Warning: Long post on iPT vs. iPhone Fees
This is a post I put up in another thread but thought it would be helpful here...
I've seen too many posts regarding the incremental upgrade fee associated with iPT vs. iPhone. I am not going to weigh in on whether the fee is right or wrong but wanted to clarify some of the points around the use of SOX compliance and accounting issues.
All public companies in the US are required to abide by the following:
1. GAAP (Generally Accepted Accounting Principles). This what allows all companies in the US to have a standardize set of books to operate their business, provide comparisons to other companies, to pay taxes, and meet SEC reporting requirments.
2. SOX (Sarbanes-Oxley). This is a protective measure instituted after ENRON and the other accounting fiascoes that requires all public companies to undergo stringent testing, documentation, and control procedures to ensure that they are meeting GAAP and SEC requirements. It also extends criminal liability to the executive staff to ensure that all the financial reporting is accurate.
3. SEC reporting requirements. All publicly traded companies must file and provide sufficient data to the public in a standardize form for specific transactions (quarterly earnings, annual reports, M&A, etc.).
I'm giving a very high level perspective on this and will not get into any detail on each of these beyond what I've written. There are entire industries built around these topics and you can google and learn more about them.
So onto the Apple iPT vs. iPhone fee...
The main confusion around SOX seems to be that folks on the fora suggests that the Apple iPT fee is caused by SOX. I watched the SDK presentation and Steve Jobs does not mention SOX at all. He mentions, and I'm paraphrasing, that the incremental fees on the iPT were due to "Accounting Issues". Perhaps it was mentioned in another presentation. Either way, based on what SOX is, it is doubtful that SOX is the cause of the fee. SOX may require that Apple demonstrate consistency in how it recognizes revenue for iPods vs. iPhone but is not the main reason for the fees.
Most likely the causes are
1) is the revenue recognition differences in the iPT vs. iPhone.
2) Apple chose to implement an upgrade fee. Again, no comment on the right or wrong on the fee.
On the accounting issues:
As I mentioned above, all public companies are required to disclose their financial information. All this information is available from the SEC at
www.sec.gov.
Apple 10-K. This is the annual report and includes the financial results for the entire year.
Apple 10-Q. This is the quarterly filing (forgot which quarter) of Apple's quarterly financial results.
One of the key areas within these reports, besides their financial results, is their disclosure of how they recognize revenue for their products. This is basically the accounting version of what happens when you buy a product from Apple.
Instead of having you guys find this section, I have copied out a section of it for you. This is verbatim from the 10-Q.
Revenue Recognition
Net sales consist primarily of revenue from the sale of hardware, software, music products, digital content, peripherals, and service and support contracts. The Company recognizes revenue for software products (operating system software and applications software), or any product that is considered to be software-related in accordance with the guidance in Emerging Issues Task Force (EITF) No. 03-5, Applicability of AICPA Statement of Position 97-2 to Non-software Deliverables in an Arrangement Containing More-Than-Incidental Software, (e.g., Mac computers, iPod portable digital music players and iPhone) pursuant to American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) No. 97-2, Software Revenue Recognition, as amended. For products that are not software or software-related, (e.g., digital content sold on the iTunes Store and certain Mac, iPod and iPhone supplies and accessories) the Company recognizes revenue pursuant to SEC Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition.
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Product is considered delivered to the customer once it has been shipped, and title and risk of loss have been transferred. For most of the Companys product sales, these criteria are met at the time the product is shipped. For online sales to individuals, for some sales to education customers in the U.S., and for certain other sales, the Company defers revenue until the customer receives the product because the Company retains a portion of the risk of loss on these sales during transit. If at the outset of an arrangement the Company determines the arrangement fee is not, or is presumed not to be, fixed or determinable, revenue is deferred and subsequently recognized as amounts become due and payable and all other criteria for revenue recognition have been met.
For both Apple TV and iPhone, the Company indicated it may from time-to-time provide future unspecified features and additional software products free of charge to customers. Therefore, sales of Apple TV and iPhone handsets are recognized under subscription accounting in accordance with SOP No. 97-2. The Company recognizes the associated revenue and cost of goods sold on a straight-line basis over the currently estimated 24-month economic lives of these products with any loss recognized at the time of sale. Costs incurred by the Company for engineering, sales, marketing and warranty are expensed as incurred.
As you can see, the accounting for iPhone is very different from the iPod. Thus it is true that Apple needs to recognize revenue differently. Also note that once you implement an accounting principle you can not change it at will. Any change will require a company to restate their current and past earnings (don't remember how far back you have to go tho). Therefore, Apple is not going to make changes on how they plan to account for the iPT or the iPhone.
I hope this clarifies the issues around the whole SOX and accounting for some of you and I hope we can stop this whole discussion on upgrade fee caused by this.
The real issue is whether people feel it is right for Apple to charge a fee to upgrade the iPT. Unfortunately, Apple has chosen this route and as a friend of mine said once, "You can vote with your feet", meaning you can choose to pay or not pay. That choice is yours.
BTW, I do not own an iPT nor do I work for Apple. However, I own 3 ipods (4g 40gb photo, 4gb nano, 5g 30gb video) and am thinking about adding an iPT to use as a PDA.
Thanks for reading!
