Funny Money: Rule Change Makes Apple Revenue Appear Larger
A new accounting rule, supported by Apple and others, could mislead the investing public. If you didn't know better, financial results showing huge revenue spikes would seem quite impressive.
But, what if the company's revenue hadn't actually changed?
This may be confusing, but it's not a rip-off. It's not even magic, just a change in how companies are allowed to count their money.
On Wednesday, the Federal Accounting Standards Board (FASB) approved a rule change that helps companies selling smartphones and other devices that include both hardware and software.
Under the old system, such revenue often had to be split across eight quarters. Now, almost all of the revenue can be realized immediately, potentially causing a huge-but-illusory jump in corporate revenue.
Here's how the Wall Street Journal explains it:
"The move wouldn't change the total revenue and earnings a company reports over time, and the cash flowing into a company remains the same. But companies contend the change would better align their reported results with the true performance of their business.
"Apple Inc. is expected to be one of the beneficiaries of the new rules, because it would change how the company reports revenue from its iPhone. Currently, Apple recognizes iPhone revenue over a two-year period, and said recently that overall revenue and earnings in its latest quarter would have been much higher if it didn't have to defer revenue for the iPhone and its Apple TV product."
Analysts said Apple might see a nearly 50 percent hike in reported revenue under the new rule. Though the company has until 2011 to implement the change, Apple and other big beneficiaries are expected to implement it much sooner.
In Apple's case, that could be as early as next month, when its fiscal year begins.
My take: The rule change makes sense. My iPhone isn't a magazine subscription and the revenue should be recognized closer to the time-of-sale. Apple, Dell, IBM, HP, Cisco, and the other proponents are right. The new rule better reflects how their businesses actually operate.
But, it is important for everyone to realize this change isn't a windfall. And the lack of deferred income, created by the old rule, will no longer help disguise a company's failing performance.