In a move designed to help US companies better compete with their overseas competitors, the Financial Accounting Standards Board has changed the rules which govern how a company may report sales on devices which combine hardware and software:
Under the old rules, companies like Apple Inc. had to spread revenue from the sale of an iPhone over two years, the estimated useful life of the device. That’s because when Apple sells an iPhone, it agrees to provide software updates in the future.
Existing accounting rules require many software companies to divide up sales over the length of licensing contracts; until now, companies with hybrid hardware-software products were also guided by those standards.
The Financial Accounting Standards Board’s latest changes mean that Apple, plus other smart-phone makers, telecommunications equipment makers, semiconductor equipment manufacturers and a host of others, will be subject to a less onerous accounting standard.
The new rules let Apple ”unbundle” iPhone hardware from its software and report the hardware sales up front. That makes it easier for investors to see how Apple did in any given period.
In the last quarter, for example, Apple said that if it were allowed to account for iPhone sales all at once, its sales would have been 17 percent higher and its profit would have been boosted by 58 percent.
While many of FASB’s recent rule changes have been the subject of much controversy (particularly its decision to allow banks not to mark-to-market the value of their illiquid securities), this one seems well-designed.
Buying an iPhone which will receive several software updates over its useful life is not equivalent to purchasing a dishwasher with a two-year warranty. In the latter case, the seller rightfully recoups that portion of the sales price which was incrementally earned during the period in which you did not exercise your warranty rights. In the former case, however, what danger does the software update pose to the original point-of-sale? Is there a realistic chance that the update will go badly and brick your iPhone?
Kudos to FASB for (finally) making an intelligent change to the rules.
via New Accounting Rules Mean Boost to Apple, Others – NYTimes.com.
