Tesla's Non-GAAP Accounting Measurements: Revenue Recognition and Stock-Based Compensation

In November 2014, questions were raised about American electric car manufacturer Tesla Motors Inc.'s (Tesla's) accounting practices, which did not follow the generally accepted accounting practices (GAAP). Tesla’s third quarter 2014 financial statements showed a loss of almost US$75 million when using U.S. GAAP standards, compared to a profit of over $5 million when using its own non-GAAP standards. The accounting discrepancy between the two systems was due mainly to the allotment of vehicle buybacks, stock-based compensation, and regulatory credit sales. Tesla’s share price had risen to $242 from its initial public offering of $17. Had the company’s non-GAAP adjustments influenced investors’ perception of Tesla’s performance and, therefore, the resulting stock price? Specifically, was it reasonable to state that Tesla had been profitable in the third quarter of 2014? Were Tesla’s non-GAAP adjustments appropriate? How could the adjustments between Tesla’s GAAP and non-GAAP numbers be explained? What would Tesla’s performance look like if the financial statements were adjusted for the resale value guarantee, regulatory credits, and stock-based compensation?

This case is suitable for an undergraduate financial accounting or graduate accounting course. Ideally, students should have some familiarity with public financial statements and some understanding of the principles underpinning revenue and expense recognition. After completion of the case, students will be able to<ul><li>assess GAAP versus non-GAAP reporting, while demonstrating the substantial differences that can exist between the two methods;</li><li>adjust between GAAP and non-GAAP financials, while identifying the drivers of the differences between the two methods;</li><li>discuss different revenue recognition concepts; in particular, the treatment of revenue with a corresponding future commitment to customers, under the U.S. GAAP method;</li><li>distinguish between revenue from core business activities and revenue from non-core business activities; and</li><li>consider the relationship between public policy and company earnings.</li><ul>

• Financial Accounting,