“A change in accounting rules for which Apple — among other high-tech companies — lobbied heavily won tentative approval last Thursday. The change could significantly affect both the company’s reported earnings and its stock price,” Philip Elmer-DeWitt reports for Fortune.
“The new rules are in draft form and must still win final approval from the FASB — the organization empowered by the SEC to set accounting standards in the United States,” Elmer-DeWitt reports. “But they have the force of law. And they could put an end to iPhone subscription accounting, a balance-sheet sleight of hand required by the old rules that has confused analysts and investors from the day the iPhone hit the market.”
Elmer-DeWitt reports, “Subscription accounting meant that Apple has been under-reporting earnings on its bestselling smartphone for two years — one of the factors, Apple bulls believe, that kept its share price from fully reflecting the success of one most profitable products Apple has ever made.”
Full article here.
GAAP Rules are a bit of a bother.
Wonder how Cramer will spin this.
“”Subscription accounting meant that Apple has been under-reporting earnings on its bestselling smartphone for two years”
wSounds like Apple is the first publicly held company to offer a phone.
Underreport as compared to whom?
Maybe Cramer will honk a horn….swing a bat..or some other reaction that shows off his financial incompetence.
just my $0.02
(slightly off-topic): Folks be glad that you are Mac user. Here is a copy and past job of an email from our IT department today. Things like this happen almost weekly. The learned helplessness is truly astounding!
“In an attempt to fix an email issue a user was having with encrypted emails we installed what Microsoft recommended. But, it didn’t fix anything and created a whole other issue.
For the the time being until our email hosting company can come up with a remedy you will not be able to cut, copy or paste using your mouse by right clicking. The keyboard options work though and are easy to do……..Sorry for the inconvenience, Microsoft has a habit of breaking it first before it finally works.”
The status quo reigns supreme.
Again: Accounting measures DO NOT create value! The cash flow will not change. Everyone knows what Apple is making right now. If the stock price goes up it will not be because of an accounting change, only a change to the value of the enterprise like more cash earnings (not how they are accounted for).
No free lunch here people.
“old rules that has confused analysts”
If this change does make a significant difference in AAPL, an increase in stock price will only demonstrate that analysts are incredibly easy to confuse…. aren’t they supposed to understand these rules and take them into account???
Damn you Obama
Accounting rules do not create value, but they can certainly affect reported income, which can affect stock price.
Does this mean that iPhone users will be charged for software upgrades like iPod Touch users currently are?
That would suck.
MDN Magic Word: low, as in “a low-down dirty shame”
In a word, no.
“Tentative”
Accounting. It’s all in the details.
@Cubert
Another real life Microsoft tax at work example. Loss productivity. IT & MS stranglehold/God Syndrome on users forced to only use MS & IT approved POS. Sad.
GAAP stands for Generally Accepted Accounting Principles. That’s more than just a simple name. Giving investment advice based on other than GAAP sales, profit, and expense numbers is the kind of thing that lands people in jail. Of course everyone knows that Apple is making more than GAAP numbers on the iPhone, but how many analysts/brokers are going to advise a client based on non-GAAP numbers? There are legalities and liabilities involved.
Earnings projections and announcements are based on GAAP numbers, so the stock price is to a great extent based on GAAP numbers. If Apple starts reporting a 50% increase in revenue from iPhones in GAAP numbers that will certainly get the attention of the analysts and investors who’ve been oblivious to the (presently) non-GAAP numbers.
“Underreport as compared to whom?”
Not compared to anyone, as compared to the facts of their actual income. That’s the problem. The revenue for a phone is received when it is sold, say 400 dollars. In the quarter it is sold, only 50 dollars is put on the balance sheet according to these rules (because Apple wants to give more value away later in terms of software updates). Therefore, the 400 is actually in the bank. The balance sheet won’t show the full impact of the increasing sales for two years (two years ago, the sales were much lower), and yet there is still deferred income coming in from between 8 and 1 quarter ago (another 50 dollars per iPhone sold during the last two years) — but the money is already in and making up some of that 30 billion and now collecting interest.
If Apple could report the revenue like any other product from any other manufacturer (despite wanting to add value later), then the iPhone revenue figures would be a lot higher, hence non-GAAP figures.
The whole point is that the cash is there. The whole point is that they had huge revenues these last two years and haven’t gotten credit for it in many articles. The whole point is that they could sell NO iPhones and still have increasing iPhone revenue on their balance sheet for the next two years because iPhone sales increased quarter over quarter the last two years and the revenue wasn’t credited then.
I can see that analysts can’t advise clients on non-GAAP numbers. But when there is speculation about the earnings, the expectations, a steady forecast or not, the state of iPhone sales, the profitability of Apple into the future, the cash Apple has, etc. Then it is quite easy to see that many have missed the boat.
An analyst may look at GAAP numbers only, and advise his client accordingly, refusing to look at the non-GAAP figure. Fine, I have no problem with that — but you can’t then at the same time ignore what the GAAP number itself actually means then! That’s irresponsible analysis. The GAAP number actually means that Apple has ALREADY EARNED 50 (for sake of argument) for each and every quarter for the next seven quarters on each and every iPhone already sold! If that doesn’t go into the analysis, because that is what the GAAP figure is, then that is crazy. Seems like analysts don’t know how to treat it, so they ignore it. Too bad for them when they finally wake up.
I disagree. Theoretically, in an efficient market, the stock price would already reflect all available information. Since Apple has always been showing GAAP financials and also non-GAAP measures (iPhone sales sans subscription accounting), the informed investor would already have taken this information into account. Thanks Apple for giving us what we needed, even when FASB was not!
Regards,
APPL stockholder