Anthropic Accounting Issues (#403)

Since Anthropic is about to go public, I thought it would be a good time to dig through their S-1 filing and find out what sorts of accounting issues they’re dealing with. I assume you know this already, but Anthropic creates the Claude family of AI models, and it’s the first major AI company to go public.

Revenue Recognition

Let’s start with revenue recognition. This happens in a couple of ways. If an arrangement with a customer is based on consumption, then Anthropic recognizes revenues as  customers use its AI services, which is measured by the number of tokens consumed. A token is a unit of information processed by an AI model. Subscription arrangements are treated differently, where Anthropic recognizes subscription revenue over the subscription period, which is usually on a monthly basis.

Another revenue issue is whether the company should report revenue on a gross or net basis. Anthropic distributes services through a group of cloud service providers. The main providers are Amazon Web Services, Google, and Microsoft. Under these arrangements, Anthropic acts as the principal, because it maintains the customer relationship, and is responsible for providing services, and establishes prices. Therefore, it reports revenue on a gross basis, rather than deducting the cloud provider’s share first. This tends to inflate its reported revenue.

Compute Costs

The next issue is how it deals with its compute cost, which is massive. The company has to spend billions on cloud computing charges, but how it accounts for these expenditures depends on the intent. If the company is incurring compute cost in order to support its current customer services, then the cost is recognized as expense right away. On the other hand, if it’s incurring compute costs in order to train its latest AI models, then you would think that they’d capitalize the cost and charge it to expense over the life of the model. However, because they think there’s too much uncertainty associated with each model, they charge this cost straight to expense. Nice and conservative. In fact, it doesn’t really record all that many fixed assets.

Purchasing Commitments

Another accounting issue relates to its purchasing commitments, which are approaching one trillion dollars. Given how massive this amount is, a critical accounting issue is when to either recognize the liability or at least disclose it. If you’re only looking at the balance sheet, you wouldn’t necessarily see the company's full exposure to future purchasing commitments, which is parked in the disclosures section.

Financing Costs

But the really wild accounting item is the losses it’s recorded on its financing arrangements. Anthropic has raised a lot of money through convertible promissory notes, which means that the holders can flip these notes over into Anthropic equity, which they certainly will if the value of the company increases. To say the least, the value of the company has increased. What this means is that Anthropic has recorded a massive loss of $94 billion in 2026 alone, because the value of the shares that it will have to hand over to investors has increased by that amount.

This does not mean that the company will have to hand over $94 billion in cash to its convertible debt holders, only that it will eventually have to hand over shares with that valuation. This is essentially one of those oddball accounting issues that make a company’s reported results look far worse than they really are. So, as the company’s value continues to increase, the obligation associated with its convertible debt also increases.

A further issue is that the loss is based on the estimated value of the company; because Anthropic isn’t yet public and so doesn’t have any publicly-traded shares, the value is a total guess – which means that the change in the fair value of the convertible notes is also a complete guess. Therefore, once the company actually goes public, the amount of that reported loss could go up or down by a lot.

Stock-Based Compensation

Next up, stock-based compensation. Anthropic has handed out a boatload of stock-based compensation to its employees, since it employs AI researchers, and their compensation is astronomical. So. Share-based compensation is measured using the grant-date fair value of the awards, and is recognized over whatever the related service period is, or when an IPO occurs. So far, they’ve recognized $3 billion of stock-based compensation expense, and they have another $32 billion of unrecognized stock-based compensation. When the IPO happens, the company has to recognize a massive compensation expense right away. And, once again, it has to recognize this expense even though there’s no actual cash payout.

Bartz Litigation

But then we’re not done yet, because then there’s the Bartz litigation. This is Bartz vs. Anthropic, which is a copyright class action lawsuit. The case has already been settled for $1.5 billion, with the payout scheduled to be on or before November 15 of this year. The settlement amount was charged to expense last year, since that was when the settlement was probable and they knew the amount of the payout.

Summary

So in short, we have a couple of oddball accounting lessons coming from the Anthropic situation. First, you can record a massive expense even when there’s no obligation – at all – to ever pay out any cash. This refers to the convertible debt situation and the stock-based compensation awards. And there’s the exact reverse, where the company has simply epic purchase obligations that exceed the cash flows of some of countries, and yet the liability doesn’t appear on its balance sheet, just in its footnote disclosures. In short, Anthropic’s income statement and balance sheet are massively misleading, even though they exactly comply with the accounting standards. This is a classic case where you have to read through the entire financial statement package in order to fully understand what’s going on.

And on top of that, this really brings up the issue of whether our current accounting standards are helping or hurting. They’re generally theoretically correct, in that they generally do show the economic activity of a business. However, they add a lot of extraneous crap to Anthropic’s financial statements, to the point where cash basis financials really would present a better view of how the company is performing.