Tesla uses non-GAAP metrics in its quarterly financial results and has attracted a lot of criticism for it. The company says that its financial situation is better represented with that method of accounting rather than using the Generally Accepted Accounting Principles (GAAP). However, detractors claim the method decorates Tesla’s financials.
Tesla lacked “substantive” case for using non-GAAP metrics
Tesla did away with the use of such methods last quarter, but The Wall Street Journal claims the change was the result of the SEC placing pressure on the company. Correspondence between Tesla and the SEC between mid-September and mid-October (obtained by the WSJ), clearly reveals that an argument took place between the automaker and the agency over the accounting guidelines.
The SEC criticized the EV firm for not being able to make a “substantive” case for providing non-GAAP figures to investors. Previously, Tesla said that it used non-GAAP information internally, but the SEC picked apart the automaker’s response in a letter dated September 23, according to the WSJ.
Khrom Capital was up 32.5% gross and 24.5% net for the first quarter, outperforming the Russell 2000's 21.2% gain and the S&P 500's 6.2% increase. The fund has an annualized return of 21.6% gross and 16.5% net since inception. The total gross return since inception is 1,194%. Q1 2021 hedge fund letters, conferences and more Read More
In the correspondence, SEC pointed to rules that require “a statement disclosing the reason why you believe that the presentation of a non-GAAP financial measure provides useful information to investors…not how your management uses the information.”
What caused the differences?
The documents were made public last week 40 days since the conclusion of the conversation. Generally, it takes 20 days from the resolution of matter for the correspondence to be made public, says MarketWatch.
Exclusion of stock-based compensation from the results and the appropriation of cars sold with the resale value guarantee under a lease accounting standard were the main differences in Tesla’s GAAP and non-GAAP accounting metrics, notes Electrek. The differences narrowed after the EV firm ended its resale value guarantee program earlier this year, but according to the SEC, Tesla’s representation is “tailored.”
The SEC claims that Tesla used “individually tailored” measurements in its August earnings by adding back certain costs to the revenue calculated. Use of some non-GAAP metrics is permissible, but the SEC prohibits the use of certain figures that adjust revenue.
It seems that now there is no real consequence to the SEC’s disapproval of Tesla’s accounting measures. The matter is currently resolved, according to an October 12 letter that the company received from the regulator.
On Monday, Tesla shares closed down 0.27% at $196.12. Year to date, the stock is down more than 18%, while in the last months, it is down more than 12%.