Today, FASB voted 5-0 for the accounting change. The question now is how earnest Apple will be to adopt it. It's my understanding the change affects future earnings, meaning Apple can't suddenly cash out what it already has already reported using the the old accounting. If Apple chooses the December quarter, fiscal 2010 first quarter could be a whopper.

@andrey - you are exactly, exactly right, I couldn't have said it better.

Most of the rest of the comments here are pretty damn sad...

Here is the paid Microsoft shill at it again. The Microsoft talking points do not include much info on Accounting though, right Joe? Funny watching people make a mockery of your Microsoft propaganda.

I don't know much about accounting, and after helping to cover for our accountant while he was on vacation for 2 weeks at work a couple of years ago, I'm not sure I want to. I was trained and acted as his backup. The only thing I did was pay the bills for the bank. Some things where easy, such as utilities and such. Other things, usually the big ticket items, such as the lease and new computer equipment (server, printers, desktops, atm) where amoratized (not sure if correct word) over 3 years. Basically, we paid for everything up front, but because the computer equipment had an assumed 3 year life span, we devided the cost into 36 equal chunks. My limited understanding is that it is in part for tax purposes, and in part so that there isn't a large chunk coming out of one quarter for our fiscal report to our stock holders.

I assume this "subscription accounting" is similar.

@Swattz

re. your accounting adventure.
I am based in the UK so things might be a little different here, but I suspect that spreading certain expenses over three years is more to to with tax laws than keeping stock holders happy.

Here in the UK I used to (many moons ago) have to spread my capital expenses over a period of 4 years. This had no real personal benefit to me. I still had to spend the money upfront... and then I had to wait 4 years to realise all the tax benefits.

"I assume this "subscription accounting" is similar."

I don't think so. I believe that these rules were introduced to prevent the practice of companies counting revenues now (deceptively) for payments that were scheduled in the future. Thereby inflating today's revenue with no certainty that those future revenues would actually materialise. Think Enron!

There is a debate as to how Apple have interpreted the rules (particularly for something like the Apple TV) but after their backdating stock options run-ins... they probably just erred on the side of caution.

Wow! If you think that the other stories "stink of bad reporting or Apple bias".... what do you call this Joe?

It's subscription ACCOUNTING. Not subscription REVENUE.

When you buy an iPhone, with a contract, from a carrier ... it's the carrier that is subsidising the cost of the phone, NOT Apple. Apple gets paid in full.
When you buy an iPhone without a contract.... Apple gets paid in full.
When you buy an AppleTV... Apple gets paid in full.

'The GAAP results are real numbers'
No they are not. They are the real numbers divided by a factor of 8.

Your lack of understanding of the subject would be amusing if it weren't for your attacks on other writers who, unlike you, managed to do a modicum of research.

Where is that 'stink' coming from?

I understand accounting all too well. The context for "subscription revenue" is how the money is accounted as deferred revenue over two years. When Apple is paid is irrelevant to how the revenue is treated according to FASB guidelines. Those may well change before you and I continue any real debate on the topic.

As for the hardware, it is only one portion of the deliverable. Apple chooses to offer updates over a period of time. How Apple delivers those updates is different from most other cell phone manufacturers. Apple updates iPhone firmware, rather than the carriers. If you buy a Windows Mobile or Symbian phone, the carrier pushes out the updates for locked phones. The accounting is appropirate for the way Apple controls the software. That control is good for Apple in that it prevents the kind of mobile OS fragmentation that, say, Nokia must deal with.

Right Joe, so do you agree that (whatever the accounting rules dictate) Apple gets paid the full price for the iPhones and Apple TVs that they sell... at the time that they sell them? because with statements like "artificially boost the company's quarterly revenue" and "manipulate their quarterly results"... you seem to be implying the opposite!

When you say, " The numbers as stated are accurate per quarter, if services revenue is deferred over the life of the subscription." you are correct. Apple is reporting their accounts correctly according to the accounting rules.

"As for the hardware, it is only one portion of the deliverable. Apple chooses to offer updates over a period of time."

Agreed. But (particularly for the iPhone) it is, by far, the largest portion! If we use the iPod Touch's software upgrade costs... approximately $30.00 for any two year period, and we estimate the total revenue earnt per iPhone at around $600.00.... then hardware amounts to 95%. Apple is currently deferring the whole income even though they have, in reality received most of it.

