Reply

Part 1: Foreign Currency Transactions and Hedging

Research your MNC and report on any accounting issues covered in this chapter related to foreign currency transactions and hedging activities.  Post your report in this week’s discussion area by nlt Saturday evening.  By the end of Week 4, you are required to also respond to at least one other post. If someone asks a question of you, please take the time to also respond to those questions.

Foreign currency had an unfavorable impact on Microsoft and led to losses of 2% in gross margin and 4% in operating income (Microsoft, 2020). Microsoft is an MNC with a profound global presence, so a small loss associated with foreign currency transactions can be expected. Microsoft also invests in foreign currency-denominated securities to diversify their profile (Microsoft, 2020). The primary currencies Microsoft interacts with are the Canadian dollar, Australian dollar, Euro, Japanese yen, and British pound (Microsoft, 2020).  To minimize issues associated with foreign currency, Microsoft monitors their transactions, liabilities, and assets on a daily basis (Microsoft, 2020). Microsoft uses forwards to minimize the variance in exchange rates (Microsoft, 2020). They also use derivatives to manage foreign currency risks that are not hedged (Microsoft, 2020). These derivatives are recognized in other income (expense) (Microsoft, 2020). In 2020, Microsoft increased their derivative net gains largely due to gains in foreign currency exchanges (Microsoft, 2020).

Microsoft uses hedging to minimize foreign currency transaction risks. When hedging foreign currency investments, Microsoft uses foreign exchange forward contracts designated at fair value (Microsoft, 2020). Risks associated with some debt in the Euro are hedged using foreign exchange forward contracts and designate them as cash flow hedging instruments (Microsoft, 2020).

 

Part 2: ASC 606

Read up and research this new standard and write a paragraph or two (in your words) on any issue that you find interesting or intriguing.  Please cite your source(s).  You should also include reflection on your MNC and the impact, if any, it will have.  Post your report in this week’s discussion area by nlt Saturday evening under the Foreign Currency Exposure & Revenue Recognition topic. 

ASC 606 completely overhauls the process of revenue recognition. Under this guidance, entities should recognize revenue when their contractual obligations are satisfied, and goods or services are provided to the customer (Deloitte, n.d.). The entity should recognize the revenue they expect to receive for the good or service, and in some scenarios, they may need to estimate an anticipated amount (Deloitte, n.d.). This standard has far reaching implications that impact topics such as licensing, contract modification, contract costs, and disclosure requirements (Deloitte, n.d.). This is a major shift for companies who are used to U.S. GAAP revenue recognition procedures, as this is a shift from a rules-based to a principles-based framework (Deloitte, n.d.).

There is a five-step model entities should follow when recognizing revenue. They must first identify the contract with the customer, then they must identify their own performance obligations (Deloitte, n.d.). They should then determine their price and allocate it to their own performance obligations (Deloitte, n.d.). They finally must recognize revenue once they satisfy their own part in the contract (Deloitte, n.d.).

Microsoft implemented this standard in financial year 2018 and has had success thus far (Park, 2017). Their most complex form of revenue recognition has been with the licensing of multi-year commercial software subscriptions (Park, 2017). For these contracts, they have recognized revenue when the contract is executed rather than throughout the period of the subscription (Park, 2017). Most of their revenue recognition for sales of hardware or other offerings such as Office 365 did not change (Park, 2017).

 

Works Cited

Deloitte. (n.d.). New revenue recognition standard updates. https://www2.deloitte.com/us/en/pages/audit/articles/a-roadmap-to-applying-the-new-revenue-recognition-standard.html

Microsoft. (2020, June 30). Form 10-K. https://microsoft.gcs-web.com/node/28366/html

Park, H. (2017, July 25). Microsoft “early adopts” new ASC 606 revenue recognition standard. Amalgam Insights. https://amalgaminsights.com/2017/07/25/microsoft-early-adopts-new-asc-606-revenue-recognition-standard/