Apple 2005 Annual Report Download - page 70

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1—Summary of Significant Accounting Policies (Continued)
Revenue on arrangements that include multiple elements such as hardware, software, and services is allocated to each element based on the
relative fair value of each element. Each element’s allocated revenue is recognized when revenue recognition criteria for that element has been
met. Fair value is generally determined by vendor specific objective evidence (VSOE), which is based on the price charged when each element
is sold separately. If the Company cannot objectively determine the fair value of any undelivered element included in a multiple-element
arrangement, the Company defers revenue until all elements are delivered and services have been performed, or until fair value can objectively
be determined for any remaining undelivered elements. When the fair value of a delivered element has not been established, the Company uses
the residual method to recognize revenue if the fair value of all undelivered elements is determinable. Under the residual method, the fair value
of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is
recognized as revenue.
The Company records reductions to revenue for estimated commitments related to price protection and for customer incentive programs,
including reseller and end user rebates, and other sales programs and volume-
based incentives. The estimated cost of these programs is accrued
as a reduction to revenue in the period the Company has sold the product and committed to a plan. The Company also records reductions to
revenue for expected future product returns based on the Company’s historical experience.
Generally, the Company does not offer specified or unspecified upgrade rights to its customers in connection with software sales or the sale of
extended warranty and support contracts. When the Company does offer specified upgrade rights, the Company defers revenue for the fair
value of the specified upgrade right until the future obligation is fulfilled or when the right to the specified upgrade expires. Additionally, a
limited number of the Company’s software products are available with maintenance agreements that grant customers rights to unspecified
future upgrades over the maintenance term on a when and if available basis. Revenue associated with such maintenance is recognized ratably
over the maintenance term.
Allowance for Doubtful Accounts
The Company records its allowance for doubtful accounts based upon its assessment of various factors. The Company considers historical
experience, the age of the accounts receivable balances, credit quality of the Company’s customers, current economic conditions and other
factors that may affect customers’ ability to pay.
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 for product warranties at the time the related revenue is recognized. The Company
assesses the adequacy of its preexisting warranty liabilities and adjusts the amounts as necessary based on actual experience and changes in
future estimates.
Software Development Costs
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
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