Apple 2004 Annual Report Download - page 45

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In December 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. (FIN) 46R, a revision to FIN 46, Consolidation
of Variable Interest Entities. FIN 46R clarifies some of the provisions of FIN 46 and exempts certain entities from its requirements. FIN 46R is
effective at the end of the first interim period ending after March 15, 2004. The adoption of FIN 46R did not have a material impact on the
Company's results of operations or financial position.
In March 2004, the FASB issued EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments
. EITF 03-1 includes new guidance for evaluating and recording impairment losses on debt and equity investments, as well as new
disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB issued FASB Staff Position
EITF 03-1-1, which delays the effective date until additional guidance is issued for the application of the recognition and measurement
provisions of EITF 03-1 to investments in securities that are impaired; however, the disclosure requirements are effective for annual periods
ending after June 15, 2004. Although the Company will continue to evaluate the application of EITF 03-1, management does not currently
believe adoption will have a material impact on its results of operations or financial position.
Accounting for Stock-Based Compensation
The Company currently measures compensation expense for its employee stock-based compensation plans using the intrinsic value method
prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and provides 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 Opinion No. 25 because, as further discussed in Part II, Item 8 of this Form 10-K at Note 1 of
the Notes to Consolidated Financial Statements, 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.
On March 31, 2004, the FASB issued a proposed Statement, Share-Based Payment, that addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are
based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. The proposed
Statement would eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25 and generally would
require instead that such transactions be accounted for using a fair-value-based method. If adopted, it is currently anticipated that the proposed
Statement would be effective for the Company beginning in its fourth fiscal quarter of 2005.
At the Company's annual shareholders meeting on April 24, 2003, shareholders approved a proposal requesting that the Company's Board of
Directors (the Board) establish a policy of expensing the value of all future employee stock options issued by the Company. The Board and
management appreciate and take seriously the views expressed by the Company's shareholders. The Company decided not to expense the value
of employee stock options until the FASB finalizes its new accounting standard on the matter, which may play a significant role in determining
the fair value of and accounting for employee stock options. The Company monitors progress at the FASB and other developments with respect
to the general issue of employee stock compensation. The Company is currently reviewing the potential impact from the guidance of the
proposed statement, which may require the Company to recognize substantially more compensation expense in future periods that could have a
material adverse impact on the Company's future results of operations. The accounting impact had the Company chosen to apply the fair-value
recognition provisions of SFAS No. 123, instead of the recognition provisions under APB Opinion No. 25, is described in Part II, Item 8 of this
Form 10-K at Note 1 of the Notes to Consolidated Financial Statements.
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