Apple 2011 Annual Report Download - page 29

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Management believes the Company’
s critical accounting policies and estimates are those related to revenue recognition, valuation and
impairment of marketable securities, inventory valuation and inventory purchase commitments, warranty costs, 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, digital content and applications, peripherals, and service and support
contracts. 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 recognition of revenue until the
customer receives the product because the Company retains a portion of the risk of loss on these sales during transit. The Company recognizes
revenue from the sale of hardware products, software bundled with hardware that is essential to the functionality of the hardware, and third-
party
digital content sold on the iTunes Store in accordance with general revenue recognition accounting guidance. The Company recognizes revenue
in accordance with industry specific software accounting guidance for the following types of sales transactions: (i) standalone sales of software
products, (ii) sales of software upgrades and (iii) sales of software bundled with hardware not essential to the functionality of the hardware.
For multi-element arrangements that include hardware products containing software essential to the hardware product’
s functionality,
undelivered software elements that relate to the hardware product’s essential software, and undelivered non-
software services, the Company
allocates revenue to all deliverables based on their relative selling prices. In such circumstances, the Company uses a hierarchy to determine the
selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-
party
evidence of selling price (“TPE”) and (iii) best estimate of the selling price (“ESP”).
VSOE generally exists only when the Company sells the
deliverable separately and is the price actually charged by the Company for that deliverable. ESPs reflect the Company’
s best estimates of what
the selling prices of elements would be if they were sold regularly on a stand-alone basis.
For sales of iPhone, iPad, Apple TV, for sales of iPod touch beginning in June 2010, and for sales of Mac beginning in June 2011, the Company
has indicated it may from time-to-
time provide future unspecified software upgrades and features free of charge to customers. In June 2011, the
Company announced it would begin providing various non-
software services to owners of qualifying versions of iOS devices and Mac. Because
the Company has neither VSOE nor TPE for these unspecified software upgrade rights or the non-
software services, revenue is allocated to these
rights and services based on the Company’s ESPs. Amounts allocated to the unspecified software upgrade rights and non-
software services are
deferred and recognized on a straight-
line basis over the estimated lives of each of these devices, which range from 24 to 48 months. The
Company’s process for determining ESPs involves management’s judgment. The Company’
s process considers multiple factors that may vary
over time depending upon the unique facts and circumstances related to each deliverable. If the facts and circumstances underlying the factors
considered change, including the estimated or actual costs incurred to provide non-
software services or the estimated lives of the related devices,
or should future facts and circumstances lead the Company to consider additional factors, the Company’s ESP for software upgrades and non-
software services related to future sales of these devices could change. If the estimated life of one or more of the devices should change, the
future rate of amortization of the revenue allocated to the software upgrade rights would also change.
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