Apple 2007 Annual Report Download - page 41

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and estimates about inherently uncertain matters. The Company's senior management has reviewed these critical accounting policies and related
disclosures with the Audit and Finance Committee of the Company's Board of Directors.
Revenue Recognition
Net sales consist primarily of revenue from the sale of hardware, software, music products, digital content, peripherals, and service and support
contracts. The Company recognizes revenue for software products (operating system software and applications software), or any product that is
considered to be software-related in accordance with the guidance in Emerging Issues Task Force ("EITF") No. 03-5, Applicability of AICPA
Statement of Position 97-2 to Non-software Deliverables in an Arrangement Containing More-Than-Incidental Software , (e.g., Mac computers,
iPod portable digital music players and iPhone) pursuant to American Institute of Certified Public Accountants ("AICPA") Statement of Position
("SOP") No. 97-2, Software Revenue Recognition , as amended. For products that are not software or software-related, (e.g., digital content sold
on the iTunes Store and certain Mac, iPod and iPhone supplies and accessories) the Company recognizes revenue pursuant to SEC Staff
Accounting Bulletin ("SAB") No. 104, Revenue Recognition.
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or
determinable, and collection is probable. Product is considered delivered to the customer once it has been shipped, and title and risk of loss have
been transferred. For most of the Company's product sales, these criteria are met at the time the product is shipped. For online sales to
individuals, for some sales to education customers in the U.S., and for certain other sales, the Company defers revenue until the customer
receives the product because the Company retains a portion of the risk of loss on these sales during transit. If at the outset of an arrangement the
Company determines the arrangement fee is not, or is presumed not to be, fixed or determinable, revenue is deferred and subsequently
recognized as amounts become due and payable and all other criteria for revenue recognition have been met.
During 2007, the Company began shipping Apple TV and iPhone. For both Apple TV and iPhone, the Company indicated it may provide future
unspecified features and additional software products free of charge to customers. Therefore, sales of Apple TV and iPhone handsets are
recognized under subscription accounting in accordance with SOP No. 97-2. The Company recognizes the associated revenue and cost of goods
sold on a straight-line basis over the currently estimated 24-month economic lives of these products with any loss recognized at the time of sale.
Costs incurred by the Company for engineering, sales, marketing and warranty are expensed as incurred.
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. For transactions involving price protection, the
Company recognizes revenue net of the estimated amount to be refunded, provided the refund amount can be reasonably and reliably estimated
and the other conditions for revenue recognition have been met. If refunds cannot be reliably estimated, revenue is not recognized until reliable
estimates can be made or the price protection lapses. For customer incentive programs, the estimated cost of these programs is recognized at the
later of the date at which the Company has sold the product or the date at which the program is offered. The Company also records reductions to
revenue for expected future product returns based on the Company's historical experience. Future market conditions and product transitions may
require the Company to increase customer incentive programs and incur incremental price protection obligations that could result in additional
reductions to revenue at the time such programs are offered. Additionally, certain customer incentive programs require management to estimate
the number of customers who will actually redeem the incentive based on historical experience and the specific terms and conditions of
particular incentive programs. If a greater than estimated proportion of customers redeem such incentives, the Company
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