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Comment by drob518 | Hacker News Reader

I think the point is that it’s not showing up on the standard financial filings. If you were to pull the annual reports for these companies, you wouldn’t see it. That doesn’t mean it’s impossible to find it. Obviously, it is otherwise the article wouldn’t have been written. But you’re going to have to go the extra mile. To be clear, none of this is illegal. It’s just covered in the advanced CFO accounting class.

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It's not hidden at all. Financial blogs very accessible to laymen like Matt Levine's Money Stuff have talked about this structure months ago. If you are an investor and surprised by this news you weren't sufficiently prepared and shouldn't have been investing in the first place.

What's the purpose of keeping it off the balance sheet if not to hide it?

A legitimate reason to do this is so that you can sell it all off or restructure it later without it being intertwined with your main books. So, for instance, it you’re an AI company, your main business is developing models and selling inference, but you need data centers to do that. You could buy those data centers yourself, or you could create a data center subsidiary that would take on debt and build your data centers and then rent them back to you. In the future, if you decide you don’t need that capability any longer, you just sell the subsidiary and you don’t have to tease apart the P&L and personnel to do it. It’s clean and separate because it was structured that way up front.

Now, that’s not to say that there aren’t other benefits of having a separate balance sheet related to moving numbers around. But it doesn’t have to be nefarious.

The structures theyre using reduce risk. The 2 big moves here are 1. agreeing to lease a datacenter from developer instead of building it yourself and 2. using subsidiaries to finance and own the datacenters. Both these moves exist so that the company isnt left holding the bag if something goes wrong with the construction. They dont need to worry about zoning and construction because their partners are doing that. This also means the companies dont need to take out debt themselves, since these agreements dont count.

If you open the annual report and look at the numbers they’re citing, they’re adding lease payments from uncommenced leases and future purchase commitments. Accounting rules prohibit either of these as being listed as debt. It’s also not possible to agree to a future lease without reporting it like this.

Generally speaking after commencement the former will become both liabilities (for a smaller amount than the number they listed due to discounting) and an asset (representing the asset of the right to occupy the lease)

The latter will generally become some sort of asset

I have no idea what the people going on about subsidiaries could even possibly be referring to as it relates to this article, this is just lease accounting

I'm with you inasmuch as the frothiness is, while massaged a bit, sufficiently perceptible for emptors to caveat.

My concern is that the subprime mortgages were not perceptible to even savvy fund managers, and the same thing could happen again; and also, even if that insidious risk-poisoning of institutional funds does not occur, them a collapsing bubble still fucks us all into recession.

Take-or-pay contracts appear as "contractual commitments" in 10-K. They are not hidden. That's the way they are reported in all industries where take-or-pay contracts exist. There's nothing nefarious about it.

Yes, the contractual obligation shows up, but not the debt the subsidiaries took on. You have to follow the entity structure and look at their books for that piece. And it’ll show up as a different accounting category, “services rendered,” for instance, not as debt repayments.

I can't assess if it's illegal, and it sounds like typical structuring for high-capital assets. But it also somewhat subvert the spirit of requiring financial filings for public companies in the first place. Investment markets are built on the principle that every investor should have the same public understanding on material matters to the business - and large expenditures or lease committments should really make the disclosure. If nothing else there is a self-dealing/self-enrichment of principals risk and watering down of investment if something underhanded is going on with these deals - as has happened in the past (e.g. WeWork, reportedly some cases in Amzon too)

For a lay person (without background in finances) what AI companies are doing looks very similar in spirit to what Enron did and Enron actions were deemed not legal.

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