In Chapter 1 (Accounting in Action), you learned a neat little formula: Net income = Revenues - Expenses. In Chapter 2 (The Recording Process), you learned some rules for recording revenue and expense transactions. Guess what? Things are not really that nice and neat. In fact, it is often difficult for companies to determine in what time period they should report some revenues and expenses. In other words, in measuring net income, timing is everything.
Who doesn’t like buying things at a discount? That’s why it’s not surprising that three years after it started as a company, Groupon was estimated to be worth $16 billion. This translates into an average increase in value of almost $15 million per day.
Now consider that Groupon had previously been estimated to be worth even more than that. What happened? Well, accounting regulators and investors began to question the way that Groupon had accounted for some of its transactions. But if Groupon sells only coupons (“groupons”), how hard can it be to accurately account for that? It turns out that accounting for coupons is not as easy as you might think.
First, consider what happens when Groupon makes a sale. Suppose it sells a groupon for $30 for Highrise Hamburgers. When it receives the $30 from the customer, it must turn over half of that amount ($15) to Highrise Hamburgers. So should Groupon record revenue for the full $30 or just $15? Until recently, Groupon recorded the full $30. But, in response to an SEC ruling on the issue, Groupon now records revenue of $15 instead.
A second issue is a matter of timing. When should Groupon record this $15 revenue? Should it record the revenue when it sells the groupon, or must it wait until the customer uses the groupon at Highrise Hamburgers? You can find the answer to this question in the notes to Groupon’s financial statements. It recognizes the revenue once “the number of customers who purchase the daily deal exceeds the predetermined threshold, the Groupon has been electronically delivered to the purchaser and a listing of Groupons sold has been made available to the merchant.”
The accounting becomes even more complicated when you consider the company’s loyalty programs. Groupon offers free or discounted groupons to its subscribers for doing things such as referring new customers or participating in promotions. These groupons are to be used for future purchases, yet the company must record the expense at the time the customer receives the groupon. The cost of these programs is huge for Groupon, so the timing of this expense can defi nitely affect its reported income.
The final kicker is that Groupon, like all other companies, must rely on many estimates in its financial reporting. For example, Groupon reports that “estimates are utilized for, but not limited to, stock-based compensation, income taxes, valuation of acquired goodwill and intangible assets, customer refunds, contingent liabilities and the depreciable lives of fi xed assets.” It concludes by saying that “actual results could differ materially from those estimates.” So, next time you use a coupon, think about what that means for the company’s accountants!.
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