Accounting Rule Changes Increase Apple Computers Revenue

Numerous firms, including computer and communication companies, sell products that have
multiple deliverables. For example, a telephone company may sell a customer a phone and a two
year unlimited long-distance telephone call package for a lump sum. How should the company
account for the lump sum that it receives? Accounting rules required that the vendor allocate the
lump sum between the two deliverables, separating the revenue from the sale of the hardware
from the revenue from the sale of the service. Referred to as subscription accounting it
required the phone company to immediately record the revenue from the sale of the hardware,
but defer and recognize the revenue from the long-distance telephone package over the two year
period.
Many high tech companies objected to this accounting rule, including Apple Computer. Under
subscription accounting, Apple was recording substantial amounts of deferred revenue associated
with the sale of its iPhone and Apple TV products. Stave Jobs was a particularly vociferous
opponent, arguing that subscription accounting obscured the real earnings growth of the
company. Because by its nature subscription accounting spreads the impact of iPhones
contribution to Apples overall sales, gross margin, and net income over two years, it can make it
more difficult for the average Apple manager or the average investor to evaluate the companys
overall performance. So, Apple began to report both GAAP and no-GAAP result side by side.
The no-GAAP earnings included the full revenue from the sale of its products and services.
In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update No. 2009-13 that addressed the issue of revenue recognition when there are
multiple deliverables. The new standard allows companies, such as Apple, to recognize the
revenue on multiple deliverables in the current period rather than over time. Apple no longer had
to use subscription accounting. In an amended 10-K filling with the Securities and Exchange
Commission Apple noted:
Under subscription accounting revenue and associated product cost of sales for iPhone and
Apple TV were deferred at the time of sale and recognized on a straight-line basis over each
products estimated economic life. This resulted in the deferral of significant amounts of
revenue and cost of sales related to iPhone and Apple TV As of September 26, 2009,
based on the historical accounting principles, total accumulated deferred revenue and
deferred costs associated with past iPhone and Apple TV sales were $12.1 billion and $5.2
billion, respectively The new accounting principles result in the recognition of
substantially all of the revenue and product costs from the sales of iPhone and Apple TV at
the time of sale The adoption of the new accounting principles increased the Companys
net sales by $6.4 billion, $5.0 billion, and $572 million for 2009, 2008, and 2007,
respectively. As of September 26, 2009, the revised total accumulated deferred revenue
associated with iPhone and an Apple TV sale to date was $483 million; revised accumulated
deferred costs for such sales were zero.

For the last quarter of 2009, Apple reported $15.6 billion of revenue, compared to $2.2 billion for
the same quarter in the previous year. The increase in revenue was attributed to two factors:
increased sales during the holiday shopping season, and the change in its revenue recognition
accounting policy. However, management would not say how much of the increased revenue was
related to the change in accounting policy. The earnings were higher than analysts expectations.
Apples share price raised $5.33 (2.7%) to close at $203.08.
Does recording substantially all the revenue in the current period result in fair reporting? Wilcox
argues that this policy masks the fact that apple has an ongoing relationship with its customer.
The iPhone is a work in progress, as evidenced by two full software upgrades and ongoing
updates. Recording deferred revenue, on the other hand, would highlight Apples obligation to
its buyers.
Questions
1. Do you think that Apples new accounting policy, that is consistent with the 2009 FASB
statement, results in fair financial reporting?
2. Do you think that Apples share price should have gone up as a result of increased
revenue due to a change in an accounting policy?