Do you thrill at accounting rules? Does a tingle run up your spine everytime someone so much as whispers “Generally Accepted Accounting Principles”? Does talk of subscription accounting cause you to fan yourself while proclaiming “Ah do declare!” If so, you may want to breathe into this paper bag for a minute, because we’re about to get crazy. Apple’s chief accountant has backed a proposal that would change the way companies would track certain product sales, so it’s time to break out the smelling salts.
As an ardent follower of all things bookkeeping, you no doubt already know that Apple has been accounting for some of its products—most notably the iPhone—via the aforementioned “subscription accounting” method. Since the company reuglarly rolls out new software updates, such as the recently released iPhone 3.1, which include new features, it accounts for the revenue from the product over the product’s lifetime (which it considers two years). That’s also why the iPod touch upgrades, which aren’t subject to subscription accounting, cost money.
While this allows the company to stay true to the letter of the law, Apple has argued that these numbers don’t accurately reflect just how slam-bang successful the iPhone has been—let’s call it the “hotcakes” factor. As a result, the company has gotten into the habit of providing adjusted, non-GAAP figures alongside its usual numbers, often with significant differences. For example, in the most recent quarter, Apple reported net income of $1.23 billion under GAAP—not bad, but if you eliminate the subscription accounting, that number balloons to an even more impressive $1.94 billion.
The proposed change to accounting rules is the dominion of the Financial Accounting Standards Board (who you may recall from its recent world tour, attended by throngs of screaming teenage girls), whose Emerging Issues Task Force has already given a thumbs up. The vote for final approval could come in November, although Apple’s new fiscal year begins on October 1st.
While it might not be the sexiest topic around, a change in the accounting procedure could have a lot of impact on Apple's bottom line, and thus how good Apple’s financials look to investors—and that ought to be enough to make you sweat.