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REV: NOVEMBER 22, 2016
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JONAS HEESE
KRISHNA G. PALEPU
H. DAVID SHERMAN
MONICA BARALDI
Accounting for the iPhone Upgrade Program (A)
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The iPhone has become one of the most important, world-changing and successful products in history. Last
week [July 27, 2016] we passed another major milestone when we sold the billionth iPhone. We never set out to
make the most, but we’ve always set out to make the best products that make a difference.
— Tim Cook, Apple CEO1

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Introduction
On September 9, 2015, Apple Inc. (Apple) launched its new iPhone 6s and iPhone 6s Plus models
and, at the same time, announced the “iPhone Upgrade Program,” a new way to purchase those iPhone
models in Apple’s retail stores throughout the U.S.2 Under the program, eligible consumers could buy
an iPhone 6s and 6s Plus and, as a form of payment, agree to a 24-month loan in partnership with
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Citizens Bank (Citizens).3 An iPhone purchased under the program was unlocked, meaning customers
were able to switch their wireless carrier according to their contract terms. The offer included Apple’s
AppleCare+ service, which provided extended warranty and software support compared to the regular
one-year limited warranty. After one year the iPhone customer could turn in her old iPhone, get a new
iPhone model, and enter into a new installment loan agreement, with a new two-year payment
obligation.4 In the event the iPhone upgrade program was terminated by the customer, the customer
was responsible for any outstanding balances due under the terms of the loan with Citizens.5
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Following the announcement, several financial analysts reacted positively to the new upgrade
program; some of them described it as a “smart move” forward.6 According to one UBS analyst, the
“Upgrade Program increases stickiness and makes the iPhone look more like an annuity business.”7
Another J.P. Morgan analyst estimated that Apple’s margin for an iPhone sold under the new program
could be four times higher than that for iPhones sold through the carrier channel, as Apple was
charging $50 more per device under this program.8 A UBS analyst wrote that the iPhone Upgrade
Program “could be a big deal,” as it allowed Apple to take control of the customer relationship.9 One
observer predicted that 75% of Apple’s iPhone customers would eventually switch to an annual
upgrade, increasing Apple’s U.S. iPhone unit sales by 10% over three years.10
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HBS Professors Jonas Heese and Krishna G. Palepu, Professor H. David Sherman (Northeastern University), and Case Researcher Monica Baraldi
(Case Research & Writing Group) prepared this case. This case was developed from published sources. Funding for the development of this case
was provided by Harvard Business School and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not
intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.
Copyright © 2016 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied,
or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
This document is authorized for educator review use only by Adrian Guzman, Universidad Anahuac until November 2016. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
117-020 Accounting for the iPhone Upgrade Program (A)
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Other business analysts were more skeptical about the program, as it came with risks related to
competition from wireless carriers. Because carriers made money when phone users paid them for
service, and because phone users tended to stick with a single carrier long-term, carriers had an
incentive to try to lock in customers by selling them phones that came with a two-year contract. They
could do this by offering other brands of phones at lower prices than Apple.11 “Apple’s move is perhaps
a bit threatening, in that it incrementally erodes the carrier’s relationship with the customer,” said one
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senior analyst.12
Next to the strategic implications of the Upgrade Program, analysts tried to understand the
accounting implications, especially for recognition of revenue, which the Upgrade Program could have
on Apple’s financials. Some assumed “no dramatic change” in revenue recognition, while others were
waiting for more guidance from Apple.
In an effort to increase iPhone sales, Apple was pushing the Upgrade Program hard for the 2015
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holidays in its retail stores, on its website, and in unsolicited e-mails.13
Company Background
The iPhone went on sale for the first time at the end of June 2007 and, at a starting price of $500, was
immediately criticized by bloggers and news commentators for being too expensive compared to an
average smartphone priced roughly around $200.14 The doubts were soon dispelled. By the end of 2007,
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Apple sold two million iPhones, and almost seven million in the last quarter of fiscal year 2008.15 From
a strategic perspective, between 2007 and 2014 Apple had been “remarkably consistent”16 in
maintaining a smartphone price somewhere near $700 and annually launching anticipated handsets
which featured incremental or radical innovations.17 Apple typically released new iPhone models in
the fall, increasing Apple’s smartphone units sold and boosting revenue during the first quarter of the
fiscal year, which typically started on October 1.18
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In 2015, Apple faced a challenging and changing competitive environment. The major wireless
service providers such as AT&T, Sprint, T-Mobile, and Verizon were competing for subscribers in a
mature U.S. market.19 Most consumers already had a cell phone and switched carriers infrequently.
The average phone upgrade frequency in the U.S. had risen from 18 months in 2010 to an estimated 26
months in 2015.20 The average contract between the consumer and the wireless carrier stretched across
two years in which the customer had to sign an agreement with the carrier and pay early-termination
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fees “in exchange for a discounted price on a phone.”21 However, new trends were emerging.
In the summer of 2015, two-year contracts were disappearing,22 unlocked phones were becoming
more popular, and consumers were accepting the idea of paying the full cost of a phone upfront in
exchange for the freedom to select their preferred carrier at any time.23 By 2013, T-Mobile was the first
carrier that no longer sold two-year contracts. “Once T-Mobile did it, all the others followed,”24 said an
industry insider. Furthermore, new players were entering the mobile market. Google was testing a
wireless service, Google Fi, which would allow consumers to switch from T-Mobile to Sprint and back
multiple times.25
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Apple’s management decided that it was time to innovate the iPhone business model. In September
2015, the company announced the new iPhone Upgrade Program. For the first time, Apple financed
iPhone sales directly to customers without locking them to any particular carrier.26
Accounting for the iPhone Upgrade Program (A) 117-020
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iPhone Upgrade Program
Under the new iPhone Upgrade Program, available only through Apple’s retail stores in the U.S.,
the company began offering a 24-month payment plan for the unlocked iPhones 6s and 6s Plus and the
AppleCare+ service for $32.41 and $44.92 a month, respectively. Customers could upgrade to a new
device after making 12 payments and could switch to new service carriers according to the contractual
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terms. (See Exhibit 1 for the iPhone Upgrade Program terms and conditions.)
From a consumer perspective, the new program did not provide any savings on the device. The
final payment would end up being about $778 for the iPhone 6s, which reflected the combined
standalone prices of the iPhone 6s ($649) and the AppleCare+ coverage ($129). However, as Apple
typically did not increase the price of its new iPhone models, the upgrade program made it attractive
for customers to upgrade. One expert reported that “[t]he leasing programa may seem like Apple is
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doing consumers a favor, but it’s really an effort to ensure people buy new phones or continue paying
more for the old one if they decide to hold on to it.”27 One consumer columnist wrote: “It [the iPhone
Upgrade Program] is a decent deal if you’re one who simply must upgrade to the latest, greatest gadget
as soon as it comes out. But if you’re like me and you keep your phones for years, then you’re probably
better off buying instead of [essentially] leasing.”28
Product innovation at Apple had anticipated the company’s new strategy in the mobile business
segment. A multi-carrier SIMb enabled the new iPhones 6s and 6s Plus to run on any wireless network
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in the world. This innovation would allow consumers to move between cellular carriers according to
their preference.29 One respected Silicon Valley inventor said of Tim Cook and Apple: “They’ve opened
up the floodgates. The strongest tie that an operator has to a user is a financial one, where there’s either
a pre-paid plan or an installment plan. With this new Apple [multi-carrier SIM], that goes away.”30
From a strategic perspective, the new iPhone Upgrade Program opened several possibilities for
Apple’s iPhone business. First, customers were allowed to access high-end handsets with a limited
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upfront payment. The program encouraged a higher turnover of the phone, at a time when the average
iPhone replacement cycle was longer than two years.31 Second, sales of iPhone units had slowed in
2014 and 2015, and observers noticed that sales of services, such as Internet services, AppleCare, and
Apple Pay, were becoming more and more relevant.32 With reference to the “Services” business
segment, Cook said: “The growth was broad-based, with App Store revenue up 37% to a new all-time
high, in addition to a strong increase in Apple Music, iCloud, and AppleCare.”33 (See Exhibit 2 for
Apple’s revenue and units sold by product.)
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The program also allowed Apple to enter the market for used iPhones, especially in developing
countries where new iPhone models had significantly lower customer penetration. One AT&T senior
executive said, “If they [Apple] are successful there will be a lot of slightly used pre-owned iPhones or
handsets out there. We’ll be really interested in talking to them about partnering with them to utilize
those [used iPhones].”34 Financial analysts were forecasting profitable market opportunities. Gartner
estimated that the high-end second-hand smartphone market would reach $14 billion by 2017,35 but
for analysts it was difficult to find “meaningful data to support an estimate,” as one observer wrote.36
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a Under the Upgrade Program, consumers purchased and owned the phone. However, due to the payment plan structure of the
accompanying loan and the ability for a consumer to turn in their phone early, some analysts referred to the program as a leasing
program.
b Most mobile devices contained SIM cards, or subscriber identity module cards. These were removable smart cards that stored
a mobile device’s identifying features, technological elements enabling voice encryption, and the user’s contacts and message
data. They enabled the device to connect to a specified carrier’s cellular network.
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A UBS analyst reported, “Our best guess for iPhone users who are using a second-hand iPhone is
somewhere around 35 million to 45 million or roughly 10% of the user base, growing by 5 to 7 million
each quarter prior to the launch of the iPhone 6s and 6s Plus. With an increasing supply of iPhones
traded-in within 1-2 years, we believe the available stock of used iPhones will rise.”37
In India, where Apple had a 2% market share, 70% of smartphones sold for less than $150. In 2016,
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in an effort to increase its sales, Apple was seeking permission from government officials to sell pre-
owned iPhones in India. Above all, Apple saw growth potential in China’s rising middle class. Chinese
customers still viewed the iPhone as a luxury product. However, Apple faced strong competition in
China, especially from Xiaomi and Huawei. In 2015, Xiaomi, a Chinese company headquartered in
Beijing, grew at a 23% annual rate. Its management had projected 100 million smartphone shipments
for that year.38 Xiaomi controlled 15.8% of the smartphone market, followed by Huawei (15.4%) and
Apple (12.2%).39 The Chinese market was especially resistant to the introduction of iPhone 6 models
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since, according to a 2014 market analysis, smartphones from national brands had a competitive price
and were perceived as having good quality.40
Finally, the iPhone Upgrade Program created new alliances. It redefined commercial and
competitive terms with phone carriers such as AT&T, T-Mobile, and Verizon. A former Verizon senior
executive said: “Apple’s move is a sign it wants to wrest control of customers from wireless carriers.
Companies that control the customer relationship have more leverage in pricing and sales.”41 A top
manager at Sprint stated, “Apple is trying to do nothing more than shorten the cycle so they can sell
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more iPhones.”42 A T-Mobile senior executive was supportive of Apple’s new strategy, saying “it
would allow customers to try out other carriers.”43
The Upgrade Program relied on a partnership with Citizens Bank. Citizens was a subsidiary of
Citizens Financial Group, one of the oldest financial institutions in the U.S., headquartered in
Providence, Rhode Island.44 Citizens provided the two-year installment loan for consumers who paid
a monthly amount tied to a credit card for the purchased iPhone. When the plan was launched, Citizens
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was Apple’s only financial partner.45 One observer noticed that, for several years, Citizens had offered
loans for college students and teachers to purchase Apple products. Some saw Citizens’ collaboration
with Apple as a low risk partnership for the bank, which controlled the credit risk related to the
contract, decided on eligibility for each Apple customer applying to the Upgrade Program, and likely
received interest payments from Apple to grant Apple’s customers 0% loans.c At the end of 2015,
Citizens added $220 million in loans to its balance sheet, which, according to one analyst, accounted
for 250,000 iPhone 6s sales in Apple Stores.46
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iPhone Revenue Recognition

