2021
2022
Financial Statement
Analysis & Valuation
A SUMMARY OF THE SEMINARS
LOUIST
A summary made by LouisT for the course: Financial Statement Analysis & Valuation given in 2021/2022
,Contents
Chapter 1. HBS Case: iPhone Upgrade Program + Asset Distortions .................................................... 4
1.1 HBS Case: iPhone Upgrade Program ...................................................................................... 4
1.2 Asset Distortions Exercise: R&D Intangibles .......................................................................... 9
Chapter 2. HBS Case: American Airlines .............................................................................................. 11
2.1 HBS Case: American Airlines ................................................................................................ 11
Chapter 3. HBS Case: Berkshire ............................................................................................................ 16
3.1 HBS Case: Berkshire .............................................................................................................. 16
Chapter 4. Calculations ......................................................................................................................... 21
4.1 HBS Case: iPhone Upgrade Program .................................................................................... 21
Chapter 5. Calculations ......................................................................................................................... 27
5.1 Question 1 ............................................................................................................................. 27
5.2 Question 2 ............................................................................................................................. 32
5.3 Question 3 ............................................................................................................................. 34
5.4 Question 4 ............................................................................................................................. 35
Chapter 6. HBS Case Twitter ................................................................................................................. 36
6.1 Question 1 ............................................................................................................................. 36
6.2 Question 2 ............................................................................................................................. 36
6.3 Question 3 ............................................................................................................................. 37
6.4 Question 4 ............................................................................................................................. 38
6.5 Question 5 ............................................................................................................................. 38
6.6 Question 6 ............................................................................................................................. 38
A summary made by LouisT for the course: Financial Statement Analysis & Valuation given in 2021/2022
,Chapter 1. HBS Case: iPhone Upgrade Program + Asset Distortions
Firstly, we will discuss the HBS case: iPhone Upgrade program through the questions given by the
course. Additionally, we will end with an extra assignment asset distortion.
1.1 HBS Case: iPhone Upgrade Program
1. Why do you think Apple introduced the iPhone Upgrade Program? What might be the added
value of the program from the customer’s perspective?
In this question, we have two perspectives: Apple’s and Customer’s.
• From apple’s perspective
So average upgrade time increased from 18 to 26 months, so they wanted to increase the
turnover. They wanted to take control over the customer relationship. Lastly, entering the
market for used phones and emerging economies in India and China
• From the customer’s perspective
Low monthly payments, zero percent interest rate on loan, upgrade option, unlocked phone,
better service through AppleCare.
However, these are only the benefits and the added value of this program. It is also important to
notice that there are costs involved in actually doing this iPhone upgrade program. So keep in mind
that there are also bad sides to things.
2. How does Apple account for the revenues from regular sales of iPhones (i.e., outside of the
Upgrade Program)? How did the changes in accounting under the “2009 rule” affect Apple’s
balance sheet and income statement?
In 2009, the rules changed in terms of how to account for revenue. Some products have multiple
deliverables and iPhone is a good example of this because iPhone has a hardware component (the
phone itself) and a service component (future software upgrades)
New Rules: This implies that selling one iPhone for 649 dollars requires Apple to account for the
revenues from the hardware and service component in different ways, namely recognize the full 639
in revenues for the hardware component and recognize the costs. The service component (10
dollars) is spread out over 24 months.
Cash BS 649
Deferred revenues BS 649
Deferred expense BS 454
Inventory BS 454
Deferred revenue BS 81
Revenue IS 81
Cost of goods sold IS 57
Deferred expense BS 57
4
A summary made by LouisT for the course: Financial Statement Analysis & Valuation given in 2021/2022
, Old Rules: While Apple has to defer the recognition of revenues for only a small component 10/649,
the recognition of iPhone sales was very different before the 2009 rule. Before everything was
deferred. Not allowed to separate.
At the time of sale (assume sale takes place at start of the quarter)
Cash BS 649
Revenue IS 639
Deferred Revenues BS 10
Cost of goods IS 447
Deferred expenses BS 7
Inventory BS 454
End of the quarter
Deferred revenue BS 1,25
Revenue IS 1.25
In terms of reliability, nothing changes because the money is already received. When you go buy an
iPhone, you generally pay immediately to get the product.
In terms of relevance (or timely), this is different. Let's say all sales are gone for one year, which one
is more relevant? Your past revenue in the old method, would still “earn” for 8 quarters and you
won’t see this change immediately. In the new method, it is more timely because you can see this
immediately.
In conclusion, in this case, you received the money, and you don’t have to do anything anymore, you
earned that money so reliability nothing changed. So new is more aggressive but better. This would
be different if a lot of discretion is required or uncertain, such as whether you still would receive
cash.
NON-GAAP accounting adjustment
In 2008, apple disclosed the effects of undoing the conservative nature of accounting rules pre-2009.
Apple’s (Non-GAAP”) accounting adjustment. So, they give a better reflection of their performance as
extra. Their adjustment made their profit double, so there might be an incentive for them to publish
this information.
Q: What would be the effect on the balance sheet of undoing this accounting treatment?
