FASB Approves Accounting Rule Change – Apple To Adopt Changes Soon

The Financial Accounting Standards Board (FASB), the entity that is responsible for setting accounting standards in United States, voted this week on a proposal to move to a new accounting principle. The result was a thumping 5-0 verdict in favor of the change which is seen as a major boost to the way Apple can now account for the sale of its iPhone.

According to the prevailing accounting restrictions, Apple was forced to use a "subscription accounting" principle which required the sale of devices which are part hardware and part software, like the iPhones, to be spread over two years. This meant that for every sale of an iPhone, Apple could only recognize 12.5% of the value of the device at the point of sale. This was extremely confusing to the investors who saw depressed reporting of the earnings. 

After months of lobbying, Apple along with other companies in the same boat like Dell, Hewlett-Packard, Cisco, Xerox and Palm have been able to convince the FASB to move to the new accounting principle. According to this new principle, the major portion of the value of the device sold will be realized at the point of sale itself. This will increase the value recognized at the point of sale to close to 90% from the prevailing 12.5%

The FASB has allowed the companies sufficient time to move to the new accounting principle; until the end of 2010. However, the desperation for Apple to show a more corrected picture to its investors was evident with Piper Jaffray's Gene Munster predicting the company to move to the new accounting principle as early as the next financial quarter; that's next week. 

Though this new accounting principle does not alter the actual cash that Apple makes from its sales in any way, the perceived earnings will dramatically increase. According to Munster, this new change will help Apple's Earnings Per Share (EPS) to increase from $5.71 to $8.21 for the current fiscal year. For 2010, the EPS is predicted to increase from $6.00 to $8.90

There have always been a discrepancy in the values of the EPS between those measured with the Generally Accepted Accounting Principles (GAAP) and those measured with non-GAAP. However, with this accounting principle change, the discrepancy is predicted to close in from over 35% difference to less than 5%.

Apple share prices have been climbing ever since the news of the new accounting principles were announced. This should make Apple investors extremely happy. If you're one, then do drop us a line in the comments.

[via AppleInsider]