Hello Can you please help me answer question 5 in the Groupon case study

ISSUES IN ACCOUNTING EDUCATION Vol. 29, No. 1 2014 pp. 229-245 American Accounting Association DOI: 10.2308/iace-50595 Growing Pains at Groupon Saurav K. Dutta, Dennis H. Caplan, and David J. Marcinko ABSTRACT: On November 4, 2011, Groupon Inc. went public with an initial market capitalization of $13 billion. The business was formed a couple of years earlier as an offshoot of ''The Point.'' The business grew rapidly and increased its reported revenue from $14.5 million in 2009 to $1.6 billion in 2011. Soon after going public, prior to its announcement of its first-quarter results, the company's auditors required Groupon to disclose a material weakness in its internal controls over financial reporting that impacted its disclosures on revenue and its estimation of returns. This case uses Groupon to motivate discussion of financial reporting issues in ecommerce businesses. Specifically, the case focuses on (1) revenue recognition practices for ''agency'' type e-commerce businesses, (2) accounting for sales with a right of return for new products, and (3) use of alternative financial metrics to better convey the intrinsic value of a business. The case requires students to critically read, analyze, and apply authoritative accounting guidance, and to read and analyze communications between the Securities and Exchange Commission (SEC) and the registrant. Keywords: Groupon; revenue recognition; allowance for sales returns; e-commerce; non-GAAP metrics. GROWING PAINS AT GROUPON A s an undergraduate music major at Northwestern University, Andrew Mason eagerly sought a version of rock music that would fuse punk with the Beatles and Cat Stevens. Little did he imagine that within ten years he would be the CEO of one of history's fastestgrowing businesses. After Northwestern and faded dreams of rock stardom, Mason, a self-taught computer programmer, was hired to write code by the Chicago rm InnerWorkings. InnerWorkings was founded in 2001 by Eric Lefkofsky, who had built several businesses around call centers and the Internet. In 2006, Lefkofsky became interested in an idea of Mason's for a website that would act as a social media platform to bring people together with a common interest in some problem Saurav K. Dutta is an Associate Professor and Dennis H. Caplan is an Assistant Professor, both at University at Albany, SUNY; and David J. Marcinko is an Associate Professor at Skidmore College. We thank the editor, associate editor, and two reviewers for their helpful insights, comments, and suggestions. We also acknowledge our accounting students who completed the case and provided us with valuable feedback. Editor's note: Accepted by William R. Pasewark Published Online: August 2013 229 230 Dutta, Caplan, and Marcinko most often some sort of social cause. Lefkofsky provided Mason with $1 million of capital to develop the concept that became known as ''The Point.''1 Virtually no one associated with The Point initially envisioned commercial aspirations for the venture. In the fall of 2008, at the height of the nancial crisis, ventures with little or no commercial aspirations were in jeopardy. Lefkofsky and Mason faced a decision on how to proceed with The Point. Lefkofsky seized on an idea proposed by a group of users of The Point. This group attempted to identify a number of people who wanted to buy the same product, and then approach a seller for a group discount. Mason had originally mentioned group-buying as one application of The Point, and now Lefkofsky latched onto the concept and pursued it relentlessly. In response, Mason and his employees began a side project that they named Groupon. The business plan was relatively simple. Groupon offered vouchers via email to its subscriber base that would provide discounts at local merchants. The vouchers were issued only after a critical number of subscribers expressed interest. At that point, Groupon charged those subscribers for the purchase and recorded the entire proceeds as revenue. Subsequently, when the subscriber redeemed the voucher with the merchant, Groupon remitted a portion of the proceeds to the merchant and retained the remainder. For example, a salon might offer a $100 hairstyling in exchange for a $50 Groupon voucher and agree to a 60-40 split of the price. Once a sufcient number of subscribers agreed to the deal, Groupon sold the voucher for $50. After providing the service, the salon would submit the voucher to Groupon and receive $30. Groupon would keep the remaining $20. The idea took off with enthusiastic support from the local media in Chicago. By the end of 2008, it was clear to Lefkofsky and Mason that The Point would become Groupon. Understanding that the key to competitive success would be