| REVENUE RECOGNITION |
REVENUE RECOGNITION Product and service revenue are generated from sales transactions through our 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 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 our websites and mobile applications. Additionally, in the United States we have recently been developing and testing voucherless offerings that are linked to customer credit cards. Customers claim those voucherless merchant offerings through our online marketplaces and earn cash back on their credit card statements when they transact with the related merchants, who pay us 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 we earn commissions when customers make purchases with retailers using digital coupons accessed through our websites and mobile applications, we generally collect payment from affiliate networks on terms ranging from 30 to 150 days. As discussed in Note 2, Summary of Significant Accounting Policies, we previously referred to our 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, we adopted Accounting Standards Codification Topic 606 using the modified retrospective method. Beginning on January 1, 2018, results are presented in accordance with the revised policies, while prior period amounts are not adjusted and continue to be reported in accordance with our historical policies. The adoption of Topic 606 did not significantly impact our 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 our online marketplaces until the customer redeems the related voucher. If the customer does not redeem a voucher with such merchant payment terms, we retain all of the gross billings for that voucher, rather than retaining only our net commission. Prior to our adoption of Topic 606, we recognized that variable consideration from unredeemed vouchers and derecognized the related accrued merchant payables when our legal obligation to the merchant expired, which we believe is shortly after the voucher expiration date in most jurisdictions. Following our adoption of Topic 606, we estimate the variable consideration from vouchers that will not ultimately be redeemed and recognize that amount as revenue at the time of sale, rather than when our legal obligation expires. We estimate variable consideration from unredeemed vouchers using our historical voucher redemption experience. Most vouchers sold through the 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 North America segment did not have variable consideration from unredeemed vouchers in prior periods. |
| | • | Prior to our adoption of Topic 606, we expensed the incremental costs to obtain contracts with third-party merchants, such as sales commissions, as incurred. Following our adoption of Topic 606, those costs are deferred and recognized over the expected period of the merchant arrangement, generally from 12 to 18 months. As of December 31, 2018, we had $2.9 million and $11.3 million of deferred contract acquisition costs recorded within Prepaid expenses and other current assets and Other non-current assets, respectively. For the year ended December 31, 2018, we amortized $25.2 million of deferred contract acquisition costs and did not recognize any impairment losses in relation to the deferred costs. |
| | • | Prior to our adoption of Topic 606, we recognized breakage income for unused customer credits when they expired or were forfeited. Following our 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 our adoption of Topic 606, we deferred the revenue from hotel reservation offerings until the customer's stay commenced. Following our 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 our adoption of Topic 606, we 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 our adoption of Topic 606, those refunds are classified as a reduction of revenue. |
| | • | Prior to our adoption of Topic 606, we classified credits issued to consumers for relationship purposes as a marketing expense. Following our adoption of Topic 606, those credits are classified as a reduction of revenue. |
We recorded a net reduction to our 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, Summary of Significant Accounting Policies, for additional information about our revenue recognition policies after the adoption of Topic 606. Impacts on Consolidated Financial Statements The following tables summarize the impacts of adopting Topic 606 on our consolidated financial statements as of and for the year ended December 31, 2018 (in thousands): Consolidated Balance Sheet | | | | | | | | | | | | | | December 31, 2018 | | As reported | | Effects of Topic 606 | | Balances without adoption of Topic 606 | Total assets | $ | 1,642,142 |
| | $ | (10,948 | ) | | $ | 1,631,194 |
| Total liabilities | 1,259,531 |
| | 103,878 |
| | 1,363,409 |
| Total equity | 382,611 |
| | (114,826 | ) | | 267,785 |
|
