Groupon: Why Revenue Recognition Matters

The recent blizzard of stories about Groupon, the online deals site, highlights all kinds of risk areas, from unhappy execs leaving soon after joining, to the difficulty of timing an IPO. Amongst them was a good old fashioned risk that never seems to go away: the risk of reporting the wrong revenue figure. Revenue is the value of what you sold, right? Simple? Not so simple. In an era of inter-dependent businesses delivering all manner of services over the internet, sometimes it is not so easy to say who sold what. A change of accounting treatment has sliced Groupon’s reported revenues in half; see here for more. This being accounting, nothing has changed in the substance of the business, and the profits (or losses) and the cash generated (or being burned) is still the same. But it does mean that there is an effective change of opinion on whether Groupon’s sales were the same as what they billed (their old way of accounting) or whether Groupon’s sales are just their share of a partnership with merchants (the new way). That, in turn, tells us something about who is generating the revenues and where the business risks lie. Changing how to account for revenues may not change business fundamentals, but it does highlight the difference made to headline numbers by policy decisions, and hence the influence that these numbers have on investors. Presentation matters – nobody chooses one policy and then swaps to another policy without having had their reasons to think that one mode of presentation might make the business look better than another. Groupon’s switch of policy is a good reminder that, if you want to assure revenues, you had better know what the word ‘revenue’ means. With online businesses getting ever more complicated and involved, do not be surprised if the same old question of how to recognize revenues keeps come back again and again.

Eric Priezkalns
Eric Priezkalns
Eric is the Editor of Commsrisk. Look here for more about the history of Commsrisk and the role played by Eric.

Eric is also the Chief Executive of the Risk & Assurance Group (RAG), a global association of professionals working in risk management and business assurance for communications providers.

Previously Eric was Director of Risk Management for Qatar Telecom and he has worked with Cable & Wireless, T‑Mobile, Sky, Worldcom and other telcos. He was lead author of Revenue Assurance: Expert Opinions for Communications Providers, published by CRC Press. He is a qualified chartered accountant, with degrees in information systems, and in mathematics and philosophy.