Almost all of the public companies that adopted new accounting standards for reporting revenue beginning in 2018 used a shortcut that allows apples-to-oranges comparisons for revenue and profit growth that’s causing confusion for investors—and some analysts.
The new rules are supposed to improve comparability by eliminating industry-specific accounting for revenue under U.S. GAAP— or generally accepted accounting principles, the standards for financial accounting and reporting that all companies listed on U.S. exchanges are required to follow—and implementing a principles-based, single revenue-recognition model across industries and around the globe.
However, Tesla TSLA, +1.59%[1] and The Madison Square Garden Companies MSG, -1.54%[2] for example, implemented the new revenue accounting standard using a “modified retrospective” method, which means they did not recast prior-period results to be comparable when shown alongside the 2018 results under the new rules.
The “modified retrospective” approach was used by approximately 85% of public companies, according to SEC filings.
Tesla’s latest earnings release [3]doesn’t highlight the inaccurate comparison anywhere, not even when it writes that the automotive revenue increased in the fourth quarter by 134% compared to the fourth quarter of 2017. Instead, Tesla attributed the boost to a “sharp increase in Model 3 deliveries.”
The new revenue-recognition rule, ASC 606, is having a positive effect on Tesla because it changed the way it accounts for automobile sales with a resale value guarantee and cars leased through its leasing partners. The effect is a higher revenue total for the car maker starting in 2018, because the sales are now generally accounted for as sales with a right of return, rather than as operating leases.
Read: The revenue-growth rate that helped fuel Tesla’s rally relied on an apples-to-oranges comparison[4]
Tesla does remind investors in its earnings that, as a result of the new revenue recognition rules, lease accounting now generally applies only to vehicles directly leased by Tesla without using bank partners. As a result, Tesla can recognize revenue immediately for all but the 4% of vehicles delivered in Q4 that were still subject to lease accounting
Madison Square Garden companies, on the other hand, when reporting second-quarter fiscal 2019 results[5] on Friday warned investors that “prior period results have not been restated to reflect the adoption of ASC Topic 606 and, therefore, the company’s consolidated and segment results for the fiscal 2019 second quarter are not directly comparable to the results for the second quarter of fiscal 2018.”
See also: Madison Square Garden says Q2 earnings not comparable to year-earlier numbers[6]
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