Groupon Case Study

GrouponCase Study

Class

Question3

Inthe months leading up to Groupon’s IPO, the sec showed some reasonsregarding Groupon’s choice of accounting principles for revenuerecognition. Specifically, the sec referred to the requirements inFASB’s ASC 605-45-45.

A.

Theamounts reported in the original and amended S-1s of the revenuesreceived by Groupon of being an agent of its merchants. These amountshave been different because of various factors. From the S-1 filing,we can see that the net income is not affected by the gross revenuesversus the revenues. This issue is important as revenues by itselfaffect the materiality of the financial statements. These differencesthe original and the amended S-1 filing have been due to indicatorsof the credit risk and the inventory risk in the financialstatements. Credit risk is evident in that the creditors of thecompany have been seen extending their credit or grace period, andthe management of Groupon has always been seen relaxing its terms,which has resulted in a loss. From the amended S-1 filing, we can seethat the management reduced its grace period and disregardedcreditors who could not pay back within the grace or credit period.This has resulted in a reduction in the net operating loss of thecompany from the year 2010 to the year 2011. Concerning the inventoryrisk, in the original S-1 filing management has been selling tounaccredited worthy customers on credit. This has resulted in arelationship where the customers are in the view that they are notsupposed to pay soon which may make them forego their payments. Inthe amended S-1 filing, Groupon has reduced its grace period forpaying the inventory purchases and has sued customers who do not payback within that grace period.

B.

Wethink Groupon Corporation preferred the amended S-1 filing as itportrayed the true revenue both net and gross, the true operatingcosts incurred by the company and how many customers and creditorsowed the company. From the amended S-1 filing, Groupon corporationstates that they record the truly portrayed revenues from the sale ofGroupon’s after paying a percentage of the price or commission fromthe sale of Groupon’s to the merchants who acted as agent for thecompany excluding any taxes to the company. The amended revenuerecorded in the S-1 filing is portrayed on a net basis since thecompany acts as an agent of the merchants in all transactionsrelating to the sale of Groupon’s. These have been the mainreasons why Groupon Corporation favored or preferred the S-1 filing.

c.

In2011, Groupon corporation decided to go public, which required thatthe company hire an auditor who reports on the operationaleffectiveness of the internal control system of the auditor. Theauditor hired inspected the company’s financial information,statements, and all relevant information about the company and foundmaterial weaknesses. In the ASC 605-45-45, filing it is evident thatGroupon corporation reports its revenue before the products orservices being delivered to the customers by the merchant. This isabsurd since proper accounting principles state that revenue shouldbe recorded when they are earned and not when they have beenrealized. In the original ASC 605-45-45, filing the company alsorecognizes revenues on a gross basis. This is not right since thecompany incurs operating costs and other expenses and also earnsother incomes from the sale of Groupon’s and, therefore, shouldreport its revenues on a net basis. The management of Grouponcorporation reports revenue as gross due to indicators of the creditrisk and inventory risk. This is not appropriate justification sincethey ought to provide for doubtful and bad debts from the sale ofGroupon’s. Customers of go upon are given a right of return whenthey find out that the goods are not in good shape. We have notedthis one strength in the management of the corporation sincecustomers of the company can build trust in the company.

Question4

Grouponhad recognized revenue from the sale of high-ticket items in late2011. Purchasers of the tickets had a right of return, as specifiedin the ‘Groupon Promise,` prominently featured on their website.

a.

Inthe US GAAP, when a right of return exists, Groupon corporation canrecognize revenue when realized and when earned. Revenues arerealized when services or products are exchanged for cash or claimsare made in cash while Revenues are realizable when related assetsreceived can be readily converted into cash. Revenues are earned whenproducts are delivered to customers and services are performed by thecontract. From the S-1 filing, it is evident that Groupon corporationrealizes revenue from the sale of Groupon’s when the merchantreceives cash for goods delivered to the customer. The company earnsrevenue when the Groupon’s have been delivered to the customers bythe merchant. The company should, therefore, record revenue accordingto the US GAAP when they have realized it as the customer has theright to return the goods if they are not satisfied with the natureof the goods (FASB Accounting Standards Codification, 2011).

B.

Wedo agree with Groupon`s accounting system. Issuing a `GrouponPromise` is important as they can retain customers who know that thecompany offers a warranty for their Groupons. It is appropriate andhas its benefits but could also have its disadvantages to thecompany. Customers always prefer a company that can value itscustomers and attend to their needs, tastes, and preferences. Theability to give credit to its customers to know whether the productsproduced by Groupon Corporation are legit or not will build trustbetween the company and the customers in that they know the companywill be able to provide goods that meet their preferred preferencesand tastes. Giving credit to its customers also has its disadvantagesas customers may refuse to payback and take the goods without payingfor them (FASB Accounting Standards Codification, 2011).

Question5

Theoperating income and revenue of Groupon Corporation have been seenreducing, but the cash flows have stagnated. This can be due to somereasons. During preparation of the trading, profit and loss account,a company like Groupon ought to less the depreciation of machinery,furniture, and other fixed assets relating to the company. This isnot the case when the company prepares a cash flow statement since indepreciating fixed assets, there is no cash inflow or cash outflowrelating to the company. The profit and revenues of a company use theaccrual concept of accounting while the cash flow statement uses thecash concept of accounting. Here, the statement of financialperformance and the statement of financial position recognizesrevenues, incomes, expenses, assets, and liabilities when they areincurred and not when they have been paid while the statement of cashflows recognizes cash when in has been realized and when it has beenpaid. The cash flow statement is affected by changes in currentassets while the profit and loss account of the company is onlyaffected by the actual existing asset. This causes the difference inthat when a change of current assets is constant the cash flow willremain unaffected (FASB Accounting Standards Codification, 2011).

Question6

Yes,they do. From Groupon’s corporation and S-1 filing, we can see thatmanagement`s accounting methods are different from those stipulatedin the Guidelines of Acceptable Accounting Principles. This oftenreflects management’s lack of experience and lack of integrity.Investors and customers of the company will lack trust in the companysince they are not using the appropriate ways when accounting for itsitems that is assets, liabilities, expenses, and incomes. This willoften lead to disparity in accounting principles, the conflictbetween the investors and management and confusion on the part ofinvestors. It also portrays that management has no experience inaccounting for its items and reporting its financial statements (FASBAccounting Standards Codification, 2011).

References

FASBAccounting Standards Codification (2011). Available athttp://aaahq.org/FASB-GASB[Accessed 2nd Dec. 2015].