This is collaborative effort, co-authored with Deep Quarry the newsletter from Olga Usvyatsky. If you value our work, please subscribe!
A paid subscription supports my efforts to support other writers and can help me maintain my subscriptions to all of the publications I need to keep up. Gift links don’t grow on trees!
Microsoft’s annual report rarely goes unnoticed.
As one of the world’s largest cloud providers and now OpenAI’s most important commercial partner, Microsoft’s results have become a barometer for the broader AI ecosystem. For example, in reporting on the year end results — Microsoft’s fiscal year end is June 30 — Reuters focused on whether Microsoft’s cloud growth and continued cash generation demonstrate that massive AI infrastructure investments are beginning to generate economic returns. The WSJ, on the other hand, contrasted Microsoft’s performance with that of other hyperscalers, viewing Microsoft’s results as a signal of whether AI infrastructure spending is producing sufficient returns.
Microsoft’s fiscal 2026 annual report also introduced several accounting and disclosure developments. Many of these changes have already attracted some attention. But, because the accounting implications of these changes are less straightforward, that’s what we’ll focus on today.
Olga Usvyatsky and I have written about Microsoft’s accounting more than once, including the limited — and in some areas non-existent — disclosure about Microsoft’s relationship with OpenAI and Microsoft’s accounting for data center construction and and related capital expenditures.
In this piece, we follow up on our previous work and discuss several new and notable changes to Microsoft’s disclosures, including:
Microsoft’s first disclosure of revenue from OpenAI and an unusual Q4 2026 gain;
The extension of the estimated useful lives of certain buildings; and
The announced shift in classification of a significant portion of future lease obligations from finance leases to operating leases and the effect of this shift on interpretation of Microsoft’s capital expenditure and free cash flow metrics.
Revenue from the OpenAI relationship
According to Microsoft’s 10-K filing, Microsoft holds a 25% interest in OpenAI — which is still private — and accounts for its investment using the equity method of accounting:
We have a long-term strategic partnership with OpenAI. In October 2025, we signed a new definitive agreement with OpenAI that extends this partnership. We have an investment accounted for under the equity method that represents an approximate 25% interest on an as-converted basis.
Olga and I explained how the equity method of accounting works according to GAAP in our previous piece:
Under the equity method accounting approach, the investor initially records the investment on its balance sheet at cost and subsequently adjusts the investment’s carrying value for its proportionate share of the investee’s net income or loss, as well as for any dividends received or additional investments. The investor’s share of the investee’s profits increases the investment balance, while losses or dividends reduce it.
This method reflects the investor’s economic influence over the investee but stops short of full consolidation of its results. Therefore, Microsoft does not consolidate OpenAI’s results line by line, but instead carries over the proportionate OpenAI net loss figure into its “Other, net” line.
An equity method investee is, by definition, a related party of the investor, subject to disclosure requirements under ASC 850. Generally, under ASC 850, the objective of related-party disclosures is to enable investors to evaluate both the nature of related-party relationships and their financial impacts. For material related-party transactions, companies generally must disclose the nature of the relationship, describe the transactions, report the dollar amounts recognized during the period, disclose amounts due to or from the related party at the balance sheet date, and provide any additional information necessary for investors to understand the effects of those transactions on the financial statements. (See PwC guide for more discussion of ASC 850.)
While Microsoft provided some disclosure in its previous filings about its relationship with OpenAI, including the accounting method used and gains and losses recognized, the revenue recognized from Open AI as a customer and under a reported revenue sharing agreement and related outstanding balances due remained a mystery.
Until now.
In its 2026 10-K Microsoft, for the first time, disclosed how much revenue the relationship with OpenAI generates and the accounts receivable outstanding at the year-end (emphasis added):
As an equity method investee, OpenAI is a related party as defined in Accounting Standards Codification Topic 850, Related Party Disclosures (“ASC 850”). In accordance with ASC 850, we are disclosing revenue and accounts receivable balances from transactions with OpenAI. For fiscal year 2026, we recorded revenue from commercial arrangements with OpenAI, inclusive of revenue-sharing payments, of $24.1 billion, and accounts receivable from OpenAI as of June 30, 2026 was $6.0 billion.
We have made total funding commitments of $13.0 billion related to our investment, of which $11.9 billion has been funded as of June 30, 2026.
We discuss our our analysis of the new Microsoft disclosures after the paywall.
Comments
Nothing yet. Say the first thing.
Sign in to join the conversation.