Tesla Inc. reduced its accumulated deficit, built up from years of chronic losses, by $520 million pretax at the start of 2018, according to its annual report, thanks to new revenue recognition accounting rules that also allow the electronic car maker to post revenue from leased cars much faster.
As late as the third quarter, Tesla TSLA, -1.64% was still not saying much about the impact of the new standard, only that it was still evaluating the new rules and had not decided on an approach. By contrast, Ford Motor Co. F, -2.53% had already completed its implementation as of Jan. 1, 2017, and General Motors Co. GM, -3.29% started telling investors about the potential $1 billion impact after the second quarter.
See also:Tesla mum on new accounting rules that could significantly change financial results
All three companies decided to implement the new revenue standard using the “modified retrospective” method, which does not require the company to recast prior period results for reporting consistency, and allows them instead to make a cumulative adjustment to the beginning balance of shareholder equity in the year of adoption.
MarketWatch reported last August that changes in how revenue from leased vehicles with resale guarantees would be recognized under the new rules, based on advice that auditor PwC was giving clients, would likely result in Tesla’s top line suddenly looking much bigger. Under the previous rules, Tesla recognized this revenue and related costs over time rather than immediately after a car was delivered to a customer.
See also:New revenue rules mean more work for companies, big revenue for consultants and auditors
Read:A revenue rule change is coming and every company will be affected
Tesla quietly discontinued its resale value guarantee program, which began in 2013, on July 1, 2016 but its obligation for the prior guarantee of a Model S after three years remains. Resale value guarantees that could be exercised in 2018 were $375.7 million on December 31, 2017. Tesla will stop recognizing lease revenue in 2018 for the cars sold with a resale value guarantee prior to 2018 and vehicles leased in the past through leasing partners. The cumulative adjustment for the difference between the remaining lease revenue and what can be recognized immediately was booked to the beginning equity balance for 2018.
See also:Tesla quietly kills guarantee of Model S resale value
Tesla said in its annual report that half-a-billion dollar positive impact from the adoption of the new revenue recognition rules was because it could now accelerate the revenue recognition of some car sales to customers or to leasing partners with a resale value guarantee. Those sales will now be accounted for as sales with a right of return instead of operating leases or collateralized lease borrowings. The company did warn, however, that its current interpretation is subject to change based on market conditions, incentives or program offerings.
A Tesla spokesman did not immediately respond to a request for comment.
Ford got approval for how it implemented the new rules from PwC, the same auditor as Tesla, and also notched a $530 million positive impact from the rule change earlier, as of January 2017, according to its annual report. Ford said that the positive impact was related to how it accounts for revenue from leased vehicles. The U.S. retail installment and lease share of Ford retail sales has been declining, to 55% in 2017 from 56% in 2016 and 65% in 2015.
GM GM, -3.29% on the other hand, reported a $1 billion negative impact to its equity account from the new accounting standard when it reported its 2017 results on Feb 6. GM recently ended a 100+ year audit relationship with Deloitte to switch to EY. The company said that certain transactions with daily rental car companies would qualify for accelerated sales recognition instead of being spread out over time. However, GM also noted that it would be required going forward to recognize the cost of sales incentives much sooner.
A spokesman from GM did not immediately respond to a request for comment.
E.W. Niedermeyer, a freelance auto industry analyst and founder of DailyKanban.com, says there are a couple of potential factors that could explain why new lease accounting rules seem to be hurting GM more than others. “Ever since the 2009 bailout. GM has relied heavily on leases to move its slow-selling compact and mid-sized sedans and hatchbacks. Either their lease incentives are higher than the competition or their residual values are dropping faster due to the glut of off-lease vehicles returning to auctions,” Niedermeyer told MarketWatch.
Tax reform had barely any impact on Tesla, even though the company, similar to many big banks, had significant deferred tax balances. That led the banks to take big profit hits as the value of those deferred assets fell as the tax rate came down.
As MarketWatch reported in December, Tesla had already taken the hit for the likelihood those assets would become worthless before they could ever use them.
“The Tax Act,” the company wrote in its annual report, “did not give rise to any material impact on the consolidated balance sheets and consolidated statements of operations due to our historical worldwide loss position and the full valuation allowance on our net U.S. deferred tax assets.”
Read:Even with its losses, Tesla won’t take a big hit from lower tax rate
Tesla said it had no foreign earnings as of December 31, 2017 and, therefore, was not subject to the additional mandatory repatriation tax. Although some of its foreign subsidiaries have accumulated earnings, those are intended to be “indefinitely reinvested” outside of the U.S. and the company has not recorded any deferred tax liabilities for these amounts either.
The “unrecognized deferred tax liability associated with these earnings is immaterial,” the company wrote at year-end.
GM recorded $7.3 billion in tax expense in the year ended December 31, 2017 for the effects of tax reform, according to its filings with the Securities and Exchange Commission. The amount relates “almost entirely” to the revaluation of its deferred tax assets to the 21% tax rate.
Ford did not itemize the impact of tax reform on its business in its annual filings. Chief Financial Officer Bob Shanks told FOX Business on Jan. 24 that the company “saw benefits from the impact of the tax reform act to the tune of about $400 million in 2017 results. But the reason that there is no change on tax going from 2017 to 2018, is the effective tax rate both in 2017 and 2018 are 15% or so. That’s because our team did a great deal of tax planning in 2017 in advance of the tax reform act that already gave us (a) very effective lower tax rate.”
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