Can someone explain why you could "straightline" the sale of the iPhone over the term of it's AT&T contract on Apple's books for GAAP purposes? Isn't a sale - a sale? I understand this concept with rent/lease accouting but this one baffles me. What GAAP is this? Thanks.
This has been discussed at great length before but as I understand it Apple need to do it that way so they can continue to provide iPhone software updates for free. If they don't (so the argument goes) they'd be accounting for things that they haven't yet delivered in full and so are potentially guilty of defrauding of their investors. Thank Enron for that. If they treat iPhone sales as subscription for a service then there's no problem providing free updates as part of that service.
Apple doesn't really care about short-term results relative to their longer-term well-being. In any case, the current margins on the outdated MacPro, iMac, Mac mini units must be huge, so each sale is very profitable (even if there are fewer sales).
So thinking strategically, what are the reasons for Apple to slow down on updates?
1. The obvious one is waiting for an appropriate CPU chip, but there's been several Intel chip updates so that doesn't fully explain it.
2. A major redesign?
3. Not enough resources as too busy with iPods/iPhones.
4. Waiting to ensure super-duper performance with Snow Leopard?
Everybody's stock is tanking. How could anybody seriously think Apple would remain impervious to the current economic worldwide collapse?
Isn't the trick to making a good return in the long term in times like this spotting the few stocks that will rebound the most when things improve. For that the company has to be financially sound, have great products and a track record of knowing what they are doing under excellent management. I'd say AAPL is up there in the running for the 'most likely to succeed' awards category
This has been discussed at great length before but as I understand it Apple need to do it that way so they can continue to provide iPhone software updates for free. If they don't (so the argument goes) they'd be accounting for things that they haven't yet delivered in full and so are potentially guilty of defrauding of their investors. Thank Enron for that. If they treat iPhone sales as subscription for a service then there's no problem providing free updates as part of that service.
As a business major, this makes sense to me. And I fully agree with your Enron statement, they changed the way things have to be done forever, and it wasn't for the better. But the more I look at it, it still confuses me, because products like the PS3 or even an operating system and its programs all do not have fee-based subscriptions, yet can come out with free updates that add more features over time without having to wory about these account principles. So why is it only exclusive to the iPhone, or if we want to make it more broad, cell phones?
This has been discussed at great length before but as I understand it Apple need to do it that way so they can continue to provide iPhone software updates for free. If they don't (so the argument goes) they'd be accounting for things that they haven't yet delivered in full and so are potentially guilty of defrauding of their investors. Thank Enron for that. If they treat iPhone sales as subscription for a service then there's no problem providing free updates as part of that service.
Thank you -this clarifies it even more why it's over 2 years then. After 2 years will you be charged if you keep the same iPhone?
GAAP accounting is NOT related to the AT&T contacts in anyway. It is NOT cash being given to Apple by AT&T for phone subscriptions.
GAAP accounting simply means that Apple are only recognising the sale of the actual iPhone itself over a 24 month period. Every month they take 1/24 of the sale value of the iPhone as revenue in to thier accounts. This accounting method lets Apple update the iPhone on a regular basis for free without falling foul of the Sabaine Oxley rules. Apple also apply the same GAAP accounting to the AppleTV, hence it gets free updates. They do not apply GAAP accounting to the iPod Touch, all revenue for those is taken a tiem of sale, hence you have to pay for updates.
Basically it works like this. If Apple have taken the revenue for a device then the device has not been fully paid for in accounting terms. Therefore they can offer additional features as upgrades without being sued by share holders who could insist the updates are paid for. The reason being the delayed revenue means the updates are paid for over the first 24 months of the device being owned.
Nice answer but He was setting anyone that answered up for a sarcastic reply .
Isn't the reason we have bubbles these days because the little guys are so numerous that they do have an enormous impact on stocks so 'gold rush' and 'sky is falling' events happen despite the more educated and large investors?
I'll concede there are probably enough day traders out there to make a difference in the share price on a given day, but I really doubt there are enough individual shareholders (those actually owning the stock as an investment) selling their shares at the drop of a hat based on a news report. Day traders make their money based on the momentum of a stock and rarely hold the stock longer than a day or two, so they're not really concerned with the legitimate health of a company - hence the wild swings based on a news report. People who believe Apple is a great company with long-term success in mind aren't the ones rushing to sell when they hear Mac sales "dropped" (especially since they didn't drop anyway).
I'll concede there are probably enough day traders out there to make a difference in the share price on a given day, but I really doubt there are enough individual shareholders (those actually owning the stock as an investment) selling their shares at the drop of a hat based on a news report. Day traders make their money based on the momentum of a stock and rarely hold the stock longer than a day or two, so they're not really concerned with the legitimate health of a company - hence the wild swings based on a news report. People who believe Apple is a great company with long-term success in mind aren't the ones rushing to sell when they hear Mac sales "dropped" (especially since they didn't drop anyway).
