Groupon, Inc. is an Internet-based marketing company that sells coupons (called "Groupons") for products and services offered by other merchants (business partners). Groupon offers a "daily deal" to subscribers. The daily deal provides significant savings on a variety of products and services as long as a minimum number of customers purchase Groupon for each deal offered. This feature ensures a sufficient volume of customers to ensure that the deal is profitable for the trading partner.

When Groupon sells a coupon, it collects revenue from the customer (gross billing) and then remits a payment to the business partner. These payments are generally paid over a 60-day period. Groupon's revenue recognition policy is outlined in its 10-K as follows:

Revenue recognition

The Company recognizes revenue from Groupons when the following criteria are met: there is persuasive evidence of a deal; delivery has occurred; the sale price is fixed or determinable; and collectability is reasonably assured. These criteria are met when the number of customers purchasing the daily deal exceeds a predetermined threshold, the Groupon has been delivered electronically to the purchaser, and a list of Groupons sold has been made available to the merchant. At that time, the Company's obligations to the merchant, for which it is acting as agent, are substantially complete. The remaining obligations of the Company, merely remitting payment to the merchant and continuing to make available on the Company's website the list of Groupons previously provided to the merchant, are inconsequential or superficial. The Company records the net amount it retains from the sale of Groupons after paying an agreed percentage of the purchase price to the featured merchant, exclusive of applicable taxes. Revenues are recorded on a net basis because the Company is acting as agent for the merchant in the transaction.

Groupon reported gross revenue of $3,985.5 million in 2011, up from $745.3 million in 2010. Its net income was $1,610.4 million in 2011 and $312.9 million in 2010. Groupon also reported that it changed its revenue recognition method during 2011:

The Company restated the Condensed Consolidated Statements of Operations for the three months ended March 31, 2011, included in Form S-1 filed with the SEC on June 2, 2011, to correct an error in its income presentation. More importantly, the Company restated its Groupon revenue reporting as net of amounts related to business fees. Historically, the Company reported gross amounts billed to its subscribers as revenue. The Condensed Consolidated Statement of Operations for the three months ended March 31, 2011, has been restated to show the net amount that the Company retains after paying commercial fees. The effect of the correction resulted in a reduction in previously reported revenue and corresponding reductions in the cost of revenue in those periods. The change in presentation had no effect on pre-tax loss, net loss or any per share amount for the period.

Groupon's refund policy is also outlined in its 2012 10-K report:

Our Groupon Promise states that we will provide our customers with a refund of the purchase price of a Groupon if they believe we have defrauded them. . . . Our standard agreements with our business partners generally limit the period of time during which we can request reimbursement of customer refunds or claims. Our customers may submit refund claims for which we are unable to request reimbursement from our business partners.

At the time revenue is recorded, we record a provision for estimated customer refunds. We accrue costs associated with reimbursements in accrued expenses on consolidated balance sheets. The cost of reimbursements when the amount to be paid to the merchant is recoverable is recorded in the consolidated statements of operations as a reduction in income. The cost of refunds when there is no recoverable amount from the merchant is presented as a cost of revenue.

To determine the amount of our rebate reserve, we track rebate patterns for past offers, use that data to build a model, and apply that model to current offers. Further analysis of our 2012 redemption activity indicated departures from modelled redemption behaviour for offers submitted in late 2011, particularly due to a change in our mix of fourth quarter offers and higher price point offers. Accordingly, we update our refund model to reflect changes in the offer mix and price point of our offers over time, and we believe this updated model will allow us to more accurately track and anticipate refund behaviour.

Ask:

Given the uncertainty surrounding refunds, what alternative accounting approaches might Groupon consider to handle refunds?

Answer rating: 100% (QA)

Given the uncertainty surrounding refunds Groupon could consider the following alternative accountin... View the full answer