Groupon is a US company with a deal-of-the-day website that features discounted gift certificates usable at local
Question:
Groupon is a US company with a deal-of-the-day website that features discounted gift certificates usable at local or national companies. Since its formation, it has faced a number of questions relating to its accounting practices. The following is a compilation of statements extracted from articles discussing two of Groupon’s questionable accounting practices.
In its latest filing, Groupon says that it has restated its financial results for the last three years ‘to correct for an error’ in the way it reported revenue. Before, the company reported as revenue all the money it collected from customers, including cash that was later paid out to Groupon’s merchant partners. Now, Groupon is reporting what it calls ‘net revenues’, which exclude the retailer payouts . . .
The other accounting problems related to certain assumptions and forecasts the company used to calculate its results. In particular, the company said it underestimated customer refunds for higher-priced offers like laser eye surgery. Groupon collects more revenue on such deals, but they also carry a higher rate of refunds. The company honours customer refunds for the life of its coupons, so those payments can affect its financials at various times. Groupon deducts refunds within 60 days from revenue; after that, the company has to take an additional accounting charge related to the payments.
Required
a. Use the following to illustrate the difference between reporting gross or net revenue. Groupon collected $1.52 billion in revenue from customers during a six month period. Of this, $0.832 billion was paid to merchant partners.
b. Explain if the reporting of gross billings or net revenue affects the company’s bottom line.
c. Discuss what factors Groupon should consider when estimating customer refunds.
d. Hypothesise how the share price of Groupon may have reacted to announcements of accounting irregularity. Identify the trend in Groupon’s share price since its listing in 2008.
e. In 2011, Groupon was criticised by the corporate regulator for its use of a pro forma profit measure. Discuss the pro forma profit measure that Groupon was using and why the regulator objected to its use.
Step by Step Answer:
a The difference is that before Groupon reported as revenue all the money it collected from customers including cash that was later paid out to Groupons merchant partners Now Groupon is reporting what it calls net revenues which exclude the retailer payouts Therefore the difference is that prior to the restatement of its financial results for the last three years Groupon reported gross billings all money received from customers while now it reports net revenues the amount received after paying out retailers b Gross billings are included in cost of sales and revenue and hence affect cost of sales and revenue Net revenues are included in operating expenses and hence do not affect cost of sales or revenue but do affect operating expenses c Groupon should estimate the amount of refunds it expects to receive based on a number of factors including cost time and date of the offer type of the offer and the goodwill associated with that offer d Groupons share price rose from 2381 to a high of 2868 in January 2012 after its secondquarter results showed solid growth in net revenue per thousand page views and in gross billings per average active customer In February 2013 its share price dropped abruptly after news was released that Groupon was reviewing its accounting practices e Groupon was criticised by the corporate regulator for its use of a pro forma profit measure It foregoes any revenue from customer ...View the full answer
Accounting Business Reporting For Decision Making
ISBN: 9780730363415
6th Edition
Authors: Jacqueline Birt, Keryn Chalmers, Suzanne Maloney, Albie Brooks, Judy Oliver
