Apple 2014 Annual Report Download - page 53

For the sale of most third-party products, the Company recognizes revenue based on the gross amount billed to customers
because the Company establishes its own pricing for such products, retains related inventory risk for physical products, is the
primary obligor to the customer and assumes the credit risk for amounts billed to its customers. For third-party applications
sold through the App Store and Mac App Store and certain digital content sold through the iTunes Store, the Company does
not determine the selling price of the products and is not the primary obligor to the customer. Therefore, the Company
accounts for such sales on a net basis by recognizing in net sales only the commission it retains from each sale. The portion of
the gross amount billed to customers that is remitted by the Company to third-party app developers and certain digital content
owners is not reflected in the Company’s Consolidated Statements of Operations.
The Company records deferred revenue when it receives payments in advance of the delivery of products or the performance
of services. This includes amounts that have been deferred for unspecified and specified software upgrade rights and non-
software services that are attached to hardware and software products. The Company sells gift cards redeemable at its retail
and online stores, and also sells gift cards redeemable on the iTunes Store for the purchase of digital content and software. The
Company records deferred revenue upon the sale of the card, which is relieved upon redemption of the card by the customer.
Revenue from AppleCare service and support contracts is deferred and recognized over the service coverage periods.
AppleCare service and support contracts typically include extended phone support, repair services, web-based support
resources and diagnostic tools offered under the Company’s standard limited warranty.
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. For the Company’s other customer incentive programs, the estimated cost of these programs 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. Revenue is
recorded net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded
as current liabilities until remitted to the relevant government authority.
Revenue Recognition for Arrangements with Multiple Deliverables
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 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 multi-element arrangements accounted for in accordance with
industry specific software accounting guidance, the Company allocates revenue to all deliverables based on the VSOE of each
element, and if VSOE does not exist revenue is recognized when elements lacking VSOE are delivered.
For sales of qualifying versions of iPhone, iPad and iPod touch (“iOS devices”), Mac and Apple TV, the Company has indicated it
may from time to time provide future unspecified software upgrades and features to the essential software bundled with each of
these hardware products free of charge to customers. Essential software for iOS devices includes iOS and related applications
and for Mac includes OS X and related applications. The Company also provides various non-software services to owners of
qualifying versions of iOS devices and Mac. The Company has identified up to three deliverables regularly included in
arrangements involving the sale of these devices. The first deliverable is the hardware and software essential to the functionality
of the hardware device delivered at the time of sale. The second deliverable is the embedded right included with the purchase of
iOS devices, Mac and Apple TV to receive on a when-and-if-available basis, future unspecified software upgrades and features
relating to the product’s essential software. The third deliverable is the non-software services to be provided to qualifying
versions of iOS devices and Mac. The Company allocates revenue between 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
Apple Inc. | 2014 Form 10-K | 51