For the exclusive use of A. Gohil, 2022. 9-121-009 REV: NOVEMBER 9, 2020 PAUL M. HEALY MARSHAL HERRMANN Accounting for Assets at Tesla In early March 2020, Alessandra Morales, an experienced analyst at a large U.S. brokerage firm was asked to provide an overview on accounting for assets for the incoming cohort of new hires in the firm’s research department, most of whom had only limited financial background. As the basis for her session, Morales decided to focus on the assets for Tesla, Inc., the U.S. designer, manufacturer and retailer of electric vehicles, and energy generation and storage systems. Tesla was founded in 2003 by two engineers looking to prove the superiority of electric cars over gasoline vehicles. Elon Musk, the engineer and entrepreneur, became an early investor and chairman of the board. Musk played an active role in the development of the company’s first car, the Roadster, and subsequently became Tesla’s CEO. Launched in 2008, the Roadster, a luxury sportscar, used the company’s innovative battery technology and electric powertrain. Tesla later introduced a variety of additional models, including the Model S (a luxury five-door electric sedan), Model X (a mid-sized luxury SUV), and Model 3 (a more affordable four-door sedan). The company’s vehicles were produced at its factories in Fremont (California) and Shanghai, with plans under way for adding additional factories in Reno (Nevada) and Berlin. Tesla’s distribution model for its cars differed from traditional auto makers. Rather than building a network of dealers to sell its cars, the company opened Tesla stores to showcase its vehicles, and encouraged customers to buy their cars on line. Qualifying customers could purchase the vehicles outright, or could lease them from the company for up to 48 months. At the end of the lease term they could either return the cars or purchase them at predetermined residual values. Tesla energy business developed, manufactured and sold homeowners, small and large businesses, and utilities rechargeable batteries to manage renewable energy generation, storage, and consumption. However, in 2019 it generated only 6% of the company’s revenues. 1 Tesla went public on Nasdaq in June 2010. Through December 31, 2019 the company’s stock had increased by 1651% versus 320% for the Nasdaq Composite Index. 2 In 2019, it delivered 367,500 cars, 50% more than in 2018 and more than triple the number sold in 2017. 3 From 2012 to 2019, Tesla’s delivered nearly 900,000 electric vehicles globally. 4 Yet, except for a few quarters, it had yet to consistently operate at a profit. Professor Paul M. Healy and Teaching Fellow Marshal Herrmann prepared this exercise as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 2020 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. This document is authorized for use only by Abhishek Gohil in TGM 517 Global Accounting & Financial Management (MGM SP22) taught by Euvin Naidoo, Thunderbird School of Global Management from Jan 2022 to Mar 2022. For the exclusive use of A. Gohil, 2022. 121-009 Accounting for Assets at Tesla In preparation for the class, Morales downloaded the assets section from Tesla’s latest balance sheet, as well as the company’s income statement, and generated an assignment and plan that would provide an overview of each major asset. Tesla Inc. Assets at December 31, 2019 and 2018 (in $millions) 5 Current assets Cash & restricted cash Accounts receivable, net Inventory Prepaid expenses and other Non-current assets Operating lease vehicles Solar energy systems, net Property, plant & equipment, net Intangible assets Other Total assets 2019 2018 $6,514 1,324 3,552 713 12,103 $3,879 949 3,113 366 8,307 2,447 6,138 11,614 537 1,470 22,206 $34,309 2,090 6,271 11,330 350 1,392 21,433 $29,740 2 This document is authorized for use only by Abhishek Gohil in TGM 517 Global Accounting & Financial Management (MGM SP22) taught by Euvin Naidoo, Thunderbird School of Global Management from Jan 2022 to Mar 2022. For the exclusive use of A. Gohil, 2022. Accounting for Assets