Are the beancounters trying to stop free updates?

Stephen Withers
Tuesday, 23 January 2007 11:30

IT Industry - Strategy

I'm neither a lawyer nor an accountant, but as a small business owner I'm unaware of any rule or regulation that says a company has to charge for anything it delivers. Obviously, there's a limit to what you can give away without going broke, but from what I remember from Accounting 101, the matching of expenses and revenue is key: when you charge for the supply of goods or services, you have to recognise the revenue in the correct period. Messing with the period in which revenue is recognised can yield significant variations in financial results.

What Apple seems to be concerned with is that it has already recognised the revenue from the sale of Macs in previous financial quarters, and that there is some (however slight) possibility of being forced to restate its earnings if it is held to have completed delivery to customers only when the 802.11n enabler is supplied. I can see where this may be coming from: Apple is already under scrutiny over the options affair, so it really doesn't want its numbers called into question.

The most recent joint project report from the International Accounting Standards Board and the Financial Accounting Standards Board on revenue recognition seems - at least in my reading - to make it clear that as far as the 802.11n enabler is concerned, Apple should have nothing to worry about: "Revenues arise when each contract deliverable (or performance obligation) is delivered (or extinguished)." Apple had no obligation to deliver the enabler, as it never claimed .11n compatibility for those systems prior to this month's Macworld Expo. Consequently, there's no revenue recognition issue.

There does seem to be a potential problem for companies that promise paying customers free upgrades (whether that's for the life of the product or just for ".x" upgrades) and those who charge for beta software on the basis that customers will receive the final version. But the problem is a matter of how they do their accounting, not a requirement that they charge for updates.

Fortunately, "free lifetime upgrades" seem to be the province of small, unincorporated developers. By and large, they would account for revenue on a cash basis, in which case the problem goes away completely.
It would be a great shame if accounting regulations made it too hard for software companies to deliver additional functionality rather than merely fixing bugs in point updates, but it seems to me that in the absence of a undertaking to provide new features at no extra charge, vendors are (and should be) entitled to recognise revenue at the time the sale is closed.

So what's going to happen?