Circular Financing in AI: How Auditors Treat a Vendor's Stake in Its Customer

AMD has already told investors how it will book the 160 million share warrant it gave OpenAI. The warrant's grant-date fair value comes off revenue as the chips are recognised. That one sentence is circular financing accounting in miniature. When a vendor hands value to its customer, ASC 606 usually treats it as a discount on the sale, not as an investment.

The short answer

A vendor's equity stake in its customer cuts the vendor's revenue only when the payment counts as consideration payable to a customer. That means equity granted alongside a sale, or cash paid above the fair value of what comes back. A stake bought at fair value is an investment. An equity-method stake also triggers related-party disclosure.

What circular financing means in accounting terms

Circular financing is a market phrase, not an accounting one. It describes a loop where a supplier puts money or value into a customer, and the customer spends it back on the supplier's product. The phrase carries an accusation. The accounting rules carry none, because they only ask what each leg of the loop actually is.

The deal map is covered in who pays whom in the AI circular deals, and the historical precedent sits in the Lucent and Nortel vendor financing story. This post does something narrower. It walks through the three accounting tests a vendor's stake in its customer has to pass, and then reads what the filings already say.

The three tests are separate and fail separately. Revenue recognition under ASC 606 asks whether the vendor gave part of its price back. Related-party disclosure under ASC 850 asks whether the reader can see the relationship. The round-trip question asks whether the revenue had any substance at all.

Our view is that the public debate collapses these into one question, "is this circular?", and gets a useless answer. A deal can be economically circular and accounted for correctly. A deal can also look clean and still overstate revenue. You have to run each test on its own.

The ASC 606 test: consideration payable to a customer

ASC 606 is the US revenue standard. Its rule on payments to customers sits in paragraph 606-10-32-25, reproduced in Deloitte's revenue recognition roadmap. Consideration payable to a customer includes cash paid to the customer and "equity instruments (liability or equity classified) granted in conjunction with selling goods or services".

The default treatment is blunt. The standard says the vendor "shall account for consideration payable to a customer as a reduction of the transaction price and, therefore, of revenue". The only exit is when the payment buys a distinct good or service that the customer transfers back to the vendor.

The fair value cap

Paragraph 606-10-32-26 closes the obvious loophole. If the vendor pays more than the fair value of the distinct good or service it receives, the excess reduces the transaction price. If the vendor cannot reasonably estimate that fair value, the whole payment comes off revenue.

Apply that to equity. When a vendor buys shares in its customer, the shares are what it receives. If the vendor pays fair value for them, nothing is left over to reduce revenue. If it pays a premium that only makes sense because of the supply deal, the premium is a discount on the chips wearing a different label.

The linkage question

The harder judgement is whether a payment belongs to a sale at all. Deloitte's roadmap says the scope includes "payments to customers that can be economically linked to revenue contracts with those customers". It adds that an entity "should not disregard payments that extend beyond the context of a specific revenue contract".

KPMG makes the same point from a different side. Its 2023 note on consideration payable says "implied payments also can represent consideration payable to a customer". So an investment signed in a separate document, on a separate day, does not escape the test by being separate. Auditors look through the paperwork to the economics.

The first row is our interpretation of the standard, not a quoted position from any firm. The last row is the honest gap. The filing describes the guarantee as given in exchange for exclusive hosting of Nvidia infrastructure, and does not say whether any part of it was assessed as consideration payable.

Equity granted to a customer: the AMD warrant is the clean case

The AMD deal is the easiest to read, because AMD wrote down its own answer. The October 2025 8-K gives OpenAI a warrant for up to 160 million AMD shares at $0.01 each. The first tranche vests after delivery of the initial 1 gigawatt of MI450 GPUs.

Full vesting requires OpenAI and its authorised purchasers to buy 6 gigawatts of AMD Instinct GPUs. Further tranches also depend on share price targets that "escalate to $600 per share for the final tranche". In February 2026 AMD issued a second warrant on similar terms to Meta, also for up to 160 million shares.

