The way Groupon defines their 'revenue' is the problem. Groupon uses Gross Revenue Treatment, not net revenue (as eBay does).
They include in their revenue the total price of the offering, but they only actually see half of that price. For example, if the coupon is sold for $20, Groupon only actually see $10 of it and they should be accounting their revenue using the $10, not the $20.
Imagine how much revenue eBay would have if they counted the total cost of the auction and not just the portion they actually receive?
>Groupon accounts for its revenue differently than say eBay, and in a way that some say is misleading to potential investors. The company defines revenue as “the purchase price paid by customers.” Then there’s the issue of “the cost of revenue,” leaving the company with what it calls “gross profit,” which is “the amount of revenue we retain after paying an agreed upon percentage of the purchase price to the featured merchant.”
Here’s the thing: Many companies like eBay [...], which also take a fee for transactions, would consider that “gross profit” number a “net revenue number.” UCLA Anderson School’s accounting lecturer Gordon Klein says the S-1 uses terms in a way he’s never used them before, and this unusual accounting tells him that investors should “run from the stock.” : http://goingconcern.com/2011/06/theres-some-fuss-about-group...
Also, the fact that Groupon delays paying their merchants is what allows them to have an operating cash-flow as they even say in their S-1 filing:
Our merchant payment terms and revenue growth have provided us with operating cash flow to fund our working capital needs. Our merchant arrangements are generally structured such that we collect cash up front when our customers purchase Groupons and make payments to our merchants at a subsequent date.
>The second issue is that the accumulation of the merchant payable, has resulted in a substantial working capital deficit. Essentially, despite being cash flow positive in the short term, they are not generating enough to cover their operating expenses like the amounts owing to merchants, salaries, rent and other costs of running of the business. As such, without additional financing, they will not be able to meet their obligations. This is extremely serious and which is why many have analyzed Groupon as being on the brink of insolvency: http://www.montrealfinancial.ca/blog/5-notable-disclosures-i...
This all makes sense, but the point that 'sunchild was raising wasn't about gross vs. net revenue; it was the fact that Mason was talking about their revenue without talking about their offsetting liabilities.
I have 100% confidence that any 2 people on HN could, given enough time to dig through accounting details, find something to disagree about in the 10K of any public company in the world.
eBay couldn't meaningfully do Groupon accounting because they do not beneficially possess the total transaction cost for any length of time. Paypal accounting gets incredibly complicated, but basically, if A agrees to buy B's widget on eBay for $100 with $10 of eBay fees, eBay gets the $10 from B's credit card and, a short period later, A pays B directly through a subsidiary which Very Carefully (TM) never puts the $100 on eBay's balance sheet or under their direct control. eBay doesn't call it revenue because eBay can't spend that money.
Groupon can spend that money.
There are many businesses which make active use of money that is owed to other people prior to actually paying it. Warren Buffets owns a lot of insurance companies. A huge portion of his investment operations are funded by float: basically, you have to pay him premiums and then he gives them back to you when (statistically speaking) your house burns down some years later. In the interim, it's his money, and if he manages float correctly it buys a company like e.g. Coca Cola on a continuous basis.
Or: take Bingo Card Creator as an example at the waaaaay opposite end of the scale. Many of my sales come through Google ads. It is basically economically equivalent to giving them 50% of the purchase price of 50% of my sales -- in fact, there is a Google pricing option which would make that exactly equivalent. However, crucially, I do not pay Google contemporaneously with the sale: like Groupon, our contractual arrangement means I pay them quite a bit later.
Ads placed on September 4th turn into sales on, statistically, September 5th which turns into money in my bank account on roughly September 7th. I get invoiced for the ads on approximately September 25th and then have until October 20th to pay my credit card prior to paying a penny of interest.
This means that I'm generally holding a couple of thousand of dollars of "Google's money" in my pockets at any given time. (It goes up and down depending on what time of the year this is. At the moment, it's a little under $1.5k off the top of my head.) Crucially, I can spend it. I'd have to replace it prior to summer (when the float tends to evaporate, due to how my market works), but if I want to replace a laptop or pay for a plane ticket for a couple months without having to pay credit card interest rates or dip into savings, I can take the money I was going to pay to Chase to pay Google in October, and then instead pay Chase in October with the money I was going to pay them in November, and then... you get the general picture.
money is just a money and logic can be twisted any way. This is why there is GAAP, and anytime somebody creatively twist their accounting beyond it there is train wreck like Enron, Merrill Lynch or Groupon.
>eBay doesn't call it revenue because eBay can't spend that money.
I'm no accountant, but my understanding is that cash on hand cannot be recognized as revenue if it carries a contingency (e.g., having to pay out to merchants). Please correct me if I am being naive on this point.
I think the contingencies you're talking about here are things like channel inventory and buybacks, not "any expenses".
"The money you have before accounting for expenses" is practically the definition of "revenue", isn't it? When people say "revenue" they're talking about the top line.
I'm not an accountant either, but having worked with them my understanding of "revenue recognition" is, loosely, "the point at which a promise of income can be accounted for as actual income". For instance, when a reseller commits to move Nx1000 units of a product at $Y, when does the producer get to account for $Nx1000xY dollars income.
Actually, I wasn't referring to gross vs. net revenue. I was referring to recognized revenue vs. cash on hand. If I can convince someone to give me $500 but I owe it all back to them, my only revenue should be interest/proceeds from investment of the $500 when actually earned – but the $500 on hand is not counted as my revenue. If my obligation to repay the $500 were to end, then it would become revenue.
I believe there are accounting strategies that might be exceptions to this, but I've never encountered any public companies can get away with using them.
There's a simple term for the issue you're describing: solvency. I don't think this is a rev rec issue. Like Patrick said upthread, Groupon is capitalizing on transaction float. They aren't borrowing money from people, claiming it as revenue, and then returning it.
I'm not saying they're solvent or that they're a good business. I don't know whether they are or aren't.
You're right: I re-read the original memo and I agree with you – he's addressing insolvency, not revenue. Leading up to an IPO, the key issue is solvency.
I'm going to take my own advice and ignore the Groupon sideshow until it goes away.
