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Facebook Inflates Operating Income by $390 Million With Accounting Change
Social media platform slows depreciation of certain technology assets to lift declining operating margins.
October 26, 2021
Facebook’s (FB) operating margins have declined three years in a row. In the most recent quarter, operating margin fell sequentially from 43% to 36%. In its latest 10-Q, Facebook revealed a change in accounting policy— the company is extending its useful life estimate for data center servers— that will slow asset depreciation and lift margins:

“...we extended the estimated average useful lives of selected cohorts of servers and other network equipment included in our network equipment category from three years to four years…”

The change reduced depreciation expense by $390 million which added $316 million in net income, or $0.11 per diluted share for the nine months ended September 30, 2021. We estimate the change added 47 basis points to Facebook's operating margin through the first nine months of 2021.

Facebook isn’t alone in extending the useful lives of its assets to lift margins. As we’ve noted recently, companies like Microsoft (MSFT), Google (GOGL), and UPS (UPS) are using similar accounting changes to increase earnings.

Facebook’s investment in its new business segment, Facebook Reality Labs, is expected to reduce the company’s operating profit by approximately $10 billion in 2021.
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