Microsoft’s financial strategy case analysis

Microsoft is a world recognized company and it started its business on April 4, 1975 with
an idea that one day there will be a desktop in every table and in every home. The company got
his first big break in 1980 when they provide IBM operating system for their personal computer.
The company reaches to the height level in the industry o modern computer software and
design within no time. In June 1999, after finishing the conference call with the company’s
analysts, it declared that the company was in trouble as they were investigated by the SCE over
some unusual and ambiguous accounting practice by the management. Main focus of the
investigation was the deferral of revenue and other undisclosed reserves accounts shows in
Income Statement and Balance Sheet of the company. They find there was a difference
between Microsoft’s market value of equity and its reported book value of equity.

The main reason for this mismatch is because of their inability to record the correct
value of intangible asset like brand value, human capital, goodwill of the company and
customer loyalty. Those intangible assets are the key factor to provide a tremendous earning
growth in the future and it will help them to increase the total market value. Also Microsoft
chose conventional accounting policy and it has affected the company’s book value of equity.
They are still reporting an exceptional growth and numbers in the coming years. They are able
to project the capability of the firm to take such strong decision and still proving themselves by
providing good results.

Microsoft as an industry leader has the ability to influence the accounting rules and
policy that has been used in the industry for long time. Microsoft was the strongest player in
the industry for that time and till now. It makes it more difficult for other companies to provide
high earning result by setting some rules and regulation that reduce earnings and assets.

The company always has an affinity to avoid any uncertain crisis and for that reason
they deepen their earning to tackle any uncertainty in coming future and it helped them to
grow exceptionally throughout the year. The company has a philosophy of fostering a sense of
“constructive paranoia” about its competitive position and Gates always prefer to have enough
cash at the end of year balance sheet to provide salary for their employee for at least one year
even though they did not earned any revenue or payment. The above mentioned argument is a
better explanation for the affinity of the company to “talk down” analysts’ expectations rather
than as an explanation for selecting conservative accounting policies, but the explanation could
possibly be made for both.