ACCT Term Paper

Fall 2013

TRUC T VO

Introduction
This paper will review the following accounting, financial reporting
and internal control issues encountered by the Internet marketing
company Groupon, Inc. ("Groupon") during its initial public offering
("IPO") and its first financial statements after becoming a public
company:

Use of non-GAAP financial measure

Revenue recognition: Principal vs. agent considerations
Internal control over the financial closing process

Background on Groupon
Groupon was launched in November 2008 by Andrew Mason, Eric
Leftkofsky and Bradley Keywell. The original business of Groupon (the
name is a conjunction of "group" and "coupon") was to provide a "deal a
day" from a local merchant to a list of email subscribers1. The merchant
would offer a product or service at a steep discount to buyers of the
coupons. In exchange for promoting the coupon and collecting payment,
Groupon would earn a portion of the amount paid for the coupon.
For example, a restaurant offers $20 worth of food for $10. The
subscriber pays Groupon $10 and prints a coupon that it can redeem at
the restaurant for $20 worth of food. Groupon retains a portion of the
$10 paid by the subscriber, with the balance paid to the merchant. The
service quickly became popular with local merchants because it
provided a flow of new customers, and unlike traditional advertising, the
merchant only had to pay Groupon when a consumer purchased a
coupon.
The business grew so rapidly that it caught the attention of Google,
Inc., which reportedly offered $6 billion in an unsuccessful bid to acquire

ACCT Term Paper

Fall 2013

TRUC T VO

Groupon2. In August 2010, Groupon was featured on the cover of Forbes

magazine with the headline "Meet the Fastest Growing Company Ever"3.

ACCT Term Paper

Fall 2013

TRUC T VO

By June 2011, Groupon had grown to approximately 7,000

employees. For the year ended December 31, 2010, Groupon reported
revenue of approximately $700 million1.
As interest in Internet and social media grew, several young
Internet businesses decided to "go public" by registering with the
Securities and Exchange Commission ("SEC") and selling stock to the
public, including Zynga, Inc. and Pandora Media, Inc.4
On June 1, 2011, Groupon took its first official step toward
becoming a public company by filing Form S-1, Registration Statement
Under the Securities Act of 1933 ("Form S-1") with the SEC1.
Non-GAAP Financial Measure
The Corporation Finance Division of the SEC ("SEC Staff") reviews
all Form S-1 filings before a company is allowed to register and sells its
shares publicly. The SEC Staff questioned Groupon on numerous matters
contained in its Form S-1 filing, including its prominent use of a financial
measure called Adjusted Consolidated Segment Operating Income
("Adjusted CSOI")5.
Groupon's financial statements reported losses for all periods 20082010. However, Groupon also presented Adjusted CSOI, which starts
with loss from operations, then adds-back online marketing expenses,
stock-based compensation expenses and acquisition-related expenses
as follows:
(amounts in $millions)

2010

2009

2008

($420.
3)

($1.1)

($1.6)

Online marketing expenses

241.5

4.5

0.2

Stock-based compensation

36.2

.1

--

203.2

--

--

Loss from operations

Adjustments:

Acquisition-related

ACCT Term Paper

Fall 2013

Adjusted CSOI

TRUC T VO

$60.6

3.5

($1.4)

In 2003, the SEC issued Conditions for Use of Non-GAAP Financial

Measures ("Regulation G"). Regulation G requires requires public
companies that disclose or release such non-GAAP financial measures to
reconcile the non-GAAP financial measure to the most directly
comparable GAAP financial measure. It also prohibits adjusting a nonGAAP performance measure to eliminate or smooth items identified as
non-recurring, infrequent or unusual, when (1) the nature of the charge
or gain is such that it is reasonably likely to recur within two years, or
(2) there was a similar charge or gain within the prior two years6.
The SEC Staff viewed the add-back of online marketing expenses in
the Adjusted CSOI computation as misleading, since those costs could
be reasonably expected to recur. Groupon stated that it expected to
discontinue those costs at some (unspecified) future time, and also
claimed that presentation of Adjusted CSOI was acceptable because
management used it to internally measure performance7.
Nevertheless, the SEC staff required Groupon to remove Adjusted
CSOI from its Form S-1 filing so that it would not be misleading to users8.
Revenue Recognition
Groupon included its audited financial statements as of and for the
years ended 31 December 2008, 2009 and 2010 in its Form S-11. In the
Consolidated Statements of Operations, Groupon reported the following:
(amounts in $millions)
Revenue

2010

2009

2008

$713.4

$30.5

$0.1

In Note 2, Groupon described its revenue recognition policy.