a massive increase in scale, Lefkofsky pushed the company to grow vigorously through quick expansion to many cities. Within a year, the new company had 5,000 employees, and by 2012 had more than 10,000. The company's revenue growth was also impressive. Beginning with $94,000 in 2008, revenue had grown to $713 million in 2010. In the rst quarter of 2011, the company nearly equaled its entire 2010 sales, reporting revenue of $644 million, and total revenue for 2011 was $1.6 billion. Andrew Mason became a media star, appearing on CNBC and The Today Show. In August of 2010, he appeared on the cover of Forbes magazine, which touted Groupon as ''the fastest growing companyever.'' The spectacular growth attracted more than media attention. Groupon quickly found itself pursued by corporate suitors. By mid-2010, Yahoo! offered to purchase the company for a price between $3 billion and $4 billionit was an offer that Mason, who had no wish to work at Yahoo!, quickly turned down. Google then approached Groupon with an offer that would eventually grow to nearly $6 billion. Groupon rejected Google's offer, as well. Faced with an ever-growing need for cash, this decision left Mason and Lefkofsky with only one option: to take Groupon public. They did so on November 4, 2011, at an IPO price of $20 per share, yielding a market capitalization of $13 billion. On the day of the IPO, the stock closed near its all-time high of $26 a share. It traded in the range of $18 to $24 for several months following the IPO. The stock price then declined precipitously after March 30, 2012, as shown in Figure 1, following the announcement of a material weakness in internal controls, when Groupon announced that it planned: to take additional measures to remediate the underlying causes of the material weakness, primarily through the continued development and implementation of formal policies, improved processes and documented procedures, as well as the continued hiring of additional nance personnel. (Groupon 2012b, 23) 1 For additional background information on Groupon, see Steiner (2010), Carlson (2011), and Stone and MacMillan (2011). Issues in Accounting Education Volume 29, No. 1, 2014 Growing Pains at Groupon 231 FIGURE 1 Groupon's Stock Price Chart REVENUE RECOGNITION Sale of products to customers prior to purchase by the vendor/retailer is a common business model for ''e-tailers'' such as Expedia and Priceline. These vendors provide a platform for exchange of goods, but do not necessarily transact in those goods. When the customer makes a purchase through an e-tailer's platform or interface, the e-tailer takes the payment from the customer and places an order with the supplier to send goods directly to the customer. At a later date, it remits a payment to the supplier for the prearranged price. Like a traditional business, the e-tailer retains the difference between the payment received from the customer and the payment it makes to the supplier. However, unlike a traditional merchandiser, the e-tailer never takes possession of the merchandise. The manner in which these transactions are recorded has signicant impact on the nancial statements. There are primarily two ways of recording the transaction: on a ''gross'' or ''net'' basis. Under the gross method, the entire amount received from the customer is recorded as revenue, and a corresponding cost of sales is recorded to account for the payment made to the supplier for the merchandise. Under the net method, only the difference between what is received from the customer and what is paid to the supplier is recorded as revenue. This is consistent with recognizing that the vendor earns a commission on the sale. We illustrate the concept further with the use of an example. Suppose an e-tailer sells an airline ticket to a customer for $1,000 online and remits $950 to the airline. The issue is how the e-tailer should journalize the two transactions: (1) the sale to the customer, and (2) the payment to the airline. Under the gross method of recognizing revenue, on the date of sale to the customer, the journal entry is: Issues in Accounting Education Volume 29, No. 1, 2014 Dutta, Caplan, and Marcinko 232 Cash 1,000 Revenue 1,000 Cost of Sales 950 Accounts Payable 950 When the company pays the airline, the corresponding journal entry is: Accounts Payable Cash 950 950 Under the net method of recording the transaction, the journal entry on the date of sale to the customer is: Cash 1,000 Accounts Payable Revenue 950 50 And on the date of payment to the airline, the journal entry is identical to the gross method: Accounts Payable Cash 950 950 The differences between the gross and net methods of recording the transactions are: \u000f \u000f Higher revenue is recorded under the gross method. Higher cost of sales is