Footnote 1 to Microsoft’s 2011 annual report contained the following:
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is probable . . . . Revenue for retail packaged products licensed to original equipment manufacturers (OEMs) ... generally is recognized as products are shipped or made available. . . . Certain multi-year licensing arrangements include a perpetual license for current products combined with rights to receive future versions of software products on a when-and-if-available basis and are accounted for as subscriptions, with billings recorded as unearned revenue and recognized as revenue ratably over the billing coverage period.. Revenue related to our Xbox 360 gaming and entertainment console, Kinect for Xbox 360, games published by us, and other hardware components is generally recognized when ownership is transferred to the resellers.
Revenue related to games published by third parties for use on the Xbox 360 platform is recognized when games are manufactured by the game publishers. Display advertising revenue is recognized as advertisements are displayed. Search advertising revenue is recognized when the ad appears in the search results or when the action necessary to earn the revenue has been completed. Consulting services revenue is recognized as services are rendered generally based on the negotiated hourly rate in the consulting arrangement and the number of hours worked during the period.
1. Explain how Microsoft’s revenue recognition policy meets the criteria of being earned and realized.
2. Discuss the accounting for multiyear licensing arrangements.
3. Discuss the accounting for revenue related to games published by third parties.