Apple 2015 Annual Report Download - page 48

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 accrued 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 and as a result software development costs were expensed as incurred.
Advertising Costs
Advertising costs are expensed as incurred and included in selling, general and administrative expenses. Advertising expense was $1.8
billion, $1.2 billion and $1.1 billion for 2015, 2014 and 2013, respectively.
Share-based Compensation
The Company recognizes expense related to share-based payment transactions in which it receives employee services in exchange for
(a) equity instruments of the Company or (b) liabilities that are based on the fair value of the Company’s equity instruments or that may be
settled by the issuance of such equity instruments. Share-based compensation cost for restricted stock and restricted stock units
(“RSUs”) is measured based on the closing fair market value of the Company’s common stock on the date of grant. The Company
recognizes share-based compensation cost over the award’s requisite service period on a straight-line basis for time-based RSUs and on
a graded basis for RSUs that are contingent on the achievement of performance conditions. The Company recognizes a benefit from
share-based compensation in the Consolidated Statements of Shareholders’ Equity if an excess tax benefit is realized. In addition, the
Company recognizes the indirect effects of share-based compensation on R&D tax credits, foreign tax credits and domestic
manufacturing deductions in the Consolidated Statements of Operations. Further information regarding share-based compensation can
be found in Note 9, “Benefit Plans.”
Income Taxes
The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets
and liabilities and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently
enacted tax rates that apply to taxable income in effect for the years in which those tax assets and liabilities are expected to be realized or
settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to
be realized.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements
from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon
settlement. See Note 5, “Income Taxes” for additional information.
Earnings Per Share
Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares
of common stock outstanding during the period. Diluted earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number
of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially
dilutive securities include outstanding stock options, shares to be purchased under the Company’s employee stock purchase plan,
unvested restricted stock and unvested RSUs. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per share
by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company’s
common stock can result in a greater dilutive effect from potentially dilutive securities.
Apple Inc. | 2015 Form 10-K | 46