recorded under the gross method. However, gross protthe excess of revenue over the cost of salesis the same under the two methods; $50 in our example. In its original S-1 ling with the SEC on June 2, 2011, Groupon noted in its footnote on revenue recognition that, ''The Company records the gross amount it receives from Groupons, excluding taxes where applicable, as the Company is the primary obligor in the transaction'' (Groupon 2011a, F-11). In its response to the S-1, the SEC commented: it is unclear to us why you believe the company is the primary obligor in the arrangement. Please advise us, in detail, and provide us management's comprehensive analysis of its revenue generating arrangements and explain the consideration given to each of the indicators of gross reporting and each of the indicators of net reporting found in ASC 60545-45 . . . If, in fact, the company is the primary obligor, then explain to us why it is appropriate for the company to recognize revenue prior to delivery of the underlying product or service by the merchant to the customer. (SEC 2011a, 11) In its response, Groupon reasserted that it was the primary obligor and, hence: it recognizes revenue on a gross basis in accordance with ASC 605-45-45 based on its assessment of the facts and circumstances of the arrangement. The purchase of a Groupon voucher gives the Customer the option to purchase goods or services at a specied price in the future. For instance, a Customer may pay $25 for a Groupon that entitles him or her to $50 of merchandise or services at a Merchant's store. However, it is important to note that the Company is not selling the underlying goods or services, only the voucher to obtain discounted goods or services. (Groupon 2011b, 31) Issues in Accounting Education Volume 29, No. 1, 2014 Growing Pains at Groupon 233 TABLE 1 Abridged Income Statements for Groupon 2009 Income Statement Account 2010 Gross Net Gross Net $30.4 M 19.5 M $14.5 M 4.4 M $713.4 M 433.4 M $312.9 M 32.5 M Gross Margin Marketing Expense General and Admin. Expense Other Expenses 10.9 M 4.6 M 7.5 M 10.1 M 4.9 M 6.4 M 280.0 263.2 233.9 203.2 Net Loss Net Loss to common shareholders EPS (Basic) 1.34 M 6.92 M (0.04) 1.09 M 6.92 M (0.04) 413.4 M 456.3 M (2.66) Revenue Cost of Sales M M M M 280.4 284.3 213.3 203.2 M M M M 420.1 M 456.3 M (2.66) This information was obtained from Groupon's S-1 ling with the SEC on June 2, 2011, and the amended ling (Amendment No. 4) on October 7, 2011. The SEC followed up: Considering your view that the Company, and not the merchant, is the primary obligor in the Groupon transaction, please explain the terms and conditions included in the Company's website that state ''Vouchers you purchase through our Site as a Groupon account holder are special promotional offers that you purchase from participating Merchants through our service'' and further that ''The Merchant is the issuer of the voucher and is fully responsible for all goods and services it provides to you'' and why you believe this is consistent with your view. (SEC 2011b, 4) In response, Groupon contended: the Company believes that, by virtue of the credit risk it bears and the Groupon Promise, it is both a seller and an issuer of vouchers. The Company is the primary obligor when it issues a Groupon voucher on behalf of a merchant, which in turn is solely responsible to deliver goods or perform services. (Groupon 2011c, 2) Although the Company provides the Groupon Promise, the Company does not accept any other responsibility for the delivery of goods or services provided to a customer and has never delivered the goods or services underlying a Groupon voucher to a customer on behalf of a merchant or otherwise. (Groupon 2011c, 3) However, in an amended S-1 ling on October 7, 2011, Groupon changed the related footnote on revenue recognition to identify itself as the agent for the merchants. It noted: we record as revenue the net amount we retain from the sale of Groupons after paying an agreed upon percentage of the purchase price to the featured merchant excluding any applicable taxes. Revenue is recorded on a net basis because we are acting as an agent of the merchant in the transaction. (Groupon 2011d, 68) The effect of this change in denition of revenue from gross to net on the income statement is shown in Table 1. The rst and third columns present the Income Statements for 2009 and 2010 as originally reported on June 2, 2011, when revenue was reported on a gross basis. The second and Issues in Accounting Education Volume 29, No. 1, 2014 234 Dutta, Caplan, and Marcinko the fourth columns present the Income Statements for 2009 and 2010 as amended in the October 7 ling, to reect revenue recognition on a net basis. Groupon further elaborated on the change in revenue recognition when