Groupon reported the gross amount billed to the purchaser of a Groupon

ACCT Term Paper

Fall 2013

TRUC T VO

as revenue, then deducted the amount paid to the merchant as cost of

revenue.1.
However, Accounting Standards Codification ("ASC") Section 60545 provides guidance for whether to report revenue on a "gross" or
"net" basis. It provides indications that an entity should use gross
revenue reporting when it:

Is the primary obligor on the arrangement,

Has general inventory risk,
Has latitude in establishing price,
Changes the product or performs the service,
Has discretion in supplier selection,
Is involved in the determination of product or service
specifications,
Has physical loss inventory risk, and
Has credit risk9.

The arrangements that Groupon had with consumer coupon

purchasers and merchants were not consistent with these indicators of
gross revenue reporting. Groupon was not the "primary obligor" on its
transactions, it carried no inventory, could not establish product and/or
service price, could not change the product and did not perform any
part of the service, had no discretion in supplier selection, and was not
involved in setting product and/or service specifications. In short, the
merchants were Groupon's customers, not the consumer coupon
purchasers.
Since Groupon had not recognized revenue in accordance with
accounting principles generally recognized in the United States ("US
GAAP") the SEC Staff required Groupon to change its revenue
recognition policy to recognize the net amount in its financial

ACCT Term Paper

Fall 2013

TRUC T VO

statements. Groupon restated its financial statements for all periods 10,
including the years ended December 31, 2008, 2009 and 2010 as
follows:
(amounts in $thousands)

2010

2009

2008

Revenue, as originally stated

$713.4

$30.5

$0.1

Revenue, as restated

$312.9

$14.5

$ --

ACCT Term Paper

Fall 2013

TRUC T VO

Instead, Groupon disclosed parenthetically, amounts labeled "gross

billings"; essentially, what it had previously labeled "revenue" plus an
allowance for refunds (which itself had been incorrectly netted against
"revenue" rather than being classified as an expense)11.
Internal Control Weaknesses
In all, Groupon amended its S-1 eight (8) times4 before finally
completing its registration and IPO on Friday, November 4, 2011, selling
40.25 million shares at $20.00 per share. The stock sale, for 6.3% of
Groupon's outstanding shares, raised $805 million12.
As an SEC registrant, Groupon was now required to file reports with
the SEC, including Quarterly Reports on Form 10-Q and Current Reports
on Form 8-K ("Form 8-K"). On February 8, 2012, Groupon issued a press
release, filed as an exhibit to its Form 8-K, announcing results for its
2011 fourth quarter. Groupon reported 4th quarter operating income of
$15.0 million on revenue of $506.5 million13.
However, on March 30, 2012 Groupon revised its announcement14
to report an operating loss of $15.0 million on revenue of $492.2 million.
In the March 30th announcement, Groupon also disclosed that it had a
material weakness in the design and operating effectiveness of its
internal control over financial reporting as defined in SEC Regulation S-X.
What happened? In correspondence with the SEC, Groupon cited a
"material adjustment" to its allowance for customer refunds, caused by
"a shift in deal mix toward higher price point offers"15. The adjustment
reduced revenue $14 million and turned a $15 million operating profit
into a $15 million operating loss.

ACCT Term Paper

Fall 2013

TRUC T VO

The material internal control weaknesses disclosed by Groupon

included:

Implementation and formalization of written policies and

procedures for the review of account analyses, reconciliations
and journal entries;
Assigning account reconciliations and journal entries during the
reporting period close process to specific individuals;
Formal documentation of procedures performed during the close
process;
Implementation of enhanced oversight procedures to ensure
that the account reconciliation review process is performed prior
to finalization of the financial statements at each
reportingperiod; and
Validation of accounting for non-routine judgments and
estimations (including the allowance for customer refunds)15.

