Term paper for Fall 2013 Accounting Research course. I found enough material for a much longer paper. However, the requirements limited me to only seven pages, including references.

1. ACCT5321 Term Paper
Fall 2013
Daniel Reynolds
Introduction
This paper will review the following accounting, financial reporting and internal
control issues encountered by the Internet marketing company Groupon, Inc.
("Groupon") during its initial public offering ("IPO") and its first financial statements
after becoming a public company:
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Use of non-GAAP financial measure
Revenue recognition: Principal vs. agent considerations
Internal control over the financial closing process
Background on Groupon
Groupon was launched in November 2008 by Andrew Mason, Eric Leftkofsky
and Bradley Keywell. The original business of Groupon (the name is a conjunction of
"group" and "coupon") was to provide a "deal a day" from a local merchant to a list of
email subscribers1. The merchant would offer a product or service at a steep discount
to buyers of the coupons. In exchange for promoting the coupon and collecting
payment, Groupon would earn a portion of the amount paid for the coupon.
For example, a restaurant offers $20 worth of food for $10. The subscriber pays
Groupon $10 and prints a coupon that it can redeem at the restaurant for $20 worth
of food. Groupon retains a portion of the $10 paid by the subscriber, with the balance
paid to the merchant. The service quickly became popular with local merchants
because it provided a flow of new customers, and unlike traditional advertising, the
merchant only had to pay Groupon when a consumer purchased a coupon.
The business grew so rapidly that it caught the attention of Google, Inc., which
reportedly offered $6 billion in an unsuccessful bid to acquire Groupon2. In August
2010, Groupon was featured on the cover of Forbes magazine with the headline "Meet
the Fastest Growing Company Ever"3.
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2. ACCT5321 Term Paper
Fall 2013
Daniel Reynolds
By June 2011, Groupon had grown to approximately 7,000 employees. For the
year ended December 31, 2010, Groupon reported revenue of approximately $700
million1.
As interest in Internet and social media grew, several young Internet businesses
decided to "go public" by registering with the Securities and Exchange Commission
("SEC") and selling stock to the public, including Zynga, Inc. and Pandora Media, Inc.4
On June 1, 2011, Groupon took its first official step toward becoming a public
company by filing Form S-1, Registration Statement Under the Securities Act of 1933
("Form S-1") with the SEC1.
Non-GAAP Financial Measure
The Corporation Finance Division of the SEC ("SEC Staff") reviews all Form S-1
filings before a company is allowed to register and sells its shares publicly. The SEC
Staff questioned Groupon on numerous matters contained in its Form S-1 filing,
including its prominent use of a financial measure called Adjusted Consolidated
Segment Operating Income ("Adjusted CSOI")5.
Groupon's financial statements reported losses for all periods 2008-2010.
However, Groupon also presented Adjusted CSOI, which starts with loss from
operations, then adds-back online marketing expenses, stock-based compensation
expenses and acquisition-related expenses as follows:
(amounts in $millions)
Loss from operations
Adjustments:
Online marketing expenses
Stock-based compensation
Acquisition-related
Adjusted CSOI
2010
($420.3)
2008
($1.6)
241.5
36.2
203.2
$60.6
2
2009
($1.1)
4.5
.1
-3.5
0.2
--($1.4)

3. ACCT5321 Term Paper
Fall 2013
Daniel Reynolds
In 2003, the SEC issued Conditions for Use of Non-GAAP Financial Measures
("Regulation G"). Regulation G requires requires public companies that disclose or
release such non-GAAP financial measures to reconcile the non-GAAP financial
measure to the most directly comparable GAAP financial measure. It also prohibits
adjusting a non-GAAP performance measure to eliminate or smooth items identified
as non-recurring, infrequent or unusual, when (1) the nature of the charge or gain is
such that it is reasonably likely to recur within two years, or (2) there was a similar
charge or gain within the prior two years6.
The SEC Staff viewed the add-back of online marketing expenses in the Adjusted
CSOI computation as misleading, since those costs could be reasonably expected to
recur. Groupon stated that it expected to discontinue those costs at some
(unspecified) future time, and also claimed that presentation of Adjusted CSOI was
acceptable because management used it to internally measure performance7.
Nevertheless, the SEC staff required Groupon to remove Adjusted CSOI from its
Form S-1 filing so that it would not be misleading to users8.
Revenue Recognition
Groupon included its audited financial statements as of and for the years ended
31 December 2008, 2009 and 2010 in its Form S-11. In the Consolidated Statements
of Operations, Groupon reported the following:
(amounts in $millions)
Revenue
2010
$713.4
2009
$30.5
2008
$0.1
In Note 2, Groupon described its revenue recognition policy. Groupon reported
the gross amount billed to the purchaser of a Groupon as revenue, then deducted the
amount paid to the merchant as cost of revenue.1.
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4. ACCT5321 Term Paper
Fall 2013
Daniel Reynolds
However, Accounting Standards Codification ("ASC") Section 605-45 provides
guidance for whether to report revenue on a "gross" or "net" basis. It provides
indications that an entity should use gross revenue reporting when it:

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Is the primary obligor on the arrangement,
Has general inventory risk,
Has latitude in establishing price,
Changes the product or performs the service,
Has discretion in supplier selection,
Is involved in the determination of product or service specifications,
Has physical loss inventory risk, and
Has credit risk9.
The arrangements that Groupon had with consumer coupon purchasers and
merchants were not consistent with these indicators of gross revenue reporting.
Groupon was not the "primary obligor" on its transactions, it carried no inventory,
could not establish product and/or service price, could not change the product and
did not perform any part of the service, had no discretion in supplier selection, and
was not involved in setting product and/or service specifications. In short, the
merchants were Groupon's customers, not the consumer coupon purchasers.
Since Groupon had not recognized revenue in accordance with accounting
principles generally recognized in the United States ("US GAAP") the SEC Staff
required Groupon to change its revenue recognition policy to recognize the net
amount in its financial statements. Groupon restated its financial statements for all
periods10, including the years ended December 31, 2008, 2009 and 2010 as follows:
(amounts in $thousands)
Revenue, as originally stated
Revenue, as restated
2010
$713.4
$312.9
4
2009
$30.5
$14.5
2008
$0.1
$ --

5. ACCT5321 Term Paper
Fall 2013
Daniel Reynolds
Instead, Groupon disclosed parenthetically, amounts labeled "gross billings";
essentially, what it had previously labeled "revenue" plus an allowance for refunds
(which itself had been incorrectly netted against "revenue" rather than being
classified as an expense)11.
Internal Control Weaknesses
In all, Groupon amended its S-1 eight (8) times4 before finally completing its
registration and IPO on Friday, November 4, 2011, selling 40.25 million shares at
$20.00 per share. The stock sale, for 6.3% of Groupon's outstanding shares, raised
$805 million12.
As an SEC registrant, Groupon was now required to file reports with the SEC,
including Quarterly Reports on Form 10-Q and Current Reports on Form 8-K ("Form
8-K"). On February 8, 2012, Groupon issued a press release, filed as an exhibit to its
Form 8-K, announcing results for its 2011 fourth quarter. Groupon reported 4th
quarter operating income of $15.0 million on revenue of $506.5 million13.
However, on March 30, 2012 Groupon revised its announcement14 to report an
operating loss of $15.0 million on revenue of $492.2 million. In the March 30th
announcement, Groupon also disclosed that it had a material weakness in the design
and operating effectiveness of its internal control over financial reporting as defined
in SEC Regulation S-X.
What happened? In correspondence with the SEC, Groupon cited a "material
adjustment" to its allowance for customer refunds, caused by "a shift in deal mix
toward higher price point offers"15. The adjustment reduced revenue $14 million and
turned a $15 million operating profit into a $15 million operating loss.
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6. ACCT5321 Term Paper
Fall 2013
Daniel Reynolds
The material internal control weaknesses disclosed by Groupon included:





Implementation and formalization of written policies and procedures for
the review of account analyses, reconciliations and journal entries;
Assigning account reconciliations and journal entries during the reporting
period close process to specific individuals;
Formal documentation of procedures performed during the close process;
Implementation of enhanced oversight procedures to ensure that the
account reconciliation review process is performed prior to finalization of
the financial statements at each reportingperiod; and
Validation of accounting for non-routine judgments and estimations
(including the allowance for customer refunds)15.
Groupon blamed the weakness on "rapid growth", "organization changes" and a
"significantly accelerated" timing of its annual audit15.
On April 24, 2012 Groupon announced the addition of two new members of its
board of directors, both of whom would serve on an expanded audit committee16.
Groupon also hired KPMG, LLP to help it develop proper internal control procedures3.
Finally, in September 2012, Groupon announced the hiring of a former KPMG partner
to the newly-created post of Chief Accounting Officer17.
Summary
This paper reviewed Groupon's accounting, financial reporting and internal
control issues. Groupon had to make significant changes to it S-1 registration
statements, restating revenue and removing a non-GAAP financial measure before the
SEC would allow its IPO to proceed. Subsequently, Groupon had to revise a public
announcement of financial results due to a misstatement resulting from a material
weakness in its internal controls. Groupon has made additions to its board of
directors and management in response to these issues.
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7. ACCT5321 Term Paper
Fall 2013
Daniel Reynolds
References
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Groupon, Inc. (2011). Registration Statement on Form S-1 (CIK: 000149281).
Retrieved October 12, 2013 from the Securities and Exchange Commission
http://www.sec.gov.
Das, Anupreeta and Chon, Gina (2011). Advisers Vie to Take on Groupon IPO. The Wall
Street Journal - January 15, 2011. Retrieved October 12, 2013 from
http://global.factiva.com.
Steiner, Christopher (2010). Meet the Fastest Growing Company Ever. Forbes - August
30, 2010. Retrieved October 13, 2013 from http://global.factiva.com.
McKenna, Francine (2012). Social Media's Phony Accounting. Forbes - May 7, 2012.
Retrieved October 13, 2013 from http://global.factiva.com.
Groupon, Inc. (2011). Letter from SEC Division of Corporate Finance dated June 29,
2011 (CIK:000149281). Retrieved October 12, 2013 from the Securities and Exchange
Commission http://www.sec.gov.
Securities and Exchange Commission (2003). Conditions for Use of Non-GAAP
Financial Measures. Retrieved October 19, 2013 from the Securities and Exchange
Commission http://www.sec.gov.
Groupon, Inc. (2011). Letter to SEC Division of Corporate Finance dated July 14, 2011
(CIK:000149281). Retrieved October 12, 2013 from the Securities and Exchange
Commission http://www.sec.gov.
Groupon, Inc. (2011). Letter from SEC Division of Corporate Finance dated July 22,
2011 (CIK:000149281). Retrieved October 12, 2013 from the Securities and Exchange
Commission http://www.sec.gov.
Accounting Standards Codification 605-45, Revenue Recognition, Principal Agent
Considerations. Retrieved October 13, 2013 from the Financial Accounting Standards
Board Codification http://asc.fasb.org.
Groupon, Inc. (2011). Letter to SEC Division of Corporate Finance dated September 16,
2011 (CIK:000149281). Retrieved October 12, 2013 from the Securities and Exchange
Commission http://www.sec.gov.
Groupon, Inc. (2011). Amendment No. 3 to Registration Statement on Form S-1 (CIK:
000149281). Retrieved October 12, 2013 from the Securities and Exchange
Commission http://www.sec.gov.
Raide, Shayndi and Smith, Randall (2011). Groupon's Deal is a Big Test for IPO Market.
The Wall Street Journal - November 4, 2011. Retrieved October 12, 2013 from
http://global.factiva.com.
Groupon, Inc. (2012). Current Report on Form 8-K filed February 8, 2012. Retrieved
October 12, 2013 from the Securities and Exchange Commission http://www.sec.gov.
Groupon, Inc. (2012). Current Report on Form 8-K filed March 30, 2012. Retrieved
October 12, 2013 from the Securities and Exchange Commission http://www.sec.gov.
Groupon, Inc. (2012). Letter to SEC Division of Corporate Finance dated August 24,
2012 (CIK:000149281). Retrieved October 12, 2013 from the Securities and Exchange
Commission http://www.sec.gov.
Groupon, Inc. (2012). Current Report on Form 8-K filed April 30, 2012. Retrieved
October 12, 2013 from the Securities and Exchange Commission http://www.sec.gov.
Groupon, Inc. (2012). Current Report on Form 8-K filed September 13, 2012. Retrieved
October 12, 2013 from the Securities and Exchange Commission http://www.sec.gov.
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