It would be fascinating to know more on this subject. Are there any graphs that can show this sort of information, i.e. the numbers of transactions by small investors and those by institutions, available?
Of course the assumption that institutions are immune to silly information is probably not true. Then add in RBC's move most likely based on sabotage due to their interest in RIM.
Isn't the trick to making a good return in the long term in times like this spotting the few stocks that will rebound the most when things improve. For that the company has to be financially sound, have great products and a track record of knowing what they are doing under excellent management. I'd say AAPL is up there in the running for the 'most likely to succeed' awards category
I agree- all this talk of "panic" and "plunge" for 4% seems a bit much.
GAAP accounting is NOT related to the AT&T contacts in anyway. It is NOT cash being given to Apple by AT&T for phone subscriptions.
It is arguable whether Sarbanes-Oxley (SOX) really requires Apple to do it this way. As rhowarth adds, one the main points of SOX was to prevent defrauding of investors by stopping companies from recording revenue until the full product was delivered. But it was very unclear about software, especially if the bulk (90%) of the software was already delivered. In any case, Apple chose the most conservative route they could choose, possibly a fallout from the stock backdating investigation that was going on at the time. For example, MS does not use deferred revenue accounting for the Zune even though they've delivered significant new software features in a subsequent update.
As for the quoted comment above, Apple was given cash (over a two-year period) by AT&T for the original iPhone (not iPhone 3G) subscriptions. This is still ongoing as iPhones bought in Jan-Mar 2008 will have AT&T payments through Jan-Mar 2010. (There were very few iPhone sales in Apr-Jun 2008). AT&T has especially highlighted its payments to Apple because not only are the subsidies for the iPhone 3G very high, but they have a double-whammy, as they still have this continuing stream of payments for iPhone until Jun 2010 (but as I said, really Mar 2010).
So some do believe that the main driver for the deferred accounting was to allow Apple to hide the exact amounts of these AT&T payments, since that was a novel arrangement. But who knows? Maybe Jobs will write about it in his memoirs.
Thank you -this clarifies it even more why it's over 2 years then. After 2 years will you be charged if you keep the same iPhone?
No, Apple assumes the life of the iPhone is 2 years. But you can keep it longer, and there is no guarantee that future updates will still be provided for your model.
Like with Mac and OS X, though its usually longer than 2 years!
I agree- all this talk of "panic" and "plunge" for 4% seems a bit much.
That 4% was actually mild compared to what could have happened, the entire board dropped due to what i feel is Wall Street trying to mess with the Obama administration ... don't ask me how or why but it is just a suspicion \
That 4% was actually mild compared to what could have happened, the entire board dropped due to what i feel is Wall Street trying to mess with the Obama administration ... don't ask me how or why but it is just a suspicion \
<ducking in anticipation of the flames>
You're antagonizing - yet I refuse to take the bait.
But the more I look at it, it still confuses me, because products like the PS3 or even an operating system and its programs all do not have fee-based subscriptions, yet can come out with free updates that add more features over time without having to wory about these account principles. So why is it only exclusive to the iPhone, or if we want to make it more broad, cell phones?
Yup, that's why people question why Apple did it that way, and why some believe it's to hide those AT&T subscription-sharing payments. BTW, I don't think there are any other cell phones that do it this way, but they generally don't promise to provide software updates with new features either.
Yup, that's why people question why Apple did it that way, and why some believe it's to hide those AT&T subscription-sharing payments. BTW, I don't think there are any other cell phones that do it this way, but they generally don't promise to provide software updates with new features either.
This is why I love AppleInsider. They're doing the entire investment community the "favor" of alerting them to concept of deferred revenue. Many investors fail to recognize this deferred revenue? Really? I doubt it. The stock price is moved up or down based on HUGE investors, like hedge funds and other large institutional investors - not Joe Stockholder. These big guys are well aware of deferred revenue and it has nothing to do with why the stock drops 4% on any given day.
Actually ....
AppleInsider has run many stories that suggest that some of the "big guy" analysts regularly miss this fact about the GAAP revenue. Apple's approach to revenue in that regard is a rare enough situation for many to miss.
So AppleInsider has published factual articles that support their contention.
I'm a long-time AAPL investor, and would consider myself worried not about a 6% drop in sales, but further P/E erosion and a lack of overall confidence. Fortunately, every time I pass by an Apple store most of that concern ebbs away, seeing how they are firing on all cylinders. I just wish I was better diversified, I guess...
The GAAP accounting will help make the next four quarters look better than they really are, but I think they need to re-think how they realize profits on the iPhone.
