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ISSUES IN ACCOUNTING EDUCATION American Accounting Association

Saurav K. Dutta, Dennis H. Caplan, and David J. Marcinko
ABSTRACT: On November 4, 2011, Groupon Inc. went public with an initial market
capitalization of $13 billion. The business was formed a couple of years earlier as an
offshoot of ‘‘The Point.’’ The business grew rapidly and increased its reported revenue
from $14.5 million in 2009 to $1.6 billion in 2011. Soon after going public, prior to its
announcement of its first-quarter results, the company’s auditors required Groupon to
disclose a material weakness in its internal controls over financial reporting that impacted
its disclosures on revenue and its estimation of returns.
This case uses Groupon to motivate discussion of financial reporting issues in ecommerce businesses. Specifically, the case focuses on (1) revenue recognition
practices for ‘‘agency’’ type e-commerce businesses, (2) accounting for sales with a right
of return for new products, and (3) use of alternative financial metrics to better convey
the intrinsic value of a business. The case requires students to critically read, analyze,
and apply authoritative accounting guidance, and to read and analyze communications
between the Securities and Exchange Commission (SEC) and the registrant.
Keywords: Groupon; revenue recognition; allowance for sales returns; e-commerce;
non-GAAP metrics.
As an undergraduate music major at Northwestern University, Andrew Mason eagerly
sought a version of rock music that would fuse punk with the Beatles and Cat Stevens.
Little did he imagine that within ten years he would be the CEO of one of history’s fastestgrowing businesses. After Northwestern and faded dreams of rock stardom, Mason, a self-taught
computer programmer, was hired to write code by the Chicago firm InnerWorkings. InnerWorkings
was founded in 2001 by Eric Lefkofsky, who had built several businesses around call centers and
the Internet. In 2006, Lefkofsky became interested in an idea of Mason’s for a website that would
act as a social media platform to bring people together with a common interest in some problem—
Saurav K. Dutta is an Associate Professor and Dennis H. Caplan is an Assistant Professor, both at University
at Albany, SUNY; and David J. Marcinko is an Associate Professor at Skidmore College.
We thank the editor, associate editor, and two reviewers for their helpful insights, comments, and suggestions. We also
acknowledge our accounting students who completed the case and provided us with valuable feedback.
Editor’s note: Accepted by William R. Pasewark
Published Online: August 2013
most often some sort of social cause. Lefkofsky provided Mason with $1 million of capital to
develop the concept that became known as ‘‘The Point.’’1
Virtually no one associated with The Point initially envisioned commercial aspirations for the
venture. In the fall of 2008, at the height of the financial crisis, ventures with little or no commercial
aspirations were in jeopardy. Lefkofsky and Mason faced a decision on how to proceed with The
Point. Lefkofsky seized on an idea proposed by a group of users of The Point. This group attempted
to identify a number of people who wanted to buy the same product, and then approach a seller for a
group discount. Mason had originally mentioned group-buying as one application of The Point, and
now Lefkofsky latched onto the concept and pursued it relentlessly. In response, Mason and his
employees began a side project that they named Groupon.
The business plan was relatively simple. Groupon offered vouchers via email to its subscriber
base that would provide discounts at local merchants. The vouchers were issued only after a critical
number of subscribers expressed interest. At that point, Groupon charged those subscribers for the
purchase and recorded the entire proceeds as revenue. Subsequently, when the subscriber redeemed
the voucher with the merchant, Groupon remitted a portion of the proceeds to the merchant and
retained the remainder. For example, a salon might offer a $100 hairstyling in exchange for a $50
Groupon voucher and agree to a 60-40 split of the price. Once a sufficient number of subscribers
agreed to the deal, Groupon sold the voucher for $50. After providing the service, the salon would
submit the voucher to Groupon and receive $30. Groupon would keep the remaining $20.
