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Accounting rules. If the credits last indefinitely, any unused credits cannot be counted as revenue. Ran into this at my last company when we signed a big contr

• stingraycharles 1y ago
  Correct, then you effectively become a holder of someone else’s money, which creates all kinds of legal trouble (you need to put that money into a separate, third party’s account that shields it from bankruptcy etc). What they could do is automatically refund the credits to the original account as soon as they expire, but that would mean it’s not the deposit but every API request that would be counted as revenue, which creates a whole lot of other complications. Let alone the fact that refunding after a year is problematic as the original payment methods may have expired, changed, and that you’re still the holder of someone else’s money until the credits are used. Bottom line: this is industry practice, but given how much flack Anthropic has been getting about the lack of transparency lately, this just adds more fuel to the fire and could be defused by some additional explanation from Anthropic’s side.
  • backprop1989 1y ago
    Exactly, now you’re a bank (or maybe selling unlicensed securities, either way it’s jeopardy). We ended up revising the contract so that the credits expired after three years. That opened up its own suboptimal outcomes. It was a lesson that was very much learned by us. On the topic itself - agreed that Anthropic should take a step back and review its policy around comms and good will in general. They’re supposed to be the “good guys” in the AI game - being up front about this stuff is table stakes for them at this point.
    • jkaplowitz 1y ago
      > Exactly, now you’re a bank (or maybe selling unlicensed securities, either way it’s jeopardy). This seems unlikely - after all, a US federal law (the Credit CARD Act of 2009) requires closed-loop (store/brand-specific) gift cards to be valid for at least 5 years after activation and some states like Florida and California don't allow them to expire at all, so for simplicity national companies don't usually let them expire at all regardless of state. But neither a 5-year expiration nor indefinite validity turns the seller into a bank or an unlicensed securities seller or otherwise puts them in jeopardy. Naturally, service credits and gift cards are probably treated differently by the CARD Act, but service credits are still not a source of legal jeopardy in the sense you were describing of being an unauthorized participant in the regulated financial world, any more than gift cards are. I can completely believe, however, that an approach similar to how gift cards must be handled is financially worse on the company's accounting statements than quickly expiring credits. That worse financial accounting consequence would be a completely sufficient explanation for why the company switched approaches.
      • yial 1y ago
        With gift cards you end up creating a liabilities account and tracking the outstanding value of your issued gift cards. This is almost easier if you have a gift card processor who holds the funds for you, but most I’ve worked with either just facilitate transferring money (as in franchises ) or simply processing the initial payment. This means you then have to track your outstanding. Depending on the state, if you cease operations you may need to escheat the value of the liability account or pay the purchasers of the gift cards if you know who they are. (Newer POS systems make this possible at times ). Gift cards on a financial statement are nearly always a negative or neutral, as while the money is in a liability account, I’ve seen companies in trouble not actually have the funds to cover the liability.
        • jkaplowitz 1y ago
          Yeah, having to track (and under certain circumstances resolve) the liability is what I meant by financially worse on the accounting statements. An entirely real downside that’s valid to choose to avoid, but which is also not the kind of jeopardy that compares to operating a bank or selling securities without the proper regulatory approvals. That was my main point to the other commenter.
        • thaumasiotes 1y ago
          > while the money is in a liability account, I’ve seen companies in trouble not actually have the funds to cover the liability. That's a weird edge case. As long as the company is operating, it isn't even possible for it to be unable to cover the liability of outstanding gift cards no matter how many there are. It has to honor the cards, but it has total freedom to set its own prices! Given that the company is free to pay off the cards in kind while it's operating, it's not obvious why it should have to pay them off in cash as it ceases operating.
    • htrp 1y ago
      "you either die a hero or live long enough to see yourself become the villain"
  • blindriver 1y ago
    > you need to put that money into a separate, third party’s account that shields it from bankruptcy This is wrong. You don’t need to do any of that. They paid for a service and it becomes a liability, but there’s no duty to segregate those funds. You do not turn into a money transfer agent just because you sell pre-paid credits to your service.
    • hn_throwaway_99 1y ago
      Thank you. As someone who used to work for a health fintech, it was amazing how often you'd hear loads of confidently wrong opinions on stuff like HIPAA (no, saying that Lisa couldn't make the meeting because she's out with the flu doesn't make it a HIPAA violation) and money transferring/KYC/AML/etc. laws. Like you said, selling prepaid credits to your service doesn't mean you're covered by money transmitter service regs.
