Microsoft's OpenAI Partnership: A Transparency Black Hole
Global technology giant Microsoft finds itself at the center of a growing controversy regarding its financial disclosures about artificial intelligence powerhouse OpenAI. Despite recent attempts to provide more information, the company's latest financial reports reveal significant gaps in transparency that concern investors and market regulators.
The core issue revolves around Microsoft's classification of OpenAI as an equity-method investment, which automatically makes the AI developer a related party under established accounting rules. This classification implies that Microsoft possesses substantial influence over OpenAI's operations and strategic direction.
What Microsoft Isn't Telling Investors
In its most recent quarterly report covering the period ending September 30, Microsoft once again failed to include mandatory related-party disclosures concerning its dealings with OpenAI. This omission becomes particularly concerning given the material significance of their relationship and the intense investor interest surrounding artificial intelligence investments.
According to generally accepted accounting principles (GAAP), companies must provide sufficient information about related-party transactions to enable external readers to understand their impact on financial statements. Microsoft currently falls short of this requirement, despite acknowledging "reciprocal revenue-sharing arrangements" with OpenAI.
The company has not disclosed how these arrangements affect critical financial metrics including revenue, cost of goods sold, or operating expenses. This lack of transparency makes it challenging for investors to determine whether transactions between the two companies occur at arm's length terms.
New Disclosures Raise More Questions
Microsoft did introduce some new information in its September quarter report, but these revelations only highlighted the relationship's importance while underscoring the need for more comprehensive disclosure.
The company revealed it now owns 27% of OpenAI following a corporate restructuring completed in October. More startling was the disclosure that Microsoft booked $4.1 billion in losses from its OpenAI investment last quarter alone, representing a substantial 12% of Microsoft's total pretax profit.
Additionally, Microsoft announced that OpenAI committed to purchasing $250 billion of Microsoft's cloud-computing services, though crucial details about the timeframe and funding mechanism remain undisclosed. In an October 28 blog post preceding its earnings release, Microsoft estimated its OpenAI investment's market value at $135 billion.
The Accounting Discrepancy Problem
A significant discrepancy exists between Microsoft's stated market valuation of its OpenAI stake and its accounting treatment. While the company values the investment at $135 billion, the carrying value on its balance sheet tells a different story.
Microsoft reported the carrying value for all its equity-method investments at $1.8 billion as of September 30, down dramatically from $6 billion the previous quarter. This difference occurs because carrying value reflects Microsoft's original investment adjusted for its share of OpenAI's losses, rather than current market valuation.
The situation suggests Microsoft might soon write down its OpenAI stake to zero if the AI company continues reporting losses. Under equity-method accounting rules, Microsoft's recognized losses would cap once the carrying amount reaches zero, though new investments would reset the accounting.
Why Transparency Matters
The case for comprehensive disclosure becomes undeniable when considering OpenAI's strategic importance to Microsoft. The partnership has significantly contributed to Microsoft's market valuation soaring to $3.7 trillion, making transparency not just preferable but essential.
By comparison, Microsoft reported $636 billion in total assets and $363 billion in equity as of September 30, with fiscal 2025 earnings reaching $102 billion. If recorded separately, the $135 billion OpenAI stake would represent Microsoft's second-largest asset, trailing only its $231 billion property and equipment portfolio.
Microsoft spokesman Frank Shaw defended the company's position, stating: "Microsoft's financial statements comply fully with generally accepted accounting principles and are audited by an independent firm." However, he declined to address specific questions or provide additional commentary.
The partial disclosure approach adopted by Microsoft has inadvertently emphasized how much crucial information remains concealed from investors. As the AI revolution accelerates, market participants require complete transparency to make informed decisions about companies leading this technological transformation.
