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Summary of significant accounting policies | 6 Months Ended
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Jun. 30, 2014
Accounting Policies [Abstract] |
Summary of significant accounting policies |
2. | Summary of significant accounting policies
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 99.6% of the consolidated amounts during the six-month periods ended June 30, 2014 and 2013. Long-lived assets and Goodwill located in the foreign operations totaled $167,538,600 and $183,922,432 as of June 30, 2014 and December 31, 2013, respectively. These interim condensed consolidated financial statements reflect the Company’s consolidated financial position as of June 30, 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 six and three-month periods ended June 30, 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 year 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 Venezuelan currency status 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. On February 9, 2013, the Venezuelan Central Bank (“BCV”) eliminated the SITME and devalued the official exchange rate used to re-measure our Venezuelan subsidiaries’ non-U.S. dollar denominated monetary assets and liabilities as from February 9, 2013 to 6.3 BsF (Bolivares Fuertes) per U.S. dollar. The effect of using the devalued official rate of 6.3 BsF per U.S. dollar generated a foreign currency loss that amounted to $6.4 million in the first quarter of 2013. On March 19, 2013, the 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 this system, a company should be registered at the Registro Automatizado (Automatized Register, or RUSAD). 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 is 6.3 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 as 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. As a consequence, SICAD 1 became, from that moment, the primary system to which the Company would have to request U.S. dollars to settle its transactions. As a result, from January 24 to May 15, 2014, the exchange rate used to re-measure the Company’s net monetary asset position in BsF and BsF transactions of its Venezuelan operations was the SICAD 1 exchange rate. In late February 2014, the Venezuelan government issued a decree to open a new exchange control mechanism (“SICAD 2”) that should allow the purchase of foreign exchange 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 Venezuelan Central Bank (“BCV”) 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. Since implementation of the SICAD 1 system, the Company was unsuccessful in gaining access to U.S. dollars through SICAD 1. As a result of this ongoing lack of access to the SICAD 1 auction system, on May 16, 2014, the Company decided to start requesting U.S. dollars through the SICAD 2 mechanism. The SICAD 2 system is an open mechanism that permits any company to request dollars for any purpose. Consequently, the Company is eligible for and has been granted, U.S. dollars through the SICAD 2 mechanism. As a consequence of the determination to obtain U.S. dollars through SICAD 2 and the lack of access to SICAD 1 since May 16, 2014, the Company concluded that the SICAD 2 exchange rate should be used to re-measure their bolivar-denominated monetary assets and liabilities in BsF and to re-measure the results of its Venezuelan operations, effective as of May 16, 2014. As a consequence, the Company has recorded a foreign exchange loss of $16.5 million during the second quarter of 2014. As of June 30, 2014 the SICAD 2 exchange rate was 49.98 BsF per U.S. dollar. In light of the current economic conditions in Venezuela, and the determination to access SICAD 2 and re-measure the BsF denominated monetary assets and liabilities of its Venezuelan subsidiaries, and the lower U.S. dollar-equivalent cash flows now expected from the Venezuelan business, the Company reviewed the long-lived assets, goodwill and intangible assets with indefinite useful life for impairment, including considering the current expected use of these assets in light of this foregoing. The Company owns two office spaces in Venezuela that had expected to use to support the main operating activities in that country. However, due to the current conditions, the Company now intends to rent these office spaces to third parties to generate rental income and will consider opportunities for disposal of these assets if real estate market conditions are favorable. Because the Company has concluded that the carrying value of these two real estate properties will not be recoverable, the Company has recorded an impairment of long-lived assets of $49,495,686 during May 2014. The carrying amount has been adjusted to its estimated fair value of approximately $22 million. 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. 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 June 30, 2014 and December 31, 2013 and net revenues for the six-month periods ended June 30, 2014 and 2013:
