Google ($GOOG) dropped another monster quarterly report earlier this week, reporting $61.9 billion in revenue for Q2 2021 and $18.5 billion in net income. Net income was particularly impressive, in that it was more than double the $6.96 billion reported one year ago.
The vast majority of that amount came from Google’s services division, which includes online advertising, sales of apps and hardware, and subscription fees for various products. But tucked away in the footnotes, we noticed one additional gem: Google has extended the estimated useful life of its servers and other equipment, which added an extra $561 million to the bottom line in Q2.
Hey, every little bit helps, right?
The full disclosure is listed in Google’s Summary of Significant Accounting Policies, which you can find using Calcbench’s Interactive Disclosure viewer. There, under the headline “Change in Accounting Estimate,” the company says this:
In January 2021, we completed an assessment of the useful lives of our servers and network equipment and adjusted the estimated useful life of our servers from three years to four years and the estimated useful life of certain network equipment from three years to five years … The effect of this change in estimate was a reduction in depreciation expense of $721 million and $1.6 billion and an increase in net income of $561 million and $1.2 billion, or $0.84 and $1.81 per basic and $0.83 and $1.78 per diluted share, for the three and six months ended June 30, 2021, respectively.
Put more simply: Google decided its equipment can last longer than originally expected. That pushed down the company’s depreciation expense, and the savings fell directly into the net income line.
Of course, $561 million is only 3 percent of Google’s total net income for the quarter, which barely qualifies as material. We were more interested in the nature of the accounting change rather than its size — because fiddling with the estimated useful life of assets is something any company can do.
Our columnist Jason Voss, for example, recently wrote about the Property, Plant & Equipment line item and how an analyst might estimate the average life of fixed assets. As Voss noted in his column, “Many firms play games with depreciation & amortization to improve their short-term results, and such games depend on PP&E.”
To be clear, we are not suggesting that Google is playing with estimated asset lifespan here. Other firms, however, have been called out for such abuses. For example, in 2019 the Securities and Exchange Commission hammered Hertz on accounting fraud. One of the company’s schemes was to extend the estimated life of its rental fleet from 20 months (the industry norm) to 30 months, which kept depreciation costs low and therefore goosed net income up.
So Google’s morsel of disclosure is just another reminder that analysts should always be on the lookout for details that might tell more than you’d expect — and as always, Calcbench has the data!