Fair Value Measurement of Assets and Liabilities

6 Months Ended

Jun. 30, 2019

Fair Value Measurement of Assets and Liabilities [Abstract]

Fair Value Measurement of Assets and Liabilities

6. Fair value measurement of assets and liabilities

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2019 and December 31, 2018:


		Quoted Prices in				Quoted Prices in
	Balances as of	active markets for	Significant other	Unobservable	Balances as of	active markets for	Significant other	Unobservable
	June 30,	identical Assets	observable inputs	inputs	December 31,	identical Assets	observable inputs	inputs
Description	2019	(Level 1)	(Level 2)	(Level 3)	2018	(Level 1)	(Level 2)	(Level 3)
	(In thousands)
Assets
Cash and Cash Equivalents:
Money Market Funds	$ 168,741	$ 168,741	$ —	$ —	$ 179,252	$ 179,252	$ —	$ —
Restricted Cash and cash equivalents:
Money Market Funds	9,591	9,591	—		24,363	24,363	—	—
Investments:
Sovereign Debt Securities (Central Bank of Brazil mandatory guarantee)	339,299	339,299	—	—	284,317	284,317	—	—
Sovereign Debt Securities	1,238,880	1,238,880	—	—	429,602	429,602	—	—
Corporate Debt Securities	255	250	5	—	262	237	25	—
Other Assets:
Firm commitments	1,030	—	—	1,030	—	—	—	—
Derivative Instruments	69	—	—	69	—	—	—	—
Total Financial Assets	$ 1,757,865	$ 1,756,761	$ 5	$ 1,099	$ 917,796	$ 917,771	$ 25	$ —
Liabilities:
Contingent considerations	$ 2,135	$ —	$ —	$ 2,135	$ 2,097	$ —	$ —	$ 2,097
Long-term retention plan	49,207	—	49,207	—	42,625	—	42,625	—
Derivative Instruments	1,030	—	—	1,030	—	—	—	—
Total Financial Liabilities	$ 52,372	$ —	$ 49,207	$ 3,165	$ 44,722	$ —	$ 42,625	$ 2,097

As of June 30, 2019 and December 31, 2018, the Company’s financial assets valued at fair value consisted of assets valued using i) Level 1 inputs: unadjusted quoted prices in active markets (Level 1 instrument valuations are obtained from observable inputs that reflect quoted prices (unadjusted) for identical assets in active markets); ii) Level 2 inputs: obtained from readily-available pricing sources for comparable instruments as well as instruments with inactive markets at the measurement date; and iii) Level 3 inputs: valuations based on unobservable inputs reflecting Company assumptions. Fair value of firm commitments and derivative instruments are determined considering the prevailing risk free interest rate and spot exchange rate.

As of June 30, 2019 and December 31, 2018, the Company’s liabilities were valued at fair value using Level 2 inputs and level 3 inputs (valuations based on unobservable inputs reflecting Company assumptions). Fair value of contingent considerations are determined based on the probability of achievement of the performance targets arising from each acquisition, as well as the Company’s historical experience with similar arrangements. Fair value of derivative instruments are determined considering the prevailing risk free interest rate and spot exchange rate.

The unrealized net gains or losses on short-term and long-term investments for which the Company has not elected the fair value option are reported as a component of other comprehensive income. The Company does not anticipate any significant realized losses associated with those investments in excess of the Company’s historical cost.

As of June 30, 2019 and December 31, 2018, the carrying value of the Company’s financial assets and liabilities measured at amortized cost approximated their fair value mainly because of their short-term maturity. These assets and liabilities included cash, cash equivalents, restricted cash and cash equivalents and short-term investments (excluding money markets funds and debt securities), accounts receivable, credit cards receivable, loans receivable, funds payable to customers, other assets (excluding firm commitments and derivative instruments), accounts payable, 2019 Notes (liability component), salaries and social security payable (excluding variable LTRP), taxes payable, provisions and other liabilities (excluding contingent considerations and derivative instruments). The estimated fair value of the 2028 Notes (liability component), which is based on Level 2 inputs, is $627,654 thousands and was determined based on market interest rates. The rest of the loans payable and other financial liabilities and operating lease liabilities approximate their fair value because the effective interest rates are not materially different from market interest rates.

The following table summarizes the fair value level for those financial assets and liabilities of the Company measured at amortized cost as of June 30, 2019 and December 31, 2018:



	Balances as of	Significant other	Balances as of	Significant other
	June 30,	observable inputs	December 31,	observable inputs
	2019	(Level 2)	2018	(Level 2)
	(In thousands)
Assets
Time Deposits	$ 414,777	$ 414,777	$ 20,056	$ 20,056
Accounts receivable	40,175	40,175	35,153	35,153
Credit Cards receivable	433,046	433,046	360,298	360,298
Loans receivable, net	192,881	192,881	95,778	95,778
Other assets	116,233	116,233	102,753	102,753
Total Assets	$ 1,197,112	$ 1,197,112	$ 614,038	$ 614,038
Liabilities
Accounts payable and accrued expenses	$ 314,703	$ 314,703	$ 266,759	$ 266,759
Funds payable to customers	778,128	778,128	640,954	640,954
Salaries and social security payable	52,448	52,448	40,942	40,942
Taxes payable	45,672	45,672	31,058	31,058
Operating lease liabilities	161,512	161,512	—	—
Loans payable and other financial liabilities (*)	782,653	846,875	735,177	735,177
Other liabilities	64,395	64,395	51,509	51,509
Total Liabilities	$ 2,199,511	$ 2,263,733	$ 1,766,399	$ 1,766,399

(*) The fair value of the 2019 Notes and the 2028 Notes (including the equity component) are disclosed in Note 9.

