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Discussion Question Set #1 – iPhone at Apple (25 points)

Lenny Allegretti

1. Which accounting method best reflects the economic reality? Put another way, which accounting numbers – the GAAP or non-GAAP numbers best reflects economic reality? [10 points]
Economic reality can be defined as the overall outlook of the economy at a certain point in time. This outlook includes factors such as interest rates, politics, and speculation. In its Q4 financial results Apple reported both GAAP and non-GAAP revenue and net profit for the iPhone. Their GAAP results showed 7.9 billion in revenue and 1.1 billion in net profit. The non-GAAP showed revenue of 11.7 billion and net profit of 2.4 billion.

The GAAP results reflect the usage of
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2. Should Apple lobby for their non-GAAP numbers to be sanctioned by FASB? [7.5 points]
I believe that Apple should not lobby for their non-GAAP numbers to be sanctioned by FASB. Apple decided to use the subscription method due to consumer backlash at an upgrade fee for the iPhone. Today Apple holds a large portion of the smart phone industry. If a small upgrade fee for the iPhone was enacted I personally believe it would not affect sales. For example, people pay on average $75-$100 for their cell phone bill a month; a small $5 one or two time fee would not stray people from purchasing an iPhone. Therefore, there would be no need to lobby for the non-GAAP numbers because the new numbers with fees charged for upgrades would be accepted under GAAP. However, with the industry standard set at free upgrades for the consumer, it may be beneficial for Apple along with other smartphone companies to lobby for this. Realistically the smartphone market is a booming market. Time will tell if these companies will decide to lobby to the FASB. Even though I believe it is not necessary for Apple to do with their current stake in the market; I do believe that it may occur with the industry standard set.

3. Does it matter if the revenue recognition rule for smartphones changes? [7.5 points]
We have established that there are two methods to recognize smartphone revenue: time of sale and subscription methods. The company providing the phone has the option on which one to
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