      • andrewmcwatters 1y ago
        I just ignore anyone who doesn't actually own a business or administrate compliance on HN, because half the people here don't know what they're talking about with basic technologies, let alone law or finance.
      • renewiltord 1y ago
        Did you know it's okay to give bad health information advice if you spell it HIPPA instead?
        • kstrauser 1y ago
          My eye just twitched so hard I might have sprained it.
        • bravesoul2 1y ago
          No. HIPPAs are the most dangerous animals in Africa.
      • bravesoul2 1y ago
  • tom_m 1y ago
    If they're non-refundable?
  • muzani 1y ago
    Refunding could violate money laundering laws in some countries, and they're in a lot of countries.
    • dv_dt 1y ago
      Maybe if they had access to an AI they could have figured out which countries customers could be refunded
  • OutOfHere 1y ago
    That's complete nonsense and lies because Uber, Lyft, and some cloud service providers do not have any trouble holding on to user credit indefinitely. I absolutely can let my credit sit in them indefinitely. As such, expiring my credit is deception and theft, plain and simple. It is a practice done by lazy robber accountants. The services that do it right may not always offer a refund, but at least my credit doesn't expire.
  • Spooky23 1y ago
    It’s not that, it’s a revenue recognition issue. And there are lots of tricks around it.
  • theshrike79 1y ago
    Fun fact: Starbucks is holding 2 BILLION of people's money in the form of unused gift cards and pre-paid store credit: https://alltrades.substack.com/p/the-bank-of-starbucks https://alltrades.substack.com/p/the-bank-of-starbucks
    • kldg 1y ago
      with proper paternal laws, we could put that money toward useful projects or return the money back to individuals. (just kidding; we'd divert it to subsidize billionaires) https://local12.com/news/local/ohio-allocates-billions-from-unclaimed-residents-funds-stadium-projects-sports-sport-athletes-cincinnati-bengals-cleveland-browns-reds-cavaliers-concert-venues-facilities-money-cash-projects-revenue-repay-tax-taxes-claims https://local12.com/news/local/ohio-allocates-billions-from-...
    • beaugunderson 1y ago
      and luckily due to Washington state's consumer protection laws (https://app.leg.wa.gov/rcw/default.aspx?cite=19.240&full=true#19.240.020 https://app.leg.wa.gov/rcw/default.aspx?cite=19.240&full=tru...) they can't add an expiration or a monthly fee to draw those balances down to zero here. would love if there was similar law for credit expiry.
  • bravesoul2 1y ago
    Every API request? Can't they just get an invoice at the end of each month to turn that to $ amount. Like a phone bill.
• eviks 1y ago
  There are other numbers besides 1 and infinity, though
  • muzani 1y ago
    Tracking "revenue" past one financial year is its own accounting hell.
    • eviks 1y ago
      No, that's just accounting
    • mrbungie 1y ago
      Customers pay Anthropic, in part, so they can figure that one out.
    • OutOfHere 1y ago
      It is not actually revenue until it has been spent by the customer. Until then it's just customer funds.
  • khuey 1y ago
    I believe the reason to use 1 year comes from the customer's side: prepayments of services that extend past 1 year have to be capitalized for tax purposes, whereas prepayments of services for 1 year or less can be expensed immediately.
• neom 1y ago
  When we hired our pre-ipo CFO at DigitalOcean to start getting it ready, he brought in this whole finance team ofc, full FP&A...anyway they spent a couple months going through everything and then one day the controller called a meeting with me and was like "errr... so what's the story with all the credits?" And I was like "huh?" and he said "well we have millions of dollars of credits you've issued to people..." and I explained "oh, it's just like Tom Dale and Alex Sexton and stuff, they're cool they're not going to spin up $10k+ in infra don't worry" and he basically facepalmed and explained to me the liability I'd created. Whooops! :)
  • archerx 1y ago
    I miss pre ipo digitalocean.
    • neom 1y ago
      You and me both buddy, you and me both...
• mrbungie 1y ago
  Even with a CFO-level explanation, it feels like a weak excuse for "fuck the customer" as always. Notice that in some places (with good enough customer protection rules) pre-paid credits can't expire, as expiration itself is a clear abuse of market power: they are forcing out revenue from services not given, even if it is "made clear at buy-time". Especially at such short time horizons like 1-year. And yet they are supposed to be the good guys.
  • akagusu 1y ago
    > it feels like a weak excuse for "fuck the customer" as always. Of course it is just an excuse to "fuck the customer" and grab the money, but it is not something you should question, because in our society you don't question how companies make money. And it doesn't matter if you are the offended part, people will just protect the state of affairs,even at their own expense. Just look how people always find a justification for this crap and look how you are being downvoted for pointing another one.