The revenue recognition for Apple’s iPhone had undergone several changes over the years. Before
fiscal year 2010, Apple reported revenues from its iPhone sales using the subscription method of
accounting. 47 iPhone products fell under the software revenue recognition rules pursuant to American
Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) No. 97-2.48 Apple used
subscription accounting as it periodically provided new software updates to iPhone customers free of
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charge, making the iPhone a product “in which the hardware and the operating system software were
tightly bundled.”49 SOP 97-2 required companies to use subscription accounting for such software-
c One analyst believed that “Apple is effectively paying an interest rate in the realm of 6-12% annualized.” Gene Munster,
“Thoughts on iPhone Upgrade Plan Economics and iPhone User Survey,” Piper Jaffray, November 23, 2015, via Thomson ONE,
accessed November 2016.
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enabled hardware devices. Under subscription accounting, Apple recognized the revenue and cost of
goods sold for the iPhone on a straight-line basis over the product’s estimated 24-month economic life.
Thus, Apple’s quarterly revenues reflected only one-eighth of the total revenue from iPhone sales
during that quarter. This resulted in a deferral of the remaining revenue and cost of goods sold,
although the company received and reported the related cash flow in the fiscal quarter when the sale
happened. As long as iPhone sales increased each quarter, the deferral balance followed the same trend.
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(See Exhibit 3 for an illustration of the iPhone subscription accounting.) By the fourth quarter of 2008,
Apple’s deferred revenues reached $7.8 billion, at which point Apple decided to provide additional
information to analysts and investors that gave Apple’s watchers a look at Apple’s revenue numbers
without the use of subscription accounting.50 (See Exhibit 4 on Apple’s deferred revenue.)
In 2009, the Financial Accounting Standards Board (FASB) ratified Emerging Issues Task Force
(EITF) Issue No. 09-351 (“2009 rule”),d which Apple immediately supported and adopted in the first
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quarter of fiscal year 2010.52 The “2009 rule” allowed Apple to split multi-element arrangements, such
as the iPhone, into separate deliverables. In the case of the iPhone the first deliverable was the hardware
and software “essential to the functionality of the hardware device at the time of sale;”53 the second
deliverable was related to the right to receive “future unspecified software upgrades and features
relating to the product’s essential software.”54 Following the “2009 rule,” Apple was able to recognize
the iPhone hardware revenue as soon as the iPhone was sold, while the revenue recognition for the
frequently updated software was based on an estimated value to be recognized over the life of the
iPhone, similar to using subscription accounting. (See Exhibit 5 for an illustration of the iPhone
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accounting under the “2009 rule.”)
In May 2014, the FASB issued the Accounting Standards Update (ASU) No. 14-09, Revenue from
Contracts with Customers, which amended the existing accounting standards for revenue
recognition.55 ASU 14-09 aimed to provide a comprehensive and uniform framework for revenue
recognition across entities and industries, thus replacing special rules such as EITF 09-3. Similar to the
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“2009 rule,” the core principle of ASU 14-09 was to identify separate deliverables (referred to as
performance obligations under the new standard) and their respective transaction prices. Revenue was
recognized when a performance obligation was satisfied. Apple was considering adopting the standard
in either its first quarter of 2018 or 2019.56
Beginning in September 2015, Apple estimated the revenue allocated to the software deliverable to
be about $10 to reflect the increase in competitive offers for similar products at little to no cost for users.
This reduced the amount Apple could reasonably charge for these deliverables on a standalone basis.
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Thus, when selling an iPhone, Apple only deferred up to $10 for the software component.57
iPhone Revenue Recognition under the Upgrade Program

