[SOLVED] In 2002 the SEC investigated Microsoft’s

In 2002 the SEC investigated Microsoft’s accounting practices that occurred during the late 1990s. The Commission found that Microsoft typically reported budgeted marketing expenses in its interim reports. At year‐ end, Microsoft reported actual marketing expenses in its annual report.
Team Debate:
Team 1: Argue in favor of Microsoft’s interim reporting practices. Use the integral view of interim reporting to support your argument.
Team 2: Argue against Microsoft’s interim reporting practices. Use the discrete view of interim financial reporting to support your argument.

Answer:
Team 1
In general, APB Opinion No. 28 (FASB ASC 270) supports the integral view of interim reporting. According to the integral view, interim periods are an integral part of the annual period, thus revenues and expenses might be allocated to various interim periods even though they occurred only in one period. The APB noted that interim financial information is essential to provide timely data on the progress of the enterprise and that the usefulness of the data rests on its relationship to annual reports. Accordingly, the Board determined that interim periods should be viewed as integral parts of the annual period and that the principles and practices followed in the annual period should be followed in the interim period. However, certain modifications were deemed necessary in order to provide a better relationship to the annual period.

Under APB Opinion No. 28 (FASB ASC 270), costs that are related to revenues should be allocated and matched with revenue in the same manner as the annual report. We argue that Microsoft’s marketing expenditures are related to sales and can be allocated across interim periods so that the results of interim periods better relate to the results of operations reported in the annual report. For example, Microsoft may make marketing expenditures in one accounting period that result in sales of another period. Since no causal relationship can be adequately determined, allocation across accounting periods of the total expected cost (such as those in the budget) would provide a reasonable approximation of the annual results.
The above is consistent with cost estimates and allocations that are allowed under APB Opinion No. 28 (FASB ASC 270) . The Opinion APB allows companies to use estimated gross profit rates to estimate and report interim cost of goods sold. It also allows companies to estimate accruals to be made at a later date in an effort to achieve a fair measure of results of operations for the annual period and to present fairly the financial position at the end of the annual period. Allocation of cost that will benefit more than one accounting period is allowed.
According to APB Opinion No. 28 (FASB ASC 270) , the amounts of certain costs are frequently subjected to year-end adjustments even though they can be reasonably approximated at interim dates. To the extent possible such adjustments should be estimated and the estimated costs assigned to interim periods so that the interim periods bear a reasonable portion of the anticipated annual amount. Use of budgeted amounts is normally related to sales projections. Hence, we argue that they provide a reasonable estimate of the relationship to annual sales and thus result in the assignment of costs to interim periods that allow the interim reports to bear a reasonable portion of the anticipated annual results.

Team 2
We disagree with the interim accounting approach used by Microsoft. We base our arguments on the discrete view of interim reporting. Proponents of the discrete view believe that each interim period should be treated as a separate accounting period in the same manner as the annual period. Thus, the same principles used to report deferrals, accruals, and estimated items in the annual report would also be employed in preparing interim reports. In accordance with the discrete approach, there generally should be no allocation to other interim periods of expenses incurred in one interim period. Instead, Microsoft should have reported all expenses incurred during the accounting period, rather than reporting budgeted expenses.
According to APB Opinion 28 (FASB ASC 270), interim information is essential to provide investors and others with timely information as to the progress of the company. The company should apply the same accounting principles and approaches to an interim report that they do for the annual report. Since companies must report cost incurred during the period in their annual report, it follows that the companies should report cost incurred during the interim period in the interim report. Thus use of the discrete approach wherein the actual expenses incurred during the interim period are reported for that period would allow the investor to see what actually occurred during the interim period and thus the real progress toward year end.

Costs incurred during an accounting period that cannot be identified with the activities or benefits of other interim periods should be charged to the interim period in which they were incurred. Advertising costs are incurred in hopes of generating company sales. However, no causal relationship between advertising costs and sales can be established. Since the relationship at best can only be assumed, companies should not arbitrarily assign these costs to interim periods.

Question: In 2002 the SEC investigated Microsoft’s