Microsoft disclosed its investment in OpenAI for the first time, totaling $13 billion, recorded using the "equity method."

Microsoft and OpenAI's Relationship Enters a New Phase, Disclosing Equity Investment in OpenAI.

On Thursday, October 31, Microsoft stated in its third-quarter earnings report that it would announce investment losses related to its stake in OpenAI in the fourth quarter. Yesterday, Microsoft disclosed for the first time its equity investment in OpenAI, stating in the latest U.S. Securities and Exchange Commission (SEC) filing:

“We have invested in OpenAI Global, LLC (“OpenAI”), with a total investment commitment of $13 billion, accounted for using the equity method.”

Accounting expert Francine McKenna told Business Insider that the latest disclosure indicates that Microsoft's previous investments in OpenAI may have been “soft money,” such as discounts or credits for services, as well as internal expenditures that did not meet a certain threshold, thus Microsoft was not required to disclose detailed information.

Microsoft's large-scale investment in OpenAI is putting pressure on earnings. Microsoft CFO Amy Hood stated in an overnight conference call that the company expects to record approximately $1.5 billion in other expenses in the fourth quarter, primarily due to anticipated investment losses in OpenAI.

Hood added that the loss for Microsoft is accounted for using the equity method. A Microsoft spokesperson explained that this accounting method refers to the company recognizing the net profit or net loss of the investee based on its ownership percentage during a specific period.

However, the spokesperson added that recording the loss “is not due to any change in our partnership or investment situation with OpenAI; our partnership will continue to yield results as we build differentiated intellectual property and drive revenue growth.”

As of September 30, Microsoft had invested $13 billion in OpenAI, and in the new round of financing announced in October, Microsoft invested an additional $750 million, bringing OpenAI's valuation to $157 billion.

Microsoft and OpenAI's Relationship Enters a New Phase

In recent years, the relationship between Microsoft and OpenAI has evolved, previously in July, Microsoft described its relationship with OpenAI as a partnership rather than an equity investment, but in yesterday's SEC filing, Microsoft even began to disclose changes in the value of its OpenAI shares.

In its annual SEC filing at the end of July, Microsoft stated:

“We have a long-term partnership with OpenAI, deploying OpenAI's models in consumer and enterprise products, serving as OpenAI's exclusive cloud service provider, with Azure supporting all of OpenAI's workloads, and we have also increased our investment in developing and deploying dedicated supercomputing systems to accelerate OpenAI's research.”

McKenna also stated that the shift from “partnership” to “equity method investment” disclosure, including recording losses, marks a new phase in the accounting relationship between Microsoft and OpenAI.

"Microsoft may have had equity investments in OpenAI before, but they did not disclose it, possibly because it was just soft funding, with little or no cash involved, so it wasn't significant. With the latest round of financing, they have crossed a threshold."

However, a Microsoft spokesperson stated yesterday that the partnership between Microsoft and OpenAI, as well as Microsoft's investment in OpenAI, has not changed