Accounting terminology can be a bit complicated especially since many terms are similar but not the same (expense, provision, reserve, accrual, deferral, etc.). This post if meant for non-finance members (finance members please skip)
To keep this post brief, I will cover only 2 of the terms that are very relevant to Tesla: Deferred Revenue and Reserve.
I will use the following example:
When Tesla sells an automobile for $57k ($50k base and $7k FSD) they have to defer the revenue on the FSD until earned and also record a reserve for warranty expenses (lets say $0.5k)
Here would be the entries:
FSD Deferral:
Debit Revenues $7,000 (reduces revenue on the income statement)
Credit Deferred Revenue $7,000 (a balance sheet account)
Once the FSD is earned, the entry above (or a portion) is reversed (Revenue goes up and balance sheet account goes down)
Warranty Provision
Debit Warranty Provision $500 (increases expenses on the income statement)
Credit Warranty Reserve $500 (a balance sheet account).
When this particular vehicle incurs warranty service, the expense does not go to the income statement but rather gets deducted from the Warranty Reserve that was set up when the vehicle was originally sold.
Summary:
Reserves are usually expenses that have been recognized but not yet paid.
Deferred Revenues are usually revenues that have been collected but not yet earned.
Both sit on the Balance Sheet as credits.
When discussing the upside potential of FSD, we are discussing when the FSD Deferred Revenue will get released; however, if you say instead "when the accrual gets released" you're not technically right but it is understood.
