1. Should the FASB have overturned the software revenue recognition portion within ASC 985-605? As part of your explanation, consider whether firms will now have too much flexibility to manipulate revenues.
2. Is Apple’s explanation for why it adopted the new rules retrospectively clear (Exhibit 1)? Is it valid?
3. Is Apple’s explanation of how it implemented the new rules clear (Exhibit 2)? Is the new revenue recognition/ deferral method reasonable?
4. Explain the changes to Apple’s 2008 and 2009 balance sheets and its 2007, 2008, and 2009 income statements (Exhibit 3). Do the restated financial statements better reflect Apple’s financial condition?
Many sales include arrangements with multiple deliverables; some goods or services are delivered immediately, whereas others are provided later, in a different accounting period. Examples include the following: sale of heavy equipment that includes maintenance and parts for three years; sale of a computer system that includes hardware, software, and software updates for three years; and sale of copiers (with imbedded software) that includes software updates for three years.
The revenue recognition principles established by SEC Staff Accounting Bulletin 104 (SAB 104) apply to sales with multiple deliverables. These four principles are (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed or determinable, and (4) collectability is reasonably assured.
In the first example, revenue can usually be recognized for heavy equipment when the equipment is delivered. However, revenue for maintenance or parts must be recognized pro rata over the next three years because the service and parts will be delivered over that three- year period, not at contract inception. In the second example, revenue can usually be recognized for hardware and software at the beginning of the contract, when they are delivered, but not for software updates, which are provided later. Similarly, revenue can usually be recognized for the copying equipment when delivered, but software update revenue would be recognized over the three-year update period, unless it is immaterial.