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Summary of significant accounting policies | 6 Months Ended
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Jun. 30, 2023
Accounting Policies [Abstract] |
Summary of significant accounting policies | 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, its wholly-owned subsidiaries and consolidated Variable Interest Entities (“VIE”). Investments in entities where the Company holds joint control, but not control, over the investee are accounted for using the equity method of accounting. These unaudited interim condensed consolidated financial statements are stated in U.S. dollars, except where otherwise indicated. Intercompany transactions and balances with subsidiaries 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. Long-lived assets, intangible assets and goodwill and operating lease right-of-use assets located in the foreign jurisdictions totaled $2,045 million and $1,817 million as of June 30, 2023 and December 31, 2022, respectively. These unaudited interim condensed consolidated financial statements reflect the Company’s consolidated financial position as of June 30, 2023 and December 31, 2022. These unaudited interim condensed consolidated financial statements include the Company’s consolidated statements of income, comprehensive income and equity for the six and three-month periods ended June 30, 2023 and 2022 and statements of cash flows for the six-month periods ended June 30, 2023 and 2022. These unaudited 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 consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2022, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission (“SEC”) (the “Company’s 2022 10-K”). The Company has evaluated all subsequent events through the date these unaudited condensed consolidated financial statements were issued. The unaudited interim condensed consolidated statements of income, comprehensive income, equity and cash flows for the periods presented herein are not necessarily indicative of results expected for any future period. For a more detailed discussion of the Company’s significant accounting policies, see Note 2 to the financial statements in the Company’s 2022 10-K. During the six-month period ended June 30, 2023, there were no material updates made to the Company’s significant accounting policies. Use of estimates The preparation of these unaudited 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, inventories valuation reserves, recoverability of goodwill, intangible assets with indefinite useful lives and deferred tax assets, impairment of short-term and long-term investments, impairment of long-lived assets, separation of lease and non lease components for aircraft leases, compensation costs relating to the Company’s long term retention program, fair value of convertible debt, fair value of investments, fair value of loans receivable, fair value of derivative instruments, income taxes and contingencies and determination of the incremental borrowing rate at commencement date of lease operating agreements. Actual results could differ from those estimates. Revenue recognition Revenue recognition criteria for the services provided and goods sold by the Company are described in Note 2 to the consolidated financial statements in the Company’s 2022 10-K. The aggregate gain included in “Fintech services” revenues arising from financing transactions and sales of financial assets, net of the costs recognized on sale of credit card receivables, is $676 million and $340 million for the six and three-month periods ended June 30, 2023 and $490 million and $263 million for the six and three-month periods ended June 30, 2022, respectively. Contract Balances Timing of revenue recognition may differ from the timing of invoicing to customers. Receivables represent amounts invoiced and revenue recognized prior to invoicing when the Company has satisfied the performance obligation and has the unconditional right to payment. Accounts receivable and credit cards receivable and other means of payments are presented net of allowance for doubtful accounts and chargebacks of $34 million and $25 million as of June 30, 2023 and December 31, 2022, respectively. The allowance for doubtful accounts with respect to the Company’s loans receivable amounts to $1,136 million and $1,112 million as of June 30, 2023 and December 31, 2022, respectively, which includes $13 million and $8 million, respectively, related to unused agreed loan commitment on credit cards portfolio presented in Other liabilities of the unaudited interim condensed consolidated balance sheets. Deferred revenue consists of fees received related to unsatisfied performance obligations at the end of the period in accordance with Accounting Standards Codification (“ASC”) 606. Due to the generally short-term duration of contracts, the majority of the performance obligations are satisfied in the following months. Deferred revenue as of December 31, 2022 was $44 million, of which $24 million was recognized as revenue during the six-month period ended June 30, 2023. As of June 30, 2023, total deferred revenue was $56 million, mainly due to fees related to classifieds advertising services billed and loyalty programs that are expected to be recognized as revenue in the coming months. Foreign currency translation All of the Company’s foreign operations have determined the local currency to be their