Analysis for Iphone

University of Minnesota                                         Financial Accounting for Data Scientists

Carlson School of Management                                                                                    Summer 2017

Paul Ma

Accounting for the Iphone

                                                HW4

        The objectives of this case is to help you understand criteria for revenue recognition and the role of accrual accounting in reflecting timing differences between cash receipts and product / service delivery, especially in the more complex setting of multiple deliverables. It also emphasizes (a) the usefulness of supplementary non-GAAP disclosures which firms often provide, (b) the impact of accounting on firm value, and (c) the role of companies in the standard setting process.

1. Read case uploaded on Moodle.
2. You may work in teams of 3 or less to produce answers to the following questions (no more than 1500 words).

Assignment Questions

1. Do you agree with Steve Jobs that the non-GAAP revenue numbers reported by Apple are a better measure of its iPhone sales than the revenues reported under the Generally Accepted Accounting Principles? Why or why not?
2. Under the GAAP subscription method, the money received is amortized and recognized as revenue over the subscription term. This method is feasible and common for software and magazine publishing industries since the service is provided during a period of time. But this method is not suitable for the software update service provided by Apple. Actually the software upgrade component of iPhone is only a tiny part of the total revenue, thus deferring the most part of the revenue into 23 month cannot properly reflect the actual profit that Apple earns. Moreover, the update service provided by Apple is more like a improvement rather than a commitment. It is aim at improving customer experience, so we should not regard it as a mandatory service that Apple need to provide during the 2-year period.
3. When it comes to the agreement between Apple and AT&T, as it is mentioned in the case, the two companies did not disclose specifically which kind of forms of cooperation they use.
4. If we take a closer look to the financial report, we will find that under the non-GAAP recording method, there should be no change on Apple’s sales number and total cash inflow, but a jump up in Apple’s stock price according to the big improvement in current revenue. This will be a good thing for Apple as investors prefer to use EPS (earning per share) to evaluate and predict the performance of a company. But under GAAP principle, more and more revenue is deferred every month as the continues increase in iPhone sales, which cannot correctly reflect Apple’s marketing performance.
5. What exactly is the difference between the way Apple’s revenues are measured under GAAP and under the approach proposed by the company? How does this difference affect the rest of operating income and the related balance sheet items? What is the effect on the cash flows? (In answering the question, review exhibit 1f on page 12, and exhibit 3 on page 15).
6. Do you think Apple should lobby for a change in the accounting rules governing the revenue recognition for products such as the iPhone?
7. If you were a member of the Financial Accounting Standards Board, would you argue for a rule change?

" 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.