I wonder how soon we will se the re-introduction of the word 'beleaguered' in the context of Apple (or should I say the Cupertino based Electronics Maker?).
Comments
Can someone explain why you could "straightline" the sale of the iPhone over the term of it's AT&T contract on Apple's books for GAAP purposes? Isn't a sale - a sale? I understand this concept with rent/lease accouting but this one baffles me. What GAAP is this? Thanks.
This has been discussed at great length before but as I understand it Apple need to do it that way so they can continue to provide iPhone software updates for free. If they don't (so the argument goes) they'd be accounting for things that they haven't yet delivered in full and so are potentially guilty of defrauding of their investors. Thank Enron for that. If they treat iPhone sales as subscription for a service then there's no problem providing free updates as part of that service.
So thinking strategically, what are the reasons for Apple to slow down on updates?
1. The obvious one is waiting for an appropriate CPU chip, but there's been several Intel chip updates so that doesn't fully explain it.
2. A major redesign?
3. Not enough resources as too busy with iPods/iPhones.
4. Waiting to ensure super-duper performance with Snow Leopard?
5. ??
Everybody's stock is tanking. How could anybody seriously think Apple would remain impervious to the current economic worldwide collapse?
Isn't the trick to making a good return in the long term in times like this spotting the few stocks that will rebound the most when things improve. For that the company has to be financially sound, have great products and a track record of knowing what they are doing under excellent management. I'd say AAPL is up there in the running for the 'most likely to succeed' awards category
This has been discussed at great length before but as I understand it Apple need to do it that way so they can continue to provide iPhone software updates for free. If they don't (so the argument goes) they'd be accounting for things that they haven't yet delivered in full and so are potentially guilty of defrauding of their investors. Thank Enron for that. If they treat iPhone sales as subscription for a service then there's no problem providing free updates as part of that service.
As a business major, this makes sense to me. And I fully agree with your Enron statement, they changed the way things have to be done forever, and it wasn't for the better. But the more I look at it, it still confuses me, because products like the PS3 or even an operating system and its programs all do not have fee-based subscriptions, yet can come out with free updates that add more features over time without having to wory about these account principles. So why is it only exclusive to the iPhone, or if we want to make it more broad, cell phones?
This has been discussed at great length before but as I understand it Apple need to do it that way so they can continue to provide iPhone software updates for free. If they don't (so the argument goes) they'd be accounting for things that they haven't yet delivered in full and so are potentially guilty of defrauding of their investors. Thank Enron for that. If they treat iPhone sales as subscription for a service then there's no problem providing free updates as part of that service.
Thank you -this clarifies it even more why it's over 2 years then. After 2 years will you be charged if you keep the same iPhone?
GAAP accounting is NOT related to the AT&T contacts in anyway. It is NOT cash being given to Apple by AT&T for phone subscriptions.
GAAP accounting simply means that Apple are only recognising the sale of the actual iPhone itself over a 24 month period. Every month they take 1/24 of the sale value of the iPhone as revenue in to thier accounts. This accounting method lets Apple update the iPhone on a regular basis for free without falling foul of the Sabaine Oxley rules. Apple also apply the same GAAP accounting to the AppleTV, hence it gets free updates. They do not apply GAAP accounting to the iPod Touch, all revenue for those is taken a tiem of sale, hence you have to pay for updates.
Basically it works like this. If Apple have taken the revenue for a device then the device has not been fully paid for in accounting terms. Therefore they can offer additional features as upgrades without being sued by share holders who could insist the updates are paid for. The reason being the delayed revenue means the updates are paid for over the first 24 months of the device being owned.
Nice answer but He was setting anyone that answered up for a sarcastic reply .
Isn't the reason we have bubbles these days because the little guys are so numerous that they do have an enormous impact on stocks so 'gold rush' and 'sky is falling' events happen despite the more educated and large investors?
I'll concede there are probably enough day traders out there to make a difference in the share price on a given day, but I really doubt there are enough individual shareholders (those actually owning the stock as an investment) selling their shares at the drop of a hat based on a news report. Day traders make their money based on the momentum of a stock and rarely hold the stock longer than a day or two, so they're not really concerned with the legitimate health of a company - hence the wild swings based on a news report. People who believe Apple is a great company with long-term success in mind aren't the ones rushing to sell when they hear Mac sales "dropped" (especially since they didn't drop anyway).
Thank you -this clarifies it even more why it's over 2 years then. After 2 years will you be charged if you keep the same iPhone?
You must be bored this morning to be antagonizing this early.
I'll concede there are probably enough day traders out there to make a difference in the share price on a given day, but I really doubt there are enough individual shareholders (those actually owning the stock as an investment) selling their shares at the drop of a hat based on a news report. Day traders make their money based on the momentum of a stock and rarely hold the stock longer than a day or two, so they're not really concerned with the legitimate health of a company - hence the wild swings based on a news report. People who believe Apple is a great company with long-term success in mind aren't the ones rushing to sell when they hear Mac sales "dropped" (especially since they didn't drop anyway).
