Change in Subscription Accounting Rules to Benefit Apple, iPhone Profit Statements

The Financial Accounting Standards Board has approved a change in the way revenue can be recognized from products sold under the subscription accounting model, like Apple's iPhone.

Apple uses a subscription accounting model for the iPhone (and Apple TV) to justify, under their interpretation of Sarbanes Oxley, adding new features for 2 year after the sale of the device proper. So, if they get $600 for an iPhone from AT&T, rather than putting that on the books immediately and in full, they spread it out over 24 months, recognizing a portion of the revenue each month. This also means that their earnings look smaller in the actual quarter of sale, which has led them to release two sets of numbers in recent quarters, GAAP and non-GAAP (generally accepted accounting practices).

Now, however, Apple and others, like Palm, will be able to book a large portion of that revenue up-front, in the actual quarter of sale, allowing a closer representation of actual earnings numbers.

iPod touch, of course, is not currently accounted for using the subscription method, which is why Apple believes they much charge a nominal fee for major OS updates. Whether or not that will change given the new rules is uncertain (though we hold to hope!)

Rene Ritchie

Rene Ritchie is one of the most respected Apple analysts in the business, reaching a combined audience of over 40 million readers a month. His YouTube channel, Vector, has over 90 thousand subscribers and 14 million views and his podcasts, including Debug, have been downloaded over 20 million times. He also regularly co-hosts MacBreak Weekly for the TWiT network and co-hosted CES Live! and Talk Mobile. Based in Montreal, Rene is a former director of product marketing, web developer, and graphic designer. He's authored several books and appeared on numerous television and radio segments to discuss Apple and the technology industry. When not working, he likes to cook, grapple, and spend time with his friends and family.

  • My bet is they continue to release GAAP and non-GAAP numbers because this isn't the only reason for doing so. Most companies do these days.
    I'm not convinced this will do anything to make Apple's 10k or 10q reports any less murky. They go out of their way to obfuscate them as it is, and I don't see them changing that any time soon.
    Those investors who buy stock on a whim with no research may rush in and buy regardless of, and out of proportion to actual earnings.
    That will cause a brief price jump as more savvy holders will sell at inflated prices, and buy back in after the stock comes back inline with actual earnings.
    This has no real meaning in the grand scheme of things, other than setting up the casual investor for a one time haircut.
    Knowing this is coming, you can buy AAPL today, and sell shortly after the first earnings using this new method are announced, and perhaps make some quick money.
    Buy the rumor. Sell the news.
  • This won't affect the stock price at all. Everyone (with any real money) who buys now does so taking into account the delayed earnings reporting. The accounting method being used doesn't really make so much of a difference.
  • It doesn't take REAL money for a few naive investors and day traders to rush in and affect the stock price.
    Real money sits on the sidelines of these fad driven surges.
  • While it would take ALOT of naive investors, you may be right about a handful of manipulative day traders.