New Rule Lets Apple Dump iPhone Subscription Accounting

| Apple Stock Watch

The Financial Accounting Standards Board voted unanimously on Wednesday to change an outdated accounting rule that forces companies like Apple to claim some product sales over time instead of the quarter where they happened. The rule change means Apple can start fully accounting for iPhone and Apple TV sales when they happen instead of slowly trickling out the revenue over a two year period.

The rule change is good news for any company that's been forced to string out revenues over several quarters, but the success of the iPhone makes the new accounting procedure even more enticing for Apple. The company has been pointing out in its quarterly earnings reports that its earnings would be higher if iPhone sales were counted fully in the quarter they happened.

The iPhone's success highlighted a problem many companies have been dealing with since Apple isn't the only company that was locked into subscription accounting to track a product's sales in a way that could negatively impact shares. For example, Apple reported earnings at US$1.35 for its third quarter thanks to subscription accounting, but without subscription accounting, that number jumped 58 percent to $2.14.

For the average Apple follower, the accounting changes could make it look like the company is suddenly earning substantially more money. For savvy investors, however, the new numbers won't come as a surprise since they've been following Apple's earning reports and have already seen the dual figures, according to Forbes.

There may, however, still be a surprise or two waiting for investors since many underestimate iPhone performance, and that could lead to some higher than expected reports from Apple.

Comments

ziploc

I haven’t seen any mention in these stories of the obvious consequences to iPhone users.  Up until now it is only the iPod Touch users that have felt unfairly burdened with having to pay for OS upgrades (full version upgrades that is).  The single reason given for this is because the iPod Touch’s were not on the subscription based accounting as the iPhone is - soon to be was.  So now ALL the iPhone users will get the joy’s of paying $10/major upgrade to the iPhone OS.  At least it will seem more “fair” now.

diouf

ziploc, I don’t understand your conclusion.  this news is only about accounting rules and have nothing to do with how Apple would market futur updates.

I don’t expect an accounting rules on how to declare revenue to have any impact in this matter.  subscriptions for iPhone will probably continue to include updates free and have more to do with contract between carrier and Apple in this matter.

pats

@Ziploc
My read of the accounting rule change allows a company to breakdown costs of software vs hardware and then recognize the hardware immediately and delay recognition of the future software cost which is include in the original purchase.  For example if the iphone cost $500 Apple recognizes the revenue and BOM over 8 quarters or about 1/8 per quarter.  The R&D and SGA costs are recognized immediately. If we assume a two year useful life, and one software feature upgrade per year at $10 per year then $20 of the cost would be deferred and $480 would be immediately recognized.  This same accounting could be applied to a MAC or Ipod, depends on Apple.  My guess is Apple doesn’t like to nickel and dime existing users so they would do away with 10/major upgrade for Iphone and Itouch and include the cost in the price of the device for its useful life.

ziploc

ziploc, I don?t understand your conclusion.? this news is only about accounting rules and have nothing to do with how Apple would market futur updates.

From the iPodObserver:  http://www.ipodobserver.com/ipo/article/PC_Magazine_iPod_touch_Update_a_Bargain_at_20/

Briefly, Mr Sean recapped all the new features included in the update, and provided a compelling argument for spending $20. [The charge for the update is apparently required by U.S. Law since Apple doesn?t conduct subscription accounting for the iPod touch as it does with the iPhone and Apple TV.]

What I had forgotten was that this older upgrade was $20 instead of the 3.0 cost of $10.  So I guess we’re making progress.

diouf

What I had forgotten was that this older upgrade was $20 instead of the 3.0 cost of $10.? So I guess we?re making progress.

the upgrade cost is now at 4.95$ for the 3.1 which include passing from 2.0 directly to 3.1.

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