Growing Pains at Groupon Solution

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1. Compare and contrast the business model of Groupon with the business models ofAmazon and Wal-Mart. Referring to the risk factors in the MD&A sections of their 10-Ks, compare significant risks and opportunities across these companies. How do these business risks translate to risks in financial reporting?


2. ‘‘Revenue and revenue growth are more important than income and income growth for new businesses, especially in the new-age economy.’’ Do you agree with this statement? Support your opinion by analyzing the relationship between Amazon’s revenue, income, and its stock price from 1997 to 2010.


3. Using the data provided in Table 1, prepare common size income statements usingrevenues and cost-of-goods-sold in the original S-1 and amended S-1. Analyze trends of expenses as a percentage of revenue for 2009 and 2010. Compare and contrast the following ratios:
   
   1. Gross Margin Percentage;
   
   
   2. Asset Turnover Ratio.
   
   


4. In the months leading up to Groupon’s IPO, the SEC posed a number of questionsregarding Groupon’s choice of accounting principles for revenue recognition. Specifically, the SEC referred to the requirements in FASB’s ASC 605-45-45.
   
   1. Compare the amount of revenue reported in the original and amended S-1s. Whatcaused the difference?
   
   
   2. Which of the two amounts do you think Groupon preferred? Why did they prefer it?
   
   
   3. In correspondence with the SEC following its initial S-1 filing, how did Groupon justifyits method of reporting revenue?
   
   
   4. With reference to ASC 605-45-45, which of Groupon’s arguments were weak, and why?
   
   


5. Groupon had recognized revenue for the sale of high-ticket items in late 2011. Purchasersof the Groupons have a right of return, as specified in the ‘‘Groupon Promise,’’ prominently featured on its website.
   
   1. Assess the U.S. GAAP requirement for recognition of revenue when right of return exists,specified in ASC Section 605-15-25, in the context of Groupon’s business model.
   
   
   2. Do you agree with Groupon’s accounting? Why or why not?
   
   
   3. What could Groupon have done differently, and how would the financial statementshave been affected?
   
   


6. Groupon’s restatement of 2011 fourth-quarter financials resulted in a reduction of $14.3 million of revenues and a decrease of $30 million of operating income. However, its operating cash flow was unaffected. Explain how this is possible.


7. The refund reserve amount for Groupon as of December 31, 2011, was $67.45 million, andon March 31, 2012, had increased to $81.56 million. Assume that the accrued expense for refund reserve was $100 million for the first quarter of 2012. a. How much refund was issued in 2012?


8. Explain why the expense recorded in the first quarter does not equal the amount paid during the quarter.


9. In its initial S-1 filing, Groupon presented a non-GAAP performance metric called ACSOI.It was subsequently removed after the SEC objected.
   
   1. Why did the SEC question the inclusion of ACSOI in Groupon’s financial statements?
   
   
   2. Non-GAAP metrics are common in some industries. These include: Value-at-Risk inthe financial sector, same-store-sales in retail, revenue-passenger-miles for airlines, and order-backlog in the semiconductor industry. Explain two of these metrics and assess their value to financial statement users.
   
   
   3. While the SEC allows the reporting of metrics identified in (b), it did question the use ofACSOI. What differences between the acceptable non-GAAP metrics in (b) and ACSOI were of concern to the SEC?
   
   
   4. Do you agree with Groupon’s contention that discretionary expenses, such assubscription acquisition costs, should be excluded from the financial measures of a company’s performance?
   
   


10. Groupon’s management needed significant cash to fund its growth. It had three options: (A) seek private investment, (B) sell the company to Yahoo! or Google, or (C) go public. a. Contrast the financial reporting challenges across the three options.


11. In March 2012, Groupon’s auditors noted a material weakness in the company’s internal controls related to ‘‘deficiencies in the financial statement close process.’’ Would this disclosure have been made if Groupon had chosen options (A) or (B)?


12. In your opinion, do the problems with Groupon’s choice of accounting methods, use of anon-GAAP metric, and material weakness in its internal control reflect a lack of management experience or a lack of management integrity?