In late September, the Financial Accounting Standards Board (FASB) voted to allow companies like Apple to recognize income from sales on products like the iPhone at the point of sale, as opposed to spreading out that revenue income over the course of 24 months.
This change in accounting led many to believe that Apple’s guidance for the next quarter would skyrocket, which says a lot given Apple’s historically conservative guidance. But in a surprise to some, Apple CFO Peter Oppenheimer explained that Apple would not immediately make the switch, and that for the time being, it would continue to defer iPhone and Apple TV revenue over a 24 month period.
We are very pleased with the FASB adoption of this new rule as we believe it will enable us to more closely align our reported results with the economics of the iPhone and Apple TV sales. We will be required to adopt the new accounting rule no later than the first quarter of our fiscal 2011, a year from now, but we do have the option of adopting earlier than that some time in our fiscal 2010. We are currently assessing the impact of the new rule on our accounting and reporting system and processes. Making this change will be complex and as of now we are uncertain as to the timing of our adoption. Therefore, we don’t have anything more specific to discuss with you today about this change.
The guidance for the December quarter that we are providing today is based on a subscription accounting treatment that we have applied to-date for the iPhone and Apple TV sales. In other words, it is based on the assumption that the full amounts of revenue and product costs for past and future iPhone and Apple TV sales continue to be recognized ratably over the estimated 24- month lives of the product.
Now you might think that Apple would jump at the chance to switch up its accounting methods as quickly as possible, and “inflate” its financial numbers to knock the socks off of investors. But Apple doesn’t operate like that, and it clearly isn’t in Apple’s DNA to base important financial and accounting decisions to keep investors and flip flopping analysts impressed. As noted by Oppenheimer, adjusting accounting methods mid-stream isn’t a simple matter, and Apple, like usual, will wait around and assess the situation instead of blindly jumping in head first. While it may have lobbied for the change, it’s certainly in no rush to implement that change without making the appropriate adjustments beforehand.
So until Apple says otherwise, they’ll continue to recognize iPhone and Apple TV income over a period of 24 months. Once they do make the change, however, which they must do before the first quarter of 2011, Apple will still have to defer a small portion of each iPhone and Apple TV sale, though the amount deferred will only correspond to the estimated cost of the free OS updates Apple periodically provides its users. Oppenheimer noted that Apple hasn’t yet determined “the specific amount of revenue deferral for each iPhone and Apple TV” sold, but stated that a “substantial portion of the revenue will be recognized for these products at the time of sale.”