Winston, your posts are very helpful. Here are a few questions and comments:
>To smooth earnings, Microsoft records a
>liability on its balance sheet instead of recognizing income. This liability gets smaller
> over time (assuming, of course, that no new products are sold) and flows into
>income.
What is the liability called? In other words, how do we investors recognize it in the Microsoft financial statements?
>The accounting rationale is that some of the cash that Microsoft receives for
> shipping product is not fully earned, e.g. if it has to provide low-cost or free
>upgrades, or provide customer support. By deferring revenues, the income is
>recognized over the period in which it has to provide this support.
Let me see if I can use a little hypothetical to try to understand how the principles you have explained might possibly operate in the real world:
Let's say that Microsoft has an OS, called "Windows."
On day one, Microsoft comes up with this test version of a planned upgrade, called "Nashville."
On day two, a competitor, we'll call it "Company N," comes up with a nifty new gismo called a browser.
On day three, Microsoft decides it will develop a browser, too, integrate it into Nashville, call the resulting product "Active Desktop" and give it away for free.
That software, of course, is a "free upgrade" to the Windows Operating System within your definition. Therefore, under GAAP, Microsoft has to defer some of the revenue it earns on its current sales of Windows in order to account for all the free Active Desktop upgrades it will be giving away for free in the future, since, under GAAP, the portions of the revenue that are attributable to Active Desktop technically have not been "earned" yet.
Hence, on day five, Microsoft announces its new policy of deferring Operating Systems revenue in order to "smooth out" its earnings. performance.
Have I got a firm grasp on what you are trying to teach us? Is this speculative hypothetical acceptable under GAAP and a plausible scenario?
Is THIS how Microsoft is accounting for its development costs on IE?
Help us out, Reg. |