As of June 30, 2019 and December 31, 2018, the Company held no direct investments in auction rate securities and does not have any non-financial assets or liabilities measured at fair value.

‎

As of June 30, 2019 and December 31, 2018, the fair value of money market funds, short and long-term investments classified as available for sale securities are as follows:



	June 30, 2019
	Cost	Gross Unrealized Gains⁽¹⁾	Gross Unrealized Losses⁽¹⁾	Financial Gains	Estimated Fair Value

	(In thousands)
Cash and cash equivalents
Money Market Funds	$ 168,741	$ —	$ —	$ —	$ 168,741
Total Cash and cash equivalents	$ 168,741	$ —	$ —	$ —	$ 168,741

Restricted cash and cash equivalents
Money Market Funds	$ 9,591	$ —	$ —	$ —	$ 9,591
Total Restricted cash and cash equivalents	$ 9,591	$ —	$ —	$ —	$ 9,591

Short-term investments
Sovereign Debt Securities (Central Bank of Brazil mandatory guarantee) (*)	$ 337,301	$ —	$ —	$ 1,998	$ 339,299
Sovereign Debt Securities (**)	1,032,882	599	—	1,723	1,035,204
Corporate Debt Securities	74	—	—	—	74
Total Short-term investments	$ 1,370,257	$ 599	$ —	$ 3,721	$ 1,374,577

Long-term investments
Sovereign Debt Securities	$ 201,250	$ 2,425	$ —	$ 1	$ 203,676
Corporate Debt Securities	179	2	—	—	181
Total Long-term investments	$ 201,429	$ 2,427	$ —	$ 1	$ 203,857


Total	$ 1,750,018	$ 3,026	$ —	$ 3,722	$ 1,756,766

(1) Unrealized gains (losses) from securities are attributable to market price movements, net foreign exchange losses and foreign currency translation. Management does not believe any remaining significant unrealized losses represent other-than-temporary impairments based on the evaluation of available evidence including the credit rating of the investments, as of June 30, 2019.

(*) Brazilian government bonds measured at fair value with impact on the consolidated statement of income for the application of the fair value option. (See Note 2 – Fair value option applied to certain financial instruments)

(**) Includes $809,380 thousands of U.S treasury notes measured at fair value with impact on the consolidated statement of income for the application of the fair value option. (See Note 2 – Fair value option applied to certain financial instruments)

‎


	December 31, 2018
	Cost	Gross Unrealized Gains⁽¹⁾	Gross Unrealized Losses⁽¹⁾	Estimated Fair Value

	(In thousands)
Cash and cash equivalents
Money Market Funds	$ 179,252	$ —	$ —	$ 179,252
Total Cash and cash equivalents	$ 179,252	$ —	$ —	$ 179,252

Restricted Cash and cash equivalents
Money Market Funds	$ 24,363	$ —	$ —	$ 24,363
Total Restricted Cash and cash equivalents	$ 24,363	$ —	$ —	$ 24,363

Short-term investments
Sovereign Debt Securities (Central Bank of Brazil mandatory guarantee)	$ 282,752	$ 1,565	$ —	$ 284,317
Sovereign Debt Securities	156,910	237	—	157,147
Corporate Debt Securities	21	—	—	21
Total Short-term investments	$ 439,683	$ 1,802	$ —	$ 441,485

Long-term investments
Sovereign Debt Securities	$ 271,024	$ 1,431	$ —	$ 272,455
Corporate Debt Securities	244	—	(3)	241
Total Long-term investments	$ 271,268	$ 1,431	$ (3)	$ 272,696

Total	$ 914,566	$ 3,233	$ (3)	$ 917,796

(1)Unrealized gains (losses) from securities are attributable to market price movements, net foreign exchange losses and foreign currency translation. Management does not believe any remaining significant unrealized losses represent other-than-temporary impairments based on the evaluation of available evidence including the credit rating of the investments, as of December 31, 2018.

The material portion of the Sovereign Debt Securities consists of U.S. Treasury Notes, which carry no significant risk.

Sovereign Debt Securities (Central Bank of Brazil mandatory guarantee)

On November 1, 2018, the Company obtained the approval from the Central Bank of Brazil to operate as an authorized payment institution. With the authorization, Mercado Pago in Brazil is subject to the supervision of the Central Bank of Brazil and must fully comply with all the obligations established in the current regulation. Among other obligations, the regulation requires authorized payment institutions to hold the balance available in the payment institution account in either in a specific account of Central Bank of Brazil that does not pay interest or in Brazilian federal government bonds registered with the “Sistema Especial de Liquidacao e Custodia”. The percentage of the electronic currency that must be deposited was 100% and 80% as of June 30, 2019 and December 31, 2018, respectively. As of June 30, 2019 and December 31, 2018 and in accordance with the regulation, the Company held $339,299 thousands and $284,317 thousands deposited in Brazilian federal government bonds, respectively, as mandatory guarantee.

As of June 30, 2019, the estimated fair values (in thousands of U.S. dollars) of money market funds and short-term and long-term investments classified by their effective maturities are as follows:


One year or less		1,552,909
One year to two years		203,672
Two years to three years		52
Three years to four years		54
Four years to five years		79
Total		$ 1,756,766

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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