Should Apple Lobby the FASB to Change the Revenue Recognition Rules for Smartphones?
Q3: Should Apple lobby the FASB to change the revenue recognition rules for smartphones?
In our opinion, Apple should lobby FASB to change the revenue recognition rules for smartphones, given the following reasons:-
1. Under “non-GAAP measures”, Apple’s performance looked much better than that under GAAP measures. Please find below a table1 summarizing the differences of key financial data between GAAP and non-GAAP measures for the fourth quarter of 2008:-
Q4 2008
GAAP ($ billions)
Non-GAAP ($ billions)
% Increase
Total sales
$7.9
$11.7
48%
Total Income
1.1
2.4
115%
iPhone Sales
0.8
4.6
475%
iPhone as % of Sales
10%
39%
This is because under subscription accounting (GAAP), Apple recognized the associated revenue and cost of goods sold for the iPhone on a straight-line basis over the product’s estimated 24-month economic life (the typical length of a mobile phone service contract)2 and hence its quarterly results only reflected eighth of the revenue and cost of goods sold. Profit margin derived from sale of iPhone would then be deferred to and spread over the remaining 21 months.
2. Some argued that investors knew to use cash revenue numbers for valuations and ratios, and that changing to non-GAAP measures should have no impact on the economic value of Apple shares3. This argument has duly indicated the fact that non-GAAP measures would better reflect the economic reality.
In the meantime, as per Jobs’ explanation in Apple’s earnings conference call, in terms of non-GAAP mobile-phone revenue, in just 15 months Apple had become the world’s third-largest phone manufacturer behind Nokia and Samsung but ahead of Sony Ericsson, LG, Motorola, and RIM.4
It turned out that the assessment under non-GAAP was a correct one and Apple has the 2nd largest market share of smartphones since 2012.5
3. As mentioned above, some argued that investors knew to use cash revenue numbers for valuations and ratios. However, it can make it more difficult for the average Apple
In our opinion, Apple should lobby FASB to change the revenue recognition rules for smartphones, given the following reasons:-
1. Under “non-GAAP measures”, Apple’s performance looked much better than that under GAAP measures. Please find below a table1 summarizing the differences of key financial data between GAAP and non-GAAP measures for the fourth quarter of 2008:-
Q4 2008
GAAP ($ billions)
Non-GAAP ($ billions)
% Increase
Total sales
$7.9
$11.7
48%
Total Income
1.1
2.4
115%
iPhone Sales
0.8
4.6
475%
iPhone as % of Sales
10%
39%
This is because under subscription accounting (GAAP), Apple recognized the associated revenue and cost of goods sold for the iPhone on a straight-line basis over the product’s estimated 24-month economic life (the typical length of a mobile phone service contract)2 and hence its quarterly results only reflected eighth of the revenue and cost of goods sold. Profit margin derived from sale of iPhone would then be deferred to and spread over the remaining 21 months.
2. Some argued that investors knew to use cash revenue numbers for valuations and ratios, and that changing to non-GAAP measures should have no impact on the economic value of Apple shares3. This argument has duly indicated the fact that non-GAAP measures would better reflect the economic reality.
In the meantime, as per Jobs’ explanation in Apple’s earnings conference call, in terms of non-GAAP mobile-phone revenue, in just 15 months Apple had become the world’s third-largest phone manufacturer behind Nokia and Samsung but ahead of Sony Ericsson, LG, Motorola, and RIM.4
It turned out that the assessment under non-GAAP was a correct one and Apple has the 2nd largest market share of smartphones since 2012.5
3. As mentioned above, some argued that investors knew to use cash revenue numbers for valuations and ratios. However, it can make it more difficult for the average Apple