Join Jim Stice for an in-depth discussion in this video Groupon story, part of Running a Profitable Business: Revenue Recognition.
- Have you purchased online coupons from the company Groupon? - Well, not exactly. I haven't, but my son has. And we've used groupons together. - Well, what kind of groupon did your son buy and how much did he pay? - He paid $30 for a very nice restaurant meal. - Okay. Now, financially speaking, do you know who gets the $30? Of course, the money originally goes to Groupon. But how much of the $30 does Groupon, the company, get to keep? - Well, I don't know. - About 1/2. About $15 out of the $30 that your son paid. Now, there is a very interesting financial reporting issue here.
Should Groupon report revenue of 15 dollars as commission for being the online broker? Or should Groupon report this as if the company's in the restaurant business? The $30 sale amount with a $15 expense for operating costs, the amount paid to the restaurant to outsource the production of the meal. - It doesn't really make any difference to the bottom-line profit. In both cases, Groupon has a profit of $15. In the first case, there's only the $15 commission revenue. That's their profit. But in the second case, the $30 restaurant revenue is reduced by the $15 operating cost.
The difference is $15, leaving just a $15 profit. So it's the same either way. - Not quite. Groupon appears to be a bigger company if it can report a sale of $30 and an expense of $15. Yes, the profit is still $15, but Groupon looks bigger on paper. And in the online marketing environment, companies always want to look bigger. It gives them more credibility. - Okay. So how does Groupon report the sale of a $30 online coupon? - Well, they used to report the entire $30 as revenue. Using this procedure, Groupon had revenue in 2010 of 713 million dollars, up dramatically from just $94,000 two years before.
The talk was that Groupon was going to be the fastest company in history to reach one billion dollars in annual sales. - Well, that sounds great. So what happened? - Well, before being listed as a public company in 2011, Groupon had to run its financial reports past the Securities and Exchange Commission, the SEC. - Well, that's routine. Everyone has to do that. - Yes, but in this case, the outcome of this review was unpleasant for Groupon. The SEC staff said that the company is not an operating business, but is an online broker. So the company can only report revenue of its $15 commission on a $30 Groupon.
- Well, how much difference did this make to their numbers? - Well, reported revenue for 2010 dropped from $713 million down to $313 million. Before this accounting restatement, analysts were saying that the company was worth about 20 billion dollars. After the restatement, when the company went public in November of 2011, its total value had dropped to 13 billion dollars. - Wow, a seven billion dollar drop in the value of the company. Because of a simple change in how the company reported its sales. - Yep.
This Groupon example illustrates the importance of the accounting topic: revenue recognition.
But without recognizing revenue, a company can't hope to report any profit. Accordingly, company management is typically under great pressure to recognize revenue as soon as possible. Want to understand these concepts better? Join professors Jim and Kay Stice as they introduce the theory, practice, and implications of revenue recognition. Together they demonstrate how this seemingly innocent accounting topic can turn a reported profit into a reported loss, sometimes with multibillion dollar implications for company values.
Lynda.com is a PMI Registered Education Provider. This course qualifies for professional development units (PDUs). To view the activity and PDU details for this course, click here.
The PMI Registered Education Provider logo is a registered mark of the Project Management Institute, Inc.
- Defining revenue recognition
- Timing revenue recognition
- Understanding multi-element transactions
- Valuing companies
- Reviewing the great revenue frauds and scandals of history