Microsoft Corporation is a leading designer and retailer of PC software applications. In its 2012 annual report, the company disclosed that the European Union Competition Commission had opened an investigation concerning a commitment to make browser choice selection easier in the company’s Windows operating system:

In March 2013 the European Union fined Microsoft \($731\) million for its failure to provide Windows PC users a Web browser choice screen.
Required

1. How should Microsoft account for the EU Competition Commission investigation in its 2012 annual report? Why?
2. How should Microsoft account for the potential fine of up to 10% of its worldwide annual revenue? Why?
3. How would the capital markets react to an announced investigation like that filed by the EU Competition Commission in 2012? How would the capital markets react to the announcement that a fine of \($731\) million was imposed?

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Government Competition Law Matters In December 2009, the European Commission adopted a decision that rendered legally binding commitments offered by Microsoft to address the Commission's concerns about the inclusion of Web browsing software in Windows. Among other things, Microsoft committed to display a "Browser Choice Screen" on Windows-based PCs in Europe where Internet Explorer is set as the default browser. Due to a technical error, we failed to deliver the requisite software to enable that display to PCs that came preinstalled with a version of Windows 7 called Windows 7 Service Pack 1. We did deliver the requisite software to PCs running the original version of Windows 7 and earlier editions of Windows. Following notification by the Commission of reports that some PCs were not receiving the update, we promptly fixed the error and advised the Commission of what we had discovered. PCs that come preinstalled with Windows 7 Service Pack are now receiving the Browser Choice Screen software, as intended. On July 17, 2012, the Commission announced that it had opened proceedings to investigate whether Microsoft had failed to comply with this commitment. The Commission stated that if a company is found to have breached a legally binding commitment, the company may be fined up to 10% of its worldwide annual revenue.