On March 30, 2012,
Groupon has announced revised 4th quarter and full year
2011 results. Groupon revised namely its revenue and cost of revenue
as follows:
As a consequence,
Groupon's net income also decreased by 22.6 MUSD.
The revision of the 4th
quarter results was above all linked to refunds paid by Groupon to
its clients:
“The revisions are
primarily related to an increase to the Company’s refund reserve
accrual to reflect a shift in the Company’s fourth quarter deal mix
and higher price point offers, which have higher refund rates. The
revisions have an impact on both revenue and cost of revenue.”
How Groupon recognizes
revenue and refunds
As described in its 10-K
report, Groupon accounts for its revenues using the formula:
Purchase Price paid by
the customer for the Groupon (= the discounted offer of goods and/or
services that Groupon targets by location and personal preference)
- Agreed Percentage of
the Purchase Price that is paid to the featured merchant partner
- Applicable Taxes
- Estimated Refunds
which can be recovered from the featured merchant
However, refunds which
are not recoverable from the merchant are accounted for as Cost of
Revenue.
Revenue Recognition
under US GAAP
The way Groupon divides
its refunds into Revenue and Cost of Revenue reminds me the more
general question of gross vs. net revenue recognition under US GAAP.
As a rule of principle, a
company should report
- the gross amount billed to a customer if it has earned revenue as a principal from the sale of goods or services;
- the net amount retained (= Amount billed to the customer – Amount paid to a supplier) if it has earned a commission or fee as an agent.
The FASB fixes 8
indicators for a company acting as a principal. 3 indicators suggest
the company is acting as an agent.
In detail,
- The primary obligor is responsible for fulfillment, including the acceptability of the products or services ordered or purchased by the customer.
- General inventory risk exists if an entity takes title to a product before that product is ordered by the customer or will take title to the product if it is returned by the customer.
- Having latitude in establishing prices means that the company can fix itself, within economic constraints, fix prices.
- When the company changes the product / performs the service, this means that, from the perspective of the product or service, it adds value to the product or service.
- Physical loss inventory risk exists if title to the product is transferred to the customer at the shipping point and upon delivery.
- Assuming credit risk means that the company is responsible for collecting the sales price from the customer but must pay the supplier in any case.
In the case of Groupon,
“revenue is recorded on a net basis because the Company is
acting as an agent of the merchant in the transaction.”
Resources:
- Groupon Press Release dated March 30, 2012
- Groupon 10-K as of March 30, 2012
- FASB Accounting Standards Codification § 605-45-05 – Revenue Recognition – Principal Agent Considerations – Overview and Background
