Microsoft announces SEC probe, accounting changes

Microsoft says it is cooperating with an investigation by the U.S. Securities and Exchange Commission (SEC) related to its accounting reserve policies, and that it expects earnings for the fourth quarter to be a penny higher per share due to an accounting change.

Microsoft says it is cooperating with an investigation by the U.S. Securities and Exchange Commission (SEC) related to its accounting reserve policies, and that it expects earnings for the fourth quarter to be a penny higher per share due to an accounting change.

Greg Maffei, chief financial officer, said yesterday he could not reveal more about the SEC investigation, which he said was triggered by a Wall Street Journal article in January that included information from two former Microsoft employees.

"We don't know the entire scope other than it relates to reserves and reserve policies," said Maffei, speaking in a teleconference with press and analysts. "We're cooperating fully with the SEC. The investigation is not public and we can't comment further."

In accounting terms, a reserve is the estimate or evaluation of an asset or sale. The investigation is not related to the accounting changes the company announced today, Maffei said.

One of the accounting changes was voluntary and the other was made to comply with changes in federal rules governing how software sales are reported for the industry.

In the first change, Microsoft is reclassifying the way it reports revenues and costs of four smaller business -- product support, consulting services, certification and training of system integrators, and MSN access -- so they will be consistent with other businesses, according to Maffei.

As a result, Microsoft's first three quarters of fiscal 1999 will see a net revenue increase of $US761 million, while revenues for fiscal 1997 and 1998 will go up by 5.1 and 5.4 percent, to $11.9 billion nd $15.2 billion [B], respectively. Microsoft also expects to see a one cent increase in per-share earnings for fiscal 2000 as a result of the accounting change, as well the penny increase in fourth-quarter earnings per share.

Microsoft's fourth fiscal quarter ends today, and results will be reported on July 19, Maffei said.

A poll of 27 brokers by First Call predicted Microsoft would report fourth-quarter earnings per share of 36 cents and earnings per share of $1.34 for fiscal 1999.

In the second accounting change, Microsoft is modifying the way it reports unearned revenue percentages related to future delivery obligations on its Windows and Office products, Maffei said. The change will increase the upfront revenue recognition and decrease the amount recognized over the product lifecycle, he said.

Under the old standard, Microsoft used to assign a value to undelivered products, whereas the new standard requires the company to "look directly at pricing" for making the unearned revenue determination, according to Maffei. As part of that change, Microsoft will use a three-year, rather than a two-year, lifecycle, for Windows, he added.

Microsoft's stock was up 2.18 points to $90.18 today on the Nasdaq stock exchange.

Microsoft, based in Redmond, Washington, can be reached at +1-425-882-8080 or on the Web at http://www.microsoft.com/.

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