Apple's 802.11n accounting conundrum

Company didn't have to charge for upgrade, but it would have had to defer revenue from notebooks sold with the chip if it didn't.

Apple's explanation of a planned Wi-Fi upgrade fee has its roots in obscure accounting rules that tell companies how to book sales of future product upgrades.

Apple said Thursday that it plans to charge customers $1.99 for a software download that enables the 802.11n Wi-Fi technology currently present in almost all MacBooks and MacBook Pros with Intel's Core 2 Duo processor. The company says accounting rules known as generally accepted accounting principles (GAAP) force it to ask for money for the download.

"During the past several months Apple has shipped some Macs with the hardware to support 802.11n, but the draft of the 802.11n specification was not complete enough to create the required software," Apple spokeswoman Lynn Fox said in an e-mail to CNET News.com. "Now that the draft specification is complete, we are ready to distribute the software to make the 802.11n hardware in these Macs come to life."

But because the company has already recognized all the revenue from the sales of those computers, it 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, said Fox.

Apple didn't have to do it this way, say accounting experts. But the company most likely faced difficult choices in relation to the upgrade: It could have held off on shipping the new Macs until the upgrade software was ready. It could have skipped the 802.11n capabilities altogether. Or it could have deferred revenue from the new Macs until the software was ready--all unlikely and unpalatable options.

Hence, the $1.99 fee.

Of course, back when the Macs first shipped, Apple could have told customers that the upgrade cost was coming and avoided customer backlash over the surprise fee, but that didn't happen either.

"To be certain, GAAP does not require companies to charge customers," said Gerard Carney, a spokesman for the Financial Accounting Standards Board (FASB), which updates and maintains GAAP standards for accounting. "Further, GAAP does not tell companies how to run their business," he wrote in an e-mail.

And now, for the tricky part...
The 802.11n Wi-Fi standard delivers faster wireless connection speeds and greater network range. It has been delayed a few times, but the Wi-Fi Alliance, a group of companies charged with managing the standard, is getting ready to certify products based on the specification. Apple announced at its recent Macworld Expo in San Francisco that it would start shipping a new 802.11n Airport Extreme Base Station and the upgrade software for $179 in February, around the same time it will ship its Apple TV product, which also has an 802.11n chip.

Apple began selling MacBook Pro notebooks with Intel's Core 2 Duo processor in September, later adding that chip to MacBooks and iMacs. However, the company also included 802.11n chips in almost all of those systems without telling buyers, Apple CEO Steve Jobs revealed at Macworld last week.

Here comes the tricky part: under accounting regulations developed over the last several years, when companies sell a product with multiple pieces that are delivered at different times, they must determine the separate value of each piece of that product, accounting experts say. And the company can only record the revenue associated with a specific piece when it is delivered to the customer.

This is a very common practice in many industries, said Ryan LaFond, assistant professor for accounting at the Massachusetts Institute of Technology's Sloan School of Business. For example, magazines receive all the money for a full year's subscription at the time the subscription is purchased, but they only record that as revenue as each issue is delivered, deferring the remaining balance into a liability account called unearned revenue.

But magazine readers purchase a subscription knowing they'll get an issue every week or month, which establishes the value of each issue and lets the accountants know how much money to recognize as revenue each month.

Tags:
Laptops
About the author

    Tom Krazit writes about the ever-expanding world of Google, as the most prominent company on the Internet defends its search juggernaut while expanding into nearly anything it thinks possible. He has previously written about Apple, the traditional PC industry, and chip companies. E-mail Tom.

     

    Discuss Apple's 802.11n accounting conundrum

    Conversation powered by Livefyre

    Show Comments Hide Comments
    Latest Articles from CNET
    Use Google Now to send messages with WhatsApp, Viber (and other apps)