New Accounting Rules A Boon To Apple, Other Tech Companies

The FASB, a U.S. private sector organization responsible for establishing financial accounting and reporting standards, approved the changes in its requirements concerning companies that report the revenue of hybrid products, or "vertically integrated stack of hardware, software, and service to customers," over the life span of products, explained Shaw Wu, a Kaufman Bros. analyst.

"The impact to Apple is the greatest," Wu said, "but just for the iPhone and Apple TV. The impact to Macs and iPods is smaller, if any. For HP, there could be positive impact, particularly those offerings sold through its services arm."

Under the previous rules, Apple amortized hardware, software and services over eight quarters or a two-year period, which meant recognizing only 1/8 at a time (1/8 is one-eighth or to be more precise, 12.5 percent is recognized one quarter at a time). With the new rules, hardware can be recognized immediately while software and service still amortized over the life of the product.

Several tech concerns lobbied the FASB for the changes, including not only Apple, but IBM, HP and Cisco.

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"I think a key reason why Apple and others have been lobbying for the accounting change is to make it easier to understand," Wu said.

In a letter sent to the FASB in August, Betsy Rafael, vice president, corporate controller and principle accounting officer, made a case for changes to the rules.

"It is our belief that investors, analysts and preparers would benefit significantly from proposed changes to accounting from multiple deliverables ... the current allowable 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 inform users making investment decisions," Rafael said.

Although the FASB has formally approved the changes, it is still finalizing an official plan that will be released on Oct. 2, said Neal McGarity, an FASB spokesperson.

Under the new terms, some companies will be allowed to apply the revisions to their current quarter depending on certain specifications. Most firms, however, will have to wait until fiscal years that start after June 15, 2010, to use the revisions, McGarity said.