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Summary of Significant Accounting Policies (Policies) | 3 Months Ended
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Mar. 31, 2012
Summary of Significant Accounting Policies [Abstract] |
Basis of presentation | The accompanying unaudited interim condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) and include the accounts of the Company and its wholly-owned subsidiaries. These interim condensed consolidated financial statements are stated in US dollars. All intercompany transactions and balances have been eliminated. Substantially all revenues and operating costs are generated in the Company’s foreign operations, amounting to approximately 99.5% and 99.7% of the consolidated totals during the three-month periods ended March 31, 2012 and 2011, respectively. Long-lived assets located in the foreign operations totaled $96,491,563 and $93,489,980 as of March 31, 2012 and December 31, 2011, respectively. Cash and cash equivalents as well as short and long-term investments, totaling $201,681,561 and $186,243,613 at March 31, 2012 and December 31, 2011, respectively, are mainly located in the United States of America and in the Company’s main locations. These interim condensed consolidated financial statements reflect the Company’s consolidated financial position as of March 31, 2012 and December 31, 2011. These statements also show the Company’s consolidated statements of income and comprehensive income for the three-month periods ended March 31, 2012 and 2011, its consolidated statement of shareholders’ equity and its consolidated statement of cash flows for the three months ended March 31, 2012 and 2011. These statements include all normal recurring adjustments that management believes are necessary to fairly state the Company’s financial position, operating results and cash flows. Because all of the disclosures required by generally accepted accounting principles in the United States of America for annual consolidated financial statements are not included herein, these interim condensed financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2011, contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 28, 2012. The condensed consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for the periods presented are not necessarily indicative of results expected for any future period.
Revenue Recognition | The Company generates revenues for different services provided. When more than one service is included in one single arrangement with the customer, the Company recognizes revenue according to multiple element arrangements accounting, distinguishing between each of the services provided and allocating revenues based on their respective selling prices. Revenues are recognized when evidence of an arrangement exists, the fee is fixed or determinable, no significant obligation remains and collection of the receivable is reasonably assured. Services are separately recognized as revenue according to the following criteria described for each type of services: - Services for intermediation between on-line buyers and sellers, for which the company charges a percentage on the transaction value (“final value fees”), are recognized as revenue once the sale transaction between the buyer and seller is successfully completed (which occurs upon confirmation of the sale by the seller). - Services for the use of the Company’s on-line payments solution, for transactions off-platform ordered by MercadoPago customers. The Company does not charge a separate fee for on-platform transactions in certain countries. The fee that we charge for all off-marketplace platform transactions is recorded as revenue once the transaction is completed, at the time when the payment is processed by the Company. For on-marketplace platform transactions, we generate revenue in the countries where we offer the service in a way that implies that the customer has to pay an additional fee for the right to use the payments solution. We also generate revenues as a result of offering financing to our MercadoPago users, either directly or when we elect to sell the corresponding financial assets to financial institutions. - Listing and optional feature services, which fees relate to the right of a seller to have the item offered listed in a preferential way, as well as classified advertising services, are recorded as revenue ratably during the listing period. Those fees are charged at the time the listing is uploaded onto the Company’s platform and is not subject to successful sale of the items listed. - Advertising revenues such as the sale of banners are recognized on accrual basis, and MercadoClics services or sponsorship of sites are recognized based on per-click values and as the impressions are delivered.
