SEC Scolded Tesla For Using Prohibited ‘Tailored’ Accounting

The U.S. Securities and Exchange Commission (SEC) has criticized Tesla Motors (NASDAQ:TSLA) for having used non-GAAP accounting metrics that were in violation of earlier SEC compliance and disclosure guidance, correspondence between the company and the SEC shows.

The SEC and Tesla exchanged letters in September and October, in which the regulator asked Tesla several times how it would change its non-GAAP measures reporting in a way that would comply with the Compliance & Disclosure Interpretations from May of this year. In these comments on non-GAAP measures, the SEC says that this measure cannot be presented in documents filed with the Commission.

“Non-GAAP measures that substitute individually tailored revenue recognition and measurement methods for those of GAAP could violate Rule 100(b) of Regulation G,” the SEC says.

In a letter exchange between Tesla, its lawyers and the SEC from September 19, the SEC comments:

“We note that you adjust your non-GAAP measures to add back the deferred revenue and related costs for cars sold with resale value guarantees and where you collected the purchase price in cash, which substitutes an individually tailored measurement method for those of GAAP.”

The SEC was also asking Tesla to provide information on how it would change its reporting and how it plans to comply with the commission’s reporting guidance.

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Then on September 23, the SEC told Tesla: “Based on your response, it is not clear whether you intend to revise your disclosure as requested in our prior comment.”

Commenting on the use of ‘tailored’, Olga Usvyatsky, vice president of research and CPA at Audit Analytics, commented for The Wall Street Journal:

“Whenever the SEC uses that specific term it’s a clear indication that this specific adjustment should not be used, it’s very strong language.”

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In its August Q2 update release, Tesla said it was evaluating the SEC guidance and has already “taken certain steps to modify our prior disclosure practices in this area”. Back then Tesla said it would determine if it was appropriate to make additional changes to the use and presentation of non-GAAP financial measures.

Then, on October 2, after the correspondence with the SEC had begun, Tesla said that as of Q3, it would no longer include in its quarterly financial releases “non-GAAP revenue and related financial metrics resulting from vehicles leased through our banking partners or that include resale value guarantees”.

By Tsvetana Paraskova for Oilprice.com

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