Groupon’s Policy - Revenue Case

Revenue

Groupon’s policy:

1. The revenue recognition

Groupon initially recognized the gross amount received as revenue. This practice suggested that the revenue reported includes the portion of the Groupon’s revenue shared with the merchants. The amount that was attributed to the merchants was recorded as cost of profit in its income statement. Thus the net revenue including the cost of merchants was stated in the first-line of Groupon’s income statement. A high-profit company with large amount of revenue was presented to the investors under ACSOI. However, according to ASC 605-45-45, a principal of a transaction recognizes gross revenue in its financial report and an agent to a transaction recognizes the net revenue in its financial reports, Groupon’s accounting practice suggested that Groupon regarded itself as the primary obligor in the arrangement and transaction. From the perspective of the customer and investors, Groupon is an agent in the transaction rather than the primary obligor. It is the merchant who makes the deal with customer while Groupon’s role is to market and distribute the deal. SEC suggested that this kind of accounting practice might mislead investors because investors always set focus on the top-line of the income statement and the gross revenue provided investors with less relevant numbers compared with the net revenue if the investors treaded Groupon as an agent rather than the primary obligor. Then Groupon abandoned its initial metric and changed its revenue reporting from gross revenue to net revenue. We can see from Exhibit 6 that this change has largely dropped the company’s revenue from the first-line. The initial revenue of Groupon was significantly higher than the revised revenue especially for the year 2008. In 2009 and 2010, the revised revenue was about 40% of the initial one.

2. Time of recognition

Initially, Groupon recognized the revenue before the merchant delivering the product or service to customer. Goupon recognize the revenue generated through the deal when the number of customers who purchase the Goupon exceeds the predetermined threshold. This accounting practice indicated that Groupon regarded itself as the primary obligor in the transaction because it recognizes the revenue when customer hit the purchase button on Groupon’s website and recognizes the obligation of the goods or service. Actually, it is the merchants’ responsibility to fulfill the obligation of the goods and services if the merchants unable to deliver the services or goods. Groupon is not responsible for providing goods or services to customers in the transaction. Therefor Groupon is not the primary obligor but an agent. Under FASB regulations, the revenue can be recognized only when a performance obligation is satisfied. It means that a company would recognize