Accounting rule changed in favor of Apple

[AppleInsider]

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.

[ View this article at AppleInsider.com ]

[Ireland]

Buy stock quick, I need you to lift mine
/don't have any /s

[iCarbon]

sounds good! I like seeing my stock prices rise for no relevant reason whatsoever!

W00T!

[DKWalsh4]

I really wish I was in a position to buy a load of Apple shares. Unfortunately that's not the case

[Hattig]

Originally Posted by DKWalsh4

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?

[Ireland]

Originally Posted by Hattig

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.

[parky]

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.

[DKWalsh4]

Originally Posted by Hattig

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.)

[Ireland]

Originally Posted by parky

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.

[teckstud]

Originally Posted by parky

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?

[DKWalsh4]

Originally Posted by parky

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?)

[Dr Millmoss]

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.

[ShavenYak]

Originally Posted by DKWalsh4

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.

[SpamSandwich]

Originally Posted by Ireland

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?

[SpamSandwich]

Originally Posted by DKWalsh4

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.

[Dr Millmoss]

Originally Posted by DKWalsh4

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.

[Dr Millmoss]

Originally Posted by SpamSandwich

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.

[DKWalsh4]

Originally Posted by Dr Millmoss

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.)

[elroth]

Originally Posted by DKWalsh4

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).

[SpamSandwich]

Originally Posted by ShavenYak

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).

[DKWalsh4]

Originally Posted by SpamSandwich

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.

Originally Posted by Dr Millmoss

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

[Dr Millmoss]

Originally Posted by DKWalsh4

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.

Right, sort of what I was saying. I just don't see the advantage, at least from an investor's point of view. I think this must save Apple some accounting effort internally, or they'd care not at all.

[Dr Millmoss]

Originally Posted by DKWalsh4

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

Odd lots are a thing of the past, at least AFAIK. Most brokers are flat-rate now, so the fees on a small trade are going to be pretty large proportionally.

[parky]

Originally Posted by teckstud

Then will the updates still be free for ATV? Or has that changed? If so, why not free for the iPod Touch?

Yes ATV updates will still be free.
iPod touch users have never had free major updates because Apple does not use the GAAP account rules for them, they realise ALL the revenue at the time of the iPod touch sale.

Macrumours has a much more accurate report here :-

http://www.macrumors.com/2009/09/23/...ue-accounting/

Dow Jones Newswires reports that the Financial Accounting Standards Board (FASB) has given final approval to a change in accounting regulations that will allow Apple to recognize more of its iPhone and Apple TV revenue at the time of sale.
The change okayed by the Financial Accounting Standards Board helps companies that sell goods and services in bundles - like smart phones and other high-tech devices combining hardware and software, or home appliances that come with installation and service contracts.

Under current accounting rules, companies must often defer large portions of their revenue from such sales - recognizing them gradually over time, instead of immediately when the sale is made. The rule change would give companies more flexibility in crediting more of that revenue to their results upfront.

Apple has employed subscription-based accounting for its iPhone and Apple TV segments, which allows the company to provide free software updates over the two-year period considered to be the lifespan of the devices for such purposes. Apple does not use subscription-based accounting for its iPod line, a move which has required the company to charge users nominal fees for operating system updates on the iPod touch.
Apple Inc. (AAPL) is expected to be one of the major beneficiaries of the change, since it would dramatically change how the company reports revenues from its iPhone. Currently, Apple recognizes iPhone revenue over a two-year period, and said recently that overall revenues and earnings in its latest quarter would have been much higher if it didn't have to defer revenues for the iPhone and its Apple TV product. An Apple spokesman couldn't immediately be reached for comment.

While the change does not affect Apple's cash flow, it will allow the company to more accurately reflect its revenue in its quarterly financial statements. Preliminary approval

[parky]

Originally Posted by DKWalsh4

Out of curiosity, can someone tell me why doing the above violates Sarbanes-Oxley?

(Did you notice my subtle spelling correction?)

Because to protect shareholders Apple cannot add features to a device later in its life for free as this would restrict share holder benefit.

Sell device for $400 realise the profit and shareholders get their benefit.
If later you improve the device for free via software updates (not fixes but new features) then shareholders can claim that the device should have been priced higher or that the extra features should be paid for. Hence the charge for enabling WiFi 'n' on the iMacs, same reason.