When Apple sells one iPhone in any given quarter they only report 1/8 of that REAL income. Yet the costs incurred for manufacturing etc. are expensed as incurred. Apple are, likely, reporting a loss on every phone for the first few quarters. Even if you factor in the future "services" revenues do you really think that represents an accurate representation of the balance sheet.

The most accurate way of reporting the figures would be to account for the hardware revenue in the current quarter and defer the software revenue over two years. However that seems unnecessarily complicated and would result in only a marginal difference in the figures compared to the proposed rule changes.

It's a little odd that most of the Wall Street pundits think that the proposed rule change would be sensible but you imply that Apple would be deceiving their investors.

Your car analogy is really poor. Apple isn't the guy you bring in to repair your "car". Apple SELLS you the "car" and then they repair it "ASWELL".

When Apple sells one iPhone in any given quarter they only report 1/8 of that REAL income. Yet the costs incurred for manufacturing etc. are expensed as incurred. Apple are, likely, reporting a loss on every phone for the first few quarters. Even if you factor in the future "services" revenues do you really think that represents an accurate representation of the balance sheet.

Not sure if this is true. Not in the business, so I don't know if or how the parts work. But...if they are doing things like most businesses I have worked for, they report the cost of thier equipment over time. Not the parts for the iPhones and such, but the manufacturing equipment. Whatever machines they use to put everything together.

Again, I'm not sure about this, but they can't have it both ways.

@Swattz

Well I got the "are expensed as incurred" line direct from Apple's last financial report.

So I guess that must just be more of Apple's deceptive practices.

The one problem in your line of thinking is that there is a reason Apple went with ATT- They get a significant cut of the subription revenue that goes to ATT each month on ATT charges. This is also why I wouldn't hold your breadth that Apple is going to make the IPhone available to other carriers when the contract endes unless another carrier offers them more of a % of the revenue stream from the carrier's subscription rate.

@rtwnt

" They get a significant cut of the subription revenue that goes to ATT each month on ATT charges"

No they don't, Not any more. The companies switched to the more common subsidy model when the iPhone 3G was launched. It was highly publicised at the time. AT&T take a hit when they sell a lot of iPhones. But they make it back by gaining new customers and customers signing up for 24 months of more expensive data plans.

Perhaps Joe Wilcox made the same mistake as you, I don't know.

Joe's premise is that Apple should stick to the current accounting rules and spread the total revenue of the iPhones (hardware AND software) over 2 years. Joe thinks that if the rules were relaxed Apple would be attempt to deceive investors by 'inflating' iPhone earnings.

My response is simple. The software upgrade component of iPhone is only a small fraction of the total revenue. Changing the rules might not result in totally accurate iPhone/Apple figures, but they will be a darn site closer then the current subscription accounting method. There are an awful lot of Wall Street pundits that see that. Joe obviously has a different calculator.

Actually, you may be right and I missed that. good catch.
Apple has gotten the accounting change it wanted and here's a link that might do a better job of explaining the issue:
http://brainstormtech.bl...s-hidden-revenue-stream/

Umm Joe, you should really at least try to learn a bit about the subject before spewing opinion pieces like this..

Fact: Subscription based account in GAAP is not nor was it EVER designed to account for the marketing of hardware devices with firmware updates over the products lifetime..

Fact: Changing GAAP to accurately reflect modern real world is a GOOD THING

Fact: the current numbers are grossly inaccurate mostly because they are applied poorly by overly conservative accountants who do not understand the market they are playing in, much less the reasoning behind rules created to cover newspaper/magazine subscriptions, pay as you go financed items in retail shops before credit cards, etc.

Core problem.. Cellphone Hardware is NOT sold over time, not by apple, not by ATT, not by anyone other than perhaps QVC/HSN and others who offer multiple payments.. However the accountants couldnt figure out how to get expenses of maintaining products out of the blackhole that is "cost of doing business" and mask it somehow.. in their zeal to make 1 line in the P&L look good, they managed to make the rest of it completely and utterly unreadable..

