Apple Inc. (AAPL)

Net sales consist primarily of revenue from the sale of hardware, software, digital content and applications, accessories, and service and support contracts. Apple 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, risk of loss and rewards of ownership have been transferred. For most of Apple'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, Apple defers revenue until the customer receives the product because Apple retains a portion of the risk of loss on these sales during transit. For payment terms in excess of Apple's standard payment terms, revenue is recognized as payments become due unless Apple has positive evidence that the sales price is fixed or determinable, such as a successful history of collection, without concession, on comparable arrangements. Apple recognizes revenue from the sale of hardware products, software bundled with hardware that is essential to the functionality of the hardware and third-party digital content sold on the iTunes Store in accordance with general revenue recognition accounting guidance. Apple recognizes revenue in accordance with industry-specific software accounting guidance for the following types of sales transactions: (i) standalone sales of software products, (ii) sales of software upgrades and (iii) sales of software bundled with hardware not essential to the functionality of the hardware.

For the sale of most third-party products, Apple recognizes revenue based on the gross amount billed to customers because Apple establishes its own pricing for such products, retains related inventory risk for physical products, is the primary obligor to the customer and assumes the credit risk for amounts billed to its customers. For third-party applications sold through the App Store and Mac App Store and certain digital content sold through the iTunes Store, Apple does not determine the selling price of the products and is not the primary obligor to the customer. Therefore, Apple accounts for such sales on a net basis by recognizing in net sales only the commission it retains from each sale. The portion of the gross amount billed to customers that is remitted by Apple to third-party app developers and certain digital content owners is not reflected in Apple's Consolidated Statements of Operations.

Apple records deferred revenue when it receives payments in advance of the delivery of products or the performance of services. This includes amounts that have been deferred for unspecified and specified software upgrade rights and non-software services that are attached to hardware and software products. Apple sells gift cards redeemable at its retail and online stores, and also sells gift cards redeemable on iTunes Store, App Store, Mac App Store, TV App Store and Book Store for the purchase of digital content and software. Apple records deferred revenue upon the sale of the card, which is relieved upon redemption of the card by the customer. Revenue from AppleCare service and support contracts is deferred and recognized over the service coverage periods. AppleCare service and support contracts typically include extended phone support, repair services, web-based support resources and diagnostic tools offered under Apple's standard limited warranty.

Apple records reductions to revenue for estimated commitments related to price protection and other customer incentive programs. For transactions involving price protection, Apple recognizes revenue net of the estimated amount to be refunded. For Apple's other customer incentive programs, the estimated cost of these programs is recognized at the later of the date at which Apple has sold the product or the date at which the program is offered. Apple also records reductions to revenue for expected future product returns based on Apple's historical experience. Revenue is recorded net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority.

Revenue Recognition for Arrangements with Multiple Deliverables

For multi-element arrangements that include hardware products containing software essential to the hardware product's functionality, undelivered software elements that relate to the hardware product's essential software, and undelivered non-software services, Apple allocates revenue to all deliverables based on their relative selling prices. In such circumstances, Apple uses a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value ("VSOE"), (ii) third-party evidence of selling price ("TPE") and (iii) best estimate of selling price ("ESP"). VSOE generally exists only when Apple sells the deliverable separately and is the price actually charged by Apple for that deliverable. ESPs reflect Apple's best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis. For multi-element arrangements accounted for in accordance with industry-specific software accounting guidance, Apple allocates revenue to all deliverables based on the VSOE of each element, and if VSOE does not exist revenue is recognized when elements lacking VSOE are delivered.

For sales of iPhone, iPad, Mac and certain other products, Apple has indicated it may from time to time provide future unspecified software upgrades to the device's essential software and/or non-software services free of charge. Apple has identified up to threedeliverables regularly included in arrangements involving the sale of these devices. The first deliverable, which represents the substantial portion of the allocated sales price, is the hardware and software essential to the functionality of the hardware device delivered at the time of sale. The second deliverable is the embedded right included with qualifying devices to receive, on a when-and-if-available basis, future unspecified software upgrades relating to the product's essential software. The third deliverable is the non-software services to be provided to qualifying devices. Apple allocates revenue between these deliverables using the relative selling price method. Because Apple has neither VSOE nor TPE for these deliverables, the allocation of revenue is based on Apple's ESPs. Revenue allocated to the delivered hardware and the related essential software is recognized at the time of sale, provided the other conditions for revenue recognition have been met. Revenue allocated to the embedded unspecified software upgrade rights and the non-software services is deferred and recognized on a straight-line basis over the estimated period the software upgrades and non-software services are expected to be provided. Cost of sales related to delivered hardware and related essential software, including estimated warranty costs, are recognized at the time of sale. Costs incurred to provide non-software services are recognized as cost of sales as incurred, and engineering and sales and marketing costs are recognized as operating expenses as incurred.

Apple's process for determining its ESP for deliverables without VSOE or TPE considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable including, where applicable, prices charged by Apple and market trends in the pricing for similar offerings, product-specific business objectives, estimated cost to provide the non-software services and the relative ESP of the upgrade rights and non-software services as compared to the total selling price of the product.

Source: 10-K (filing date: 2018-11-05).

Apple Inc., Income Statement, Revenues

USD $ in millions

Based on: 10-K (filing date: 2018-11-05), 10-K (filing date: 2017-11-03), 10-K (filing date: 2016-10-26), 10-K (filing date: 2015-10-28), 10-K (filing date: 2014-10-27), 10-K (filing date: 2013-10-30).

Item	Description	The company
Net sales	Amount of revenue recognized from goods sold, services rendered, insurance premiums, or other activities that constitute an earning process. Includes, but is not limited to, investment and interest income before deduction of interest expense when recognized as a component of revenue, and sales and trading gain (loss).	Apple Inc.'s net sales increased from 2016 to 2017 and from 2017 to 2018.