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Groupon’s S-1 filing has been generating a lot of attention for its use of a non-GAAP accounting term that Groupon labels “Adjusted Consolidated Statement of Operating Income (CSOI).”In laymen’s terms, the CSOI can be translated as the “best possible view of our business if you took out all of the things that make our business look truly awful.”
I’m actually more concerned about how they are booking revenue. It is different from how other companies that offer similar services book revenue.
Consider this transaction, assuming a 50/50 split:
Groupon promotional value: $50
Price to consumer: $25.
Share to Groupon: $12.50.
Share to merchant: $12.50
Groupon is recording this as $25.00 worth of revenue, with the $12.50 considered “cost of revenue.”
Other companies that provide similar services (payments and distribution) handle this differently. Amazon Marketplace and eBay only record as revenue the transaction fees that they receive. In this example, Amazon would only record $12.50 in revenue, where Groupon is recording $25.00.
To take this example to an extreme, if Square were to record revenue in the same way as Groupon does, based on its current run rate, it would record $1 billion in revenue instead of its share, roughly $25 million.
Because Groupon is a new business in a new category, it’s hard to say what the right way is.
What I can say definitively is that Groupon’s way is different. The numbers are disclosed, so anyone who wants to dig can find them. But many investors and press only look at the top line revenue.
That’s a big problem. Top line revenue can easily be gamed when it is being recorded like this. Let’s say they wanted to add $75 million to revenue. They could run a Groupon where they sell $100 American Express Gift Cards for $75. They pay American Express $95 for these gift cards and sell 1 million of them. The way Groupon is booking revenue, this translates into $75 million in revenue and $95 million in cost of revenue.
Gaming is not the only problem. Taxes are another.
In its merchant agreement, Groupon dumps the tax compliance burden on the merchant. But this method of booking revenue is inviting the tax man to come take a look. Because Groupon is booking the entire transaction as revenue and treating the payouts to local merchants as cost of goods sold, tax authorities may look at it and say that Groupon is the retailer and should be responsible for remitting taxes on the entire transaction.
It is easier, both politically and operationally, to target Groupon for tax compliance than hundreds of local businesses. Any state in which Groupon has a physical presence could go after them.
If Groupon were to book only the fees it receives, it would be much easier for it to make the claim that the merchant is responsible for taxes.
In every way but revenue recognition — taxes, gift card compliance, escheat laws — Groupon is claiming that it is the merchant’s transaction.
Groupon wants to have its revenue cake and eat it, too.
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