Question 1

You consult funds on accounting pitfalls. When you see a company whose net income is mostly unrealized markups on private stakes, what do you actually tell them to do with that number?

Eli Bartov · Accepted Answer

There are two issues here. First, unrealized markups may or may not involve significant management discretion. When discretion is involved — as with the measurement of gains or losses on non-marketable securities — there is a risk that management could use that discretion to influence reported gains or losses and achieve its desired reporting outcomes, potentially resulting in misleading information for investors.

Second, the income you are referring to comes from investments in securities rather than from the company’s core income-generating activities. Google is a technology company operating primarily in areas such as information technology, internet content and information, and online advertising; it is not a financial institution. Investors should therefore evaluate investment-related gains separately from operating income because such gains, particularly unrealized gains, may not be recurring or indicative of the company’s underlying operating performance.

If investors focus primarily on net income without recognizing that approximately 70% of Google’s Q2 2026 net income was non-recurring, they could overestimate the company’s sustainable earnings power and bid the stock price above its fundamental value. If the market subsequently recognizes this valuation error, the resulting price correction could lead to investment losses.

Question 2

On the way down, does the write-down come as fast as the write-up? A markup needs an observable transaction, but down rounds are private and slow to surface. Is there a lag, and where would it show up first?

Eli Bartov · Accepted Answer

The answer depends on the type of investment and the valuation methodology used. If the investment is in marketable securities, gains and losses are generally based on observable market prices, so changes in value are typically reflected promptly, with little or no valuation lag.

For non-marketable securities, the situation is different. Valuations often rely on models, comparable companies or transactions, and other inputs rather than readily observable market prices. This “mark-to-model” approach gives management and valuation specialists greater judgment over both the timing and magnitude of changes in reported fair value. As a result, there can be a lag between a deterioration in the underlying investment’s economic value and the recognition of a corresponding write-down in the financial statements.

Question 3

What’s the strongest argument that this accounting is actually the right treatment?

Eli Bartov · Accepted Answer

The strongest argument is that GAAP is designed to provide a standardized and consistently applied framework for financial reporting, even though accounting measurements do not always perfectly capture a company’s underlying economic reality. Certain accounting rules can therefore create differences between reported earnings and the economics that investors ultimately care about.

For valuation purposes, investors should understand these accounting limitations and, where appropriate, adjust reported GAAP figures to better reflect the company’s sustainable economic earnings and underlying performance. The adjusted figures can then be used alongside the reported GAAP numbers in the valuation analysis, rather than relying on GAAP net income alone.