Accounting Rule Change May Affect Apple's Future Earnings Reports

[MacRumors]

Silicon Alley Insider reports that a change to accounting standards that received preliminary approval last week may alter the way Apple treats revenue from the iPhone and Apple TV. The issue relates to Apple's policy of recognizing revenue from the iPhone and Apple TV over a two-year period from the date of purchase, a policy developed to satisfy accounting regulations as Apple provides free feature additions and software updates to the devices beyond the initial purchase.

Consequently, Apple has instituted a policy of releasing two sets of earnings numbers each quarter, one official set using Generally Accepted Accounting Principles (GAAP) that parcels out iPhone and Apple TV revenue, and one set of non-GAAP numbers that includes all revenue as recorded on the date of purchase. For example, at its most recent quarterly earnings announcement, Apple reported official GAAP earnings of $1.23 billion on $8.34 billion in revenue, while the company's non-GAAP earnings came in at $1.94 billion on $9.74 billion in revenue.

The Emerging Issues Task Force of the Financial Accounting Standards Board has issued preliminary approval of a policy change that would allow Apple to officially recognize most of the revenue from iPhone and Apple TV sales at the time of purchase, setting aside only a small portion of the revenue deemed to be the value of future software upgrades for future recognition.

In a report last week, Credit Suisse describes an accounting rule change that may eventually allow Apple to book most iPhone revenue upfront. Doing so would not change the company's cash flow, so there would be no actual change in the theoretical value of the company or stock.

But the change would cause Wall Street analysts to jack up their earnings estimates, and it would significantly boost the company's reported earnings. This would make Apple's stock look much cheaper to unsophisticated investors. It might also, therefore, act as a catalyst for the stock.

The report notes that the rule change would affect only future sales, meaning that as Apple transitions to the new standard, its earnings would be somewhat inflated as the company recognized full revenue from new iPhone and Apple TV sales while still recording deferred revenue from sales in previous quarters made under the old standard.

Article Link: Accounting Rule Change May Affect Apple's Future Earnings Reports

[applesith]

wow. why even bother with GAAP anymore?

[Full of Win]

Basically a "6 will get you half a dozen" situation

[MrAwax]

Originally Posted by MacRumors

This would make Apple's stock look much cheaper to unsophisticated investors.

Unsophisticated is the word.

This accounting bias has been stated from day 1 and has been thoroughly explained by Apple. Both GAAP and non-GAAP numbers where available at every earning reports.

There is not a single modification in Apple or its earning here : there is just a modification in the order it will present its numbers (GAAP/nonGAAP becomes nonGAAP/GAAP).

If your investor is trying to sell you "suddently over-performing Apple stocks", you shouldn't trust him anymore and place your savings elsewhere.

[sockdoggy]

Originally Posted by applesith

wow. why even bother with GAAP anymore?

I'm not sure what your issue with US GAAP is, but there is a pretty big purpose for it... comparability, understandability, reliability, relevance.

This would be a good thing for Apple. They get so show more revenue up front rather than having to recognize it over a 2 year period.

Surprising that FASB is going the less conservative route here but I think it does reflect Apple's operations more accurately.

[tiguk]

It just made me smile to see accounting principles being front page news.

I didn't imagine there are too many who visit this site who'd care...

[Bubba Satori]

Originally Posted by tiguk

It just made me smile to see accounting principles being front page news.

I didn't imagine there are too many who visit this site who'd care...

Well, there's no computer news.

[WeeBull]

Woot! Now iPhone owners will have to pay for OS updates too.

[phineas]

Originally Posted by WeeBull

Woot! Now iPhone owners will have to pay for OS updates too.

Think again, torrent downloads, hacked versions , the way the economy is going and now more money. NOTTTTTTTTTTTTTTTTTTTTT

[DipDog3]

Originally Posted by WeeBull

Woot! Now iPhone owners will have to pay for OS updates too.

They said they would set aside a small amount of the sale for upgrades, but that may mean that there would be limited upgrades in the future that would be free.

[alent1234]

Originally Posted by WeeBull

Woot! Now iPhone owners will have to pay for OS updates too.

then watch us non-fanboy iphone owners either bail for another phone or not upgrade

over the last decade in the cell phone/PDA market there was a new cool device every 2-3 years. In each case the company didn't continue to develop it and lost market share to the next cool thing.

Android seems too be maturing very nicely and even Microsoft may have finally learned their lesson, but Android probably has them beat on cost to build a device

[Beric]

Originally Posted by tiguk

It just made me smile to see accounting principles being front page news.

I didn't imagine there are too many who visit this site who'd care...

Well, I learned this in Spring in my Intro to Business class. Interesting to see it in real life.

[knemonic]

It still bothers me they do not consider the ipod Touch a revenue generating device.

If they do not charge Apple TV users for updates, then they should not for Touch users based on this article. It is in Apple's best interest of revenue that OS upgrades for the Touch be free. Imagine if people did not upgrade from OS 1.0 to 2.0 for the App store, tons of revenue would of been lost from people that were not buying apps, which they have currently sold 2.2 billion. Imagine how that number might have been effected if they did not charge 9.95 for that update.

