CNBC reported that Alphabet has made three major changes to how it is going to report its earnings this quarter. The company made the announcement earlier this year that it would be changing its accounting, reporting as well as disclosure items in their first quarter earnings report.
The company stated that as of January 1, 2018, it was required to change its accounting standard to Accounting Standard Update 2016-01 (ASU 2016-01). This would change the way the company accounts for equity security investments.
Alphabet’s equity security investments consist of both marketable equity securities (these are investments in publically traded companies) as well as non-marketable equity securities (which are investments made in privately held companies).
Previously non-marketable equity securities profits and losses were not recorded on the company’s financial statements. However, with the new rules in place, Alphabet will now include these investments on its income statement under the Other Income and Expense segment.
A simpler way to explain this would be to take the example of the two privately held companies that Alphabet has stakes in – ride hailing startup Uber and augmented reality startup Magic Leap.
Before the new rule, the company only needed to list the price of the investments on its income statement in the quarter that it took place. Besides that, all would need to do was report losses or gains from its investments in Uber and Magic Leap under specific circumstances, such as if Alphabet were selling its stake in these companies, or it deemed these investments worthless.
Now, however, Alphabet will have to put a value to its investments every quarter and report those figures on its income statement. Thus, if the value of its investment in Uber has gone up (which it has), then the company needs to include that increase in Uber’s value as its income.
The idea is that investors should know how well their investments are doing. The criticism on this new rule is that it will complicate the earnings reports and it could also cause confusion. The confusion would be caused by variations in the valuation of an investment. For example, two investors with Uber stakes may value them differently.
The second change taking place is that Alphabet’s stand-alone smart home business, Nest, will be rolled back into Google’s hardware division due to the overlap of the kind of work that is being done. Previously, Nest had been placed under the Other Bets segment – divisions that generate significant revenue – along with its health-care company Verily and Fiber, the company’s internet service provider. However, now that Nest is back with Google, the Other Bets division could see a drop in its revenue.
Nest’s revenue will now be reported under Google’s “Other Revenues” section, along with the company’s cloud computing business, hardware sales as well the Google Play Store.
The last change that the tech giant will make to its reporting structure is how it reports its advertising revenue. Currently Google reports advertising revenue in two categories:
- Google Properties (Google Search, YouTube, Gmail and Others)
- Google Network Member’s Properties (money generated from third party websites that use Google’s AdMob, AdSense and/or DoubleClick products to put ads on their sites).
The company used to measure the percentage change of paid-clicks (i.e., how many times ads were clicked) and cost-per-click (i.e., how much the per-ad cost was). Now, it will measure the percentage change of impressions (i.e., how frequently ads are viewed) and cost-per-impression (i.e., how much it may charge for each view).
This change is a reflection of how advertisers are actually buying ads.