Accounting Rule Changes Increase Apple Computer’s Revenue

Accounting Rule Changes Increase Apple Computer’s Revenue

Case Study Question: Accounting Rule Changes Increase Apple Computer’s Revenue

Q1. Do you think that Apple’s new accounting policy, that is consistent with the 2009 FASB statement, results in fair financial reporting?

Ans. A change in accounting rules for which Apple among other high-tech companies lobbied heavily won and was consequently adopted. This has significantly and positively affected both the company’s reported earnings and its stock price. Under previous rules, companies defer subscription revenue. Since they deliver services over time, revenue is accounted for by X percentage every quarter (for about a period of 2 years i.e. the economic life of an iPhone). Since device, service and software are intertwined. It raises a question about ownership and how much the device-service-software is more of a lease, which by definition is a subscription. Jack Consumer buys iPhone, which requires a carrier (presumably Telstra in Australia) and ongoing software updates from Apple. This binding of device, service and software demands accountability, which revenue deferral offers as customer obligation. Apple shouldn't get the benefit of money upfront for a service delivered to the buyer over X time period. Deferred revenue accentuates Apple's obligation to its iPhone buyers and other stakeholders, most importantly shareholders. As such it results in unfair accountability and reporting.
But it could be argued that no company’s product has been more misunderstood by more investors because of the old rules than Apple’s iPhone. However it is fair and sensible that Apple report non-GAAP earnings on some basis (may it be side by side), if for no other reason than comparison to other mobile phone manufacturers using similar subscription revenue accounting methods.

Q2. Do you think that Apple’s share price should have gone up as a result of increased revenue due to a change in an accounting policy?

Ans. Deferred revenue encourages accountability. Apple and...

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