The iPhone Upgrade Program introduced additional accounting complexities. Next to the handset
and the software, the Upgrade Program also required the customer to subscribe for AppleCare+ and
gave the customer the right to trade in her used phone.58 Upon exercise of the trade-in right and
purchase of a new iPhone, the customer enrolled in a new two-year 0% loan with Citizens, Apple
satisfied the customer’s outstanding balance due to Citizens on the original device, and Apple paid
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interest to Citizens for granting the new loan.
d The title “2009 rule” is not an official term. The case authors use the expression “2009 rule” only to improve clarity and
comprehension of the case narrative.
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The revenue from AppleCare+ was deferred and recognized ratably over the service coverage
period of two year. In presenting the Q4 2015 financials, Apple CFO Luca Maestri explained that Apple
would be “deferring the portion of revenue related to AppleCare+.”59
Apple accounted for the trade-in right as a guarantee liability and recognized revenue for the
iPhone net of the value of such right. According to an accounting experts, trade-in rights were typically
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treated like a right to return the purchased item. To determine the value of this right (and consequently
the guarantee liability), Apple had to estimate the number of customers exercising the right and the
point in time customers exercised the right. The difference between the sales price and the expected
value of the trade-in right is the revenue that should be recognized at the time of sale, whereas the
expected value of the trade-in right is recorded as a guarantee liability on Apple’s books. Recognizing
such liability resulted in a deferral of the remaining revenue and cost of goods sold, although Apple
received and reported the full cash from the sale of the phone from Citizens in the fiscal quarter when
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the sale happened. The more iPhones sold under the program and the earlier customers exercised the
trade-in right, the larger the guarantee liability, and consequently the less revenue could be recognized
at the time of sale. The deferred part of cost of goods sold represents the expected value of the returned
phone and is recorded as a Right of Return Asset on the firm’s balance sheet. (See Exhibit 6 for an
illustration of the iPhone accounting under the new Upgrade Program and Exhibit 7 for Apple’s
revenue recognition policies.)
At the end of each financial reporting period, the estimate of the firm’s return expectations were
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updated. Changes in this estimate were accounted for as adjustments to the amount of revenue and
cost of goods sold recognized. In 2015, Apple described in its 10-K that it recognized subsequent
changes to the guarantee liability within revenue.60
The Upgrade Program carried three additional issues that were not directly related to revenue
recognition but nonetheless impacted Apple’s financials: the value of a right of return asset,
refurbishment costs, and inventory impairments of refurbished phones.
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Value of Right of Return Asset Apple promised its customers to take back the used iPhones
and pay the outstanding balance due to Citizens if certain conditions were met. If, at the time of sale,
the company expected that the outstanding balance was larger than the value of the returned phone,
the company would adjust the right of return asset as well as costs of goods sold accordingly. (See
Exhibit 8 for market prices of used and refurbished iPhones). In addition, Apple had to periodically
check if the carrying amount of the right of return asset was still recoverable. If Apple determined that
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the fair value of the used iPhones decreased, it recorded an impairment loss equal to the amount by
which the book value of its iPhones exceeded the fair value (net realizable value) of these iPhones.
Refurbishment costs When receiving used iPhones, Apple was likely to incur some costs to
refurbish these phones. Such costs would be capitalized and recorded in an inventory asset account.
Value of refurbished iPhones In much the same manner as for the right of return asset, Apple
also had to periodically check if the carrying amount of the refurbished iPhones was still recoverable.
If Apple determined that the fair value of the refurbished iPhones decreased, it recorded an impairment
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loss equal to the amount by which the book value of its iPhones exceeded the fair value (net realizable
value) of these iPhones.
The Upgrade Program required Apple’s management to exercise judgment on several dimensions.
The guarantee liability, for instance, required Apple’s management to forecast customers’ decision to
upgrade their iPhone during the two-year program. The upgrade could take place any time after six
months, with the expectation of completing the necessary 12 monthly payments, until the end of the
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two-year program. The expected loss from buying back the used iPhones from its customers also had
to be estimated. Such loss was likely to be affected by the level of innovation of the new iPhones as well
as the supply and demand of refurbished iPhones.
Conclusion
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Apple’s second fiscal quarter, ending in March 2016, was seen as a turning point for the company.
For the first time in 13 years, Apple’s revenue declined 13% (to $50.6 billion) compared to the net sales
of the previous year. (See Exhibits 9 and 10 for Apple’s annual reports.) The company sold 16% fewer
iPhones than in the same quarter in 2015. Apple stock dropped 14% following the earnings call in April
2016. (See Exhibit 11 for Apple’s share price.) There were different reactions to the news. Cook
described the revenue decline as a “pause” and not the reflection of a fundamental shift in Apple’s
business.61 Analysts were trying to understand the reason for the decline. “There’s no question that
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Apple’s best days are behind it. The company grew at astronomical rates, and it’s now so big that its
ability to grow at those rates doesn’t exist anymore,” said one analyst.62 According to other analysts,
the revenue decline could be related to a period of slowing replacement sales, a strong dollar
depressing international sales, and slow growth for services such as Apple Music and iCloud.63
Most of all, analysts focused on iPhone sales. Some observers noticed that the iPhone 7, expected to
be released in the fall of 2016, would show only subtle changes, like the removal of the headphone plug
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to make a thinner phone, and might not be a stellar driver of sales.64 Most relevant changes, like the
edge-to-edge organic light emitting diode (OLED) screen and a longer battery life, were expected to be
introduced on the market at the time of the 10th anniversary of the product in 2017.65 The same
observers noticed that minor innovations to the iPhone 5 in the past led to a 13% sales increase, while
the introduction of the larger display in 2014 generated a 37% increase at the end of 2015 fiscal year.66
The slower growth trend had also been confirmed by the iPhone 6s and 6s Plus, which resembled the
previous year’s models and had not generated great enthusiasm.67 Consequently, analysts forecasted
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a drop in unit sales as high as 20%.68 According to another analyst, the incentive for Android customers
to switch to the iPhone was lower than in the past due to the high degree of innovation and
improvement that Android devices introduced, such as the curved screen of Samsung’s S7 Edge and
Motorola’s modular Moto Z.69
Cook was very optimistic about the Upgrade Program and its impact on iPhone sales: “We are going
to give you things that you can’t live without, that you just don’t even know you need today. You will
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look back and wonder ‘how did I live without this?”70 According to Cook, in January 2016 only 40% of
iPhone users had an iPhone 6s or 6s Plus. Many users with an old device were likely tied to a standard
two-year contract, most likely stipulated in 2014. By 2016, these customers represented an opportunity
to increase sales.71
Apple’s observation on iPhones sales trends was confirmed by field experts. At the beginning of
2016, RBC Capital Markets expected 20% of the 6,400 customers it surveyed to sign up for Apple’s
iPhone Upgrade Program.72 Credit Suisse noted, “[A]ssuming about 30% of iPhone users join, the
Upgrade Program would add about 50 million iPhone sales by 2017.”73
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Could the iPhone Upgrade Program bring new life to the product? How could Apple forecast its
revenues under the new Upgrade Program? Should the company push the Upgrade Program or were
there other priorities related to the impact such a program could have on Apple’s financials?
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Exhibit 1 iPhone Upgrade Program Terms and Conditions
Apple offers the iPhone Upgrade Program described below under the following terms and
conditions (“Terms & Conditions”). When you enroll in an iPhone Upgrade Program, you are agreeing
to these Terms & Conditions.
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iPhone Upgrade Program. The iPhone Upgrade Program is available to qualified customers and
consists of the purchase and activation of an eligible iPhone, AppleCare+ for iPhone, and includes
an option to upgrade to a new eligible iPhone pursuant to the conditions set forth below.
a) Conditions for Upgrade Option. You may exercise your Upgrade Option to purchase a new
eligible iPhone, subject to availability, under all of the following conditions:
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 Payments. You have paid the equivalent of at least twelve (12) installment payments under
your Installment Loan plus any taxes and fees paid at the time of enrollment;
 Installment Loan. Your account with Bank is in good standing under the terms of your
Installment Loan at the time of purchase at an Apple Retail Store or at time of purchase
and shipment from apple.com; and
 AppleCare+. You have continuously maintained AppleCare+ with your Financed iPhone.
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b) Exercising your Upgrade Option. To exercise your Upgrade Option you must:
 Trade in your Financed iPhone in good physical and operational condition, as directed by
Apple; and
 Enroll in a new iPhone Upgrade Program which includes applying for and entering into a
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new 24-month 0% APR installment loan (“New Installment Loan”) with Bank.
c) Timing. You must exercise your Upgrade Option prior to the expiration date of your
Installment Loan.
d) Early Upgrade Option. At any time six (6) months after the date of enrollment, you can become
upgrade eligible by making advance payments so that you have paid the equivalent of at least
twelve (12) installment payments under your Installment Loan plus any taxes and fees paid at
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the time of enrollment.
e) Termination of Original Installment Loan After Exercising Upgrade Option. Upon

