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Apple Accounting iFAQ

LR Mobile Column
LR Mobile Column
LR Mobile Column
1/26/2010
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In today's earnings release, Apple Inc. (Nasdaq: AAPL) announced some major accounting changes – to the tune of $2 billion!

After many months in the making, the proposed accounting changes were passed by the FASB (Financial Accounting Standards Board) and plugged into Apple's numbers going back as far as 2007. After sorting through Apple’s filings, the conference call transcript, and various reports, I've come up with the answers to many questions folks might have.

Here is a simple FAQ:

Q: How can an accounting move change the numbers in their books by billions of dollars?

A: They have come up with an entirely new way to account for sales of iPhone and Apple TV “as well as other types of transactions related to revenue recognition.” These changes are retroactive to 2007, when Apple started selling the iPhone and Apple TV.

Q: What exactly did they do?

A: They changed the way they recognize revenue, which means when they are allowed to count stuff that they sold. In the old method, when they sold, say, an iPhone, they were required by FASB to recognize the revenue over a period of time, rather than recognizing all the revenue up front. This is called “subscription” accounting. The logic here is that they were providing software upgrades so that the user was getting value over time.

Q: You mean FASB thought the iPhone was a subscription product?

A: Yes. Kind of silly. It really it didn’t make much sense, since with a hardware product, you sell it when you sell it.

Q: So you think the accounting change is good?

A: Well, it makes more sense to me. When you sell an iPhone for $300, shouldn’t you just count that as $300 in revenue on the books? I don’t think anybody really thinks of the iPhone as a subscription product.

Q: This accounting change boosted revenues a lot. By how much?

A: Apple reported first-quarter revenues of $15.7 billion with the new accounting change. Revenue in the first quarter of fiscal 2009 was $11.88 billion. This represents a gain of nearly $4 billion. According to Apple CFO Peter Oppenheimer, on the conference call, “roughly half was attributed to the performance of the business.” In other words, Apple gained $2 billion in revenue from accounting changes and $2 billion by actually selling more stuff.

Q: How will this affect the share price?

A: In theory, it should have little effect. People have known about this for awhile. Financial analysts have been trying to adjust to the accounting change well in advance and were calculating a separate set of numbers based on the changes. But basically, they sell what they sell, and changing the accounting doesn't change how the business is doing – but may change how it is perceived in the near term.

Q: I don't understand. If the numbers are all different, why doesn't that change things?

A: What the change meant was that Apple was building up a non-GAAP (Generally Accepted Accounting Principles) revenue stream that is now being recognized as GAAP. Most people anticipated that. If anything, there might be a “sell the news” effect now that the new revenues are baked into the cake. It doesn't change how much product they actually sell, just when they can recognize the numbers. The bottom line is, in the future, they will either grow faster and sell more product, or they won't. The accounting doesn't change that.

— R. Scott Raynovich is the Editor and Publisher of the Rayno Report. He used to work at Light Reading collecting spare change at CTIA in Las Vegas.

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