Apple 2008 Annual Report Download - page 64

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Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1—Summary of Significant Accounting Policies (Continued)
The Company sells software and peripheral products obtained from other companies. The Company generally establishes its own pricing and
retains related inventory risk, is the primary obligor in sales transactions with its customers, and assumes the credit risk for amounts billed to its
customers. Accordingly, the Company generally recognizes revenue for the sale of products obtained from other companies based on the gross
amount billed.
The Company accounts for multiple element arrangements that consist only of software or software-related products in accordance with SOP
No. 97
-2. If a multiple-element arrangement includes deliverables that are neither software nor software-related, the Company applies EITF No.
00-21, Revenue Arrangements with Multiple Deliverables, to determine if those deliverables constitute separate units of accounting from the
SOP No. 97-2 deliverables. If the Company can separate the deliverables, the Company applies SOP No. 97-2 to the software and software-
related deliverables and applies other appropriate guidance (e.g., SAB No. 104) to the deliverables outside the scope of SOP No. 97-2. 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 the revenue recognition criteria for that element have 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. Revenue is recorded net of taxes collected from
customers that are remitted to governmental authorities, with the collected taxes recorded as current liabilities until remitted to the relevant
government authority.
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.
In 2007, the Company began shipping Apple TV and iPhone. For Apple TV and iPhone, the Company indicated it may from time-to-time
provide future unspecified features and additional software products free of charge to customers. Accordingly, Apple TV and iPhone handsets
sales are accounted for under subscription accounting in accordance with SOP No. 97-2. As such, the Company’s policy is to defer the
associated revenue and cost of goods sold at the time of sale, and recognize both on a straight-line basis over the currently estimated 24-month
economic life 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.
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