On top of that, we can now buy music, tv shows and movies on the Touch. And now that they market it as a gaming system means more game sales. And Apple gets 30% of every game sale, massive revenue generator.

Too bad they did not consider this when re-evauluating their Accounting Practices.

[kresh]

Originally Posted by MacRumors

This would make Apple's stock look much cheaper to unsophisticated investors. It might also, therefore, act as a catalyst for the stock.

Translation --> "When we make this change we feel that we can confuse a significant amount of investors, tricking them into passing us money hand over fist."

Why do the words "money grubbing" come to mind?

[applesith]

Originally Posted by sockdoggy

I'm not sure what your issue with US GAAP is, but there is a pretty big purpose for it... comparability, understandability, reliability, relevance.

This would be a good thing for Apple. They get so show more revenue up front rather than having to recognize it over a 2 year period.

Surprising that FASB is going the less conservative route here but I think it does reflect Apple's operations more accurately.

I know GAAP and why it is important...economics & finance major. I am just very surprised that Apple will be allowed to recognize all of the revenue at time of sale....goes against GAAP. I was being sarcastic with my original post.

[seashellz]

Originally Posted by alent1234

then watch us non-fanboy iphone owners either bail for another phone or not upgrade

over the last decade in the cell phone/PDA market there was a new cool device every 2-3 years. In each case the company didn't continue to develop it and lost market share to the next cool thing.

Android seems too be maturing very nicely and even Microsoft may have finally learned their lesson, but Android probably has them beat on cost to build a device

---------
You should be registered posting at an MS site-dontcha think?
if they GET it-then so should you
Like MS paying people to edit WIKI to make Linux look like a poor choice
(they will never "Get it"-a bunch of way past Boomer stage old farts or groomed young corporate WOW! GEE! poodles)
Just so you know
MS is increasing irrellevant in the 21st century

[cbeyond]

There is an error in the report...specifically:

The report notes that the rule change would affect only future sales, meaning that as Apple transitions to the new standard, its earnings would be somewhat inflated as the company recognized full revenue from new iPhone and Apple TV sales while still recording deferred revenue from sales in previous quarters made under the old standard.

When a change is made in an accounting treatment, the change MUST be reflected in ALL financial reports released from the company. Otherwise, we would not be able to truly compare different periods together - it would be comparing apples to oranges (pun intended). This is BASIC accounting, guys.

And from the modification in FASB, it looks like the actual reporting will be a hybrid of the two values Apple shows currently, since the non-GAAP revenue amounts they quote are recognizing 100% of the retail sales of iPhones and AppleTVs.

At least this will keep the Finance Department in Cupertino busy.

[ruinfx]

only makes sense seeing as how the iphone no longer has revenue sharing

[Surely]

Originally Posted by WeeBull

Woot! Now iPhone owners will have to pay for OS updates too.

It doesn't say anything about that.

Originally Posted by DipDog3

They said they would set aside a small amount of the sale for upgrades, but that may mean that there would be limited upgrades in the future that would be free.

This is about how accountants will recognize revenues. I don't think that this is a plan by Apple (or the FASB) to start charging for iPhone OS upgrades 2 years from now.

Originally Posted by applesith

I know GAAP and why it is important...economics & finance major. I am just very surprised that Apple will be allowed to recognize all of the revenue at time of sale....goes against GAAP. I was being sarcastic with my original post.

Not all of the revenue at the time of sale, just more of it (most of it, according to the OP). That would still follow GAAP.


/Bah, the GAAP we all know today will be quite different in the coming years what with the convergence of GAAP and iGAAP. It will be interesting to see what this bastard child will look like......

[simpleleap]

Well the more accurate the reports, the better for everyone

[akacaj]

First they change how they report drive space in Snow Leopard and now they change how they report their earnings... what is going on with Apple these days?

[Surely]

Originally Posted by akacaj

First they change how they report drive space in Snow Leopard and now they change how they report their earnings... what is going on with Apple these days?

This is not the result of a decision made by Apple. This required accounting change would be in response to a rule change made by the FASB.

Apple would simply be responding to the change in rules.

[Constable Odo]

Great. When I wake up one morning I guess I can expect to see the price of Apple shares double. Victory dance.

I'm not holding my breath on this one. Maybe Apple should just sell more desktop computers and investors will actually think Apple is worth investing in. Maybe Apple should raise the $.99 price point of applications to around $5 and start making some money from the App Store.

[twoodcc]

so the stock price will probably go up then i guess

[crackbookpro]

Originally Posted by sockdoggy

I'm not sure what your issue with US GAAP is, but there is a pretty big purpose for it... comparability, understandability, reliability, relevance.

This would be a good thing for Apple. They get so show more revenue up front rather than having to recognize it over a 2 year period.

Surprising that FASB is going the less conservative route here but I think it does reflect Apple's operations more accurately.

..good point