    • mrbungie 1y ago
      Kind of understandable after seeing the reaction, I would guess that the same tricks are expected to be made by middle-man companies. Hate the game not the players, I guess?
      • akagusu 1y ago
        > Hate the game not the players, I guess? It's not like the game had fixed rules and everybody is playing by the same rules. The rules are made by the players, while they are playing the game. The problem is that are players following rules the benefit all players and are other players doing rules that benefit only their own at expense of the others
      • sleepybrett 1y ago
        You can hate the players for perpetuating the game you hate.
    • 1y ago
• csomar 1y ago
  You could count it as revenue once it’s consumed but my understanding is that if you are US based you are essentially acting as a wallet of sort. This is of course solvable: book the credit as revenue. Transform the dollar credit to points credits that the user can use indefinitely.
• OutOfHere 1y ago
  That's complete nonsense because Uber, Lyft, and some cloud service providers, and others do not have this issue. I can let my credit sit in them indefinitely. As such, it is deception and theft, plain and simple. They may not always offer a refund, but at least my credit doesn't expire.
• ikidd 1y ago
  You'd have to replace your accountants anywhere that gift cards aren't allowed to expire by law.
  • deleted 1y ago
    [deleted]
• ManlyBread 1y ago
  How come this never happens to video game companies that give out various in-game currencies?
  • benabbott 1y ago
    Because it does not cost them to provide in-game items (skins, weapons, etc.) On the other hand, certainly does cost companies to provide compute.
    • Tade0 1y ago
      How does Starbucks avoid the same with their vouchers?
      • xeromal 1y ago
        They hold 2 billion dollars worth of gift cards on the books.
        • foxglacier 1y ago
          They probably have a good model for what percentage of those will never be redeemed so they wouldn't have to count the whole $2 billion as a liability. The OP's one big customer would be harder to predict the future behavior of.
          • otterley 1y ago
            That’s not how accounting works. There’s no such thing as a probabilistic liability.
            • jacquesm 1y ago
              Let me introduce you to actuarial science: https://en.wikipedia.org/wiki/Actuarial_science https://en.wikipedia.org/wiki/Actuarial_science
• ethan_smith 1y ago
  This is specifically about revenue recognition under accrual accounting - unexpired credits are considered "deferred revenue" (a liability) until used or expired. Companies prefer definite expiration dates to avoid carrying growing liabilities on their balance sheets indefinitely.
  • jacquesm 1y ago
    If you can't be bothered to implement it properly, don't use pre-paid accounts but charge as you go.
• ksec 1y ago
  What about Starbucks top up card or Apple iTunes Credit? How would those work?
  • bpavuk 1y ago
    unlike Anthropic, iTunes and Starbucks are profitable. suppose iTunes gets $1 from every $5 spent there. if Apple sold a $50 gift card, it can pocket $10 and not worry about it. Anthropic, OTOH, sells their API at loss, so unused credits mean losses that await to be materialized. it is unprofitable for them to let you keep the compute bucks forever.
    • senko 1y ago
      > Anthropic, OTOH, sells their API at loss, Sources? It is widely believed that their fixed-price plans lose money, but last I heard API (price per token) had positive margins?
      • Spooky23 1y ago
        Maybe in some universe. Companies like this grow so fast you have no idea, and any prognostication about making money is just frankly bullshit. Growth hides all sins, as long as the investors keep ponying up.
  • tart-lemonade 1y ago
    Retailers have historical data on gift card redemptions and, using this data, can recognize portions of the unspent value of the gift cards as revenue when that portion is unlikely to be redeemed.
    • neom 1y ago
      In addition to this, gift cards have a specific carve out in consumer protection laws, "business credits" do not and fall under accounting practices, specifically ASC 606, and specifically around "breakage", as as tart-lemonade is referencing.
  • 1y ago
• Waterluvian 1y ago
  I don't really get this logic. Why don't they count it as revenue the moment the credits are issued? Or is this more just a "this is a convenient free win as a consequence of how we decide to manage our books."
  • Havoc 1y ago
    > Why don't they count it as revenue the moment the credits are issued? Because the corresponding service hasn't been rendered yet. Conceptually you want the revenue and the costs to generate it recognised at roughly same time else your P/L number is volatile/meaningless
    • thaumasiotes 1y ago
      Well, your actual profits and expenses are volatile. Is it bad for your accounting to reflect the reality of your company?
