September 24, 2009

New Accounting Rules Will Help Tech Firms

Tech firms like Apple Inc could be getting a boost in earnings thanks to a new set of accounting rules approved on Wednesday.

Currently, the rule requires tech firms to spread earnings over a period of years due to licensing contracts. For instance, Apple is required to spread its revenue from iPhones over a period of two years, which is the estimated useful life of the device.

"If you had a product that had both a hardware element to it and a software element ... if the software was critical to it, then you had to follow the software rules," Brian Minnihan, a partner in the technology practice of accounting firm BDO Seidman, told Reuters.

The Financial Accounting Standards Board approved the new rule in a 5-0 vote. They will go into effect in mid-2010, but companies can already begin to apply them.

Analysts believe the new changes will allow for a better image of how well a company is performing.

According to the Associated Press, Apple reported that if it were allowed to account for all iPhone sales at once, they would have been 17 percent higher and its profit would have been increased by 58 percent.

"A lot of people really closely follow the reported revenues as key measure of company's performance. A company can provide disclosures, but people always go back to reported revenues," said Jay Howell, also with BDO Seidman.

The new rules also increase US companies' ability to compete with those overseas, where the accounting rules are similar.

CNN Money reported that Piper Jaffray's Gene Munster issued a note to clients Thursday showing estimated earnings per share with the new accounting rules.

"While this has been expected for the last month, we believe this will be a positive for shares of AAPL," he said, adding that the believed the Cupertino, Calif-based firm would put the new measures into effect immediately.


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