Microsoft Corporation
One Microsoft Way
Redmond, WA 98052-6399
Tel 425 882 8080
Fax 425 936 7329
http://www.microsoft.com/
April 28, 2006
Mr. Alan Teixeira
Project Manager
International Accounting Standards Board
30 Cannon Street
London EC4M 6XH, United Kingdom
Dear Mr. Teixeira:
Microsoft appreciates the opportunity to provide its views on the Discussion Paper,
“Management Commentary”. We commend the IASB and the project team for what we
considered a thought provoking, well written Discussion Paper. More importantly, it
shows leadership and forward thinking regarding potential improvements to financial
reporting, especially with respect to the proposed Management Commentary (MC)
disclosure framework. To be quite blunt, we believe the traits of leadership and forward
thinking with regards to potential improvements to financial reporting are sorely missing
from financial reporting supply chain participants, including the preparer community of
which we are a part.
There is currently a lot of debate and discussion concerning issues such as complexity of
accounting standards, fair value measurements, and quarterly earnings guidance and how
addressing these issues can improve financial reporting. Microsoft believes these issues
are symptoms of a bigger problem, a broken financial reporting model. In essence, we
have a financial reporting model largely based on a manufacturing economy and the
industrial age, while the economy has moved to the information age and the financial
reporting model has failed to change accordingly. We believe the proposed MC
disclosure framework goes a long way to addressing this issue and should be the focus of
discussions on improving the financial reporting model.
Microsoft believes that the U.S. Securities and Exchange Commission’s (SEC) 2003
Interpretative Release on MD&A was a significant step forward in providing guidance on
how financial reporting can be improved. Included in that guidance was an emphasis that
companies should identify and discuss key performance indicators, including nonfinancial performance indicators, that their management uses to manage the business and
that would be material to investors, and that companies must identify and disclose known
trends, events, demands, commitments and uncertainties that are reasonably likely to have
a material effect on financial condition or operating performance. In a recent speech by a
SEC Commissioner, it was noted that MD&A has improved, but that management's story
would be more complete if it contained more forward looking information, better
2
explained trends and uncertainties that affect the business, and discussed in more detail
the business' key drivers. We believe that the Discussion Paper provides the type of
guidance to help make those improvements.
Research concerning the short comings of current financial reporting, such as that
referenced in paragraphs 103 and 104 of the Discussion Paper, is shocking and indicates
the strong need for significant improvement and forward thinking with respect to
financial reporting. Other research by PricewaterhouseCoopers shows that about 25% of
an entity’s market value can be attributed to accounting book value. The remaining 75%
of market value is based upon value drivers not fully communicated through the existing
GAAP model. Research also tells us that less than 25% of the measures generally
associated with surveyed industry sectors are published in formal filings.
Microsoft is one of the founding members, along with the AICPA, Grant Thornton LLP
and PricewaterhouseCoopers, of the Enhanced Business Reporting Consortium (EBRC),
which was established in 2005 upon the recommendation of the AICPA Special
Committee on Enhanced Business Reporting. The EBRC is an independent, marketdriven non-profit collaborative focused on improving the quality, integrity, and
transparency of information used for decision-making in a cost effective, time efficient
manner. The EBRC has drafted a high-level content framework which is consistent with
the MC disclosure framework and, similar to the MC disclosure framework, was based on
PricewaterhouseCoopers ValueReporting framework as well as other current best
practices including TRS Mapping jointly developed by Accenture and AssetEconomics,
the Operational Reporting and Intellectual Capital Reporting principles proposed by
AssetEconomics, and the Gartner Performance Framework.
A MC disclosure framework is also essential to leverage the potential of the eXtensible
Business Reporting Language (XBRL). A structured framework is necessary in order to
be able to develop an XBRL taxonomy that can be used to tag MC disclosures in a
meaningful way so that users can more efficiently and effectively consume and analyze
the information.
Microsoft believes that MC should be considered an integral part of financial reports. We
also agree that MC guidance should be in the form of an IASB standard that provides for
optional adoption by jurisdictions or entities in the short term.
Our responses to the individual issues raised in the Discussion Paper are attached. If you
have any questions, please contact me at (425) 703-6094.
