Filling in that Tesla ‘crack’

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Mea culpa. Having last week got rather excited by the minutiae of Tesla’s accounting, its time to row back on the apparent $1.4bn gap between capital investment and asset values.

The question of why a cash-rich company raised new debt in both of the last two years still stands, as does the trajectory of that cash balance if car sales continue to crater. But Tesla’s balance-sheet mismatch may have a benign explanation.

Lessons below, including kind words from one of the expert correspondents who got in touch to say that “reconciling accrual-based accounts with cash accounts (especially with the cash flow statement in its indirect form) is always difficult.” Indeed.

At issue was the difference between Tesla’s $6.3bn of capital investment in the second half of last year, and the smaller $4.9bn rise in the value of the gross assets it reported.

Two things help to reconcile the numbers: payments for assets already purchased, and the possible disposal of depreciated property.

The first is found at the bottom of the cash flow statement, where Tesla notes a balance sheet detail:

Supplemental Non-Cash Investing and Financing Activities

Acquisitions of property and equipment included in liabilities

The line, explained in moderately simple terms here, represents the balance of property plant and equipment purchased on credit. During the six months in question, Tesla paid down $689mn of those liabilities, shrinking the apparent gap to $733mn.

Asset disposals reduce the gap by another $270mn, to $463mn. While Tesla didn’t disclose any material asset sales or impairments, its capital investment figure is reported on a net basis. Comparing the depreciation expense with the change in accumulated depreciation indicates that assets depreciated by $270mn were disposed of.

The crack we’re left with at Tesla is now small enough — just under half a billion dollars — to be filled with some combination of foreign exchange movements, non-material asset write-offs, or the sale of machinery or equipment close to its not-fully depreciated value.

US investors may be interested to learn that under international accounting standards, no-such sleuthing is required because a reconciliation of these factors is published. For instance, here’s VW:

As we sound the Alphaville bugle while lowering this particular red flag, one unavoidable conclusion is that at a certain point it’s necessary to trust the auditor’s judgment.

Working capital movements are such an example. Last year, changes in “accounts payable, accrued and other liabilities” contributed $3.6bn to Tesla’s operating cash flow.

The line suggests that even though Tesla sales shrank last year, it improved its cash position in part by taking longer to pay suppliers.

Like other large listed companies, the link to the balance sheet figures is not immediately apparent. The total for “accounts payable” plus “accrued liabilities and other” fell by $300mn, to $23.5bn, which might suggest a small cash outflow overall. There was also a $2bn rise in long-term other liabilities, which are mainly composed of lease liabilities and warranty commitments.

The likely explanation, our new accountant friends tell us, is in the allocation of flows to the operations, investing or financing parts of the cash flow statement, which would require insider knowledge or documentation to reconcile.

If Tesla, which does not often respond to media requests, does come back with comments we’ll update this post.

In the meantime, those fascinated by accounting minutiae still have plenty to hold their interest, as Tesla invests heavily in AI infrastructure and has almost $7bn worth of assets under construction. Cash generation and debt issuance remain areas of interest.

But with Tesla very nearly recovered to a fully diluted $1tn stock market valuation, what really matters to investors may present the bigger question.

Thoughts and answers very welcome in the comments.

Related Links:
— Answering some questions about Tesla’s CAPEX (The Dig)
— Elon Musk urges Tesla employees to ‘hang on’ to their shares (FT)
— A fork in the road for Tesla (FTAV)