My understanding is sometimes companies fudge the numbers though. If a $40 order has a $5 discount, they might consider $40 as revenue and put the $5 discount under a marketing expense
This is absolutely incorrect. You cannot take a discount as marketing expense and claim the full revenue. That is basic accounting that is not up for interpretation. If done intentionally it’s fraudulent.
That’s only sort of true, depending on how they do it. They advertise “promotional credits” which I assume do fall under the category of marketing expenses. Yesterday, I saw an ad that gave me a code for a $100 delivery credit from DoorDash. If I use it, my receipt will show a charge for delivery, and then a promotional credit that offsets that. I believe those credits can be reported as marketing expenses, and revenue would be the gross amount of the charge.
If you sell something for $100 and give a future voucher for $80, you recognize $20 in revenue for this quarter and $80 liability on your balance sheet. In the next quarter when that voucher is used on another $100 purchase, you can claim $100 revenue this quarter and remove the $80 liability. But you already took the $80 hit to revenue from the voucher on the previous quarter.
If you sell something for $100 and immediately give a $80 refund then you only take a $20 revenue.
People think the SEC and accountants are dumb or blind but they aren’t. They have seen all of these tricks before and act very quickly if they see new ways to mislead.
What if you flip the order and give someone $10 in credits, expiring XYZ, and they use it on a $40 order?
Here's from the S-1:
> >> Our marketing efforts currently include referrals, affiliate programs, free or discount trials, partnerships, display advertising, television, billboards, radio, video, direct mail, social media, email, podcasts, hiring and classified advertisement websites, mobile “push” communications, search engine optimization, and keyword search campaigns. Our marketing initiatives may become increasingly expensive and generating a meaningful return on these initiatives may be difficult.
This comment was downvoted, which seems to imply that it's false. Is it? I know nothing about the laws of accounting and I am curious if you can truly offload discounts into marketing expenses.
So there's two kinds of accounting, GAAP and non-GAAP.
A great example of non-GAAP accounting was WeWork's "community-adjusted EBITDA." When you use non-GAAP metrics to measure your business, you get to kind of define the standard by which you're measuring yourself. You get to do things exactly like the parent suggested, where you count 100% of the income as revenue and all your incentive spending as "marketing expenses."
Uber does this too, for instance (back when it was a thing) 100% of the sticker price of an Uber Pool ride was reported as revenue while only the 30% cut of an UberX or Uber Black was reported as revenue, and yes, they would list driver incentives as marketing expenses.
Out of curiosity, which part, the Pool vs. X, or the driver incentives are marketing? Also, always happy to do some more reading especially if you have some references.
To be clear, Uber does use non-GAAP accounting in the form of both EBITDA and "segment-adjusted EBITDA", the latter of which excludes stock comp, platform operating expenses, corporate expenses, accounting, lobbying, etc.
Regarding the SEC, they are actually quite upset about the use of non-GAAP accounting, and have begun taking enforcement action against companies which give prominence to non-GAAP numbers.
The SEC steps in typically when they're certain of a ruling in their favour and when it is politically expedient to do so.
In order for regulators to proactively prevent all misbehaviour such organisations would need to be impractical huge and financially inconvenient to tax payers.
Rather, society generally tolerates some level of fraud / crime / misbehaviour, probably because the benefits out weigh the costs to liberty.
And we know with absolute certainly that fraud is occurring at scale and rarely prosecuted, so it doesn't follow that illegality results in absense of activity.
My understanding is sometimes companies fudge the numbers though. If a $40 order has a $5 discount, they might consider $40 as revenue and put the $5 discount under a marketing expense