Microsoft needs to open up more about its OpenAI dealings

In its latest annual report, for the fiscal year ended June 30, Microsoft said it included the losses from its OpenAI stake in a $4.7 billion expense line called “other, net."

The losses from OpenAI might have been larger than that, or smaller. Microsoft didn’t say. The expense line combined a hodgepodge of items, positive and negative.

Microsoft said its “other, net" expense a year earlier was $1.3 billion. Microsoft said, without elaborating, that the category “primarily reflects net recognized losses on equity method investments, including OpenAI."

Microsoft also hasn’t disclosed the carrying amount for its OpenAI stake, the investment’s structure or its fair market value. It said it had “reciprocal revenue-sharing arrangements" with OpenAI, but didn’t explain how those transactions or others with the ChatGPT developer affected its financial statements. Nor has it said what percentage of OpenAI it owns.

How Microsoft has managed to avoid disclosing such basic details is baffling. The company 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. Microsoft, however, doesn’t identify OpenAI in its financial reports as a related party, and doesn’t say anything about its transactions with OpenAI in its related-party disclosures.

The equity-method label signifies that Microsoft has the ability to exercise significant influence over OpenAI. The equity method of accounting typically is used when a company has an ownership stake of between 20% and 50%.

Microsoft’s lack of related-party disclosures might have been defensible when OpenAI was relatively small and its value to Microsoft was immaterial. But that is no longer the case.

OpenAI recently hit a $500 billion private-market valuation after completing a secondary share sale. That could perhaps put the fair value of Microsoft’s stake past $100 billion. That is a big number even for Microsoft, where shareholder equity is $343 billion. Microsoft’s fiscal 2025 earnings were $102 billion.

Adding to the complexity, OpenAI is structured as a nonprofit organization with a for-profit subsidiary. OpenAI has said it plans to overhaul its ownership structure to include a new for-profit company, but many details remain unclear. In a joint statement last month, OpenAI and Microsoft said they were working to finalize terms “for the next phase of our partnership."

OpenAI is strategically crucial to Microsoft, and some meaningful portion of Microsoft’s $3.9 trillion stock-market value is now tied to its OpenAI relationship. 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."

Microsoft is scheduled to report fiscal first-quarter earnings on Oct. 29. A Microsoft spokeswoman declined to comment. So did a spokesman for OpenAI, which isn’t publicly traded and doesn’t disclose financial reports.

Microsoft’s opacity regarding OpenAI has begun to draw criticism as OpenAI has grown in importance. In an Oct. 8 report, Morgan Stanley accounting analysts led by Todd Castagno flagged Microsoft for its lack of related-party disclosures regarding OpenAI. “When a relationship exists where a company exercises significant influence over its customer, there is a risk that transactions may not be conducted at arm’s length," they wrote. “Related party disclosures allow investors to evaluate that risk."

Disclosures about the stake’s size are also unsatisfying. In its annual report, Microsoft said: “We have an investment in OpenAI" and “have made total funding commitments of $13 billion." It didn’t say how much it had invested—even though it publicly announced an initial $1 billion investment in 2019—or how much of the commitments it had funded.

The Wall Street Journal reported in October 2024 that Microsoft had invested $13.75 billion in OpenAI since 2019.

Microsoft doesn’t use the fair value of OpenAI’s shares to value its stake. Instead, under the equity method, it reduces the carrying amount based on its proportionate share of OpenAI’s losses. Its losses would be capped once the carrying amount fell to zero, while any new investments in OpenAI would increase the carrying amount.

Whatever the carrying amount was, it didn’t exceed $6 billion as of June 30. That is what Microsoft reported for its total equity-method investments. That was the same as a year earlier.

One concern for investors is that OpenAI’s losses could widen as it invests heavily in computing infrastructure, but revenue growth lags behind. That in turn would likely increase the pressure on Microsoft to provide more details about the relationship.

Microsoft has a chance with its next quarterly report to open up about OpenAI and start reporting their dealings in its related-party disclosures. Even if it could still rationalize that its transactions with OpenAI are quantitatively insignificant, there is no denying that the overall relationship with OpenAI is quite material. Investors want and need to know more.

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