Chances seem that CATL pricing is better than former sourcing, so despite price cuts margins should be equal or better. Further, several sources suggest that CATL is doing most of pack preparation for the SR vehicles. Of course, we do not know that for certain, but we do know that CATL chemistry and production processes are definitely cheapest in class.
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Near-future quarterly financial projections
- Thread starter luvb2b
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In context the train option is eventually likely however the change of gauge requirements along the route do make the process much more complex than it would otherwise be. Several German exports use rail and some imports from China also use rail. The cost advantage is real, as is time, but the logistics take considerable time to arrange.
Some do promote the service:
Rail connections from China to Germany
https://www.dhl.com/cn-en/home/pres...reight-service-between-china-and-germany.html
For short term financial forecasts I think traditional sea shipping should be the reasonable choice.
The Accountant
Active Member
I understand your point. It is difficult to know the exact Tesla accounting but here is how I have assessed it:
Enhanced Auto Pilot is $4,000 and all of the features have been delivered. Thus $4,000 is recognized upon purchase.
If FSD is $8,000 and delivered features include everything within EAP plus Traffic Light and Stop Sign Control, then more than $4,000 of the $8,000 has been delivered. I assumed $4,300 delivered and $3,700 deferred until we have Auto Steer on Streets.
The Accountant
Active Member
Thanks - I will work out the GF3 cost of manufacturing for Q4 considering your insights on the CATL pricing.
Hopefully we might be able to quantify the advantage from some of the Chinese analysts. I am enquiring about that with a client whose firm also is a CATL customer but I am not optimistic of getting good insight.
dc_h
Active Member
Interesting cost differences balanced against the reduction in inventory, cutting delivery times from about 4-6 weeks from Fremont and China by sea and about 2 to 2.5 weeks by rail. Tariffs on some Chinese companies accused of dumping are high, but I could not find the base tariff schedule. Presumably similar to US imports.
Rail freight transport between China and Europe | DSV.
It can be much cheaper with clever logistics management of gauge changes, among other such things. Tesla seems to be very adept in logistics optimization. In particular anything that can reduce DOH for components or finished goods is very valuable in cash flow terms.
FYI this is the train:- Yiwu–London railway line - Wikipedia
Train is unlikely, but it is an additional option shipping from China to Europe, they might get good rates shipping by rail, simply because the Chinese government wants to promote the line. An additional option might be shipping smaller batches more frequently, or shipping closer to the end of quarter..
@The Accountant Would you Consider elaborating on “Deferred Tax Valuation Allowance” for us non-financial types? I follow your posts with tremendous interest; however, I lack fluency in accounting practices. How will it impact Tesla’s GAAP earnings if it used?
On the front end, let me say thank you for the work you put in. I appreciate it, and view your contributions as significantly advancing Tesla’s Master Plan. Again, thank you Sir.
It's just paper gain, don't have to pay tax on the loss accumulates from the previous year.
In other words, Tesla ran losses for several years. Those losses can be applied against current and future year taxable income. For accounting purposes, you generally record the accumulated unused loss as a deferred tax asset in the year that the loss is earned. However, where you do not have a feasible plan to generate sufficient future income offset those losses, accounting rules would require you to have a “valuation allowance” to reduce the deferred tax asset to only the amount you expect to be able to realize.
Tesla has only recently turned to structural, consistent profitability. So, the point at which it is more likely than not for those historic losses to be actually consumed may have been met. Once that bar is crossed, the valuation allowance can be removed and an immediate impact to GAAP earnings will be realized (due to a massive decrease to income tax expense line).
bkp_duke
Well-Known Member
Not only past losses, but they have tons of real-estate and equipment that would fall under depreciable assets.
I would not be surprised if Tesla didn't pay taxes for the next 10+ years.
The Accountant
Active Member
Jack since 2004, Tesla has had $6.9B in losses which they can use to offset future income in the future.
When you have a loss, you should book a tax benefit in the year of the loss. But since there was no assurance that Tesla would ever be profitable, they could not take these benefits each year. So they have accumulated about $1.9B in benefit that they have not realized on the P&L. Once it is likely they can achieve profits in the future, they can bring all of this benefit the the income statement to catch up for all those years they did not take the beneit.
I identitied this item in January 2020 and had these two posts explaining it:
Tesla, TSLA & the Investment World: the 2019-2020 Investors' Roundtable
Tesla, TSLA & the Investment World: the 2019-2020 Investors' Roundtable
Difficult topic but I hope this helps.
