I used the 2009 Microsoft financial statements in class yesterday (well just the balance sheet and contractual obligations footnote). Interesting item on the balance sheet- securities lending payable. Maybe I missed it but the footnotes were pretty bare on discussing this. My understanding of this transaction is that the company (in this case, Microsoft) will transfer to a hedge fund some of their government securities (investments) as the hedge fund is selling short so has to have them in their possession. The hedge fund gives Microsoft collateral (I guess cash) for the borrowed securities. Because Microsoft is the legal owner of the securities, they keep them on the b/s. But they have to record the collateral so that’s a debit to cash and a credit to securities lending payable. So their assets are a bit grossed up – both investments (still there) and the cash for collateral – but they have that payable (promise to give back cash when investments come back from hedge fund).

Maybe Bob Laux can pipe in here. Is my characterization correct? Why so little discussion in the footnotes? (The #’s seem much smaller on the 2010 10-K that just came out last week .. but my fall class notes had to go to press in July so didn’t have that at the time).