Accounting rule changed in favor of Apple
A change to the rules on how companies must report their earnings was made official Wednesday, a move that is expected to benefit Apple's publicly stated iPhone profits.
The Financial Accounting Standards Board certified the change, which will allow companies that sell subscriptions for services with their hardware, like Apple and the iPhone, to report earnings up-front. Under the previous rules, those profits were required to be represented over a period of time -- in the case of the iPhone, over the two-year contract term.
Wednesday's decision was expected, as the FASB had previously drafted the rule change, though the meeting made it official, according to The Wall Street Journal. The not-for-profit board sets accounting standards for U.S. public companies, a power designated to the private group by the Securities and Exchange Commission.
Last week, analyst Shaw Wu with Kaufman Bros. estimated that the previous rules required Apple to underestimate its revenue by $1.4 billion last quarter, a loss of 17 percent. In addition, the company's earnings per share were also said to be under-valued by $0.78, or 58 percent.
The change doesn't affect how much revenue Apple actually earns, just how it reports it quarterly. Some believe it could be a boon for AAPL stock.
"We believe Apple will be able to defer the iPhone revenue in a less dramatic manner," Piper Jaffray Senior Research Analyst Gene Munster told AppleInsider last week. "This could meaningfully alter the reported, GAAP-based revenue numbers in future quarters and the change would likely be a positive for the stock."
Apple lobbied heavily for the change to the generally accepted accounting principles (GAAP), citing the rules as the reason it must charge some customers nominal fees for upgrades to products like the iPod touch and Airport Extreme. In August, Apple wrote to FASB Chairman Russell Golden in support of the rule change, noting that the then-current requirements did not accurately reflect the real economics of transactions.
"(The changes)... will result in a more accurate reflection of an entity's economic activities, and in less complex and more transparent financial information that will better serve investors, financial analysts, and other users of financial statements," Betsy Rafael, Apple's vice president, corporate controller and principal accounting officer, said in a note to Golden.
Wu noted that most professional investors already look at Apple's free cash flow instead of GAAP reported revenue, so he does not expect the rule change to have a significant impact on the company's stock. However, he said the change will make it easier for "mainstream investors" to understand the company's earnings per share report.
The Financial Accounting Standards Board certified the change, which will allow companies that sell subscriptions for services with their hardware, like Apple and the iPhone, to report earnings up-front. Under the previous rules, those profits were required to be represented over a period of time -- in the case of the iPhone, over the two-year contract term.
Wednesday's decision was expected, as the FASB had previously drafted the rule change, though the meeting made it official, according to The Wall Street Journal. The not-for-profit board sets accounting standards for U.S. public companies, a power designated to the private group by the Securities and Exchange Commission.
Last week, analyst Shaw Wu with Kaufman Bros. estimated that the previous rules required Apple to underestimate its revenue by $1.4 billion last quarter, a loss of 17 percent. In addition, the company's earnings per share were also said to be under-valued by $0.78, or 58 percent.
The change doesn't affect how much revenue Apple actually earns, just how it reports it quarterly. Some believe it could be a boon for AAPL stock.
"We believe Apple will be able to defer the iPhone revenue in a less dramatic manner," Piper Jaffray Senior Research Analyst Gene Munster told AppleInsider last week. "This could meaningfully alter the reported, GAAP-based revenue numbers in future quarters and the change would likely be a positive for the stock."
Apple lobbied heavily for the change to the generally accepted accounting principles (GAAP), citing the rules as the reason it must charge some customers nominal fees for upgrades to products like the iPod touch and Airport Extreme. In August, Apple wrote to FASB Chairman Russell Golden in support of the rule change, noting that the then-current requirements did not accurately reflect the real economics of transactions.
"(The changes)... will result in a more accurate reflection of an entity's economic activities, and in less complex and more transparent financial information that will better serve investors, financial analysts, and other users of financial statements," Betsy Rafael, Apple's vice president, corporate controller and principal accounting officer, said in a note to Golden.
Wu noted that most professional investors already look at Apple's free cash flow instead of GAAP reported revenue, so he does not expect the rule change to have a significant impact on the company's stock. However, he said the change will make it easier for "mainstream investors" to understand the company's earnings per share report.
Comments
/don't have any /s
W00T!
I really wish I was in a position to buy a load of Apple shares. Unfortunately that's not the case
How about a time machine to go back to when they were a mere fraction of the value they are today?
How about a time machine to go back to when they were a mere fraction of the value they are today?
If I had a time machine I'd be writing down lotto numbers. I'd do last week's EuroMillions and get my half of the €100,000,000 prize.
I has nothing to do with the contract you have with AT&T.
It is just that Apple decided to take the revenue from the sale of the phone over 24 months, nothing to do with income from iPhone contracts. Simple.
In the UK we have 18 month contracts but Apple still realises revenue over 24 months.
Get it right AI......
This rule also applies to the Apple TV, which also has its revenue realised over 24 months, no contact in sight there.
They did this for both devices so that they could give free updates with added features in the future without failing foul of the Sawbane - Oxley rules.
How about a time machine to go back to when they were a mere fraction of the value they are today?
Well let's say the year 2002...well I would have been 17 years old with about $50 dollars to my name. According to Yahoo, on 10/9/02 I would have been able to afford 7 shares of Apple. (Share price of $6.80). Now a days those 7 shares would have been worth $1291.36
(Yes, I know you can't buy 7 shares at a time.)
How many times do we need to repeat this its is NOT related to "the two-year contract term."
I has nothing to do with the contract you have with AT&T.
It is just that Apple decided to take the revenue from the sale of the phone over 24 months, nothing to do with income from iPhone contracts. Simple.
