Apple Accounting: Revenue Recognition

There’s a lot of confusion floating around the web regarding Apple’s accounting policies. It’s understandable, given that accounting terminology is full of business jargon and needlessly confusing corp-speak. Financial statements such as the Balance Sheet, Income Statement, Statement of Cash Flows all assume that the reader has at least some accounting knowledge, so they make very little sense to those without it. As someone who has this accounting knowledge, I would like to clear up some confusions regarding Apple and its accounting practices, so that even a layman could understand them. There’s no end to the amount of detail I can go into, so I will begin by explaining one of the most important accounting concepts: Revenue Recognition. 

Revenue Recognition

So you are Apple, and you sell a customer (Joe) an iPhone at the retail store. He pays for it with his credit card, and in return, you give him the iPhone. Since the exchange of resources (money for iPhone) happened in the store, Apple can say it earned Revenue from the customer.

But can Apple say that it made money (revenue) if Joe ordered his iPhone online? He pays for it with his credit card, and waits a few days while the iPhone is delivered to his house. You have his money, but he doesn’t have your phone, so the exchange of resources didn’t happen yet. In this case, Apple defers revenue from the sale until Joe gets the delivery. It makes sense, right? You can only get money after you provide the goods.

Here is how it’s worded in Apple’s 10K Form:

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed 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 U.S., and for certain other sales, the Company defers revenue until the customer receives the product because the Company retains a portion of the risk of loss on these sales during transit.

What’s happening behind the scenes here are two fairly simple accounting concepts called Free on Board (FOB) Shipping Point and FOB Destination. 

In an extremely simplified version, FOB Shipping Point works like this. If you sell an iPhone to Joe, he has to pay for shipping. Since he pays for shipping, the phone is his as soon as you place it on the FEDEX truck. Likewise, you can record a sale (revenue) as soon as the iPhone is on the truck.

FOB Destination works in the opposite way. You pay for shipping the iPhone to Joe, and since you pay, the iPhone is still yours until it is delivered to his home. As soon as it’s delivered, you can claim revenue and Joe can get his phone. 

There are lots of exceptions to the rule, but most of the online sales done by Apple are FOB Destination (since Apple pays for shipping), which means that they only record revenue once the product has been delivered.

I will be clarifying other accounting policies in upcoming posts. If you have any specific questions or requests, please let me know by writing a comment below or sending me an email.

It’s All In The Details

My first smartphone was the Motorola Droid. After using it for a week, I recognized two things very quickly. First, having the internet in your unnecessarily tight pocket was a disruptive technology being put under your command. It was incredible; instead of having to go home to look up something on the internet, you could do it from your phone - anytime and anywhere (unless you use T-Mobile or Sprint, of course). I’m sure most of you felt the same way after getting your first smartphone. 

That’s all obvious. The second thing I realized early on was how much better the Motorola Droid could be. Although it was my first smartphone, I had owned an iPod touch before, which made me accustomed to the concept of apps and web browsing on a tiny screen. In other words, I had already been initiated into the world of iOS, but I didn’t yet know how hard it would be to leave it.

As you surely know, the Motorola Droid was an Android phone. I chose it because I was on Verizon, which didn't carry the iPhone at the time, and the Motorola Droid was the best smartphone they had. From Day 1, I knew this phone was not for me. 

The hardware, what reviewers called spectacular “industrial design”, was in my opinion dreadful. The build quality was excellent (I dropped it many a time, and it never broke), but the design was the epitome of Android; practical and functional, but not a sliver of imagination or user experience in mind. It was like a durable car. It had four wheels that got you from point A to point B, but you never enjoyed riding it. It was a mean looking phone. Suffice to say, I hated every single day that I had to experience the lack of smoothness and the dearth of apps on Android that I was previously accustomed to with my iPod Touch. 

Then the iPhone 4 came to Verizon, slipping right into my pocket. Yep, you bet I got it the day it was announced for Verizon. I was always jealous of friends who had it on AT&T, while I had to put up with the Droid. But now it was mine. 

Then I got the iPhone 4S. And then the iPhone 5. The last intruder, the iPad mini. At a cursory glance, one would probably call me an Apple enthusiast (aka fanboy), but I never saw myself in that way. I always saw myself as a person who likes the best possible product, disregarding the company that made it. I didn't care if the company was Apple or Huawei or Microsoft, I judged simply by the product they sold, and still do. 

Let me now tell you why I love iOS devices so much before I get to the instigator of this post. It’s the details – Apple sweats them. I like how pinch to zoom just feels right. I like seeing that bouncing effect after scrolling too fast and hitting the top or bottom of the screen, just like it would in real life if I threw a ball against the wall. I like using an app (Apple’s or a 3rd party) and getting the feeling it was made by somebody who cares about the minute details. Somebody like me. I also like, and this doesn’t go for everyone, not having a billion and one choices. When I had the Droid, I rooted it to customize the hell out of the phone, to overlock it, and to do generally nerdy stuff. This took time, lots of it, which I now appreciate not having to worry about (I jailbroke for the first few months, but quickly decided I don’t have the time to keep up with new developments). 

But people say that iOS is getting stale, and sometimes I agree with them. So I got a HTC One. The main reason was because I needed a business phone, and carrying two iPhone’s was silly. But the other was that I wanted to see what this recent commotion about Android was all about; did it really improve much since I last used it with the Droid? Here are my thoughts after using the HTC One (which most say is the best Android phone available at the moment) for a few weeks.

I’m not The Verge or Engadget, I won’t be giving you SpeedTests or Quadrant scores. Instead, I’ll be writing about the aesthetic and experiential differences of using iOS versus Android. Going in, I was thoroughly excited and honestly expected to be wooed into Android. Going out, well, you’ll find out soon. 

