Apple 2014 Annual Report Download - page 56

Financial Instruments
Cash Equivalents and Marketable Securities
All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents.
The Company’s marketable debt and equity securities have been classified and accounted for as available-for-sale.
Management determines the appropriate classification of its investments at the time of purchase and reevaluates the
designations at each balance sheet date. The Company classifies its marketable debt securities as either short-term or long-
term based on each instrument’s underlying contractual maturity date. Marketable debt securities with maturities of 12 months
or less are classified as short-term and marketable debt securities with maturities greater than 12 months are classified as long-
term. The Company classifies its marketable equity securities, including mutual funds, as either short-term or long-term based
on the nature of each security and its availability for use in current operations. The Company’s marketable debt and equity
securities are carried at fair value, with the unrealized gains and losses, net of taxes, reported as a component of shareholders’
equity. The cost of securities sold is based upon the specific identification method.
Derivative Financial Instruments
The Company accounts for its derivative instruments as either assets or liabilities and carries them at fair value.
For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated as cash flow
hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of AOCI in
shareholders’ equity and reclassified into income in the same period or periods during which the hedged transaction affects
earnings. The ineffective portion of the gain or loss on the derivative instrument, if any, is recognized in current income. To
receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash
flows on hedged transactions. For options designated as cash flow hedges, changes in the time value are excluded from the
assessment of hedge effectiveness and are recognized in income. For derivative instruments that hedge the exposure to
changes in the fair value of an asset or a liability and that are designated as fair value hedges, both the net gain or loss on the
derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in
earnings in the current period. For derivative instruments designated as a hedge of the foreign currency translation exposure of
the net investment in a foreign operation, the net gain or loss on the effective portion of the derivative instrument is reported in
the same manner as a foreign currency translation adjustment. For forward exchange contracts designated as net investment
hedges, the Company excludes changes in fair value relating to changes in the forward carry component from its definition of
effectiveness. Accordingly, any gains or losses related to this component are recognized in current income. Derivatives that do
not qualify as hedges are adjusted to fair value through current income.
Allowance for Doubtful Accounts
The Company records its allowance for doubtful accounts based upon its assessment of various factors. The Company
considers historical experience, the age of the accounts receivable balances, credit quality of the Company’s customers,
current economic conditions and other factors that may affect customers’ ability to pay.
Inventories
Inventories are stated at the lower of cost, computed using the first-in, first-out method, or market. If the cost of the inventories
exceeds their market value, provisions are made currently for the difference between the cost and the market value.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed by use of the straight-line method over the
estimated useful lives of the assets, which for buildings is the lesser of 30 years or the remaining life of the underlying building;
between two to five years for machinery and equipment, including product tooling and manufacturing process equipment; and
the shorter of lease terms or ten years for leasehold improvements. The Company capitalizes eligible costs to acquire or
develop internal-use software that are incurred subsequent to the preliminary project stage. Capitalized costs related to
internal-use software are amortized using the straight-line method over the estimated useful lives of the assets, which range
from three to five years. Depreciation and amortization expense on property and equipment was $6.9 billion, $5.8 billion and
$2.6 billion during 2014, 2013 and 2012, respectively.
Apple Inc. | 2014 Form 10-K | 54