At a Tesla showroom that was showcasing a Model 3.
Tesla automotive revenue recognition comes from the following segments:
- Automotive sales (inclusive of regulatory credits)
- Automotive leasing
Revenue Recognition from Automotive Sales
According to the company quarterly report, all automotive sales revenue includes revenue related to sale of Model S, Model X and Model 3 vehicles. In addition, automotive sales also include revenue derived from internet connectivity, Supercharger access, software updates for cars equipped with autopilot hardware and regulatory credits to other automotive manufacturers.
In terms of accounting, automotive sales revenue is recognized from two main segments, which are:
- Sale of vehicles without resale value guarantee
- Sale of vehicle with resale value guarantee
Revenue Recognition from Automotive Sales without Resale Value Guarantee
For sales of vehicles without resale value guarantee, the revenue is related to the deliveries of new vehicles to customers and the deliveries of other features and services such as internet connectivity, access to Supercharger network and future over-the-air software updates. For sales of new vehicles, the revenue is recognized once the ownership of a vehicle is transferred to the customer.
But for the sales of other features such as internet connectivity, Supercharger and over-the-air software update, revenues are deferred and then recognized over time on a straight-line basis since Tesla is obligated to deliver such services to customers over the ownership life of the vehicle which is eight-year life for vehicle and four-year life for internet connectivity.
In addition, revenue related to Autopilot and full self-driving features is recognized immediately once the functionality is delivered to customers.
Revenue Recognition from Automotive Sales with Resale Value Guarantee
For sales of vehicles with resale value guarantee, the revenue recognition is consistent with sales without resale value guarantee. The difference lies in that the revenue is recognized as a sale with a right of return and when the customer has no significant economic incentive to exercise the option of returning the vehicle.
Tesla determines whether a customer has significant economic incentive of returning the vehicle by comparing the vehicle’s estimated market value with the resale value guarantee at the time the option is exercisable. In this sense, when the estimated market value is higher than the resale value guarantee, the customer will have no obvious incentive of returning the vehicle to Tesla.
Besides, Tesla also estimates a sale return reserve, which is a liability in the balance sheet, for revenue recognized as sales with resale value guarantee. The sale return reserve is recorded starting 1Q 2018 due to the adoption of new revenue standard for automotive sales with resale value guarantee. Before that, all transactions with resale value guarantee were recorded as operating leases.
The sale return reserve is recorded as part of the “Accrued liabilities and other” in the balance sheet when the reserve is a current liability and in “Other Long-Term Liability” when the reserve is a long-term liability.
Revenue Recognition from Automotive Leasing
Based on the quarterly report dated 2Q18, automotive leasing revenue is generated from lease collection for Model S and Model X vehicles. Model 3 vehicles are not yet offered for leasing as of 2Q18.
In terms of revenue recognition, automotive leasing revenue consists of revenues recognized from the following items:
- Direct vehicle leasing
- Vehicle sales to leasing partners with a resale value guarantee and a buy back option
- Vehicle sales to customers with a resale value guarantee where exercise is probable
Revenue Recognition from Direct Vehicle Leasing
For direct vehicle leasing, Tesla is the lessor whereas customer is the lessee. In direct vehicle leasing, customers are leasing vehicles directly from Tesla for up to 48 months. At the end of the lease terms, they have the option of returning the vehicle to Tesla or purchasing it for a pre-determined residual value.
These leasing transactions are recognized as operating leases. Leasing revenues are recorded to automotive leasing revenues on a straight-line basis over the lease term. The cost of manufacturing of vehicles are capitalized as operating lease vehicles, net, in the balance sheet and depreciated gradually over the course of the lease term to cost of automotive leasing revenue.
In addition, initial direct costs such as shipping, referral fees, contract administration and sales commissions are also capitalized as an element of operating lease vehicles, net, and subsequently depreciated over the course of the lease term to cost of automotive leasing revenue.
Revenue Recognition from Vehicle Sales to Leasing Partners with a Resale Value Guarantee and a Buy Back Option
As ownership of the vehicles under sales to leasing partners with a resale value guarantee and a buy back option has not been transferred to customers, these transactions are accounted for as interest-bearing collateralized borrowings. In other words, they are being recorded as an interest-bearing loan borrowed from leasing partners with leased vehicles as collateral.
Under these transactions, Tesla received cash for the full price of the vehicles when they are being leased out, but revenue is not immediately recognized. Instead, the cash received is recorded as a loan borrowed, a liability in the balance sheet, with a short-term and long-term portion. In the cash flow statement, it is recorded as collateralized lease borrowings within cash flow from financing activities.
According to the quarterly and annual report, the short-term portion is recorded in “Deferred Revenue” whereas the long-term portion is recorded in “Resale Value Guarantee” in the balance sheet. Revenue is recognized to automotive leasing revenue on a straight-line basis over the lease term from the “Deferred Revenue” portion.
Over the lease period, part of the “Deferred Revenue” will be amortized to automotive leasing revenue and a portion of the long-term liability “Resale Value Guarantee” will be re-classified to the short-term “Deferred Revenue”.
Revenue Recognition from Vehicle Sales to Customers with a Resale Value Guarantee where Exercise Is Probable
When the customers have significant economic incentive to exercise the resale value guarantee where the vehicles will be returned to Tesla, these transactions will be accounted for as operating lease.
Under this program, the amount of sale equal to the resale value guarantee, which is recorded as a long-term liability in the balance sheet, is deferred until the guarantee expires or is exercised. The remaining sale proceeds which equals the current liability of deferred revenue in the balance sheet is recognized on a straight-line basis to automotive leasing revenue over the lease period.
The cost of these vehicles is capitalized as operating lease vehicles, net, on the balance sheet and their values, less salvage values, are depreciated to cost of automotive leasing revenue over the lease period.
Revenue Recognition from Automotive Regulatory Credits
Moreover, the automotive segment also includes the revenue from sales of ZEV and GHG credits to other automotive manufacturers. The ZEV is regulatory credit under a state law such as California requiring auto manufacturers to ensure a portion of the vehicles sale is zero-emission vehicles. The GHG credit or Green House Gas credit is similar to ZEV credit where it’s applicable at federal level requiring automakers to comply with the emission standard.
Disclosure:
The authors wrote this article themselves, and it expresses their own opinions. The authors are not receiving compensation for writing the article. The authors have no business relationship with any company whose stocks are mentioned in this article.
References:
1. All financial information in this page were obtained from Tesla quarterly and annual reports through its Investor Relation website: Tesla Investor Relations.
2. Featured image was obtained from 8000vueltas and london road.
