The FASB (Financial Accounting Standards Board) unanimously approved an accounting rule change which will benefit companies that currently report tech gadget sales on a subscription basis. Apple in particular will ‘profit' from the new fuzzy math.
Current accounting rules have required companies to spread revenue from gadgets like the iPhone or Amazon Kindle over a two-year period. So, if Apple made $1 million this month from iPhone sales, that revenue would actually be reported as $125,000 per quarter for the next 8 quarters.
The change to the accounting rules means that Apple could instead claim the entire $1 million in this quarter- a spike in reported revenue of 800%. Woo hoo! Very impressive. Especially to someone who hasn't been following breaking news in accounting rule changes and is looking to invest. Suddenly skyrocketing revenue will be attractive to investors.
Of course, nothing really changed. In my example, Apple still generated the same $1 million. It is just being reported differently which gives the illusion of a spike in revenue. It is a ‘Monopoly money' shell game.
To put it in perspective, imagine how the reverse of this rule might apply to you. When you purchase a $30,000 car with a 4-year loan you are incurring the $30,000 debt today, but deferring the payments over 48 months. Keeping it simple and assuming a zero percent interest rate on the loan, the payments would be $625 per month.
The FASB accounting rules are the equivalent of your lender changing the rules and requiring the whole $30,000 now rather than deferring it over 4 years. When it's a debt, it's a shock and a tragedy. When its income it's a windfall and cause for celebration.
This has been a good year for Apple when it comes to benefiting from fuzzy math. With the release of Snow Leopard Apple was able to create the illusion that it had freed up a significant amount of hard drive real estate. The reality is that Apple changed the way it calculates available storage space so that it appears bigger even though nothing actually changed on the drive.
There is a potential downside to the accounting rule change. The ability to report the income in the current quarter may make the current quarter look great. But, if there is a sharp decline in sales that sharp drop will be reflected just as immediately. Companies won't have the benefit of averaging the gains and losses over two years. That skyrocketing revenue now may lead to plummeting revenue later and incite panic among investors.
Overall though the rule change seems to make sense. The accounting changes will result in revenue reports that more accurately reflect the current reality for the organization- whether revenue is up or down. Its probably wise to take revenue reports over the next few months with a grain of salt though and keep the confetti and streamers put away until revenue numbers get normalized under the new system.
Tony Bradley is an information security and unified communications expert with more than a decade of enterprise IT experience. He tweets as @PCSecurityNews and provides tips, advice and reviews on information security and unified communications technologies on his site at tonybradley.com .