In the UK we have 18 month contracts but Apple still realises revenue over 24 months.
Get it right AI......
This rule also applies to the Apple TV, which also has its revenue realised over 24 months, no contact in sight there.
They did this for both devices so that they could give free updates with added features in the future without failing foul of the Sawbane - Oxley rules.
I think there are other reasons too, but I can't quite pinpoint why.
Get it right AI......
This rule also applies to the Apple TV, which also has its revenue realised over 24 months, no contact in sight there.
They did this for both devices so that they could give free updates with added features in the future without failing foul of the Sawbane - Oxley rules.
Then will the updates still be free for ATV? Or has that changed? If so, why not free for the iPod Touch?
They did this for both devices so that they could give free updates with added features in the future without failing foul of the Sawbane - Oxley rules.
Out of curiosity, can someone tell me why doing the above violates Sarbanes-Oxley?
(Did you notice my subtle spelling correction?)
Well let's say the year 2002...well I would have been 17 years old with about $50 dollars to my name. According to Yahoo, on 10/9/02 I would have been able to afford 7 shares of Apple. (Share price of $6.80). Now a days those 7 shares would have been worth $1291.36
(Yes, I know you can't buy 7 shares at a time.)
First of all, you most certainly can buy 7 shares at a time. You could even do it back in the bad old days of 2002. Internet discount brokers had been around for a few years. The real problem is that the stock has split three times since then. They wouldn't have been $6.80, in fact they were probably more than $50 each - but each one would now be 8 shares. Actually it might not be three splits exactly, but you get the idea.
That's a bit irrelevant if you have a time machine, though. You'd probably be going back to the '80s to buy it when it first went public. Actually, a better way to make a fortune with a time machine is just to travel to the future, get an almanac and some newspapers for the next few years, come back to the present, and make lots of guaranteed investments and sports bets. If you go back in time to invest, you have to be careful to carry period-authentic currency and such.
If I had a time machine I'd be writing down lotto numbers. I'd do last week's EuroMillions and get my half of the ?100,000,000 prize.
Wow, ?100,000,000? That's a lot of US dollars. How's the tax on winnings, though?
Well let's say the year 2002...well I would have been 17 years old with about $50 dollars to my name. According to Yahoo, on 10/9/02 I would have been able to afford 7 shares of Apple. (Share price of $6.80). Now a days those 7 shares would have been worth $1291.36
(Yes, I know you can't buy 7 shares at a time.)
Sure, you could buy 7 shares at a time, but you also have to pay the company you buy the shares from, then pay them again when you sell them.
Out of curiosity, can someone tell me why doing the above violates Sarbanes-Oxley?
Apple's bean counters interpreted the accounting rules to require a restatement of earnings and expenses if they added a feature to a product already sold. We could argue all day long whether this is true to no effect. All we know is, this is Apple's interpretation.
Sure, you could buy 7 shares at a time, but you also have to pay the company you buy the shares from, then pay them again when you sell them.
You just pay the brokerage commission, same as if you buy 70 or 700 shares.
This is a two-edged sword for a couple of reasons, the main one being that as Apple begins to report profits on this new basis, it will be evaluated with an asterisk which notes that the previous year or quarter are no longer comparable. For the next year or so, this will cause even more confusion than reporting both GAAP and non-GAAP numbers. I don't really understand why Apple was so interested in changing this rule. Maybe it makes their accounting easier. It sure doesn't do anything for investors.
I have a feeling they will report the non-GAAP numbers as their official numbers, but still report the GAAP numbers at least for a small period of time. Similar to what they are doing now, just the opposite. It will keep the numbers comparable for the time being.
At least in my experience, cash accounting is much easier than accrual. There are places and needs for accrual, I just don't see it being necessary for Apple. The only need for accrual regarding the iPhone I see would be for ATT stretching out the loss on the subsidy over the two years. (They may already do this, I'm not sure.)
Out of curiosity, can someone tell me why doing the above violates Sarbanes-Oxley?
Companies used to (deceptively) count revenue now for transactions that were scheduled to occur in the future, and that would make a company's revenue look higher now than it really was. S/O prevents that.
Probably the wording of the bill unintentionally covered situations like Apple's, where Apple gets paid now for the iPhone and iPod Touch, but will deliver improvements and new software for the devices in the future. (As the good Doctor noted above, this is Apple's interpretation of the rules. Remember that when this started, Apple was under investigation for backdating stock options, and probably wanted to play it as safe as they could).
First of all, you most certainly can buy 7 shares at a time. You could even do it back in the bad old days of 2002. Internet discount brokers had been around for a few years. The real problem is that the stock has split three times since then. They wouldn't have been $6.80, in fact they were probably more than $50 each - but each one would now be 8 shares. Actually it might not be three splits exactly, but you get the idea.
That's a bit irrelevant if you have a time machine, though. You'd probably be going back to the '80s to buy it when it first went public. Actually, a better way to make a fortune with a time machine is just to travel to the future, get an almanac and some newspapers for the next few years, come back to the present, and make lots of guaranteed investments and sports bets. If you go back in time to invest, you have to be careful to carry period-authentic currency and such.
This is an interesting plan, but once an individual space-time pathway is used, it could not be reused.
(Extra points to those who recognize this snippet of dialogue).
Sure, you could buy 7 shares at a time, but you also have to pay the company you buy the shares from, then pay them again when you sell them.
You just pay the brokerage commission, same as if you buy 70 or 700 shares.
I learn something new everyday. I was always under the impression you had to buy in lots of 100. I guess this is why I don't mess around in the stock market