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Nestled in between three items relating to revenue recognition topics and a decision on financial statement presentation, a rule change put forth by the Financial Accounting Standards Board could dramatically affect the fortunes of certain tech companies. In its monthly summary for board decisions, FASB summarized changes that could benefit such firms as Apple (Nasdaq: AAPL) and Palm -- at least from the perspective of shareholders who read these companies' financial statements.
The rule change alters the way revenue is recognized for products that combine both hardware and software -- smartphones being a typical example. Under the status quo, such devices fell under rules governing software recognition. These accounting guidelines meant that revenue would be recognized over the life cycle of the product, which could take years.
For example, sales for a new blockbuster device -- such as the iPhone -- could conceivably be booked over a period of years. The new change would allow companies to recognize a greater portion of the revenue upfront -- namely, in the quarter in which they occurred.
The change can be adopted for fiscal years that start after June 15, 2010. FASB did not return a call to MacNewsWorld in time for publication.
Favorable Reception
As expected, tech companies that could be favorably impacted -- as well as the accountants who service them -- are not surprisingly giving the rules change a favorable reception. Apple may be among the rule change's top beneficiaries, given the oomph that iPhone sales managed to deliver to its bottom line even before the rule change was enacted. Apple TV's revenues could also be reported using this new methodology.
Indeed, Apple voiced support for the proposed rule change as it was under consideration.
"It is our belief that investors, analysts and preparers would benefit significantly from the proposed changes to accounting for multiple devices ..." Betsy Rafael, Apple's principal accounting officer, wrote in a letter to the chairman of FASB's Emerging Issue task force this August.
Crunching numbers under current rules, she said, "often results in accounting that does not reflect the underlying economics of transactions and can result in financial reporting that lacks the transparency necessary to fully inform users making investment decisions."
Sooner Rather Than Later
The change is taking place officially on or after June 15, but FASB is in some cases allowing for earlier application, said Fred Ruffy, senior trading analyst with WhatsTrading.com.
"While Palm, Cisco (Nasdaq: CSCO) and others will be affected, Apple is expected to see the most impact," he told MacNewsWorld. "It'll have a major impact on earnings," he said -- which will most likely translate into a higher share price.
He pointed to Piper Jaffray analysts, which raised their price target on Apple to US$235 from $186 after the decision.
