A "gray area" within U.S. Generally Accepted Accounting Principles (GAAP) is enabling major technology companies to effectively make tens of billions of dollars in potential debt vanish from their balance sheets, even as they engage in a massive construction boom for AI data centers. International ratings agency Moody's has issued a warning, stating that "limitations" in current U.S. accounting standards permit large tech firms to conceal potential liabilities amounting to hundreds of billions of dollars during this artificial intelligence data center frenzy. This loophole could prevent investors from gaining a clear view of the true financial health of these tech giants.
Moody's analysts pointed out that due to the constraints of the rules, AI companies might not be required to account for the costs of renewing data center leases, nor the costs incurred from not renewing them, even though both figures could be extraordinarily large. Moody's cautioned that "disclosures may not present the full picture," and current accounting liability figures are "unlikely to reflect certain plausible future scenarios."
The accounting standards contain a "blind spot." As companies like Meta Platforms, Inc. and Oracle increasingly utilize Special Purpose Vehicles (SPVs), primarily funded by external investors, to construct data centers, this "off-balance-sheet financing" model is attracting close scrutiny from credit markets. In the eyes of rating agencies and many bond investors, the long-term cost of leasing back these data centers from such entities is essentially equivalent to debt.
However, Moody's found that companies are designing lease terms ingeniously to make these liabilities "invisible" on their books. The specific tactic involves companies signing relatively short-term leases while simultaneously committing to pay compensation if they choose not to renew and the data center's value consequently drops—a provision known as a Residual Value Guarantee (RVG).
Under U.S. GAAP, the standards for booking these costs are as follows: - The cost of a lease renewal must be recorded only if the renewal is deemed "reasonably certain," typically interpreted as having a likelihood of at least 70%. - A liability for an RVG payment must be recorded only if the triggering event is considered "probable," meaning it has a likelihood of over 50%.
This creates a perfect "vacuum zone." Analysts David Gonzales and Alastair Drake explained, "The decision to extend a lease partly depends on whether the hyper-scaler is willing to make additional investments in hardware... Strict application of this guidance could result in many lease renewals falling below the 'reasonably certain' threshold." Given that the key technological components in data centers often have useful lives of just 4 to 6 years, companies can argue that a lease renewal is not "reasonably certain," while simultaneously arguing that triggering an RVG payment is not "probable." The result is that two potential massive expenditures remain off the books as liabilities.
Moody's illustrated this risk using the example of a major private credit data center transaction involving Meta Platforms, Inc. Meta's planned Hyperion facility in Louisiana is housed within an SPV named Beignet Investor, financed by Blue Owl Capital. Meta will lease the facility from this entity with an initial term of just 4 years, but holds options to renew for up to 20 years. Crucially, Meta has also provided a guarantee of up to $28 billion, promising compensation if the property value declines.
However, these staggering figures appear only in the footnotes of Meta's latest annual report; no related liability is recorded on the company's balance sheet. Meta stated in its report, "As of December 31, 2025, payment under the residual value guarantee (RVG) was not 'probable' and, therefore, no liability has been recorded." This treatment effectively renders tens of billions in potential cash outflows "invisible" in the financial statements, despite its significant implications for the company's future financial flexibility.
In response to the growing prevalence of such off-balance-sheet financing techniques, Moody's stated it will adopt stricter assessment criteria. The agency explicitly stated that when determining credit ratings for tech companies, it will conduct its own probability assessments to decide which future liabilities should be considered. Moody's said, "If we believe the reported lease liability understates likely cash outflows, we may make a quantitative debt adjustment." The agency added that such adjustments would "take into account likely renewal periods or the probable exercise of residual value guarantees (RVGs), or both."
This means that even if tech giants compliantly hide debt within their accounting reports, they may still face the reality that rating agencies will treat it as actual debt when they seek financing in the bond market, which could potentially impact their credit ratings or financing costs.
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