Meta's accounting move to boost profit by billions

Meta Platforms Inc. made a small change last month that's likely to increase the company's profit by billions of dollars this year.

It wasn't the release of a new product or cost cuts. It was a tweak to an accounting formula used to measure the depreciation of its expensive artificial intelligence infrastructure. 

The change, disclosed in the social-media giant's earnings materials on Jan. 29, extends the so-called useful life period of certain servers and networking assets to five and a half years, from the four to five years it previously used. While that may sound trivial, its impact on earnings will be sizable given the heavy spending on these relatively short-lived assets.

By Meta's reckoning, the shift is expected to reduce the company's depreciation expense by $2.9 billion in 2025, which would, on its own, amount to almost 4% of the estimated pre-tax profits for the year. With Meta planning to spend as much as 75% more this year on capital expenditures to build out its AI capabilities, the effect will be even bigger in 2026.

The changing expectations highlight how companies are grappling with the temporary shelf life of the tens of billions of dollars of new semiconductors and computer servers they are purchasing to power their AI services. Meta is now hoping that the equipment will last longer than they had expected.  

"While there may be legitimate reasons to extend the server life based on their actual experience, it also decreases the depreciation in the short run and improves the bottom line," said Ravi Gomatam, partner at tax and accounting firm Zion Research Group.

Meta's chief financial officer, Susan Li, said on the most recent earnings call that the company is making efficiency gains "by extending the useful lives of our servers and associated networking equipment." A Meta representative declined to comment.

Meta isn't alone in changing its timetable on depreciation — and with it, the financial results. In 2022, Microsoft Corp. extended the useful lives of server and networking equipment to six years from four. In 2023, Oracle Corp. extended its estimate to five years, from four, according to a filing.

Others, however, have taken the opposite approach. Amazon.com Inc. said this month that the lifespan of the equipment is growing shorter — from six years to five. The change, which took effect on Jan. 1, will cut operating income by about $700 million, the company said in a filing. 

Unlike real estate, where amortization is spread out over decades, computing and networking gear lose their value much more quickly. The reason is simple: buildings tend to hold their value over long periods; the pace of technology advancement, on the other hand, is so fast that even the most recent models become obsolete in a matter of years, much like an old iPhone.

"It's the number one number that they can adjust back out because it's not a cash expense," said Francine McKenna, an accounting expert and newsletter author. "It's a big deal in capital intensive companies and in companies that are technologically dependent, where it's a competitive advantage."

With companies like Meta, Microsoft, Amazon, and Alphabet Inc. pledging to boost capital expenditures this year by tens of billions of dollars, those depreciation expenses threaten to be an increasingly big drag on profits in coming years.

Those four companies are expected to spend about $300 billion on capital expenditures in 2025, up from $217 billion in 2024, according to data compiled by Bloomberg. 

Bank of America estimates the spending will be a 1.6 percentage point drag on the companies' margins for earnings before interest and taxes in 2026 compared with the fourth quarter of 2024, strategists Ohsung Kwon and Savita Subramanian wrote in a research note on Feb. 10.

None of this seems to be concerning investors, who have been focused on the potential growth from the AI operations. Meta shares have closed higher for a record 17 consecutive days.