at Tesla 121-009 Tesla Inc. Income Statement For the years ended December 31, 2019 and 2018 (in $millions) 6 Revenues Automotive sales Automotive leasing Energy generation & storage Services & other Cost of revenues Automotive sales Automotive leasing Energy generation & storage Services & other Gross profit Operating expenses Research & development Selling, general & administrative Restructuring & other Loss from operations Interest income Interest expense Other income Loss before income taxes Provision for taxes Net loss 2019 2018 $19,952 869 1,531 2,226 24,578 $17,632 883 1,555 1,391 21,461 15,939 459 1,341 2,770 20,509 4,069 13,686 488 1,365 1,880 17,419 4,042 1,343 2,646 149 4,138 (69) 44 (685) 45 (685) 110 $(775) 1,460 2,835 135 4,430 (388) 24 (663) 22 (1,005) 58 $(1,063) Selected Footnotes on Tesla’s Assets at December 31, 2019 (in $millions) 1. Accounts receivable Accounts receivable primarily include amounts related to receivables from financial institutions and leasing companies offering various financing products to our customers. We provide an allowance against accounts receivable to the amount we reasonably believe will be collected. We write-off accounts receivable when they are deemed uncollectible. We typically do not carry significant accounts receivable related to our vehicle and related sales as customer payments are due prior to vehicle delivery, except for amounts due from commercial financial institutions for approved financing arrangements between our customers and the financial institutions. 7 3 This document is authorized for use only by Abhishek Gohil in TGM 517 Global Accounting & Financial Management (MGM SP22) taught by Euvin Naidoo, Thunderbird School of Global Management from Jan 2022 to Mar 2022. For the exclusive use of A. Gohil, 2022. 121-009 2. Accounting for Assets at Tesla Inventories Inventories are stated at the lower of cost or market. Cost approximates actual cost on a first-in, first-out basis. We record inventory write-downs based on reviews for excess and obsolescence determined primarily by future demand forecasts. We also adjust the carrying value of our inventories when we believe that the net realizable value is less than the carrying value. These write-downs are measured as the difference between the cost of the inventory, including estimated costs to complete, and estimated selling prices. Once inventory is written down, a new, lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. During the years ended December 31, 2019, 2018 and 2017, we recorded write-downs of $138 million, $78 million and $124 million, respectively, in cost of revenues. Our inventory consisted of the following (in $millions): 8 Raw materials Work in process Finished goods Service parts Total 3. December 31, 2019 1,428 362 1,356 406 3,552 December 31, 2018 932 297 1,581 303 3,113 Fixed assets Tesla reported that it owned three classes of fixed assets: (i) Operating lease vehicles, (ii) Solar energy systems, and (iii) Plant, property & equipment (PPE). Operating lease vehicles and Solar energy systems were the book value of cars and solar energy systems, respectively, that Tesla had leased to customers. The cost less estimated residual value of these automobiles and solar energy systems was depreciated over the lease period. Morales decided to focus her attention on the PPE, Tesla’s fixed assets used for the production of automobiles and solar energy systems. Property, plant and equipment, net, are recognized at cost less accumulated depreciation. Depreciation is generally computed using the straight-line method over the estimated useful lives of the respective assets, as follows: Machinery, equipment, vehicles and office furniture Building and building improvements Computer equipment and software 2 to 12 years 15 to 30 years 3 to 10 years Leasehold improvements are depreciated on a straight-line basis over the shorter of their estimated useful lives or the terms of the related leases. 