It would be fascinating to know more on this subject. Are there any graphs that can show this sort of information, i.e. the numbers of transactions by small investors and those by institutions, available?
Of course the assumption that institutions are immune to silly information is probably not true. Then add in RBC's move most likely based on sabotage due to their interest in RIM.
Isn't the trick to making a good return in the long term in times like this spotting the few stocks that will rebound the most when things improve. For that the company has to be financially sound, have great products and a track record of knowing what they are doing under excellent management. I'd say AAPL is up there in the running for the 'most likely to succeed' awards category
I agree- all this talk of "panic" and "plunge" for 4% seems a bit much.
GAAP accounting is NOT related to the AT&T contacts in anyway. It is NOT cash being given to Apple by AT&T for phone subscriptions.
It is arguable whether Sarbanes-Oxley (SOX) really requires Apple to do it this way. As rhowarth adds, one the main points of SOX was to prevent defrauding of investors by stopping companies from recording revenue until the full product was delivered. But it was very unclear about software, especially if the bulk (90%) of the software was already delivered. In any case, Apple chose the most conservative route they could choose, possibly a fallout from the stock backdating investigation that was going on at the time. For example, MS does not use deferred revenue accounting for the Zune even though they've delivered significant new software features in a subsequent update.
As for the quoted comment above, Apple was given cash (over a two-year period) by AT&T for the original iPhone (not iPhone 3G) subscriptions. This is still ongoing as iPhones bought in Jan-Mar 2008 will have AT&T payments through Jan-Mar 2010. (There were very few iPhone sales in Apr-Jun 2008). AT&T has especially highlighted its payments to Apple because not only are the subsidies for the iPhone 3G very high, but they have a double-whammy, as they still have this continuing stream of payments for iPhone until Jun 2010 (but as I said, really Mar 2010).
So some do believe that the main driver for the deferred accounting was to allow Apple to hide the exact amounts of these AT&T payments, since that was a novel arrangement. But who knows? Maybe Jobs will write about it in his memoirs.
Thank you -this clarifies it even more why it's over 2 years then. After 2 years will you be charged if you keep the same iPhone?
No, Apple assumes the life of the iPhone is 2 years. But you can keep it longer, and there is no guarantee that future updates will still be provided for your model.
Like with Mac and OS X, though its usually longer than 2 years!
You must be bored this morning to be antagonizing this early.
Why is that antagonizing, I ask you? I'm only inquiring- I don't care if it's written down over 20 years- I must know "why"?
And yes, I am a little bored.
I agree- all this talk of "panic" and "plunge" for 4% seems a bit much.
That 4% was actually mild compared to what could have happened, the entire board dropped due to what i feel is Wall Street trying to mess with the Obama administration ... don't ask me how or why but it is just a suspicion
<ducking in anticipation of the flames>
That 4% was actually mild compared to what could have happened, the entire board dropped due to what i feel is Wall Street trying to mess with the Obama administration ... don't ask me how or why but it is just a suspicion
<ducking in anticipation of the flames>
You're antagonizing - yet I refuse to take the bait.
But the more I look at it, it still confuses me, because products like the PS3 or even an operating system and its programs all do not have fee-based subscriptions, yet can come out with free updates that add more features over time without having to wory about these account principles. So why is it only exclusive to the iPhone, or if we want to make it more broad, cell phones?
Yup, that's why people question why Apple did it that way, and why some believe it's to hide those AT&T subscription-sharing payments. BTW, I don't think there are any other cell phones that do it this way, but they generally don't promise to provide software updates with new features either.
Yup, that's why people question why Apple did it that way, and why some believe it's to hide those AT&T subscription-sharing payments. BTW, I don't think there are any other cell phones that do it this way, but they generally don't promise to provide software updates with new features either.
Further insights- very interesting.
This is why I love AppleInsider. They're doing the entire investment community the "favor" of alerting them to concept of deferred revenue. Many investors fail to recognize this deferred revenue? Really? I doubt it. The stock price is moved up or down based on HUGE investors, like hedge funds and other large institutional investors - not Joe Stockholder. These big guys are well aware of deferred revenue and it has nothing to do with why the stock drops 4% on any given day.
Actually ....
AppleInsider has run many stories that suggest that some of the "big guy" analysts regularly miss this fact about the GAAP revenue. Apple's approach to revenue in that regard is a rare enough situation for many to miss.
So AppleInsider has published factual articles that support their contention.
What do you have besides "I doubt it" ?
The GAAP accounting will help make the next four quarters look better than they really are, but I think they need to re-think how they realize profits on the iPhone.