Apple 2002 Annual Report Download - page 45

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Revenue for consulting and implementation services is recognized upon performance and acceptance by the customer. Revenue from extended
warranty and support contracts is recognized ratably over the contract period. Amounts billed to customers in excess of revenue recognized on
extended warranty and support contracts are recognized as deferred revenue until revenue recognition criteria are met.
Revenue on arrangements that include multiple elements such as hardware, software, and services is allocated to each element based on vendor
specific objective evidence of the fair value of each element. Allocated revenue for each element is recognized when revenue recognition
criteria have been met for each element. Vendor specific objective evidence of fair value is generally determined based on the price charged
when each element is sold separately.
Shipping Costs
The Company's shipping and handling costs are included in cost of sales for all periods presented.
Warranty Expense
The Company provides currently for the estimated cost that may be incurred under product warranties at the time related revenue is recognized.
Research and Development
Research and development costs are expensed as incurred. Development costs of computer software to be sold, leased or otherwise marketed
are subject to capitalization beginning when a product's technological feasibility has been established and ending when a product is available
for general release to customers. In most instances, the Company's products are released soon after technological feasibility has been
established. Therefore, costs incurred subsequent to achievement of technological feasibility are usually not significant, and generally all
software development costs have been expensed.
During the third and fourth quarter of 2002, the Company incurred substantial development costs associated with the development of Mac OS
X version 10.2 (code-
named "Jaguar") subsequent to achievement of technological feasibility as evidenced by public demonstration and release
of a developer beta in May 2002 and prior to release of the final version of the product in the fourth quarter. As such, the Company capitalized
approximately $13.3 million of development costs associated with development of
56
Jaguar. Amortization of this asset began in the fourth quarter when Jaguar was shipped and is being recognized on a straight-line basis over
3 years. In addition, during 2002, the Company also began capitalizing certain costs related to development of its new PowerSchool enterprise
student information system. Capitalization, which began upon achievement of technological feasibility in the first quarter, amounted to
approximately $6 million during the first nine months of fiscal 2002. The final version of the enterprise student information system was
released in July.
During 2001 the Company incurred substantial development costs associated with the development of the original version of Mac OS X,
subsequent to release of a public beta version of the product and prior to release of the final product version. As a result, the Company
capitalized approximately $5.4 million of development costs during 2001 associated with development of Mac OS X. Related amortization is
computed by use of the straight-line method over the estimated useful life of the asset of 8 years.
Total amortization related to capitalized software development costs was $1.2 million and $350,000 in 2002 and 2001, respectively.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was $209 million, $261 million, and $281 million for 2002, 2001, and 2000,
respectively.
Stock-Based Compensation
The Company measures compensation expense for its employee stock-
based compensation plans using the intrinsic value method prescribed by
Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees and has provided pro forma disclosures of the
effect on net income and earnings per share as if the fair value-based method had been applied in measuring compensation expense. The
Company has elected to follow APB No. 25 because, as discussed below, the alternative fair value accounting provided for under SFAS
No. 123,
Accounting for Stock-Based Compensation , requires use of option valuation models that were not developed for use in valuing
employee stock options and employee stock purchase plan shares. Under APB Opinion No. 25, when the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized.
Pro forma information regarding net income (loss) per share is required by SFAS No. 123 and has been determined as if the Company had