1. Identify, clarify, and frame the revenue recognition issue in terms of the company’s business model. 2. Describe Groupon’s revenue recognition before and after the revision. Discuss the magnitude of the effect of the restatement on revenue and net income. 3. Evaluate Groupon’s pre and post revision accounting based on ASC revenue recognition criteria in place at the time (see ASC 605-45). What justifications existed for Groupon’s prerevision revenue recognition? 4. Evaluate Groupon’s pre and post revision accounting based on current ASC revenue recognition criteria (see ASC 606). How might your recommendation of accounting treatment differ under the new guidance? 5. Please address the incentives to manage earnings as it relates to this case and any counterbalancing incentives at play.
Microsoft Word - GrouponCase Revenue Recognition Issues at Groupon, Inc. On September 23, 2011, Groupon, Inc. issued a third amendment to its Registration Statement (Form S-1) required by the Securities and Exchange Commission (SEC). This amended Form S-1 shows restated revenue numbers from 2008 through the first six months of 2011. Please refer to this specific amendment dated September 23, 2011. To Do: Use the SEC’s EDGAR database to locate the following: o The original filing (S-1 in Edgar) dated June 2, 2011 See Note 2: Summary of Significant Accounting Policies p. F-11 o The amendment (S-1/A in Edgar) dated September 23, 2011 See Note 3: Summary of Significant Accounting Policies p. F-12 See Note 2: Restatement p. F-9 o The SEC comment letter (UPLOAD in EDGAR) dated June 29, 2011 – See Comment 62 o Groupon’s response to the SEC comment letter (CORRESP in EDGAR) dated July 14, 2011 – see Comment No. 62 o Groupon’s respone to the to the SEC dated August 10, 2011- see Comment Nos. 30 and 31 o Groupon’s response to the SEC dated August 29, 2011- See Comment Nos. 13-15 Locate the relevant excepts from ASC 605 and 606 posted on Blackboard Briefly discuss: 1. Identify, clarify, and frame the revenue recognition issue in terms of the company’s business model. 2. Describe Groupon’s revenue recognition before and after the revision. Discuss the magnitude of the effect of the restatement on revenue and net income. 3. Evaluate Groupon’s pre and post revision accounting based on ASC revenue recognition criteria in place at the time (see ASC 605-45). What justifications existed for Groupon’s pre- revision revenue recognition? 4. Evaluate Groupon’s pre and post revision accounting based on current ASC revenue recognition criteria (see ASC 606). How might your recommendation of accounting treatment differ under the new guidance? 5. Please address the incentives to manage earnings as it relates to this case and any counterbalancing incentives at play. This is an individual assignment. No collaboration of any kind is permitted. ASC 605 Excerpts Related to Principal-Agent Relationships Core Principle Revenue and Gains - 605-10-25-1 25-1 The recognition of revenue and gains of an entity during a period involves consideration of the following two factors, with sometimes one and sometimes the other being the more important consideration: a. Being realized or realizable. Revenue and gains generally are not recognized until realized or realizable. Paragraph 83(a) of FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises, states that revenue and gains are realized when products (goods or services), merchandise, or other assets are exchanged for cash or claims to cash. That paragraph states that revenue and gains are realizable when related assets received or held are readily convertible to known amounts of cash or claims to cash. b. Being earned. Paragraph 83(b) of FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises, states that revenue is not recognized until earned. That paragraph states that an entity's revenue-earning activities involve delivering or producing goods, rendering services, or other activities that constitute its ongoing major or central operations, and revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. That paragraph states that gains commonly result from transactions and other events that involve no earning process, and for recognizing gains, being earned is generally less significant than being realized or realizable. Overall Considerations of Reporting Revenue Gross as a Principal versus Net as an Agent 605-45-45-1 through 18 45-1 It is a matter of judgment whether an entity should report revenue based on either of the following: a. The gross amount billed to a customer because it has earned revenue (as a principal) from the sale of the goods or services b. The net amount retained (that is, the amount billed to the customer less the amount paid to a supplier) because it has earned a commission or fee as an agent. 45-2 The factors or indicators set forth in this Section shall be considered in that evaluation. >> Indicators of Gross Revenue Reporting 45-3 The following eight indicators may support reporting gross revenue. >>> The Entity Is the Primary Obligor in the Arrangement 45-4 Whether a supplier or an entity is responsible for providing the product or service desired by the customer is a strong indicator of the entity's role in the transaction. If an entity is responsible for fulfillment, including the acceptability of the products or services ordered or purchased by the customer, that fact is a strong indicator that an entity has risks and rewards of a principal in the transaction and that it should record revenue gross based on the amount billed to the customer. Representations (written or otherwise) made by an entity during marketing and the terms of the sales contract generally will provide evidence as to whether the entity or the supplier is responsible for fulfilling the ordered product or service. Responsibility for arranging transportation for the product ordered by a customer is not responsibility for fulfillment. >>> The Entity Has General Inventory Risk—Before Customer Order Is Placed or Upon Customer Return 45-5 Unmitigated general inventory risk is a strong indicator that an entity has risks and rewards as a principal in the transaction and, therefore, that it should record revenue gross based on the amount billed to the customer. General inventory risk exists if an entity takes title to a product before that product is ordered by a customer (that is, maintains the product in inventory) or will take title to the product if it is returned by the customer (that is, back-end inventory risk) and the customer has a right of return. 