[backprop1989]

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 contract and gave them hundreds of thousands of dollars in non-expiring credits. Our accountant went nuts when we told him.

[stingraycharles]

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.

[blindriver]

> 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]

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]

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]

Did you know it's okay to give bad health information advice if you spell it HIPPA instead?

[kstrauser]

My eye just twitched so hard I might have sprained it.

[bravesoul2]

No. HIPPAs are the most dangerous animals in Africa.

[bravesoul2]

HN is short for hallucination? H11N maybe?

[dylan604]

This reminds me of a company in town that was known for doing the precise thing of putting money into separate accounts, specifically, CDs. It was the type of service where 50% was paid up front, 25% at specified milestone, remaining 25% at completion. So the company would receive the 50% and place a large chunk of that into a CD. There were lots of reasons, but my favorite was the excuse of it covers when someone fails to pay the last 25%. These were the types of jobs that could easily last 6-12 months. Lots of people had mixed feelings about this, but at least it wasn't paying for office renovations or the owner's car payments, etc.

[gpvos]

CD = Certificate of deposit, a bank account in the United States with a fixed maturity date. (I assume.) https://en.wikipedia.org/wiki/Certificate_of_deposit

[cutemonster]

> covers when someone fails to pay the last 25%

Could it have been that they could use that "reserved" money to pay people's salaries, if the client stopped paying? Then in a way it would have covered? although badly phrased maybe

[theshrike79]

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

[beaugunderson]

and luckily due to Washington state's consumer protection laws (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.

[kldg]

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-...

[muzani]

Refunding could violate money laundering laws in some countries, and they're in a lot of countries.

[dv_dt]

Maybe if they had access to an AI they could have figured out which countries customers could be refunded

[backprop1989]

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]

> 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]

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]

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]

> 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]

"you either die a hero or live long enough to see yourself become the villain"

[OutOfHere]

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]

It’s not that, it’s a revenue recognition issue. And there are lots of tricks around it.

[bravesoul2]

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.

[tom_m]

If they're non-refundable?

[ethan_smith]

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]

If you can't be bothered to implement it properly, don't use pre-paid accounts but charge as you go.

[lelanthran]

> 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]

If the contract states the credits expire EOY all bets are off. Implicitly makes the credits the 'delivery' not the service itself.

[lelanthran]

> 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]

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]

> 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.

[ikidd]

You'd have to replace your accountants anywhere that gift cards aren't allowed to expire by law.

[neom]

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]

I miss pre ipo digitalocean.

[neom]

You and me both buddy, you and me both...

[Waterluvian]

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]

> 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

[stockresearcher]

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

[toast0]

The IRS allows for cash-based accounting, but GAAP requires accrual-based accounting, if you meet the thresholds and have to file statements with the SEC, then you have to at least follow GAAP for the statements.

I don't know if Anthropic needs to file statements with the SEC, but they might be trying to get their books aligned for it.

[thaumasiotes]

Well, your actual profits and expenses are volatile. Is it bad for your accounting to reflect the reality of your company?

[Havoc]

> 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]

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.

[gwd]

> Why don't they count it as revenue the moment the credits are issued?

You've gotten the revenue but you haven't paid the cost for that revenue yet. Those are essentially un-cashed checks that the accountants have to keep on the books indefinitely otherwise. Imagine you're chugging along and out of the blue someone shows up with $100M of credits they bought 10 years ago, expecting you to do something for them. Now you're using electricity and displacing new revenue for money that may be long gone.

[lubujackson]

Makes sense. Just like how when you put money in the bank they have to put it in a big vault and not touch it so you can access it in the future. Oh wait... rules for thee and not for me.

[gwd]

Not sure what you mean... banks definitely have to worry about people unexpectedly coming and asking for all their money back [1]. The difference is, that risk management is the bank's core business. That's not the business Anthropic wants to be in.

[1] https://en.wikipedia.org/wiki/Bank_run

[Etheryte]

Banks have very strict legal rules about minimum balance sheets. They don't have to have 100% coverage, but that doesn't mean it isn't there.

[throwaway4496]

A fraction of it, it is called fractional reserve banking for a reason.

[anigbrowl]

I'm not sure if this is legal in California. There's a law here specifically to prevent gift cards from expiring automatically.

[kelnos]

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!

[eviks]

There are other numbers besides 1 and infinity, though

[khuey]

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.

[muzani]

Tracking "revenue" past one financial year is its own accounting hell.

[mrbungie]

Customers pay Anthropic, in part, so they can figure that one out.

[OutOfHere]

It is not actually revenue until it has been spent by the customer. Until then it's just customer funds.

