XML 47 R18.htm IDEA: XBRL DOCUMENT v2.4.0.8
Summary of Significant Accounting Policies (Policies)
 3 Months Ended
Mar. 31, 2014
Accounting Policies [Abstract]  
Basis of Presentation

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. Ownership interests of minority interests are recorded as noncontrolling interest. These interim condensed consolidated financial statements are stated in U.S. dollars. Intercompany transactions and balances have been eliminated for consolidation purposes.

Substantially all net revenues, cost of net revenues and operating expenses, are generated in the Company’s foreign operations, amounting to approximately 99.4% and 99.7% of the consolidated amounts during the three-month periods ended March 31, 2014 and 2013 respectively. Long-lived assets and Goodwill located in the foreign operations totaled $176,636,954 and $183,922,432 as of March 31, 2014 and December 31, 2013, respectively.

These interim condensed consolidated financial statements reflect the Company’s consolidated financial position as of March 31, 2014 and December 31, 2013. These financial statements also show the Company’s consolidated statements of income, of comprehensive income and of cash flows for the three-month periods ended March 31, 2014 and 2013. These interim condensed consolidated financial 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 U.S. GAAP for annual consolidated financial statements are not included herein, these unaudited interim condensed financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the three-month period ended December 31, 2013, contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). The condensed consolidated statements of income, of comprehensive income and of cash flows for the periods presented herein are not necessarily indicative of results expected for any future period.
Foreign Currency Translation

Foreign currency translation

All of the Company’s foreign operations have determined the local currency to be their functional currency, except for Venezuela since January 1, 2010, as described below. Accordingly, these foreign subsidiaries translate assets and liabilities from their local currencies into U.S. dollars by using the period-end exchange rates while income and expense accounts are translated at the average rates in effect during the period, unless exchange rates fluctuate significantly during the period, in which case the exchange rates at the date of the transaction are used. The resulting translation adjustment is recorded as a component of other comprehensive income (loss). Gains and losses resulting from transactions denominated in non-functional currencies are recognized in earnings.

According to U.S. GAAP, the Company has transitioned its Venezuelan operations to highly inflationary status as from January 1, 2010, which requires that transactions and balances are re-measured as if the U.S. dollar were the functional currency for such operation.

In February 2013, the Government of Venezuela eliminated the SITME, which was a former system that allowed companies limited access to foreign currencies for payments to foreign suppliers, and devalued the official exchange rate to 6.3 BsF per U.S. dollar. The devaluation required re-measurement of the Company’s Venezuelan subsidiaries’ non-U.S. dollar denominated monetary assets and liabilities at that rate from February 2013 and the mentioned devaluation generated a foreign currency loss amounting to approximately $6.4 million in the first quarter of 2013.

On March 19, 2013, the Venezuelan Central Bank (BCV) announced the creation of the Sistema Complementario de Administración de Divisas (“SICAD 1”), which acts jointly with the Commission for the Administration of Foreign Exchange Control (CADIVI). In order to operate within that system, a company has to be registered at the Registro Automatizado (Automatized Register, or “RUSAD”), and the acquisition of foreign currencies under this system is organized under an auction process to obtain foreign currencies for payments to foreign suppliers, where the minimum exchange rate to be offered was 6.30 BsF per U.S. dollar.

 

During December 2013, the Venezuelan regulation that created the SICAD 1 was amended to expand its use, and to require publication of the average exchange rate implied by transactions settled in SICAD 1 auctions. Additionally, on January 23, 2014, the exchange regulation was amended to include foreign currency sales for certain transactions, such us but not limited to: contracts for leasing and services, use and exploitation of patents, trademarks, foreign investments and payments of royalties, contracts for technology import and technical assistance. Due to the change in rules that provided for the creation of the SICAD 1 system, the official exchange rate remains only available to obtain foreign currency to pay for a limited list of goods considered to be of high priority by the Government, which does not include those relating to the company´s business. So, SICAD 1 is now the primary system to which the company will have to request US dollars to settle its transactions. As a result, the exchange rate the Company uses to re-measure its net monetary asset position and BsF transactions of our Venezuelan operations from January 24, 2014 is the SICAD 1 exchange rate. As of March 31, 2014, the SICAD 1 exchange rate was 10.7 BsF per U.S. dollar. The average exchange rate of the first quarter of 2014 was 10.1 BsF per U.S. dollar. At the date of issuance of these interim condensed consolidated financial statements, the published SICAD 1 exchange rate is 10.0 BsF per U.S. dollar.

In late February 2014, the Venezuelan government issued a decree to open a new exchange control mechanism (“SICAD 2”) that would allow the purchase of foreign currencies, through authorized foreign exchange operators offered by individuals and companies such as Petróleos de Venezuela, S.A. (PDVSA, the oil state-owned corporation of Venezuela), the Central Bank of Venezuela and other public entities authorized by the Ministry of Finance. The Venezuelan government has published operating rules for the new exchange mechanism in Exchange Agreement N° 27, and SICAD 2 began operating on March 24, 2014. The Venezuelan government has indicated that all industry sectors would be able to access SICAD 2. As of March 31, 2014, the SICAD 2 variable exchange rate was 49.81 BsF per U.S. dollar. Although the average rate transacted is being published daily by the Venezuelan Central Bank, there is no information about volumes being transacted and SICAD 2 is considered an alternative mechanism for the entities admitted under SICAD 1.

