New Credit Loss Standards' Effect on Apple


The 2008 financial crisis made investors, regulators, congress, industry executives, and the world at large, aware that losses resulting from lending credit were not adequately estimated on company financial statements. The accounting standard update 2016-13 established new credit loss recognition standards and affects entities holding financial assets, loans, debt securities, trade receivables, reinsurance receivables, and other financial assets that have the contractual right to receive cash.

As noted in Apple's 10K "effective for the Company beginning in its first quarter of 2021 and early adoption is permitted. The Company does not believe the adoption of ASU 2016-13 will have a material impact on its consolidated financial statements." (Note that Apple's fiscal year beginning is October 1, so its first quarter of fiscal year 2021 is in reality the last quarter of 2020.) Apple extends credit through the sale of some products, in addition to offering upgrade programs. While not material, Apple will be required to estimate and report its credit losses under the new standard.

Additionally many of Apple’s suppliers, creditors and debtors will be required to estimate credit losses on their financial statements. Apple is not a lending institution, and credit loss standards are more relevant to those entities that offer credit versus a consumer products and services company.

Investors and analysts must wonder how the credit loss standards will affect the companies or reporting entities that are embedded within Apple’s $170+ billion of long term investments, and $75+ billion of long term debt. If Apple holds bonds, or loans from a financial institution, and that financial institution is affected by the credit loss reporting standards, how would that trickle through to affect Apple?

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Sources

Apple's 10k fiscal year ended September 30, 2016

http://files.shareholder.com/downloads/AAPL/2456063358x8143945x913905/66363059-7FB6-4710-B4A5-7ABFA14CF5E6/10-K_2016_9.24.2016_-_as_filed.pdf

FASB Financial Instruments - Credit Losses

http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176168232528&acceptedDisclaimer=true