Summary

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.

Accounting Policy #1 – Revenue Recognition

Tesla recognizes revenue under... 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.

Accounting Policy #2 – Inventory Valuation

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,…