Apple, Hewlett-Packard, Cisco and other technology earnings reports will benefit from a rule change made Wednesday by the Financial Accounting Standards Board. The FASB, which establishes standards for financial accounting, agreed to change how software and computer businesses report their earnings. The vote for approval was 5-0.
Because it is the FASB’s mission to establish and improve accounting and reporting for the public, including issuers, auditors and others, it changed a rule to make reporting on software sales easier to understand. Under current guidelines, software revenues are recognized over a product’s life cycle, which often is years.
Companies such as Cupertino, Calif.-based Apple lobbied for the change. Some analysts say that’s no surprise, since Apple benefits the most from the change because sales of its popular iPhone and its Apple TV haven’t been fully represented in quarterly results.
In 2007, Apple began selling the iPhone and Apple TV. Because Apple can provide unspecified features and additional software to iPhone and Apple TV customers in the future free of charge, the company has recognized revenue and the cost of goods for these products on a straight-line basis over their economic lives, with any loss recognized at the time of sale.
Because the product cycles are two years, the subscripting accounting results in Apple deferring nearly all the revenue and cost of goods sold during the quarter in which the products are sold. Sales of its other products, such as Macs and iPods, are recognized at the time of sale.
“It is our belief that investors, analysts and preparers would benefit significantly from the proposed changes to accounting for multiple deliverables,” said Betsy Rafael, Apple’s corporate controller and accountant, in a letter to Russell Goldman, chairman of the FASB. “The current allowable method of determining the value of individual elements in multi-element…