it led its rst-quarter 10-Q on May 15, 2012. The company noted that it had to ''restate'' the Statements of Operations led with the SEC on June 2, 2011, to ''correct for an error in its presentation of revenue.'' It explained the change as follows: The Company restated its reporting of revenues from Groupons to be net of the amounts related to merchant fees. Historically, the Company reported the gross amounts billed to its subscribers as revenue . . . The effect of the correction resulted in a reduction of previously reported revenues and corresponding reductions in cost of revenue in those periods. The change in presentation had no effect on pre-tax loss, net loss or any per share amounts for the period. (Groupon 2012c, 10) The controversy over reporting revenue on a net versus gross basis is not new. This was a much-debated issue in 1999, when the company in the center of the controversy was Priceline. In the third quarter of 1999, Priceline reported revenue of $152 million. This amount included the full price the customers paid to Priceline for hotel rooms, rental cars, airline tickets, and holiday packages. However, much like travel agencies, Priceline retained only $18 million, a small portion of the $152 million; the rest it remitted to the actual service providers, the hotels, the airlines, etc. The revenue recognition issue was resolved in 2000, when Priceline reported only the commission as revenue. During the same period, Priceline's stock decreased about 98 percent from April to December 2000. Subsequent to the Priceline revenue recognition controversy, the SEC issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. This guidance specically required rms to report revenue on a net basis when the rm acts as an agent or broker without assuming the risks of ownership of the goods or the risk of default on payment. Concurrently, the SEC directed the Financial Accounting Standards Board (FASB) to explore the issue. In July 2000, the Emerging Issues Task Force (EITF) of the FASB reached a consensus on Issue No. 99-19. The FASB afrmed the guidance of EITF 99-19 in ASC Section 605, Revenue Recognition.2 Although net income is generally not affected by the use of gross versus net revenues, the issue is important because revenue itself is a critical component in the nancial statements, and revenue is materially affected by the choice. ASC Section 605-45-45 (FASB 2012b) identies indicators supporting the use of gross revenue rather than net revenue. Two of these indicators, credit risk and inventory risk, can be assessed for Groupon from its balance sheet and related footnote disclosures. These are reproduced in Table 2 from Groupon's original S-1 ling on June 2, 2011 (Groupon 2011a, F-4, F-9). SALES WITH A RIGHT OF RETURN Companies that provide a right of return to customers are required to establish an allowance for sales returns if the amount is material. A merchandiser satises its obligations when it provides the product to the customer and, hence, can recognize revenue for the amount of sale. However, if the possibility exists that the customer could return the merchandise for a full or partial refund, the company is required to create a reserve for such occurrences. The amount to be reserved is based on past experience with returns and management estimates of future trends. When historical data do not exist and estimation of future returns is not possible, recognition of revenue must be deferred 2 See Phillips, Luehlng, and Daily (2001) for a discussion of SAB No. 101 and EITF 99-19. Issues in Accounting Education Volume 29, No. 1, 2014 Growing Pains at Groupon 235 TABLE 2 Groupon Selected Disclosures Balance Sheet Excerpts (in '000s) December 31 2009 Assets Current assets: Cash and cash equivalents Accounts receivable, net Prepaid expenses and other current assets Total current assets Property and equipment, net Goodwill Intangible assets, net Deferred income taxes, non-current Other non-current assets Total Assets 2010 $12,313 601 1,293 $118,833 42,407 12,615 14,207 274 239 242 173,855 16,490 132,038 40,775 14,544 3,868 $14,962 $381,570 Footnote Disclosure of Accounts Receivable, net: Accounts receivable primarily represent the net cash due from the company's credit card and other payment processors for cleared transactions. The carrying amount of the company's receivables is reduced by an allowance for doubtful accounts that reflects management's best estimate of amounts that will not be collected. The allowance is based on historical loss experience and any specific risks identified in collection matters. Accounts receivable are charged off against the allowance for doubtful accounts when it is determined that the receivable is uncollectible. The company's allowance for doubtful accounts at December 31, 2009, and 