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  • Tesla's: Marketing Machine Continues To Deflect Demand Discussion [View article]

    Market_Lost knows accounting. He straightened me out on the R&D issue. Tesla's sales/lease transactions are complicated "stuff".

    It's just not possible to have accounting standards that "fit" every business and every business transaction. I didn't see the distortions related to R&D until a week ago. I'm sure there are more, some created by management no doubt, to dress up the numbers. We just aren't aware of them.
    Mar 24, 2015. 11:27 PM | 3 Likes Like |Link to Comment
  • Tesla's: Marketing Machine Continues To Deflect Demand Discussion [View article]

    "If you you have trouble sleeping then you can read them Leases-Joint Project."

    I understand that the "sale" is being treated "like" a lease under GAAP, but my understanding is that Tesla is "selling" the vehicle, not leasing it, to the customer. The language is that Tesla will "buy back" the vehicle at the end of 36 to 39 months.

    Tesla talks of a new revenue recognition standard that becomes effective after Dec 15, 2016. See links. I think this is where the guaranteed resale value transactions fall under, rather than the lease standard. (See page 67 of 10-K)

    "In May 2014, the Financial Accounting Standards Board issued an accounting update which amends the existing accounting standards for revenue recognition. The new guidance provides a unified model to determine when and how revenue is recognized. Under the new model, revenue is recognized as goods or services are delivered in an amount that reflects the consideration we expect to collect. The guidance is effective for fiscal years beginning after December 15, 2016; early adoption is prohibited. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. We have not yet selected a transition method and are currently evaluating the impact of adopting this guidance on our consolidated financial statements."

    Here is guidance on the new revenue recognition standard:

    After reading your post, I thought I might have misinterpreted the transaction, but further after further review, I don't think I have.
    Mar 24, 2015. 10:54 PM | 1 Like Like |Link to Comment
  • Tesla: Forget Range Anxiety, What About Investor Anxiety? [View article]
    ""How is your Betamax running?
    It was a clearly technically superior solution."


    So who is VHS in this analogy?"

    No, Who's on first. :)
    Mar 24, 2015. 05:01 PM | 3 Likes Like |Link to Comment
  • Tesla's: Marketing Machine Continues To Deflect Demand Discussion [View article]
    I agree Market Lost on your second post, as far as what to debit credit. Not sure about what you said about paying out different than what remains on the lease obligation, unless the customer's returned vehicle has some dings etc that would mean paying out less as a result. The resale value guarantee is based on the purchase price, as I understand it, so their liability is limited to a percentage of that price, IMO. I don't see a situation where they would pay out more, but I certainly could be wrong.
    Mar 24, 2015. 04:38 PM | Likes Like |Link to Comment
  • Tesla's: Marketing Machine Continues To Deflect Demand Discussion [View article]

    It would take someone more intelligent than I to project what cash requirements will be in 2015. But, Tesla spent about $1 billion in 2014 from cash, not $400 million. They had $845 million at the start of the year, their financing cash inflow was about $2.1 billion, and they had $1.9 billion at the end of the year. So, $.845 billion plus $2.1 billion, less $1.9 billion equals about $1 billion, basically what was spent on investing activities.

    Even if they had positive operating cash flow for the year, let's say $400 million in CFO. $1.5 billion spent on investing activities would still use up $1.1 billion of the $1.9 billion of cash on hand. That would be sufficient for them to get through the year, if the timing of the receipts versus the payments was right. But Tesla is not forthcoming on information. I have heard nothing in relation as to whether they expect positive operating cash flow or not.

    Don't forget that they had $1 billion in current liabilities at the end of the year. Those will have to be paid in 2015.
    Mar 24, 2015. 10:20 AM | 3 Likes Like |Link to Comment
  • Tesla's: Marketing Machine Continues To Deflect Demand Discussion [View article]

    The original transaction is with customer A. After customer A returns the car and Tesla refurbishes it to resell, any second sale would be with Customer B, so I don't see how you can count revenues now with Customer B, under any standard, when no transaction with an unknown Customer B has taken place.

