I keep trying to think of something to say about this. I'm speechless.
What else do you need to know to accept that these guys are dishonest?
1. The share that the business receives is negotiable and different for different vendors.
2. Groupon is the point of sale for the full amount of the revenue.
3. The merchant receives their share at a different time from when the Groupon receives the revenue.
At issue is whether or not Groupon was the principal or the agent in the transaction. To determine whether or not Groupon is the principal (which they would need to be in order to book the entire coupon as revenue) they would have to satisfy ASC 605-45. The following was taking from http://www.pwc.com/en_GX/gx/pharma-life-sciences/pdf/med-tec...:
ASC 605-45-45, Revenue Recognition—Principal Agent Considerations [formerly contained in EITF 99-19], includes a number of indicators of gross and net arrangements. Indicators to evaluate gross treatment include: • The seller is the primary obligor in the transaction. • The seller has inventory risk (general inventory risk before customer order is placed or upon customer return or risk of loss after customer order or during shipping). • The seller has latitude in establishing price. • The seller changes the product or performs part of the service. • The seller has discretion in supplier selection. • The seller is involved in the determination of product or service specifications. • The seller has physical loss inventory risk. • The seller has credit risk.
It's obvious they were the agent and not the principal for the transaction. This is why they were forced to change their accounting for their revenues.
Groupon is a commissions based business; as I understand it, such businesses do not count an entire deposit as revenue.
Indeed, most businesses which hold and forward cash on behalf of others don't count incoming monies as revenues. For example, banks don't book deposits made by account holders as revenue.
(IANAA, seek professional accounting advice).
They take title in the sense that they are paying (although paying late) and buying a certain amount of product (after they have received orders.) A commission would be if the same thing happened and the restaurant forwarded x% of the sale to groupon.
Here's an example. You are a programmer and I send you a customer. The customer gives you $5000 worth of work. You pay me $500. So you collect the money and pay me a commission. Other way: I get the $5000 from the customer (I have the contract with them) and pay you $4500 for what you have done (and have added risk etc.)
In the case of the first example I don't book $5000 in sales. In the case of the second example I do book $5000 in sales. (Forget the margins there are many businesses (supermarkets) that operate on small margins.)
Now, for accounting purposes there could be reasons that I don't want to book $5000 in sales even though I could (stuff they don't teach in school btw.) Like if I book more sales then there might be some local gross receipts tax whereby I have to pay % of sales etc (or something like that). Of course if I am applying to a bank for a loan maybe I want the higher sales because they will be more impressed. This by the way is why you need to know as much as you can because professionals won't always tell you all the things you need to know to have the best outcome.
No, they work on a commission--the product they sell is the future services/products of a company who they have agreed to sell on behalf of. It's like TicketMaster collecting money for an event and then paying the promoter in a lump sum less agreed upon commissions (and yes, TM only counts their take as revenue).
Groupon doesn't buy a certain amount of product, they collect revenue and then pay out based on receipts. No products are purchased, they're simply a third party affiliate that has an email list and sales force.
> Here's an example. You are a programmer and I send you a customer. The customer gives you $5000 worth of work. You pay me $500. So you collect the money and pay me a commission. Other way: I get the $5000 from the customer (I have the contract with them) and pay you $4500 for what you have done (and have added risk etc.)
That's a horrible analogy. A better one is you make an agreement with a programmer who has a software package. You will sell the software for an agreed upon price and then split the proceeds 50/50. Your revenue is whatever your cut is, you're working on commission. This is exceedingly common online for affiliate programs, the only difference is Groupon approaches the business about starting the affiliate program just for them.
Either way, the initial comment that "OMG, Groupon are obviously crooks", is misinformed.
As a commenter put it here: "They were forced into accounting that Priceline hasn't been forced into in 15 years. Accounting that, I might add, provides no real additional visibility into the business. Now, it's a high-margin business with 1/2 the revenue it had before. Then it was a meh margin business with about 2x the revenues. This is not the SEC doing us any favors. It's rearranging chess pieces."
http://allthingsd.com/20110923/more-groupon-amends-its-s-1-i...
Given the media scrutiny on this, it's clear now that Groupon should have made this adjustment earlier, and referred to their full pass-through revenue as "gross billings" instead of "gross revenue". That would have been the most conservative way to describe their numbers.
Still, it's a big stretch to call this dishonest. It was definitely not conservative labeling. But all the numbers were clearly disclosed, and the labels clearly described. If you read the S-1, it was very clear how their financials worked. The problem is that this is getting so much media attention that people aren't reading the S-1, and are getting their information from the media.
I can see why the SEC might want them to change it, but it's not obvious to me that the only way you could come to this type of accounting is dishonesty. Am I missing something?
Gaming the system is more or less an "oops hands got caught in the cookie jar" as opposed to dishonesty? Bringing up a certain plausible deniability (which they have) for what they have done. A child who didn't know better. (That's the image of course not the reality. Boys will be boys etc.)
Obviously to a certain extent everyone does this (only varies with the degree of deception and how much the media questions it). Facebook or any site releasing users and including people who have created multiple accounts. So they can get up to a magic number that sounds good in the press. People like large numbers. If you're at a party and someone says "how many employees" you don't say "5 part time and 5 full time" you probably will just say "10". "We have an office in NYC" means you have someone working from home in NYC. Etc.
In the 90's the big thing was the press repeating how many "hits" you got where each image on a page would be a "hit" (as opposed to unique IP's or users whatever.) So that was easy to manipulate.
It's like Priceline counting the whole fare as revenue whereas Expedia only counts the commission.
Yes, calling all $10 revenue is disingenuous, but this accounting change doesn't effect their profitability (or lack thereof)
No, it isn't. That's the definition of revenue. What's disingenuous is obscuring the costs that correspond to, and apparently exceed, that revenue.
If I buy an iPod from Apple for $150 and sell it to you for $199, my revenue is $199. That's the definition of revenue. Along with that revenue, I have $150 COGS (cost of goods sold), plus my own expenses. So my net income (revenue) might be anything less than $49.