Tesla Inc. revealed in its recent annual financial statement how much regulatory credits fueled its profits only after U.S. market regulators compelled it to do so, documents released Wednesday show.
The Securities and Exchange Commission told Tesla to justify why it lumped auto sales and lucrative sales of government credits in the same income statement line items in its 2020 10-K, according to correspondence between the company and the regulator.
Tesla initially defended the practice to regulators, but ultimately opted to break out the credit sales, the letters show. The decision revealed to investors how sales of government credits for making electric vehicles have boosted the company’s overall revenues. The company’s credit sales totaled nearly $1.5 billion in 2021, while Tesla reported net income of $5.52 billion for the year.
“We are extremely transparent about the impact of such credits on our results and have chosen to separately present the automotive regulatory credits,” Tesla said in a February letter the SEC publicly released on Wednesday.
Tesla did not immediately respond to a request for comment Wednesday.
The company in its 2021 10-K included a separate income statement line item highlighting regulatory credit sales. In response to the SEC’s requests, it also included a new disclosure in the Management’s Discussion & Analysis section of its financial statement about the impact of all regulatory credits and incentives on its gross profit and net income.
“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,” SEC staff reviewers told the company in a December letter.
Credits For Clean Vehicles
Tesla earns tradeable government credits related to making zero-emission vehicles and clean fuel. Tesla in turn, sells those credits to other automakers, typically overseas. Tesla’s sale of regulatory credits leapt from $986 million in 2019 to $1.58 billion in 2020. In 2021, it sold $1.46 billion, according to its annual filing.
The SEC started asking Tesla questions in April 2021, noting that the spike in regulatory credit sales exceeded revenues from other activities such as automotive leasing. Since credit sales represent sales of intangible assets, the regulator said it should present these revenues separately as their own source of revenue or in “Services and other.” The agency also questioned the inclusion of regulatory credits in automotive sales, as it boosts gross profit metrics and could mislead investors.
The SEC’s Regulation S-X calls on companies to break out the sale of tangible products versus intangible products, among other items. The SEC argued that a regulatory credit is an intangible item and therefore needed to be separated.
Tesla defended its practice, advising the SEC that it evaluates revenues for separate presentation in accordance with the rule, which says an item can be combined with another if the income derived from it isn’t more than 10% of the other item. Since regulatory credit sales represented approximately 6% of auto sales revenues and 5% of total revenues for 2020, the company said it didn’t hit the 10% threshold and therefore was justified in combining the figures.
The SEC pushed back. It told the company to that sales of regulatory credits may be a revenue stream that is distinct from your automotive sales, having a material impact on consolidated gross margin, automotive sales gross margin and net income. By February, Tesla said it would break it out.