AppleInsider is supported by its audience and may earn commission as an Amazon Associate and affiliate partner on qualifying purchases. These affiliate partnerships do not influence our editorial content.
The Financial Accounting Standards Board certified the change, which will allow companies that sell subscriptions for services with their hardware, like Apple and the iPhone, to report earnings up-front. Under the previous rules, those profits were required to be represented over a period of time — in the case of the iPhone, over the two-year contract term.
Wednesday's decision was expected, as the FASB had previously drafted the rule change, though the meeting made it official, according to The Wall Street Journal. The not-for-profit board sets accounting standards for U.S. public companies, a power designated to the private group by the Securities and Exchange Commission.
Last week, analyst Shaw Wu with Kaufman Bros. estimated that the previous rules required Apple to underestimate its revenue by $1.4 billion last quarter, a loss of 17 percent. In addition, the company's earnings per share were also said to be under-valued by $0.78, or 58 percent.
The change doesn't affect how much revenue Apple actually earns, just how it reports it quarterly. Some believe it could be a boon for AAPL stock.
"We believe Apple will be able to defer the iPhone revenue in a less dramatic manner," Piper Jaffray Senior Research Analyst Gene Munster told AppleInsider last week. "This could meaningfully alter the reported, GAAP-based revenue numbers in future quarters and the change would likely be a positive for the stock."
Apple lobbied heavily for the change to the generally accepted accounting principles (GAAP), citing the rules as the reason it must charge some customers nominal fees for upgrades to products like the iPod touch and Airport Extreme. In August, Apple wrote to FASB Chairman Russell Golden in support of the rule change, noting that the then-current requirements did not accurately reflect the real economics of transactions.
"(The changes)... will result in a more accurate reflection of an entity's economic activities, and in less complex and more transparent financial information that will better serve investors, financial analysts, and other users of financial statements," Betsy Rafael, Apple's vice president, corporate controller and principal accounting officer, said in a note to Golden.
Wu noted that most professional investors already look at Apple's free cash flow instead of GAAP reported revenue, so he does not expect the rule change to have a significant impact on the company's stock. However, he said the change will make it easier for "mainstream investors" to understand the company's earnings per share report.