Apple 2012 Annual Report Download - page 50

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these deliverables using the relative selling price method. Because the Company has neither VSOE nor TPE for
these deliverables, the allocation of revenue is based on the Company’s ESPs. Revenue allocated to the delivered
hardware and the related essential software is recognized at the time of sale provided the other conditions for
revenue recognition have been met. Revenue allocated to the embedded unspecified software upgrade rights and
the non-software services 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. Cost of sales related to delivered hardware and related essential software, including
estimated warranty costs, are recognized at the time of sale. Costs incurred to provide non-software services are
recognized as cost of sales as incurred, and engineering and sales and marketing costs are recognized as
operating expenses as incurred.
The Company’s process for determining its ESP for deliverables without VSOE or TPE considers multiple
factors that may vary depending upon the unique facts and circumstances related to each deliverable. The
Company believes its customers would be reluctant to buy unspecified software upgrade rights for the essential
software included with its qualifying hardware products. This view is primarily based on the fact that unspecified
software upgrade rights do not obligate the Company to provide upgrades at a particular time or at all, and do not
specify to customers which upgrades or features will be delivered. The Company also believes its customers
would be unwilling to pay a significant amount for access to the non-software services because other companies
offer similar services at little or no cost to users. Therefore, the Company has concluded that if it were to sell
upgrade rights or access to the non-software services on a standalone basis, including those rights and services
attached to iOS devices, Mac and Apple TV, the selling prices would be relatively low. Key factors considered
by the Company in developing the ESPs for software upgrade rights include prices charged by the Company for
similar offerings, market trends in the pricing of Apple-branded and third-party Mac and iOS compatible
software, the nature of the upgrade rights (e.g., unspecified versus specified), and the relative ESP of the upgrade
rights as compared to the total selling price of the product. The Company may also consider additional factors as
appropriate, including the impact of other products and services provided to customers, the pricing of
competitive alternatives if they exist, product-specific business objectives, and the length of time a particular
version of a device has been available. When relevant, the same factors are considered by the Company in
developing ESPs for offerings such as the non-software services; however, the primary consideration in
developing ESPs for the non-software services is the estimated cost to provide such services, including
consideration for a reasonable profit margin.
For the three years ended September 29, 2012, the Company’s combined ESPs for the unspecified software
upgrade rights and the rights to receive the non-software services included with its qualifying hardware devices
have ranged from $5 to $25. Revenue allocated to such rights included with iOS devices and Apple TV is
recognized on a straight-line basis over two years, and revenue allocated to such rights included with Mac is
recognized on a straight-line basis over four years.
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
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