Change in Subscription Accounting Rules to Benefit Apple, iPhone Profit Statements

The Financial Accounting Standards Board has approved a change in the way revenue can be recognized from products sold under the subscription accounting model, like Apple’s iPhone.

Apple uses a subscription accounting model for the iPhone (and Apple TV) to justify — under their interpretation of Sarbanes Oxley — adding new features for 2 year after the sale of the device proper. So, if they get $600 for an iPhone from AT&T, rather than putting that on the books immediately and in full, they spread it out over 24 months, recognizing a portion of the revenue each month. This also means that their earnings look smaller in the actual quarter of sale, which has led them to release two sets of numbers in recent quarters, GAAP and non-GAAP (generally accepted accounting practices).

Now, however, Apple and others, like Palm, will be able to book a large portion of that revenue up-front, in the actual quarter of sale, allowing a closer representation of actual earnings numbers.

iPod touch, of course, is not currently accounted for using the subscription method, which is why Apple believes they much charge a nominal fee for major OS updates. Whether or not that will change given the new rules is uncertain (though we hold to hope!)