Alphabet Q1 earnings preview changes


The second significant change to Alphabet’s balance sheet comes because of a new accounting standard for equity security investments.

Under the new rule, called Accounting Standards Update 2016-01, Alphabet has to report the unrealized gains and losses from its investments on its income statement.

For example, Alphabet bought a stake in both ride-hailing start-up Uber and augmented reality start-up Magic Leap. Previously, it only had to list the price of that investment on its income statement during the quarter it happened. Beyond that, it would only have had to report gains or losses from those investments in certain circumstances, such as selling its stake or concluding that the investment was worthless.

Now, Alphabet will have to value its stake in its investments every quarter and report those numbers on its income statement. So if Uber’s valuation has gone up since Google invested (it has), Alphabet will now include that increase in value of its investment as income.

The goal of the rule is to provide investors with more clarity around how well a company’s investments are doing, although critics say it could unnecessarily complicate earnings reports and be inconsistent between companies (two Uber investors might value it differently).

Alphabet, for its part, warns of “increased volatility in OI&E” (other income and expense) on the income statement and will likely remind investors on its earnings call that the income statement changes won’t actually reflect any changes to its core business.

“Market transactions for marketable equity securities occur daily in the stock market; transactions for non-marketable equity securities occur sporadically and are generally not within our control,” Alphabet says.

Here’s a chart Alphabet created to summarize how the new rule will change its accounting:

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