The idea took off with enthusiastic support from the local media in Chicago. By the end of
2008, it was clear to Lefkofsky and Mason that The Point would become Groupon. Understanding
that the key to competitive success would be a massive increase in scale, Lefkofsky pushed the
company to grow vigorously through quick expansion to many cities. Within a year, the new
company had 5,000 employees, and by 2012 had more than 10,000. The company’s revenue
growth was also impressive. Beginning with $94,000 in 2008, revenue had grown to $713 million
in 2010. In the first quarter of 2011, the company nearly equaled its entire 2010 sales, reporting
revenue of $644 million, and total revenue for 2011 was $1.6 billion. Andrew Mason became a
media star, appearing on CNBC and The Today Show. In August of 2010, he appeared on the cover
of Forbes magazine, which touted Groupon as ‘‘the fastest growing company—ever.’’
The spectacular growth attracted more than media attention. Groupon quickly found itself
pursued by corporate suitors. By mid-2010, Yahoo! offered to purchase the company for a price
between $3 billion and $4 billion—it was an offer that Mason, who had no wish to work at Yahoo!,
quickly turned down. Google then approached Groupon with an offer that would eventually grow to
nearly $6 billion. Groupon rejected Google’s offer, as well. Faced with an ever-growing need for
cash, this decision left Mason and Lefkofsky with only one option: to take Groupon public. They
did so on November 4, 2011, at an IPO price of $20 per share, yielding a market capitalization of
$13 billion.
On the day of the IPO, the stock closed near its all-time high of $26 a share. It traded in the
range of $18 to $24 for several months following the IPO. The stock price then declined
precipitously after March 30, 2012, as shown in Figure 1, following the announcement of a material
weakness in internal controls, when Groupon announced that it planned:
to take additional measures to remediate the underlying causes of the material weakness,
primarily through the continued development and implementation of formal policies,
improved processes and documented procedures, as well as the continued hiring of
additional finance personnel. (Groupon 2012b, 23)
1 For additional background information on Groupon, see Steiner (2010), Carlson (2011), and Stone and
MacMillan (2011).
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Sale of products to customers prior to purchase by the vendor/retailer is a common business
model for ‘‘e-tailers’’ such as Expedia and Priceline. These vendors provide a platform for exchange
of goods, but do not necessarily transact in those goods. When the customer makes a purchase
through an e-tailer’s platform or interface, the e-tailer takes the payment from the customer and
places an order with the supplier to send goods directly to the customer. At a later date, it remits a
payment to the supplier for the prearranged price. Like a traditional business, the e-tailer retains the
difference between the payment received from the customer and the payment it makes to the
supplier. However, unlike a traditional merchandiser, the e-tailer never takes possession of the
The manner in which these transactions are recorded has significant impact on the financial
statements. There are primarily two ways of recording the transaction: on a ‘‘gross’’ or ‘‘net’’ basis.
Under the gross method, the entire amount received from the customer is recorded as revenue, and a
corresponding cost of sales is recorded to account for the payment made to the supplier for the
merchandise. Under the net method, only the difference between what is received from the
customer and what is paid to the supplier is recorded as revenue. This is consistent with recognizing
that the vendor earns a commission on the sale. We illustrate the concept further with the use of an
example. Suppose an e-tailer sells an airline ticket to a customer for $1,000 online and remits $950
to the airline. The issue is how the e-tailer should journalize the two transactions: (1) the sale to the
customer, and (2) the payment to the airline. Under the gross method of recognizing revenue, on the
date of sale to the customer, the journal entry is:
Groupon’s Stock Price Chart
Growing Pains at Groupon 231
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Volume 29, No. 1, 2014
Cash 1,000
Revenue 1,000
Cost of Sales 950
Accounts Payable 950
When the company pays the airline, the corresponding journal entry is:
Accounts Payable 950
Cash 950
Under the net method of recording the transaction, the journal entry on the date of sale to the
customer is:
Cash 1,000
Accounts Payable 950
Revenue 50
And on the date of payment to the airline, the journal entry is identical to the gross method:
Accounts Payable 950
Cash 950
The differences between the gross and net methods of recording the transactions are:
Higher revenue is recorded under the gross method.
Higher cost of sales is recorded under the gross method.
However, gross profit—the excess of revenue over the cost of sales—is the same under the two
methods; $50 in our example.