      • Havoc 1y ago
        > reflect the reality of your company Accounting is an exercise in standardization and communication. Like a network protocol you want different parts speaking the same language even if it requires some constraints and abstractions The info you describe is something you’d have FP&A/MI team do. There you can do whatever the team thinks is best to capture things in a unique manner Mixing the two is generally a recipe for disaster (and IRS audits)
        • thaumasiotes 1y ago
          What? This is just the difference between cash accounting and accrual accounting. Using cash accounting isn't going to get you audited, or even raise any eyebrows.
    • stockresearcher 1y ago
      The IRS allows companies to choose between cash-based and accrual-based accounting. Most companies choose accrual-based accounting. It's much more complicated, and one of the things about it is that you don't don't get to count money collected as revenue until the customer actually "uses" it to buy something from you. That's just the way that goes. Remember - the company chose this method of accounting. If you form a company and don't make the choice, the IRS will assume you are using cash-based accounting. But here's something interesting - Warren Buffett explaining how liabilities are insanely profitable for Berkshire Hathaway (except that he calls it "float" instead of "liabilities") [1]. Liabilities are just a number on a chart, neither good nor bad. How you handle them, how you communicate about them, etc. That's what matters. [1] https://www.berkshirehathaway.com/letters/2009ltr.pdf https://www.berkshirehathaway.com/letters/2009ltr.pdf
• anigbrowl 1y ago
  I'm not sure if this is legal in California. There's a law here specifically to prevent gift cards from expiring automatically.
  • kelnos 1y ago
    Unclear, actually. I asked Claude about prepaid credit expiration in California. The answer wasn't super clear; Claude focused on gift cards and gift certificates, which I'm not sure prepaid credit counts as. Then I specifically asked if Anthropic is allowed to expire its prepaid credit for California users. Claude consulted Anthropics credit terms, said the expire in one year, but then said that it's an interesting legal question, and that I might have grounds to complain to the CA Dept of Consumer Affairs!
• sleepybrett 1y ago
  Not accounting rules. Shady accounting. Sell someone credits that expire or not expire.. if you sell someone something that expires you can get some free money.
• deleted 1y ago
  [deleted]
• interestica 1y ago
  This was the (corp) argument in Canada for allowing companies to expire gift cards. They no longer expire.
• KingOfCoders 1y ago
  Had the same problem with vouchers in one startup, gave out free vouchers as marketing, became a huge accounting headache when the company wanted to clean things up. Also huge problems (Germany) with yearly payments and how to account for them to minimize liabilities.
• lelanthran 1y ago
  > Accounting rules. Correct. > If the credits last indefinitely, any unused credits cannot be counted as revenue. Maybe incorrect? Unless they are cooking the books, the unused credits should reflect as a liability on the books. When someone pays you for a thing, until they take delivery of it (or use it up if it is a service), you owe them the value of that thing.
  • iExploder 1y ago
    If the contract states the credits expire EOY all bets are off. Implicitly makes the credits the 'delivery' not the service itself.
    • lelanthran 1y ago
      > If the contract states the credits expire EOY all bets are off. Implicitly makes the credits the 'delivery' not the service itself. I wasn't addressing what the contract states and what the effect is; I was addressing the accounting rule for service sold but not yet delivered. As long as the credits are usable (i.e. not expired), those credits are a liability on the books and financial statements must reflect that. This is why they need to expire the credits after a certain time.
      • graemep 1y ago
        The argument hing made is that the credits are what is being delivered. It may or may not be correct, but it is not obvious to me that the revenue should be recognised when the credits are used or expire rather than when they are sold. its probably defined somewhere in the rules (I assume US GAAP in this case?)
        • lelanthran 1y ago
          > The argument hing made is that the credits are what is being delivered. Right, I understand that. > but it is not obvious to me that the revenue should be recognised when the credits are used or expire rather than when they are sold. The realisation (or recognition, if you want) of the revenue is irrelevant. Once you have already accepted payment for a service, that service is a liability until you deliver it. So, unless they are cooking their books to say that they are not obligated to provide the service after accepting payment, I don't really see how they can report it on their statements as anything other than a liability.
• notepad0x90 1y ago
  Shouldn't they refund remaining credits using the original payment method, instead of you know..stealing?
• killerstorm 1y ago
  Skype expires the credits. But then allows customer to restore them. I think it's the best to comply with laws: it's just a mild annoyance for the customer.
• aflag 1y ago
  They can't because they aren't, right? That's the whole point of having them not expiring. Until you used them, you can still get your money back in some situations.
• cedws 1y ago
  Can you just make them expire after 1000 years?