Microsoft Adds $500 Million to Net Income With Accounting Change
Technology giant credits change in useful life estimates for preserving gross margin growth.
April 28, 2021
Microsoft (MSFT), a global technology company, would have reported a decrease in gross margins in its most recent quarter if not for an accounting change it made the year prior. Beginning in FY21, Microsoft increased the estimated useful life of its server equipment from three years to four years and increased the estimated useful life of network equipment from two years to four years.
In its latest 10-Q, Microsoft cited the change as a factor in maintaining gross margin growth:
“Gross margin increased $4.6 billion or 19%, driven by growth across each of our segments and the change in estimated useful lives of our server and network equipment.”
Excluding the impact of the accounting change, Microsoft disclosed:
“...gross margin percentage decreased, driven by gross margin percentage reductions in More Personal Computing and Productivity and Business Processes.”
Microsoft isn’t alone in extending the useful lives of its technology assets. We documented billions of dollars of net income generated due to changes in useful life estimates.
In Microsoft’s case, not only did the change preserve gross margin growth it added hundreds of millions to the company’s reported earnings. Without the accounting change, Microsoft would have beaten consensus EPS forecast by $0.10 per share rather than $0.17 per share.
“...the effect of this change in estimate for the three months ended March 31, 2021, was an increase in operating income of $611 million and net income of $505 million, or $0.07 per both basic and diluted share.”
Though the change impacted Microsoft’s accounting earnings it did not increase the company’s cash flow. In the quarter, Microsoft grew net income 44% while cash from operations increased 26.7%. For fiscal year 2021, the change is expected to add $2.7 billion to Microsoft’s operating income, or approximately 4.1%.
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