2010 was $0 and less than $0.1 million, respectively. The corresponding bad debt expense for the years ended December 31, 2008, 2009, and 2010 was $0, $0, and less than $0.1 million, respectively (Groupon 2011a, F-9). until the right of return has expired (FASB 2012a, ASC 605-15-25). Until then, any cash received should be accounted for as unearned revenue, a liability. Groupon's business plan entails selling coupons for a product or service, and collecting cash prior to the merchant providing the product or service. That is, customers pay up front for a coupon for services or goods, and can redeem the coupon within the next six months. Moreover, the product is provided by a separate merchant, independent of Groupon. To entice customers to transact with Groupon, rather than directly with the vendor, Groupon features a generous right of return for its subscribers at least on par with the vendor's own right of return. The return policy is featured prominently on the company's website. Since Groupon does not directly provide the service, it guarantees the quality of services/goods on behalf of the vendor. Furthermore, since customers pay cash to Groupon while receiving services/goods from the vendor, customers expect ''cash-back'' from Groupon should they be dissatised. Groupon summarizes its policy as ''The Groupon Promise,'' which states simply: ''If Groupon ever lets you down, we will return your purchasesimple as that.'' In addition, it allows for full or partial refunds in the following situations: \u000f \u000f If a business closes permanently; Any unredeemed Groupon can be returned for a full refund within seven days of purchase; Issues in Accounting Education Volume 29, No. 1, 2014 Dutta, Caplan, and Marcinko 236 \u000f \u000f In other cases, unredeemed Groupons are evaluated on a ''case-by-case'' basis; After the expiration date, the Groupon is still worth the amount paid, which never expires. In reviewing Groupon's initial S-1 ling, the SEC noted: It appears that the ''Groupon Promise'' is unconditional. In light of your rapid growth and entry into new markets, explain to us why you believe the amount of future refunds is reasonably estimable. (SEC 2011a, 11) While acknowledging its rapidly growing and expanding markets, Groupon defended its ability to reasonably estimate returns: as the Company deals with more and more merchants, it does not believe the characteristics of its merchants within a geographical region differ from one another such that it would materially affect the Company's estimates. (Groupon 2011b, 35) As Groupon expanded to other markets, its product diversity increased from small-ticket items such as restaurant meals and salon services to high-ticket items such as international vacations and expensive medical services. Entering new markets with little or no historical experience, it became increasingly difcult for Groupon to estimate customer returns. In early 2012, Groupon's internal accountants discovered that the amount of customer refunds in January exceeded all previous models Groupon had constructed to predict customer behavior. One example was a large number of refund requests for a deal involving Lasik eye surgery. Interestingly, many consumers that purchased the Groupon for eye surgery did not realize that they had to be in good physical condition to undergo surgical procedures. Hence, when these subscribers were deemed unt to undergo the surgical procedure, they returned their purchase to Groupon and asked for a refund. However, Groupon had already recorded the sale and reported the revenue in the previous quarter without having made an adequate provision for returns. The high level of refund activity was signicantly correlated with high price-point deals that the company had only begun offering in 2011. These circumstances led to yet another nancial restatement by the young company. The revision to previously reported nancial results for the fourth quarter of 2011 was announced in the press release reproduced below: Groupon, Inc. (NASDAQ: GRPN) today announced a revision of its reported nancial results for its fourth quarter and year ended December 31, 2011 . . . The revisions are primarily related to an increase to the Company's refund reserve accrual to reect 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. (Groupon 2012a) The press release also noted: The revisions resulted in a reduction to fourth quarter 2011 revenue of $14.3 million. The revisions also resulted in an increase to fourth quarter operating expenses that reduced operating income by $30.0 million, net income by $22.6 million, and earnings per share by $0.04 . . . There is no change to Groupon's previously reported operating cash ow of $169.1 million for the fourth quarter 2011 and $290.5 million for the full