitive advantage of securing high returns as compared to the analyst expected returns.................................

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