Apple 2011 Annual Report Download - page 50

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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. For sales of third-party software applications for iPhone, iPad and iPod touch (“iOS devices”)
and Macs made through the App
Store and the Mac App Store, the Company is not the primary obligor to users of the software, and third-
party developers determine the selling
price of their software. Therefore, the Company accounts for such sales on a net basis by recognizing only the commission it retains from each
sale and including that commission in net sales in the Consolidated Statements of Operations. The portion of the sales price paid by users that is
remitted by the Company to third-party developers is not reflected in the Company’s Consolidated Statements of Operations.
The Company records deferred revenue when it receives payments in advance of the delivery of products or the performance of services. This
includes amounts that have been deferred for unspecified and specified software upgrade rights and non-
software services that are attached to
hardware and software products. The Company sells gift cards redeemable at its retail and online stores, and also sells gift cards redeemable on
the iTunes Store for the purchase of content and software. The Company records deferred revenue upon the sale of the card, which is relieved
upon redemption of the card by the customer. Revenue from AppleCare service and support contracts is deferred and recognized over the service
coverage periods. AppleCare service and support contracts typically include extended phone support, repair services, web-
based support
resources and diagnostic tools offered under the Company’s standard limited warranty.
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
recognized 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.
Revenue Recognition for Arrangements with Multiple Deliverables
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 to the essential software bundled with each of
these hardware products free of charge to customers. Essential software for iOS devices includes iOS and related applications and for Mac
includes Mac OS X and iLife. In June 2011, the Company announced it would provide various non-
software services to owners of qualifying
versions of iOS devices and Mac. The Company has identified up to three deliverables in arrangements involving the sale of these devices. The
first deliverable is the hardware and software essential to the functionality of the hardware device delivered at the time of sale. The second
deliverable is the embedded right included with the purchase of iOS devices, Mac and Apple TV to receive on a when-and-if-
available basis,
future unspecified software upgrades and features relating to the product’s essential software. The third
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