Tesla disclosed government credits profit only after the SEC mandated it, new documents show
The U.S. Securities and Exchange Commission (SEC) just made its financial disclosure correspondence with Tesla public and solved the mystery of Tesla's sudden change of heart that lead to reporting regulatory credits as a separate entity in its annual statement. Tesla made US$1.5 billion from government subsidies and credit offsets bought by other automakers on US$5.2 billion in net income last year. That's more than a quarter of its profits and, understandably, Tesla has been reluctant to disclose the numbers separately, as it just recently began making more money from selling cars than from government-imposed carbon tax and various other regulations or subsidies.
The SEC, however, pressured the world's top electric carmaker to split the bulk number in different line items, as, according to its Regulation S-X, companies ought to be reporting income from tangible and intangible assets separately. Tesla initially argued against that requirement, reveal the letters published by the SEC yesterday, presenting another SEC rule as an argument. The rule says that entries could be folded into one line item if the revenue from one doesn't exceed 10% of the other, it said, and, since regulatory credits were 6% of its car sales revenue, it wasn't obliged to split the numbers in its financial statements.
The SEC, however, noticed last April that an increase in income from regulatory credits - basically free money for Tesla - was making more money than its actual car leases and asked that they be reported separately as an intangible asset so as not to mislead investors. "You should emphasize that the sales of regulatory credits have no associated cost and the timing of such sales is not necessarily correlated to the actual sales of automobiles," it wrote to Tesla in a December letter. In February, Tesla ultimately budged and saved face by sending a letter back to the SEC saying it will do it in the name of transparency:
We are extremely transparent about the impact of such credits on our results and have chosen to separately present the automotive regulatory credits.
The rest is history presented in Tesla's latest 2021 10-K filing where carbon tax credits sold to various overseas and domestic carmakers, as well as various smaller government subsidies are listed as a new line item, and Tesla changed the 10-K filing language to reflect that:
We earn tradable credits in the operation of our business under various regulations related to zero-emission vehicles (“ZEVs”), greenhouse gas, fuel economy and clean fuel. We sell these credits to other regulated entities who can use the credits to comply with emission standards and other regulatory requirements. Sales of these credits are recognized within automotive regulatory credits revenue in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K...
Our revenue from automotive regulatory credits is directly related to our new vehicle production, sales and pricing negotiated with our customers. We monetize them proactively as new vehicles are sold based on standing arrangements with buyers of such credits, typically as close as possible to the production and delivery of the vehicle or changes in regulation impacting the credits.