GROUPON FINALLY RESTATES ITS NUMBERS
Anthony H. Catanach Jr. and J. Edward Ketz
Grumpy Old Accountants
Groupon amended its registration a third time on Friday September 23, but
this time there is an improvement. The S-1/A#3 restates the income
statement to report the proper numbers for revenues, pretty much as we
said a month ago. It is refreshing and satisfying to see that sometimes our
writings have an impact on practice.
You will recall that in August we wrote that you should not trust Groupon’s
accountants. In the previous registration statements, Groupon stated that
it:
Records the gross amount it receives from Groupons, excluding
taxes where applicable, as the Company is the primary obligor
in the transaction, and records an allowance for estimated
customer refunds on total revenue primarily based on historical
experience…the Company also records costs related to the
associated obligation to redeem the award credits granted as
issuance as an offset to revenue. (emphasis added)
This accounting method was wrong—it did not follow generally accepted
accounting principles. The accounting policy did not conform to the
requirements of Emerging Issues Task Force (EITF) 99-19. As the company
stated, the merchants are responsible for fulfilling the obligation to deliver
the goods and services, which means that Groupon in fact is not the primary
obligor but is a guarantor of sorts. This conclusion is further bolstered by
observing that Groupon has no inventory, cannot set product or service
price, cannot change the product and does not perform part of the service,
has no discretion in supplier selection, and is not involved in product or
service specifications.
SEC Staff Accounting Bulletin 101 on Revenue Recognition, Question 10
specifically, is congruent with EITF 99-19. The SEC stated that firms should
report revenues on a net basis if they did not take title to the products, did
not have the risk and rewards of ownership, and acted as an agent or
broker.
All of these indicia imply that Groupon should have reported revenues on a
net basis instead of a gross basis. Why its auditor initially allowed gross
reporting of revenues is beyond our understanding—and its understanding of
EITF 99-19 and SAB 101.
Because of the clear violations of GAAP, we complained to the SEC via its
Whistleblower Program. We supplied the SEC with a copy of our article and
said that it should review Groupon’s filings and make a decision whether
Groupon can account for its revenues on a gross or net basis.
Apparently the SEC intervened, as reported by Shayndi Raice in “More
Trouble for Groupon IPO,” The Wall Street Journal. Douglas MacMillan at
Business Week adds: the Groupon Chief Operating Officer is leaving Groupon
and going to Google.
Groupon now shows the revenues on a net basis. Footnote 2 of the latest S1/A contains Groupon’s mea culpa, such as it is. The reader sees the
following:
Revenues (000)
2008
2009
2010
As previously
reported
Restatement
adjustment
As restated
$
$(
89)
( 15,931)
(400,424)
$
94
30,471
713,365
5
14,540
312,941
We still think there are various issues in the accounting at Groupon; further,
the analysis of their financial statements reveals many question marks. But
at least the revenues are properly stated on a net basis, just as we told you
they should be.
This essay reflects the opinion of the authors and not necessarily the
opinions of The Pennsylvania State University, The American College, or
Villanova University.