4 This document is authorized for use only by Abhishek Gohil in TGM 517 Global Accounting & Financial Management (MGM SP22) taught by Euvin Naidoo, Thunderbird School of Global Management from Jan 2022 to Mar 2022. For the exclusive use of A. Gohil, 2022. Accounting for Assets at Tesla 121-009 Maintenance and repair expenditures are expensed as incurred while major improvements that increase the functionality, output or expected life of an asset are capitalized and depreciated ratably over the identified useful life. Our property, plant and equipment, net, consisted of the following (in $millions): Machinery, equipment, vehicles and office furniture Tooling Leasehold improvements Land and buildings Computer equipment, hardware and software Operating lease right-of-use assets Construction in progress Less: Accumulated depreciation Total December 31, 2019 7,167 1,493 1,087 3,024 595 1,218 764 15,348 (3,734) 11,614 December 31, 2018 6,329 1,398 961 4,047 487 807 14,029 (2,699) 11,330 Depreciation expense during the years ended December 31, 2019 and 2018 was $1.37 billion and $1.11 billion, respectively. 9 4. Intangibles In its financial statement footnotes, Tesla disclosed the following information on its intangibles: Goodwill increased $130 million from $68 million as of December 31, 2018 to $198 million as of December 31, 2019 primarily due to completed business combinations during the year (Maxwell Technologies). There were no accumulated impairment losses as of December 31, 2019 and 2018. Indefinite-lived intangible assets were valued at $5m on December 31, 2019, and $47m on December 31, 2018. Information regarding our finite-lived intangible assets including assets recognized from our acquisitions was as follows (in millions): 10 Developed technology Favorable contracts leases Other & December 31, 2019 Accumu Gros lated Net s amortizatio n 291 (72) 220 89 113 (24) 41 445 (16) (112) 25 334 Gross 152 113 81 346 December 31, 2018 Accumu lated Net amortizatio n (40) 113 (17) 96 (55) (112) 27 236 5 This document is authorized for use only by Abhishek Gohil in TGM 517 Global Accounting & Financial Management (MGM SP22) taught by Euvin Naidoo, Thunderbird School of Global Management from Jan 2022 to Mar 2022. For the exclusive use of A. Gohil, 2022. 121-009 Accounting for Assets at Tesla Endnotes 1 Tesla, Inc., December 31, 2019 Form 10-K, https://www.sec.gov/Archives/edgar/data/1318605/000156459020004475/tsla10k_20191231.htm, accessed August 2020.” 2 Tesla, Inc., Capital IQ, Inc., a division of Standard & Poor’s, accessed August 2020. 3 Felix Richter, “Tesla Deliveries Soared to New Heights in 2019,” Statista, January 6, 2020, https://www.statista.com/chart/8547/teslas-vehicle-deliveries-since-2012/, accessed August 2020. 4 Ibid. 5 Tesla, Inc., December 31, 2019 Form 10-K, https://www.sec.gov/Archives/edgar/data/1318605/000156459020004475/tsla- 10k_20191231.htm, accessed August 2020.” 6 Ibid. 7 Ibid. 8 Ibid. 9 Ibid. 10 Ibid. 6 This document is authorized for use only by Abhishek Gohil in TGM 517 Global Accounting & Financial Management (MGM SP22) taught by Euvin Naidoo, Thunderbird School of Global Management from Jan 2022 to Mar 2022. 2019 2018 Cost of revenues Automotive sales Automotive leasing Energy generation & storage Services & other Total: 15.939 459 1.341 2.770 20.509 13.686 488 1.365 1.880 17.419 Inventory Raw Materials Work in process Finished goods Service parts Total: 1.428 362 1.356 406 3.552 932 X 297 Y 1.581 Z 303 3.113 Days Inventory calculation excluding service parts inventory Automotive sales 15.939 Automotive leasing 459 Energy generation & storage 1.341 Total cost of revenues used 17.739 13.686 488 1.365 15.539 A Total Inventory Exclude: Service parts Total Inventory used 3.113 (303) 2.810 B Days inventory excl leasing and services Disaggregated by inventory type: Days raw materials Days WIP Days FG Days for service parts only Services & other (cogs) Service parts (inventory) Days service parts 3.552 (406) 3.146 64,7 66,0 =365*B/A 29,4 7,4 27,9 64,7 21,9 =365*X/A 7,0 =365*Y/A 37,1 =365*Z/A 66,0 2770 406 53,5 1880 303 58,8 
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