Apple Charging for software update
 

Wallstreet Journal this AM

Apple Gets a Bruise by Blaming
A $1.99 Fee on Accounting Rules
By DAVID REILLY
January 20, 2007; Page B3

Apple Inc. recently told some customers they would have to pay $1.99 to download a software enhancement that enables a wireless-networking technology already included on some of its computers.

Apple's reason: Accounting rules forced it to make customers foot the bill for the enhancement.

That's an excuse, counter accounting experts and officials at the body that sets accounting rules, known as generally accepted accounting principles, or GAAP, for public and private companies. Rather, Apple is choosing to make customers pay so that it receives a particular accounting treatment it considers most favorable to it, they say.

You Needn't 'Charge Squat'?

"GAAP doesn't require you to charge squat," says Lynn Turner, managing director of research at Glass Lewis & Co. and a former chief accountant of the Securities and Exchange Commission. "You charge whatever you want. GAAP doesn't even remotely address whether or not you charge for a significant functionality change. GAAP establishes what the proper accounting is, based on what you did or didn't charge for it."

In a statement Friday night, Apple said that "the proper accounting" for shipping the enhancement was "to charge for this performance improvement in order to be in compliance with software revenue accounting requirements." It added that Apple had recognized revenue related to the computers when they were sold.

The electronics maker recently said customers who bought some new Macs, including the MacBook and MacBook Pro laptops based on a microprocessor from Intel Corp. called Core 2 Duo, would now be able to use hardware that supports a faster new variant of a wireless technology commonly known as Wi-Fi. While Apple for several months has shipped computers with the wireless hardware, the final technical specifications for software for it weren't complete enough to include software to support the technology.

Now that the technical specifications are complete, Apple said customers who want to turn on the hardware will be able to download software to enable this technology from the Apple Web site, provided they pay $1.99. Customers purchasing a new Apple product that allows laptops and other computers to connect wirelessly to the Internet, and which will be available next month, will include the software enhancement at no extra charge.

Addressing the $1.99 charge in a statement issued late this past week, Apple said the fee was "required in order for Apple to comply with generally accepted accounting principles for revenue recognition."

So why would Apple charge customers if it didn't have to? The company felt it had no choice, based on the accounting outcome that would have resulted had it given the product away, said a person familiar with the matter. In that sense, even if the accounting rules didn't explicitly say such a charge was necessary, that was the result, this person said. When Apple shipped the computers with the technology now being enhanced, it couldn't defer revenue related to that technology, because there was no market price for the enhancement, the person added.

If Apple had given the enhancement away free, Apple's auditors could have required it to restate revenue for that period and could possibly have required Apple to start in the future to defer all the revenue from computer sales until all such enhancements are shipped, this person said. That would have had a devastating impact on Apple.

GAAP in Logic?

Still, Apple's language surprised officials who oversee accounting rules. "Accounting doesn't require any charge for anything," says Edward Trott, a member of the Financial Accounting Standards Board, which writes the accounting rules. "No, GAAP doesn't tell you to do anything. You need to work out your transaction with your customer, and GAAP will tell you how to reflect your transaction with that customer."

The accounting rules in this case are analogous, accounting experts say, to income-tax rules affecting the sale of stock. If an investor sells shares less than a year after buying, gains are taxed at personal income-tax rates that can range as high as 35%. If the investor sells after holding the stock for more than a year, gains are taxed at the capital-gains rate of 15%.

The income-tax rules dictate the amount of tax to be paid, but they don't tell the person when, or whether, to sell.

this is what you get when the bean counters take over

God Forbid if MicroSquish finds out and starts charging for software updates....

Linux is looking better and better ever day...

No, this is what you get when the boss goes to the bean counters and says 'isn't there some way we can blame this charge on accounting rules?'.

GAAP SCMAAP i say. it's good to be in public accounting and not have to fool with GAAP nonsense. tax basis all the way baby!

You can thank Enron, thats how this all got started.

This is no joke, its a law made to temper fradulent accounting practices and its having a unique effect on the computer and software industries.

But who cares, its only for 802.11N support and only in a special set of Airport basestations. It will not roll into the standard software updates for the system as they are only to "fix bugs", not "add new features"

+100

What piece of software are they actually talking about? I'd like to download it for myself, see what happens.

Hell, I don't have any 802.11N-capable hardware, AFAIK.

All Intel-based iMacs with Intel Core 2 Duo (except 17-inch, 1.83GHz iMac) as well as MacBook and MacBook Pro's with the Intel Core 2 Duo processor are compatible with the currently shipping Apple TV and AirPort Extreme Base Station.

So you need one of the newer Imacs, MacBooks or MacBook Pros.

Tell me more about this law...

I believe this is a result of the Sarbanes-Oxley Act, which was passed in response to a number of major corporate and accounting scandals including those affecting Enron, Tyco International, Peregrine Systems and WorldCom (thanks to Wikipedia for the background). Apple's interpretation of the law may be especially conservative or read to allow them to rationalize charging their customers for the upgrade. Although I am a big fan of Apple, my money is on the latter explanation.

Funny how they interpret this law very conservatively, yet they've been very resistant to expensing stock options...

My guess would be that their recent SEC problems with the stock option issue has driven them to take a conservatice approach.

This seems rather stupid.

"n" WLAN is just one feature of a MacBook. Computers often ship with features that don't work without a subsequent software download. E.g. trial software, virus updates, bug fixes and OS updates. You don't see other computer companies tying themselves in knots over those subequent downloads.

Anyway, it is possible to estimate the value of the "n' feature. A mini-WLAN card supporitng a/b/g costs, what, $99? Turning on "n" is akin to supplying a new n-capable mini-WLAN card.

In the worst case, if Apple did have to defer recognition of the entire MacBook price, and hence restate the last couple quarters' financials, what of it? Wall Street won't care, as long as it is clearly explained.

A restatement is still better than a silly - and to consumers, puzzling and irritating - $1.50 charge.

If they're going to charge $1.50, why not charge $0.01? Either sum is meaningless. Or charge $1.50 but donate it to charity.

It is not a question of Apple wanting another $1.50. It seems like an over-fearful accountant pushing the company into a silly business decision.

I speculate this could have something to do with the on-going options investigation at Apple. The company may be walking on eggshells as far as any sort of accounting goes.

Yeah, I've been in companies with SEC problems. Ain't purty. Everyone gets conservative for a while.