Apple 2014 Annual Report Download - page 42

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. Should future facts and
circumstances change, 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. Factors subject to change include the unspecified
software upgrade rights offered, the estimated value of unspecified software upgrade rights, the estimated or actual costs
incurred to provide non-software services and the estimated period software upgrades and non-software services are expected
to be provided.
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 of tax, in the
Company’s Consolidated Balance Sheets. Changes in the fair value of available-for-sale securities impact the Company’s net
income only when such securities are sold or an other-than-temporary impairment is recognized. Realized gains and losses on
the sale of securities are determined by specific identification of each security’s cost basis. The Company regularly reviews its
investment portfolio to determine if any security is other-than-temporarily impaired, which would require the Company to record
an impairment charge in the period any such determination is made. In making this judgment, the Company evaluates, among
other things, the duration and extent to which the fair value of a security is less than its cost; the financial condition of the issuer
and any changes thereto; and the Company’s intent to sell, or whether it will more likely than not be required to sell, the security
before recovery of its amortized cost basis. The Company’s assessment on whether a security is other-than-temporarily
impaired could change in the future due to new developments or changes in assumptions related to any particular security.
Inventory Valuation and Valuation of Manufacturing-Related Assets and Estimated Purchase Commitment Cancellation
Fees
The Company must order components for its products and build inventory in advance of product shipments and has invested
in manufacturing process equipment, including capital assets held at its suppliers’ facilities. In addition, the Company has made
prepayments to certain of its suppliers associated with long-term supply agreements to secure supply of inventory
components. The Company records a write-down for inventories of components and products, including third-party products
held for resale, which have become obsolete or are in excess of anticipated demand or net realizable value. The Company
performs a detailed review of inventory that considers multiple factors including demand forecasts, product life cycle status,
product development plans, current sales levels and component cost trends. The Company also reviews its manufacturing-
related capital assets and inventory prepayments for impairment whenever events or circumstances indicate the carrying
amount of such assets may not be recoverable. If the Company determines that an asset is not recoverable, it records an
impairment loss equal to the amount by which the carrying value of such an asset exceeds its fair value.
Apple Inc. | 2014 Form 10-K | 40