What AMD said it would do

AMD's 10-Q for the quarter ended 27 September 2025 is explicit. It expects to classify the warrant as a liability, and "the grant date fair value of the warrant will be recognized as a reduction to revenue when revenue is recognized". Changes in the liability's fair value go to other income, so share price swings never touch revenue.

That is exactly the 606-10-32-25 outcome for equity granted with a sale. We think AMD deserves credit here. It is the only company in this group that has told investors, in a filing, that part of an AI supply deal is a price concession.

As of 27 June 2026, AMD's latest 10-Q says no warrant shares had vested and the warrants "had no impact" on its financial statements. The cut to revenue arrives when qualifying GPU revenue does. So a reader today sees the policy, and has not yet seen a dollar figure.

A rule change also lands in the middle of this deal. ASU 2025-04, issued on 15 May 2025, makes vesting conditions based on the customer's purchases a performance condition. Revenue is reduced only once vesting is probable. When that assessment flips, Deloitte notes it can trigger "an immediate reversal of some amount of revenue already recognized". The ASU applies to fiscal years beginning after 15 December 2026.

On our reading, a warrant that vests by the gigawatt fits the new definition closely. Watch for a quarter where AMD judges a tranche probable. That is when a catch-up cut to revenue would show up, and it may be lumpy.

Equity bought in a customer: the Nvidia pattern

Nvidia's structure runs the other way. It does not grant its own shares. It buys shares in companies that buy its chips, either directly or through the cloud providers that rent them out.

The FY2026 10-K, audited by PwC, says Nvidia "invested $17.5 billion in private companies and infrastructure funds". The next sentence is the one that matters for this post: "These investments include AI model makers that purchase our products directly or through CSPs".

How the stakes are measured

Nvidia carries these stakes "at cost less impairment, and adjusted for observable price changes". That is not the equity method. It signals that Nvidia does not claim significant influence over most investees, which matters for the related-party test below.

It also means the value moves when an investee raises money at a higher price. The July 2026 10-Q reports cumulative gross unrealised gains of $9.1 billion on these holdings. Some of those gains come from rounds the AI model makers raised to pay for compute.

What the notes do and do not say

We read the notes to the July 2026 10-Q. OpenAI is named once, as "a customer" on whose behalf Nvidia gave lease guarantees capped at $105 billion. The 10-Q also records $25 billion of committed equity investments in "AI model makers, infrastructure financiers, and other private companies". We did not find a statement in those notes about whether any investment was assessed as consideration payable to a customer.

That silence is not proof of a problem. A stake bought at the same price as unrelated investors needs no revenue adjustment, and needs no paragraph saying so. But it leaves the reader unable to run the 606-10-32-26 test themselves. Nvidia also discloses that one direct customer accounted for 22% of FY2026 revenue and another 14%, so investees and the largest buyers sit very close together. For the depreciation side of the same ledger, see how GPU useful lives shape AI earnings.

Related-party disclosure: the ASC 850 test and Microsoft's OpenAI stake

ASC 850 decides who counts as a related party. The definition in 850-10-20, reproduced in PwC's Viewpoint guide, includes entities whose equity "would be required" to be accounted for under the equity method by the investor. It also includes principal owners, meaning holders of more than 10% of the voting interests.

Once a party is related, 850-10-50-1 requires four things. The nature of the relationship, a description of the transactions, the dollar amounts of transactions for each period, and amounts due to or from the related party at each balance sheet date.

Microsoft and OpenAI sit inside the rule

Microsoft's FY2026 10-K describes its OpenAI holding as "our equity method investment". By the 850-10-20 definition, that makes OpenAI a related party of Microsoft. It is also a large Azure customer, which is what makes the relationship worth reading closely.

The equity side is visible. Other income included $6.5 billion of net gains in FY2026, after $4.8 billion of net losses in FY2025. Microsoft says the FY2026 gain mainly reflects a dilution gain from OpenAI's recapitalisation. None of it touches revenue, which is correct for an equity-method stake.