|  | Six-month periods ended June 30, |
|  | 2014 |  |  | 2013 |
Venezuelan operations |  |  |  |  |  |  |  |
Net Revenues |  | $ | 35,908,018 |  |  | $ | 32,694,097 |
|  | June 30, 2014 |  |  | December 31, 2013 |
Assets |  |  | 59,760,695 |  |  |  | 126,873,804 |
Liabilities |  |  | (36,209,130 | ) |  |  | (62,437,338 | )
Net Assets |  | $ | 23,551,565 |  |  | $ | 64,436,466 |
As of June 30, 2014, net assets (before intercompany eliminations) of the Venezuelan subsidiaries amounted to approximately 7.0% of consolidated net assets, and cash and investments of the Venezuelan subsidiaries held in local currency in Venezuela amounted to approximately 1.6% 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. Regardless the current operating, political and economic conditions and certain other factors in Venezuela, management currently plans to continue supporting its Business in Venezuela 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 first quarter of 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. As of June 30, 2014, the Argentinean Peso exchange rate was $8.13 per U.S. dollar. 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 benefit totaled $1,496,827 and $2,275,176 for the three-month periods ended June 30, 2014 and 2013, respectively, while for the six-month periods ended at such dates amounted to $3,599,169 and $4,769,024, respectively. Aggregate per share effect of the Argentine tax holiday amounted to $0.03 and $0.05 for the three-month periods ended June 30, 2014 and 2013, respectively, while for the six-month periods ended at such dates amounted to $0.08 and $0.11, 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 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. During May 2014, the Company presented all the required documentation in order to apply for the new software development law. At the date of issuance of these interim condensed consolidated financial statements, the Industry Secretary resolution which approves the Company’s application is still pending. Accumulated other comprehensive income The following table sets forth the Company’s accumulated other comprehensive income as of June 30, 2014 and the year ended December 31, 2013:
|  | June 30, 2014 |  |  | December 31, 2013 |
Foreign currency translation |  | $ | (103,583,097 | ) |  | $ | (87,481,437 | )
Unrealized gains on investments |  |  | 178,019 |  |  |  | 36,626 |
Estimated tax loss on unrealized gains on investments |  |  | (56,125 | ) |  |  | (11,159 | )
|  | $ | (103,461,203 | ) |  | $ | (87,455,970 | )
The following tables summarize the changes in accumulated balances of other comprehensive income for the six-month period ended June 30, 2014 and the year ended December 31, 2013:
|  | 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 |  |  | 178,019 |  |  |  | (16,101,660 | ) |  |  | (56,125 | ) |  |  | (15,979,766 | )
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 |  |  | 141,393 |  |  |  | (16,101,660 | ) |  |  | (44,966 | ) |  |  | (16,005,233 | )
Balances as of June 30, 2014 |  | $ | 178,019 |  |  | $ | (103,583,097 | ) |  | $ | (56,125 | ) |  | $ | (103,461,203 | )
Details about Accumulated Other Comprehensive Income Components for the three-month period ended June 30, 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
Impairment of long-lived assets The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. As explained in the section “Foreign Currency Translation” of the present Note to these interim condensed consolidated financial statements, as a consequence of an ongoing lack of access to SICAD 1 auction system, on May 16, 2014 the Company decided to start requesting U.S. dollars through the SICAD 2 mechanism and use the SICAD 2 exchange rate to re-measure its Bolivar-denominated monetary assets and liabilities in BsF and to re-measure the result of its Venezuelan operations, effective as of May 16, 2014. Considering this change in facts and circumstances and the lower U.S. dollar-equivalent cash flows now expected from our Venezuelan business, and their expected current use in the new context (receive rental income instead of using the long-lived assets to support the Company’s future growth of operations in Venezuela), the Company compared the carrying amount of the long-lived assets with the expected undiscounted future net cash flows and concluded that two office spaces held in Caracas, Venezuela, should be impaired. As a consequence, the Company estimated the fair value of the impaired long-lived assets and recorded an impairment loss of $49,495,686 during the three-month period ended June 30, 2014. Convertible Senior Notes On June 30, 2014, the Company issued $330 million of 2.25% convertible senior notes due 2019 (the “Notes”). The Notes are unsecured, unsubordinated obligations of the Company, which pay interest in cash semi-annually, on January 1 and July 1, at a rate of 2.25% per annum. The Notes will mature on July 1, 2019 unless earlier repurchased or converted in accordance with their