A couple of thoughts at 5:30 in the AM:

1. I like Groupon, although the deals of interest have gotten a little thinner in the last 6 months or so.

2. The "local deal" sites will persist, but there were too many piling on (I believe facebook ended theirs, as did a few others.

3. My one concern is the "discountification" of things and what effect does that have on industries and smaller businesses; for example, I think Priceline is great, but is there a point where it becomes the dominant force in the travel industry and what does that do to the travel industry?

Additionally, Groupon has had a remarkable number of these sorts of issues for a fairly high-visibility IPO and it's both a little surprising and a little surprising more action has not been taken (although that's the time we live in, I guess.) Reporting something as large as the deal revenue without the merchant portion taken out is a pretty blatant mistake.

Thank you for the link to the NY Times article. Certainly the article as written by USA Today was lacking in details.

I guess the accounting standards today are so loose, that anything goes. I cannot imagine how you could include another company's revenue as your own in Net Revenue. By the time a filing reaches the SEC, the details are reviewed by the company's treasury and legal departments. While the 2010 and 2011 numbers are unaudited, the prior years were. So the external auditor just signed off on the accounting methodology. But someone of note did notice it, dictating that GroupOn make the accounting change. If it was kosher, they wouldn't have made this change so late in the game (IPO).

A dozen years back my former company wanted to take some expenses in the hundreds of thousands of dollars for restructuring charges. I was asked to calculate those expenses, as I had been involved with the project's finances almost from inception. But I was unsure if this was allowable, so I decided to research it. I read chapters of some very dry material published by the Association of Independent Accounting Professionals. Well, I can't say that I wasn't warned. I even called AIAP to discuss my findings, and to see if there were other documents that I might review.

I decided that the expense was in a gray area. I came up with a fair way to calculate the write off expense. Then wrote up a summary of my findings, and I recommended taking the expense as a restructuring charge. My documentation was pretty brief. No one in corporate management wants to read details. But certainly I was prepared to go into complete detail, if I got a call from the internal or external auditors. Not surprisingly I never heard a peep. I heard that at the top level, they were dumping everything they could into the restructuring charges (think kitchen sink analogy), because highly compensated industry financial analysts tend to discount restructuring charges. Or at least they did back then.

After I left the company, a former colleague told me that they wrote off the entire project to a new restructuring change. I asked if the buildings and plants were still open, and most were. So it was obvious to me that the equipment was still in use, hence the expense was not eligible based on my prior research . The decision was the result of one middle manager wanting to impress a VP with a seven figure write off for the new round of restructuring charges. So much for following generally accepted accounting standards.

"Net Revenue" is not exactly the term that Groupon used in its revised filing, but it is darn close. Footnote 1 of its Consolidated Financial Statements (link also in NYTimes article) reads: The Consolidated Financial Statements have been restated for the presentation of revenue on a net basis for all periods presented.

They're talking about the top line revenue figure here, which has what you're calling top line revenue in parenthesis on that top line, denoted "gross billings".

The current filing looks like:

Revenue (gross billings of $1,597,423)   $688,105
Costs and Expenses
 Cost of Revenue                         $66,522 (the non-merchant costs)

In its filing a month prior, on its top line it presented:

Revenue         $1,522,746 (substantially identical to the gross billings, above)
Cost of Revenue $911,699 (merchant costs plus other costs of revenue as above)
Gross Profit    $611,047  
      (aside from the other costs, basically the "net revenue" of the earlier filing)

The numbers aren't perfect matches because numbers are never precise and some editing always gets done, but essentially all you're seeing is that the merchant costs are now netted out in the top line Revenue.

In either filing, what you saw was merchant costs incorporated into the top line - it's just that in the older filing all costs of the coupons (both merchant costs and others) were netted out to produce Gross Profit. By having a separate line for Gross Profit, this enables Groupon to show its gross revenue as a full fledged line item, rather than as a parenthetical remark about gross billings.

Investor - thanks. I have gone through some FASB concept statements and FASs, but not in years.

I think the penultimate paragraph is not especially relevant, because (if I'm reading it right), it requires separate revenue lines for goods and services the company provides and goods and services it simply arranges for. But since all Groupon does is the latter, we're still left with a single revenue line. (Thus, this paragraph appears moot.)

The main point is that top line revenue is not supposed to include the cost of services that the company (Groupon) is arranging. (That's the last paragraph.) Groupon netted out the cost in both the current and the prior S-1 filing. The only thing it seems they arguably did wrong was call the gross figure "revenue", while still publishing the net revenue but calling it "gross profit". Clearly done so that Groupon could claim a higher revenue figure.

There are two questions - does the SEC require GAAP accounting in S-1 filings. (Likely, but it's not something I've looked into in a long time.) And was Groupon right in thinking that it could trick some investors by hyping this higher revenue figure. (IMHO, also likely, but this is one item where I think such investors deserve what they get, because the "net revenue" figure was still easy to find and read in the older filing.)

Another article about Groupon whose IPO is expected to go public on Nov 4. Whether it goes off or not is something I'll watch. If it does, I'll be surprised if they raise $10B. Also it will be interesting to see which mutual fund families buy a significant share.

http://finance.yahoo.com/news/Groupons-fall-to-earth-apf-1850258734.html?x=0&sec=topStories&pos=8&asset=&ccode=

Just an update. To save you some trouble, the GRPN IPO was at $20 and the stock opened at $28 last Nov. In 9 months the stock has fallen to $5.33 as of 2:53pm EDT today.

All the signs were there that this was a lousy investment. The CEO hyping the stock during the pre-IPO quiet period against securities rules; the CEO selling a significant amount of stock before the IPO; multiple CFO's leaving in a short period of time; the revenue accounting debacle; and the weak moat and business plan.

So why didn't I short the stock? For the same reason I didn't short Netflix when last summer, they announced their new pricing strategy, and I listened to people calling in to a talk radio program, saying that they were going to cancel their subscriptions. Netflix was trading around $290 and is now $63 a share. My reason is that shorting stocks is very risky. It is a risk that I don't want to take. So I just watch and laugh.

* In case you read above this reply, I am the Deleted User, as I posted without logging in.