The first case
Microsoft’s Financial Reporting Strategy

Brief Summary
Under the background that Microsoft Corporation announced to be under investigation by the Securities and Exchange Commission (SEC) for certain accounting practices, this case explores the Microsoft’s financial reporting strategy related to two policies through two accounting issues – software capitalization and revenue recognition. Analyzing the performance of its stock, annual income statement, balance sheets, cash flow and some other data, the company was found that it selects relatively conservative accounting methods. In addition, it discusses the issue of managing analysts’ expectations and the reasons why Microsoft choose conservative strategy. Furthermore, it talk about the related practices of the investigation held by the SEC.

Capitalization policy
When we talk about the capitalization policy, we suppose that, ignoring any potential tax effects, Microsoft start to capitalize 70% of its R&D reported expenses after technological feasibility was established and the average life was two year. Exploring the capitalizing R&D Expenses on Microsoft’s fiscal 1997, 1998 and 1999, it is required to collect research and development expenses from prior years, with the number of years of historical data being a function of the amortizable life. The following table provides this information for each of the years and the procedure of estimating the value of the research asset, and the amortization of R&D expenses in 1997, 1998, and 1999 respectively.

Especially, in this case, because the Mirosofts’ balance sheets haven’t shown the debts, the book value of capital = the book value of equity, and adjusted book value = adjusted book value of equity.
So we can get that: For the year 1997 | Adjusted operating earnings = Operating earnings for 1997 + 1997's R&D expense | |