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No good reason for Apple's 802.11n fee?

updated 11:10 pm EST, Fri January 19, 2007

Apple's 802.11n fee redux

Experts and officials are questioning Apple's stated reasons behind its proposed $1.99 fee to enable faster wireless technology in some already shipped Macs. The company on Thursday confirmed that it will charge users a small fee to enable the new, faster 802.11n wireless technology in its previously shipped Core 2 Duo-based Macs, saying that the charges were required to stay in compliance with generally accepted accounting principles (a.k.a, GAAP). "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 told The Wall Street Journal. "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."

Apple, however, continued to stand by the reasons behind its charges, despite reports that GAAP may not require the Cupertino-based to charge a fee. On Thursday, the company said that "the nominal distribution fee" was required in order for Apple to comply with GAAP for revenue recognition. It said that those GAAP rules generally require that that companies charge for significant feature enhancements, such as 802.11n, when added to previously purchased products.

In a statement to The Wall Street Journal on Friday, Apple reiterated that the charges were required by GAAP and 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 also that it had recognized revenue related to the computers when they were sold in previous quarters.

The report says Apple may be charging the fee to order to avoid restating its revenue based on shipments of technology before it has its full market value. "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... That would have had a devastating impact on Apple," the Journal wrote.

Apple has already recognized all the revenue from the sales of those already shipped Macs with 802.11n hardware, but it now has to now charge customers at least a nominal fee in order to establish the value of its software upgrade and satisfy an obscure accounting regulation known as SOP 97-2, it told News.com.

However, officials continue to question Apple's logic and publicly stated reasons for the nominal fee.

"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."




by MacNN Staff

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Comments

  1. climacs

    Joined: Dec 1969

    0

    it's bullshit

    Good on these accountants for calling BS on Apple. There are NO accounting rules or principles which dictate that you must charge for something. Accounting is solely concerned with how you account for the money once you earned it.

    Is Apple trying to imitate Microsoft by insulting our intelligence?

  1. shawnce

    Joined: Dec 1969

    0

    this isn't about charging

    It is about accounting... it can be construed that Apple shipped and realized revenue for an unfinished product since the full capabilities of the product couldn't be utilized until the firmware enabler was shipped.

    It is dumb... but to dismiss what Apple is stating ignores that the law is unclear.

  1. sixcolors

    Joined: Dec 1969

    0

    Just do it

    I'd say that this is a bs fear based move by people with too much time on their hands. Take care of your customers first and worry about some obscure and unclear law after. Doing something like this could lead down a very dangerous path that would set a precedent that any software updates that do something new will require a fee.

  1. macgyver

    Joined: Dec 1969

    0

    It's not bullshit

    The first poster is mostly correct about there not being accounting rules or principles which dictate that you must charge for something. However, there are rules regarding how and when public companies report their earnings, which is the issue here. If Apple effectively doubles the feature set of a product after shipping it (and reporting the income), they can be potentially penalized for recording that income before the 'full' product was delivered (the argument being half should have been recognized at the time of sale, the other half when the remaining features were delivered). Companies routinely deal with delayed income, especially near the end of fiscal periods, which is why they can't record income for products they haven't shipped (and why most won't charge your credit card until they ship it).

    If Apple was doing this for greed, they'd certainly charge more than $1.99. It's unlikely they'll even make a profit on this, as I doubt they'll sell enough of these to balance out the overhead cost of selling them in the first place.

    Bear in mind, the only people who are are even going to buy this upgrade are those who bought a Core2Duo machine in the past 3-6 months, want/need 802.11n, but aren't buying a 802.11n Base Station (as they get the upgrade as part of the Base Station cost) and who need it before (or aren't upgrading to) Leopard, which will include it in the spring.

  1. fhunter

    Joined: Dec 1969

    0

    the fee isn't the problem

    Look, its $1.99, if that is what it takes for them to simplify their accounting, so what, that is their business. At $1.99 it probably costs them at least half of that just to deal with collecting the money. Further, how many units are we taking about that were shipped with this capability? All in all not a really big deal.

    The 802.11n chipsets they shipped very likely cost them more than the previous 802.11g chipsets, so possibly they need to account for this cost to their shareholders. Remember, we live in the post-Enron age, the accounting practices of companies is under constant scrutiny. If Apple chooses to charge some nominal fee to avoid getting spanked by a shareholder lawsuit or the IRS, SEC or some other three-letter agency I think they made the right choice business-wise.

    To me the sad part of this issue is that companies have to spend time and money thinking about c*** like this instead of designing, building and delivering innovative products.

  1. cameronx

    Joined: Dec 1969

    0

    re: "it's bullshit"

    Of course that's what the former FASB chief accountant would say--but he's not auditing Apple is he? GAAP, in theory, should reflect the business rather than drive it, but the reality is that GAAP often does drive business decisions--Apple judged it would be more damaging to its reputation to risk having to restate or defer revenue than to have customers pay a paltry $1.99. I'm sure this decision wasn't made without the input of Apple's auditors.

  1. ender

    Joined: Dec 1969

    0

    Re: just do it

    "worry about some obscure and unclear law after"

    Oh sure, and look where that got them with the options scandal. I believe I read someplace that the backdating of options wasn't technically illegal, but look at how much hot water they are in about that. There are still some who think it's possible Jobs could be force to step down because of it.

    So, if you've got all the eyes of the accounting world and a bunch of federal regulators watching you, wouldn't you go the extra mile to make sure you are squeaky-clean with you ledgers?

  1. appleusr

    Joined: Dec 1969

    0

    boo who

    Nobody is forcing anyone to pay the fee. Don't get the upgrade. That was simple.

  1. Philip J. Fry

    Joined: Dec 1969

    0

    re: boo who

    I agree. It's $1.99 people, the same as a TV show on iTunes or a gallon of gas. If you don't have anything else that's 802.11n capable, then don't upgrade. No one is forcing you to.

  1. Cubester

    Joined: Dec 1969

    0

    Wow fanboys

    Sheesh, I'm a 100% dyed-in-the-wool share-holding Apple loving fanboy, but even I can see this is outrageous. This is a software update, pure and simple. Watch where this leads. Will every system update that includes improved functionality now be accompanied by a "nominal" fee? And if it turns out this fee actually *is* required for accounting needs (yeah, right) then why isn't it 25 or 50?? I never understand why you guys support every bonehead move Apple makes

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