year 2011. (Groupon 2012a) Retroactively, Groupon adjusted its refund reserve, which is a liability for estimated costs to provide refunds that are not recoverable from merchants. The reserve amount as of December 31, 2011 was $67.45 million, and on March 31, 2012 had increased to $81.56 million. The increase of Issues in Accounting Education Volume 29, No. 1, 2014 Growing Pains at Groupon 237 $14.1 million in the balance of this account signies the excess of accrued expense over actual cash disbursements due to customer refunds. By its decision to go public, Groupon imposed upon itself the requirements of Section 404 of the Sarbanes-Oxley Act, which requires the company's auditors to report annually on the effectiveness of the company's internal controls. The SEC permits a company going public to wait until its second 10-K to comply with this requirement. When preparing for its initial Section 404 audit as required for the year ending December 31, 2012, Groupon and its auditors identied and reported this material weakness in its 2011 10-K. The need to restate the refund reserve was attributed to a material weakness in Groupon's internal controls over its ''nancial statement close process'' (Groupon 2012a). ACSOI: AN ALTERNATIVE FINANCIAL METRIC As a private company, Groupon relied upon a non-GAAP measure of company performance called Adjusted Consolidated Segment Operating Income (ACSOI). This metric was related, but not identical, to the commonly used non-GAAP metric Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA). While ACSOI included all of the revenues, it excluded some common expenses, including: marketing expenses, acquisition-related costs, stock compensation costs, interest, and tax expenses. ACSOI is even more aggressive than EBITDA because it ignores some signicant expenses related to Groupon's business. In its initial S-1 ling with the SEC, Groupon appeared more protable under ACSOI than under the GAAP metrics of net income and operating income. While on a GAAP basis, the company lost $413.4 million for 2010 and $113.9 million in the rst three months of 2011, the ACSOI measures were a positive $60.6 million and $81.6 million, respectively. The difference was in large part due to excluding from ACSOI online marketing costs to attract new customers. In its response to Groupon's initial S-1 ling, the SEC commented: We note your use of the non-GAAP measure Adjusted Consolidated Segment Operating Income, which excludes, among other items, online marketing expense. It appears that online marketing expense is a normal, recurring operating cash expenditure of the company. (SEC 2011a, 4) In its response, the company provided the following rationale for excluding marketing expenses from this metric: The Company's management utilizes Adjusted CSOI internally as a measure to assess the performance of the business . . . In utilizing Adjusted CSOI as a performance measure, management does not rely on the non-recurring, infrequent or unusual nature of online marketing expense. It focuses instead on the fact that such expenses are almost entirely discretionary and incurred primarily to acquire new subscribers. (Groupon 2011b, 11) EPILOGUE In a letter to Groupon employees in early March 2013, CEO Andrew Mason wrote: After four and a half intense and wonderful years as CEO of Groupon, I've decided that I'd like to spend more time with my family. Just kiddingI was red today. If you're wondering why . . . you haven't been paying attention. From controversial metrics in our S-1 to our material weakness to two quarters of missing our own expectations and a stock price that's hovering around one quarter of our listing price, the events of the last year and a half speak for themselves. As CEO, I am accountable. (Washingtonpost.com 2013) Issues in Accounting Education Volume 29, No. 1, 2014 Dutta, Caplan, and Marcinko 238 CASE REQUIREMENTS 1. 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 signicant risks and opportunities across these companies. How do these business risks translate to risks in nancial reporting? 2. ''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 Amazon's revenue, income, and its stock price from 1997 to 2010. 3. 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. 