REVENUE RECOGNITION

Product and service revenue are generated from sales transactions through the Company's online marketplaces in three primary categories: Local, Goods and Travel.

Product revenue is earned from direct sales of merchandise inventory to customers and includes any related shipping fees. Service revenue primarily represents the net commissions earned by the Company from selling goods and services provided by third-party merchants. Those marketplace transactions generally involve the online delivery of a voucher that can be redeemed by the purchaser with the third-party merchant for goods or services (or for discounts on goods or services). To a lesser extent, service revenue also includes commissions earned when customers make purchases with retailers using digital coupons accessed through the Company's websites and mobile applications. Additionally, in the United States the Company has recently been developing and testing voucherless offerings that are linked to customer credit cards. Customers claim those voucherless merchant offerings through the Company's online marketplaces and earn cash back on their credit card statements when they transact with the related merchants, who pay the Company commissions for such transactions.

In connection with most of our product and service revenue transactions, we collect cash from credit card payment processors shortly after a sale occurs. For transactions in which the Company earns commissions when customers make purchases with retailers using digital coupons accessed through its websites and mobile applications, the Company generally collects payment from affiliate networks on terms ranging from 30 to 150 days.

Previously, the Company referred to its product revenue and service revenue as "direct revenue" and "third-party and other revenue," respectively.

Adoption of ASC Topic 606, Revenue from Contracts with Customers

On January 1, 2018, the Company adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers ("Topic 606") using the modified retrospective method. Beginning on January 1, 2018, results are presented in accordance with the Company's revised policies, while prior period amounts are not adjusted and continue to be reported in accordance with the Company's historical policies. The adoption of Topic 606 did not significantly impact the Company's presentation of revenue on a gross or net basis. The following changes resulted from the adoption of Topic 606:

•

For merchant agreements with redemption payment terms, the merchant is not paid its share of the sale price for a voucher sold through one of the Company's online marketplaces until the customer redeems the related voucher. If the customer does not redeem a voucher with such merchant payment terms, the Company retains all of the gross billings for that voucher, rather than retaining only its net commission. Prior to its adoption of Topic 606, the Company recognized that variable consideration from unredeemed vouchers and derecognized the related accrued merchant payables when its legal obligation to the merchant expired, which the Company believes is shortly after the voucher expiration date in most jurisdictions. Following its adoption of Topic 606, the Company estimates the variable consideration from vouchers that will not ultimately be redeemed and recognizes that amount as revenue at the time of sale, rather than when the Company's legal obligation expires. The Company estimates variable consideration from unredeemed vouchers using its historical voucher redemption experience. Most vouchers sold through the Company's marketplace in the United States do not have expiration dates and redemption payment terms were not widely used in that jurisdiction before 2017, so the Company's North America segment did not have variable consideration from unredeemed vouchers in prior periods.


•	Prior to its adoption of Topic 606, the Company expensed the incremental costs to obtain contracts with third-party merchants, such as sales commissions, as incurred. Following its adoption of Topic 606, those costs are deferred and recognized over the expected period of the merchant arrangement, generally from 12 to 18 months.


•	Prior to its adoption of Topic 606, the Company recognized breakage income for unused customer credits when they expired or were forfeited. Following its adoption of Topic 606, breakage income from customer credits that are not expected to be used is estimated and recognized as revenue in proportion to the pattern of redemption for customer credits that are used.


•	Prior to its adoption of Topic 606, the Company deferred the revenue from hotel reservation offerings until the customer's stay commenced. Following its adoption of Topic 606, revenue from hotel reservation offerings is recognized at the time the reservation is made, net of an allowance for estimated cancellations.


•	Prior to its adoption of Topic 606, the Company classified refunds on service revenue transactions for which the merchant's share of the refund amount is not recoverable as a cost of revenue. Following its adoption of Topic 606, those refunds are classified as a reduction of revenue.


•	Prior to its adoption of Topic 606, the Company classified credits issued to consumers for relationship purposes as a marketing expense. Following its adoption of Topic 606, those credits are classified as a reduction of revenue.

The Company recorded a net reduction to its opening accumulated deficit of $88.9 million, which is net of a $6.7 million income tax effect, as of January 1, 2018 due to the cumulative impact of adopting Topic 606. The following table summarizes balance sheet accounts impacted by the cumulative effect of adopting Topic 606 (in thousands):



Account	Increase (decrease) to beginning accumulated deficit
Prepaid expenses and other current assets	$	(4,007	)
Other non-current assets	(10,223		)
Accrued merchant and supplier payables	(64,970		)
Accrued expenses and other current liabilities	(13,188		)
Other non-current liabilities	3,443
Effect on beginning accumulated deficit	$	(88,945	)

See Note 2, Adoption of New Accounting Standards, for additional information about the Company's revenue recognition policies before and after the adoption of Topic 606.