45-6 Evaluation of this indicator shall include arrangements between an entity and a supplier that reduce or mitigate the entity's risk level. For example, an entity's risk may be reduced significantly or essentially eliminated if the entity has the right to return unsold products to the supplier or receives inventory price protection from the supplier. 45-7 A similar and equally strong indicator of gross reporting exists if a customer arrangement involves services and the entity is obligated to compensate the individual service provider for work performed regardless of whether the customer accepts that work. >>> The Entity Has Latitude in Establishing Price 45-8 If an entity has reasonable latitude, within economic constraints, to establish the exchange price with a customer for the product or service, that fact may indicate that the entity has risks and rewards of a principal in the transaction and that it should record revenue gross based on the amount billed to the customer. >>> The Entity Changes the Product or Performs Part of the Service 45-9 If an entity physically changes the product (beyond its packaging) or performs part of the service ordered by a customer, that fact may indicate that the entity is primarily responsible for fulfillment, including the ultimate acceptability of the product component or portion of the total services furnished by the supplier, and that it should record revenue gross based on the amount billed to the customer. This indicator is evaluated from the perspective of the product or service itself such that the selling price of that product or service is greater as a result of an entity's physical change of the product or performance of the service and is not evaluated based on other entity attributes such as marketing skills, market coverage, distribution system, or reputation. >>> The Entity Has Discretion in Supplier Selection 45-10 If an entity has multiple suppliers for a product or service ordered by a customer and discretion to select the supplier that will provide the product or service ordered by a customer, that fact may indicate that the entity is primarily responsible for fulfillment and that it should record revenue gross based on the amount billed to the customer. >>> The Entity Is Involved in the Determination of Product or Service Specifications 45-11 If an entity must determine the nature, type, characteristics, or specifications of the product or service ordered by the customer, that fact may indicate that the entity is primarily responsible for fulfillment and that it should record revenue gross based on the amount billed to a customer. >>> The Entity Has Physical Loss Inventory Risk—After Customer Order or During Shipping 45-12 Physical loss inventory risk exists if title to the product is transferred to an entity at the shipping point (for example, the supplier's facilities) and is transferred from that entity to the customer upon delivery. Physical loss inventory risk also exists if an entity takes title to the product after a customer order has been received but before the product has been transferred to a carrier for shipment. This indicator may provide some evidence, albeit less persuasive than general inventory risk, that an entity should record revenue gross based on the amount billed to the customer. >>> The Entity Has Credit Risk 45-13 If an entity assumes credit risk for the amount billed to the customer, that fact may provide weaker evidence that the entity has risks and rewards as a principal in the transaction and, therefore, that it should record revenue gross for that amount. Credit risk exists if an entity is responsible for collecting the sales price from a customer but must pay the amount owed to a supplier after the supplier performs, regardless of whether the sales price is fully collected. 45-14 A requirement that an entity return or refund only the net amount it earned in the transaction if the transaction is cancelled or reversed is not evidence of credit risk for the gross transaction. Credit risk is not present if an entity fully collects the sales price prior to the delivery of the product or service to the customer (in other words, before the entity incurs an obligation to the supplier). Credit risk is mitigated, for example, if a customer pays by credit card and an entity obtains authorization for the charge in advance of product shipment or service performance. Credit risk that has been substantially mitigated is not an indicator of gross reporting. >> Indicators of Net Revenue Reporting 45-15 The following three indicators may support reporting net revenue. >>> The Entity's Supplier Is the Primary Obligor in the Arrangement 45-16 Whether a supplier or an entity is responsible for providing the product or service desired by a customer is a strong indicator of the entity's role in the transaction. If a supplier (and not the entity) is responsible for fulfillment, including the acceptability of the products or services ordered or purchased by a customer, that fact may indicate that the entity does not have risks and rewards as principal in the transaction and that it should record revenue net based on the amount retained (that is, the amount billed to the customer less the amount paid to a supplier). Representations