successfully exercising your Upgrade Option, entering into a New Installment Loan, and
completing your First Installment Payment on your New Installment Loan with Bank as
outlined above, Apple will pay any remaining balance due under your original Installment
Loan on your behalf to the Bank, and Bank will consider your original Installment Loan to be
paid in full. Subsequent monthly payments will be made under the terms of your New
Installment Loan, subject to the conditions of “Return of New, Upgraded iPhone After
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Exercising Upgrade Option,” as set forth below.
f) Prompt Return of Financed iPhone. If you exercise your Upgrade Option and do not return
your original Financed iPhone as directed by Apple within 14 days, your original Installment
Loan will be reinstated and you will be responsible for any missed and/or remaining
installment payments, as well as any installment payments under your New Installment Loan.
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g) Condition of Financed iPhone when Exercising your Upgrade Option. As noted above, your
Financed iPhone must be in good physical and operational condition when exercising your
Upgrade Option as determined solely by Apple or Apple’s trade-in service provider (“Trade-
In Service Provider”). For a Financed iPhone to be considered in good physical and operational
condition, the Financed iPhone must:
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 Power on and hold a charge;
 Have an intact and functioning display;
 Have no breaks or cracks; and
 Have Activation Lock disabled (you may be asked to disable at the time of upgrade).
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If exercising your Upgrade Option via apple.com, you must also remove the SIM card prior to
returning the original Financed iPhone.
h) Repairs under AppleCare+. If your Financed iPhone is not in good physical and operational
condition, you will need to exercise your service rights set forth in the AppleCare+ Terms and
Conditions, including paying any applicable service fee(s) required under the AppleCare+
plan. In the event you have already exhausted your service rights set forth in the AppleCare+
Terms and Conditions, or the necessary repair is not covered by AppleCare+, you must have
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your Financed iPhone repaired at an Apple Store or through an Apple Authorized Service
Provider at the prevailing service rates, or, depending on the extent of repairs needed, pay the
prevailing out of warranty replacement cost of the Financed iPhone. If you are upgrading via
apple.com and repairs are not available under AppleCare+ as outlined above, we will return
your original iPhone to you, the Installment Loan associated with the original Financed iPhone
will be reinstated, and you will be responsible for any missed and/or remaining installment
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payments as well as any installment payments under your New Installment Loan.
Source: Adapted from Apple Web site, http://www.apple.com/legal/sales-support/iphoneupgrade_us/, accessed July 2016.
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117-020 -10-
Exhibit 2 Apple’s Revenue and Units Sold by Products, FY2007–FY2016

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FY2016 FY2015 FY2014 FY2013 FY2012
Units Revenue Units Revenue Units Revenue Units Revenue Units Revenue
(K) ($M) (K) ($M) (K) ($M) (K) ($M) (K) ($M)
Product Summary:
Desktop 4,656 $6,040
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Portables 13,502 17,181
Subtotal CPUs 13,598 $22,831 20,587 $25,471 18,906 $24,079 16,341 $21,483 18,158 $23,221
iTunes, Software and Services 24,348 19,909 18,063 16,051 12,890
iPhone and related products and services 211,884 136,700 231,218 155,041 169,219 101,991 150,257 91,279 125,046 78,692
iPad and related products and services 45,590 20,628 54,856 23,227 67,977 30,283 71,033 31,980 58,310 30,945
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iPod 11,132 10,067 14,377 2,286 26,379 4,411 35,165 5,615
Accessories 6,093 5,706 5,145
Total Apple $215,639 $233,715 $182,795 $170,910 $156,508
FY2011 FY2010 FY2009 FY2008 FY2007

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Units Revenue Units Revenue Units Revenue Units Revenue Units Revenue
(K) ($M) (K) ($M) (K) ($M) (K) ($M) (K) ($M)
Product Summary:
Desktop 4,669 $6,439 4,627 $6,201 3,182 $4,324 3,712 $5,603 2,714 $4,020
Portables 12,066 15,344 9,035 11,278 7,214 9,535 6,003 8,673 4,337 6,294
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Subtotal CPUs 16,735 21,783 13,662 17,479 10,396 13,859 9,715 14,276 7,051 10,314
iTunes, Software and Services 9,268 7,521 6,447 5,547 4,004
iPhone and related products and services 72,293 47,057 39,989 25,179 20,731 13,033 11,627 1,844 1,389 123
iPad and related products and services 32,394 20,358 7,458 4,958 0 0
iPod 42,620 7,453 50,312 8,274 54,132 8,091 54,828 9,153 51,630 8,305
Accessories 2,330 1,814 1,475 1,659 1,260
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Total Apple $108,249 $65,225 $42,905 $32,479 $24,006
Source: Compiled from Apple Inc. Form 10-K, various years.

