Apple said Thursday that it generally accepted accounting principles (GAAP) force it to ask for money for the download.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
"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 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 sellingprocessor 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 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.
In order to figure out how much revenue can be booked up front, companies need what's called "vendor-specific objective evidence" of the value of the separate pieces of software. In other words, they need to prove how much each piece of software would be worth if it was sold separately, as opposed to how much it's worth in a package deal with other pieces of software.
The problem is you can't prove what some things are worth until you sell them. What's the value of a software upgrade to 802.11n on the open market? Apple isn't going to let any other company sell software that would upgrade a piece of its hardware, making it almost impossible to establish a market value for that software.
That means a company in this situation would have to defer all the revenue associated with the product until it can establish the value of the Wi-Fi upgrade, or until it delivers the complete set of software, said Brett Trueman, a professor of accounting with the Anderson Business School at the University of California at Los Angeles. So, Apple would have had to defer all the revenue for Macs sold with the 802.11n chips from September until it delivers the upgrade in February, and that's not a realistic option.
So now, Apple has to establish a value for the Wi-Fi upgrade in order to satisfy the requirement to separately account for the different pieces of software. One easy way to do that is to charge people for it.
There's absolutely nothing in the GAAP requirements that says Apple must charge its customers for that software upgrade. The only requirement imposed by GAAP is that Apple must account for the separate value of the 802.11n capability, said MIT's LaFond. It can do this by creating a value at the time of purchase or it can wait until it delivers that capability to record all the revenue associated with the product.
Another option, if the company had wanted to keep the 802.11n capabilities secret, is to create a "new arrangement" with the customer. Apple sold the customer a notebook in September, and is now selling the customer 802.11n capabilities for that notebook. These are two separate transactions that satisfy the need to account for the undelivered 802.11n capability as well as Apple's desire to book all the revenue for the notebook up front and keep the use of the 802.11n chip a secret.
Any of those options would satisfy Apple's need to account for the separate delivery times for the Macs and the 802.11n capabilities, according to several experts interviewed for this article. But simply blaming the fee on GAAP, or on the Sarbanes-Oxley regulations as some rumors have suggested, does not tell the full story.
"If I'm a company, and I want to give my customer something, GAAP isn't going to prevent you from doing that," LaFond said. But at a time when Apple's accounting practices arefrom regulators looking into the company's stock-options backdating practices, the company has to be extra careful about following the proper procedures while keeping financial analysts happy with .