Apple (AAPL) just might open their new cash register next quarter.
The FASB has ruled that Apple can begin accounting for iPhone sales as they happen. The new regulations mandate the change to occur at or before Q1 2011.
The Task Force reached a consensus that this Issue shall be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. If a vendor elects earlier application and the first reporting period of adoption is not the first reporting period in the vendor’s fiscal year, the guidance in this Issue must be applied through retrospective application from the beginning of the vendor’s fiscal year and the vendor must disclose the effect of the change to those previously reported periods.
Since Apple lobbied for the accounting change, I think they will move on this.
When Apple reports its earnings next month, it will be able to present its iPhone sales in any of three ways:
- Apple can continue its old subscription accounting system.
- It can convert to a retrospective approach in which old iPhone sales are stripped out. Only iPhones sold in the quarter would be rung in. (Imagine being able to declare current iPhone sales as they occur.) Current iPhone sales and earnings dwarf the 24 month subscription amortizations. Last quarter's earnings were 2.13 x higher than reported EPS when new iPhone sales were included and old sales excluded. Christmas season iPhone sales likely will be even greater causing an even bigger earning's upside.
- Apple can prospectively account for its iPhone sales. That way they can both ring in the old and new iPhone sales. The 24 month subscription sales that are moving along their amortization tables would continue. Iphones sold in the quarter would be booked as well. Here Apple reaps an even bigger EPS bonanza than the retrospective approach.
The upcoming earnings report presents a tremendous opportunity to show the investment world Apple's actual earnings as they are generated. I think they institute the change sooner than later, most likely this upcoming quarter.
Disclosure: long AAPL