FCF is much less susceptible to manipulation than reported earnings, which can be altered meaningfully without violating any securities laws. In today’s increasingly asset-heavy era, one of the most important distinctions between the two gauges is that EPS, unlike FCF, is affected by amortization and depreciation, which gradually write off an asset’s cost over its useful life.
The Financial Accounting Standards Board prescribes no guidelines regarding the useful lives that should be assumed for calculating depreciation on data centers or servers. That means companies use their judgment to determine the appropriate useful lives of these assets with the approval of the auditors whom they hire – and can fire.
A firm may select one time frame only to decide later that longer lives would be more appropriate, with the fortuitous consequence that the company’s annual depreciation charges would decline, making it easier to beat expectations and guidance.
This is only a modest concern with data centers. Companies typically assign long lives – often on the order of 40 years – to the buildings, so an opportunistic decision to shift to a longer period would have a limited impact.
It’s a different story, though, for the equipment inside. When it comes to servers, these types of accounting changes are already being made.
In 2023, Alphabet extended the assumed average lives of its servers and certain networking equipment by 50%, moving from four years to six years. Microsoft’s MSFT.O Azure also went from four to six years in fiscal 2022, while Meta META.O switched from about three years to 5.5 years in stages from 2020 to 2025. Amazon Web Services AMZN.O extended its servers’ assumed lives from five years to six years in 2024, although it took a subset of them back to five years in 2025.
One might like to believe that all of these adjustments were designed to align depreciation charges more closely with the physical and technological facts. But accounting expert Baruch Lev says that companies are “playing games” with the service lives of AI assets. He calls their chosen depreciation schedules “totally arbitrary.”
Given that bleak assessment, it’s appropriate for investors to cast aside Wall Street’s longstanding EPS fixation and focus instead on FCF, as they did so forcefully following Alphabet’s latest earnings announcement.
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