Apple 2015 Annual Report Download - page 66

Share-based Compensation
The following table shows a summary of the share-based compensation expense included in the Consolidated Statements of Operations
for 2015, 2014 and 2013 (in millions):
2015 2014 2013
Cost of sales $ 575 $ 450 $ 350
Research and development 1,536 1,216 917
Selling, general and administrative 1,475 1,197 986
Total share-based compensation expense $ 3,586 $ 2,863 $ 2,253
The income tax benefit related to share-based compensation expense was $1.2 billion, $1.0 billion and $816 million for 2015, 2014 and
2013, respectively. As of September 26, 2015, the total unrecognized compensation cost related to outstanding stock options, RSUs and
restricted stock was $6.8 billion, which the Company expects to recognize over a weighted-average period of 2.7 years.
Note 10 – Commitments and Contingencies
Accrued Warranty and Indemnification
The following table shows changes in the Company’s accrued warranties and related costs for 2015, 2014 and 2013 (in millions):
2015 2014 2013
Beginning accrued warranty and related costs $ 4,159 $ 2,967 $ 1,638
Cost of warranty claims (4,401) (3,760) (3,703)
Accruals for product warranty 5,022 4,952 5,032
Ending accrued warranty and related costs $ 4,780 $ 4,159 $ 2,967
The Company generally does not indemnify end-users of its operating system and application software against legal claims that the
software infringes third-party intellectual property rights. Other agreements entered into by the Company sometimes include
indemnification provisions under which the Company could be subject to costs and/or damages in the event of an infringement claim
against the Company or an indemnified third-party. In the opinion of management, there was not at least a reasonable possibility the
Company may have incurred a material loss with respect to indemnification of end-users of its operating system or application software for
infringement of third-party intellectual property rights. The Company did not record a liability for infringement costs related to
indemnification as of September 26, 2015 or September 27, 2014.
In September 2015, the Company introduced the iPhone Upgrade Program, which is available to customers who purchase an iPhone 6s
and 6s Plus in one of its U.S. physical retail stores and activate the purchased iPhone with one of the four national carriers. The iPhone
Upgrade Program provides customers the right to trade in that iPhone for a new iPhone, provided certain conditions are met. One of the
conditions of this program requires the customer to finance the initial purchase price of the iPhone with a third-party lender. Upon exercise
of the trade-in right and purchase of a new iPhone, the Company satisfies the customer’s outstanding balance due to the third-party
lender on the original device. The Company accounts for the trade-in right as a guarantee liability and recognizes arrangement revenue net
of the fair value of such right with subsequent changes to the guarantee liability recognized within revenue.
The Company has entered into indemnification agreements with its directors and executive officers. Under these agreements, the
Company has agreed to indemnify such individuals to the fullest extent permitted by law against liabilities that arise by reason of their
status as directors or officers and to advance expenses incurred by such individuals in connection with related legal proceedings. It is not
possible to determine the maximum potential amount of payments the Company could be required to make under these agreements due
to the limited history of prior indemnification claims and the unique facts and circumstances involved in each claim. However, the
Company maintains directors and officers liability insurance coverage to reduce its exposure to such obligations.
Concentrations in the Available Sources of Supply of Materials and Product
Although most components essential to the Company’s business are generally available from multiple sources, a number of components
are currently obtained from single or limited sources. In addition, the Company competes for various components with other participants
in the markets for mobile communication and media devices and personal computers. Therefore, many components used by the
Company, including those that are available from multiple sources, are at times subject to industry-wide shortage and significant pricing
fluctuations that could materially adversely affect the Company’s financial condition and operating results.
Apple Inc. | 2015 Form 10-K | 64