Alibaba Group Initial Public Offering: A Case Study of Financial Reporting Issue

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Alibaba Group Initial Public Offering: A Case Study of Financial Reporting Issues ABSTRACT: In September 2014, the Chinese e-commerce giant Alibaba Group Holding Limited issued shares on the New York Sbck Exchange, making it the world's largest initial public offering. This case examines different aspects of the Alibaba Group's initial public offering, including Alibaba Group's business model, financial reporting and corporate govemance, as well as the macroeconomic, political, and legal environment in which the company operates. In addition, this case will familiarize students with the risks and opportunities for Chinese companies and investors when a Chinese company lists in the U.S. This case is suitable for fnancial accounting and intemational accounting courses at the intemediate and advanced levels for undergraduates as well as graduate students. The case is scalable, and instructors can choose from multiple sections of the case and different case questions b tailor the case difficulty to their students' leaming needs. Keywords: Alibaba Group Holding Limited; initial public offering; variable interest entities, equity investment financial statement analysis. INTRODUCTION n September 19, 2014, Alibaba Group Holding Limited (Alibaba Group, the Chinese e-commerce giant founded in 1999. had an initial public offering (IPO) of American depository shares at S68 per share on the New York Stock Exchange. Based on this offering price, this deal raised S25 billion for Alibaba Group, making it the world's largest IPO (Barreto 2014). The scope of Alibaba Group's IPO has drawn particular attention to the risks and opportunities of investing in this company as well as other U.S.-listed Chinese companies. This case will first provide a brief background on Alibaba Group, and then explore important aspects associated with its IPO in the U.S. Corporate Overview Since the launch of Alibaba.com in 1999 by Jack Ma in his apartment in Hangzhou, China, Alibaba Group has established a portfolio of companies operating in wholesale and retail online marketplaces as well as Intemet-based businesses offering advertising and marketing services, electronic payments, cloud-based computing, and network services as well as mobile solutions. Alibaba Group has developed an ecosystem around its platform that consists of buyers, sellers, third-party service providers, strategic alliance partners, and investee companies. Table 1 shows important milestones in Alibaba Group's history (http://www.alibabagroup.com/en/about/history).

Explanation / Answer

1. ASC 606 provides the overview of how revenue is recognised from an entity's contract with the customers.

Step 1: Identify the contract with a customer - Here, Contract is Online Marketing Service

Step 2: Identify the performance obligation in the contract - Click the Online Marketing Servie

Step 3: Determine the transaction price of the contract - Price as per contract between Alibaba and the Website

Step 4: Allocate the transaction price to the performance obligations in the contract - Allocate the transaction price of each standalone service in the contract between Alibaba and Webiste

Step 5: Recognise the revenue as the performance obligations are satisfied by the entity - Entity recognises the revenue on completion of contract as per the following entry:

a)Account Receivable (Dr.)

To Revenue (Cr.)

b) Bank Account (Dr.)

To Account Receivable

If transaction amount is received in total before completion of all the performance obligations, then obligations that have not been completed will be transferred to Deferred Revenue as per below:

Cash and Cash Receivables (Full Considertion Received)

To Deferred Revenue (Considertions pertaining to Obligations not yet completed)

To Revenue (Perfomance Obliagtion Completed, hence revenue recognised)

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