Groupon 2011 Annual Report Download - page 80

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GROUPON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 the Company utilizes in most of its 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 the Company determines that a Groupon will not be
redeemed and Groupon is legally released from its 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, the Company pays its 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.
Cost of Revenue
Cost of revenue is composed of direct and indirect costs incurred to generate revenue, including costs related to credit card processing fees, refunds
provided to customers which are not recoverable from the merchant, certain technology costs, editorial costs and other processing fees. Credit card and other
processing fees are expensed as incurred. At the time of sale, the Company records a liability for estimated costs to provide refunds which are not recoverable
from the merchant based upon historical experience. Technology costs in cost of revenue consist of payroll and stock1
based compensation expense related to the
Company's technology support personnel who are responsible for operating and maintaining the infrastructure of the Company's existing website. Such
technology costs also include website hosting and email distribution costs. Editorial costs consist of the payroll and stock1
based compensation expense related to
the Company's editorial personnel, as such staff is primarily dedicated to drafting and promoting merchant deals.
Marketing
Marketing expense consists primarily of online marketing costs, such as sponsored search, advertising on social networking sites, email marketing
campaigns, loyalty programs, affiliate programs, and to a lesser extent, offline marketing costs such as television, radio and print advertising. Marketing payroll
costs, including related stock1
based compensation expense, are also classified as marketing expense. The Company records these costs in marketing expense on
the consolidated statements of operations when incurred. No costs included in marketing expense are incurred in connection with the fulfillment of the
Company's obligations to its merchants.
Selling, General and Administrative
Selling expenses reported within selling, general and administrative on the consolidated statements of operations consist of payroll, sales commissions
and stock-
based compensation for inside and outside sales representatives as well as costs associated with supporting the sales function such as technology,
telecommunications and travel.
General and administrative expenses consist of payroll and related expenses, including stock-
based compensation, for employees involved in general
corporate functions, including accounting, finance, tax, legal, and human relations, among others. Additional costs included in general and administrative include
subscriber service and operations, amortization and depreciation expense, rent, professional fees and litigation costs, travel and entertainment, charitable
contributions, recruiting, office supplies, maintenance and other general corporate costs.
Stock
1
11
1
Based Compensation
The Company measures stock1based compensation cost at fair value, net of estimated forfeitures. Expense is generally recognized on a straight-
line
basis over the service period during which awards are expected to vest, except for awards with performance conditions, which are recognized using the
accelerated method. The Company includes stock-
based compensation expense in cost of revenue, marketing and selling, general and administrative expenses
consistent with the respective employees'
74