Could $TSLA book a one off up to $2bn deferred tax profit in Q419, achieve FY profitability & S&P 500 eligibility?
I put this at low odds, but I believe it is possible.
Thanks to The Accountant for flagging this in his excellent post - teslamotorsclub.com/tmc/posts/4401…
Thread continued: -
I put this at low odds, but I believe it is possible.
Thanks to The Accountant for flagging this in his excellent post - teslamotorsclub.com/tmc/posts/4401…
Thread continued: -
1) At 2018 Tesla had $2.7bn gross deferred tax assets on balance sheet but had booked a $1.8bn valuation allowance against US losses to leave a net $0.9bn asset. 
2) A valuation allowance (a contra asset account) has to be recorded if “it is more likely than not (> 50 percent) that some portion or all of the deferred tax assets will not be realized.” At each balance sheet date, the VA is determined by applying this judgment rule.
3) Tesla: "As of December 31, 2018, we recorded a valuation allowance of $1.81 billion for the portion of the deferred tax asset that we do not expect to be realized
4) ....."Management believes that based on the available information, it is more likely than not that the U.S. deferred tax assets will not be realized, such that a full valuation allowance is required against all U.S. deferred tax assets.”
5) Auditors are encouraged to be skeptical and conservative when evaluating company’s profit forecasts and consequent deferred asset valuation allowance changes.
6) When auditors do not have >50% confidence of enough future profitability, deferred tax benefits are not booked to P&L against pre tax losses each quarter, they are instead cancelled out by accruing a valuation allowance to cancel out this asset.
7) However, if the confidence in future profitability changes, this valuation allowance has to be reversed and flows immediately through the P&L.
8) So if Tesla and its auditors now think there is a >50% chance of all or part of the $1.8bn US deferred tax assets now being used to offset future tax on US profits, then all or part of this $1.8bn should be booked as a one off profit in the P&L.
9) During 2019 this valuation allowance likely increased towards $2bn so it is a potential huge wildcard for Q4 earnings.
10) While I hope Tesla are confident in significant future profits as Model Y and MIC Model 3 leverage its fixed cost base, auditors may be more conservative and its far from guaranteed they will change their assumptions this quarter.
11) I don't usually care about one off accounting gains - they do not change the company’s value & should be adjusted for.
12) However, as discussed in the thread below, last twelve month profitability makes Tesla eligible for S&P 500 inclusion & if the S&P committee agrees to add Tesla, I think this would have a huge impact on stock price.
13) For extra context.
Twitter released ~$700m P&L profit from reversing its valuation allowance in 3Q18 and a total ~$800m in 2018.
Twitter released ~$700m P&L profit from reversing its valuation allowance in 3Q18 and a total ~$800m in 2018.
14) Twitter 2018 10-k: "The Company released $797.4 million of the valuation allowance related to most of the United States federal and all states deferred tax assets with the exception of California and Massachusetts."
15) ..."The Company concluded, based upon the preponderance of positive evidence (i.e. cumulative profit before tax adjusted for permanent items over the previous twelve quarters, a history of taxable income in recent periods, and the current forecast of income before taxes ..."
16) ... "for the United States going forward) over
negative evidence and the anticipated ability to use the deferred tax assets, that it was more likely than not that the deferred tax assets could be realized."
negative evidence and the anticipated ability to use the deferred tax assets, that it was more likely than not that the deferred tax assets could be realized."
