Tesla 2012 Annual Report Download - page 111

Table of Contents
Development Services Revenue
Revenue from development services arrangements consist of revenue earned from the development of electric vehicle powertrain
components for other automobile manufacturers, including the design and development of battery packs, chargers and sample vehicles to meet a
customer’s specifications. Beginning in the quarter ended March 31, 2010, we started entering into such contracts with the expectation that our
development services would constitute a viable revenue-generating activity. Revenue is recognized as 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 sheets. Costs of development services are expensed as incurred. When development services arrangements have multiple
elements, we evaluate the separability of the various deliverables to ensure appropriate revenue recognition. 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 revenues.
Prior to 2010, compensation from the Smart fortwo EV development arrangement with Daimler AG (Daimler) (see Note 14), was recorded
as an offset to research and development expenses. This early arrangement was motivated primarily by the opportunity to engage Daimler and at
the same time, jointly progress our own research and development activities with the associated development compensation. All amounts
received under the Smart fortwo EV agreement were recognized as an offset to research and development expenses, as we were performing
development activities on behalf of Daimler, were being compensated for the cost of these activities and could not practicably separate the
efforts or costs related to these activities from our own research and development.
Freestanding Stock Warrants
We accounted for freestanding warrants to purchase shares of our convertible preferred stock as liabilities on the consolidated balance
sheets at fair value upon issuance. The convertible preferred stock warrants were recorded as a liability because the underlying shares of
convertible preferred stock were contingently redeemable which therefore, may have obligated us to transfer assets at some point in the future
(see Note 8). The warrants were subject to re-measurement to fair value at each balance sheet date and any change in fair value was recognized
in other expense, net, on the consolidated statements of operations. For our Series C and other Series E convertible preferred stock warrants,
excluding the Department of Energy (DOE) warrant, we adjusted the liability for changes in fair value through the completion of our IPO on
July 2, 2010. At that time, the convertible preferred stock warrants were net exercised and the related liability was reclassified to additional paid-
in capital. For the Series E convertible preferred stock warrants issued to the DOE (see Note 9), we adjust the liability for changes in fair value
until the earlier of vesting or expiration of the warrants. Upon the completion of our IPO, the DOE warrant converted into a warrant to purchase
our common stock and the related liability will continue to be adjusted for changes in fair value until the earlier of vesting or expiration of the
warrants. If the warrants are exercised, the warrant liability will be reclassified to common stock or additional paid-in capital, as applicable.
Cash and Cash Equivalents
All highly liquid investments with an original or remaining maturity of three months or less at the date of purchase are considered to be
cash equivalents. We currently deposit excess cash primarily in money market funds.
Marketable Securities
During the year ended December 31, 2011, we purchased marketable securities including commercial paper and corporate debt. All
marketable securities are designated as available-for-sale and reported at estimated fair value, with unrealized gains and losses recorded in
accumulated other comprehensive loss which is included
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