The reorganization at Microsoft will lead to changes in financial reporting, the company said Thursday, and the question for investors is whether it will make it easier or harder to understand performance.
The organizational changes announced by Chief Executive Steve Ballmer strip away a structure based around divisions overseeing particular products, such as Microsoft Windows, the Xbox videogame console or the Office bundle of workplace software. In its place, Microsoft is imposing a horizontal scheme with managers that oversee different kinds of functions–like engineering, marketing and finance–that would be applied to multiple product lines.
Even though Mr. Ballmer told analysts on a conference call that the level of accountability we all feel rises as we all have to look at the integrated profitability of the company, and getting to a ‘One Microsoft’ strategy is very important, and we need to have strong financial accountability.
In 2007 Microsoft recorded a liability related to legal claims against the company. This liability reflects an estimated exposure of $1.7 billion, less payments made to date of $500 million. The $1.2 billion provision is carried on the balance sheet in Other Long-term Liabilities. Commitments and contingencies is shown as a line on the balance sheet, however it does not carry a balance. Rather, users are directed to the footnotes for details relating to this item. This happened in 2007 before this reorganization. We can see that company’s behavior is to refer such an important provision of $1.2 billion to footnotes, which most of investors might not notice.
When the financial statements of all divisions come together, it might be harder to guide the investors to figure out the material information regarding the current business.
From company’s stock history, we can see that within 2007 and 2008,when Microsoft faced the “Xbox 360” charge and a $1.2 billion provision, the stock price had experienced a wide wave fluctuation and maintained a staggering price afterwards till now. Currently revenue for those efforts is reported in separate business divisions, and separate managers are accountable for profit and loss in those divisions. “When the money-losing Bing is blended into the same unit as Office, we’ll never know how much Bing is losing again,” Mr. Gillis said. The money-losing Bing can be disguised under the overall integration.The purpose of the reorganization might be associated with inciting the stock price. However, when all the divisions are integrated into one, it becomes harder to evaluate in retrospect which division contribute more and bite more of company’s profits. That will become harder to trace the origin of the problem with lower transparency especially combining all the divisions.