Groupon
Revenue Recognition Writing Assignment
1) Groupon’s Revenue Recognition issues
In September 2011, Groupon dramatically changed the way it reported revenue. Prior to this date, Groupon recorded revenue acting as a principal, not an agent. Recording revenue in this manner means that Groupon was recording a “cost of goods sold” entry with each “revenue” entry on every sale it made. These entries heavily inflated the amount of revenue Groupon was reporting. Although net income was not affected by this, many other things were such as revenue growth rates and gross profit margins (Hilton, 2013). Herein lies the problem, Groupon is an agent, not a principal. To be considered a principal, a few criteria must be met. These criteria include, “the company is primarily responsible for providing the product or service to the customer”, “the company owns inventory prior to a customer ordering it and after a customer returns it”, and “the company has discretion in setting prices and identifying suppliers” (Spiceland, Sepe, and Nelson 2013). The nature of Groupon’s business violates these aforementioned criteria. They do not carry any inventory or inventory risk on the coupons they sell for discounts. Also, they do not hold the primary responsibility for providing the product or service they are selling the discount for. Groupon has now gone from using the gross method to the net method for reporting revenue.
2) Illustration of the incorrect reporting
Due to Groupon’s questionable accounting practices prior to 2012, some balance sheet and income statement accounts were improperly reflected in their financial statements. The most obvious example is on the income statement. Because Groupon was recording the gross revenue of each coupon it sold instead of the net revenue it should have recorded since it’s an agent and not a principal, the sales revenue was way overstated. They were also recording and including on their financial statements a “cost of goods
1) Groupon’s Revenue Recognition issues
In September 2011, Groupon dramatically changed the way it reported revenue. Prior to this date, Groupon recorded revenue acting as a principal, not an agent. Recording revenue in this manner means that Groupon was recording a “cost of goods sold” entry with each “revenue” entry on every sale it made. These entries heavily inflated the amount of revenue Groupon was reporting. Although net income was not affected by this, many other things were such as revenue growth rates and gross profit margins (Hilton, 2013). Herein lies the problem, Groupon is an agent, not a principal. To be considered a principal, a few criteria must be met. These criteria include, “the company is primarily responsible for providing the product or service to the customer”, “the company owns inventory prior to a customer ordering it and after a customer returns it”, and “the company has discretion in setting prices and identifying suppliers” (Spiceland, Sepe, and Nelson 2013). The nature of Groupon’s business violates these aforementioned criteria. They do not carry any inventory or inventory risk on the coupons they sell for discounts. Also, they do not hold the primary responsibility for providing the product or service they are selling the discount for. Groupon has now gone from using the gross method to the net method for reporting revenue.
2) Illustration of the incorrect reporting
Due to Groupon’s questionable accounting practices prior to 2012, some balance sheet and income statement accounts were improperly reflected in their financial statements. The most obvious example is on the income statement. Because Groupon was recording the gross revenue of each coupon it sold instead of the net revenue it should have recorded since it’s an agent and not a principal, the sales revenue was way overstated. They were also recording and including on their financial statements a “cost of goods