Revenue deferral is a very strange term. What basically happened is Microsoft claims Windows 10 is free and gives it away to everyone, hence the non-GAAP income. However, under GAAP, they are not actually giving Windows 10 away for free. Instead, they book revenue from Windows 10 but because they aren't charging for it, they must expense it as a promotional activity. What part of this is a revenue deferral? Nowhere, really, except that revenue which should have been booked is not (because it's free).

Microsoft obviously does not want to do this since it drops their earnings by a significant amount, but I'm sure their auditors gave them shit for it. Their auditors probably also made them book impairment charges on things they didn't feel were impaired.

Revenue deferral is not strange. It probably is a company has prepaid for licenses. Licenses can't be counted as revenue until it is delivered to them. However the cash can be collected early.

I meant it is a strange way of referring to items given away for free.

it seems to come down to two main points, as far as consumer tech companies go:

1. GAAP says that revenue from a software service subscription (e.g. cloud service) can only be counted as revenue once the service has been delivered, not at time of sale.

http://www.marketwatch.com/story/ea-to-ease-non-gaap-usage-a...

http://www.grayboxpdx.com/blog/post/revenue-recognition-for-...

2. Equity-based compensation is accounted for as a cost.

http://mercercapital.com/financialreportingblog/equity-based...

That is the standard definition for accounting and has been that way for a while:

Persuasive evidence of an arrangement exists Delivery has occurred or services have been rendered The seller's price to the buyer is fixed or determinable Collectibility is reasonably assured.

Stock compensation doesn't make it not an expense. It is coming from somewhere. It is coming from the equity holders pockets therefore it is a real cost.

The basic definition is Assets=Liability+Equity.

So rewriting it E=A-L

If you you pay a person with cash: E-C=A-C-L

When you pay person with equity:

E-X where X is equity you are losing in both cases they are equivalent. So stock option are not free and need to be treated as an expense.

>What does this mean?

It sounds like they are deferring some of the revenue from licenses sold with the intention of booking it over the life of the OS, as "free" updates are released.

It might mean the opposite.

GAAP rulea may dictate they book the revenue over the life of the OS to better match liabilities in the form of updates. MSFT want to book all the revenue now as an "economic reality".

It sounds like they're also claiming restructurings of their phone hardware division was a "one time charge" and removing those expenses, again, to better represent the "economic reality".

>GAAP rulea may dictate they book the revenue over the life of the OS to better match liabilities in the form of updates. MSFT want to book all the revenue now as an "economic reality".

I think you might be right; the revenue should be deferred over the life of Windows 10, but their non-GAAP measure books it up front. Hence the top line beat.

Not a particularly heinous accounting maneuver.

So the news is ... a lie?

Not totally a lie. There are a finite number of accounting rules applied to unique businesses all over the country and globe. However, not all these rules allow a company to fully represent the financial state of the business. Therefore, companies try to reconcile these discrepancies through management guidance and non-GAAP accounting.

As an observer, you need to make a judgement call on whether you agree with the GAAP numbers, the guidance numbers, or somewhere in between.