Tesla’s Travails: Road Test for FASB’s Materiality Proposals

About a week ago, Fortune’s Carol Loomis wrote the first story about the Tesla autopilot incident that claimed the life of its driver. Tesla CEO Elon Musk famously responded that the incident was “not material to Tesla” and that the story was “BS.” Since then, the Wall Street Journal has reported that the SEC is in the early stages of investigating whether or not the incident was a material fact that should have been disclosed to investors before a $2 billion stock sale.

It’s hard to see how it wasn’t a material factor for investors: if they’re buying Tesla stock, it’s not because Tesla cars have rich Corinthian leather in their seats. They’re buying Tesla stock for its promise of futuristic technology, be it the electrical power or the possibility of being a fully driverless car someday. If there’s an event that surfaces questions about the viability of those technologies, it would only be fair for investors to know that BEFORE they fork over cash for some of that future.

That’s where it is now – and it will be interesting to see where the SEC comes out on this. I can’t help but wonder how this would be disclosed in the footnotes of the financial statements under a pair of exposure drafts issued by the FASB that would grant more discretion to issuers in what they considered to be material matters to report. (My response is here; I wasn’t a fan.)

Given that Tesla already considered it a non-event, it probably wouldn’t be reported even if greater discretion was allowed. That’s why it will be interesting to see where the SEC stands on this – it might point up a difference in views on materiality between the two regulators. The SEC would want the FASB’s materiality concepts to hold up so they could apply them for their own purposes. Again, it’s tough to see how this series of events wouldn’t affect the judgment of a reasonable investor. Maybe the outcome will affect the FASB’s views on what they might create with their materiality proposal.

 

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