Microsoft Corporation: Accounting Function and Financial Health

Introduction and Company Background

Microsoft Corporation concerns itself with not only the provision of, but also the development and marketing of hardware devices and software services (Wall Street Journal, 2017). As the Wall Street Journal further notes, the company's "products include operating systems for computing devices, servers, phones and intelligent devices" (WSJ, 2017). At the time of writing, Microsoft Corporation's CEO is Satya Nadella.

Corporate Governance at Microsoft

A company the size of Microsoft ought to have a sound commitment to good corporate governance, whereby the interests of shareholders are well catered for and promoted, and the accountability of management and the board is enhanced. Microsoft points out that long-term thinking provides direction for everything it does in order to sustain its success and further enhance value for its shareowners.

The company has in place a governance framework that "establishes and preserves management accountability to company owners…; provides a structure for management and board to set objectives and monitor performance; strengthens and safeguards our culture of business integrity…; encourages the efficient use of resources…" (Microsoft, 2017). Microsoft's corporate governance framework enables the Board to formulate policies and make decisions without any undue managerial interference. In this way, the corporate governance structures at Microsoft promote and enhance good corporate governance.

The Role of Accounting in Microsoft

When it comes to accounting, it is important to note that Microsoft Corporation, like any other professionally run entity, clearly separates management accounting from financial accounting. Its financial statements are prepared for external audiences — including shareholders, financial analysts, and government agencies — and therefore comply with the relevant accounting standards and systems. Microsoft specifically points out that its financial reports adhere to Generally Accepted Accounting Principles (GAAP).

The information contained in Microsoft's 2016 Annual Report captures the entire results of the corporation. It is based on factual operational data rather than estimates, and is focused on the company's past financial performance. This effectively means that the company maintains additional operational information that is not distributed to outsiders and is intended for internal consumption. Such information may include operational reports, forecasts, budgets, and other estimates that could help the business become more profitable in the future.

The accounting role is effective in that, by separating the two accounting functions, the corporation meets its obligations to shareholders and relevant government agencies while simultaneously providing its managerial team with key information on areas such as capital budgeting, operational budgeting, and cost analysis. It is important to note that, as a result of new standards issued by the Financial Accounting Standards Board, Microsoft made adjustments in its 2016 financial report to employee share-based payment accounting. These adjustments effectively required "that excess tax benefits and tax deficiencies to be recorded in the income statement when stock awards vest or are settled" and directed that "excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows" (Microsoft, 2016).

The company makes use of its own proprietary accounting software, which can be adapted on the basis of future operational and accounting needs. To ensure that its financial reporting procedures conform to globally accepted standards and to certify the integrity of its internal controls, Microsoft engages external accounting advisors. These include Deloitte and Touche LLP, engaged for the purpose of expressing "an opinion on the company's internal control over financial reporting…" (Microsoft, 2017).

Conclusion and References

Overall, Microsoft's accounting practices appear broadly effective. The company satisfies its obligations to external stakeholders through GAAP-compliant financial reporting while maintaining internal management accounting systems to guide decision-making. Compared to IBM, Microsoft demonstrates superior liquidity and lower financial risk, though its return on assets suggests room for improvement in the efficiency with which it deploys its asset base.

References

Albrecht, W. A., Stice, E. K., & Stice, J. D. (2007). Financial Accounting (10th ed.). Thomson Higher Education.

Bierman, H. (2010). An Introduction to Accounting and Managerial Finance: A Merger of Equals. World Scientific.

Drury, C. (2008). Management and Cost Accounting (7th ed.). Cengage Learning.

Microsoft Corporation. (2017). Governance Framework. Retrieved from https://www.microsoft.com/en-us/Investor/corporate-governance/framework.aspx

Microsoft Corporation. (2017). Annual Report 2016. Retrieved from https://www.microsoft.com/investor/reports/ar16/index.html

Porter, G. A., & Norton, C. L. (2016). Financial Accounting: The Impact on Decision Makers (10th ed.). Cengage Learning.

Tirole, J. (2010). The Theory of Corporate Finance. Princeton University Press.

Wall Street Journal. (2017). Description: Microsoft Corp. Retrieved from http://quotes.wsj.com/MSFT/company-people