Apple 2012 Annual Report Download - page 28

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/or 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 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 qualifying versions of iOS devices, Mac and Apple TV, the Company has indicated it may from time
to time provide future unspecified software upgrades and features free of charge to customers. The Company also
provides various non-software services to owners of qualifying versions of iOS devices and Mac. Because the
Company has neither VSOE nor TPE for the unspecified software upgrade rights or the non-software services,
revenue is allocated to these rights and services based on the Company’s ESPs. Revenue allocated to the
unspecified software upgrade rights and non-software services based on the Company’s ESPs is deferred and
recognized on a straight-line basis over the estimated period the software upgrades and non-software services are
expected to be provided for each of these devices, which ranges from two to four years.
The Company’s process for determining ESPs involves management’s judgment and 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 period the software upgrades and non-software
services are expected to be provided, or should future facts and circumstances lead the Company to consider
additional factors, the Company’s ESPs and the future rate of related amortization for software upgrades and
non-software services related to future sales of these devices could change.
The Company records reductions to revenue for estimated commitments related to price protection and other
customer incentive programs. 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 the Company’s other customer incentive programs, the estimated cost is recognized at the
later of the date at which the Company has sold the product or the date at which the program is offered. The
Company also records reductions to revenue for expected future product returns based on the Company’s
historical experience. Future market conditions and product transitions may require the Company to increase
customer incentive programs that could result in reductions to future revenue. Additionally, certain customer
incentive programs require management to estimate the number of customers who will actually redeem the
incentive. Management’s estimates are based on historical experience and the specific terms and conditions of
particular incentive programs. If a greater than estimated proportion of customers redeems such incentives, the
Company would be required to record additional reductions to revenue, which would have an adverse impact on
the Company’s results of operations.
Valuation and Impairment of Marketable Securities
The Company’s investments in available-for-sale securities are reported at fair value. Unrealized gains and losses
related to changes in the fair value of securities are recognized in accumulated other comprehensive income, net
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