Tesla Will Look Better on Paper Thanks to Accounting Change (1)
Posted March 20, 2019, 4:46 AM - Updated March 20, 2019, 1:33 PM
- Tesla tells investors balance sheet will shrink due to lease accounting changes for solar products
Revenue recognition rules also helping the leveraged automaker’s balance sheet
Tesla Inc.’s balance sheet could soon appear healthier because of accounting rule changes, potentially making it easier for the debt-laden carmaker to obtain needed financing.
Tesla told investors in a recent filing that it expects new lease accounting rules this year will reduce its assets overall by as much as $500 million, with a similar reduction in liabilities of up to $600 million.
The decrease is unusual, because the balance sheets of most companies will grow under the new lease accounting rule, which requires companies to report operating leases on their balance sheets for everything from bank branches to airplanes for the first time.
The change is a boon to Tesla’s $30 billion balance sheet because its current high debt load could be a barrier to its ability to raise capital for investment and to expand its vehicle production, said Kevin Tynan, senior automotive analyst with Bloomberg Intelligence.
“Even if it’s paper wealth, or the moving of assets or liabilities around to the point where it makes the balance sheet look healthier, this is a company that needs that way more than its competitive peers, who are 100-year-old companies,” Tynan told Bloomberg Tax.
Solar Leases, Revenue Rules Boost Balance Sheet
For Tesla, the big change is that it will start accounting for any new solar energy leases under revenue recognition rules, removing the leases from the balance sheet.
Tesla’s solar customers benefit from the power generated from the electrical equipment, not the equipment itself. New solar leases will be treated as a revenue contract while existing solar agreements will fall under the leasing standard, ASC 842, an accounting change common in the solar industry, a company spokesman told Bloomberg Tax.
The spokesman stressed that the accounting changes represent an immaterial impact to Tesla’s income and cash flow statements.
The decision about whether to book a transaction as a sale or a lease, and which accounting rule to follow, depends on the source of the revenue and whether the revenue from a related product or from the lease of the asset is greater, said Dee Mirando-Gould, managing director of the technical accounting consulting practice at Moss Adams LLP. Variable payments, the amount of beneficial use from an asset, and other factors, including how an agreement is structured, can affect whether a company accounts for a transaction as a lease, Mirando-Gould said.
Tesla became a major lessor of solar energy and power generation equipment following its 2016 acquisition of SolarCity.
A change in rules related to when revenue is recognized also has contributed to Tesla’s shrinking balance sheet.
Tesla offers customers a guarantee that it will buy its vehicles back, a perk designed to attract potential buyers wary of the company’s new technology. Under previous rules, cars sold with this guarantee were treated as leases for accounting purposes. That meant the carmaker booked rental income and kept the remaining value of the car on its balance sheet, said Bill Bosco, a leasing consultant to the Equipment Leasing and Finance Association.
Revenue rules that Tesla adopted in 2018, ASC 606, allow the carmaker to treat those sales as true sales, booking the full price of a vehicle as revenue up front and removing the car from the balance sheet. The result is a decrease to Tesla’s assets, Bosco said.
That balance sheet impact is unique to the auto-industry newcomer, Bosco said.
(Updates with additional reporting in paragraphs 6 and 8.)
To contact the reporter on this story: Amanda Iacone in Washington at firstname.lastname@example.org
This article was originally published in Bloomberg Tax’s Daily Tax Report®. Rely on expert practitioners for practical guidance and real-world approaches to complex accounting issues.