2012 Q4 Earnings Report thread

[NigelM]

I'm still interested in how service contracts affect things.

When Tesla asks us to pay for our service contracts, they'll probably receive some $10 million in cash over a couple months.
I imagine that on a GAAP basis, this somehow needs to be amortized over the life of the service contract, but on a non-GAAP basis, they suddenly have $10m more in the bank, right?
$10m isn't a huge %age of their revenue, but it could be the difference between a positive cash flow and a negative cash flow.

Anyone know for real how that works?

I'll take a stab at it.,,,Seeing as we're paying in advance for a service not yet provided it should be treated as future revenue, This would be the case because there is a measurable liability (the cost of said service) which should probably be recognized on the balance sheet. IIRC it doesn't make a difference whether we're talking US GAAP or IFRS. In other words advance payment for a service plan will be treated largely as a balance sheet item and will generally not affect revenue (P&L) in the short-term. It is very nice to have from a CF perspective and will be recognized on the CF statement.

When are we going to need to pay, anyway?

When they ask us to.

 

[kenliles]

I'll take a stab at it.,,,Seeing as we're paying in advance for a service not yet provided it should be treated as future revenue, This would be the case because there is a measurable liability (the cost of said service) which should probably be recognized on the balance sheet. IIRC it doesn't make a difference whether we're talking US GAAP or IFRS. In other words advance payment for a service plan will be treated largely as a balance sheet item and will generally not affect revenue (P&L) in the short-term. It is very nice to have from a CF perspective and will be recognized on the CF statement.

that sounds right- so would it be a double entry of asset against liability? then over a linear time, reduction in liability? If so, then service costs as performed over time would be an operational cost, no?

 

[NigelM]

that sounds right- so would it be a double entry of asset against liability? then over a linear time, reduction in liability? If so, then service costs as performed over time would be an operational cost, no?

Yes. As the liability is reduced (service is provided) then the advance payments can be recognized as revenue.

 

[Bradleybang]

Yes. As the liability is reduced (service is provided) then the advance payments can be recognized as revenue.

Service Contracts are treated like insurance. Thats my industry.
When the service contract is sold
a cash Asset in the amount of premium(your cost) is debit (increase) and
a liability credit (increase) is 100% booked as unearned premium. Sometimes shown as Service Waranty in liabilities.

Say the contract is a 3 year contract (36 months).
Each month 1/36th of premium for the contract is income credit (increase)- shown as earned premium or Service Revenue in income statement and
the liability of unearned premium is debit (decrease).
Thats how the income side is done.

As service is provided they become expenses. Say a part is needed for replacement. Asset of inventory is credit (decrease) and service parts expense is debit (increase).
Service labor , overhead will also be accounted for as service expenses.

In the end, earned premium - service expense = service profit (loss)

Most mfg will not disclose this breakdown in their consolidated financials. However, a good firm will track and try to make a profit on the service. Sometimes a mfg will buy insurance from a 3rd party insurer.

 

[kenliles]

I figured the service must be an expense somewhere; interesting how it's handled like insurance
thanks