Apple explains its accounting conundrum

… the value of each issue and lets the accountants know how much money to recognise 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 rumours 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 are under significant scrutiny from 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 strong earnings reports.