What they could do is automatically refund the credits to the original account as soon as they expire, but that would mean it’s not the deposit but every API request that would be counted as revenue, which creates a whole lot of other complications. Let alone the fact that refunding after a year is problematic as the original payment methods may have expired, changed, and that you’re still the holder of someone else’s money until the credits are used.
Bottom line: this is industry practice, but given how much flack Anthropic has been getting about the lack of transparency lately, this just adds more fuel to the fire and could be defused by some additional explanation from Anthropic’s side.
We ended up revising the contract so that the credits expired after three years. That opened up its own suboptimal outcomes. It was a lesson that was very much learned by us.
On the topic itself - agreed that Anthropic should take a step back and review its policy around comms and good will in general. They’re supposed to be the “good guys” in the AI game - being up front about this stuff is table stakes for them at this point.
This seems unlikely - after all, a US federal law (the Credit CARD Act of 2009) requires closed-loop (store/brand-specific) gift cards to be valid for at least 5 years after activation and some states like Florida and California don't allow them to expire at all, so for simplicity national companies don't usually let them expire at all regardless of state. But neither a 5-year expiration nor indefinite validity turns the seller into a bank or an unlicensed securities seller or otherwise puts them in jeopardy.
Naturally, service credits and gift cards are probably treated differently by the CARD Act, but service credits are still not a source of legal jeopardy in the sense you were describing of being an unauthorized participant in the regulated financial world, any more than gift cards are.
I can completely believe, however, that an approach similar to how gift cards must be handled is financially worse on the company's accounting statements than quickly expiring credits. That worse financial accounting consequence would be a completely sufficient explanation for why the company switched approaches.
This is almost easier if you have a gift card processor who holds the funds for you, but most I’ve worked with either just facilitate transferring money (as in franchises ) or simply processing the initial payment.
This means you then have to track your outstanding. Depending on the state, if you cease operations you may need to escheat the value of the liability account or pay the purchasers of the gift cards if you know who they are. (Newer POS systems make this possible at times ).
Gift cards on a financial statement are nearly always a negative or neutral, as while the money is in a liability account, I’ve seen companies in trouble not actually have the funds to cover the liability.
That's a weird edge case. As long as the company is operating, it isn't even possible for it to be unable to cover the liability of outstanding gift cards no matter how many there are. It has to honor the cards, but it has total freedom to set its own prices!
Given that the company is free to pay off the cards in kind while it's operating, it's not obvious why it should have to pay them off in cash as it ceases operating.
This is wrong. You don’t need to do any of that. They paid for a service and it becomes a liability, but there’s no duty to segregate those funds. You do not turn into a money transfer agent just because you sell pre-paid credits to your service.
Could it have been that they could use that "reserved" money to pay people's salaries, if the client stopped paying? Then in a way it would have covered? although badly phrased maybe
(just kidding; we'd divert it to subsidize billionaires) https://local12.com/news/local/ohio-allocates-billions-from-...
would love if there was similar law for credit expiry.
Correct.
> If the credits last indefinitely, any unused credits cannot be counted as revenue.
Maybe incorrect? Unless they are cooking the books, the unused credits should reflect as a liability on the books.
When someone pays you for a thing, until they take delivery of it (or use it up if it is a service), you owe them the value of that thing.
I wasn't addressing what the contract states and what the effect is; I was addressing the accounting rule for service sold but not yet delivered.
As long as the credits are usable (i.e. not expired), those credits are a liability on the books and financial statements must reflect that. This is why they need to expire the credits after a certain time.
It may or may not be correct, but it is not obvious to me that the revenue should be recognised when the credits are used or expire rather than when they are sold.
its probably defined somewhere in the rules (I assume US GAAP in this case?)
Right, I understand that.
> but it is not obvious to me that the revenue should be recognised when the credits are used or expire rather than when they are sold.
The realisation (or recognition, if you want) of the revenue is irrelevant. Once you have already accepted payment for a service, that service is a liability until you deliver it.
So, unless they are cooking their books to say that they are not obligated to provide the service after accepting payment, I don't really see how they can report it on their statements as anything other than a liability.
Or is this more just a "this is a convenient free win as a consequence of how we decide to manage our books."
Because the corresponding service hasn't been rendered yet. Conceptually you want the revenue and the costs to generate it recognised at roughly same time else your P/L number is volatile/meaningless
Accounting is an exercise in standardization and communication. Like a network protocol you want different parts speaking the same language even if it requires some constraints and abstractions
The info you describe is something you’d have FP&A/MI team do. There you can do whatever the team thinks is best to capture things in a unique manner
Mixing the two is generally a recipe for disaster (and IRS audits)
Most companies choose accrual-based accounting. It's much more complicated, and one of the things about it is that you don't don't get to count money collected as revenue until the customer actually "uses" it to buy something from you. That's just the way that goes. Remember - the company chose this method of accounting. If you form a company and don't make the choice, the IRS will assume you are using cash-based accounting.
