The Southeast Asian ride-hailing company slated to go public via one of the biggest SPAC deals of the year announced in early August it would have to cut its 2020 full-year revenue by more than half.
The warning by Grab Holdings Inc.—which is being folded into a special purpose acquisition company—wasn’t tied to economic or pandemic-related issues, but a complex accounting rule. Grab had earlier tallied customer perks and incentives as marketing expenses instead of deducting them from its overall revenue, the Singapore-based startup said.
What may sound like a small accounting change had a big impact. The company slashed its previously announced full-year 2020 revenue from $1.2 billion to $469 million.
Grab’s accounting headache is the latest example of the struggles app-based companies that deliver takeout or offer taxi rides face when interpreting a tricky part of U.S. and international revenue accounting rules. Depending on how a company operates and how it defines its customers, companies with seemingly similar business models, such as Uber Technologies Inc. or Lyft Inc., can have different top-line revenue outcomes when they account for incentives. This makes analysts’ jobs harder.
“It throws a wrench into the comparisons,” said Ben Wechter, research analyst at Zion Research Group.
No Clear Answers
There’s no clear accounting answer on how companies should treat customer perks like ride credits or delivery discounts under U.S. GAAP’s ASC 606 or its international counterpart, IFRS 15. The treatment hinges on how a business operates and how it defines its customers. The result: Similar companies can have starkly different revenues.
Take Grab’s U.S. counterparts: Uber Technologies Inc. and Lyft Inc. Uber defines its customers as the drivers who pick up passengers or drop off food, not the people who order rides or late-night snacks through their phones. Same goes for Lyft.
Through the nuances of the accounting rules, when Uber offers discounts on passenger rides to a targeted number of riders, it accounts for these breaks as marketing expenses. In contrast, discounts that reduce the fares for all or substantially all trips in a specific market get accounted for as hits to revenue, according to Uber.
Lyft goes by a similar policy. Targeted passenger incentives get treated like marketing expenses, but market-wide discounts get booked as deductions to revenue. While driver performance incentives get recorded as deductions to revenue, driver incentives for referring new drivers or passengers are tallied as marketing expenses.
At GrubHub Inc., when the company offers cash credits to restaurants and diners to use its platform, the incentives get recorded as reductions in revenues, according to the company. Doordash Inc. records perks like free delivery as revenue reductions but discounts to customers who refer friends to the delivery platform as marketing expenses.
Grab initially considered its drivers and merchant partners its customers, the company said, which led to the company treating discounts as marketing expenses. But in what’s called a pre-clearance consultation, or voluntary review, with the Securities and Exchange Commission, the market regulator came to a different conclusion. Those who order takeout or hail rides from their phones are Grab’s customers, the SEC said, according to Grab. This decision meant less revenue for Grab.
Grab explained the adjustment to investors in an earnings presentation and registration statement. It didn’t change the company’s cash in hand or the fundamentals of its balance sheet, its CFO said.
“This is purely a change in presentation, and the economics of our business have not changed,” Chief Financial Officer Peter Oey said on the Aug. 2 financial update webcast.
Principles Versus Rules
Written over the course of a decade by the Financial Accounting Standards Board in the U.S. and the International Accounting Standards Board in London, the revenue standards offer most companies worldwide a single way to record the top lines in their income statements. Companies have to use their best judgment, including on the basic question of what is a company’s customer.
“We fought for a long time about what it means to be a customer in writing the standard,” said Jeff Wilks, professor at Brigham Young University’s School of Accountancy and a former staff member at FASB when the board was writing the standard with the IASB. “You’d think that would obvious but it’s not.”
Determining who the customer is has knock-on effects for another part of the rules: deciding whether a company is a principal or an agent. The call hinges on who controls the goods or services before they goes to the end customer. This is a straightforward question when it comes to sales of physical goods, but is tricky for companies using emerging technology platforms, Wilks said. Each company has to assess whether it is in full control over the end product—a completed trip or a successfully delivered pizza—before making that call.
Uber’s auditor, PwC LLP, listed the revenue question as a critical audit matter, or an especially complex area to audit, in the company’s latest annual financial statement. The accounting required a “high degree of auditor judgment, subjectivity and effort,” the accountancy firm said. Uber offered $2 billion in credits and incentives in 2020 to Uber app users who aren’t considered the company’s customers, the firm said.
The accounting rulemakers are paying attention to these questions, too. FASB is reviewing some of the trickiest aspects of the revenue standard—including these questions—to see if the board can offer any solutions.
There’s such judgment in the accounting, particularly for platform-based companies, “that it’s very challenging to reach the answer on your own and think that everyone would reach the same answer,” FASB Chairman Richard Jones said at the meeting.
The board’s panel of investor advisers also asked the board for help.
“Because this is an emerging, growing part of the economy, these distortions are likely to persist and get bigger,” said Yoni Engelhart, partner at Schilit Forensics, told FASB in May.
But writing solutions into the accounting standard may be easier said than done, said Scott Taub, managing director at Financial Reporting Advisors LLC and a former SEC acting chief accountant.
“I have not been able to come up with anything that, if FASB were just to add this to the literature it’d be a lot easier,” Taub said.
The principles in the revenue standard are just that: principles. When a business model is complicated, the solutions are complicated, too, he said.
Many companies feel the safest bet is to do exactly what Grab did: consult with the SEC to make the calls, Taub said.
“One of the reasons you’re seeing companies pre-clear is that certainly everybody realizes this is a big deal,” Taub said.
