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Amazon’s Q1 Loss Would Have Been Higher by $763 Million Without Accounting Change
The retail & cloud giant’s new accounting treatment will add approximately $4 billion to 2022 operating income.
May 1, 2022
The ten-percent decline in Amazon (AMZN) shares following the company’s slowest quarterly rate of growth since the dot-com bust in 2001 might have been worse if not for a well-timed accounting change. On the first day of the quarter, Amazon extended the useful life estimates of its servers from four to five years and for its networking equipment from five to six years. The company says the longer useful lives are due to continuous improvements in hardware, software, and data center designs.

Importantly, the change stretched out Amazon’s depreciation schedule, boosting operating and net income. Based on the server and networking equipment the company started the quarter with and the new equipment purchased during the quarter, the new useful life estimates reduced depreciation and amortization expense by $973 million, adding $769 million yo net income, or $1.51 per basic share and $1.51 per diluted share.

The move could add nearly $4 billion to Amazon’s 2022 operating income.

It’s not the first time Amazon has extended its useful life estimates. In 2020, the company extended the useful life of its servers from three to four years. The change added approximately $2.3 billion to 2020 operating income.

We tracked similar changes that added billions to operating income in 2021, including Google and Microsoft which added $2.1 billion and $2.7 billion respectively to operating income. We also suggested in a year-end report that if inflation persists, smaller companies would follow big tech’s lead to preserve margins. Subsequently, ServiceNow implemented new useful life estimates in the first quarter. Not only did doing so lift operating income $21 million, it also preserved 120 bps of margin.
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