Apple 2008 Annual Report Download - page 41

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Table of Contents
reported in its Consolidated Financial Statements and accompanying notes. Note 1 “Summary of Significant Accounting Policies” of Notes to
Consolidated Financial Statements in this Form 10-K describes the significant accounting policies and methods used in the preparation of the
Company’s Consolidated Financial Statements. Management bases its estimates on historical experience and on various other assumptions it
believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets
and liabilities. Actual results may differ from these estimates and such differences may be material.
Management believes the Company’s critical accounting policies and estimates are those related to revenue recognition, allowance for doubtful
accounts, inventory valuation and inventory purchase commitments, warranty costs, stock-based compensation, income taxes, and legal and
other contingencies. Management considers these policies critical because they are both important to the portrayal of the Company’s financial
condition and operating results, and they require management to make judgments 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 the Securities and
Exchange Commission (“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.
For both Apple TV and iPhone, the Company has indicated that from time-to-time 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. The Company’s policy requires that, 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
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