Jul 24, 2014 in this interview, robert speaks with phil barden, leader of deloitte expert advisory panel on revenue recognition, panos kakoullis, head of audit of deloitte uk, william touche, a senior partner of deloitte uks technology group, and mark beddy, a senior partner of deloitte uks real estate group. Jan 17, 2016 the revenue associated with a given element is recognized after the firm performs its obligations related to that element e. Apples guidance on its services revenue left analysts with more. Issues with revenue recognition within the software. Apple inc and retrospective of revenue recognition rules. How apple makes billions of dollars selling services the verge. Should the fasb have overturned the software revenue recognition portion within asc 985605. Apple sinks after one of its facialrecognition suppliers.
The accounting question, the revenue recognition question, is this. Accounting software has made the revenue recognition. A set of new accounting rules that govern revenue recognition said to be the biggest change in standards since the sarbanesoxley act of 2002 will take effect next year, affecting either. This accounting policy will have no impact on cash flow or the economics of our business. These new revenue recognition changes now enable apple to recognize the iphone hardware revenue as soon as it is sold, while the revenue recognition for the software is based on an estimated value that is spread over the life of the iphone. And some of those services wont be delivered for several years. This publication summarizes the more significant impacts of the new guidance on the software industry, broken down by step of the model.
Apple has disclosed in quarterly filings that it recognizes revenue from its new iphone as well as the ipod and macintosh computers under software revenue recognition rules. Revenue recognition for subscription businesses leapfin. How to comply with the new revenue recognition rules when the financial accounting standards board updated the business accounting rules earlier this year, apple was quick to embrace. Instead of having separate rules for revenue recognition for each industry, the fasb are now finalizing plans to consolidate the rules to be. May 01, 2018 apple is closing in on its goal to double software and services revenue by 2020, posting a 31 percent jump for the segment in the march quarter. Apr 07, 2016 the statement of position number 922 is pretty clear about software revenue recognition which should be based on subscription method of accounting. According to sab 104 and software license revenue recognition rules, revenue for both perpetual and time based licenses can be recognized when the licenses are delivered as long as a firm. A broader revenue recognition discussion paper was issued by fasb and the international accounting standards board in december 2008 for a sixmonth comment period. Apple started reporting under the new rules on october 1, one of the latest big. Under these rules, the hardware too is drawn into the vortex of vsoe and sop 972.
Accounting for the iphone at apple incthe nongaap numbers of apple inc. The rule is especially important to apple because it affects the revenue related to two of the companys most successful products the ipod and the iphone. Eitf 0801, fasb revenue recognition adoption best practices. The timing of revenue recognition from its sale of hardware products, software bundled. Apple is closing in on its goal to double software and services revenue by 2020, posting a 31 percent jump for the segment in the march quarter. How revenue recognition is changing in 2018 accountingweb. In contrast to the other declining lines, services revenue is up 20% from the same quarter a year ago. Aug 02, 2017 apple is expected to be affected by almost all of the changes, including recognition of giftcard revenue. The financial accounting standards boards forthcoming new standard isnt too complex to grasp. Nov 30, 2010 how to comply with the new revenue recognition rules when the financial accounting standards board updated the business accounting rules earlier this year, apple was quick to embrace them. When you have delivered a service over a period, you may recognize that revenue. Its services revenue was calculated using new revenuerecognition rules, which were put in.
So whats already bringing in all that services revenue, and how. The new revenue standards asc 606 and ifrs 15, revenue. Apple defers related iphone revenue over the 24month term of the typical iphone contract, necessary because apple offers free software. Refer to the revenue recognition discussion in note 1. The timing of revenue recognition from its sale of hardware products, software. A iphone revenue recognition strategy page 4 case questions. Ibm also expects the timing of its revenue recognition for certain software licenses to change but does not expect material changes to its financial statements as a result. Now that apple aapl has finally reported a quarter under changed revenue recognition rules that push most of the money from iphone sales up front, we can take a stab at calculating a. These guidelines will likely prompt changes to a companys it, sales, marketing, and financial systems. In 2018, the fasb is urging accountants to consider revenue. Apple changes tune on new revenuerecognition rules.