Foreign currency translation | All of the Company’s foreign operations have determined the local currency to be their functional currency, except for Venezuela since the year ended December 31, 2010, as described below. Accordingly, these foreign subsidiaries translate assets and liabilities from their local currencies to U.S. dollars using period/year-end exchange rates while income and expense accounts are translated at the average rates in effect during the period. The resulting translation adjustment is recorded as part of accumulated other comprehensive income (loss). Gains and losses resulting from transactions denominated in non-functional currencies are recognized in earnings. Net foreign currency transaction results are included in the consolidated statements of income under the caption “Foreign currency loss” and amounted to $1,032,978 and $500,655 for the three-month periods ended March 31, 2012 and 2011, respectively. Until September 30, 2009, the Company translated its Venezuelan subsidiaries assets, liabilities, income and expense accounts at the official rate of 2.15 “Bolivares Fuertes” per US dollar. Starting in the fourth quarter of 2009, as a result of the changes in facts and circumstances that affected the Company’s ability to convert currency for dividends remittances using the official exchange rate in Venezuela, the Venezuelan subsidiaries assets, liabilities, income and expense accounts were translated using the parallel exchange rate resulting in the recognition in that quarter of a currency translation adjustment of $16,977,276 recorded in accumulated other comprehensive income. The average exchange rate used for translating the fourth quarter of 2009 results was 5.67 “Bolivares Fuertes” per US dollar and the year-end exchange rate used for translating assets and liabilities was 6.05 “Bolivares Fuertes” per US dollar. As of the date of these interim condensed consolidated financial statements the Company did not buy US dollars at the official rate of 2.15 “Bolivares Fuertes” per US dollar. According to US GAAP, the Company has transitioned its Venezuelan operations to highly inflationary status as of January 1, 2010 considering as if the US dollar was the functional currency. See “Highly inflationary status in Venezuela” below. Therefore, no translation effect was accounted for in other comprehensive income since January 1, 2010 related to our Venezuelan operations. The Venezuelan Central Bank is the only institution through which foreign currency-denominated transactions can be brokered. Under this system, known as the Foreign Currency Securities Transactions System (SITME), entities domiciled in Venezuela can buy U.S. dollar–denominated securities only through banks authorized by the BCV to import goods, services or capital inputs. Additionally, the SITME imposes volume restrictions on an entity’s trading activity, limiting such activity to a maximum equivalent of $50,000 per day, not to exceed $350,000 in a calendar month. This limitation is non-cumulative, meaning that an entity cannot carry over unused volume from one month to the next. As of March 31, 2012, the exchange rate used to re-measure transactions was 5.30 “Bolivares Fuertes” per U.S. dollar. The following table sets forth the assets, liabilities and net assets of the Company’s Venezuelan subsidiaries, before intercompany eliminations, as of March 31, 2012 and December 31, 2011 and for the three-month periods ended March 31, 2012 and 2011.
|  | March 31, |  |  | March 31, |
|  | 2012 |  |  | 2011 |
Venezuelan operations |  |  |  |  |  |  |  |
Net Revenues |  | $ | 11,241,572 |  |  | $ | 6,770,453 |
|  | March 31, |  |  | December 31, |
|  | 2012 |  |  | 2011 |
Assets |  |  | 33,729,830 |  |  |  | 31,074,871 |
Liabilities |  |  | (9,941,851 | ) |  |  | (10,414,881 | )
Net Assets |  | $ | 23,787,979 |  |  | $ | 20,659,990 |
As of March 31, 2012, net assets (before intercompany eliminations) of the Venezuelan subsidiaries amount to approximately 10.0% of our consolidated net assets, and cash and investments of the Venezuelan subsidiaries held in local currency in Venezuela amount to approximately 8.6% of our consolidated cash and investments. Although, the current mechanisms available to obtain US dollars for dividends distributions to shareholders outside Venezuela imply increased restrictions, the Company does not expect that the current restrictions to purchase dollars have a significant adverse effect on its business plans with regard to the investment in Venezuela.
Highly inflationary status in Venezuela | During May 2009, the International Practices Task Force discussed the highly inflationary status of the Venezuelan economy. Historically, the Task Force has used the Consumer Price Index (CPI) when considering the inflationary status of the Venezuelan economy. The CPI has existed since 1984. However, the CPI covers only the cities of Caracas and Maracaibo. Commencing on January 1, 2008, the National Consumer Price Index (NCPI) has been developed to cover the entire country of Venezuela. Since inflation data is not available to compute a cumulative three year inflation rate for the entire country solely based on the NCPI, the Company uses a blended rate using the NCPI and CPI to calculate Venezuelan inflation rate. The cumulative three year inflation rate as of December 31, 2009 was calculated using the CPI information for periods before January 1, 2008 and NCPI information for the period after January 1, 2008. The blended CPI/NCPI three-year inflation index (23 months of NCPI and 13 months of CPI) as of November 30, 2009 exceeded 100%. According to US GAAP, calendar year-end companies should apply highly inflationary accounting as from January 1, 2010. Therefore, the Company transitioned its Venezuelan operations to highly inflationary status as of January 1, 2010 considering the US dollar as the functional currency.