Note: Apple stopped reporting separate data on Desktop and Portables product segment sales after fiscal year 2012.
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Exhibit 3 Illustration of the iPhone Subscription Accounting
Assume that Apple sold the iPhone 6s for $649 (without AppleCare+) and that Apple allocated $10 of
revenue to the software deliverable. The software deliverable is excluded from the illustration below,
reducing the revenue for the iPhone 6s to $639. After excluding the software deliverable, assume that
the gross profit was $192 (30%). The subscription accounting for the iPhone sale would be as follows:
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Q1 (iPhone was sold to consumer):
Dr. Cash 639

Cr. Revenue (1/8) 80
Cr. Deferred Revenue (7/8) 559
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Dr. Cost of Goods Sold (1/8) 56
Dr. Deferred Cost of Goods Sold (7/8) 391
Cr. Inventory 447
Q2 to Q8 (remaining quarters of iPhone’s economic life):

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Dr. Deferred Revenue 80
Cr. Revenue 80
Dr. Cost of Goods Sold 56
Cr. Deferred Cost of Goods Sold 56
Source: Casewriter.
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Note: “Dr.” means “debit” and “Cr.” means “credit.”
Exhibit 4 Unaudited Condensed Schedule of Deferred Revenue (in $ millions), 2008–2015

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Deferred Revenue 09/26/15 09/27/14 09/28/13 09/29/12 09/24/11 09/25/10 09/26/09 09/27/08
Current 8,940 8,491 7,435 5,953 4,091 2,984 10,305 4,853
Non-current 3,624 3,031 2,625 2,648 1,686 1,139 4,485 3,029
Total 12,564 11,522 10,060 8,601 5,777 4,123 14,790 7,882
Source: Capital IQ, accessed July 2016.

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Exhibit 5 Illustration of the iPhone Accounting under the “2009 rule” ($)
the gross profit was $192 (30%). The accounting for the iPhone sale under the “2009 rule” would be as
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follows:
Dr. Cash 639

Cr. Revenue 639
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Dr. Cost of Goods Sold 447
Cr. Inventory 447
Source: Casewriter.
Note: “Dr.” means “debit“ and “Cr.” means “credit.”

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No
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Exhibit 6 Illustration of the iPhone Accounting under the New Upgrade Program ($)
the gross profit was $192 (30%). Apple assumed that the consumer exercised the trade-in option after
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one year and that the market value of the returned phone was not lower than the book value of the
returned phone at the point in time Apple purchased it back from the customer. The accounting for the
iPhone sale under the upgrade program would be as follows:
Dr. Cash 639
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Cr. Revenue 319.5
Cr. Guarantee liability for trade-in option 319.5
Dr. Cost of Goods Sold 223.5

Dr. Right of Return Asset 223.5
Cr. Inventory 447
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After one year (exercise of trade-in option):
Dr. Guarantee liability for trade-in option 319.5

Cr. Cash 319.5
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Dr. Inventory 223.5

Cr. Right of Return Asset 223.5
Source: Casewriter.
Note: “Dr” means “debit“ and “Cr” means “credit.”

No
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Exhibit 7 Apple Inc. FY 2015 Revenue Recognition Policy—Notes to Consolidated Financial
Statements
The Company 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
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software products. The Company sells gift cards redeemable at its retail and online stores, and also
sells gift cards redeemable on iTunes Store, App Store, Mac App Store and iBooks Store for the
purchase of digital content and software. The Company 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 the Company’s standard limited warranty. The Company
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records reductions to revenue for estimated commitments related to price protection and other
customer incentive programs. For transactions involving price protection, the Company recognizes
revenue net of the estimated amount to be refunded. For the Company’s other customer incentive
programs, the estimated cost of these programs is recognized at the later of the date at which the
Company has sold the product or the date at which the program is offered. The Company also records
reductions to revenue for expected future product returns based on the Company’s historical
experience. Revenue is recorded net of taxes collected from customers that are remitted to
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governmental authorities, with the collected taxes recorded as current liabilities until remitted to the
relevant government authority.
In September 2015, the Company introduced the iPhone Upgrade Program, which is available to
customers who purchase an iPhone 6s and 6s Plus in one of its U.S. physical retail stores and activate
the purchased iPhone with one of the four national carriers. The iPhone Upgrade Program provides
customers the right to trade in that iPhone for a new iPhone, provided certain conditions are met. One
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of the conditions of this program requires the customer to finance the initial purchase price of the
iPhone with a third-party lender. Upon exercise of the trade-in right and purchase of a new iPhone, the
Company satisfies the customer’s outstanding balance due to the third-party lender on the original
device. The Company accounts for the trade-in right as a guarantee liability and recognizes
arrangement revenue net of the fair value of such right with subsequent changes to the guarantee
liability recognized within revenue.
No
Source: Excerpted from Apple Web site, http://files.shareholder.com/downloads/AAPL/2531064259x0x861262/2601797E-

6590-4CAA-86C9-962348440FFC/2015_Form_10-K_As-filed_.pdf, p. 45 and p. 64, accessed July 2016.
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Exhibit 8 Price of Used and Refurbished iPhone 6s
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Source:
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Compiled from Appleinsider.com and Gazelle.com; historical data from these sites accessed via
http://archive.org/web/. Trade-in prices from Appleinsider.com refer to prices on Gazelle.com.
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Exhibit 9 Apple Inc. Consolidated Statements of Operations (in $ millions),a 2014-2016
09/24/2016 09/26/2015 09/27/2014

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Net sales $215,639 $233,715 $182,795

Cost of sales 131,376 140,089 112,258
Gross Margin 84,263 93,626 70,537
Operating expenses:
Research and Development 10,045 8,607 6,041
Selling, general and administrative 14,194 14,329 11,993
Total operating expenses 24,239 22,396 18,034
Operating income 60,024 71,230 52,503
No
Other income/(expenses), net 1,348 1,285 980

Income before provision for income taxes 61,372 72,515 53,483
Provision for income taxes 15,685 19,121 13,973
Net income 45,687 53,394 39,510
Earnings per share

