Groupon 2013 Annual Report Download - page 104

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GROUPON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
96
introductions of new deals, discontinuations of legacy deals and expected changes, if any, in Company practices in response to
refund experience or economic trends that might impact customer demand. The portion of customer refunds for which the merchant's
share is not recoverable on third party revenue deals is estimated based on the refunds that are expected to be issued after expiration
of the related vouchers, the refunds that are expected to be issued due to the merchant bankruptcy or poor customer experience,
and whether the payment terms of the related merchant contracts are structured using a redemption payment model or a fixed
payment model.
In early 2012, actual refund activity for deals featured late in 201l was demonstrating a consistent trend that was deviating
from the modeled refund behavior, due in part to a shift in fourth quarter deal mix and higher price point offers. Accordingly, the
Company updated its refund model to better capture variations in trends in its business. By continually refining the refund model
to reflect such data inputs as discussed above, the Company believes its model enables it to track and anticipate refund behavior.
The Company accrues costs associated with refunds within "Accrued expenses" on the consolidated balance sheets. The
cost of refunds for third party revenue where the amounts payable to the merchant are recoverable and for all direct revenue is
presented on the consolidated statements of operations as a reduction to revenue. The cost of refunds for third party revenue for
which the merchant's share is not recoverable is presented as a cost of revenue.
The Company assesses the trends that could affect its estimates on an ongoing basis and makes adjustments to the refund
reserve calculations if it appears that changes in circumstances, including changes to the Company's refund policies, may cause
future refunds to differ from its original estimates. If actual results are not consistent with the estimates or assumptions stated
above, the Company may need to change its future estimates, and the effects could be material to the consolidated financial
statements.
Subscriber Credits
The Company issues credits to its subscribers that can be applied against future purchases through its online marketplaces
for certain qualifying acts, such as referring new subscribers, and also to satisfy refund requests. The Company has recorded its
subscriber credit obligations within "Accrued expenses" on the consolidated balance sheets (See Note 7 "Supplemental Consolidated
Balance Sheet and Statement of Operations Information"). Subscriber credit obligations incurred for new subscriber referrals or
other qualifying acts are expensed as incurred and are classified within "Marketing" on the consolidated statements of operations.
Subscriber credits issued to satisfy refund requests are applied as a reduction to the refunds reserve.
Compensation
The Company measures 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 within "Cost of revenue," "Marketing" and "Selling, general and administrative," consistent with the respective employees'
cash compensation, on the consolidated statements of operations. Prior to the Company's initial public offering in November 2011,
the fair value of restricted stock units and restricted stock was estimated based on valuations of the Company's (or subsidiaries')
stock on the grant date or reporting date if required to be remeasured under applicable accounting guidance. The fair value of stock
options was determined on the date of grant using the valuation model. See Note 10
Compensation."
Foreign Currency
Balance sheet accounts of the Company's operations outside of the U.S. are translated from foreign currencies into U.S.
dollars at the exchange rates as of the consolidated balance sheet dates. Revenue and expenses are translated at average exchange
rates during the period. Foreign currency translation adjustments and gains and losses on intercompany foreign currency transactions
that are of a long-term investment nature are included within "Accumulated other comprehensive income" on the consolidated
balance sheets. Gains and losses resulting from foreign currency transactions which are denominated in currencies other than the
entity's functional currency, including intercompany foreign currency transactions that are not of a long-term investment nature,
are included within "Other (expense) income, net" on the consolidated statements of operations. For the years ended December
31, 2013, 2012 and 2011, the Company had $10.3 million of foreign currency transaction losses, $1.4 million of foreign currency
transaction gains and $1.8 million of foreign currency transaction gains, respectively.