Sincerely,
Bob Laux
Director, Technical Accounting and Reporting
Attachment
Requirements for management commentary (MC)
The project team concluded that an entity’s financial report should be viewed as a
package comprising the primary financial statements, accompanying notes and MC
(section 1). They also concluded that the quality of MC was likely to be enhanced if the
Board issued requirements relating to MC (section 6).
Question 1: Do you agree that MC should be considered an integral part of financial
reports? If not, why not?
Response: Yes, MC should be considered an integral part of financial reports.
Question 2: Should the development of requirements for MC be a priority for the Board?
If not, why not? If yes, should the IASB develop a standard or non-mandatory guidance
or both?
Response: Yes, the development of requirements for MC should be a priority for the
Board, but it is important that those requirements do not specify the precise information
that must be disclosed, but rather, set out the principles and qualitative characteristics
necessary to make MC useful to investors. We believe the IASB should develop a
standard that provides for optional adoption by jurisdictions or entities in the short term.
Question 3: Should entities be required to include MC in their financial reports in order
to assert compliance with IFRSs? Please explain why or why not.
Response: As indicated above, Microsoft believes the IASB should develop a standard
that provides for optional adoption by jurisdiction or entities in the short term. This
approach will allow for robust discussions for improving MC and financial reporting in
general, without the barriers a mandatory requirement would create.
Purpose of MC
The project team concluded that the objective of MC has three elements (section 2). The
project team also concluded that the primary focus of MC is to meet the information
requirements of investors.
Question 4: Do you agree with the objective suggested by the project team or, if not, how
should it be changed? Is the focus on the needs of investors appropriate?
Response: Microsoft agrees with the objectives suggested by the project team and the
focus on the needs of investors. While items such as corporate social responsibility are
important, we believe separate reporting of these types of items better serves the needs of
those users and that a focus on them in MC could potentially lessen the usefulness of MC.
2
However, to the extent items such as corporate social responsibility have a significant
impact on a company’s current or future financial results; they should be discussed in
MC.
Principles, qualitative characteristics and content of MC
The project team concluded that it is not appropriate to specify the precise information
that must be disclosed within MC, or how it is presented. Rather, they believe that any
requirements for MC should set out the principles and qualitative characteristics, as well
as the essential areas of MC, necessary to make the information useful to investors. It is
up to management to determine what information is necessary to meet these
requirements, and to determine how the information is presented. The project team have
also suggested that it is appropriate to consider ways to limit the amount of information
management discloses, as a way of ensuring that only relevant information is presented to
investors (see sections 3 and 4).
Question 5: Do you agree with the principles and qualitative characteristics that the
project team concluded are essential to apply in the preparation of MC? If not, what
additional principles or characteristics are required, or which ones suggested by the
project team would you change?
Response: We agree with the principles and qualitative characteristics, but we disagree
with the comment in paragraph 94 that, “we envisage that changes in indicators would not
occur ever year, but would be triggered by events such as a comprehensive strategic
review.” Given the constant change in the business environment and the ever
accelerating change in technology, we believe it is quite possible that changes in
indicators could occur every year. We do not believe changing indicators should be
discouraged if new indicators are used to manage the business, however, management
should be required to explain why it has changed an indicator or measure.
Question 6: Do you agree with the essential content elements that the project team
concluded that MC should cover? If not, what additional areas would you recommend or
which ones suggested by the project team would you change?
Response: Microsoft strongly agrees with the essential content elements and believes that
the proposed MC disclosure framework will significantly improve financial reporting.
Research concerning the short comings of current financial reporting, such as that
referenced in paragraphs 103 and 104, is shocking and indicates the strong need for
significant improvement and forward thinking with respect to financial reporting. Other
research by PricewaterhouseCoopers shows that about 25% of an entity’s market value
can be attributed to accounting book value. The remaining 75% of market value is based
upon value drivers not fully communicated through the existing GAAP model. Research
also tells us that less than 25% of the measures generally associated with surveyed
industry sectors are published in formal filings.
