Accounting board approves rule change re: recognition of iPhone revenue

Wed, Sep 23, 2009

Finance, News

Today, the Financial Accounting Standards Board (FASB) voted to allow companies like Apple to recognize income from sales on products like the iPhone instantaneously, as opposed to spreading out the revenue income over the course of 24 months, as Apple currently does due to accounting regulations.

The rule change will not officially go into effect until 2011, but companies will be allowed to implement it much sooner, with an analyst at Morgan Stanley speculating that Apple may implement accounting changes as early as the first fiscal quarter of 2010.

Apple lobbied strongly for this change, and in a letter to the FASB late this Summer, it argued that the old accounting rules don’t accurately “reflect the underlying economics of transactions and can result in financial reporting that lacks the transparency necessary to fully inform users making investment decisions.”

At the end of the day, the accounting changes do nothing to affect the intrinsic financial health of Apple, but it will nonetheless have a substantial effect on Apple’s income statement, and rightly or wrongly, may work to push Apple’s share price even higher.

CNN Money writes:

The move wouldn’t change the total revenues and earnings a company reports over time, and the cash flowing into a company remains the same. But companies contend the change would better align their reported results with the true performance of their business.

As an example, when Apple last released earnings this past June, it noted that had it not been required to defer its iPhone revenue over a course of 24 months, its revenue would have increased by 17%, up to $8.34 billion, and that its actual earnings would have increased by an astounding 58%, leveling out at $1.23 billion.  Needless to say, there’s a helluva lot of profit margin tied up in that little iPhone device.

Incidentally, Apple’s stock price reached $188 a share earlier today, marking the highest the stock has been in the last 12 months.


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