Balance sheet, the deferred revenues would go down. From exhibit 4, we learn how the change in
accounting after 2009 changes Apple’s Balance sheet
5
A summary made by LouisT for the course: Financial Statement Analysis & Valuation given in 2021/2022
2022
Financial Statement
Analysis & Valuation
A SUMMARY OF THE SEMINARS
LOUIST
A summary made by LouisT for the course: Financial Statement Analysis & Valuation given in 2021/2022
,Contents
Chapter 1. HBS Case: iPhone Upgrade Program + Asset Distortions .................................................... 4
1.1 HBS Case: iPhone Upgrade Program ...................................................................................... 4
1.2 Asset Distortions Exercise: R&D Intangibles .......................................................................... 9
Chapter 2. HBS Case: American Airlines .............................................................................................. 11
2.1 HBS Case: American Airlines ................................................................................................ 11
Chapter 3. HBS Case: Berkshire ............................................................................................................ 16
3.1 HBS Case: Berkshire .............................................................................................................. 16
Chapter 4. Calculations ......................................................................................................................... 21
4.1 HBS Case: iPhone Upgrade Program .................................................................................... 21
Chapter 5. Calculations ......................................................................................................................... 27
5.1 Question 1 ............................................................................................................................. 27
5.2 Question 2 ............................................................................................................................. 32
5.3 Question 3 ............................................................................................................................. 34
5.4 Question 4 ............................................................................................................................. 35
Chapter 6. HBS Case Twitter ................................................................................................................. 36
6.1 Question 1 ............................................................................................................................. 36
6.2 Question 2 ............................................................................................................................. 36
6.3 Question 3 ............................................................................................................................. 37
6.4 Question 4 ............................................................................................................................. 38
6.5 Question 5 ............................................................................................................................. 38
6.6 Question 6 ............................................................................................................................. 38
A summary made by LouisT for the course: Financial Statement Analysis & Valuation given in 2021/2022
,Chapter 1. HBS Case: iPhone Upgrade Program + Asset Distortions
Firstly, we will discuss the HBS case: iPhone Upgrade program through the questions given by the
course. Additionally, we will end with an extra assignment asset distortion.
1.1 HBS Case: iPhone Upgrade Program
1. Why do you think Apple introduced the iPhone Upgrade Program? What might be the added
value of the program from the customer’s perspective?
In this question, we have two perspectives: Apple’s and Customer’s.
• From apple’s perspective
So average upgrade time increased from 18 to 26 months, so they wanted to increase the
turnover. They wanted to take control over the customer relationship. Lastly, entering the
market for used phones and emerging economies in India and China
• From the customer’s perspective
Low monthly payments, zero percent interest rate on loan, upgrade option, unlocked phone,
better service through AppleCare.
However, these are only the benefits and the added value of this program. It is also important to
notice that there are costs involved in actually doing this iPhone upgrade program. So keep in mind
that there are also bad sides to things.
2. How does Apple account for the revenues from regular sales of iPhones (i.e., outside of the
Upgrade Program)? How did the changes in accounting under the “2009 rule” affect Apple’s
balance sheet and income statement?
In 2009, the rules changed in terms of how to account for revenue. Some products have multiple
deliverables and iPhone is a good example of this because iPhone has a hardware component (the
phone itself) and a service component (future software upgrades)
New Rules: This implies that selling one iPhone for 649 dollars requires Apple to account for the
revenues from the hardware and service component in different ways, namely recognize the full 639
in revenues for the hardware component and recognize the costs. The service component (10
dollars) is spread out over 24 months.
Cash BS 649
Deferred revenues BS 649
Deferred expense BS 454
Inventory BS 454
Deferred revenue BS 81
Revenue IS 81
Cost of goods sold IS 57
Deferred expense BS 57
4
A summary made by LouisT for the course: Financial Statement Analysis & Valuation given in 2021/2022
, Old Rules: While Apple has to defer the recognition of revenues for only a small component 10/649,
the recognition of iPhone sales was very different before the 2009 rule. Before everything was
deferred. Not allowed to separate.
At the time of sale (assume sale takes place at start of the quarter)
Cash BS 649
Revenue IS 639
Deferred Revenues BS 10
Cost of goods IS 447
Deferred expenses BS 7
Inventory BS 454
End of the quarter
Deferred revenue BS 1,25
Revenue IS 1.25
In terms of reliability, nothing changes because the money is already received. When you go buy an
iPhone, you generally pay immediately to get the product.
In terms of relevance (or timely), this is different. Let's say all sales are gone for one year, which one
is more relevant? Your past revenue in the old method, would still “earn” for 8 quarters and you
won’t see this change immediately. In the new method, it is more timely because you can see this
immediately.
In conclusion, in this case, you received the money, and you don’t have to do anything anymore, you
earned that money so reliability nothing changed. So new is more aggressive but better. This would
be different if a lot of discretion is required or uncertain, such as whether you still would receive
cash.
NON-GAAP accounting adjustment
In 2008, apple disclosed the effects of undoing the conservative nature of accounting rules pre-2009.
Apple’s (Non-GAAP”) accounting adjustment. So, they give a better reflection of their performance as
extra. Their adjustment made their profit double, so there might be an incentive for them to publish
this information.
Q: What would be the effect on the balance sheet of undoing this accounting treatment?
Balance sheet, the deferred revenues would go down. From exhibit 4, we learn how the change in
accounting after 2009 changes Apple’s Balance sheet
5
A summary made by LouisT for the course: Financial Statement Analysis & Valuation given in 2021/2022
