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Groupon, Inc. 2011 Initial Public Offering

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Slide deck overview of my term paper on the 2011 Groupon, Inc. Initial Public Offering. I focus on accounting and financial reporting issues relevant to the course material, including: non-GAAP financial measures, revenue recognition, and internal control weaknesses.

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Groupon, Inc. 2011 Initial Public Offering

  1. 1. Groupon, Inc. 2011 Initial Public Offering Daniel G. Reynolds Fall 2013
  2. 2. Agenda • • • • • Background Initial public offering Non-GAAP financial measure Revenue recognition Internal control weakness 2
  3. 3. Background 3
  4. 4. Beginnings • Started in November 2008 • Chicago, IL • Original business model – Offer “Deals” from local merchants – “Deal” would activate when enough consumers purchased one 4
  5. 5. Typical Groupon “Deal” 5
  6. 6. How it works • Groupon arranges with local merchant to sell $20 value coupon for $10 • Groupon sends email with “deal” to its subscribers • Subscriber purchases and prints coupon • Subscriber takes coupon to local merchant to redeem • Merchant provides the goods or service • Groupon sends $5 to local merchant and keeps $5 for itself 6
  7. 7. Rapid Growth Revenue 800 713.4 700 $ millions 600 500 400 300 200 100 0 0.1 2008 30.5 2009 2010 7
  8. 8. Rapid Growth Subscribers 60 50.6 50 millions 40 30 20 10 0 0 1.8 2008 2009 2010 8
  9. 9. Rapid Growth Coupons sold 35 30.3 30 millions 25 20 15 10 5 0 0 2008 1.2 2009 2010 9
  10. 10. Forbes® Magazine August 2010 • Featured cofounder and CEO Andrew Mason • “Groupon is on pace to pull in $1 billion in sales faster than any company in history” 10
  11. 11. Hot Market for Internet Companies • Google offers $6 billion for Groupon • Zynga files for IPO • Pandora Media files for IPO • Groupon files for IPO 11
  12. 12. Initial Public Offering 12
  13. 13. Form S-1 • Registration Statement Under the Securities Act of 1933 • Filed with the SEC June 2, 2011 • Amended eight (8) times • Became effective November 2, 2011 • Key accounting issues: – Non-GAAP financial measure – Revenue recognition 13
  14. 14. Non-GAAP Financial Measure 14
  15. 15. Why Use a Non-GAAP Measure? • Groupon had lost money each year from 2008-2010 • Heavy spending to grow subscriber base • Several acquisitions with contingent consideration • So, Groupon invented “Adjusted CSOI” 15
  16. 16. What was Adjusted CSOI? • “Adjusted Consolidated Segment Operating Income” • Start with Operating Income (loss) • Add-back: – Online marketing expenses – Stock-based compensation – Acquisition-related expenses 16
  17. 17. Converts Losses into Income 17
  18. 18. Regulation G • Adopted by SEC in 2003 • Governs use of non-GAAP financial measures • Must reconcile to most directlycomparable GAAP measure • Must not adjust for non-recurring items if reasonably likely to recur 18
  19. 19. Groupon Claimed • Online marketing expense would eventually go away – At some unspecified future date – When its subscriber base was fullydeveloped • Adjusted CSOI used for internal performance measurement 19
  20. 20. SEC Staff Required • Adjusted CSOI must be removed from the Form S-1 filing – To avoid making the filing misleading to investors • Groupon changed it to “CSOI” – Leaving the online marketing expense – Still mentioned Adjusted CSOI in the president’s letter 20
  21. 21. Revenue Recognition 21
  22. 22. Principal or Agent? • Groupon’s sales force contacted local merchants to advertise using a Groupon offer • Subscribers purchased a coupon on the Web site • Groupon collected payment • And sent payment to merchant • After deducting its fee 22
  23. 23. US GAAP Guidance ASC 605-45 • Revenue Recognition, Principal Agent Considerations – Report gross amount billed as revenue when earned as a principal – Report net amount retained as revenue when earn a commission or fee as agent 23
  24. 24. Indicators of Gross Revenue ASC 605-45-45 (3 through 14) Indicator of gross revenue reporting Groupon Primary obligor in the arrangement No General inventory risk before order placed or after return No Latitude in establishing price No Changes the product or performs part of the service No Has discretion in supplier selection No Determines product or service specifications No Physical loss inventory risk after order placed or during shipping No Credit risk No 24
  25. 25. Indicators of Net Revenue ASC 605-45-45 (15 through 18) Indicator of net revenue reporting Groupon Supplier is primary obligor Yes Amount earned is fixed Yes Supplier has credit risk Yes 25
  26. 26. SEC Staff Required • Financial statements had to be restated • Reduced revenue • Reduced cost of sales • No effect on net income/loss 800 713.4 700 600 $ millions – Years 2008-2010 – Interim periods through June 2011 Revenue 500 400 312.9 300 200 100 0 0.1 0 30.5 14.5 2008 2009 As reported 2010 As corrected 26
  27. 27. Internal Control Weakness 27
  28. 28. Groupon Completes IPO $20/share – raised $800 million 28
  29. 29. Groupon’s first report.... 29
  30. 30. ...had to be revised 30
  31. 31. What Happened? • “Material adjustment” to 4th quarter allowance for refunds • Caused by “shift in the deal mix to higher price point offers” • “Material weakness in internal controls” 31
  32. 32. Embarrassing Announcement 32
  33. 33. What Was Lacking? • Written policies and procedures • Specific assignments for reconciliations and journal entries • Documentation of closing procedures performed • Oversight procedures • Validation of accounting for nonroutine judgments and estimations 33
  34. 34. Corrective Actions • Hired KPMG to develop internal controls • Expanded audit committee with additional financial experts • Named former KPMG partner as Principal Accounting Officer 34
  35. 35. Questions ? 35

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