In its original S-1 filing with the SEC on June 2, 2011, Groupon noted in its footnote on
revenue recognition that, ‘‘The Company records the gross amount it receives from Groupons,
excluding taxes where applicable, as the Company is the primary obligor in the transaction’’
(Groupon 2011a, F-11). In its response to the S-1, the SEC commented:
it is unclear to us why you believe the company is the primary obligor in the arrangement.
Please advise us, in detail, and provide us management’s comprehensive analysis of its
revenue generating arrangements and explain the consideration given to each of the
indicators of gross reporting and each of the indicators of net reporting found in ASC 605-
45-45 … If, in fact, the company is the primary obligor, then explain to us why it is
appropriate for the company to recognize revenue prior to delivery of the underlying
product or service by the merchant to the customer. (SEC 2011a, 11)
In its response, Groupon reasserted that it was the primary obligor and, hence:
it recognizes revenue on a gross basis in accordance with ASC 605-45-45 based on its
assessment of the facts and circumstances of the arrangement. The purchase of a Groupon
voucher gives the Customer the option to purchase goods or services at a specified price in
the future. For instance, a Customer may pay $25 for a Groupon that entitles him or her to
$50 of merchandise or services at a Merchant’s store. However, it is important to note that
the Company is not selling the underlying goods or services, only the voucher to obtain
discounted goods or services. (Groupon 2011b, 31)
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The SEC followed up:
Considering your view that the Company, and not the merchant, is the primary obligor in
the Groupon transaction, please explain the terms and conditions included in the
Company’s website that state ‘‘Vouchers you purchase through our Site as a Groupon
account holder are special promotional offers that you purchase from participating
Merchants through our service’’ and further that ‘‘The Merchant is the issuer of the
voucher and is fully responsible for all goods and services it provides to you’’ and why you
believe this is consistent with your view. (SEC 2011b, 4)
In response, Groupon contended:
the Company believes that, by virtue of the credit risk it bears and the Groupon Promise, it
is both a seller and an issuer of vouchers. The Company is the primary obligor when it
issues a Groupon voucher on behalf of a merchant, which in turn is solely responsible to
deliver goods or perform services. (Groupon 2011c, 2)
Although the Company provides the Groupon Promise, the Company does not accept any
other responsibility for the delivery of goods or services provided to a customer and has
never delivered the goods or services underlying a Groupon voucher to a customer on
behalf of a merchant or otherwise. (Groupon 2011c, 3)
However, in an amended S-1 filing on October 7, 2011, Groupon changed the related footnote on
revenue recognition to identify itself as the agent for the merchants. It noted:
we record as revenue the net amount we retain from the sale of Groupons after paying an
agreed upon percentage of the purchase price to the featured merchant excluding any
applicable taxes. Revenue is recorded on a net basis because we are acting as an agent of
the merchant in the transaction. (Groupon 2011d, 68)
The effect of this change in definition of revenue from gross to net on the income statement is
shown in Table 1. The first and third columns present the Income Statements for 2009 and 2010 as
originally reported on June 2, 2011, when revenue was reported on a gross basis. The second and
Abridged Income Statements for Groupon
Income Statement Account
2009 2010
Gross Net Gross Net
Revenue $30.4 M $14.5 M $713.4 M $312.9 M
Cost of Sales 19.5 M 4.4 M 433.4 M 32.5 M
Gross Margin 10.9 M 10.1 M 280.0 M 280.4 M
Marketing Expense 4.6 M 4.9 M 263.2 M 284.3 M
General and Admin. Expense 7.5 M 6.4 M 233.9 M 213.3 M
Other Expenses 203.2 M 203.2 M
Net Loss 1.34 M 1.09 M 413.4 M 420.1 M
Net Loss to common shareholders 6.92 M 6.92 M 456.3 M 456.3 M
EPS (Basic) (0.04) (0.04) (2.66) (2.66)
This information was obtained from Groupon’s S-1 filing with the SEC on June 2, 2011, and the amended filing
(Amendment No. 4) on October 7, 2011.
