Apple 2015 Annual Report Download - page 47

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 iTunes Store, App Store, Mac App Store and iBooks 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, 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. The Company has identified up to three deliverables regularly included in arrangements involving the sale of these
devices. The first deliverable, which represents the substantial portion of the allocated sales price, 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
qualifying devices to receive on a when-and-if-available basis, future unspecified software upgrades relating to the product’s essential
software. The third deliverable is the non-software services to be provided to qualifying devices. 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 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. 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 including, where applicable, prices charged by the Company and
market trends in the pricing for similar offerings, product specific business objectives, length of time a particular version of a device has
been available, estimated cost to provide the non-software services and the relative ESP of the upgrade rights and non-software services
as compared to the total selling price of the product.
Beginning in September 2015, the Company reduced the combined ESPs for iOS devices and Mac between $5 and $10 to reflect the
increase in competitive offers for similar products at little to no cost for users, which reduces the amount the Company could reasonably
charge for these deliverables on a standalone basis.
Shipping Costs
Amounts billed to customers related to shipping and handling are classified as revenue, and the Company’s shipping and handling costs
are classified as cost of sales.
Apple Inc. | 2015 Form 10-K | 45