Microsoft Excludes $12.3 Billion Liability From Its Balance Sheet

Technology firm is understating its future lease obligations by 39.8%.

January 26, 2022

Microsoft (MSFT) is understating its future lease liabilities— and total liabilities— offering investors an incomplete picture of its future financial obligations. In its latest 10-Q, the company says it has more than $30.9 billion in future undiscounted operating and finance lease liabilities. This understates Microsoft’s true liability since the company doesn’t count leases not yet commenced. The additional liabilities— which are buried in the footnotes— significantly understate the company’s future liabilities:

“As of December 31, 2021, we have additional operating and finance leases, primarily for datacenters, that have not yet commenced of $5.8 billion and $6.5 billion, respectively.”

On an undiscounted basis, Microsoft’s $12.3 billion in not yet commenced leases are 39.8% of the company’s total future lease obligations and 6.8% of the company’s total liabilities.

Under an accounting loophole, companies can omit from the balance sheet leases that haven’t started as well as corporate offices under construction or build-to-suit arrangements. It’s seemingly inconsistent with FASB’s guidance on the topic which states if a lease is legally binding— as Microsoft acknowledges— Topic 842 (ASU 2016-02) makes clear it must be accounted for on the balance sheet:

“A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability)...”

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