Tesla Motors Accounting Policies

There are certain aspects of Tesla' s business model that distinguish it from other automakers. These manifest either in its accounting policies, or in the ways in which those policies will affect Tesla (but maybe not its competitors, even if they utilize the same policies). The direct-to-consumer sales model in particular holds influence over some policies, while the company's youth handcuffs it with respect to how it handles things like warranty risk on its financial statements.

Tesla recognizes revenue on the basis of revenue it believes it will collect, on vehicles delivered. This is a little bit different than companies that work with the dealer model, because Tesla sells directly to consumers, and takes substantial deposits. Deliveries are equivalent to sales for the company, which is different from most automakers, and the pre-payment and waiting lists typically mean that the company will not have many returns. It does offer some buyback protection, which also helps it price out any return that might occur.

The inventory valuation policy reflects lower of cost or market, meaning that Tesla has to estimate the market value of its vehicles. If it expects to sell a vehicle at a loss, than writedown will be reflected in the year of the expected sale. This policy means that the company may also face added stress on its revenues if it finds itself in the position of selling a car for less than it costs to make.

Tesla's accounting of leases is interesting. For the Model S, the company has a buyback guarantee. On vehicles is sells via third-party financing, it treats this buyback guarantee as a lease in terms of revenue recognition, and furthermore amortizes the cost of the vehicle in the transaction. This creates a situation where instead of recording the car sold at full value (a sale), it is recorded gradually over 39 months. This despite the fact that no lease agreement exists, and that it creates a distortion in the revenue and costs. As a result, one has to look at the units sold and the cash flow statement in order to augment one's analysis of the income statement, owing to this quirk in the way that leases are recognized.

Tesla recognizes revenue under the following condition – where evidence of an arrangement exists, where delivery has occurred and there are no uncertainties with respect to customer acceptance, where the pricing or fees are fixed or determinable and where collection is reasonably assured. One point that is different from many automobile companies is that where delivery has occurred. This is because Tesla delivers to the end consumer, not a dealership, and therefore the risk of returns is much lower; Tesla is responsible for the sale of the car and the handling of financing. The company has often collected a fair bit of money from the end customer prior to shipping the vehicle, which allows it to recognize revenue in this way.

In 2016, the company started reporting leasing revenue separately from general revenues. This is common practice in the automotive industry, but Tesla's leasing revenue was perhaps too small until that point to worry about separate reporting. This also distinguishes cash sales from lease sales, and the attendant credit risk that Tesla will bear as a result of these sales. It further allows for someone looking at the statements to parse the cost of goods sold on both the financing arm of the company and the automotive arm of the company.

With respect to collection being reasonably assured, there are a few different approaches to this. Some companies might prefer to recognize all revenue but note an expense for bad debts. Tesla instead chooses only to recognize revenue where collection is assured, and will not recognize revenue if it expects that this revenue will not be collected.

Tesla recognizes inventories at "the lower of cost or market." Cost is computed "using standard costs for vehicles and energy storage products, which approximates actual costs on a first-in, first-out basis. Costs for solar systems are recognized at actual cost.

There are two elements to this policy. The first is that Tesla uses FIFO as its system, which typically results in lower COGS, but higher inventory valuation. If the company has a quick throughput of inventory, then the choice of FIFO or LIFO does not matter that much, but FIFO is fairly common. Tesla's throughput should be high enough, given that it has back orders on its cars.

The other element to this policy is the valuation at lower of cost or market. This policy recognizes that if the goods have a market value below cost, that this is how those goods should be reflected on the balance sheet. Again, this policy probably does not matter that much to Tesla, given its inventory throughput and the high resale value of its vehicles. However, for an automotive company that sells direct to consumers, this policy could have some interesting impacts down the road if Tesla ever hits a point where it is carrying a significant finished goods inventory.

The company also needs to conduct inventory reviews in order to determine what inventory it is holding, but also what the market value of that inventory is. That process is valuable to the company, but it is also necessary in order to adequately value the company's inventory to determine whether market value or book value is lower. The company determines whether the value of the inventory (selling cost of the vehicles) is lower than the cost to convert inventory into a finished product. Basically, if they are going to sell a car for less than the cost it takes to make it, the inventory will be valued at the final value of the expected sale, and a writedown on the value of the inventory will be required. This is important for a young automotive company that might sell vehicles at a loss, because the company will incur a loss in the year in which the loss occurred – there is a revenue impact to the inventory valuation policy that Tesla has, if it finds itself in the position of selling its cars at a loss.