Groupon blamed the weakness on "rapid growth", "organization

changes" and a "significantly accelerated" timing of its annual audit 15.
On April 24, 2012 Groupon announced the addition of two new
members of its board of directors, both of whom would serve on an
expanded audit committee16. Groupon also hired KPMG, LLP to help it
develop proper internal control procedures3. Finally, in September 2012,
Groupon announced the hiring of a former KPMG partner to the newlycreated post of Chief Accounting Officer17.
Summary
This paper reviewed Groupon's accounting, financial reporting and
internal control issues. Groupon had to make significant changes to it S1 registration statements, restating revenue and removing a non-GAAP
financial measure before the SEC would allow its IPO to proceed.
Subsequently, Groupon had to revise a public announcement of financial
results due to a misstatement resulting from a material weakness in its

ACCT Term Paper

Fall 2013

TRUC T VO

internal controls. Groupon has made additions to its board of directors

and management in response to these issues.

ACCT Term Paper

Fall 2013
References

TRUC T VO

1Groupon, Inc. (2011). Registration Statement on Form S-1 (CIK: 000149281).

Retrieved October 12, 2013 from the Securities and Exchange Commission
http://www.sec.gov.
2Das, Anupreeta and Chon, Gina (2011). Advisers Vie to Take on Groupon IPO. The
Wall Street Journal - January 15, 2011. Retrieved October 12, 2013 from
http://global.factiva.com.
3Steiner, Christopher (2010). Meet the Fastest Growing Company Ever. Forbes August 30, 2010. Retrieved October 13, 2013 from http://global.factiva.com.
4McKenna, Francine (2012). Social Media's Phony Accounting. Forbes - May 7,
2012. Retrieved October 13, 2013 from http://global.factiva.com.
5Groupon, Inc. (2011). Letter from SEC Division of Corporate Finance dated June
29, 2011 (CIK:000149281). Retrieved October 12, 2013 from the Securities and
Exchange Commission http://www.sec.gov.
6Securities and Exchange Commission (2003). Conditions for Use of Non-GAAP
Financial Measures. Retrieved October 19, 2013 from the Securities and Exchange
Commission http://www.sec.gov.
7Groupon, Inc. (2011). Letter to SEC Division of Corporate Finance dated July 14,
2011 (CIK:000149281). Retrieved October 12, 2013 from the Securities and
Exchange Commission http://www.sec.gov.
8Groupon, Inc. (2011). Letter from SEC Division of Corporate Finance dated July
22, 2011 (CIK:000149281). Retrieved October 12, 2013 from the Securities and
Exchange Commission http://www.sec.gov.
9Accounting Standards Codification 605-45, Revenue Recognition, Principal Agent
Considerations. Retrieved October 13, 2013 from the Financial Accounting
Standards Board Codification http://asc.fasb.org.
10Groupon, Inc. (2011). Letter to SEC Division of Corporate Finance dated
September 16, 2011 (CIK:000149281). Retrieved October 12, 2013 from the
Securities and Exchange Commission http://www.sec.gov.
11Groupon, Inc. (2011). Amendment No. 3 to Registration Statement on Form S-1
(CIK: 000149281). Retrieved October 12, 2013 from the Securities and Exchange
Commission http://www.sec.gov.
12Raide, Shayndi and Smith, Randall (2011). Groupon's Deal is a Big Test for IPO
Market. The Wall Street Journal - November 4, 2011. Retrieved October 12, 2013
from http://global.factiva.com.
13Groupon, Inc. (2012). Current Report on Form 8-K filed February 8, 2012.
Retrieved October 12, 2013 from the Securities and Exchange Commission
http://www.sec.gov.
14Groupon, Inc. (2012). Current Report on Form 8-K filed March 30, 2012.
Retrieved October 12, 2013 from the Securities and Exchange Commission
http://www.sec.gov.
15Groupon, Inc. (2012). Letter to SEC Division of Corporate Finance dated August
24, 2012 (CIK:000149281). Retrieved October 12, 2013 from the Securities and
Exchange Commission http://www.sec.gov.
16Groupon, Inc. (2012). Current Report on Form 8-K filed April 30, 2012. Retrieved
October 12, 2013 from the Securities and Exchange Commission
http://www.sec.gov.
17Groupon, Inc. (2012). Current Report on Form 8-K filed September 13, 2012.
Retrieved October 12, 2013 from the Securities and Exchange Commission

http://www.sec.gov.