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the fourth columns present the Income Statements for 2009 and 2010 as amended in the October 7
filing, to reflect revenue recognition on a net basis.
Groupon further elaborated on the change in revenue recognition when it filed its first-quarter
10-Q on May 15, 2012. The company noted that it had to ‘‘restate’’ the Statements of Operations
filed with the SEC on June 2, 2011, to ‘‘correct for an error in its presentation of revenue.’’ It
explained the change as follows:
The Company restated its reporting of revenues from Groupons to be net of the amounts
related to merchant fees. Historically, the Company reported the gross amounts billed to its
subscribers as revenue … The effect of the correction resulted in a reduction of previously
reported revenues and corresponding reductions in cost of revenue in those periods. The
change in presentation had no effect on pre-tax loss, net loss or any per share amounts for
the period. (Groupon 2012c, 10)
The controversy over reporting revenue on a net versus gross basis is not new. This was a
much-debated issue in 1999, when the company in the center of the controversy was Priceline. In
the third quarter of 1999, Priceline reported revenue of $152 million. This amount included the full
price the customers paid to Priceline for hotel rooms, rental cars, airline tickets, and holiday
packages. However, much like travel agencies, Priceline retained only $18 million, a small portion
of the $152 million; the rest it remitted to the actual service providers, the hotels, the airlines, etc.
The revenue recognition issue was resolved in 2000, when Priceline reported only the commission
as revenue. During the same period, Priceline’s stock decreased about 98 percent from April to
December 2000.
Subsequent to the Priceline revenue recognition controversy, the SEC issued Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements. This guidance specifically required
firms to report revenue on a net basis when the firm acts as an agent or broker without assuming the
risks of ownership of the goods or the risk of default on payment. Concurrently, the SEC directed
the Financial Accounting Standards Board (FASB) to explore the issue. In July 2000, the Emerging
Issues Task Force (EITF) of the FASB reached a consensus on Issue No. 99-19. The FASB
affirmed the guidance of EITF 99-19 in ASC Section 605, Revenue Recognition.2
Although net income is generally not affected by the use of gross versus net revenues, the issue
is important because revenue itself is a critical component in the financial statements, and revenue is
materially affected by the choice. ASC Section 605-45-45 (FASB 2012b) identifies indicators
supporting the use of gross revenue rather than net revenue. Two of these indicators, credit risk and
inventory risk, can be assessed for Groupon from its balance sheet and related footnote disclosures.
These are reproduced in Table 2 from Groupon’s original S-1 filing on June 2, 2011 (Groupon
2011a, F-4, F-9).
Companies that provide a right of return to customers are required to establish an allowance for
sales returns if the amount is material. A merchandiser satisfies its obligations when it provides the
product to the customer and, hence, can recognize revenue for the amount of sale. However, if the
possibility exists that the customer could return the merchandise for a full or partial refund, the
company is required to create a reserve for such occurrences. The amount to be reserved is based on
past experience with returns and management estimates of future trends. When historical data do
not exist and estimation of future returns is not possible, recognition of revenue must be deferred
2 See Phillips, Luehlfing, and Daily (2001) for a discussion of SAB No. 101 and EITF 99-19.
234 Dutta, Caplan, and Marcinko
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Volume 29, No. 1, 2014
until the right of return has expired (FASB 2012a, ASC 605-15-25). Until then, any cash received
should be accounted for as unearned revenue, a liability.