Basic $8.35 $9.28 $6.49
Diluted $8.31 $9.22 $6.45
Shares used in computing earnings per share
Basic 5,470,820 5,753,421 6,085,572
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Diluted 5,500,281 5,793,069 6,122,663
Cash dividends declared per share $2.18 $1.98 $1.82
Source: Excerpted from company Web site, FY2016 10-K, http://investor.apple.com/financials.cfm, accessed November
2016.
a Except number of shares which are reflected in thousands and per share amounts.
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Exhibit 10 Unaudited Condensed Consolidated Balance Sheets (in $ millions)*, 2014-2016
ASSETS 09/24/2016 09/26/2015 09/27/2014
Current Assets:
Cash and cash equivalent $20,484 $21,120 $13,844
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Short-term marketable securities 46,671 20,481 11,233
Accounts Receivable 15,754 16,849 17,460
Inventories 2,132 2,349 2,111
Deferred tax assets - 5,546 4,318
Vendor non-trade receivables 13,545 13,494 9,759
Other current assets 8,283 9,539 9,806
Total current assets 106,869 89,378 68,531
Long-term marketable securities 170,430 164,065 130,162
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Property, plant and equipment, net 27,010 22,471 20,624
Goodwill 5,414 5,116 4,616
Acquired intangible assets, net 3,206 3,893 4,142
Other non-current assets 8,757 5,556 3,764
Total assets 321,686 290,479 231,839
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
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Accounts payable 37,294 35,490 30,196
Accrued expenses 22,027 25,181 18,453
Deferred revenue 8,080 8,940 8,491
Commercial paper 8,105 8,499 6,308
Current portion of long-term debt 3,500 2,500
Total current liabilities 79,006 80,610 63,448
Deferred revenue, non-current 2,930 3,624 3,031
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Long-term debt 75,427 53,463 28,987

Other non-current liabilities 36,074 33,427 24,826
Total liabilities 193,437 171,124 120,292
Commitment and contingencies (Note 10)
Shareholders’ equity
Common stock and additional paid-in capital, $0.00001 31,251 27,416 23,313
per value: 12,600,000 shares authorized; 5,336,166 and
5,578,753 shared issued and outstanding, respectively
No
Retained earnings 96,364 92,284 87,152

Accumulated other comprehensive income/(loss) 634 (345) 1,082
Total shareholders’ equity 128,249 119,355 111,547
Total liabilities and shareholders’ equity 321,686 290,479 231,839
Note 10 – Commitments and Contingencies
[…] The Company offers an iPhone Upgrade Program, which is available to customers who purchase an iPhone 6s and 6s Plus
in its U.S. retail and online stores and activate the purchased iPhone with one of the four U.S. national carriers. The iPhone
Upgrade Program provides customers the right to trade in that iPhone for a new iPhone, provided certain conditions are met.
One of the conditions of this program requires the customer to finance the initial purchase price of the iPhone with a third-party
lender. Upon exercise of the trade-in right and purchase of a new iPhone, the Company satisfies the customer’s outstanding
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balance due to the third-party lender on the original device. The Company accounts for the trade- in right as a guarantee liability
and recognizes arrangement revenue net of the fair value of such right with subsequent changes to the guarantee liability
recognized within revenue. […]
Source: Excerpted from company website, FY2016 10-K, http://investor.apple.com/financials.cfm, accessed November 2016.
Note: * Except number of shares which were reflected in thousands and par value.
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Exhibit 11 Apple Inc. Share Pricing ($), April 15-May 16, 2016
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Source: Compiled from Capital IQ, accessed August 2016.
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No
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Endnotes
1 Jasper Hamill, “Apple Has Flogged One Billion iPhones in Less than a Decade,” The Sun, July 28, 2016,
https://www.thesun.co.uk/news/1516139/apple-has-flogged-one-billion-iphones-in-less-than-a-decade/, accessed July 2016.
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2 Thomas Gryta and Ryan Knutson, “Apple Wants to Sell You an iPhone for $32 a Month,” The Wall Street Journal,
http://blogs.wsj.com/digits/2015/09/09/apple-wants-to-sell-you-an-iphone-for-32-a-month/, accessed July 2016.
3 Deirdre Fernandes, “Citizens Is the Bank behind Apple’s New iPhone Upgrade Plan,” The Boston Globe, September 10, 2015,
http://www.betaboston.com/news/2015/09/10/citizens-bank-to-offer-loans-for-iphone-subscriptions/, accessed August
2016.
4 Apple, “iPhone Upgrade Program Terms & Conditions,” Apple Web site, http://www.apple.com/legal/sales-
support/iphoneupgrade_us/, accessed July 2016.
yo
5 Apple, “iPhone Upgrade Program Terms & Conditions.”
6 Steven Milunovich, “Apple Inc. Upgrade Program a Net EPS Positive and Could Boost Multiple on Recognition of Annuity
Revenue,” UBS Securities LLC., September 15, 2015, via Thomson ONE, accessed August 2016.
Revenue.”
8 Rod Hill, “Apple Inc., iPhone Upgrade Program Deep Dive,” J.P. Morgan, September 15, 2015, via Thomson ONE, accessed
July 2016.
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Revenue.”
10 Philip Elmer-DeWitt, “Apple’s Secret Plan to Boost iPhone Sales Is Working,” Fortune, December 15, 2015,
http://fortune.com/2015/12/15/apple-iphone-upgrade-program/, accessed August 2016.
11 Rod Hill, “Apple Inc., iPhone Upgrade Program Deep Dive;” Munster, Gene, “Apple Inc., Early Take On iPhone Upgrade
Program Metrics,” PiperJaffray, January 22, 2016, via Thomson ONE, accessed July 2016.
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12 Thomas Gryta and Ryan Knutson, “Apple Takes Aim at Wireless Phone Companies,” The Wall Street Journal, September 9,
2015, http://www.wsj.com/articles/apple-takes-aim-at-wireless-phone-companies-1441845365, accessed July 2016.
13 Philip Elmer-DeWitt, “Apple’s Secret Plan to Boost iPhone Sales Is Working.”
14 Statista, “Average Price of PDAs/Smartphones, after Discount, in the United States between 4th Quarter 2006 and 4th
Quarter 2009 (in U.S. Dollars),” Statista, http://www.statista.com/statistics/185718/average-price-for-pdas-and-smartphones-
in-the-united-states-since-2006/, accessed August 2016.
No
15 Statista, “Global Apple iPhone Sales from 3rd Quarter 2007 to 2nd Quarter 2016 (in Million Units),” Statista,
http://www.statista.com/statistics/263401/global-apple-iphone-sales-since-3rd-quarter-2007/, accessed August 2016.
16 Vlad Savov, “The Entire History of iPhone vs. Android Summed Up in Two Charts,” The Verge, June 1, 2016,
http://www.theverge.com/2016/6/1/11836816/iphone-vs-android-history-charts, accessed August 2016.
17 Wayne Williams, “Just How Innovative Was Each iPhone Release?,” Betanews, September 5, 2014,
http://betanews.com/2014/09/05/just-how-innovative-was-each-iphone-release/, accessed August 2016.
18 Jack Linshi, “This 1 Chart Shows How Intense the Apple-Samsung Rivalry Really Is,” Time, April 29, 2015,
http://time.com/3840414/samsung-apple-market-share/, accessed August 2016.
19 Joanna Stern, “Kill the Wireless Contract! Buy Your Own Phone,” The Wall Street Journal, February 25, 2015,
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http://www.wsj.com/articles/kill-the-wireless-contract-buy-your-own-phone-1424807865, accessed July 2016.