Setting up the One was almost as simple as setting an iPhone, except you log into your Google account, but filing out the password and username forms already felt slightly off. It was nowhere near what you would call laggy, but I felt the awkward scrolling already. 

It’s been years since I last used the Droid, so when I opened up the Chrome browser on the HTC One I assumed they fixed pinch to zoom. After all, it’s a feature everybody uses. Every day. All Day. In fact, I would venture to say that it’s a fundamental part of any mobile operating system. Pinch to zoom allows for the direct manipulation of the digital world through physical gestures. And it’s vitally important to nail down. I gave Android a pass with the Droid since it was a relatively new OS back then, but not today. Today, I expected it to be as smooth as iOS. But was it?

As soon as I opened Chrome I started zooming in and out to test how Android has improved in the last few years. It was much smoother. There was no stutter as before, and the animation was fluid. But it was still off. Pinching and zooming didn't exactly follow the movements of my fingers; it was ever so slightly delayed. Always a step back. Not mirroring the physical world. 

I tried the same experiment within the photo’s application, and the same problem was there. The animation was incongruent with my movements, and that bugged me. It still bugs me. Why doesn't Google fix this? It can’t be because they want the pinch to zoom interactions to be delayed by design. I can only think of two reasons for this annoyance. One, they can’t reproduce the elegance of the iOS user experience. Or two, they don’t see anything wrong with how Android functions. After all, it’s been almost four years since I last used the Droid (which had Android 2.0), and the interactions still haven’t been fixed. Really, it’s probably a combination of both reasons. 

Much has been said about the dearth of quality applications on Android, so I won’t beat a dead horse. I’ll just lightly bang it. Android applications, even the best ones, are not even as smooth as the first iPhone. That’s not necessarily the fault of developers, but of Android as a whole. The same lack of precision and user experience that is missing from pinch to zoom is present in all aspects of the Android experience. Every single app registers taps and gestures in a way that’s not natural feeling. It feels robotic. Mechanical. Unemotional. It feels like an Android. 

And I finally understood the whole Android versus iOS debate. People who use Android and evangelize it don’t notice the frustrations I am experiencing. Or if they do, they don’t seem to mind them. Notice that I never said Android is worse than iOS. I just said that it’s not for me. If you’re the type of person who prioritizes functionality, practicality, and customizability, Android may be right for you. It definitely gives you more freedom, and by proxy, more power user features. It’s very much open to tinkering. 

In the other jean pocket, we have iOS. If you are more of a perfectionist, who cares about every single interaction, gesture, design, pixel, Android will never lend itself to you. It will feel foreign and cold, whereas iOS will feel friendly. You will be at home with the iPhone. 

Different people like different things. The important part is finding the thing that works for you. I tried both platforms, and I can’t see myself leaving iOS until Android improves the user experience to be on par. Alternatively, Android users will never use iOS until it embraces more of an “open” approach – a day I doubt will ever come. There’s room for both platforms, and maybe a third. And that, we can all appreciate. 

 

The Birth Of A Fanboy

Note: I originally wrote this post on my previous blog, which has since been deprecated. To my surprise, the post became a hit, and The Tech Block contacted me to publish it, which you can find here. I am adding it to this site because this is where it belongs, as this is the place I will be doing my writing from now on. With that said, here's the piece below. 

How exactly does one become a fanboy? To understand how this transformation happens, let’s begin with the birth of a fanboy. 

Birth

A fanboy for company X isn’t born a fanboy for company X. Nobody loves Apple just because Apple exists. They have come to love it for various reasons. The products, the actions, the values - all of these things make a person align themselves with a company. And there’s nothing wrong with that. What’s wrong, however, is when that company is no longer what it used to be, and yet you still see it for its past behaviors. You staunchly defend it from criticisms even though you subconsciously know that the critics are at-least partially right.  

Let’s get back to the birth of a fanboy. You’re new to tech, so you don’t have a favorite company…yet. You read various blogs; The Verge, Engadget, CNET for comprehensive coverage of all things technology. Google news, Apple news, Microsoft news, you absorb it all, but you still don’t have a favorite company. Until you buy your first iPhone. Now you’re invested in Apple. Apple’s success is now your success, Apple’s failure is your failure. But why? 

First, you want more people to buy iPhones after having bought one yourself. If Apple keeps making money, the iPhone you own will keep getting updated. Apple will see the demand for it, and they will focus their attention on the product you own. You know that, so you tell all your friends how great your iPhone is. But you hate some aspect of the phone, such as the fact that you can’t set a default browser such as Chrome. Guess what though? You leave that part out from your friends because you want them to buy an iPhone, and that little quirk can make them purchase an Android phone instead. And you don’t want that because that means more people buy Android, and thus less iPhones, and even further, that Apple makes less money. “What if so few people purchase iPhones that Apple eventually stops development for it" you ask yourself. That would also mean less developers are incentivized to create apps for you. Finally, you’re left with an abandoned phone without applications!

Not only does that leave you with an abandoned phone, but it also means that you made the incorrect phone choice. You made a bad decision, and you were wrong. Nobody wants to be wrong.

Every rational human being thinks in that way. Nobody wants to end up with a forsaken phone on a dead operating system, so they glamorize the phone they own. People who don’t own that phone, or who don’t have a vested interest in the success of company X will write terrible reviews about the product. They will criticize the faults, features it’s missing, and other qualities of the phone. 

So to defend your investment, you post comments that we categorize as “fanboyish". You try to dismiss these criticisms because, even though you know they are correct, they decrease the value of your investment. And there you go, a fanboy is born.