3
Microsoft is one of the founding members, along with the AICPA, Grant Thornton LLP
and PricewaterhouseCoopers, of the Enhanced Business Reporting Consortium (EBRC),
which was established in 2005 upon the recommendation of the AICPA Special
Committee on Enhanced Business Reporting. The EBRC is an independent, marketdriven non-profit collaborative focused on improving the quality, integrity, and
transparency of information used for decision-making in a cost effective, time efficient
manner. The EBRC has drafted a high-level content framework which is consistent with
the MC disclosure framework and, similar to the MC disclosure framework, was based on
PricewaterhouseCoopers ValueReporting framework as well as other current best
practices including TRS Mapping jointly developed by Accenture and AssetEconomics,
the Operational Reporting and Intellectual Capital Reporting principles proposed by
AssetEconomics, and the Gartner Performance Framework.
A MC disclosure framework is also essential to leverage the potential of the eXtensible
Business Reporting Language (XBRL). A structured framework is necessary in order to
be able to develop an XBRL taxonomy that can be used to tag MC disclosures in a
meaningful way so that users can more efficiently and effectively consume and analyze
the information.
Question 7: Do you think it is appropriate to provide guidance or requirements to limit
the amount of information disclosed within MC, or at least ensure that the most
important information is highlighted? If not, why not? If yes, how would you suggest this
is best achieved?
Response: No, while an MC standard should reiterate that the objective of MC is to help
investors to identify and assess what management views as the most important issues
facing the entity, we do not believe it would be practical to provide guidance or
requirements to limit the amount of information disclosed within MC. We believe it is
the role of the financial reporting supply chain to monitor the quality of MC, with
emphasis placed on feedback from investors and regulators on whether the objective of
MC is being met.
Question 8: Does your jurisdiction already have requirements for some entities to
provide MC? If yes, are your local requirements consistent with the model the project
team has set out? If they are not consistent, what are the major areas of conflict or
difference? If you believe that any of these differences should be included in an IASB
model for MC please explain why.
Response: Yes, as noted in the Discussion Paper, Management’s Discussion and
Analysis (MD&A) is an essential element of the core reporting package for public
companies in the United States. We believe that the U.S. MD&A requirements are
consistent with the model the project team has set out, but, as indicated elsewhere in this
letter, improves upon the guidance currently provided by the U.S. MD&A requirements.
4
Microsoft believes that the U.S. Securities and Exchange Commission’s (SEC) 2003
Interpretative Release on MD&A was a significant step forward in providing guidance on
how MD&A can be improved. Included in that guidance was an emphasis that
companies should identify and discuss key performance indicators, including nonfinancial performance indicators, that their management uses to manage the business and
that would be material to investors, and that companies must identify and disclose known
trends, events, demands, commitments and uncertainties that are reasonably likely to have
a material effect on financial condition or operating performance. In a recent speech by a
SEC Commissioner, it was noted that MD&A has improved, but that management's story
would be more complete if it contained more forward looking information, better
explained trends and uncertainties that affect the business, and discussed in more detail
the business' key drivers. We believe that the Discussion Paper provides the type of
guidance necessary to make those improvements.
Placement criteria
The project team concluded that it would be helpful to establish criteria to guide the
Board in determining whether information it requires entities to disclose within financial
reports should be placed in MC, or in the general purpose financial statements. The
project team have suggested placement criteria (section 5).
Question 9: Are the placement criteria suggested by the project team helpful and, if
applied, are they likely to lead to more consistent and appropriate placement of
information within financial reports? If not, what is a more appropriate model?
Response: Yes, we believe the placement criteria suggested by the project team are
helpful and they are likely to lead to more consistent and appropriate placement of
information within financial reports. There is currently a lot of debate and discussion
concerning issues such as complexity of accounting standards, fair value measurements,
and quarterly earnings guidance and how addressing these issues can improve financial
reporting. Microsoft believes these issues are symptoms of a bigger problem, a broken
financial reporting model. In essence, we have a financial reporting model largely based
on a manufacturing economy and the industrial age, while the economy has moved to the
information age and the financial reporting model has failed to change accordingly. We
believe the proposed MC framework goes a long way to addressing the issue and should
be the focus of discussion in improving the financial reporting model.