Wednesday, September 23, 2009

iPhone Accounting Changed

Apple's GAAP earnings (and their transparency) will take a huge boost with the unanimously-approved new accounting rule. Instead of booking iPhone revenue evenly in the 24-month period following the sale of each phone, Apple will book the revenue at the time of sale. The fact that iPhones have high margins, combined with the fact that it is a high-growth area of business for Apple, makes this an especially important change for commonly-evaluated metrics like earnings, gross margins, and the price-to-earnings ratio (which plummets on the news, theoretically justifying higher share prices).

Although news of the impending change has moved Apple's price significantly over the last week or so, the company has of course not done anything dramatic at all over the period. The price excitement is based on "news" about how to account for the same things Apple's been doing literally for years. Articles have been written already (even here) about the impact of subscription accounting on the valuation of Apple's shares; it's not news at all. In a rational world, it would have no effect on the price at which shares traded.

Apparently, we do not live in a world in which markets are governed by rationality.

Long live the markets!

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