Numerous firms, including computer and communication companies, sell products that have multiple deliverables. For example, a telephone company may sell a customer a phone and a two-year unlimited long-distance telephone call package for a lump sum. How should the company account for the lump sum that it receives?

Accounting rules required that the vendor allocate the lump sum between the two deliverables, separating the revenue from the sale of the hardware from the revenue from the sale of the service. Referred to as

“subscription accounting,” it required the phone company to immediately record the revenue from the sale of the hardware but defer and recognize the revenue from the long-distance telephone package over the two-year period.

Many high-tech companies objected to this accounting rule, including Apple Computer.

Under subscription accounting, Apple was recording substantial amounts of deferred revenue associated with the sale of its iPhone and Apple TV products.

Steve Jobs was a particularly vociferous opponent, arguing that subscription accounting obscured the real earnings growth of the company. “Because by its nature subscription accounting spreads the impact of iPhone’s contribution to Apple’s overall sales, gross margin, and net income over two years, it can make it more difficult for the average Apple manager or the average investor to evaluate the company’s overall performance.” So, Apple began to report both GAAP and non-

GAAP results side by side. The non-

GAAP earnings included the full revenue from the sale of its products and services........

Questions:-

1. Do you think that Apple’s new accounting policy, which is consistent with the 2009 FASB statement, results in fair financial reporting?
2. Do you think that Apple’s share price should have gone up as a result of increased revenue due to a change in an accounting policy?