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Microsoft Corp. (MSFT)
Analysis of Investments
Difficulty: Advanced
Investment Accounting Policy
Microsoft considers all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The fair values of these investments approximate their carrying values. In general, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. All cash equivalents and short-term investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in market value, excluding other-than-temporary impairments, are reflected in OCI.
Equity and other investments classified as long-term include both debt and equity instruments. Debt and publicly-traded equity securities are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in the market value of available-for-sale securities, excluding other-than-temporary impairments, are reflected in OCI. Common and preferred stock and other investments that are restricted for more than one year or are not publicly traded are recorded at cost or using the equity method.
Microsoft lends certain fixed-income and equity securities to increase investment returns. These transactions are accounted for as secured borrowings and the loaned securities continue to be carried as investments in Microsoft’s consolidated balance sheets. Cash and/or security interests are received as collateral for the loaned securities with the amount determined based upon the underlying security lent and the creditworthiness of the borrower. Cash received is recorded as an asset with a corresponding liability.
Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. Fair value is calculated based on publicly available market information or other estimates determined by management. Microsoft employs a systematic methodology on a quarterly basis that considers available quantitative and qualitative evidence in evaluating potential impairment of the investments. If the cost of an investment exceeds its fair value, Microsoft evaluates, among other factors, general market conditions, credit quality of debt instrument issuers, the duration and extent to which the fair value is less than cost, and for equity securities, the intent and ability to hold, or plans to sell, the investment. For fixed-income securities, Microsoft also evaluates whether Microsoft has plans to sell the security or it is more likely than not that Microsoft will be required to sell the security before recovery. Microsoft also considers specific adverse conditions related to the financial health of and business outlook for the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded to other income (expense), net and a new cost basis in the investment is established.
Source: 10-K (filing date: 2018-08-03).
Adjustment to Net Income (Loss): Mark to Market Available-for-sale Securities
Microsoft Corp., adjustment to Net Income
USD $ in millions
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| Net income (adjusted) | |
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Based on: 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-02), 10-K (filing date: 2016-07-28), 10-K (filing date: 2015-07-31), 10-K (filing date: 2014-07-31), 10-K (filing date: 2013-07-30).
Adjusted Ratios: Mark to Market Available-for-sale Securities (Summary)
Microsoft Corp., adjusted ratios
Based on: 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-02), 10-K (filing date: 2016-07-28), 10-K (filing date: 2015-07-31), 10-K (filing date: 2014-07-31), 10-K (filing date: 2013-07-30).
| Ratio | Description | The company |
|---|---|---|
| Adjusted net profit margin | An indicator of profitability, calculated as adjusted net income divided by revenue. | Microsoft Corp.’s adjusted net profit margin improved from 2016 to 2017 but then deteriorated significantly from 2017 to 2018. |
| Adjusted ROE | A profitability ratio calculated as adjusted net income divided by shareholders’ equity. | Microsoft Corp.’s adjusted ROE improved from 2016 to 2017 but then deteriorated significantly from 2017 to 2018. |
| Adjusted ROA | A profitability ratio calculated as adjusted net income divided by total assets. | Microsoft Corp.’s adjusted ROA deteriorated from 2016 to 2017 and from 2017 to 2018. |
Microsoft Corp., Ratios: Reported vs. Adjusted
Adjusted Net Profit Margin
Based on: 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-02), 10-K (filing date: 2016-07-28), 10-K (filing date: 2015-07-31), 10-K (filing date: 2014-07-31), 10-K (filing date: 2013-07-30).
2018 Calculations
1 Net profit margin = 100 × Net income ÷ Revenue
= 100 × ÷ =
2 Adjusted net profit margin = 100 × Adjusted net income ÷ Revenue
= 100 × ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted net profit margin | An indicator of profitability, calculated as adjusted net income divided by revenue. | Microsoft Corp.’s adjusted net profit margin improved from 2016 to 2017 but then deteriorated significantly from 2017 to 2018. |
Adjusted Return on Equity (ROE)
Based on: 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-02), 10-K (filing date: 2016-07-28), 10-K (filing date: 2015-07-31), 10-K (filing date: 2014-07-31), 10-K (filing date: 2013-07-30).
2018 Calculations
1 ROE = 100 × Net income ÷ Stockholders’ equity
= 100 × ÷ =
2 Adjusted ROE = 100 × Adjusted net income ÷ Stockholders’ equity
= 100 × ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted ROE | A profitability ratio calculated as adjusted net income divided by shareholders’ equity. | Microsoft Corp.’s adjusted ROE improved from 2016 to 2017 but then deteriorated significantly from 2017 to 2018. |
Adjusted Return on Assets (ROA)
Based on: 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-02), 10-K (filing date: 2016-07-28), 10-K (filing date: 2015-07-31), 10-K (filing date: 2014-07-31), 10-K (filing date: 2013-07-30).
2018 Calculations
1 ROA = 100 × Net income ÷ Total assets
= 100 × ÷ =
2 Adjusted ROA = 100 × Adjusted net income ÷ Total assets
= 100 × ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted ROA | A profitability ratio calculated as adjusted net income divided by total assets. | Microsoft Corp.’s adjusted ROA deteriorated from 2016 to 2017 and from 2017 to 2018. |