As disclosed in the excerpt from notes to the consolidated fi nancial statements shown below (emphasis added), Apple Inc. (NasdaqGS: AAPL) uses diff erent revenue recognition policies depending on the type of revenue producing activity, including product sales, service and support contracts, and products obtained from other companies. Note that these are only the fi rst three paragraphs of Apple’s disclosure on revenue recognition; the entire revenue recognition portion has nine paragraphs. Revenue Recognition Net sales consist primarily of revenue from the sale of hardware, software, digital content and applications, peripherals, and service and support contracts. Th e Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fi xed or determinable, and collection is probable. Product is considered delivered to the customer once it has been shipped and title and risk of loss have been transferred. For most of the Company’s product sales , these criteria are met at the time the product is shipped. For online sales to individuals, for some sales to education customers in the United States, and for certain other sales, the Company defers revenue until the customer receives the product because the Company legally retains a portion of the risk of loss on these sales during transit [portions omitted]. Revenue from service and support contracts is deferred and recognized ratably over the service coverage periods. Th ese contracts typically include extended phone support, repair services, web-based support resources, diagnostic tools, and extend the service coverage off ered under the Company’s standard limited warranty. Th e Company sells software and peripheral products obtained from other companies . Th e Company generally establishes its own pricing and retains related inventory risk, is the primary obligor in sales transactions with its customers, and assumes the credit risk for amounts billed to its customers. Accordingly, the Company generally recognizes revenue for the sale of products obtained from other companies based on the gross amount billed. Source : Apple Inc. 10-K/A for the year ended 26 September 2009, as fi led with the SEC on 25 January 2010. Emphasis added. 1 . What criteria does Apple apply to determine when to recognize revenue from product sales? 2 . What principle underpins the company’s deferral of revenue from service and support contracts?
As disclosed in the excerpt from notes to the consolidated fi nancial statements shown below (emphasis added), Apple Inc. (NasdaqGS: AAPL) uses diff erent revenue recognition policies depending on the type of revenue producing activity, including product sales, service and support contracts, and products obtained from other companies. Note that these are only the fi rst three paragraphs of Apple’s disclosure on revenue recognition; the entire revenue recognition portion has nine paragraphs. Revenue Recognition Net sales consist primarily of revenue from the sale of hardware, software, digital content and applications, peripherals, and service and support contracts. Th e Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fi xed or determinable, and collection is probable. Product is considered delivered to the customer once it has been shipped and title and risk of loss have been transferred. For most of the Company’s product sales , these criteria are met at the time the product is shipped. For online sales to individuals, for some sales to education customers in the United States, and for certain other sales, the Company defers revenue until the customer receives the product because the Company legally retains a portion of the risk of loss on these sales during transit [portions omitted]. Revenue from service and support contracts is deferred and recognized ratably over the service coverage periods. Th ese contracts typically include extended phone support, repair services, web-based support resources, diagnostic tools, and extend the service coverage off ered under the Company’s standard limited warranty. Th e Company sells software and peripheral products obtained from other companies . Th e Company generally establishes its own pricing and retains related inventory risk, is the primary obligor in sales transactions with its customers, and assumes the credit risk for amounts billed to its customers. Accordingly, the Company generally recognizes revenue for the sale of products obtained from other companies based on the gross amount billed. Source : Apple Inc. 10-K/A for the year ended 26 September 2009, as fi led with the SEC on 25 January 2010. Emphasis added. 1 . What criteria does Apple apply to determine when to recognize revenue from product sales? 2 . What principle underpins the company’s deferral of revenue from service and support contracts?
1. What criteria does Apple apply to determine when to recognize revenue from product sales?
Following 4 conditions are required to be fulfilled for revenue recognition as per US GAAP:
a) Evidence of arrangement exists
b) Sales price can be determined
c) Performance obligation or delivery has occurred
d) Collection is probable
However, Apple recognizes revenue on some products at the time of delivery and for some products at the time of shipment. Its depend on when the risk of loss ends.
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