Revenue recognition accounting policy net sales consist primarily of revenue from the sale of hardware, software, digital content and applications, peripherals, and service and support contracts. The new revenue recognition guidance may constitute the biggest accounting change the world has seen in over a decade, because revenue recognition informs a wide array of business decisions. New revenue guidance implementation in the software industry. How revenue recognition changes are affecting preparers like ge, microsoft by ken tysiac. You may collect a down payment on future services to be rendered at the time of signing the contract, but the revenue will be recognized over a period of time as the software gets used, or services delivered. He mentioned that this contract would significantly increase his sales during the current year.
Reporting on revenue recognition changes is still causing. Revenue allocated to the delivered hardware and bundled software. Apple profits benefit from 2015 accounting change cfo. Instead of having separate rules for revenue recognition for each industry, the fasb are now finalizing plans to consolidate the rules to be able to apply to any type of business to be effective in december 2017, or 2019 for private companies. Apple inc financial case study solution apple inc financial case study solution. Revenue is the amount earned as a result of the business core functions in their respective industry such as selling merchandise or providing services and may be accounted for. How revenue recognition changes are affecting preparers. Apple will record all revenue and related costs of sales from the iphone on a straightline basis over the twoyear estimated life of this product. Apple facial recognition supplier lumentum slashed its quarterly outlook, citing a reduced shipment request from one of its biggest customers in an annual filing, lumentum listed. Where delivery of a software product is involved per revenue recognition guidance under asc 985605 earlier sop 972, software revenue recognition a customer gets a beta version i. How the way technology companies recognize revenue is. The statement of position number 922 is pretty clear about software revenue recognition which should be based on subscription method of accounting.
Apple started reporting under the new rules on october 1, one of the. The public debate following apple s announcement illustrates the accounting difficulties in this area. This new rule on revenue recognition could shake up earnings. Record their recognition of revenue for the sale of an iphone under the new revenue recognition policy in the financial statements effect template. The authors note apple s decision to recognize iphone revenue, as well as that from macintosh computers, under software revenue recognition. Revenue allocated to the delivered hardware and bundled software is recognized when control has. Because apple lacks observable prices for the undelivered performance obligations, the allocation of revenue is based on apples estimated ssps. Apple revenue recognition case study 882 words cram. The fasb core principle of the new standard is as follows. The change could significantly affect both the company. May 03, 2016 the future of revenue recognition asc 606. Additionally, rather than holding that deferred revenue over years of incremental recognition, as apple does with its ios and os x products, microsoft simply delayed its revenue until it actually. However, the company did not remind analysts that the number was calculated using the new revenue recognition rules.
Apple said it is required under generally accepted accounting principles to charge customers for the software upgrade. Revenue allocated to the delivered hardware and bundled software is recognized when control has transferred to the customer, which generally occurs when the product is shipped. However, previous revenue recognition guidance differs in generally accepted accounting principles gaap and international financial reporting standards ifrsand many believe both standards were in need of improvement. For a discussion of the key considerations for technology entities that do not currently apply software guidance, refer to our applying ifrs, the new revenue recognition standard technology january 2015 technology. Because, in the existing method of accounting, revenue and cost of goods sold are spread over the lifetime of the product expected 24months, while the costs incurred for engineering, sales, marketing and warranty are recorded immediately. How to comply with the new revenue recognition rules. Accounting policy on the company revenue recognition. Issues with revenue recognition within the software industry the isoft example financial controllersoftwarehouse ltd this report has been prepared for the board of directors of softwarehouse ltd for elucidation about the contentious issues that have given rise to the publication of the article concerning isofts issues with revenue recognition. Revenue recognition within the software industry has historically been highly complex with much industryspecific guidance.
Detailed rules on software license revenue recognition bi101. Understand, apply and update your knowledge of the changing practices of revenue recognition. This statistic shows a breakdown of apple s revenue by productoperating segment from 2012 to 2019. The show appeared to spark a rally on the following day that sent apple.