4. In the months leading up to Groupon's IPO, the SEC posed a number of questions regarding Groupon's choice of accounting principles for revenue recognition. Specically, the SEC referred to the requirements in FASB's ASC 605-45-45. a. Compare the amount of revenue reported in the original and amended S-1s. What caused the difference? b. Which of the two amounts do you think Groupon preferred? Why did they prefer it? c. In correspondence with the SEC following its initial S-1 ling, how did Groupon justify its method of reporting revenue? d. With reference to ASC 605-45-45, which of Groupon's arguments were weak, and why? 5. Groupon had recognized revenue for the sale of high-ticket items in late 2011. Purchasers of the Groupons have a right of return, as specied in the ''Groupon Promise,'' prominently featured on its website. a. Assess the U.S. GAAP requirement for recognition of revenue when right of return exists, specied in ASC Section 605-15-25, in the context of Groupon's business model. b. Do you agree with Groupon's accounting? Why or why not? c. What could Groupon have done differently, and how would the nancial statements have been affected? 6. Groupon's restatement of 2011 fourth-quarter nancials resulted in a reduction of $14.3 million of revenues and a decrease of $30 million of operating income. However, its operating cash ow was unaffected. Explain how this is possible. 7. 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 rst quarter of 2012. a. How much refund was issued in 2012? b. Explain why the expense recorded in the rst quarter does not equal the amount paid during the quarter. 8. In its initial S-1 ling, 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 Groupon's nancial statements? b. Non-GAAP metrics are common in some industries. These include: Value-at-Risk in the nancial 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 nancial 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 identied 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 Groupon's contention that discretionary expenses, such as subscription acquisition costs, should be excluded from the nancial measures of a company's performance? 9. Groupon's management needed signicant 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 nancial reporting challenges across the three options. b. In March 2012, Groupon's auditors noted a material weakness in the company's internal controls related to ''deciencies in the nancial 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 Groupon's choice of accounting methods, use of a non-GAAP metric, and material weakness in its internal control reect a lack of management experience or a lack of management integrity? REFERENCES Carlson, N. 2011. Inside Groupon: The truth about the world's most controversial company. Business Insider (October 31). Available at: http://www.businessinsider.com/inside-groupon-the-truth-about-the-worldsmost-controversial-company-2011-10 Financial Accounting Standards Board (FASB). 2012a. Revenue Recognition: ProductsRecognition. Accounting Standards Codication (ASC) Section 605-15-25. Norwalk, CT: FASB. Financial Accounting Standards Board (FASB). 2012b. Revenue Recognition: Principal Agent ConsiderationsOther Presentation Matters. ASC Section 605-45-45. Norwalk, CT: FASB. Groupon. 2011a. Form S-1: Registration Statement under the Securities Act of 1933. Filed with the SEC on June 2. Washington, DC: Government Printing Ofce. Groupon. 2011b. Letter to SEC dated July 14. Available at: http://www.sec.gov/Archives/edgar/data/1490281/ 000104746911006336/0001047469-11-006336-index.htm Groupon. 2011c. Letter to SEC dated August 29. Available at: http://www.sec.gov/Archives/edgar/data/ 1490281/000104746911007725/0001047469-11-007725-index.htm Groupon. 2011d. Amendment No. 4 to Form S-1: Registration Statement under the Securities Act of 1933. Filed with the SEC on October 7. Washington, DC: Government Printing Ofce. Groupon. 2012a. Groupon Announces Revised Fourth Quarter and Full Year 2011 Results, Conrms First Quarter Guidance (March 30). Press Release. Available at: http://investor.groupon.com/releasedetail. cfm?releaseid660861 Groupon. 2012b. Form 10-K. Filed with the SEC on March 30. Washington, DC: Government Printing Ofce. Groupon. 2012c. Form 10-Q. Filed with the SEC on May 15. Washington, DC: Government Printing Ofce. Phillips, T. J., Jr., M. S. Luehlng, and C. M. Daily. 2001. The right way to recognize revenue. Journal of Accountancy 191 (6): 39-46. Securities and Exchange Commission (SEC). 2011a. SEC-generated letter dated June 29. Available at: http:// www.sec.gov/Archives/edgar/data/1490281/000000000011039811/0000000000-11-039811-index.htm. Securities and Exchange Commission (SEC). 2011b. SEC-generated letter dated August 19. Available at: http://www.sec.gov/Archives/edgar/data/1490281/000000000011050412/0000000000-11-050412index.htm. Steiner, C. 2010. The next web phenom. Forbes 186 (3): 58-62. Stone, B., and D. MacMillan. 2011. Are four words worth $25 billion? Bloomberg Businessweek 4221 (March 21): 70-75. Washingtonpost.com. 2013. Groupon's CEO writes the best resignation letter ever (March 1). Available at: http://www.washingtonpost.com/blogs/wonkblog/wp/2013/03/01/groupons-ceo-writes-the-bestresignation-letter-ever/ Issues in Accounting Education Volume 29, No. 1, 2014