20 Thomas Gryta and Ryan Knutson, “Apple’s iPhone: The Biggest Change Is How You’ll Pay for It,” The Wall Street Journal,
September 8, 2015, http://www.wsj.com/articles/apples-iphone-the-biggest-change-is-how-youll-pay-for-it-1441754856,
accessed July 2016.
21 Ryan Knutson, “Sprint to Abandon Two-Year Contracts,” The Wall Street Journal, August 18, 2015,
http://www.wsj.com/articles/sprint-to-abandon-two-year-contracts-1439837235, accessed July 2016.
18
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22 Ryan Knutson, “Sprint to Abandon Two-Year Contracts.”
23 Joanna Stern, “Kill the Wireless Contract! Buy Your Own Phone.”
24 Cade Metz, “New iPhone Means We’ll Soon Escape the Captivity of Carriers,” Wired, September 14, 2015,
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http://www.wired.com/2015/09/new-iphone-means-well-soon-escape-captivity-carriers/, accessed July 2016.
25 Cade Metz, “New iPhone Means We’ll Soon Escape the Captivity of Carriers.”
26 Thomas Gryta and Ryan Knutson, “Apple Takes Aim at Wireless Phone Companies.”
27 ABC News, “What You Should Know about New Lease Program for Apple iPhone 6s and 6sPlus,” ABC News website,
September 11, 2015, http://wtnh.com/2015/09/11/what-you-should-know-about-new-lease-program-for-apple-aapl-iphone-
6s-and-6s-plus/, accessed August 2016.
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28 Susanna Kim, “What you should know about new lease program for apple iPhone 6s and 6sPlus,” ABCNews, September 24,
2015, http://abcnews.go.com/Technology/lease-program-apple-aapl-iphone-6s-6s/story?id=33657547, accessed November
2016.
29 Sam Oliver, “Apple Unveils New Multi-Carrier Apple SIM Bundled with new iPads,” AppleInsider, October 16, 2014,
http://appleinsider.com/articles/14/10/16/apple-unveils-new-multi-carrier-apple-sim-bundled-with-new-ipads, accessed
August 2016.
30 Cade Metz, “New iPhone Means We’ll Soon Escape the Captivity of Carriers.”
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31 Puneet Sikka, “Has Apple’s iPhone Upgrade Program Led to Faster Upgrades?,” Market Realist, April 19, 2016,
http://marketrealist.com/2016/04/apples-iphone-upgrade-program-helped-faster-upgrades/, accessed August 2016.
32 Hannes Sverrisson, “Services. The New iPhone!,” Seeking Alpha, July 27, 2016, http://seekingalpha.com/article/3992035-
services-new-iphone, accessed July 2016.
33 Hannes Sverrisson, “Services. The New iPhone.”
34 Reinhardt Krause, “Apple Used-iPhone Market Could Boom From Upgrades,” Investor’s Business Daily, September 16, 2015,
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http://www.investors.com/apple-iphone-upgrade-program-fuels-used-iphone-market/, accessed August 2016.

Revenue,” UBS Securities LLC., September 15, 2015, via Thomson ONE, accessed August 2016.
Revenue.”
37 Reinhardt Krause, “Apple Used-iPhone Market Could Boom From Upgrades.”
38 Sam Mattera, “This New Smartphone Could Be the iPhone’s Biggest Competition in China,” The Motley Fool, March 14,
No
2016, http://www.fool.com/investing/general/2016/03/14/this-new-smartphone-could-be-the-iphones-biggest-c.aspx,
accessed August 2016.
39 Adam Rogers, “Apple Sees Growth Potential in China’s Rising Middle Class,” Market Realist, January 6, 2016,
http://marketrealist.com/2016/01/apple-sees-growth-potential-chinas-rising-middle-class/, accessed August 2016.
40 Statista, “Main Reasons Not to Purchase an Apple iPhone 6/6 Plus among Smartphone Users in China as of September
2014,” Statista Web site, http://www.statista.com.ezp-prod1.hul.harvard.edu/statistics/369701/china-main-reasons-against-
iphone-6-purchase/, accessed August 2016.
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44 Citizens Bank, “About Us,” Citizens Bank Web site, http://investor.citizensbank.com/about-us.aspx, accessed August 2016.
45 Deirdre Fernandes, “Citizens Is the Bank behind Apple’s New iPhone Upgrade Plan.”
19
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46 Ian Kar, “Apple’s iPhone Upgrade Program Is Off to a Slow Start, but the Real Test Is in September,” Quartz, January 29,
2016, http://qz.com/600547/the-iphone-upgrade-program-could-be-apples-major-key/, accessed August 2016; Gene Muster,
“Early Take On iPhone Program Metrics,” Piper Jaffray Analyst Report, January 22, 2016, Thomson ONE, accessed July 2016.
47 Philip Elmer-DeWitt, “Spotlight on Apple’s Hidden Revenue Stream,” Fortune, January 20, 2009,
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http://fortune.com/2009/01/20/spotlight-on-apples-hidden-revenue-stream/, accessed August, 2016.
48 FASB, “Statement of Position 97-2 Software Revenue Recognition,” FASB Web site, October 27, 1997, http://www.fasb.org/
jsp/FASB/Document_C/DocumentPage?cid=1176156442593&acceptedDisclaimer=true, accessed August 2016; Apple, 2008
Form 10-K, p. 55, http://investor.apple.com/secfiling.cfm?filingid=1193125-08-224958&cik=, accessed August 2016.
49 Walter Isaacson, The Innovators. (New York: Simon & Schuster, 2014) p. 381.
50 Daniel Eran Dilger, “Inside Apple’s iPhone Subscription Accounting Changes,” AppleInsider, October 21, 2009,
yo
http://appleinsider.com/articles/09/10/21/inside_apples_iphone_subscription_accounting_changes/page/2, accessed July
2016.
51 FASB, “FASB Emerging Issues Task Force,” FASB Web site, June 4, 2009,
http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175818951112&blo
bheader=application%2Fpdf, accessed August 2016.
52 Philip Elmer-DeWitt. “Accounting Rule Change in Apple’s Favor,” Fortune, September 14, 2009, http://fortune.com/2009/
09/14/accounting-rule-change-in-apples-favor/, accessed August 2016; Joe Wilcox, “Accounting Change Lifts Apple Fiscal Q1
2010 Results to over $15.6 billion,” Betanews, January 25, 2010, http://betanews.com/2010/01/25/accounting-change-lifts-
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apple-fiscal-q1-2010-results-to-over-15-6-billion/, accessed August 2016.
53 Apple, 2010 Form 10-K, p. 50.
54 Apple, 2010 Form 10-K, p. 50.
55 FASB, “Update No. 2014-09—Revenue from Contracts with Customers (Topic 606),” FASB Web site, 2016,
http://www.fasb.org/cs/ContentServer?c=Page&pagename=FASB%2FPage%2FSectionPage&cid=1176156316498, accessed
August 2016.
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56 Apple, 2015 Form 10-K, p. 30, http://investor.apple.com/secfiling.cfm?filingid=1193125-15-356351&cik=320193, accessed

