iPhone Accounting Rule Change Unanimously Approved

iphone guy att store

Good news for Apple and Palm: The U.S. Financial Accounting Standards Board unanimously approved an accounting rule change that will allow the companies to record more revenue under GAAP when certain products are sold, Reuters reports.

This is especially helpful for Apple, which will be able to report far more quarterly revenue and profits for the iPhone and Apple TV under GAAP. This could drive shares up, even though it means the company isn’t actually conducting business differently than before.

Previously, the company divided iPhone revenue over 8 quarters under subscription accounting. Now it can report all of its iPhone and Apple TV in the quarter the devices are sold.

Why is this good for Apple and its stock? As we noted yesterday

That could drive Street estimates for next year significantly: Morgan Stanley analyst Kathryn Huberty estimates in a note today that Apple’s calendar-year 2010 revenue could grow an extra 11%, EPS could grow 21%, and gross margins could grow 60 bps as a result of the changes.

The benefit, according to Huberty’s note:

  • Apple shares will seem cheaper, which could drive uptake from “quant-driven strategies and retail investors.”
  • Apple could drive larger earnings surprises given the relatively extreme profitability of the iPhone. Huberty estimates 50%-60% gross margins over the last year.

Apple has used the 24-month “subscription accounting” technique for its iPhone and Apple TV gadgets since they launched — as does Palm for its Pre — so the company can offer free software updates over the period. (This is why iPod touch users must pay a nominal fee to upgrade to the latest operating system; Apple doesn’t use subscription accounting for its iPod line.)

If the rule change is passed, Huberty thinks Apple will implement the changes in its December quarter this year. She estimates that 33% of Apple’s revenue is subject to current subscription accounting rules.

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