[teckstud]

Originally Posted by parky

Yes ATV updates will still be free.
iPod touch users have never had free major updates because Apple does not use the GAAP account rules for them, they realise ALL the revenue at the time of the iPod touch sale.

I will read it but you're contradicting yourself. If Apple TV's revenue (non-subscription accounting) is realised all up front now that would put it in exactly the same category as a Touch hence enabling it to charge for updates. Same for the iPhone as well.

[teckstud]

Look what Jim Kramer says!

http://www.benzinga.com/craig-jones/...l-skyrocket-50

[parky]

Originally Posted by teckstud

I will read it but you're contradicting yourself. If Apple TV's revenue (non-subscription accounting) is realised all up front now that would put it in exactly the same category as a Touch hence enabling it to charge for updates. Same for the iPhone as well.

Please read again more carefully.

The Apple TV and iPhone currently use GAPP (Subscription) accounting.
That means Apple takes the revenue / profit over a 24 month period.
In fact they also spread their costs (manufacturing, marketing, etc) over the same 24 months.

I am not contradicting myself you just can't read.

Apple TV and iPhone will still continue to get free updates when Apple changes its accounting methods to non GAAP accounting, just as they do now. The law change enables this,

[AIaddict]

This ha NOTHING to do with Sarbox which if you actually bothered to read it, does not address ANY specific accounting policies. Those are set by the FASB.

Apple FASB rules and accounting principles have long required that revenue be booked when the product is delivered not when ordered. For a subscription, or a software product where feature updates are expected or required at the time of purchase SOME revenue has to be deferred to match up with the actual delivery of those features. To simplify things, companies were allowed to do what Apple did and spread out the revenue evenly over an expected time period since they can not predict actual feature releases.

The crap that the HAVE to charge for touch updates is 100% BS. Lots of companies give out free software updates. For example iTunes. Any pay for iTunes 9? Did Apple have to defer any revenue because they give iTunes away for free? No, duh!

As for influence on the stock price, there should be none. Investors have known about this issue since the iPhone hit the market and it is easy to undo the calculation since the deferred revenue shows up on the balance sheet on day one and simply transfers to the income statement over time. If you do not understand this you should not be buying stocks without professional help.

[teckstud]

Originally Posted by parky

Please read again more carefully.

The Apple TV and iPhone currently use GAPP (Subscription) accounting.
That means Apple takes the revenue / profit over a 24 month period.
In fact they also spread their costs (manufacturing, marketing, etc) over the same 24 months.

I am not contradicting myself you just can't read.

Apple TV and iPhone will still continue to get free updates when Apple changes its accounting methods to non GAAP accounting, just as they do now. The law change enables this,

Again- you're not making sense. If they switch to the exact same non-subscription accounting as the Touch then the rules of the Touch will also apply to them. Sarbanes-Oxley requires Apple to charge Touch users for this very reason!
Think of any new iPhone OS as if you were buying a new OS for your MAc.
Plain and simple.
Kapeesh?
It's not that I can't read, it's that you don't understand.

All I have to say is these new OS upgrades better be significant for Apple to charge for them.

[parky]

Originally Posted by AIaddict

This ha NOTHING to do with Sarbox which if you actually bothered to read it, does not address ANY specific accounting policies. Those are set by the FASB.

Apple FASB rules and accounting principles have long required that revenue be booked when the product is delivered not when ordered. For a subscription, or a software product where feature updates are expected or required at the time of purchase SOME revenue has to be deferred to match up with the actual delivery of those features. To simplify things, companies were allowed to do what Apple did and spread out the revenue evenly over an expected time period since they can not predict actual feature releases.

The crap that the HAVE to charge for touch updates is 100% BS. Lots of companies give out free software updates. For example iTunes. Any pay for iTunes 9? Did Apple have to defer any revenue because they give iTunes away for free? No, duh!

As for influence on the stock price, there should be none. Investors have known about this issue since the iPhone hit the market and it is easy to undo the calculation since the deferred revenue shows up on the balance sheet on day one and simply transfers to the income statement over time. If you do not understand this you should not be buying stocks without professional help.

iTunes has always been free so no loss of revenue for the shareholders - Duh.

ILife is not free when it is updated each year - costs money to update - Duh.