But here's something interesting - Warren Buffett explaining how liabilities are insanely profitable for Berkshire Hathaway (except that he calls it "float" instead of "liabilities") [1]. Liabilities are just a number on a chart, neither good nor bad. How you handle them, how you communicate about them, etc. That's what matters.
I don't know if Anthropic needs to file statements with the SEC, but they might be trying to get their books aligned for it.
You've gotten the revenue but you haven't paid the cost for that revenue yet. Those are essentially un-cashed checks that the accountants have to keep on the books indefinitely otherwise. Imagine you're chugging along and out of the blue someone shows up with $100M of credits they bought 10 years ago, expecting you to do something for them. Now you're using electricity and displacing new revenue for money that may be long gone.
Then I specifically asked if Anthropic is allowed to expire its prepaid credit for California users. Claude consulted Anthropics credit terms, said the expire in one year, but then said that it's an interesting legal question, and that I might have grounds to complain to the CA Dept of Consumer Affairs!
On the other hand, certainly does cost companies to provide compute.
from https://www.bitsaboutmoney.com/archive/accounting-for-saas-a... :
Accounting for potions: This is fairly easy. If you sell someone a potion, revenue is recognized when they drink the potion. Or use their speed boost. Or skip the progress gate to get to the next dungeon. The fiction doesn’t matter. Reality matters, and the economic reality of the situation is that performance has happened after the temporary thing you’ve promised is delivered. (Technically speaking you do have to recognize the revenue over time if your potions last long enough to be close to monthly SaaS contracts, but practically speaking most are over with in a day and most accounting systems lose precision below that.)
Accounting for swords: If you trade gems for swords then you can ratably recognize the purchase price of the gems when you satisfy your obligation by giving the player a new sword.
Hah, just kidding. That would be way too easy.
You actually need to recognize the prorated cost of the gems exchanged for the sword over the economically useful life of the imaginary sword. “Economically useful life” is a concept with a lot of prior art on it in accounting. You are obligated to, and accountants can point to substantial work on, estimating the economically useful life of factories, cruise ships, CNC machines, bunk beds, Bitcoin miners, dairy cattle, and almost everything else that depreciates.
But there is not a huge amount of prior art on imaginary swords. So you get to pick one of two methods..
The first, by far less commonly used, is to put your head together with very expensive accounting professionals and rigorously answer the question “What events in reality, in the universe we actually live in, would cause the owner of this imaginary sword to believe it had no or de minimis future value to them?” And perhaps that conversation would involve questions like power creep, game balance changes, declining player preference for swords now that you’re offering a sale on imaginary nuclear weapons, etc.
Nobody has time for that conversation or the truly gargantuan amount of implementation engineering required to enforce the decision it comes up with, so they largely use door #2: the economically useful life of a virtual good is by nature upper bounded by the economically useful life of a player’s relationship with our game, so use that instead.
You are required to use your existing data to make a reasonable estimate of how long either the particular player or, failing that, the hypothetical spherical frictionless average player will continue to play the game after the purchase. Then you recognize the price of the sword ratably over that time period.
This causes many virtual goods companies to have bookings (player purchases) diverge sharply from revenue. That depresses the value of their companies, in the real world, and those companies then spend substantial amounts of professional labor taking their frustration out on imaginary swords.
How would those work?
suppose iTunes gets $1 from every $5 spent there. if Apple sold a $50 gift card, it can pocket $10 and not worry about it. Anthropic, OTOH, sells their API at loss, so unused credits mean losses that await to be materialized. it is unprofitable for them to let you keep the compute bucks forever.
Sources? It is widely believed that their fixed-price plans lose money, but last I heard API (price per token) had positive margins?
Growth hides all sins, as long as the investors keep ponying up.
> That’s not really a justification, it’s just describing their chosen accounting convenience. Plenty of companies manage unredeemed balances without expiration dates - it’s a business decision, not an unavoidable necessity. Calling it “ordinary” doesn’t make it fair to customers.
Notice that in some places (with good enough customer protection rules) pre-paid credits can't expire, as expiration itself is a clear abuse of market power: they are forcing out revenue from services not given, even if it is "made clear at buy-time". Especially at such short time horizons like 1-year.
And yet they are supposed to be the good guys.
Of course it is just an excuse to "fuck the customer" and grab the money, but it is not something you should question, because in our society you don't question how companies make money.
And it doesn't matter if you are the offended part, people will just protect the state of affairs,even at their own expense.
Just look how people always find a justification for this crap and look how you are being downvoted for pointing another one.
It's not like the game had fixed rules and everybody is playing by the same rules.
The rules are made by the players, while they are playing the game.
The problem is that are players following rules the benefit all players and are other players doing rules that benefit only their own at expense of the others
This is of course solvable: book the credit as revenue. Transform the dollar credit to points credits that the user can use indefinitely.
Also huge problems (Germany) with yearly payments and how to account for them to minimize liabilities.