Apple 2014 Annual Report Download - page 54

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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 with additional consideration given to the
estimated cost to provide such services.
In 2014, 2013 and 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 $40. As of September 27,
2014, the combined ESPs for Mac was $40 and for iPhone and iPad ranged from $15 to $25. Revenue allocated to such rights
is deferred and recognized on a straight-line basis over the estimated period the rights are expected to be provided for each
device, which ranges from two to 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 Costs
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 (“R&D”) 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 has been
established and ending when a product is available for general release to customers. In most instances, the Company’s
products are released soon after technological feasibility has been established. Costs incurred subsequent to achievement of
technological feasibility were not significant, and software development costs were expensed as incurred during 2014, 2013
and 2012.
Advertising Costs
Advertising costs are expensed as incurred and included in selling, general and administrative expenses. Advertising expense
was $1.2 billion, $1.1 billion and $1.0 billion for 2014, 2013 and 2012, respectively.
Apple Inc. | 2014 Form 10-K | 52