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.