SICAD 2 does not eliminate or change the official rate of 6.3 BsF per U.S. dollar or the SICAD 1 above-described mechanism. According to current Venezuelan Central Bank regulations, SICAD 1 is still the primary channel to obtain foreign currencies to settle the kind of transactions the Company’s conducts in Venezuela, and for dividend distributions. At the date of this report, it is the Company’s intent to settle transactions requiring conversion to U. S. dollars through the SICAD 1 system, and did not settle transactions through SICAD 2.

Until 2010 the Company was able to obtain U.S. dollars for any purpose, including dividends distribution, using alternative mechanisms other than through the CADIVI. Those U.S. dollars, obtained at a higher exchange rate than the one offered by CADIVI, and held in balance at U.S. bank accounts of our Venezuelan subsidiaries, were used for dividend distributions from our Venezuelan subsidiaries. As of the date of these financial statements, the Company has not obtained U.S. dollars at the official exchange rate, SICAD 1 or SICAD 2 but it expects to be able to access SICAD 1. Our Venezuelan subsidiaries have not requested authorization since 2012 to acquire U.S. dollars to make dividend distributions. The Company has not distributed dividends from our Venezuelan subsidiaries since 2011.

The following table sets forth the assets, liabilities and net assets of the Company’s Venezuelan subsidiaries, before intercompany eliminations, as of March 31, 2014 and December 31, 2013 and net revenues for the three-month periods ended March 31, 2014 and 2013:

 

     Three-month period ended March 31,  
     2014     2013  

Venezuelan operations

     

Net Revenues

    $ 19,356,587      $ 15,130,551   
     March 31,
2014		     December 31,
2013		  

Assets

      125,455,211        126,873,804   

Liabilities

      (51,591,061 )      (62,437,338 ) 
  

 

 

    

 

 

  

Net Assets

    $ 73,864,150      $ 64,436,466   
  

 

 

    

 

 

  

As of March 31, 2014, net assets (before intercompany eliminations) of the Venezuelan subsidiaries amounted to approximately 21.1% of consolidated net assets, and cash and investments of the Venezuelan subsidiaries held in local currency in Venezuela amounted to approximately 8.7% of our consolidated cash and investments.

The Company’s ability to obtain U.S. dollars in Venezuela is negatively affected by the exchange regulations in Venezuela that are described above and elsewhere in these financial statements. In addition, its business and ability to obtain U.S. dollars in Venezuela would be negatively affected by additional material devaluations or the imposition of significant additional and more stringent controls on foreign currency exchange by the Venezuelan government.

Despite the current difficult macroeconomic environment in Venezuela, the Company continues to actively manage, through its Venezuelan subsidiaries, its investment in Venezuela. Based on current operating, political and economic conditions and certain other factors in Venezuela, management currently believes that its business plans and operating strategy in Venezuela will not be materially adversely impacted in the long run.

 

Argentine currency status

The Argentine government has implemented certain measures that control and restrict the ability of companies and individuals to exchange Argentine pesos for foreign currencies. Those measures include, among other things, the requirement to obtain the prior approval from the Argentine Tax Authority of the foreign currency transaction (for example and without limitation, for the payment of non-Argentine goods and services, payment of principal and interest on non-Argentine debt and also payment of dividends to parties outside of the country), which approval process could delay, and eventually restrict, the ability to exchange Argentine pesos for other currencies, such as U.S. dollars. Those approvals are administered by the Argentine Central Bank through the Local Exchange Market (“Mercado Unico Libre de Cambios”, or “MULC”), which is the only market where exchange transactions may be lawfully made.

Further, restrictions also currently apply to the acquisition of any foreign currency for holding as cash within Argentina. Although the controls and restrictions on the acquisition of foreign currencies in Argentina place certain limitations on our current ability to convert cash generated by our Argentine subsidiaries into foreign currencies, based on the current state of Argentine currency rules and regulations, we do not expect that the current controls and restrictions, will have a material adverse effect on our business plans in Argentina or on our overall business, financial condition or results of operations.

Additionally, during January 2014 the Argentinean peso exchange rate against the U.S. dollar increased in approximately 23%, from 6.52 Argentinean Pesos per U.S. dollar as of December 31, 2013 to approximately 8.0 Argentinean Pesos per U.S. dollar. Due to the abovementioned devaluation, during the three-month period ended March 31, 2014, the reported net assets in Argentina decreased in $14,625,451 with the related impact in Other Comprehensive Income and the Company recognized a foreign exchange gain of $4,597,510.
Income Tax Holiday in Argentina

Income Tax Holiday in Argentina

According to Argentine law, from fiscal year 2008, the Company’s Argentine subsidiary has been 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, thus resulting in an effective tax rate in Argentina lower than the income tax law statutory rate. The law expires in September of 2014. As a consequence, the average tax rate for 2014 would be approximately 22% as we expect no income tax holiday during last quarter of fiscal year 2014.