Taxes on Revenues | The Company’s subsidiaries in Brazil, Argentina, Venezuela and Colombia are subject to certain taxes on revenues which are classified as cost of revenues. Taxes on revenues totaled $5,452,197 and $4,461,547 for the three-month periods ended March 31, 2012 and 2011, respectively.
Income and Asset Taxes | The Company is subject to U.S. and foreign income taxes. The Company accounts for income taxes following the liability method of accounting which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred tax assets are also recognized for tax loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets or liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded when, based on the available evidence, it is more likely than not that all or a portion of the Company’s deferred tax assets will not be realized. The Company’s income tax expense consists of taxes currently payable, if any, plus the change during the period in the Company’s deferred tax assets and liabilities. From fiscal year 2008, the Company’s Argentine subsidiary is a beneficiary of a software development law. Part of the benefits obtained from being a beneficiary of the aforementioned law is a relief of 60% of total income tax determined in each year, until fiscal year 2014. Aggregate tax benefit totaled $1,971,478 and $1,206,609 for the three-month periods ended March 31, 2012 and 2011, respectively. Aggregate per share effect of the Argentine tax holiday amounts to $ 0.04 and $0.03 for the three-month periods ended March 31, 2012 and 2011, respectively. If the Company had not been granted the Argentine tax holiday, the Company would have pursued an alternative tax planning strategy and, therefore, the impact of not having this particular benefit would not necessarily be the abovementioned dollar and per share effect. On August 17, 2011, the Argentine government issued a new software development Law which is still waiting for the regulatory decree. If the Company qualifies under the new software development law, the current income tax relief could slightly decrease but will extend its tax holiday, which would otherwise finish in 2014, for an additional five years, to 2019 and would obtain some other fiscal benefits. As of March 31, 2012 and December 31, 2011, MercadoLibre, Inc has included in the non-current deferred tax assets line the foreign tax credits related to the dividend distributions received from its subsidiaries for a total amount of $2,519,254 and $2,965,668, respectively. Those foreign tax credits will be used to offset the future domestic income tax payable.
Use of estimates | The preparation of interim condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used for, but not limited to accounting for allowance for doubtful accounts, depreciation, amortization, impairment and useful lives of long-lived assets, compensation cost related to cash and share-based compensation, recognition of current and deferred income taxes and contingencies. Actual results could differ from those estimates.
Comprehensive Income | Comprehensive income is comprised of two components, net income and other comprehensive income (loss), net of income tax, and defined as all other changes in equity of the Company that result from transactions other than with shareholders. Other comprehensive income (loss) includes the cumulative translation adjustment relating to the translation of the financial statements of the Company’s foreign subsidiaries (except Venezuela since January 1, 2010, see Foreign Currency Translation) and unrealized gains on investments classified as available-for-sale securities. Total comprehensive income, attributable to MercadoLibre Inc, for the three-month periods ended March 31, 2012 and 2011 amounted to $22,683,254 and $14,882,781, respectively.
Redeemable Noncontrolling Interest | In September 2011, the Company acquired the 60% of the shares of AP Clasificados S.R.L. de C.V. (“AP Clasificados”), as well as signed a call and put option agreement to acquire the remaining 40% of those shares (See note 4 “Business Combinations, Goodwill and Intangible Assets” for more detail). According to the signed agreement, the price for the remaining 40% call or put options will be determined by greater of (i) $4,000,000 and (ii) the amount resulting from multiplying (A) the percentage of the seller’s interests as of the exercise date of the Call/Put option by (B) an amount equal to 3.5 times the amount of invoiced sales of the Business for the twelve months period ending on the exercise date. The put option is to be exercised if any of the following events occurs: (i) the third anniversary of the acquisition date, (ii) the termination of the employment of the main operating officer, and (iii) death or incapacitation of the main operating officer. The call option is to be exercised following the earlier to occur of (i) third anniversary of the acquisition date and (ii) members holding a majority of the issued and outstanding interests determine that an additional capital contribution is required to capitalize AP Clasificados and the Seller does not make such additional capital contribution. Redeemable noncontrolling interest is not considered to be permanent equity and is reported in the mezzanine section between liabilities and equity in the consolidated balance sheet for a total amount of $4,000,000 at March 31, 2012. The noncontrolling interest was measured at its estimated redemption value according to the abovementioned agreed conditions. Changes between the estimated redemption value and its carrying amount as of the period-end were recorded in retained earnings.

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