Microsoft to restate earnings

The software giant on Monday announced its plan to switch from giving employees stock options to granting them actual shares.

Although the switch requires the company to account for future stock awards as an expense, Microsoft is not required to restate the expense of stock options. However, Microsoft says that, by restating its past two years' earnings, it will provide it will provide the most accurate information to which investors can compare its future financial statements.

Another effect of the restatement, however, is that the company's future results will now look comparatively better, because it will knock down previous earnings. A Microsoft representative said Wednesday that gaining a more favorable comparison with past earnings was not the reason the software giant chose to alter its books.

"This was not a factor," the representative wrote in an e-mail. "The accounting provides a more transparent and comparable view for our investors to look at past years' performance."

Microsoft said it will restate earnings going back to its fiscal year 2002. Though the changes will not be reflected in the company's annual report for fiscal 2003, they will be reflected in its first quarterly report of 2004, the company said. Microsoft's fiscal year started July 1. The Redmond, Wash., company may offer further details when it reports quarterly earnings next week and at a July 24 meeting for financial analysts.

The company has not said just how large the restatements will be, but a Microsoft representative said it expects the restated figures to nearly match estimates the company previously has given for the potential cost of expensing options.

For example, Microsoft estimated that, for the 12 months ended March 31, the effect of expensing options would have been to reduce net income from $9.6 billion to just less than $7 billion--a drop of more than 27 percent.

In the future, Microsoft will account both for the expense of previously awarded options that become vested and for its new grants of stock to employees. Other companies, such as Intel, have resisted pressure to account for stock options as an expense, saying that using current accounting methods would not accurately reflect the cost to the company of granting such options.

Expensing stock options for the past couple of years will reduce Microsoft's earnings for that period by about 30 percent, Citigroup Smith Barney analyst Philip Gainey IV, wrote in a research note this week. Gainey said Microsoft is likely to see a similar outcome in the coming years from the combination of new stock grants and the expensing of already granted options.

Some noted the irony in Microsoft's willingness to expense options now that it plans to stop giving them.

"It's not a coincidence that, on the same day it announced it was switching to restricted stock, they also said they were going to expense options," said Martin Staubus, director of consulting for the Beyster Institute for Entrepreneurial Employee Ownership, a nonprofit that advocates more employee stakeholders in companies.

Although Microsoft also will have to account for the expense of restricted stock grants, those are much easier to account for than are stock options, experts say.

"They've sort of sidestepped the whole expense thing and given something that needs to be expensed right away," said Bill Coleman, senior vice president for compensation at Salary.com. "There's probably some laughing in the back rooms at Microsoft as people there say, 'What's everybody else going to do?'"

CNET News.com's Lisa M. Bowman contributed to this report.