Consolidated Statements of Operations | | | | | | | | | | | | | | Year Ended December 31, 2018 | | As reported | | Effects of Topic 606 | | Balances without adoption of Topic 606 | Revenue: | | | | | | Service revenue (1) | $ | 1,205,487 |
| | $ | 522 |
| | $ | 1,206,009 |
| Product revenue | 1,431,259 |
| | — |
| | 1,431,259 |
| Total revenue | 2,636,746 |
| | 522 |
| | 2,637,268 |
| Cost of revenue: | | | | | | Service cost of revenue (2) | 120,077 |
| | 25,436 |
| | 145,513 |
| Product cost of revenue | 1,196,068 |
| | — |
| | 1,196,068 |
| Cost of revenue (2) | 1,316,145 |
| | 25,436 |
| | 1,341,581 |
| Gross profit | 1,320,601 |
| | (24,914 | ) | | 1,295,687 |
| Operating expenses: | | | | | | Marketing (3) | 395,737 |
| | 7,867 |
| | 403,604 |
| Selling, general and administrative (4) | 870,961 |
| | (3,092 | ) | | 867,869 |
| Restructuring charges | (136 | ) | | — |
| | (136 | ) | Total operating expenses | 1,266,562 |
| | 4,775 |
| | 1,271,337 |
| Income (loss) from operations | 54,039 |
| | (29,689 | ) | | 24,350 |
| Other income (expense), net | (53,008 | ) | | — |
| | (53,008 | ) | Income (loss) before provision (benefit) for income taxes | 1,031 |
| | (29,689 | ) | | (28,658 | ) | Provision (benefit) for income taxes (5) | (957 | ) | | (803 | ) | | (1,760 | ) | Net income (loss) | $ | 1,988 |
| | $ | (28,886 | ) | | $ | (26,898 | ) |
| | (1) | For the year ended December 31, 2018, the adoption of Topic 606 resulted in a $33.3 million decrease to Revenue for refunds on service revenue transactions for which the merchant's share is not recoverable and customer credits issued for relationship purposes, partially offset by increases of $27.2 million related to the timing of recognition of variable consideration from unredeemed vouchers, $2.6 million related to the timing of recognition of revenue from hotel reservation offerings and $3.0 million related to the timing of recognition of breakage revenue from customer credits that are not expected to be used. |
| | (2) | Reflects decreases to Cost of revenue following the adoption of Topic 606 for refunds on service revenue transactions for which the merchant's share is not recoverable. |
| | (3) | Reflects decreases to Marketing expense following the adoption of Topic 606 for customer credits issued for relationship purposes. |
| | (4) | Reflects increases to Selling, general and administrative expense for the amortization of deferred contract acquisition costs in excess of amounts capitalized. |
| | (5) | As discussed in Note 15, Income Taxes, for the year ended December 31, 2018, we recognized an income tax benefit of $6.4 million 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 | | | | | | | | | | | | | | Year Ended December 31, 2018 | | As reported | | Effects of Topic 606 | | Balances without adoption of Topic 606 | North America | | | | | | Service revenue: | | | | | | Local | $ | 752,863 |
| | $ | (1,050 | ) | | $ | 751,813 |
| Travel | 71,856 |
| | (1,460 | ) | | 70,396 |
| Goods | 18,283 |
| | 113 |
| | 18,396 |
| Product revenue - Goods | 796,393 |
| | — |
| | 796,393 |
| Total North America revenue | 1,639,395 |
| | (2,397 | ) | | 1,636,998 |
| | | | | | | International | | | | | | Service revenue: | | | | | | Local | 306,700 |
| | 2,286 |
| | 308,986 |
| Travel | 41,183 |
| | (262 | ) | | 40,921 |
| Goods | 14,602 |
| | 895 |
| | 15,497 |
| Product revenue - Goods | 634,866 |
| | — |
| | 634,866 |
| Total International revenue | 997,351 |
| | 2,919 |
| | 1,000,270 |
| | | | | | | Consolidated | | | | | | Service revenue: | | | | | | Local | 1,059,563 |
| | 1,236 |
| | 1,060,799 |
| Travel | 113,039 |
| | (1,722 | ) | | 111,317 |
| Goods | 32,885 |
| | 1,008 |
| | 33,893 |
| Product revenue - Goods | 1,431,259 |
| | — |
| | 1,431,259 |
| Total Consolidated Revenue | $ | 2,636,746 |
| | $ | 522 |
| | $ | 2,637,268 |
|
Contract Balances 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. Our deferred revenue was $25.8 million and $25.5 million as of January 1, 2018 and December 31, 2018. The amount of revenue recognized for the year ended December 31, 2018 that was included in the deferred revenue balance at the beginning of the period was $25.1 million. The following table summarizes the activity in the liability for customer credits for the year ended December 31, 2018 (in thousands): | | | | | | Customer Credits | Balance as of January 1, 2018 | $ | 19,414 |
| Credits issued | 126,874 |
| Credits redeemed (1) | (112,161 | ) | Breakage revenue recognized | (18,802 | ) | Foreign currency translation | (207 | ) | Balance as of December 31, 2018 | $ | 15,118 |
|
| | (1) | Customer credits can be redeemed through our online marketplaces for goods or services provided by a third-party merchant or for merchandise inventory sold by us. 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 us, 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. |
|