Accounting for the Iphone at Apple Inc

Accounting for the Apple iPhone at Apple Inc.

For revenue to be recognized according to SEC issued four key conditions must be met:

1. Persuasive evidence of an arrangement exists

2. Delivery has occurred or services have been rendered

3. The seller's price to the buyer is fixed or determinable

4. Collectability is reasonably assured

In IFRS the following conditions for revenue recognition must be met:

1. Risks and rewards have been transferred from the seller to the buyer

2. The seller has no control over the goods sold

3. Collection of payment is reasonably assured

4. The amount of revenue can be reasonably measured

5. Costs of earning the revenue can be reasonably measured

Examples of unearned revenue are rent payments made in advance, prepayment for newspapers subscriptions, annual prepayment for the use of software, and prepaid insurance.

Due to the subscription elements of software where a user purchases an agreement to use the software and may receive future updates as opposed to buying full rights and ownership to the software as such, software companies filing their accounts under US GAAP are advised to choose the deferred revenue method or unearned revenue whereas the revenue of the sale of the software is recognized over the expected lifetime of the user agreement.

The typical balance sheet effects at a sale of a product or contract accounted for as deferred revenue over e.g. 2 years as in the case of Apple is an increase (debit) to Cash account, credit to Deferred Revenue.

As the year progresses the company recognizes revenue month by month by recording a debit entry to the Deferred revenue account and a credit entry to its Net sales account.

By the end of year two all the deferred revenue has transferred from the balance sheet to the income statement.

This results generally in a “larger” balance sheet as opposed to a company not deferring its revenue.

The development of technology and rapid spreading of software apps, on-line ability for constant updates, free or for a payment, makes the traditional definition of when a full and final delivery of services has been made unclear.

Moreover, the definition of where hardware ends and software begins is not clear; hardware, a firm good sold and delivered physically, and the software within are mostly inseparable and will