“I assumed that Apple will sell 11M iPhones in Q4 2009 and report them using subscription accounting,” Sidahmed writes. “This leaves nearly $14B in deferred iPhone revenues going into 2010 – the leftovers.”
How will Apple account for these? I don’t know what the FASB rule change will say, but I can think of 3 scenarios:
1. Restate all past income and recognize iPhone revenues in the quarter of actual sale.
2. Recognize all deferred iPhone revenues in Q1 2010 and get a huge bump in EPS all at once.
3. Recognize the deferred revenues over the next 2 years.
“I think scenario #1 is just too hard and too expensive. Apple would have to go back to the beginning of 2007 when the Apple TV came out. Scenario #2 is simple, but they may run into problems with carrier revenue which will be paying out till the middle of 2010. Carrier payments justifiably belong under subscription accounting,” Sidahmed writes. “I think the cleanest scenario is #3. The system is already in place. The down side is that is will continue to skew earning[s] for another 2 years.”
There’s much more in the full article here.
[Thanks to MacDailyNews Reader “Carl H.” for the heads up.]
No great option here. But all of them are better than the current, misleading, financial statements.
i think i need an ‘apple accounting for dummies’ article.
You need to differ to GAAP for how assets that are depreciated over time are accounted for when there is a loss.
E.G. – you have an asset on the books that cost $1200 (a laptop) that is depreciated over 3 years (12 quarters)
You get 2 years into the 3 yr depreciation (800 has been accounted for, $400 to go) and then the laptop is stolen/breaks/etc.
I am not an accountant but I believe GAAP allows you to either continue to depreciate the $100 per quarter until the end or take a one time hit and depreciate the remaining $400 in the quarter because the asset’s valuable life has changed.
Anyone know for sure where GAAP stands on this?
Actually, there is a 4th option – keep on doing what they have been doing.
But #3 is the easiest and simplest *by far*, so that’s what’s going to be done.
I think Apple should continue to use the current “subscription” accounting practice for iPhone sales. Now that the iPhone has been sold for more than two years (the complete 24-month subscription period), the recognized revenue for any given quarter can be considered the “average” quarterly revenue for the last two years. As long as Apple’s iPhone sales continue to grow year-over-year, the quarterly recognized revenue will steady increase.
This will (continue to) add consistency to Apple’s overall quarterly results, because revenue from Mac and iPod sales are significantly impacted by seasonal effects, such as holiday and back-to-school shopping. If iPhone’s revenue was recognized “as earned,” it too will be increase and decrease quarter-by-quarter. For example, sales will probably be down in the Apr-Jun quarter, because everyone will be waiting for the new iPhone model that usually comes late June. But through subscription accounting, as long as there was a year-over-year increase, the quarterly revenue from iPhone will keep steadily increasing each quarter.
“me” – deferred iPhone revenues are not depreciated. Non-tangible items on the balance sheet such as goodwill or deferred revenues are amortized, but they don’t lose value over time. Actually, deferred revenues are a liability on the balance sheet and offset by the actual cash (asset) received at the time of sale. In theory, if someone cancels a subscription, they get the pro rated balance of the subscription back.
GAAP – Generally Accepted Accounting Principles – accounting rules.
‘The fourth horseman’ – true, but since apple is leading the charge for this accounting change, I did not include status-quo as an option.
Ken1w – I understand your point, but disagree. The accounting “should” best represent a companies operations. Apple get their $580 for an iPhone at the time of sale. If the subscription with At&T;is canceled, no one gets money back from Apple.
This discussion is idiotic. The FASB will define how the previously booked revenue must be handled. The reports that I have read suggest that the current plan is _not_ retroactive and all revenue that was booked under the previous subscription rule will continue to be booked in that manner.
OTOH, Apple has no choice but to change to match the new rule when it becomes effective. Once again, the reports suggest that the new rule will have an optional phase in period during which it will be legal to book revenue either by the new or the old rule. This period is strictly a convenience for those who have to make changes in their accounting procedures.
Disclaimer: I am not an accountant, however, I do maintain accounting books – ss
skips – recommend you read the full article
Lately we read that Apple pays more out in stock options than for R&D;. This means that salaries are UNDERSTATED and by the same token margins are OVERSTATED, to the extent that R&D;is included therein.
Stock options simply DISTORT EARNINGS statements, and deprive shareholders of a level playing field. The represent OFF BALANCE SHEET costs, as they are not reflected in income. Further, the company does not get the benefit of the tax deductions that would accrue if the true salary cost was reflected in income. Who loses? Only the shareholder.
Adding back the deferred assets won’t fix the significant income distorting effects of stock options. So, analysts and investors need to adjust the statement to include the stock option costs in EPS calculations. As to when to add the deferred income, that would be when the decision is taken to change the policy: do it all at once as a special item.
@ Stefan Sidahmed
> true, but since apple is leading the charge for this accounting change
Apple may want to have the option to change the way they report iPhone revenue. Or perhaps to report the revenue from an unreleased future product. That does not necessarily mean Apple is going to immediately change the way the report iPhone revenue.
> If the subscription with ATT is canceled, no one gets money back from Apple.
ATT does not need to get money back from Apple, because they will charge the subscriber with an early contract termination fee.