Did Microsoft Corp. Really Spend More on R and Dlast year than any other company in the world? We thinkso, but we can't be sure. The reason is that roughlyUS $1.3 billion of the software giant's $8 billionR and D outlay was actually paid out as shares of stockto its researchers. At the moment, hardly any companybesides Redmond, Wash.-based Microsoft bothers to trackstock or stock options as an R and D expense. The fewthat do account for this expense in widely differentways.

But before the end of this year, all companies listed on U.S. stock markets may have to begin figuring stock outlays into their R and D expenses. That would be the result of a new rule proposed by a private sector organization in Norwalk, Conn., called the Financial Accounting Standards Board, which establishes U.S. accounting standards. If the rule is not outlawed by an act of Congress this fall, the U.S. Securities and Exchange Commission will soon require all publicly traded firms to abide by it.

The looming prospect of this new corporate accounting practice is already buffeting R and D in a way that few other developments have over the past half-century. Day traders, analysts, and policy wonks are all finding it nearly impossible to assess companies' R and D spending and, by extension, their commitment to competing in dynamic technology markets and to creating entirely new ones.

Disruptive as it is, the stock-accounting trend is just one of several poised to have long-term effects on R and D, according to analysts and executives contacted for IEEE Spectrum's third annual R and D survey. These insiders also singled out the increasing concentration of R and D resources on software development, systems engineering, and consulting; the shift of basic research from corporate ivory towers such as Xerox Palo Alto Research Center to government-funded university projects; and the globalization of the industrial research enterprise.

In the short term, though, the stock-accounting proposal is keeping executives up at night worrying about how investors will view such transactions once they are made public—as investments in the best minds stock can buy or as a hit to the bottom line.

To see how accounting for these transactions can affect a balance sheet, step into the shoes of a Microsoft shareholder who reads the company's fourth-quarter fiscal 2004 earnings statement. At first glance, it certainly looks as though Bill Gates and Steve Ballmer have made good on their promise to increase Microsoft's spending on R and D to unprecedented heights, throwing almost $8 billion at it in 2004, compared with $4.4 billion in 2001, and propelling the company from No. 10 to No. 1 on our list.

But read the fine print: most of that increase is from an obscure change in Microsoft's accounting practices. Like every other company, Microsoft counts payroll and employee benefits for its researchers and developers as R and D expenses. Unlike many high-tech companies that partially compensate employees with the option to buy company stock during a particular period at a set price, Microsoft last year began paying out actual shares.

Because the shares have a specific value, Microsoft is required by law to count them as a cost of doing business. If those shares weren't counted, the company would have reported a reduction in this year's R and D spending of at least $126 million from 2003.