How Microsoft can vie the market capitalization race without really trying

Microsoft (MSFT) has held the tradition of capitalizing only a very small portion of its software research and development costs.

The amount it is conservatively understate approximates US$10b, which translates to US$6.5b shareholder value. Calculation below.

If this adjustment is done, MSFT market capitalization would be US$229b, higher than that of Apple (AAPL) which amounts $227. This has not even inusual market overreaction to good information.

In sum, with only a slight legal and reasonable accounting adjustment, Microsoft can easily come back to be world’s most valuable technology company. Issue is: is the status quo really important besides media coverage?

Detail accounting adjustment and calculation is below:

Assumptions

• R&D is capitalized using straight-line depreciation over expected life of the software which approximates three years


• Amortization is taken from half a year’s spending

Capitalization

Year	R&D Outlay (US$b)	Proportion Capitalized this fiscal year	Asset this fiscal year ($b)	Proportion Capitalized last fiscal year	Asset last fiscal year ($b)
0	6.6	1 - 1/3/2 = 83.5	5.5
-1	6.1	1 - 1/3/2 - 1/3 = 50.5	3.1	1 - 1/3/2 = 83.5	5.1
-2	7.7	1 - 1/3/2 - 2/3 = 16.5	1.3	1 - 1/3/2 - 1/3 = 50.5	3.9
-3	6.6			1 - 1/3/2 - 2/3 = 16.5	1
Total			9.9		10

Adjustment

	Adjustment this fiscal year		Adjustment last fiscal year
US$b	Assets	Liabilities & Equity	Assets	Liabilities & Equity
Balance Sheet
Long-term Intangible Assets	+9.9		+10
Deferred Tax Liability		+3.4		+3.5
Common Shareholders’ Equity		+6.5		+6.5

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