Apple case study apple case study apple inc case study a. Feb 04, 2019 however, the company did not remind analysts that the number was calculated using the new revenue recognition rules. Jan 15, 2018 apple inc financial case study solution apple inc financial case study solution. The right way to recognize revenue journal of accountancy. The new revenue recognition standard replaced the more than 100 different industry and transactionspecific guidelines with a basic, fivestep framework. As part of your explanation, consider whether firms will now have too much flexibility to manipulate revenues. Do they appear to be aligned with the revenue recognition criteria you described in part b, above.
Oct 10, 2019 the new revenue recognition standard replaced the more than 100 different industry and transactionspecific guidelines with a basic, fivestep framework. However, previous revenue recognition guidance differs in generally. The updated standard uses a different process to allocate the contract value and related discounts with the contract by eliminating the need to establish vendorspecific objective evidence vsoe, which may produce more aggressive revenue recognition. Profits, though down from 2015, were actually bolstered by a decrease in deferred revenue. Us gaap, revenue recognition, software, asc 606, apple inc. Software revenue recognition has not gotten easier.
For a discussion of the key considerations for technology entities that do not currently apply software guidance, refer to our applying ifrs, the new revenue recognition. It is easy to apply the revenue recognition principle because revenue issues are always easy to identify and resolve. Under the old rules, apple had to recognize all iphone revenue over a twoyear period. The second largest part of apples aapl revenue now.
Breaking down apples new focus from apple music to accounting tricks. The timing of revenue recognition from its sale of hardware products, software bundled with hardware, licenses and thirdparty digital content. Consider the sale of peripheral products obtained from other companies, such as logitech speakers. For certain sales made through the itunes store, including sales of thirdparty software applications for the companys ios devices, the company is not the primary obligor to users of the software, and thirdparty dev.
In q32019 apple generated nine percent of its revenue from ipad sales. The iphone makers services business got a boost from new accounting rules, but some analysts and investors didnt catch the change. Jun 20, 2012 describe the revenue recognition criteria outline in the fasbs statement of concepts no. Apple changes tune on new revenuerecognition rules marketwatch. The company sells its products worldwide through its online stores, its retail stores, its direct sales force, and thirdparty wholesalers, resellers, and valueadded. This new rule on revenue recognition could shake up. Software revenue recognition on the rise journal of accountancy. What impact did the new accounting principle for revenue recognition have on apple s balance sheet, income statement and statement of cash flow did the new revenue recognition. Revenue is the amount earned as a result of the business core functions in. The university of chicago booth school of business financial accounting 30000 financial statement analysis case apple understanding the effect of revenue recognition. Because apple lacks observable prices for the undelivered performance obligations, the allocation of revenue is based on apple s estimated ssps. Inside apples iphone subscription accounting changes. Apple is expected to be affected by almost all of the changes, including recognition of giftcard revenue. A change in accounting rules for which apple among other hightech companies lobbied heavily won tentative approval last thursday.
The revenue associated with a given element is recognized after the firm performs its obligations related to that element e. Revenue recognition is an accounting principle that outlines the specific conditions under which revenue sales revenue sales revenue is the income received by a company from its sales of goods or the provision of services. As such, the accounting for software products and services is expected to be one of the areas most impacted by the new standards. In accounting, the terms sales and revenue can be, and often are, used interchangeably, to mean the same thing. Although, apple reports its official financial information according the gaap, but the company go out of its way to publish a side by side gaap and nongaap revenues numbers. Apple s april 2007 q2 earnings call announced that the company planned to book revenue for its new iphone and apple tv using the subscription method of accounting, a decision that startled. Getting your finance processes in shape for fasbs new revenue.
Recording revenue when cash is received is an objective application of the revenue recognition principle. Accounting for bundled services multielement arrangements. Revenue recognition principles, criteria for recognizing. Apple case study apple case study apple inc case study a in. How companies implemented the new revenue recognition standard. How companies implemented the new revenue recognition. Cios should familiarize themselves with new accounting standards asc 606 and ifrs 15. Revenue is one of the most important measures used by investors in assessing a companys performance and prospects.
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