Groupon 2013 Annual Report Download - page 129

GROUPON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
121
upon percentages between the Company and the Partner. The liabilities of the LLC are solely the LLC's obligations and are not
obligations of the Company or the Partner.
The Company's obligations associated with its interests in the LLC are primarily building, maintaining, customizing,
managing and operating the LLC's website, contributing intellectual property, identifying deals and promoting the sale of deal
vouchers, coordinating the fulfillment of deal vouchers in certain instances and providing the record keeping.
Under the LLC agreement, the LLC shall be dissolved upon the occurrence of any of the following events: (1) either
party becoming a majority owner; (2) the third anniversary of the date of the LLC agreement; (3) certain elections of the Company
or the Partner based on the operational and financial performance of the LLC or other changes to certain terms in the agreement;
(4) election of either the Company or the Partner in the event of bankruptcy by the other party; (5) sale of the LLC; or (6) a court's
dissolution of the LLC.
Variable interest entities ("VIEs") are entities that have either a total equity investment that is insufficient to permit the
entity to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics
of a controlling financial interest (i.e., the ability to make significant decisions through voting rights and the right to receive the
expected residual returns of the entity or the obligation to absorb the expected losses of the entity). A variable interest holder that
has both (a) the power to direct the activities of the VIE that most significantly impact its economic performance and (b) either an
obligation to absorb losses or a right to receive benefits that could potentially be significant to the VIE is referred to as the primary
beneficiary and must consolidate the VIE.
The Company has determined that the LLC is a VIE and the Company is its primary beneficiary. The Company consolidates
the LLC because it has the power to direct activities of the LLC that most significantly impact the LLC's economic performance.
In particular, the Company identifies and promotes the deal vouchers, provides all of the back office support (i.e. website, contracts,
personnel resources, accounting, etc.), presents the LLC's deals via email and the Company's website and provides the editorial
resources that create the verbiage included on the website with the LLC's deal offers.
13. FAIR VALUE MEASUREMENTS
Fair value is defined under U.S. GAAP as the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement
that should be determined based on assumptions that market participants would use in pricing an asset or a liability.
To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs in valuation
methodologies used to measure fair value:
Level 1-Measurements that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2-Measurements that include other inputs that are directly or indirectly observable in the marketplace.
Level 3-Measurements derived from valuation techniques in which one or more significant inputs or significant value
drivers are unobservable. These fair value measurements require significant judgment.
In determining fair value, the Company uses various valuation approaches within the fair value measurement framework.
The valuation methodologies used for the Company's assets and liabilities measured at fair value and their classification in the
valuation hierarchy are summarized below:
Cash equivalents - Cash equivalents primarily consist of AAA-rated money market funds with overnight liquidity and
no stated maturities. The Company classified cash equivalents as Level 1 due to the short-term nature of these instruments
and measured the fair value based on quoted prices in active markets for identical assets.
Available-for-sale securities - The Company has investments in preferred shares of F-tuan and convertible debt securities
issued by another nonpublic entity. See Note 6 "Investments" for further information regarding the Company's valuation
methodology for its investments in F-tuan. The Company measures the fair value of convertible debt securities using
the probability-weighted expected return method, which is an income approach that incorporates probability-weighted
outcomes.