True fact #1 Under the current model and thinking implemented by most "hardware" manufacturers in the cellphone space.. Then EVERY PC, Every piece of software ever sold should also be considered "subscription sales"

True fact #2 Apple is playing fast and loose trying to use "the evil GAAP as the reason why you have to charge for updates to ipod touch but not iphone" This is utter bulls***t and is just a apple moneygrab again those same beancounters who do not have a clue.

The numbers in question are basically going like this..

Bestbuy orders 10,000,000$ worth of ipod touch's on a revolving credit plan with apple In short they do not pay when ordering but instead when devices are sold.. Under current GAAP rules.. this is counted as revenue immediately on order..

ATT orders 10,000,000$ worth of iphones and pays for them as customers buy them.. but this revenue is accounted for over the term of the ATT contract, since GAAP says that this device is a subcription.. because they require updates over the life of the product.

An idiot could see that the rules are broken and need a change, unfortunately.. this is betanews where anyone with a pulse can spew whatever he wants regardless of having a clue (such as the lovely and equally retarded web browser "testing")

How is GAAP the real number? When you buy an iPhone, Apple gets *all* the money from the iPhone sale up front. Apple's financials also make it look like AT&T and other carriers are subsidizing the full price up front, not distributing that subsidy over the next X years of the contract.

When a user subscribes to an iPhone plan, the service plan money goes to AT&T, not Apple; it's AT&T providing the service.

Moreover, you have yet to explain how this justifies the deferred revenue on the Apple TV, or how it's okay to force iPod touch users to spend $5-10 every year -- not because Apple feels like charging the amount for the upgrade, but because it feels Sarbannes-Oxley dictates this. It's a backwards system that hides the money Apple is actually taking in and punishes you for using any device that doesn't fit a subscription model.

These accounting rules are ridiculous. It should go like this. They should realize the money when they get it. So if AT&T pays Apple when a customer buys an iPhone for the entire length of the contract then Apple should report the total amount. If AT&T gives Apple a check every month then they should report what they got. There shouldn't be an "adjusted sales". Give me a break. No wonder our financial industry is such as mess.

you clearly have no idea what you're saying and obviously don't even understand how accounting works

In the nutshell, you can't claim money for something you haven't delivered. Services are delivered over time, and as such revenue should be reported proportionally. For example, when you buy a house and get a loan, can the bank report they earned all those money? No, because you haven't paid them yet. Same with services that are being spread over several years.

Reporting non-earned revenue will artificially boost profits, giving Apple, Microsoft an advantage to non-reasonably inflate the stock price. The story will be exactly as with mortgages until the entire bubble bursts and we'll be back to square one where companies report what they actually earn.

Thank you, Andrey. You expressed it just right.

Except that this is EARNED money

EVEN ATT CAN REPORT the income from a 2 year contract as earned on the day the contract is signed.. since you are definately 100% of the time owing them the full amount..

IN NO WAY SHAPE OR FORM IS A HARDWARE DEVICE BEING SOLD BY APPLE TO A VENDOR "SERVICES" OR "SUBSCRIPTION" no amount of trying to justify will change that fact.

Money is claimed as earned EVERY DAY as revenue.. even when said money will be arriving over time..

True facts.. construction firm signs contract to build a new skyscraper over 5 years.. at a cost of 30,000,000$ you dont think that they dont mention that as its paid to them? you think that they put it on the books over 5 years.. even when paid up front? Clearly you have less understanding of accounting than our illustrious article writer..

Except that she is wrong.. and you should go back to school and look at the accounting books again.. and figure out exactly how party A sells party B an object, collects the cash at time of sale and then reports it as sold that day on his books.. is "inflating artificially" anything at all?

If you pull the "omg they are forced to do software updates for ages on the product" card you are mistaken as that also applies to every other device sold that is in any way changeable outside of the factory.. and precious few are put on the books as subscription income..

Gorgeth, your argument is flawed. You're arguing for how you want things to be, not how they are. FASB guidelines may change tomorrow, but for today they sensibly apply to iPhone. More than 30 other companies, mostly high-tech, have joined Apple in requesting the rule change. They include Dell, HP, IBM Saleforce.com, TiVo and Xerox. Like Apple, some of these companies sell hardware products with supporting software and/or services component that requires revenue to be deferred.

