Apple 2014 Annual Report Download - page 41

Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting
principles (“GAAP”) and the Company’s discussion and analysis of its financial condition and operating results require the
Company’s management to make judgments, assumptions and estimates that affect the amounts reported in its consolidated
financial statements and accompanying notes. Note 1, “Summary of Significant Accounting Policies” of the Notes to
Consolidated Financial Statements in Part II, Item 8 of this Form 10-K describes the significant accounting policies and
methods used in the preparation of the Company’s consolidated financial statements. Management bases its estimates on
historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from
these estimates and such differences may be material.
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 valuation of manufacturing-related assets and
estimated purchase commitment cancellation fees, 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, accessories, 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, risk of loss and rewards of ownership 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 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/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.
Apple Inc. | 2014 Form 10-K | 39