Microsoft’s dealings with OpenAI still need a lot more sunlight

Here is the rub: Microsoft in its financial reports identifies OpenAI as an equity-method investment. That means OpenAI, by definition, is a related party of Microsoft under the accounting rules, and that Microsoft has the ability to exercise significant influence over the ChatGPT developer. Once again, however, Microsoft in its latest quarterly report didn’t include any related-party disclosures regarding OpenAI.

The lack of information would be defensible if the two companies’ transactions were too insignificant to matter. However, it has become apparent that their dealings are quite material and that investors care tremendously about them.

Under generally accepted accounting principles, companies reporting related-party transactions must disclose enough information about them so that an outside reader can gain “an understanding of the effects of the transactions on the financial statements." That is something Microsoft doesn’t do.

For instance, Microsoft has said it has “reciprocal revenue-sharing arrangements" with OpenAI. However, Microsoft hasn’t disclosed the effects of those arrangements on its revenue, cost of goods sold or operating expenses.

When related-party disclosures are lacking, one problem for investors is that it becomes difficult to evaluate whether the transactions are being conducted on an arm’s length basis.

A Microsoft spokesman, Frank Shaw, said: “Microsoft’s financial statements comply fully with generally accepted accounting principles and are audited by an independent firm." He declined to answer questions or comment further.

When Microsoft last reported financial results, for the Sept. 30 quarter, it did include some new details for the first time about its relationship with OpenAI. But those disclosures didn’t go far enough. If anything, they highlighted how crucial the relationship is to Microsoft and its investors, and why more complete information is necessary.

Microsoft said it owned 27% of OpenAI after an overhaul of the AI company’s corporate structure that was completed in October. Microsoft said it booked $4.1 billion of losses from OpenAI last quarter, equivalent to 12% of Microsoft’s pretax profit, which marked the first time Microsoft had made such a disclosure. In addition, it said OpenAI had agreed to buy $250 billion of Microsoft’s cloud-computing services, although it didn’t provide a time frame or say how OpenAI would fund the purchases.

It also said, in an Oct. 28 blog post before its earnings release, that its OpenAI investment was worth $135 billion. Microsoft in its quarterly report didn’t disclose the carrying amount for its OpenAI stake, but it is a much smaller number. In a footnote, Microsoft said the carrying value for all its equity-method investments was $1.8 billion as of Sept. 30, down from $6 billion a quarter earlier. The discrepancy exists because the carrying value reflects Microsoft’s original investments in OpenAI, adjusted for its proportionate share of OpenAI’s losses, rather than OpenAI’s current market value.

It now seems likely that Microsoft soon could write down its OpenAI stake’s value to zero, assuming OpenAI keeps bleeding money. In that case, Microsoft’s disclosures about OpenAI could become even more scant. Under the equity method of accounting, Microsoft’s losses from OpenAI would be capped once the carrying amount fell to zero, while any new investments in OpenAI would increase the carrying amount.

The case for why Microsoft’s OpenAI dealings are material—and why related-party disclosures are necessary—is straightforward. OpenAI is strategically important to Microsoft and has helped fuel the rise of Microsoft’s own market value to $3.7 trillion. And strictly by the numbers, an investment worth $135 billion is a big deal even to Microsoft.

Microsoft had $636 billion of assets and $363 billion of equity as of Sept. 30, and its fiscal 2025 earnings were $102 billion. The $135 billion figure, if the OpenAI stake was a stand-alone item on Microsoft’s balance sheet, would be Microsoft’s second-largest asset behind its $231 billion of property and equipment.

By lifting the veil only slightly on its OpenAI numbers, Microsoft underscored how much it still keeps hidden. Microsoft hasn’t come close to explaining the full effects of its OpenAI dealings on its own financial statements. This isn’t supposed to be optional.

Write to Jonathan Weil at jonathan.weil@wsj.com