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Technology Stocks : MSFT Internet Explorer vs. NSCP Navigator
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To: Gerald R. Lampton who wrote (3308)11/23/1996 2:27:00 AM
From: Winston Chang   of 24154
 
I will try to respond to your questions. 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.

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.

This is consistent with GAAP (generally accepted accounting principles) in the U.S. "Non-GAAP earnings manipulations" (which are rightly criticized) can occur in a variety of ways, and they tend to be aggressive, rather than conservative (income is increased rather than decreased). I will list several examples, which are not all-inclusive:

1. Capitalization of R&D costs.
2. Recognizing sales revenue upon booking orders, or when significant conditions still exist.
3. Shipping product to customers who have a right to return the items (N.B. if the company can estimate the amount of returns and does not recognize that into income, that is allowed).

The above list excludes instances of outright fraud.

Hope this helps,

Winston
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