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CASE REQUIREMENTS

Compare and contrast the business model of Groupon with the business models of Amazon and Wal-Mart. Referring to the risk factors in the MD&A sections of their 10-Ks, compare significant risks and opportunities across these companies. How do these business risks translate to risks in financial reporting?

Revenue and revenue growth are more important than income and income growth for new businesses, especially in the new-age economy. Do you agree with this statement? Support your opinion by analyzing the relationship between Amazons revenue, income, and its stock price from 1997 to 2010.

Using the data provided in Table 1, prepare common size income statements using revenues and cost-of-goods-sold in the original S-1 and amended S-1. Analyze trends of expenses as a percentage of revenue for 2009 and 2010. Compare and contrast the following ratios:

a. Gross Margin Percentage; b. Asset Turnover Ratio. In the months leading up to Groupons IPO, the SEC posed a number of questions regarding Groupons choice of accounting principles for revenue recognition. Specifically, the SEC referred to the requirements in FASBs ASC 605-45-45.

1. Compare the amount of revenue reported in the original and amended S-1s. What

   caused the difference?

2. Which of the two amounts do you think Groupon preferred? Why did they prefer it?

3. In correspondence with the SEC following its initial S-1 filing, how did Groupon justify

   its method of reporting revenue?

4. With reference to ASC 605-45-45, which of Groupons arguments were weak, and why?

Groupon had recognized revenue for the sale of high-ticket items in late 2011. Purchasers of the Groupons have a right of return, as specified in the Groupon Promise, prominently featured on its website.

1. AssesstheU.S.GAAPrequirementforrecognitionofrevenuewhenrightofreturnexists,

   specified in ASC Section 605-15-25, in the context of Groupons business model.

2. Do you agree with Groupons accounting? Why or why not?

3. What could Groupon have done differently, and how would the financial statements

   have been affected?

Groupons restatement of 2011 fourth-quarter financials resulted in a reduction of $14.3 million of revenues and a decrease of $30 million of operating income. However, its operating cash flow was unaffected. Explain how this is possible. The refund reserve amount for Groupon as of December 31, 2011, was $67.45 million, and on March 31, 2012, had increased to $81.56 million. Assume that the accrued expense for refund reserve was $100 million for the first quarter of 2012. a. How much refund was issued in 2012? b. Explain why the expense recorded in the first quarter does not equal the amount paid

during the quarter. In its initial S-1 filing, Groupon presented a non-GAAP performance metric called ACSOI. It was subsequently removed after the SEC objected. a. Why did the SEC question the inclusion of ACSOI in Groupons financial statements? b. Non-GAAP metrics are common in some industries. These include: Value-at-Risk in

the financial sector, same-store-sales in retail, revenue-passenger-miles for airlines, and order-backlog in the semiconductor industry. Explain two of these metrics and assess their value to financial statement users.

Issues in Accounting Education Volume 29, No. 1, 2014

Growing Pains at Groupon 239

c. While the SEC allows the reporting of metrics identified in (b), it did question the use of ACSOI. What differences between the acceptable non-GAAP metrics in (b) and ACSOI were of concern to the SEC?

d. Do you agree with Groupons contention that discretionary expenses, such as subscription acquisition costs, should be excluded from the financial measures of a companys performance?

9. Groupons management needed significant cash to fund its growth. It had three options: (A) seek private investment, (B) sell the company to Yahoo! or Google, or (C) go public. a. Contrast the financial reporting challenges across the three options. b. In March 2012, Groupons auditors noted a material weakness in the companys

internal controls related to deficiencies in the financial statement close process.

Would this disclosure have been made if Groupon had chosen options (A) or (B)? 10. In your opinion, do the problems with Groupons choice of accounting methods, use of a non-GAAP metric, and material weakness in its internal control reflect a lack of

management experience or a lack of management integrity?