Accounting plays role in Apple’s overtaking of Microsoft

With the one-two-three punch in recent years of the iPod/iTunes, iPhone, and the iPad, Apple has impressed consumers and investors, and has overtaken Microsoft as the technology industry’s top player by market capitalization.

Since it went on sale in the U.S., Apple has sold more than 1 million iPads, helping the company rake in $3 billion in net quarterly profits on a turnover of $13.50 billion during Q2 of 2010.
 
Last week, Apple’s capitalization closed at $222 billion compared with Microsoft’s $219 billion. With Apple’s shares recently trading at $253, its market capitalization had risen to $230 billion, with Microsoft still behind on $228 billion ($26 a share). Supplementary notes to Apple’s results and filings with the Securities and Exchange Commission confirm that the company’s early adoption of new U.S. revenue recognition rules has added extra luster to its reported results in recent months.
 
Apple’s latest quarterly results announcement explains that accounting standards updates issued by the US Financial Accounting Standards Board’s Emerging Issues Task Force in late 2009 required technology companies selling upgradeable devices and services to change the way they recognized income from sales. The deadline for adoption was the first financial quarter of 2011, but Apple opted to move early.
 
Under the previous historical accounting principles, Apple explained that it was required to apply a subscription accounting treatment for sales of both iPhone and Apple TV because it would occasionally provide unspecified software upgrades free of charge. Under subscription accounting, revenue and associated costs of sales were deferred at the time of sale and recognized on a straight-line basis over each product’s estimated economic life. This deferred significant amounts of revenue from iPhones and Apple TV – and iPad sales would have fallen into the same category.
 
Looking at the restated figures under the new treatment, the half-year net profit figure that was originally reported at $2.6 billion now is being reported for comparative purposes as $3.9 billion – a 47.5 percent increase. Adding in the effects of the iPad sales under the new treatment merely adds to the apparent moment.
 
While Apple is to be congratulated for the week’s significant feat, it’s a useful reminder to make note of the role accounting can play in headline financial results.
 
Reprinted from our sister site, accountingweb.co.uk.
 
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