How does the new lease accounting standard (ASC 842) affect Microsoft's financial statements?

ASC 842's primary impact is on the balance sheet, where Microsoft now recognizes 'right-of-use' assets and corresponding lease liabilities for operating leases. While this materially impacts the balance sheet by increasing both assets and liabilities, it did not have a material impact on the income statement or cash flow statements.

Did these accounting standard changes affect Microsoft's cash flow?

No, both the early adoption of the new revenue recognition standard (ASC 606) and the lease accounting standard (ASC 842) had no impact on Microsoft's consolidated cash flow statements, whether from operating, financing, or investing activities.

Why did Microsoft elect to early adopt these standards?

Microsoft elected to early adopt these new accounting standards to proactively align its financial reporting with upcoming industry-wide changes. This allows investors to see the company's financial performance under the new rules before they become mandatory, providing greater transparency and predictability in financial reporting.

MSFT 8-K: Regulation FD

Q: What is the primary impact of the new revenue recognition standard (ASC 606) on Microsoft's financials?

The most significant impact of ASC 606 relates to software license revenue. For Windows 10, revenue is now primarily recognized at the time of billing and delivery instead of being spread over the life of the device. For certain multi-year commercial software subscriptions, license revenue will be recognized at the time of contract execution rather than ratably over the subscription period. This generally leads to more front-loaded revenue recognition for these specific products.

Summary

Microsoft Corporation (MSFT) filed an 8-K on August 3, 2017, to disclose its early adoption of two new accounting standards: Revenue Recognition (ASC 606) and Leases (ASC 842), effective July 1, 2017. The company elected to early adopt both standards to align its financial reporting with upcoming industry-wide changes. This proactive approach allows investors to see how these significant accounting shifts will impact Microsoft's financial statements before the mandatory adoption dates. The adoption of the revenue recognition standard, using the full retrospective method, materially impacted the income and balance sheets, particularly in how software license revenue is recognized. Specifically, Windows 10 revenue is now primarily recognized at billing and delivery, and certain multi-year commercial software subscriptions with licenses and Software Assurance will see license revenue recognized at contract execution. While most cloud and hardware revenue recognition remains unchanged, this shift presents a more front-loaded revenue recognition for some software products. The lease standard, adopted retrospectively with practical expedients, materially impacted the balance sheet by introducing right-of-use assets and lease liabilities for operating leases, though it had no material impact on the income statement or cash flows.

Key Highlights

1Microsoft is early adopting new accounting standards for Revenue Recognition (ASC 606) and Leases (ASC 842) effective July 1, 2017.
2The adoption of ASC 606 significantly impacts software license revenue recognition, with Windows 10 revenue now recognized at billing and delivery, and certain subscription revenue recognized at contract execution.
3ASC 606 adoption had a material impact on income and balance sheets but no impact on cash flow statements.
4ASC 842 adoption had a material impact on the balance sheet by recognizing right-of-use assets and lease liabilities for operating leases.
5ASC 842 adoption had no material impact on the income statement or cash flow statements.
6The company is furnishing restated financial information for fiscal years 2016 and 2017 under these new standards, provided in Exhibit 99.1.
7Microsoft hosted a conference call on August 3, 2017, to discuss these accounting standard adoptions and their financial implications.

MICROSOFT CORP 8-K Report, Regulation FD Disclosure (Aug 3, 2017)

Summary

Key Highlights

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