Wednesday, June 6, 2018

So there we were, skimming Google’s earnings report for first quarter 2018, and as usual Google was killing it. Revenues up, net income up, EPS up. Yawn.

Then we came to the Other Income line-item — which stood at $3.54 billion, fourteen times larger than the $251 million in Other Income that Google reported in first-quarter 2017.

That woke us up.

What gives? Other Comprehensive Income is where Google would report the value of its holdings in other businesses, as well as the value in hedging instruments or financial derivatives. So we clicked on the $3.54 billion using our always-popular Trace feature to see where that number came from and what Google had to say about it.

Sure enough, we found this:

Prior to January 1, 2018, we accounted for our non-marketable equity securities at cost less impairment… On January 1, 2018, we adopted ASU 2016-01 which changed the way we account for non-marketable securities. We now adjust the carrying value of our non-marketable equity securities to fair value upon observable transactions for identical or similar investments of the same issuer or impairment (referred to as the measurement alternative)… Because we adopted ASU 2016-01 prospectively, we will recognize unrealized gains that occurred in prior periods in the first period after January 1, 2018 when there is an observable transaction for our securities.

Simple translation: Google changed the way it calculates the value of equity investments it owns, and made one big markup in the first quarter for all the investments it had been carrying on its books under the prior valuation method.

Specifically, Google had an upward adjustment of $2.511 billion in the first quarter of 2018, plus a downward adjustment of $23 million — for a net upward gain of $2.488 billion.

In other words, more than 70 percent of Google’s Other Income in the first quarter came from an accounting change that drove the company to value its investments at fair market value. While Google doesn’t much talk about this line of business, the reality is that Google Ventures invests in a lot of tech startups, and the market just loves investments in hot tech startups these days.

For example, Google was an early investor in Uber. Google Ventures dropped $258 million into Uber in 2013, when the ride-hailing company was valued at only $3.76 billion. GV subsequently picked up another $245 million piece of Uber as part of a litigation settlement.

Well, nowadays Uber is valued at around $48 billion, so that early stake by GV is worth gobs more money. That’s what we’re seeing in Google’s gigantic Other Income number.

Google is also lead investor in a $250 million round of funding for Lime, a scooter rental startup. (It should sound sexier than that. Let’s call it “an online platform for reserving and using non-motorized two-wheel transport for the unbicycled.”) You can see a list of Google Venture’s other investments on its website.

Casting a Larger Net

All this raises a larger question: what other companies are going through similar experiences with Other Income, and how can you find them?

Certainly you could use our Multi-Company Search page to search for Other Comprehensive Income items. We have a few sub-categories, such as OCI from hedges, foreign currency, pension holdings, and the like.

Or if you want to search for the new accounting rule, ASU 2016-01, to see what firms had to say about that change and its financial effects— in that case, you can always use our Interactive Disclosure database and search for the actual text “ASU 2016-01.” We did a quick peek there and found dozens of companies mentioning the new standard in first quarter 2018.

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