Groupon 2011 Annual Report Download - page 58

Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted accounting principles of the United States, or U.S. GAAP, requires estimates
and assumptions that affect the reported amounts and classifications of assets and liabilities, revenues and expenses, and the related disclosures of contingent
liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a company's critical accounting policies as the ones that are
most important to the portrayal of the company's financial condition and results of operations, and which require the company to make its most difficult and
subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the
following critical accounting policies and estimates addressed below. We also have other key accounting policies, which involve the use of estimates, judgments,
and assumptions that are significant to understanding our results. See Note 2 " Summary of Significant Accounting Policies
" of Notes to Consolidated Financial
Statements for further information. Although we believe that our estimates, assumptions, and judgments are reasonable, they are based upon information
available at the time. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions.
Revenue Recognition
The Company recognizes revenue from Groupons when the following criteria are met: persuasive evidence of an arrangement exists; delivery has
occurred; the selling price is fixed or determinable; and collectability is reasonably assured. These criteria are met when the number of customers who purchase
the daily deal exceeds the predetermined threshold, where, applicable, the Groupon has been electronically delivered to the purchaser and a listing of Groupons
sold has been made available to the merchant. At that time, the Company's obligations to the merchant, for which it is serving as an agent, are substantially
complete. The Company's remaining obligations, which are limited to remitting payment to the merchant and continuing to make available on the Company's
website the listing of Groupons previously provided to the merchant, are inconsequential or perfunctory. The Company records the net amount it retains 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 the Company is acting as an agent of the merchant in the transaction.
Merchant Payments
Under the redemption payment model, which we utilize in most of our international operations in conformity with local market practice, merchants are
not paid until the customer redeems the Groupon that has been purchased. In the event that we determine that a Groupon will not be redeemed and we are legally
released from our obligation to provide the merchant payment, i.e. breakage has occurred, the merchant payment liability is relieved using the liability method of
accounting for breakage.
Under the alternative merchant payment model, we pay our merchants in installments over a period of generally sixty days for all Groupons purchased.
Under this payment model, merchants are paid regardless of whether the Groupon is redeemed.
Customer Loyalty and Reward Programs
We use various subscriber and customer loyalty and reward programs to build brand loyalty, generate traffic to the website and provide customers with
incentives to buy Groupons. When customers perform qualifying acts, such as providing a referral to a new customer or participating in promotional offers, we
grant the customer credits that can be redeemed for awards such as free or discounted goods or services in the future. We accrue the costs related to the
associated obligation to redeem the award credits granted at issuance in accrued expenses on the consolidated balance sheets and record the expense within
marketing expense in the consolidated statements of operations. If our judgments regarding estimated accrued costs associated with customer loyalty and reward
programs are inaccurate, reported results of operations could differ from the amount we previously accrued.
Refunds
At the time revenue is recorded, we record an allowance for estimated customer refunds. We accrue costs associated with refunds in accrued expenses
on the consolidated balance sheets. The cost of refunds where the amount payable to the merchant is recoverable is recorded in the consolidated statements of
operations as a reduction to revenue. The cost of refunds when there is no amount recoverable from the merchant are presented as a cost of revenue.
To determine the amount of our refund reserve, we track refund patterns of prior deals, use that data to build a model and apply that model to current de
als. Further analysis of our refund activity into 2012 indicated deviations from modeled refund behavior for deals featured in late 2011, particularly due to a shift
in our fourth quarter deal mix and higher price point offers. Accordingly, we updated our refund model to reflect changes in the deal mix and price point of our
deals over time and
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