Net revenue

Uber bets on net income, but experts say gross would better inform investors

Uber Technologies Inc.’s plan for its financial reporting has drawn criticism from accountants, who say it may even contradict advice issued by the company’s auditor to customers.

Uber Technologies Inc. said it believes it has the blessing of the Securities and Exchange Commission to release its financial results without the driver portion of passenger fares, as MarketWatch reported earlier this week.

MarketWatch reported Wednesday that after consultation with the SEC and auditor PwC, Uber has adopted new accounting rules that allow it to report only net revenue that accrues to the company when a transaction takes place, completely excluding picking up drivers.

Read:Uber believes it has SEC-approved earnings approach that reflects its business model

Uber said it sought the regulator’s approval in what’s called a “pre-clearance” letter to the SEC’s chief accountant and noted that PwC agreed with its findings. The SEC declined to say whether Uber pre-approved its revenue recognition approach.

Uber declined to provide MarketWatch with a copy of its letter to the SEC or the regulator’s response.

See also:Opinion: This new accounting rule could dramatically change the way some companies recognize revenue

Read:IPO market could be slowed by revenue recognition rules

“Uber is an accounting opportunist, and it looks like PwC is trying to accommodate them instead of pushing them away like they should.”

— Tom Selling, author and professor emeritus, Thunderbird School of Global Management

J. Edward Ketz, an associate professor of accounting at Pennsylvania State University, said Uber was stupid for not reporting what it pays drivers, even though it doesn’t have to.

“This statistic is an important data point for investors in evaluating company performance because it helps estimate future business,” Ketz told MarketWatch. “Some investors will leave the company if Uber does not allow them to understand and quantify its business model.”

According to Tom Selling, author of the Accounting Onion blog and professor emeritus at the Thunderbird School of Global Management, the intent of the specific sections of the new revenue recognition rules related to a net or gross presentation of income and expenses is to only show the net income details only where it would be informative, and at the same time to avoid giving the misleading impression that some companies are bigger than they really are.

“Uber is an accounting opportunist,” Selling told MarketWatch, “and it looks like PwC is trying to accommodate them instead of pushing them away like they should.”

Uber’s auditor, PwC, issued guidelines that strongly indicate that Uber should report on a gross basis rather than a net basis, according to Selling. He pointed to PwC’s revenue recognition guidance, updated last August, which outlines how companies should address the principal versus agent dilemma, particularly when there are multiple parties to a transaction, just like at Uber.

The role played by a business – principal or agent – ​​will determine how revenue is recognized. The rules state that income is presented on a gross basis when the company acts as principal, but only the net amount it expects to keep after paying the other party is presented when it comes to the agent.

In deciding, PwC’s guidance states that a firm should consider, among other criteria, “who the client considers primarily responsible for performing the contract, including which entity will provide customer support, resolve customer complaints and will accept responsibility for the quality or suitability of the product or service.”

In the case of Uber, service complaints are filed with Uber through its software. While waiting for a ride, passengers can see a driver’s photo, as well as the driver’s first name and license plate number so they can identify their car when it arrives. But if an item is left in a car, it must be picked up through Uber, who contacts the driver on the passenger’s behalf. Passengers are not expected to contact a driver after a ride has ended.

The main one, in the PwC guidelines, is the one who promises to provide the ride to the passenger. The Uber app sends potential riders who request rides through its app to drivers, and drivers don’t know where they’re going until they pick up a rider and initiate the ride. A driver who refuses trips too often will be penalized by the company.

And it is the principal, according to the PwC guide, who has the discretion to establish the prices of the specified goods or services.

Uber sets ride prices and charges a booking fee that is always included in the initial fare, the fare riders see in the Uber app when they request a ride.

Drivers are responsible for their own expenses, but Uber offers every driver a commercial insurance policy with coverage of $1 million per incident for drivers who don’t maintain insurance for at least those amounts. The company’s site says the booking fee, added to every trip taken on uberX or uberPOOL in most U.S. markets, helps “support regulatory, safety, and operational costs,” such as liability insurance. .

On the other hand, the company is an agent, according to the PwC guide, if it earns a fixed percentage of revenue from each sale. Both Uber and its drivers earn set amounts — Uber’s is much smaller — but Uber dictates the split between driver and company, and it has varied over time at the discretion of the driver. ‘business.

As Selling told MarketWatch, “To its customers and to investors, Uber is simply, more or less, a high-tech taxi company. It doesn’t matter whether you look at the letter of the accounting rules or their intent. I’ve looked at it from both sides of the horse, and both sides say Uber’s revenue should be presented on a gross basis.

In the elevator with Arianna Huffington

For comparison, Groupon GRPN,
has been pondering these questions for a long time, since before its IPO in November 2011. Groupon even revised its IPO filing as it presented the gross amount of revenue it received from transactions on the site, rather than just fees. Groupon reversed its approach after filing with the SEC to go public under previous rules.

See also:GrubHub and Groupon shares rise thanks to food delivery partnership

Groupon discloses in its latest quarterly SEC filing that it currently reports a combination of third-party revenue earned as an agent and direct revenue, earned from direct sales of its own merchandise inventory through its own online marketplaces. Unlike Uber, Groupon does not fix the prices of goods and services sold by third parties.

Groupon says it doesn’t expect the new revenue recognition rules to change its presentation of gross or net revenue. Groupon’s sales to third parties are reported on a net basis, based on what remains after an agreed portion of the purchase price is paid to a merchant. Groupon’s direct revenue is reported on a gross basis, based on the purchase price received from the customer.

Groupon stock gained 39% in 2017, while the S&P 500 SPX,
gained 15% and the Dow Jones Industrial Average DJIA,
gained about 18%.