Groupon’s business plan entails selling coupons for a product or service, and collecting cash
prior to the merchant providing the product or service. That is, customers pay up front for a coupon
for services or goods, and can redeem the coupon within the next six months. Moreover, the
product is provided by a separate merchant, independent of Groupon. To entice customers to
transact with Groupon, rather than directly with the vendor, Groupon features a generous right of
return for its subscribers at least on par with the vendor’s own right of return. The return policy is
featured prominently on the company’s website. Since Groupon does not directly provide the
service, it guarantees the quality of services/goods on behalf of the vendor. Furthermore, since
customers pay cash to Groupon while receiving services/goods from the vendor, customers expect
‘‘cash-back’’ from Groupon should they be dissatisfied. Groupon summarizes its policy as ‘‘The
Groupon Promise,’’ which states simply: ‘‘If Groupon ever lets you down, we will return your
purchase—simple as that.’’ In addition, it allows for full or partial refunds in the following
If a business closes permanently;
Any unredeemed Groupon can be returned for a full refund within seven days of purchase;
Groupon Selected Disclosures
Balance Sheet Excerpts (in ’000s)
December 31
2009 2010
Current assets:
Cash and cash equivalents $12,313 $118,833
Accounts receivable, net 601 42,407
Prepaid expenses and other current assets 1,293 12,615
Total current assets 14,207 173,855
Property and equipment, net 274 16,490
Goodwill — 132,038
Intangible assets, net 239 40,775
Deferred income taxes, non-current — 14,544
Other non-current assets 242 3,868
Total Assets $14,962 $381,570
Footnote Disclosure of Accounts Receivable, net:
Accounts receivable primarily represent the net cash due from the company’s credit card and other payment
processors for cleared transactions. The carrying amount of the company’s receivables is reduced by an
allowance for doubtful accounts that reflects management’s best estimate of amounts that will not be
collected. The allowance is based on historical loss experience and any specific risks identified in
collection matters. Accounts receivable are charged off against the allowance for doubtful accounts when it
is determined that the receivable is uncollectible. The company’s allowance for doubtful accounts at
December 31, 2009, and 2010 was $0 and less than $0.1 million, respectively. The corresponding bad debt
expense for the years ended December 31, 2008, 2009, and 2010 was $0, $0, and less than $0.1 million,
respectively (Groupon 2011a, F-9).
Growing Pains at Groupon 235
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Volume 29, No. 1, 2014
In other cases, unredeemed Groupons are evaluated on a ‘‘case-by-case’’ basis;
After the expiration date, the Groupon is still worth the amount paid, which never expires.
In reviewing Groupon’s initial S-1 filing, the SEC noted:
It appears that the ‘‘Groupon Promise’’ is unconditional. In light of your rapid growth and
entry into new markets, explain to us why you believe the amount of future refunds is
reasonably estimable. (SEC 2011a, 11)
While acknowledging its rapidly growing and expanding markets, Groupon defended its ability to
reasonably estimate returns:
as the Company deals with more and more merchants, it does not believe the
characteristics of its merchants within a geographical region differ from one another
such that it would materially affect the Company’s estimates. (Groupon 2011b, 35)
As Groupon expanded to other markets, its product diversity increased from small-ticket items
such as restaurant meals and salon services to high-ticket items such as international vacations and
expensive medical services. Entering new markets with little or no historical experience, it became
increasingly difficult for Groupon to estimate customer returns. In early 2012, Groupon’s internal
accountants discovered that the amount of customer refunds in January exceeded all previous
models Groupon had constructed to predict customer behavior. One example was a large number of
refund requests for a deal involving Lasik eye surgery. Interestingly, many consumers that
purchased the Groupon for eye surgery did not realize that they had to be in good physical
condition to undergo surgical procedures. Hence, when these subscribers were deemed unfit to
undergo the surgical procedure, they returned their purchase to Groupon and asked for a refund.
However, Groupon had already recorded the sale and reported the revenue in the previous quarter
without having made an adequate provision for returns.
The high level of refund activity was significantly correlated with high price-point deals that
the company had only begun offering in 2011. These circumstances led to yet another financial
restatement by the young company. The revision to previously reported financial results for the
fourth quarter of 2011 was announced in the press release reproduced below:
Groupon, Inc. (NASDAQ: GRPN) today announced a revision of its reported financial
results for its fourth quarter and year ended December 31, 2011 … The revisions are
primarily related to an increase to the Company’s refund reserve accrual to reflect a shift in
the Company’s fourth quarter deal mix and higher price point offers, which have higher
refund rates. The revisions have an impact on both revenue and cost of revenue. (Groupon
The press release also noted:
The revisions resulted in a reduction to fourth quarter 2011 revenue of $14.3 million. The
revisions also resulted in an increase to fourth quarter operating expenses that reduced
operating income by $30.0 million, net income by $22.6 million, and earnings per share by
$0.04 … There is no change to Groupon’s previously reported operating cash flow of
$169.1 million for the fourth quarter 2011 and $290.5 million for the full year 2011.