Making the reasonable assumption that Tesla will be GAAP profitable in Q3 and Q4, they will have been profitable for the whole financial year, and would have to owe tax on that. Thus they will be forced to realize the prior loss benefit, at least enough to cover the liability. Are there rules about when to book the rest of it? Can the dribble it out only as they make profits, or realize some of it every quarter or something? Realizing a lot at once would make for a blowout quarter, as you observed before.
bkp_duke
Well-Known Member
Not a CPA, so hopefully one with direct experience can comment, but I do run a business and got into this conversation with our CPA once. My understanding is you basically have to make a choice in how you call forward those prior loss benefits. Obviously you want to call forward and use those that are nearing expiration first, but beyond that it is my understanding that you have leeway in how much of it you utilize at one time. I believe the important part is that, while staying in the rules for calling them forward, you remain consistent in how you do it, so that you do not have to go back and restate prior earnings or take a one-time charge if you make a change in how you are utilizing them.
I would surmise that Tesla would probably use these Tax Benefit Deferred assets reasonably quickly, because they will have to set depreciation schedules for the various Giga/Terafactories, which will likely have a large impact on taxes. Those depreciation schedules I believe would be a lot harder to change once they are set than utilizing past tax credits.
@The Accountant - could you clarify this for us?
The Accountant
Active Member
i believe that most of the Tax Benefit that they have not realized ($1.9B) relates to US taxable losses. So as you mention, current taxable incomein the US is tax free as they use these prior years' tax losses. They may still show tax expense due to taxable income in Europe, Asia, etc.
The rest of it should come in with one large amount.....it usually does not dribble in. Once PwC is comfortable that Tesla is more likely than not to be profitable on sustainly basis, they will take in a large amount of this $1.9B. I estimate it to be somewhere between $1.4B to 1.6B.
Some of it will not be realized and held back to cover aggressive tax positions that Tesla may have taken on tax returns.
The Accountant
Active Member
I am not a tax accountant but have worked with Deferred Taxes quite a bit in my line of work in the past (now retired).
This is a difficult topic that many of my CPA colleagues did not understand.
When you have a tax loss, you can go back to your tax returns of the past 5 years and get refunds for those payments (Carryback). If after doing this, the company still has unused losses, they can use it to offset losses in future years (caryfoward). Sometimes the tax rates are higher in future years, so a company will elect not to carryback and carryforward instead.
Since Tesla had no gains in the past, they have no carryback option and must use the losses as carryforwards.
They will use the losss from 2004 first and then 2005 because they expire first.
I am a Tax Accountant and CPA (in Canada), but work with a number of clients reporting under US GAAP. Just confirming that everything @The Accountant has said in this topic is spot on. Tesla would not have the ability to slowly recognize the benefit. Once they pass the more likely than not measure in terms of likelihood of sufficient future income to consume these tax attributes, there will be a windfall impact to GAAP earnings (and once PWC agrees). Also spot on that SOME may be held back due to aggressive tax positions (if any).
@bkp_duke does raise a good point that the losses may be just SOME of the tax attributes. It’s also possible they have other discretionary deductible pools, tax credits, and tax depreciable asset balances which may also have a similar windfall impact once their valuation allowance is removed.
Artful Dodger
"Neko no me"
Valuation allowances - an explanation for investors | General overview of VA topic
BLOG: Tesla's $1.8B Valuation Allowance: Could it mean FY 2019 GAAP profits and immediate S&P 500 inclusion? | most excellent Blog by our own @FrankSG
Also DO NOT miss the Grand Daddy of all TMC comments on "Valuation Allowance", nor this followup:
The annual 10K comment on the Deferred Tax Valuation Allowance has been consistent for many years....except for this year. | The Accountant Feb 13, 2020:
"I was saving this post for quieter times...but since you asked:
"The annual 10K comment on the Deferred Tax Valuation Allowance has been consistent for many years....except for this year. For the first time, Telsa has not stated that "it is more likely than not that the Tax Asset will not be realized". This change in wording, I believe, means that a partial or full release of the valuation allowance to income is coming soon.
"My guess: No later than Q3 2020; however, if Q1 is significantly profitable, they may take it then. The Valuation Reserve now sits at $1,956M"
(Comment by @The Accountant continues at link above)
"The annual 10K comment on the Deferred Tax Valuation Allowance has been consistent for many years....except for this year. For the first time, Telsa has not stated that "it is more likely than not that the Tax Asset will not be realized". This change in wording, I believe, means that a partial or full release of the valuation allowance to income is coming soon.
"My guess: No later than Q3 2020; however, if Q1 is significantly profitable, they may take it then. The Valuation Reserve now sits at $1,956M"
(Comment by @The Accountant continues at link above)
Also, seach TMC for "Valuation Allowance" beginning Jan 18, 2020. HTH.
Cheers!
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