Impacts on Condensed Consolidated Financial Statements

The following tables summarize the impacts of adopting Topic 606 on the Company's condensed consolidated financial statements as of and for the three months ended March 31, 2018 (in thousands):

Condensed Consolidated Balance Sheet



	March 31, 2018
	As reported		Adjustments			Balances without adoption of Topic 606
Total assets	$	1,502,928	$	(13,082	)	$	1,489,846
Total liabilities	1,152,556		84,185			1,236,741
Total Groupon, Inc. stockholders' equity	350,372		(97,267		)	253,105

Condensed Consolidated Statement of Operations



	Three Months Ended March 31, 2018
	As reported			Adjustments			Balances without adoption of Topic 606
Revenue:
Service revenue ⁽¹⁾	$	301,797		$	(1,779	)	$	300,018
Product revenue	324,743			—			324,743
Total revenue	626,540			(1,779		)	624,761
Cost of revenue:
Service cost of revenue ⁽²⁾	31,145			6,275			37,420
Product cost of revenue	270,510			—			270,510
Cost of revenue ⁽²⁾	301,655			6,275			307,930
Gross profit	324,885			(8,054		)	316,831
Operating expenses:
Marketing ⁽³⁾	99,156			1,573			100,729
Selling, general and administrative ⁽⁴⁾	222,061			(1,264		)	220,797
Restructuring charges	283			—			283
Total operating expenses	321,500			309			321,809
Income (loss) from operations	3,385			(8,363		)	(4,978		)
Other income (expense), net	(8,515		)	—			(8,515		)
Income (loss) before provision (benefit) for income taxes	(5,130		)	(8,363		)	(13,493		)
Provision (benefit) for income taxes ⁽⁵⁾	(2,335		)	(1,019		)	(3,354		)
Net income (loss)	$	(2,795	)	$	(7,344	)	$	(10,139	)

(1)

Reflects decreases of $5.6 million related to the timing of recognition of variable consideration from unredeemed vouchers, $3.3 million related to the timing of recognition of revenue from hotel reservation offerings and $0.7 million related to the timing of recognition of breakage revenue from customer credits that are not expected to be used, partially offset by a $7.8 million increase for refunds on service revenue transactions for which the merchant's share is not recoverable and customer credits issued for relationship purposes, which are classified as reductions of revenue under Topic 606.


(2)	Reflects an increase for refunds on service revenue transactions for which the merchant's share is not recoverable, which are classified as a reduction of revenue under Topic 606.


(3)	Reflects an increase for customer credits issued for relationship purposes, which are classified as a reduction of revenue under Topic 606.


(4)	Reflects the amortization of deferred contract acquisition costs in excess of amounts capitalized in the current period.


(5)	As discussed in Note 12, Income Taxes, for the three months ended March 31, 2018, the Company recognized a $6.4 million income tax benefit resulting from the impact of adopting Topic 606 on intercompany activity in certain foreign jurisdictions. That income tax benefit is not reflected in this table, which presents the direct impacts of adopting Topic 606.

Segment and Category Information



	Three Months Ended March 31, 2018
	As reported		Adjustments			Balances without adoption of Topic 606
North America
Service revenue:
Local	$	187,411	$	3,613		$	191,024
Goods	4,874		—			4,874
Travel	20,084		(3,080		)	17,004
Product revenue - Goods	180,887		—			180,887
Total North America revenue	393,256		533			393,789

International
Service revenue:
Local	74,578		(1,445		)	73,133
Goods	3,414		(239		)	3,175
Travel	11,436		(628		)	10,808
Product revenue - Goods	143,856		—			143,856
Total International revenue	233,284		(2,312		)	230,972

Consolidated
Service revenue:
Local	261,989		2,168			264,157
Goods	8,288		(239		)	8,049
Travel	31,520		(3,708		)	27,812
Product revenue - Goods	324,743		—			324,743
Total Consolidated Revenue	$	626,540	$	(1,779	)	$	624,761

Contract Balances

The following table summarizes the activity in revenue deferred from contracts with customers for the three months ended March 31, 2018 (in thousands):



	Deferred Revenue
Balance as of January 1, 2018	$	25,763
Revenue deferred	22,185
Revenue recognized	(25,935		)
Foreign currency translation	172
Balance as of March 31, 2018	$	22,185

A substantial majority of our deferred revenue relates to product sales for which revenue will be recognized as the products are delivered to customers, generally within one week following the balance sheet date.

The following table summarizes the activity in the liability for customer credits for the three months ended March 31, 2018 (in thousands):



	Customer Credits
Balance as of January 1, 2018	$	19,414
Credits issued	32,386
Credits redeemed ⁽¹⁾	(28,167		)
Breakage revenue recognized	(5,036		)
Foreign currency translation	164
Balance as of March 31, 2018	$	18,761

(1)

Customer credits can be redeemed through the Company's online marketplaces for goods or services provided by a third-party merchant or for merchandise inventory sold by the Company. When customer credits are redeemed for goods or services provided by a third-party merchant, service revenue is recognized on a net basis as the difference between the carrying amount of the customer credit liability derecognized and the amount due to the merchant for the related transaction. When customer credits are redeemed for merchandise inventory sold by the Company, product revenue is recognized on a gross basis equal to the amount of the customer credit liability derecognized. Customer credits are primarily used within one year of issuance.