You say that "Under the current model and thinking implemented by most 'hardware' manufacturers in the cellphone space..Then EVERY PC, Every piece of software ever sold should also be considered subscription sales." But there is no dependent services component to PCs. Except perhaps for carrier subsidized netbooks, there is no dependent service. By the way, for years, Microsoft accounted for OEM Windows license sales when the PC was sold, not when the OEM bought the license. Microsoft since changed the practice, which I don't see as being much different from what Apple wants. Microsoft shouldn't be able to account for the revenue until the PC is sold, because Windows is dependent on the OEM hardware.

With the mobile phone there is hardware, software and carrier service; Apple provides the first two components. How Apple delivers those updates is different from most other cell phone manufacturers. Apple updates iPhone firmware, rather than the carriers. If you buy a Windows Mobile or Symbian phone, the carrier pushes out the updates for locked phones. The accounting is perhaps more appropirate for the way Apple controls the software than Nokia. That control is good for Apple in that it prevents the kind of mobile OS fragmentation that Nokia must deal with.

The software updates don't just affect the hardware but the service. The three are intertwined. Nice try with the "update for ages" bit. Apple delivers the software as a service.

With the mobile phone there is hardware, software and carrier service; Apple provides the first two components. How Apple delivers those updates is different from most other cell phone manufacturers. Apple updates iPhone firmware, rather than the carriers. If you buy a Windows Mobile or Symbian phone, the carrier pushes out the updates for locked phones. The accounting is perhaps more appropirate for the way Apple controls the software than Nokia. That control is good for Apple in that it prevents the kind of mobile OS fragmentation that Nokia must deal with.

Just going to cut out this little bit. I used to have a Windows Mobile Motorola Q from Verizon. When I did updates, I downloaded an update file from the Mototola web site, not from Verizon. Yes, it was a Verizon version, but not all the different than the ATT version of the iPhone update. The only difference being that Verizon's setting where built into the file instead of a carrier ipc file (or whatever it's called) that is uploaded that enables or disables features. (ie:MMS messaging).

Your still using flawed outdated model which was last adjusted to suit landline phones rented to consumers as part and parcel of a service package.. pre-bell breakup.

And your still missing the point.. the point is that APPLE is not earning or delivering anything as part of a subscription.

Show me the PC manufacturer who is accounting in this fashion for netbook giveaways as part of Cellphone data plan packages.. you wont find one.. because they are NOT "integral to the service"

When I sign up for an ATT plan, I am in no way locked to the iphone, which i buy to use said service, they are completely seperate unbundled transactions.

Software updates to the iphone are not relevant to the discussion either, and apple's accountants should NEVER have reported a dime as subscription.. because the guidelines do NOT in fact require or encourage it.

Apple Accountants DECIDED TO DO IT AS A MATTER OF EXPEDIENCY IN ORDER TO SHOW LESS OF A HIT TO INCOME IF THE IPHONE WAS NOT A HUGE SUCCESS AND ARE NOW STUCK..

By the logic expressed here.. especially apple the entire product line should be subscription based accounting.. and there is no way around that.

You are stuck on the "service" provided entirely by ATT as some forcing apple to do something.. especiallt bizzare when you consider that for all intents and purposes the ipod touch is the exact same device.. getting the exact same "treatment" when it comes to updates as the product sold and accounted for entirely differently.. including apple claiming to be forced to charge for updates to the second products OS.. which is circular logic at best.

ENRON ENRON ENRON

gorgeth... you really are confusing the issue here. Whether Apple should be reporting GAAP or non-GAAP figures is beside the point. Apple did it the way they did it. That's just a plain fact. Nobody appears to fully understand Sarbanes-oxley. That's why there appears to be so many different ways the rules are interpreted.

The issue that some of the posters here would like to see resolved is why Joe thinks that Apple would be hoodwinking investors.. if the accounting rules were changed.

We don't need you to muddy things up with your conspiracy theories.

Gorgeth, what you are referring to is cash accounting and its ancient. What they are debating here is on the matching principle. Their so-called free service has a cost to Apple. Take a look at accounting for warranties, and you'll wise up.

Joe does seem to have a point. The accounting change will most likely boost earnings and clean up their balances. I'm not so much concerned about savvy investors as long as GAAP numbers are reported. However, putting those numbers as official would definitely influence the perception of less sophisticated speculators. Earnings and stock prices would be more volatile and that is really a bad no-no.