Revenue recognition switch helps Apple overtake Microsoft
Recognition switch helps Apple overtake Microsoft On the day that the Apple iPad went on general sale, UK papers reported that Apple had overtaken Microsoft as the technology industry’s top player by market capitalisation.
With the one-two-three success in recent years of the iPod/iTunes, iPhone and the iPad, Apple has wowed consumers and investors in equal parts. Since it went on sale in the US, Apple has sold more than 1m iPads, helping the company to rake in $3bn in net quarterly profits on a turnover of $13.50bn in Q2 of 2010.
On Wednesday, Apple’s capitalisation closed at $222bn compared to Microsoft’s $219bn. With Apple’s shares trading at $253 each on Friday, its market capitalisation had risen to $230bn with Microsoft still behind on $228bn ($26 a share).
Supplementary notes to Apple’s results and filings with the SEC confirm that the company’s early adoption of new US revenue recognition rules has added extra lustre to its reported results in recent months.l
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 recognised income from sales. The deadline for adoption was the first financial quarter of 2011, but Apple opted to move early, for obvious reasons.
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 recognised 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 $2.6bn is now being reported for comparative purposes as $3.9bn – a 47.5% 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 this week’s epoch-making feat, it’s a useful reminder to make note of the role accounting can play in headline financial results.