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Groupon's Wild and Crazy IPO Accounting May Be a No-Go With the SEC

Daily deal site Groupon has faced heavy criticism over some of its accounting terminology in the company's S-1 IPO filing with the SEC. It was bad enough that the Securities and Exchange Commission focused attention on the topic.

Apparently that "focus" has turned into arm twisting. According to Kara Swisher at All Things Digital, Groupon will axe the metric it calls adjusted consolidated segment operating income. Given the current economic climate, that could be a first step in tech companies having to become more conservative in their IPO presentations.

It depends on the meaning of debits and credits
The interest in accounting definitions comes down to GAAP versus non-GAAP financials. GAAP means generally accepted accounting principles. It's the U.S. standard (the other big one at the moment is IFRS, or international financial reporting standards).

Without independent standards, accounting would be completely subject to the whims of individual companies, and the shifting interpretations can make for enormous differences. Not long ago, for instance, smartphone vendors had to amortize hardware revenue over 24 months because the devices shipped with software, rather than officially recognizing the sales when they happened.

Sometimes companies have reasonable grounds to present non-standard accounting treatments along with the standard ones. Official approaches may unreasonably represent what happens under common practices in certain industries or markets. But once the door is open, companies frequently try to sneak all sorts of stuff through.

Don't like expenses? Toss 'em
Groupon had two big quirks it tried to push through. The first was its treatment of gross profit. The idiosyncratic definition seemed to ignore some potentially significant costs that make the number look better than it otherwise might.

But the bigger head-shaker was adjusted consolidated segment operating income, or ACSOI. Groupon wanted investors to look at its results without taking into account some major expenses, including costs of acquiring new customers, acquisition-related expenditures, and stock-based compensation.

The term made Groupon look great. In 2010, Groupon's GAAP operating loss was $420,344,000. After the adjustments, adjusted CSOI was a positive $60,553,000. That's a swing of nearly $481 million.

Only, the new definition made no sense. The reason to move outside standard accounting is when staying within gives a misleading portrait of what a company is doing. Groupon's rationale was that the growth-related expenses were extraneous because the company didn't have to keep growing at its current pace. But the only thing really keeping the company going is the continued expansion. Those costs became as optional as those checks for steel are to GM.

Just say no
Groupon previously tried to back off from using ACSOI as a "valuation metric" because of previous SEC concerns. It sounds as though even that won't be enough for the agency. Or investors or the press, for that matter.

The company reportedly plans to drop the term. But that's hardly the end of the issue. Many companies in high tech, particularly in the Internet wing of the industry, use a variety of metrics. None have seemed so extreme as Groupon's. However, the U.S. downgrade already presents challenges for IPOs.

As often happens when stock regulation issues come up, expect one prominent example to bring increased scrutiny to everyone else in the same industry -- like other tech companies planning an IPO and hoping they can woo investors when the straight-up financial results don't seem that compelling.


Image: Flickr user randomidea, CC 2.0.
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