Aggregate tax relief totaled $2,102,342 and $2,493,849 for the three-month periods ended March 31, 2014 and 2013, respectively. Aggregate per share effect of the Argentine tax holiday amounts to $0.05 and $0.06 for the three-month periods ended March 31, 2014 and 2013, respectively.

 

In addition, during fiscal year 2013 the Company acquired a software development company (see Note 4), located in the Province of Cordoba, Argentina, which is also beneficiary of the aforementioned income tax holiday, however the total benefit obtained is immaterial. If the Company had not been granted the Argentine tax holiday, it 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 and on September 9, 2013 the regulatory decree was issued, which established the new requirement to become beneficiary of the new software development law. The new decree establishes compliance requirements with annual incremental ratios related to exports of services and research and development expenses that must be achieved to remain within the tax holiday. The Argentine operation will have to achieve certain required ratios annually under the new software development law.

If we apply and we are successful in being admitted as beneficiaries under the new law, the current income tax relief would decrease, but it is currently estimated that the Argentine effective income tax rate would still be materially lower than the statutory income tax rate. Also, the tax holiday under the new law would last until 2019.

The Industry Secretary resolution which rules, among other provisions, on the mechanism to file the information to obtain the benefits derived from the new software development law was issued in late February 2014, and the Company is currently analyzing its provisions for both applying to qualify under the new law, and the potential effects that this new rule may have on the benefits received under the current law.
Accumulated Other Comprehensive Income

Accumulated other comprehensive income

The following tables summarize the changes in accumulated balances of other comprehensive income for the three-month period ended March 31, 2014 and the year ended December 31, 2013:

 

     March 31,
2014		     December 31,
2013		  

Foreign currency translation

    $ (104,216,669 )    $ (87,481,437 ) 

Unrealized gains on investments

      55,210        36,626   

Estimated tax loss on unrealized gains on investments

      (16,881 )      (11,159 ) 
  

 

 

    

 

 

  
   $ (104,178,340 )    $ (87,455,970 ) 
  

 

 

    

 

 

  

 

     Unrealized
Gains on
Investments		     Foreign
Currency
Translation		     Estimated tax
(expense)
benefit		     Total  

Balances as of December 31, 2013

    $ 36,626      $ (87,481,437 )    $ (11,159 )    $ (87,455,970 ) 

Other comprehensive income before reclassification adjustments for gains on available for sale investments

      55,210        (16,735,232 )      (16,881 )      (16,696,903 ) 

Amount of gain (loss) reclassified from accumulated other comprehensive income to net income

    $ (36,626 )      —        $ 11,159        (25,467 ) 
  

 

 

    

 

 

    

 

 

    

 

 

  

Net current period other comprehensive income

      18,584        (16,735,232 )      (5,722 )      (16,722,370 ) 
  

 

 

    

 

 

    

 

 

    

 

 

  

Balances as of March 31, 2014

    $ 55,210      $ (104,216,669 )    $ (16,881 )    $ (104,178,340 ) 
  

 

 

    

 

 

    

 

 

    

 

 

  

 

Details about Accumulated

Other Comprehensive Income

Components for the three-month

period ended March 31, 2014

    Amount of Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive
Income		    

Affected Line Item
in the Statement of Income

Unrealized gains on investments

    $ 36,626      Interest income and other financial gains

Estimated tax loss on unrealized gains on investments

      (11,159 )    Income / asset tax expense
  

 

 

    

Total reclassifications for the period

    $ 25,467      Total, net of income taxes
Use of Estimates

Use of estimates

The preparation of interim condensed consolidated financial statements in conformity with U.S. GAAP 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 and chargeback provisions, depreciation, amortization, recoverability of goodwill and intangible assets with indefinite useful lives, useful lives of long-lived assets, impairment of short-term and long-term investments, compensation costs relating to the Company’s long term retention plan, recognition of income taxes and contingencies. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements

Recently issued accounting pronouncements

In April 2014, the FASB issued the Accounting Standards Update (“ASU”) N° 2014-8, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the ASU, only disposals that represent a strategic shift that has (or will have) a major effect on the entity’s results and operations would qualify as discontinued operations. In addition, the ASU (1) expands the disclosure requirements for disposals that meet the definition of s discontinued operation, (2) requires entities to disclose information about disposals of individually significant components, and (3) defines “discontinued operations” similarly to how it is defined under IFRS 5, “Non-current Assets Held for Sale and Discontinued Operations”. The standard is required to be adopted in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The Company does not anticipate that this adoption will have a significant impact on its financial position, results of operations or cash flows.