    The 10-Qs and 10-Ks will spell out where the revenue comes from, so don't know what you mean by "inflated" against the actual business levels. They will break out the revenue from new sales, versus revenue from the resale value guarantee transactions.
    Mar 24, 2015. 09:05 AM | Likes Like |Link to Comment
  • Tesla's: Marketing Machine Continues To Deflect Demand Discussion [View article]

    "bryce wrote:
    "As I said, it looks to me like Tesla at least broke even, earnings wise, in 2014, and HAD POSITIVE CASH FLOW, and I can back it up with numbers. GAAP distorts the economic reality."

    Hahaha, they burned $400mm in cash in Q4 alone. The accountants used to tell us that Enron had positive cash flow. That's why we have standards now, so as not to "distort the economic reality". "

    You have a lot to learn. Look at the example starting on page 80 in the link. That entrepreneur burned through cash as well and he was left wondering if his efforts were worth it. From an accrual basis of accounting they were. Tesla is investing in assets, like the entrepreneur did, in hopes those investments will pay off in the form of increased revenues and net profit.

    I am using a textbook written by accountants to support what I am presenting. What are you using to support your claim that GAAP doesn't distort economic reality? And what's Enron got to do with any of it?
    Mar 24, 2015. 06:53 AM | 2 Likes Like |Link to Comment
  • Tesla's: Marketing Machine Continues To Deflect Demand Discussion [View article]
    It does look to me like Tesla will need an infusion of cash to fund expansion this year, else it's cash on hand will run pretty low. My question is where will that funding come from?
    Mar 24, 2015. 06:14 AM | 1 Like Like |Link to Comment
  • Tesla's: Marketing Machine Continues To Deflect Demand Discussion [View article]

    I'd suggest taking a look at the illustration of the difference between cash basis and accrual accounting starting on page 80, in the link. Cash basis accounting showed the entrepreneur lost money on his business, while accrual basis accounting showed he made a profit. That is why it is important to classify transactions as accurately as possible. The numbers we are talking about, the difference, is material to net income or loss, and to operating cash flow and investing cash flows.
    Mar 24, 2015. 06:08 AM | 1 Like Like |Link to Comment
  • Tesla's: Marketing Machine Continues To Deflect Demand Discussion [View article]

    " I think the debates on whether or not to expense R+D are somewhat misleading. In the end, both methods get you to the same place in the end"

    Properly classifying transactions is not "misleading". It gives you a clearer picture of a company's performance or lack thereof. For Net Income, both methods do not get you to the same place. Net Income would be higher or Net Loss lower for the year if some development costs were capitalized. For cash flow, it tells you how much, if any, OCF is available to pay for investing activities, i.e. principal payments and interest on debt on borrowed funds and what, if anything, is left over.

    "In the case of Tesla, I think the impact of expensing R+D would be relatively small,"

    How do you arrive at that? It doesn't make sense. Tesla is very young, as far as the amount of R&D expenditures that have been incurred. A total of $1.2 billion have been incurred from 2011 through 2014. If development costs benefit at least 10 years, and 1/3 of annual R&D expenditures are capitalized, that makes a sizable amount of R&D still listed as assets and not expensed. Tesla just began producing and selling its first mass produced car, the Model S, in mid 2012. Furthermore, that would mean that out of the $464 million of R&D expenditures in 2014, $154 million would be capitalized. About 15% ($23 million) or so of that number would be amortization expense from capitalization of previous years, but that still leaves $131 million in development expenditures that would be taken away from the $294 GAAP Net Loss, along with 90% of the gross profits from the resale value guarantee sales deferred revenue, $74 million, reduces the GAAP Net Loss of ($294) million down to ($89) million. It also makes operating cash flow positive to the tune of $97 million.