terms prior to such date. The Notes may be converted, under specific conditions, based on an initial conversion rate of 7.9353 shares of common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $126.02 per share of common stock), subject to adjustment as described in the indenture governing the Notes. Prior to January 1, 2019, the Notes will be convertible only upon the occurrence of certain events and during certain periods, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date of the Notes. The conversion rate is subject to customary anti-dilution adjustments. Following certain corporate events described in the Indenture that occur prior to the maturity date, the conversion rate will be increased for a holder who elects to convert its Notes in connection with such corporate event in certain circumstances. The Indenture contains customary terms and covenants, including that upon certain events of default occurring and continuing, either the Trustee or the holders of at least 25% in principal amount of the outstanding Notes may declare 100% of the principal of, and accrued and unpaid interest on, all the Notes to be due and payable. In accordance with ASC 470-20 Debt with Conversion and Other Options, the convertible debt instrument within the scope of the cash conversion subsection, was separated into debt and equity components at issuance and a fair value was assigned. The value assigned to the debt component was the estimated fair value, as of the issuance date, of a similar debt without the conversion feature. As of June 30, 2014, the Company determined the fair value of the liability component of the Notes based on market data that was available for senior, unsecured nonconvertible corporate bonds issued by comparable companies. The difference between the cash proceeds and this estimated fair value, represents the value assigned to the equity component and was recorded as a debt discount. The debt discount is amortized using the effective interest method from the origination date through its stated contractual maturity date. The initial debt component of the Notes was valued at $283,015,125, based on the contractual cash flows discounted at an appropriate market rate for a non-convertible debt at the date of issuance, which was determined to be 5.55%. The carrying value of the permanent equity component reported in additional paid-in-capital was initially valued at $46,984,875. The effective interest rate after allocation of transaction costs to the liability component is 6.10% and is used to amortize the debt discount and transaction costs. In connection with the issuance of the Notes, the Company paid approximately $19,668,000 to enter into capped call transactions with respect to its common shares (the “Capped Call Transactions”), with certain financial institutions. The Capped Call Transactions are expected generally to reduce the potential dilution upon conversion of the Convertible Notes and / or offset any cash payments the Company may be required to make in excess of the principal amount of any converted notes in the event that the market price of the common shares is greater than the strike price of the Capped Call Transactions, initially set at $126.02 per common share, which corresponds to the initial conversion price of the Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Notes, and have a cap price of approximately $155.81 per common share. The $19,668,000 cost of the capped call transactions, which net of deferred income tax effect amounts to $12,784,200, is included as a net reduction to additional paid-in capital in the stockholders’ equity section of our consolidated balance sheets. For more detailed information in relation to the Notes and the Capped Call transactions, see Note 9 to these interim condensed consolidated financial statements. 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 life, useful life of long-lived assets, impairment of short-term and long-term investments, impairment of long-lived assets, compensation costs, relating to the Company’s long term retention plan, fair value of convertible debt note, recognition of income taxes and contingencies. Actual results could differ from those estimates. 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. On May 28, 2014, the FASB issued the Accounting Standard Update (“ASU”) N° 2014-09, “Revenue contracts with clients”, which changes in the timing of revenue recognition, includes variable consideration in the transaction price prior to resolution of contingencies, allocates the transaction price based on standalone selling price, among other changes. This standard is required to be adopted for annual reporting periods beginning after December 15, 2016 for public entities, no early adoption is permitted. The Company is assessing the effects that the adoption of this accounting pronouncement will have on the Company’s financial position, results of operations or cash flows.

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