(Groupon 2012a)
Retroactively, Groupon adjusted its refund reserve, which is a liability for estimated costs to
provide refunds that are not recoverable from merchants. The reserve amount as of December 31,
2011 was $67.45 million, and on March 31, 2012 had increased to $81.56 million. The increase of
236 Dutta, Caplan, and Marcinko
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$14.1 million in the balance of this account signifies the excess of accrued expense over actual cash
disbursements due to customer refunds.
By its decision to go public, Groupon imposed upon itself the requirements of Section 404 of
the Sarbanes-Oxley Act, which requires the company’s auditors to report annually on the
effectiveness of the company’s internal controls. The SEC permits a company going public to wait
until its second 10-K to comply with this requirement. When preparing for its initial Section 404
audit as required for the year ending December 31, 2012, Groupon and its auditors identified and
reported this material weakness in its 2011 10-K. The need to restate the refund reserve was
attributed to a material weakness in Groupon’s internal controls over its ‘‘financial statement close
process’’ (Groupon 2012a).
As a private company, Groupon relied upon a non-GAAP measure of company performance
called Adjusted Consolidated Segment Operating Income (ACSOI). This metric was related, but
not identical, to the commonly used non-GAAP metric Earnings before Interest, Taxes,
Depreciation, and Amortization (EBITDA). While ACSOI included all of the revenues, it excluded
some common expenses, including: marketing expenses, acquisition-related costs, stock
compensation costs, interest, and tax expenses. ACSOI is even more aggressive than EBITDA
because it ignores some significant expenses related to Groupon’s business.
In its initial S-1 filing with the SEC, Groupon appeared more profitable under ACSOI than
under the GAAP metrics of net income and operating income. While on a GAAP basis, the
company lost $413.4 million for 2010 and $113.9 million in the first three months of 2011, the
ACSOI measures were a positive $60.6 million and $81.6 million, respectively. The difference was
in large part due to excluding from ACSOI online marketing costs to attract new customers. In its
response to Groupon’s initial S-1 filing, the SEC commented:
We note your use of the non-GAAP measure Adjusted Consolidated Segment Operating
Income, which excludes, among other items, online marketing expense. It appears that
online marketing expense is a normal, recurring operating cash expenditure of the
company. (SEC 2011a, 4)
In its response, the company provided the following rationale for excluding marketing expenses
from this metric:
The Company’s management utilizes Adjusted CSOI internally as a measure to assess the
performance of the business … In utilizing Adjusted CSOI as a performance measure,
management does not rely on the non-recurring, infrequent or unusual nature of online
marketing expense. It focuses instead on the fact that such expenses are almost entirely
discretionary and incurred primarily to acquire new subscribers. (Groupon 2011b, 11)
In a letter to Groupon employees in early March 2013, CEO Andrew Mason wrote:
After four and a half intense and wonderful years as CEO of Groupon, I’ve decided that
I’d like to spend more time with my family. Just kidding—I was fired today. If you’re
wondering why … you haven’t been paying attention. From controversial metrics in our
S-1 to our material weakness to two quarters of missing our own expectations and a stock
price that’s hovering around one quarter of our listing price, the events of the last year and
a half speak for themselves. As CEO, I am accountable. ( 2013)
Growing Pains at Groupon 237
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  1. Compare and contrast the business model of Groupon with the business models of
    Amazon 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 using
    revenues 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:
    a. Gross Margin Percentage;
    b. Asset Turnover Ratio.
