Revenue Recognition Policy for Apple

As disclosed in the excerpt from notes to the consolidated financial statements shown below (emphasis added), Apple Inc. (NasdaqGS: AAPL) uses different revenue recognition policies depending on the type of revenue producing activity, including product sales, service and support contracts, and products obtained from other companies. Note that these are only the first three paragraphs of Apple’s disclosure on revenue recognition; the entire revenue recognition portion has nine paragraphs.

Revenue Recognition

Net sales consist primarily of revenue from the sale of hardware, software, digital content and applications, peripherals, and service and support contracts. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Product is considered delivered to the customer once it has been shipped and title and risk of loss have been transferred. For most of the Company’s product sales, these criteria are met at the time the product is shipped. For online sales to individuals, for some sales to education customers in the U.S., and for certain other sales, the Company defers revenue until the customer receives the product because the Company legally retains a portion of the risk of loss on these sales during transit[portions omitted].

Revenue fromservice and support contractsis deferred and recognized ratably over the service coverage periods. These contracts typically include extended phone support, repair services, web-based support resources, diagnostic tools, and extend the service coverage offered under the Company’s standard limited warranty.

The Company sells software and peripheralproducts obtained from other companies. The Company generally establishes its own pricing and retains related inventory risk, is the primary obligor in sales transactions with its customers, and assumes the credit risk for amounts billed to its customers. Accordingly, the Company generally recognizes revenue for the sale of products obtained from other companies based on the gross amount billed.

1. What criteria does Apple apply to determine when to recognize revenue from product sales?

2. What principle underpins the company’s deferral of revenue from service and support contracts?