It is standard GAAP accounting. Amazon reports revenue as the sales price of the item sold, even though a portion goes to suppliers. Google reports total revenue from Adsense, even though a portion of the revenue goes to the site hosting the ad. In my opinion as an ex-finance/accounting guy, the SEC is wrong in this case, for a few reasons:
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.
You are wrong. Groupon's accounting was NOT standard GAAP accounting.
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.
"Groupon is a commissions based business; as I understand it, such businesses do not count an entire deposit as revenue."
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.
> 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.
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.
Good point. Also, aren't the vendors effectively under 'accounts payable' because Groupon doesnt have to pay them immediately? They can float that money for some 30-60 days right? I know several business that do this (including mine) and no one has objected to how are revenue is stated. not that we're IPOing anytime soon :)
It is interesting to note some counter examples though. A real estate agent books only the commission as revenue, not the price of the property. A stock broker does the same. A delivery company that delivers something COD, also only books the fees, not the value of the goods. The question is, is Groupon acting more like a broker/agent, or are they responsible for making sure the service is rendered? It is not obvious, so there is some logic to the SEC saying Groupon should record revenue as if they are an agent/broker.
Either way, the initial comment that "OMG, Groupon are obviously crooks", is misinformed.
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.