[parky]

Originally Posted by teckstud

Again- you're not making sense. If they switch to the exact same non-subscription accounting as the Touch then the rules of the Touch will also apply to them. Sarbanes-Oxley requires Apple to charge Touch users for this very reason!
Think of any new iPhone OS as if you were buying a new OS for your MAc.
Plain and simple.
Kapeesh?
It's not that I can't read, it's that you don't understand.

All I have to say is these new OS upgrades better be significant for Apple to charge for them.

I do understand, it is just that you have not realised that Apple can now choose if charge for iPod touch updates in the future, They now DON"'T have to, it is up to them. They won't break any rules if they do now. THAT IS WHY THE LAW CHANGED!!!!

[aaarrrgggh]

Wow... $260 would be nice... but I won't hold my breath. Seems to make a $200 call a pretty safe investment.

If the stock market were rational, we wouldn't see the wild swings we do. Still don't understand why people think AMZN is worth 3x GOOG on a P/E basis...

[parky]

Originally Posted by teckstud

Again- you're not making sense. If they switch to the exact same non-subscription accounting as the Touch then the rules of the Touch will also apply to them. Sarbanes-Oxley requires Apple to charge Touch users for this very reason!
Think of any new iPhone OS as if you were buying a new OS for your MAc.
Plain and simple.
Kapeesh?
It's not that I can't read, it's that you don't understand.

All I have to say is these new OS upgrades better be significant for Apple to charge for them.

My guess is that Apple will charge WILL charge for iPhone / iPod touch updates from the next major release, just like your major Mac OS updates. They will want to get on the same method to charge for updates.

The free updates served them well while they were developing the iPhone OS, but now it is getting feature rich and there is less to improve, they will start to charge for updates. I think that was probably always the plan they had. After 2 - 3 years start charging for iPhone OS updates, just like the iPod touch. They know it works as people pay. It may only be $5 a pop but it is going to happen.

[teckstud]

Originally Posted by parky

I do understand, it is just that you have not realised that Apple can now choose if charge for iPod touch updates in the future, They now DON"'T have to, it is up to them. They won't break any rules if they do now. THAT IS WHY THE LAW CHANGED!!!!

Where did you read that SARBANES- OXLEY (The LAW) HAS BEEN REPEALED? Jeesh!

[teckstud]

Originally Posted by parky

My guess is that Apple will charge WILL charge for iPhone / iPod touch updates from the next major release, just like your major Mac OS updates. They will want to get on the same method to charge for updates.

The free updates served them well while they were developing the iPhone OS, but now it is getting feature rich and there is less to improve, they will start to charge for updates. I think that was probably always the plan they had. After 2 - 3 years start charging for iPhone OS updates, just like the iPod touch. They know it works as people pay. It may only be $5 a pop but it is going to happen.

You're still not getting it. They will indeed charge. It's required by law. The law has not been repealed.

[Bageljoey]

Originally Posted by teckstud

You're still not getting it. They will indeed charge. It's required by law. The law has not been repealed.

Lets all settle down. Go back to the original article:

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.

No, S/O has not been repealed, but they *have* changed the accounting rules that feed into it. This change will, in effect, seem like an adjustemnt to S/O.

(don't forget to apologize)

[lantinian]

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

Does that mean that future updates of the iPhone OS could be FREE for iPod Touch users? If yes, this is really a big deal. There are iPod Touches used in much more places than there is App Store, making it impossible for people to legitimately setup an account and pay for apps or even the software update.

[teckstud]

Originally Posted by lantinian

Does that mean that future updates of the iPhone OS could be FREE for iPod Touch users? If yes, this is really a big deal. There are iPod Touches used in much more places than there is App Store, making it impossible for people to legitimately setup an account and pay for apps or even the software update.

No. Apple can now recognise all revenue for iPHONE and AppleTV up front now. That's all.

[teckstud]

Originally Posted by Bageljoey

Lets all settle down. Go back to the original article:


No, S/O has not been repealed, but they *have* changed the accounting rules that feed into it. This change will, in effect, seem like an adjustemnt to S/O.

(don't forget to apologize)

The only half of the answer. Are you interpreting this as a stop to charging for Touch and start charging for iPhones and ATVs? I'm not. To me it's only about reporting iPhone and Apple TV numbers all up front- FASB. FASB HAS NOTHING TO DO WITH CHARGING FOR UPDATES- that is LAW. If Apple was illegally charging then expect a lot of lawsuits demanding back for those Touch users.