Microsoft expenses its software R&D costs, arguing that all material research and

development costs are incurred before technological feasibility is reached $($US GAAP allows

capitalization of development costs once technical feasibility is established until the product

is released to the market$).$ What adjustment would be required if the analyst decided to

capitalize Microsoft$$s software R&D and to amortize the intangible asset using the straightline method over the expected life of software $($ approximately three years$)?$

Assume that R&D spending occurs evenly throughout the year and that only half a

year$$s amortization is taken on the latest year$$s spending. R&D outlays for $2007,2008,2009$

and $2010$ are $$7\mathrm{.}1,$ $$8\mathrm{.}2,$ $$9\mathrm{.}0$ and $$8\mathrm{.}7$ respectively. Given R&D outlays for the years $2007$

to $2010,$ the R&D asset at the end of the $2009$ and $2010$ fiscal years $(06/30/09,06/30/10)$ is

$$12\mathrm{.}8$ and$$13\mathrm{.}2$ billion, respectively. The R&D amortization expenses for $2009$ and $2010$ are

$$7\mathrm{.}6$ billion and $$8\mathrm{.}3$ billion, respectively.

Since Microsoft will continue to expense software R&D immediately for tax

purposes, the change in reporting method will give rise to a Deferred Tax Liability. Given a

marginal tax rate of $35\%,$ following adjustment required in the financial statements.