Apple 2011 Annual Report Download - page 52

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software accounting guidance. For such transactions, revenue on arrangements that include multiple elements is allocated to each element based
on the relative fair value of each element, and fair value is determined by VSOE. If the Company cannot objectively determine the fair value of
any undelivered element included in such multiple-
element arrangements, 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. Beginning in July 2011,
the sale of certain upgrades to Mac OS X and Mac versions of iLife include when-and-if-
available upgrade rights for which the Company does
not have VSOE. Therefore, beginning in July 2011 the Company defers all revenue from the sale of upgrades to the Mac OS and Mac versions
of iLife and recognizes it ratably over 36 months.
Shipping Costs
For all periods presented, amounts billed to customers related to shipping and handling are classified as revenue, and the Company’
s shipping
and handling costs are included in cost of sales.
Warranty Expense
The Company generally provides for the estimated cost of hardware and software warranties at the time the related revenue is recognized. The
Company assesses the adequacy of its pre-
existing warranty liabilities and adjusts the amounts as necessary based on actual experience and
changes in future estimates.
Software Development Costs
Research and development costs are expensed as incurred. Development costs of computer software to be sold, leased, or otherwise marketed are
subject to capitalization beginning when a product’
s technological feasibility has been established and ending when a product is available for
general release to customers. In most instances, the Company’
s products are released soon after technological feasibility has been established.
Therefore, costs incurred subsequent to achievement of technological feasibility are usually not significant, and generally most software
development costs have been expensed as incurred.
The Company did not capitalize any software development costs during 2011 and 2010. In 2009, the Company capitalized $71 million of costs
associated with the development of Mac OS X Version 10.6 Snow Leopard (“Mac OS X Snow Leopard”),
which was released during the fourth
quarter of 2009. The capitalized costs are being amortized to cost of sales on a straight-
line basis over a three year estimated useful life of the
underlying technology.
Total amortization related to capitalized software development costs was $30 million, $48 million and $25 million in 2011, 2010 and 2009,
respectively.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was $933 million, $691 million and $501 million for 2011, 2010 and 2009,
respectively.
Share-based Compensation
The Company recognizes expense related to share-
based payment transactions in which it receives employee services in exchange for (a) equity
instruments of the Company or (b) liabilities that are based on the fair value of the enterprise’
s equity instruments or that may be settled by the
issuance of such equity instruments. Share-based compensation cost for restricted stock units (“RSUs”)
is measured based on the closing fair
market value of the Company’s common stock on the date of grant. Share-
based compensation cost for stock options is estimated at the grant
date based on each option’s fair-value as calculated by the Black-Scholes-Merton (“BSM”) option-
pricing model. The Company recognizes
share-based compensation cost as expense ratably on a straight-line
50