Microsoft defers $305 million in revenue, but better that than the Osborne Effect

Well-trained software sales people know not to promise a customer that the customer will get a forthcoming upgrade for free when it is released. Under software-accounting guidelines known as SOP 97-2, when a vendor makes such a promise, the earnings process for the sale won’t be deemed complete until the vendor provides the free upgrade — which in turn means, under generally-accepted accounting principles (GAAP), that the vendor must defer recognizing the sale’s revenue until the upgrade is shipped.

Microsoft’s fiscal third-quarter earnings release illustrates this principle. The company reported that it was deferring $305 million in Office 2007 revenue, because it has promised customers who buy Office 2007 that they will get a free upgrade to Office 2010 when it becomes available.

I’m sure, though, that Microsoft would much rather make the sales now, and get the cash in hand, than have customers defer their purchases until Office 2010 is released. With the cash in hand, deferring ‘official’ recognition of the revenue is a small price to pay not to risk the so-called Osborne Effect — named after a well-known early computer company that went bankrupt, supposedly because its founder bragged about an improved new model that was being developed, causing customers not to buy the existing model, in turn causing the company to run out of cash.