Groupon Case Summary

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On June 2, 2011, Groupon filed its original S-1 form to register as a publicly traded company. The company’s income statements for 2009 and 2010 reported revenue of $30.4 million and $713.4 million respectively. In a footnote pertaining to revenue recognition, the company stated, “The company records the gross amount it receives from Groupons, excluding taxes where applicable, as the company is the primary obligor in the transaction.” The SEC scrutinized Groupon’s decision to classify itself as the primary obligor in its business transactions as well as the company’s use of gross reporting for revenue, citing issues with compliance to ASC 605-45-45. After numerous attempts to refute the SEC’s claims that Groupon had not used the appropriate …show more content…
Which of the two amounts do you think Groupon preferred? Why did they prefer it? Using the data provided in Tables 1 and 2, compute the gross margin percentage and asset turnover ratio (sales divided by year-end total assets) for 2009 and 2010 under the gross and net methods and explain if either of them might have affected Groupon’s choice of revenue recognition method. Although the revenue figures that Groupon reported under the net method provide a more accurate representation of the company’s actual business performance, the gross revenue recognition method undoubtedly makes the company’s financial performance appear much stronger. Considering the attention surrounding Groupon’s rapid growth and the company’s highly anticipated IPO, it is no surprise that management chose to report revenue under the gross method in its first S-1 filing. This decision obviously made the company’s standalone revenue figures appear much greater; however, these numbers also impacted year-over-year revenue growth. Under the gross method, revenue appears to increase 2,247% from 2009 to 2010. Using the revenue figures in the amended income statement shows a slightly lower revenue growth rate of 2,058% for the same two years. Although the difference between these two figures is relatively minor due to the fact that Groupon was experiencing exponential growth at this time, there is reason for concern that revenue growth for Groupon could have been severely misinterpreted in the future. When companies reach their maturity stage, minor differences in year over year revenue growth can have major implications for investors, especially when they rely on historical data to make assumptions and build

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