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Accounting for the iPhone at Apple Inc.

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by

Christina Di Mauro

on 8 December 2014

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Transcript of Accounting for the iPhone at Apple Inc.

FASB Requirements
AICPA requires either charging for an upgrade fee, or reporting under subscription accounting

For iPhones,Apple uses subscription accounting

Apple decided to supplement non-GAAP information to help investors with decision making
Apple- Subscription Accounting
They defer the revenue and COGS over a period of 24 months on a straight-line basis.
In the last quarter of 2008 Apple released supplementary financial information, reporting the remaining deferred revenue of their iPhone and Apple TV sales.
Representational Faithfulness
Needs to be verifiable, complete and neutral

comparision of GAAP (subsciption method) and non-GAAP (immediate recognition)
Introduction
Founded by Steve Jobs and Steve Wozniak

Entered mobile phone market in 2007

2 year contract, periodic software updates

Competitive advantage: free software updates

Accounting for the iPhone at Apple Inc.
Increases Comparability with Industry and IFRS
current GAAP becoming more difficult for investors and managers to understand

hard to estimate separable costs

Apple issued non-U.S GAAP numbers to reflect immediate recognition/cost-plus margin
higher revenue under cost-plus margin

IFRS (non-U.S GAAP) better reflects Apple's business

Increases Comparability with Industry and IFRS cont'd
Market Efficiency
Completeness
cost-plus margin changes NI figures, not cash flows

ideal conditions, rational investor converts information from given policy to policies used by other companies

reality, investors have limited business knowledge and may not wish to convert

non-U.S GAAP disclosure increases investor understanding of Apple's earnings and can easily compare to competitors
Definition: All information required is reported

The predominant majority of the labour, materials and overhead costs were transferred to the end user at sale but only 23/24th of COGS and revenue reported at that time

Therefore, does not show the complete economic reality of firm
Verifiability
Definition: Independent, Knowledgable user would reach same consensus

Weakness of Subscription Accounting: 2 year accrual makes it difficult to trace back what period revenues are really coming from

Weakness of Immediate recognition:: if in full, involves estimating future costs
Neutrality
Subscription Accounting involves no estimation and is more conservative measure and therefore can be considered less bias

Should be noted that Apple's intentions are not earnings management but rather better information
For the remainder of the presentation we will compare the GAAP and non-GAAP measures in accordance with FASB framework
WHY?
In 2008 iPhone business has grown to 39%

As a result, this segment became more significant for investors

International competitors report under IFRS
IFRS allows a more subjective measure:
COST + MARGIN
Understandability and Informativeness
Relevance
Financial Statement Analysis
Conclusion
overall positive reaction
effective to signal good performance
lacks comparability (among competitors)
should not be used in isolation
It's time for questions!
In the beginning, subscription model was simpler for Apple
As business grew, non-US GAAP became more reliable, complete and informative
Both provide same information to investors
non-US GAAP provides information usefulness
Why Relevance?
1-Business Model

2-Conservative Accounting.
Non GAAP mechanism- Investor reaction
Why Non-GAAP
GAAP Issues
1-Rigidity/Disconnect
2-GAAP metrics distortion
3-Earnings Management
4-Cash/Revenue Discrepancy
Counter measure-Non-GAAP
What's easier for investors to understand? GAAP or Non-GAAP numbers?
Subscription accounting for iPhone is inconsistent with accounting policies for other products
Non-GAAP numbers reflect more useful information
Non-GAAP numbers increase transparency
Spreading sales, costs and net income over 2 years may confuse some investors
Non even Wall Street could figure out what this method would do to Apple's bottom line
Date of announcement
Full transcript