Lessons from Groupon: Does Gross vs. Net Really Matter?

By Sarah Dryden, CPA, Senior Audit Manager

In the midst of the buzz around the Groupon IPO in the last half of 2011, Groupon was forced to restate its pre-IPO revenues to nearly half of what was previously reported at the request of the SEC.  Why?  The SEC required Groupon to report its revenues at net proceeds (the amount a merchant actually pays Groupon to run an ad) instead of gross proceeds (the total out of pocket amount a customer actually pays to Groupon for an online coupon, which includes the merchant’s share).  As we reflect on the lessons learned from this, it begs the question:  What should you think about when reporting your revenues at gross vs. net?

Considerations:

1. You act as principal in transaction? If yes, then gross revenue reporting.
2. You act as agent in transaction?  If yes, then net revenue reporting.
3. You take title to and/or possession of goods?  If yes, then gross revenue reporting.
4. Who has risks and rewards of ownership, delivery of goods / service?  If the you do, then gross revenue reporting.  If another 3rd party, then net revenue reporting.
5. You are collecting a fee or commission (broker or agent), then net revenue reporting, vs. earning residual income or loss, then gross revenue reporting.

Indicators of reporting revenue at gross:

1. 1. Your company is the primary obligor to the customer.
   2. Your company retains general inventory risk, including loss after order or during shipping, as well as owning, holding, and financing it.
   3. Your sales department makes pricing decisions.
   4. Your R&D department makes periodic product enhancements.
   5. Your company’s employees perform the service deliverables.
   6. Your operations department selects which suppliers to use and sets quality specifications.
   7. Your company bears customers’ credit risk.

I think the real question here is, in the grand schemes of things, does it really matter?  My opinion is “no,” because at the end of the day both your gross profit and net income will not change if you report revenues in gross vs. net.  As this clearly is a grey area open for accounting interpretation, I recommend evaluating your company’s reporting position and document, document, document so that your auditors will be satisfied.

If you’re dealing with the SEC, well, you likely have more hoops to get through, but doing a thorough evaluation when your company is still pre-IPO is well worth the time and effort.

If you’re interested, see the Wall Street Journal’s spin on Groupon’s revenue misstatement.