Alphabet announced these changes earlier this month. These changes will result in a decrease in "other betting" revenue, increased volatility in "other income and expenses", and a measure of the success of advertising on third-party websites. new method.
The following is an explanation of these three adjustments:
Nest will no longer be included in the "other bets" category
Alphabet announced in February of this year that it plans to re-integrate its independent smart home division Nest into the Google hardware team because the work of the two teams overlaps.
Alphabet has previously emphasized that, like healthcare company Verily and Internet service provider Fiber, Nest is one of the few businesses in the "other bets" category that can generate substantial revenue. Now that this business is re-integrated into Google, revenue in the "other bets" category may decrease.
On the contrary, Nest's revenue will be included in Google's "other income" category, other businesses under this category also include cloud business, Play Store and hardware sales. Similarly, Nest’s operating profit or loss will also be transferred to Google’s balance sheet.
Alphabet's consolidated financial performance will not be affected by this change, but by studying different types of changes, investors may be able to better understand the scale of Nest's revenue.
Show unrealized investment gains or losses on the income statement
The second major change in Alphabet's balance sheet stems from the implementation of new accounting standards for securities investments.
According to a new regulation called "Accounting Standard Update (2016-01)", Alphabet must report unrealized investment gains or losses on the income statement.
For example, Alphabet acquired shares in ride-hailing startup Uber and augmented reality startup Magic Leap. Before that, it only needed to list the price of the investment on the income statement for the current quarter when the investment transaction occurred. In addition, it only needs to report the gains or losses of those investments under certain circumstances, such as selling shares or drawing the conclusion that the relevant investments are worthless.
Now, Alphabet must evaluate the value of its invested shares every quarter, and then publish these data on its income statement. Therefore, if Uber's valuation rises after Google's investment, Alphabet must now include the added value of its investment in revenue.
The purpose of implementing this new regulation is to provide investors with clearer information so that investors can understand the investment status of a company. However, there are also criticisms that this may unnecessarily complicate financial reporting and cause different companies to make different estimates of the value of the same company.
Alphabet warns that the volatility of "other income and expenses" on the income statement will increase, and may remind investors that changes in its income statement will not truly reflect any changes in its core business.
Alphabet said: "Market transactions in securities are happening on the stock market every day, and transactions in non-marketed stocks and securities happen sporadically and are usually outside of our control."
Finally, Alphabet will also change the monetization standard for all Google web assets from clicks to impressions.
Google divides its advertising revenue into two parts: Google attributes (income from Google search, Gmail, YouTube, and other businesses) and Google network member attributes (income from third-party websites that use AdMob, AdSense, and DoubleClick advertising products).
Previously, it also included the percentage change in paid clicks (the number of times people clicked on their ads) and cost-per-click (how much it would charge the ads). Now it converts the metrics of network attributes into the percentage change of impressions (how often its ads are viewed) and the cost per impression (how much it can charge for these views).
The change in this indicator reflects that most advertisers are already buying ads.
To provide a basis for comparison, Alphabet’s first-quarter earnings will include the percentage change in impressions and costs of network revenue for all quarters of 2017.