  4. In the months leading up to Groupon’s IPO, the SEC posed a number of questions
    regarding Groupon’s choice of accounting principles for revenue recognition. Specifically,
    the SEC referred to the requirements in FASB’s ASC 605-45-45.
    a. Compare the amount of revenue reported in the original and amended S-1s. What
    caused the difference?
    b. Which of the two amounts do you think Groupon preferred? Why did they prefer it?
    c. In correspondence with the SEC following its initial S-1 filing, how did Groupon justify
    its method of reporting revenue?
    d. 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. Purchasers
    of the Groupons have a right of return, as specified in the ‘‘Groupon Promise,’’
    prominently featured on its website.
    a. 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.
    b. Do you agree with Groupon’s accounting? Why or why not?
    c. What could Groupon have done differently, and how would the financial statements
    have 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, and
    on 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?
    b. Explain why the expense recorded in the first quarter does not equal the amount paid
    during the quarter.
  8. In its initial S-1 filing, Groupon presented a non-GAAP performance metric called ACSOI.
    It was subsequently removed after the SEC objected.
    a. Why did the SEC question the inclusion of ACSOI in Groupon’s financial statements?
    b. Non-GAAP metrics are common in some industries. These include: Value-at-Risk in
    the 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.
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    c. While the SEC allows the reporting of metrics identified in (b), it did question the use of
    ACSOI. What differences between the acceptable non-GAAP metrics in (b) and ACSOI
    were of concern to the SEC?
    d. Do you agree with Groupon’s contention that discretionary expenses, such as
    subscription acquisition costs, should be excluded from the financial measures of a
    company’s performance?
  9. 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.
    b. 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)?
  10. In your opinion, do the problems with Groupon’s choice of accounting methods, use of a
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    Issues in Accounting Education
    Volume 29, No. 1, 2014

Sample Solution

Introduction Both mental and developmental disorders in childhood, refers to syndromes in neurological, emotional or behavioral development, with serious impact in psychological and social health of children (Nevo & Manassis., 2009). Children who suffer from these types of disorders, they need special support firstly from their close family environment and then from educational systems. In many case, the disorders continue to exist in adulthood (Scott et al., 2016). According to Murray and partners (2012), mental and developmental syndromes in childhood, are an emerging challenge for modern health care systems worldwide. The most common factors that tend to increase such syndromes in low and middle income countries, is the reduced mortality of children under the age of five and the onset of mental and developmental syndromes in adults during their childhood One of the most common mental disorders in children with developmental disorder is anxiety disorder. In the Diagnostic and Statistical Manual of Mental Disorder, seven types of anxiety disorder are recognized both in childhood and adolescents. Among them are Separation Anxiety Disorder (SAD) and Generalized Anxiety Disorder (GAD) (American Psychiatric Association, 2000). The aim of this study is, to present a common mental disorder that affects children with a developmental syndrome. Thus, try to present the clinical features, the prevalence and diagnostic issues in this population. 1. Mental disorders in children World Health Organization (WHO) has identified mental health disorders, as one of the main causes of disability globally (Murray & Lopez., 2002). According to the same source of evidence, childhood is a crucial life stage on the occurrence of mental disorders, which are likely to affect the quality of life, the learning and social level of a child. Within this framework, possible negative experiences at home like family conflicts or bullying incidents at school, may have a damaging effect on the development of children, and also in their core cognitive and emotional skills. Moreover, the socioeconomic conditions within some children grow up can also affects their choices and opportunities in adolescence and adulthood. On the other hand, children’s exposure in risk factors during early life, can significantly affect their mental health, even decades later. The coherences of such exposure can lead on high and periodically increasing rates of mental health, and also behavioral problems. In European Union countries, anxiety and depression syndromes are among top 5 causes of overall disease burden among children and adolescents. But, suicide is the most common cause of death between 10 to19-year-olds, mainly in countries with low- and middle-income and the second cause in high income countries (WHO, 2013-2020). 