Tesla 2014 Annual Report Download - page 72

Table of Contents
Resale Value Guarantee
In April 2013, we began offering a resale value guarantee to all customers who purchased a Model S in the United States and financed their
vehicle through one of our specified commercial banking partners, and in October 2013, we introduced this program in Canada. Under the
program, Model S customers have the option of selling their vehicle back to us during the period of 36 to 39 months after delivery for a pre-
determined resale value. Although we receive the full amount of cash for the vehicle sales price at delivery, we account for transactions under
the resale value guarantee program as operating leases. Accordingly, we defer and amortize to automotive sales revenue the initial purchase
consideration less resale value guarantee amount on a straight-line basis, over the contractual term of the guarantee program (i.e. the proxy
operating lease term). Similarly, we capitalize and depreciate the cost of the respective operating lease vehicles less expected salvage value to
cost of automotive sales over the same period. If a customer decides not to sell their vehicle back to us by the end of the resale value guarantee
term, the amount of the resale value guarantee and operating lease vehicle net book value is then recognized in automotive sales and cost of
automotive sales, respectively.
We estimated the expected residual value based on an evaluation of market indicators, competitive factors as well as a third party valuation
study. We will adjust our depreciation estimates as needed, if the expected salvage value is projected to be lower in future periods. As we
accumulate more actual data related to the resale experience of Model S, we may be required to make significant changes to our estimates.
Regulatory Credit Sales
California and certain other states have laws in place requiring vehicle manufacturers to ensure that a portion of the vehicles delivered for
sale in that state during each model year are zero emission vehicles. These laws and regulations provide that a manufacturer of zero emission
vehicles may earn regulatory credits, and may sell excess credits to other manufacturers who apply such credits to comply with these regulatory
requirements. Similar regulations exist at the federal level which require compliance related to GHG emissions and also allow for the sale of
excess credits by one manufacturer to other manufacturers. As a manufacturer solely of zero emission vehicles, we have earned regulatory
credits, such as ZEV and GHG credits on vehicles, and we expect to continue to earn these credits in the future. Since our commercial vehicles
are electric, we do not receive any compliance benefit from the generation of these credits, and accordingly look to sell them to other vehicle
manufacturers. In order to facilitate the sale of these credits, we enter into contractual agreements with third parties requiring them to purchase
our regulatory credits at pre-determined prices. We recognize revenue on the sale of these credits at the time legal title to the credits are
transferred to the purchasing party by the governmental agency issuing these credits.
Maintenance and Service Plans
We offer a prepaid maintenance program for Model S, which includes plans covering maintenance for up to eight years or up to 100,000
miles, provided these services are purchased within a specified period of time. The maintenance plans cover annual inspections and the
replacement of wear and tear parts, excluding tires and the battery, with either a fixed fee per visit for Tesla Ranger service or unlimited Tesla
Ranger visits for a higher initial purchase price. Payments collected in advance of the performance of service are initially recorded in deferred
revenues on the consolidated balance sheets and recognized in automotive sales as we fulfill our performance obligations.
We also offer an extended service plan, which covers the repair or replacement of Model S parts for an additional four years or up to an
additional 50,000 miles, after the end of our initial New Vehicle Limited Warranty, provided they are purchased within a specified period of
time. For customers that are not covered by our New Vehicle Limited Warranties or our extended service plans, we offer Tesla Ranger service at
a higher cost. Payments collected in advance of the performance of service are initially recorded in deferred revenues on the consolidated
balance sheets and recognized in automotive sales ratably over the service coverage periods.
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