[eviks]

No, that's just accounting

[notepad0x90]

Shouldn't they refund remaining credits using the original payment method, instead of you know..stealing?

[ManlyBread]

How come this never happens to video game companies that give out various in-game currencies?

[benabbott]

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]

How does Starbucks avoid the same with their vouchers?

[xeromal]

They hold 2 billion dollars worth of gift cards on the books.

[foxglacier]

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]

That’s not how accounting works. There’s no such thing as a probabilistic liability.

[ManlyBread]

What? They have to run the servers all the same.

[ultimatefan1]

video game companies definitely have to deal with these same kinds of questions.

from https://www.bitsaboutmoney.com/archive/accounting-for-saas-a... :

Accounting for potions: This is fairly easy. If you sell someone a potion, revenue is recognized when they drink the potion. Or use their speed boost. Or skip the progress gate to get to the next dungeon. The fiction doesn’t matter. Reality matters, and the economic reality of the situation is that performance has happened after the temporary thing you’ve promised is delivered. (Technically speaking you do have to recognize the revenue over time if your potions last long enough to be close to monthly SaaS contracts, but practically speaking most are over with in a day and most accounting systems lose precision below that.)

Accounting for swords: If you trade gems for swords then you can ratably recognize the purchase price of the gems when you satisfy your obligation by giving the player a new sword.

Hah, just kidding. That would be way too easy.

You actually need to recognize the prorated cost of the gems exchanged for the sword over the economically useful life of the imaginary sword. “Economically useful life” is a concept with a lot of prior art on it in accounting. You are obligated to, and accountants can point to substantial work on, estimating the economically useful life of factories, cruise ships, CNC machines, bunk beds, Bitcoin miners, dairy cattle, and almost everything else that depreciates.

But there is not a huge amount of prior art on imaginary swords. So you get to pick one of two methods..

The first, by far less commonly used, is to put your head together with very expensive accounting professionals and rigorously answer the question “What events in reality, in the universe we actually live in, would cause the owner of this imaginary sword to believe it had no or de minimis future value to them?” And perhaps that conversation would involve questions like power creep, game balance changes, declining player preference for swords now that you’re offering a sale on imaginary nuclear weapons, etc.

Nobody has time for that conversation or the truly gargantuan amount of implementation engineering required to enforce the decision it comes up with, so they largely use door #2: the economically useful life of a virtual good is by nature upper bounded by the economically useful life of a player’s relationship with our game, so use that instead.

You are required to use your existing data to make a reasonable estimate of how long either the particular player or, failing that, the hypothetical spherical frictionless average player will continue to play the game after the purchase. Then you recognize the price of the sword ratably over that time period.

This causes many virtual goods companies to have bookings (player purchases) diverge sharply from revenue. That depresses the value of their companies, in the real world, and those companies then spend substantial amounts of professional labor taking their frustration out on imaginary swords.

[interestica]

This was the (corp) argument in Canada for allowing companies to expire gift cards. They no longer expire.

[ksec]

What about Starbucks top up card or Apple iTunes Credit?

How would those work?

[JimDabell]

I’ve implemented those for the next-largest coffee chain. They did the same thing as Anthropic here, for the reasons everybody gave already. Taking money in exchange for future service is a pain to account for if it never gets collected. If somebody loads up a gift card with $100 and then destroys the gift card, you don’t want that $100 to stay on your books forever. It’ll just keep mounting up and up over the years until you have a massive theoretical debt that in practice can’t ever be collected. So they put expiration dates on so they can clear those things off their books. It’s a completely ordinary thing to do, it’s not a rip-off.

[7bit]

Here’s a concise rebuttal you could use:

> That’s not really a justification, it’s just describing their chosen accounting convenience. Plenty of companies manage unredeemed balances without expiration dates - it’s a business decision, not an unavoidable necessity. Calling it “ordinary” doesn’t make it fair to customers.

[prasadjoglekar]

Un redeemed gift cards are a liability for the issuer in perpetuity in many US states including CA. In many others the expiry is at least 5 years from the date of issuance.

[tart-lemonade]

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]

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.

[bpavuk]

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]

> 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]

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.

[mrbungie]

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]

> 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.

[ewoodrich]

I see this all the time on Reddit where someone points to some kind of consumer-hostile tactic from Apple and some people feel compelled to defend them with "but they need to do that to have the highest profit margins in the industry".

[mrbungie]

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]

> 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]

You can hate the players for perpetuating the game you hate.

[csomar]

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.

[killerstorm]

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.

[KingOfCoders]

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.

[aflag]

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.

[sleepybrett]

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.

[cedws]

Can you just make them expire after 1000 years?

[OutOfHere]

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.