August 2016.
57 Apple, 2015 Form 10-K, p. 45.
58 Apple, “iPhone Upgrade Program Terms & Conditions.”
59 Luca Maestri, “Apple’s (AAPL) CEO Tim Cook on Q4 2015 Results - Earnings Call Transcript,” Seeking Alpha, October 27,
2015, http://seekingalpha.com/article/3611256-apples-aapl-ceo-tim-cook-q4-2015-results-earnings-call-transcript?part=single,
No
60 Ernst&Young, “Revenue Recognition – Multiple Elements Arrangements,” Ernst&Young Web site, revised May 2015,
www.ey.org, accessed July 2016.
61 Ben Popper, “Apple Sees Its Revenue Decline for the First Time in 13 Years,” The Verge, April 26, 2016,
http://www.theverge.com/2016/4/26/11510312/apple-q2-second-quarter-2016-earnings, accessed July 2016.
62 Katie Kuehner-Hebert, “Apple’s Q2 Results Miss on iPhone Sales Drop,” CFO Magazine, April 27 2016,
http://ww2.cfo.com/financial-performance/2016/04/apples-q2-results-miss-iphone-sales-drop/, accessed July 2016.
63 Vindu Goel, “iPhone Sales Drop, and Apple’s 13-Year Surge Ebbs,” The New York Times, April 26, 2016,
http://www.nytimes.com/2016/04/27/technology/apple-q2-earnings-iphone.html?_r=0, accessed July 2016.
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64 Daisuke Wakabayashi and Eva Dou, “Apple Unlikely to Make Big Changes for Next iPhone,” The Wall Street Journal, June
21, 2016, http://www.wsj.com/articles/apple-unlikely-to-make-big-changes-for-next-iphone-1466526489, accessed July 2016.
65 Daisuke Wakabayashi and Eva Dou, “Apple Unlikely to Make Big Changes for Next iPhone;” Gordon Kelly, “Apple Leak
Reveals Massive iPhone 7 Upgrade,” Forbes, July 14, 2016, http://www.forbes.com/sites/gordonkelly/2016/07/14/apple-
leak-big-iphone-7-battery-upgrade/#c308652608ec, accessed July 2016.
66 Daisuke Wakabayashi and Eva Dou, “Apple Unlikely to Make Big Changes for Next iPhone.”
20
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67 Daisuke Wakabayashi and Eva Dou, “Apple Unlikely to Make Big Changes for Next iPhone.”
68 Tim Bradshaw, “Apple Earnings: What to Expect,” Financial Times, July 26, 2016, https://next.ft.com/content/bf644bd0-
52ee-11e6-9664-e0bdc13c3bef, accessed July 2016.
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69 Trefis, “iPhone Unlikely to See Meaningful Update This Year, How Will This Impact Apple?”Trefis web site, June 22, 2016,
http://www.trefis.com/stock/aapl/articles/361949/iphone-unlikely-to-see-meaningful-update-this-year-how-will-this-
impact-apple/2016-06-22, accessed July 2016.
70 Todd Haselton, “Apple’s Tim Cook: “We’re Going to Give You Things You Can’t Live Without,” TechnoBuffalo, May 3,
2016, http://www.technobuffalo.com/2016/05/03/apple-tim-cook-cnbc-jim-cramer-mad-money/, accessed July 2016.
71 Seeking Alpha, “Apple’s (AAPL) CEO Tim Cook on Q1 2016 Results - Earnings Call Transcript,” Seeking Alpha Web site,
January 26, 2016, http://seekingalpha.com/article/3836826-apples-aapl-ceo-tim-cook-q1-2016-results-earnings-call-transcript,
yo
72 Adam Rogers, “iPhone Upgrade Program: An Important Apple Initiative,” Market Realist, January 6, 2016,
http://marketrealist.com/2016/01/iphone-upgrade-program-important-apple-initiative/, accessed July 2016.
73 Ian Kar, “Apple’s iPhone Upgrade Program Is Off to a Slow Start, but the Real Test is in September.”
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No
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t

Accounting for the iPhone Upgrade Program (A)

— Tim Cook, Apple CEO1

iPhone Revenue Recognition

iPhone Revenue Recognition under the Upgrade Program

interest to Citizens for granting the new loan.

the time of enrollment.

e) Termination of Original Installment Loan After Exercising Upgrade Option. Upon

Exercising Upgrade Option,” as set forth below.

 Have an intact and functioning display;

 Have no breaks or cracks; and

Exhibit 2 Apple’s Revenue and Units Sold by Products, FY2007–FY2016

FY2011 FY2010 FY2009 FY2008 FY2007

Source: Compiled from Apple Inc. Form 10-K, various years.

Dr. Cash 639

Q2 to Q8 (remaining quarters of iPhone’s economic life):

Note: “Dr.” means “debit” and “Cr.” means “credit.”

Exhibit 4 Unaudited Condensed Schedule of Deferred Revenue (in $ millions), 2008–2015

Source: Capital IQ, accessed July 2016.

Q1 (iPhone was sold to consumer):

Dr. Cash 639

Note: “Dr.” means “debit“ and “Cr.” means “credit.”

Q1 (iPhone was sold to consumer):

Dr. Cash 639

Dr. Cost of Goods Sold 223.5

Dr. Guarantee liability for trade-in option 319.5

Dr. Inventory 223.5

Note: “Dr” means “debit“ and “Cr” means “credit.”

Source: Excerpted from Apple Web site, http://files.shareholder.com/downloads/AAPL/2531064259x0x861262/2601797E-

09/24/2016 09/26/2015 09/27/2014

Net sales $215,639 $233,715 $182,795

Other income/(expenses), net 1,348 1,285 980

Earnings per share

Diluted 5,500,281 5,793,069 6,122,663

Cash dividends declared per share $2.18 $1.98 $1.82

ASSETS 09/24/2016 09/26/2015 09/27/2014

LIABILITIES AND SHAREHOLDERS’ EQUITY

Long-term debt 75,427 53,463 28,987

Retained earnings 96,364 92,284 87,152

Note 10 – Commitments and Contingencies

http://www.wsj.com/articles/kill-the-wireless-contract-buy-your-own-phone-1424807865, accessed July 2016.

http://www.investors.com/apple-iphone-upgrade-program-fuels-used-iphone-market/, accessed August 2016.

54 Apple, 2010 Form 10-K, p. 50.

56 Apple, 2015 Form 10-K, p. 30, http://investor.apple.com/secfiling.cfm?filingid=1193125-15-356351&cik=320193, accessed

58 Apple, “iPhone Upgrade Program Terms & Conditions.”

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