Apple 2015 Annual Report Download - page 36

For sales of qualifying versions of iOS devices, Mac, Apple Watch and Apple TV, the Company has indicated it may from time to time
provide future unspecified software upgrades to the device’s essential software and/or non-software services free of charge. 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.
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 unspecified 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 and non-software
services offered, the estimated value of unspecified software upgrade rights and non-software services and the estimated period
unspecified 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 operating results.
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, which would have an adverse impact on the Company’s operating results.
Inventory Valuation and Valuation of Manufacturing-Related Assets and Estimated Purchase Commitment Cancellation Fees
The Company must purchase components and build inventory in advance of product shipments and has invested in manufacturing-
related assets, 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.
The industries in which the Company competes are subject to a rapid and unpredictable pace of product and component obsolescence
and demand changes. In certain circumstances the Company may be required to record additional write-downs of inventory and/or
manufacturing-related assets. These circumstances include future demand or market conditions for the Company’s products being less
favorable than forecasted, unforeseen technological changes or changes to the Company’s product development plans that negatively
impact the utility of any of these assets, or significant deterioration in the financial condition of one or more of the Company’s suppliers that
hold any of the Company’s manufacturing-related assets or to whom the Company has made an inventory prepayment. Such write-
downs would adversely affect the Company’s financial condition and operating results in the period when the write-downs were recorded.
Apple Inc. | 2015 Form 10-K | 34