Tesla 2014 Annual Report Download - page 73

Table of Contents
We provided Tesla Roadster customers with the opportunity to purchase an extended warranty plan for the period after the end of our
initial New Vehicle Limited Warranty to cover additional services for an additional three years or 36,000 miles. We refer to this program as our
Extended Service plan. Amounts collected on these sales are initially recorded in deferred revenues on the consolidated balance sheets and
recognized in automotive sales over the extended warranty period.
Additionally, we have previously provided customers of our Tesla Roadsters with a one-time option to replace the battery packs in their
vehicles at any time after the expiration of the New Vehicle Limited Warranty but before the tenth anniversary of the purchase date of their
vehicles. We refer to this program as our Battery Replacement program. Amounts collected on these sales are initially recorded in deferred
revenues on the consolidated balance sheets and recognized in automotive sales as we fulfill our obligation to replace the battery packs.
Development Services
Revenue from development services arrangements consist of revenue earned from the development of electric vehicle powertrain
components and systems for other automobile manufacturers, including the design and development of battery packs, drive units and sample
vehicles to meet a customer’s specifications. Revenue is recognized as a development arrangement is finalized, the performance requirements of
each development arrangement are met and collection is reasonably assured. Where development arrangements include substantive at-risk
milestones, revenue is recognized based upon the achievement of the contractually-
defined milestones. Amounts collected in advance of meeting
all of the revenue recognition criteria are not recognized in the consolidated statement of operations and are instead recorded as deferred revenue
on the consolidated balance sheet. Increased complexity to our development agreements or changes in our judgments and estimates regarding
application of these revenue recognition guidelines could result in a change in the timing or amount of revenue recognized in future periods.
Costs of development services are expensed as incurred. Costs of development services incurred in periods prior to the finalization of an
agreement are recorded as research and development expenses; once an agreement is finalized, these costs are recorded in cost of development
services.
Inventory Valuation
We value our inventories at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost on a first-
in,
first-out basis. We record inventory write-downs for estimated obsolescence or unmarketable inventories based upon assumptions about future
demand forecasts. If our inventory on hand is in excess of our future demand forecast, the excess amounts are written off.
We also review inventory to determine whether its carrying value exceeds the net amount realizable upon the ultimate sale of the
inventory. This requires us to determine the estimated selling price of our vehicles less the estimated cost to convert inventory on hand into a
finished product.
Once inventory is written-down, a new, lower-cost basis for that inventory is established and subsequent changes in facts and
circumstances do not result in the restoration or increase in that newly established cost basis.
Inventory amounts are based on our current estimates of demand, selling prices and production costs. Should our estimates of future selling
prices or production costs change, material changes to these reserves may be required. Further, a small change in our estimates may result in a
material charge to our reported financial results.
Warranties
We accrue warranty reserves at the time revenue is recognized for the sale of a vehicle or powertrain component. Warranty reserves
include management’s best estimate of the projected costs to repair or to replace
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