The Securities and Exchange Commission (“SEC”) reviews a company’s financial statements to ensure that they conform to U.S. GAAP before allowing the company to conduct an initial public offering and list on a major U.S. stock exchange. As part of its review, the SEC may write letters to the company to ask for justification for its particular accounting choices and policies. The company must write back with satisfactory explanations before it may conduct the initial public offering. In some cases, the company must change its accounting choices and policies to satisfy the SEC’s critique. 

In June 2011, Groupon Inc. began the process of conducting an initial public offering by filing a form S-1 with the SEC. (The Form S-1 has the same sections as a 10-K, but in a different order and with some additional disclosure.) The SEC questioned the company’s revenue recognition policy in a series of correspondences. Ultimately, Groupon changed its revenue recognition policy and financial statements in response to these critiques.

In this paper, you will examine Groupon Inc.’s business, its revenue recognition policy, the SEC’s critique, and the change in Groupon Inc.’s revenue recognition policy. Address the following questions:

1. Based on the Business description section (beginning on p. 68 of the S-1 dated June 2, 2011), describe what product Groupon sells and how the company makes money. Who are its 2 of 2 customers? Who are its suppliers? Who are its other key stakeholders, such as employees, regulators, or financial backers? What are the company’s competitive advantages, if any?

2. Even though the revenue recognition steps we covered in class and in the textbook were integrated in U.S. GAAP in 2016, imagine that these rules were in place in 2011. Based solely on the Business description, how would you apply these rules to recognize revenue for Groupon. Write an ideal revenue recognition policy for Groupon that incorporates the five steps.

3. Now look at the company’s revenue recognition policy in the financial statements, which begin on page F-1.

a) Describe how Groupon determined when and how much revenue recognize.

b) Explain how Groupon’s revenue recognition policy differs from the revenue recognition policy you proposed in answering question 2.

4. Now look at the SEC’s letter to Groupon, dated June 29, 2011. See paragraphs 62 to 67 regarding Groupon’s revenue recognition policy.

a) What does the SEC question about Groupon’s revenue recognition policy?

b) What is the relevance of point 63 vis-à-vis point 62?

5. Finally, look at Groupon’s 10-K for 2011. This 10-K was issued after the company changed its revenue recognition policy, the SEC approved the new accounting policy, and the company conducted its initial public offering.

a) How does this new revenue recognition policy address the SEC’s critique?

b) How much did the company’s reported revenue change as compared to what was reported in the S-1?

6. Which means of accounting manipulation had Groupon used to inflate its revenue?