Business decisions + Accounting = EAP/FSD Fiasco

[TSAaccount]

Plenty of discussion on the business decisions around the EAP/FSD changes but many do not realize that accounting rules are playing a big part on why things are happening the way they are.

Accounting 101

If Tesla gives anything away for free with a car purchase, the freebie must be accounted for in the period in which the car sale took place. If Tesla were to give free EAP or discounted FSD to owners of vehicles sold in 2018, the value of those giveaways would need to have been accounted for in 2018 (i.e. - reflected as a reduction in revenue).

Fiasco context

Since they've already announced their 2018 financials, they cannot provide the freebies to 2018 owners as they do not want to restate 2018 numbers.

2019 deliveries get the freebies. Why? Because they can still account for the freebies in the first quarter of 2019 financial statements. They've already announced that the first quarter will be a losing quarter so taking the negative revenue hit for these freebies in the first quarter makes financial sense (vs any other period) and they can justify it by stating that this is to help make up for the reduced IRS rebate.

The reduced prices for EAP/FSD will be made available in 1 month? Why? 1 month gets you into the next fiscal quarter. The flood of excited non EAP/FSD owners who will plunk down cash for the functionality will help boost the second quarter revenue rather than taking in all that revenue in the first quarter which will be a relatively bad quarter as noted above.

Accounting is not the only reason for all the actions being taking but certainly a consideration.

Bean counters matter

 

[dave999z]

Don’t buy it. Giving away software now does not reduce 2018 revenue.

Even if that’s an issue, just sell FSD to EAP owners for $1.

 

[argon2018]

Don’t buy it. Giving away software now does not reduce 2018 revenue.

Even if that’s an issue, just sell FSD to EAP owners for $1.

lol why should they sell FSD for only a dollar?

 

[Big Dog]

Don’t buy it. Giving away software now does not reduce 2018 revenue.

Just the opposite. If they offer to pre-'19 purchasers, they might have to restate 2018 income by increasing that income. (All the $3k's for pre-FSD are on the balance sheet as a liability. To move them off the BS, the dollars go into income, increasing it.)

 

[smjbh5]

Plenty of discussion on the business decisions around the EAP/FSD changes but many do not realize that accounting rules are playing a big part on why things are happening the way they are.

Accounting 101

If Tesla gives anything away for free with a car purchase, the freebie must be accounted for in the period in which the car sale took place. If Tesla were to give free EAP or discounted FSD to owners of vehicles sold in 2018, the value of those giveaways would need to have been accounted for in 2018 (i.e. - reflected as a reduction in revenue).

This is incorrect. This would come through as a new transaction (new order - sw upgrade) and thus be recognized in the period the transaction takes place. They would not be adjusting a prior order, but creating a new one for the SW. Now if they were to transact it as an adjustment for a prior order, then what you said is correct.

 

[TSAaccount]

Appreciate the armchair accountant info but you’re all incorrect. In layman’s terms, you cannot give something away for free without accounting for it and you can only take revenue when you’ve delivered. An EAP/FSD freebie would have to be accounted for. If a car was sold in 2018 and they did contemplate the give away, then yes @Big Dog, a deferred revenue would have been placed on the books in 2018 and revenue for the period would be reduced by the amount deferred. When the software is delivered then they would recognize revenue. But they very likely did not contemplate this giveaway which would be evident by the many changes in the offering over the last week.

Yes, the could theoretically say that the cost of the EAP/FSD addon is .01, @dave99z and then articulate that any 2018 impact is immaterial. Issue with that approach is that the .01 price point would have to stay intact in the future to demonstrate that the price point has substance. Apple had taken a similar accounting approach several years back.

@smjbh5 - you would be correct for the follow on $3K and $2K add on purchases but because a freebie is not a new transaction but rather connected to the 2018 sale my treatment noted applies.

We've lost many of the forum members at this point, but simply put - business decisions are driven, in part (sometimes large part) by accounting consequences. If we cannot agree on that - then there is no use in continuing the conversation.

Source: publicly company accountant in silicon valley with 15+ years of experience on revenue recognition.

 

[insaneoctane]

@TSAaccount, can't they give 2018 EAP owners the FSD product for free without any bottom line impact simply by stating that the free version they would be giving away is unique and different from what they currently are offering? It would be absolutely true because the FSD offered today has a completely different feature set than what Tesla would offerccurrent EAP owners. FSD today has Navigate on AutoPilot, freeway entrance and off ramp, and more. The "free" version of FSD that Tesla could offer EAP owners would not need those features and could easily be considered a zero value retired product. Seems like where there is a will there is a way. Tesla is an innovative company... Consider it an innovative financial solution....

 

[TSAaccount]

Elon Musk on Twitter

Anecdotal but on point as well.

 

[GeoX750]

Elon Musk on Twitter

Anecdotal but on point as well.

Wow, direct and honest too.

This guy could become something.

 

[TSAaccount]

@insaneoctane - that's a clever solution but you're still in the same boat. The accounting gods have stated that nothing is free. Tesla would have to determine a value for the incremental FSD functionality since they had not delivered by the end of 2018 and that amount theoretically would impact 2018 numbers. It's a difficult job for the Tesla CFO and accounting team because they are moving very fast at Tesla and everything that is considered will have a financial implication. Some are forward looking and some historically impacting; the latter of which causes great concern for accountants and auditors since Tesla is already under the SEC microscope.

 

[insaneoctane]

nothing is free

Yes, but $100 for an old retired product would work

 

[TANGO SUKKA]

nothing is free.

the air you breathe is. for now.

 

[MXWing]

I’m not an expert on gaap and balance sheets but I do know two things:

1.) The EAP/FSD fire sale starts on the first day of Q2.

2.) Tesla makes more on every old customer adding EAP/FSD than selling a new 35K car with no options.

 

[TSAaccount]

@insaneoctane - $100 possibly may work but onus is on Tesla to support that figure. If it was a valid value, then they need to determine impact on 2018 financials and if it is material to the figures. At the very least, they would have a Sarbanes-OXley financial control issue as they likely did not account for these amounts in the correct time frame (2018).

@MXWing - I believe the timing is all to do with accounting. They want that incremental revenue in Q2 not in Q1 which will be a period negatively impacted by the 2019 EAP/FSD freebies + restructuring charges. Also, they will get a beneficial margin impact in Q2 since there is very little cost to push the EAP updates to the cars.

 

[Big Dog]

I’m not an expert on gaap and balance sheets but I do know two things:

1.) The EAP/FSD fire sale starts on the first day of Q2.

2.) Tesla makes more on every old customer adding EAP/FSD than selling a new 35K car with no options.

1. I've always assumed that TSLA would offer Holiday specials: 'buy EAP for da special person in your life'.

2. EAP added by existing customers is pure profit since its all sw with immaterial expense.

 

[sperkin]

Thank you for this. I didn't think about it this way. Our financial team always ask me to produce something new at year's end and sell to our partners so they can pay us next year's millions this year early. It has to do with how we report earning for the current year. Makes a lot of sense now. Almost like a pyramid scheme. Tesla can't rob anyone this year to pay for last year since earning are already reported