    What I see with VW is that their capitalized R&D was 35% of total R&D for the year. (See page 125 of annual report) For BMW, 33% of R&D was capitalized in 2014 ($4.566 billion eruo, see page 38 of report) and $1.068 Billion amortized. For Tesla, the amortization expense would be a lower percentage of capitalized costs, IMO, versus BMW.

    If cash basis accounting, what expensing all R&D as incurred amounts to, were as good as accrual, the SEC and FASB would use it instead of accrual accounting for public company reporting. That is not the case.
    Mar 24, 2015. 05:22 AM | 1 Like Like |Link to Comment
  • Tesla's: Marketing Machine Continues To Deflect Demand Discussion [View article]

    "One correction. "R&D expenses in 2014 reflected our engineering work on Model X as well as development work on our dual motor powertrain and other development programs including localization efforts for foreign markets." There is little to no investment to date in R+D for the Model 3 or it would have been included in the 10-K."

    I am guessing you are referring to this statement I made:

    "Development costs for the Model X or Model III will benefit more than one year, so to call them "period" costs, meaning costs applied to the current month, quarter, or year, is absurd."

    The point I was trying to make was that some development costs, whether it is for the Model X or for other models that Tesla has already placed in production, benefit future years and not just 2014.

    So, when those expenditures are expensed in one year, net income is understated or net loss is overstated.

    I don't have any "numbers". Just that the GAAP standards under which all public companies are required to report are a broad set of standards and don't "fit" perfectly the operations of all companies, meaning that GAAP can distort the underlying economic reality in some cases.
    Mar 24, 2015. 03:57 AM | 2 Likes Like |Link to Comment
  • Tesla's: Marketing Machine Continues To Deflect Demand Discussion [View article]
    Market Lost,

    Thanks. It doesn't take away the fact that all the expansion must pay off for Tesla to begin to generate sufficient operating cash flow to begin to pay for the expansion and to reward shareholders. High risk, high potential for reward or loss, IMO.

    But for the warrants to be fully exercised, the share price would have to be over $500. I doubt shareholders would complain with an extra 11 million shares diluting earnings if that were to happen. I wouldn't.
    Mar 23, 2015. 11:22 PM | 2 Likes Like |Link to Comment
  • Tesla's: Marketing Machine Continues To Deflect Demand Discussion [View article]

    "Just for clarification, am I right in saying that Tesla treats its R&D expenses in exactly the same way in GAAP and non-GAAP - i.e. expensed now."

    Not exactly. For non-GAAP, Tesla takes out the stock based compensation included in GAAP R&D expense. Except for that R&D under GAAP and non-GAAP are the same.

    See the shareholder newsletter, the very last page.
    Mar 23, 2015. 10:54 PM | 2 Likes Like |Link to Comment
  • Tesla: Forget Range Anxiety, What About Investor Anxiety? [View article]

    Yes, I have to keep pounding the fact that GAAP is distorted until everyone starts to puke at the sight of me. You don't get it. That's cool. Good luck with your investment.
    Mar 23, 2015. 10:40 PM | 5 Likes Like |Link to Comment
  • Tesla's: Marketing Machine Continues To Deflect Demand Discussion [View article]
    @ ckarabin, but also for Bodian from a post higher up the thread:

    "This is all fact from their 10K, certainly not hubris. "

    The "facts" per GAAP need to be interpreted, IMO.

    First of all the warrants issued are in conjunction with convertible debt issued in 2013 and 2014. See link.

    The strike price for about half of the 11 million plus shares of stock associated with the warrants is in excess of $500 per share. It's doubtful those warrants will be exercised, IMO. And Tesla purchased bond hedges to offset the dilutive effect of the exercise of the warrants, so I don't see but 2 million shares being exercised, at the most (Tesla shares would be at $300/ share) Dilution central? I don't think so.

    In looking at GAAP statements, oftentimes one has to "interpret" the results, as stated per the link. I realize that the bears and bulls aren't going to like this, but the "facts" are it's something that oftentimes has to be done to get a clearer picture of economic reality.

