Question

Please respond to the following: From the case study, in 2009, the FASB issued a ruling related to income recognition from multiple element sales involving software to various stakeholder groups. Evaluate the impact of Apple’s retrospective restatement of its financial statements resulting from FASB’s ruling. Provide support for your rationale.

From the case study, examine the influence of both Apple’s reported deferred revenue and the lobbying by Apple executives on FASB’s ruling. Indicate your agreement or disagreement with Apple’s attempt to influence FASB’s ruling.

Case Study: Apple’s net income before provision for income taxes was only $7.984 billion. For 2007 through 2009, but primarily for 2008 and 2009, Apple deferred $9.619 billion of pretax profits (some should have been deferred because Apple did have an obligation to provide software updates, and not all of the deferrals were because of the iPhone and iTV). The market appropriately ignored Apple’s accounting because the expected cost to provide software updates to its iPhones was so low (when it adopted the new revenue recognition rules, Apple disclosed that it was deferring only $25 of revenue for iPhone software upgrades, and that may be a very conservative deferral).

Answer 1

Apple decided to restate their financial statements retrospectively because by going retrospectively the company would use the new rules like they had always been in place and would give more comparable data for previous years. The textbook says, “The Company believes retrospective adoption provides the most comparable and useful financial information for financial statement users, is more consistent with the information the Company’s management uses to evaluate its business and better reflects the underlying economic performance of the Company. The financial statements and notes to the financial statements presented herein have been adjusted to reflect the retrospective adoption of the new accounting principles.”

I agree with Apple lobbying and trying to influence FASB’s ruling. Apple had over $12 billion in deferred revenue, when it should have been recording more sales. Apple is a big company that has a large number of sales. Revenue recognition for the years that Apple restated their financial statements painted a much clearer picture of the company as a whole instead showing a large amount of deferred revenue. Technology, sales, and upgrades to that technology definitely benefits from this change. I think Apple did a great service to the profession by helping change the FASB’s ruling.

I believe that if Apple and other technology companies had not lobbied FASB for a change in the revenue recognition rules related to bundled packages with software that Apple would not show such success on its financial statements. The deferred revenue was misleading as it counted as a liability and the software updates were not certain or timed and therefore are not worth much of the cost of an iPhone. I think this change is for the best and these companies were right in lobbing for change.