2. Anxiety disorder in children with neurodevelopmental disorder According to American Psychiatric Association (APA, 2013), anxiety disorder is characterized by excessive or improper fear, which is connected with behavioral disorders that impair functional capacity. Furthermore, anxiety is characterized as a common human response in danger or threat and can be highly adaptive in case of elicited in an appropriate context. Is clinically important when anxiety is persistent and associated with impairment in functional capacity, or affects an individuals’ quality of life (Arlond et al., 2003). Especially in childhood, clinical characteristics of anxiety is complicated when complicated by developmental factors, due to the reason that some type of fears maybe characterizes as normative in certain age of groups (Gullone, 2000). Additionally, although a child is able of experiencing the emotional and physiologic components of anxiety at an early age, definite mental abilities may be prerequisites for the full expression of an anxiety disorder (Freeman et al., 2002). Within this framework, Separation Anxiety Disorder (SAD) is characterized by excessive and developmental inappropriate anxiety, as a response to separation from the close family environment or from attached figures. The most common symptoms in such disorder are, anticipatory anxiety concerning with separation occasions, determined fears about losing or being separated 2.1. Anxiety disorder prevalence in children Although an essential body of data are available about the epidemiology of anxiety disorders, the evidence for prevalence presented are highly fragmented and the reports for prevalence varies considerably (Baxter et al., 2012). According to global epidemiological data evidence, mental disorders is a difficult task, due to significant absence of officially data for many geographical regions globally. These evidence are less in pediatric patients – children, particularly in low to middle income countries where other concerns are in the front line. The above issue of data absence, is highlighted in the Global Burden of Disease Study 2010 (Whiteford et al., 2013). Childhood mental disorders epidemiologically data, were remain relatively constant during the 21 world regions defined by Global Burden of Disease Study 2010. However, these prevalence rates were based on sporadic data, for some disorders or no data for specific disorders in childhood. According to the12-month global prevalence of childhood mental disorders in 2010 is shown that, anxiety disorder rates were higher in adolescents between the age of 15 to 19 years old and especially in females (32,2% general rate, 3,74% in males and 7,02% in females). Moreover The anxiety disorder rates in children between the age of 5 to 9 years old were (5,4%) and 21,8% in children between the age of 10-14. In both groups of children, the percentages of prevalence were higher in females. These systematic reviews were then updated for GBD 2013, were the data for mental disorders in children and adolescents were sparse. This resulted in large uncertainty intervals around burden estimates despite mental disorders being found as the leading cause of disability in those aged under 25 years. Moreover, lack of absence of empirical data restricts the visibility of mental disorders in comparison with other diseases in childhood and makes it difficult to advocate for their inclusion as a priority in health initiatives 2.2. Anxiety disorder clinical features The main clinical features of Separation Anxiety Disorder (SAD) is, the inordinate and developmental inappropriate anxiety about separation from the home or from attachment figures. The leading symptoms of that type of mental disorder, refers to anticipatory anxiety regarding separation events, persistent concerns about losing or being separated from an attachment figure, school denial, unwillingness to stay alone in the home, or to sleep alone, recurrent nightmares with a separation theme, and somatic complaints. In particular, the clinical feature of school refusal has been reported to happen in about 75% of children with SAD, and also SAD occurs in 70%to 80% of children presenting with school refusal. In that case, epidemiologic studies exhibit that the rates of prevalence are from 3.5% to 5.1% with a mean age of onset from 4.3 to 8.0 years old (Masi et al., 2001). One area that has attracted considerable attention is the potential link between childhood SAD and panic disorder in adulthood. Indirect support for this hypothesis is provided by retrospective studies of adults with anxiety disorders. Furthermore, the developmental sequel between childhood anxiety disorders and panic disorders in adult age, is also supported by the biologic challenge study, of Pine et al. (2000). Researchers at this study found that, children who suffer from SAD (but not social phobia) they showed respiratory changes during carbon dioxide inhalation that which had common characteristics with adults’ panic attacks. In a similar study, children with SAD and parents who suffer with panic attacks, were found to have significant percentage of atopic disorders, including asthma and allergies (Slattery et al., 2002). On the other hand, Generalized Anxiety Disorder (GAD) in childhood, is characterized by immoderate worry and stress about daily life events that the child is not able to control effectively. That anxiety is expressed on most days and has a duration for at least 6 months, and also there is an extended distress or difficulty in performing everyday processes (Gale & Millichamp., 2016).

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