    "Accounting Analysis (see pages 12-13 in link)
    Accounting analysis is a process of evaluating the extent to which a company's accounting reflects economic reality. This is done by studying a company's transactions and events, assessing the effects of its accounting policies on financial statements, and adjusting the statements to both better reflect the underlying economics and make them more amenable to analysis. "

    Wait a minute, you mean GAAP doesn't always reflect economic reality? Say it isn't so! They are suggesting you have to "adjust" the "GAAP statements" to better reflect the underlying economics? WT*??!!! Heresay!

    Yep, it's true, you have to have some accounting background if you want to understand the statements. A novice to GAAP isn't going to understand the financials, as here for Tesla, for example.

    "Second, discretion and imprecision in accounting can distort financial statement information. Accounting distortions are deviations of accounting information from the underlying economics. These distortions occur in least at three forms. (1) Managerial estimates can be subject to honest errors or omissions. This estimation error is a major cause of accounting distortions. (2) Managers might use their discretion in accounting to manipulate or window-dress financial statements. This earnings management can cause accounting distortions. (3) Accounting standards can give rise to accounting distortions from a failure to capture economic reality. These three types of accounting distortions create accounting risk in financial statement analysis. Accounting risk is the uncertainty in financial statement analysis due to accounting distortions. A major goal of accounting analysis is to evaluate and reduce accounting risk and to improve the economic content of financial statements, including their comparability. "

    You got that? There are at least three ways that distortions in the financial statements can occur. I am addressing number three hear. I am saying that the accounting standards under which Tesla's financial statements are prepared, GAAP, is causing some distortions in them.

    First of all, the revenue recognition standard under which Tesla recognizes revenue may distort Telsa's revenue. I say "may" because the possible distortion depends on future events that have not occurred yet. Tesla sells some of its vehicles under a Resale Value Guarantee program where Tesla guarantees the resale value of the Model S at the end of 36 months. If that resale value is less than or equal to the actual resale value of the Model S, at that time, it is very unlikely the car will be returned to Tesla, requiring Tesla to return the cash collected to the bank or the customer. That money is collected at the time of sale and listed as a liability under GAAP. Under this sales arrangement, the sale is treated as a lease. 100% of the sales price is collected in cash at the time of sale, but the entire sales proceeds is deferred. About 50% of the revenue is recognized, ratably, over the life of the three year term, and the remainder (the resale value guarantee) is recognized at the end of 36 months, assuming the customer keeps the car. If the customer returns the car at the end of 36 months, the cash collected that represents the resale value guarantee has to be paid out to the bank or the customer. Currently, it appears the resale value of the Model S is holding up, so there is no incentive for the car to be returned to Tesla at the end of the 36 months. If that continues to hold true, the currently reported revenues for these transactions under GAAP will distort (understate) the real current revenues.

    Second, the idea behind R&D projects is to find projects that generate positive future returns for Tesla. The projects can be monitored and the realization or non-realization of expectations can be estimated as the projects progress. However, currently, under US GAAP, R&D outlays are treated as if they have no future benefits. They are all expensed on the income statement, as incurred. So, conceptually, the current approach FASB uses is incorrect. Conceptually, R&D expenditures have future benefit. FASB needs to rethink this, IMO.

    So, currently under GAAP, no development expenditures that produce future economic benefits to Tesla can be capitalized (placed on the balance sheet instead of being expensed on the income statement) and amortized over their life. So, IMO, this causes net income to be understated, or net loss to be overstated. It also causes operating cash flow from operations to be understated and cash used in investing activities to be understated.

    So, there you have it. GAAP, unadjusted, is distorted. IMO, Tesla's results of operations, cash flows from operating activities, and financial position are materially better than GAAP portrays. That doesn't negate the risks involved with Tesla. Most of its funding for investing activities is still coming from external sources (debt or equity) and it is using a lot of cash which is coming from these external sources, primarily. However, the bears would like you to believe that GAAP, unadjusted, is "fact", and that simply isn't the case, IMO.
    Mar 23, 2015. 10:25 PM | 3 Likes Like |Link to Comment