The sales side is harder to see. In the sections of the 10-K we opened, we did not find a dollar figure for Azure revenue from OpenAI. An October 2025 analysis by Implicator reported that OpenAI did not appear in Microsoft's related-party footnotes for FY2025. Microsoft may judge the amounts immaterial at its scale, or present them elsewhere. The filing we read does not say which.

Why most Nvidia stakes fall outside it

Nvidia's cost-basis stakes do not meet the equity-method prong, and Nvidia is not the investees' reporting entity. So the related-party rule usually does not require Nvidia to tabulate sales to the companies it invests in. Its 10-K points related-party questions to the proxy statement instead.

The same gap applies to the November 2025 three-way deal, in which Anthropic committed to $30 billion of Azure compute. Nvidia committed up to $10 billion and Microsoft up to $5 billion of investment. A minority stake that falls short of significant influence creates no ASC 850 duty at all. We think this is the weakest seam in the current rules, because the disclosure trigger is ownership structure rather than commercial dependence.

What auditors look for in AI vendor financing

No Big Four firm publishes its audit programme for these deals. What follows is derived from the guidance quoted above: the evidence a reviewer would need to sign off on each test. Treat it as our reading of where the judgement sits, not a firm's checklist.

The question auditors cannot answer for you

An auditor tests whether the accounting follows the standard. It does not test whether the customer could have paid without the vendor's money. That is a credit question, and it belongs to the reader. Those exposures are tracked in the CoreWeave debt stack and in the data centre leases still off the balance sheet.

Where circular financing becomes round-trip revenue

Round-trip revenue is the failure case. The SEC has charged it before, and the past cases look structurally familiar. In 2002 the SEC alleged that Unify "made an investment in another company, which then used most or all of the invested funds to purchase Unify product". Its revenue was overstated by 61% to 150% a quarter across four quarters.

In 2007, Veritas Software paid a $30 million civil penalty over a $20 million deal with AOL. According to the SEC's litigation release, Veritas agreed to "buy" advertising in exchange for AOL buying its software at inflated prices. The SEC said the round trip was documented "as if it was two separate, bona fide transactions, conducted at arm's length".

What separates today's deals from those cases

Two things separate them, and both matter. The AI customers are using the chips: compute is consumed, models ship, and end users pay for them. And the largest investees raise most of their money from parties other than their vendors, which gives auditors an outside price to test against.

The warning signs are the same ones the SEC cases show. Watch for a vendor that is the dominant funder of a customer's purchases, a price per share no outsider would pay, and two contracts that only make sense read together. We would not call any of the deals in this post a round trip on the public record. We would also not assume that holds for every smaller investee nobody names.

Where this argument is weakest

Three limits, stated plainly, on the same standard this blog applies to everyone else.

We read parts of the filings, not all of them. Several notes were too long to retrieve in full. A related-party table or a consideration-payable discussion could sit in a section we did not open, or in a proxy statement. Every "not found" above means exactly that, and nothing stronger.

Auditors see what readers cannot. PwC signed Nvidia's FY2026 opinion with access to term sheets, side letters and board minutes. If the stakes were bought at prices matching outside investors, the absence of a revenue adjustment is simply correct accounting. Silence is consistent with a clean deal.

Economic circularity is not an accounting error. A vendor funding demand for its own product can be a rational way to grow a market. The rules exist to price the subsidy correctly, not to forbid it. Readers who treat every loop as fraud will be wrong more often than right, and the honest critique is about disclosure, not about the deals existing.

Frequently asked questions

How to read the next AI vendor filing

Pick one supplier you depend on, and open its latest 10-Q at the investments note and the customer concentration note. Write down two numbers: the carrying value of private stakes, and the share of revenue from the largest direct customer. If both rise together for two quarters, you know which question to ask on the next earnings call.

If you negotiate a vendor deal that includes equity, warrants or credit support, ask how the vendor will account for it before you sign. A vendor that says "reduction of revenue" has priced the subsidy honestly. A vendor that cannot answer is telling you the discount is hidden somewhere you will not see. The run-rate side of the same question is covered in what OpenAI's valuation multiple assumes.

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