Assessing the expected lifespan of technology can boost earnings and reduce costs - here's how

Earlier this year, Big Tech companies like Alphabet, Amazon, Microsoft, and Meta reported they had boosted  their profits by $10 billion by extending the estimated working life of their servers.

This accounting change has helped to soften the blow of future costs such as developing generative artificial intelligence. By extending the estimated life of their assets, these companies have reduced their depreciation charges, adding about $10bn to their collective reported earnings.

For finance and accounting teams, this approach can be a valuable strategy. By carefully assessing the expected lifespan of their technology assets and adjusting their depreciation schedules accordingly, they can potentially boost their reported earnings and reduce future costs.

However, it’s important to note that this approach requires careful consideration and accurate forecasting. Overestimating the lifespan of a technology can lead to under-depreciation, which can inflate earnings in the short term but lead to financial difficulties down the line when the technology needs to be replaced.

In addition to depreciation, finance teams should also consider the potential for technological obsolescence. As new technologies emerge, older systems may become less efficient or even redundant. This can lead to unexpected costs if not properly accounted for in the financial planning process.

The evolving tech stack

As the world of finance continues to evolve, so too does the technology that supports it. From advanced data analytics to artificial intelligence, the tools at the disposal of finance teams are becoming increasingly sophisticated. However, with this advancement comes the need for careful accounting of the system life of these technologies. Understanding how to factor this into the cost cycle is crucial for maintaining financial health and planning for future investments.

The system life of a technology refers to the estimated period during which the technology will be operational and provide value to the organization. This can be influenced by factors such as the rate of technological advancement, the durability of the hardware, and the adaptability of the software to changing business needs.

One of the key ways to account for the system life of technology is through depreciation. Depreciation is the process of allocating the cost of a tangible asset over its useful life. In the case of technology, this can be a complex task due to the rapid pace of technological advancement and obsolescence.

The benefits

There are several advantages to capitalising on existing infrastructure beyond financial statement improvements. Prolonging server and hardware viability allows companies to extract additional value from costly data center investments. It also keeps more equipment out of landfills in an environmentally conscious asset life cycle approach.

Moreover, with rapidly changing technologies like AI and cloud-native architectures emerging, legacy systems may still have untapped usefulness, rather than facing sudden obsolescence. Rigorously re-evaluating asset lifespan estimates could yield operational and sustainability upsides.

Getting six years instead of four from servers, storage and network gear conserves resources all while still supporting revenue-driving workloads. Evaluating each asset individually rather than blanket timelines allows for nuance between different platforms and use cases. Companies can mine additional value while gradually upgrading equipment on an optimized timeline. In some cases, sticking with tried-and-true legacy gear pays dividends over hastily chasing each tech fad.

Risks are there, watch out

On the surface, getting more mileage out of existing tech infrastructure makes sense financially. But large one-time accounting gains like this can obscure what’s really going on in terms of R&D spending and next-gen competitiveness.

Critics argue moves like this allow firms to reduce research and capital spending on emerging technologies like quantum computing and AI. By extracting more life from current equipment, they may feel less urgency to develop high-risk, high-reward innovations. Tech companies are essentially buying more time before they have to reinvest significantly.

The risk is that pushing off large infrastructure upgrades hinders their ability to make technologically competitive leaps. If they simply milk more profits from aging tech, that does little to advance digital experiences or their platforms’ capabilities.

Additionally, overestimating the functional lifespan of servers runs the risk of substantial asset impairment charges down the road. If hardware assets like data centers become obsolete earlier than expected, companies might face unplanned costs related to write-downs.

Some also question whether the accounting change is as fiscally prudent as it might seem initially. In the long run, there can be negative tax implications related to delayed re-investment. Postponing large capital expenditures can actually drive taxes higher eventually.