functional currency, except for Argentina, which has used the U.S. dollar as its functional currency since July 1, 2018. Accordingly, the foreign subsidiaries with local currency as functional currency translate assets and liabilities from their local currencies into U.S. dollars by using period-end exchange rates while income and expense accounts are translated at the average monthly 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). Net foreign currency transaction results are included in the unaudited interim condensed consolidated statements of income under the caption “Foreign currency losses, net”. Argentine currency status As of July 1, 2018, the Company transitioned its Argentine operations to highly inflationary status in accordance with U.S. GAAP, and changed the functional currency for Argentine subsidiaries from Argentine Pesos to U.S. dollars, which is the functional currency of their immediate parent company. Argentina’s inflation rate for the six-month periods ended June 30, 2023 and 2022 was 50.7% and 36.2%, respectively. The Company uses Argentina’s official exchange rate to account for transactions in the Argentine segment, which as of June 30, 2023 and December 31, 2022 was 256.70 and 177.16 Argentine Pesos, respectively, against the U.S. dollar. For the six-month periods ended June 30, 2023 and 2022, Argentina’s depreciation of its local currency against the U.S. dollar was 44.9% and 21.9%, respectively. The following table sets forth the assets, liabilities and net assets of the Company’s Argentine subsidiaries and consolidated VIEs, before intercompany eliminations, as of June 30, 2023 and December 31, 2022:
| June 30, 2023 |  | December 31, 2022
| (In millions)
Assets | $ | 3,696 |  |  | $ | 3,238 |
Liabilities | 2,486 |  |  | 2,419 |
Net Assets | $ | 1,210 |  |  | $ | 819 |
The following table provides information relating to net revenues and direct contribution (see Note 8 of these unaudited interim condensed consolidated financial statements for definition of direct contribution) for the six and three-month periods ended June 30, 2023 and 2022 of the Company’s Argentine subsidiaries and consolidated VIEs:
| Six Months Ended June 30, |  | Three Months Ended June 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
| (In millions) |  | (In millions)
Net revenues | $ | 1,492 |  |  | $ | 1,112 |  |  | $ | 771 |  |  | $ | 594 |
Direct contribution | 644 |  |  | 420 |  |  | 335 |  |  | 222 |
Argentine Exchange regulations Since the second half of 2019, the Argentine government instituted exchange controls restricting the ability of companies and individuals to exchange Argentine Pesos for foreign currencies and their ability to remit foreign currency out of Argentina. An entity’s authorization request to the Central Bank of Argentina (“CBA”) to access the official exchange market to make foreign currency payments may be denied depending on the circumstances. As a result of these exchange controls, markets in Argentina developed trading mechanisms, in which an entity or individual buys U.S. dollar denominated securities in Argentina (i.e. shares, sovereign debt) using Argentine pesos, and subsequently sells the securities for U.S. dollars, in Argentina, to access U.S. dollars locally, or outside Argentina, by transferring the securities abroad, prior to being sold (the latter commonly known as “Blue Chip Swap Rate”). The Blue Chip Swap Rate has diverged significantly from Argentina’s official exchange rate (commonly known as exchange spread). In recent years, the Blue Chip Swap Rate has been higher than Argentina’s official exchange rate. As of June 30, 2023 and December 31, 2022, the spread of the Blue Chip Swap was 93.1% and 94.2%, respectively (see Note 16 of these unaudited interim condensed consolidated financial statements). As part of the exchange controls, since 2019, the Argentine government imposes a tax on the acquisition of foreign currency through the official exchange market in certain circumstances. On July 24, 2023, through the Executive Power Decree No. 377/2023, the Argentine government extended the application of this tax to the following cases: (i) certain services acquired from abroad or services rendered by foreign residents in Argentina (i.e. technical, legal, accounting, management, advertising, engineering, audiovisual services, among others), which will be subject to a 25% tax rate, (ii) freight and other transportation services for import and export of goods, which will be subject to a 7.5% tax rate; and (iii) imported goods, which will be subject to a 7.5% tax rate, with certain exemptions (such as fuels and products of the basic food basket). Income taxes Income taxes’ accounting policy is described in Note 2 to the consolidated financial statements in the Company’s 2022 10-K. The Company’s consolidated estimated effective tax rate for the six and three-month periods ended June 30, 2023 increased as compared to the same periods in 2022. This was a result of (i) taxable foreign exchange gains accounted for local tax purposes, which are not recorded for accounting purposes since Argentina’s operations functional currency is the U.S. dollar due to the country’s highly inflationary status, (ii) a higher proportion of pre-tax results arising from entities under general income tax treatment regime over the Brazilian segment as compared to the same period in 2022, and (iii) higher non-deductible foreign exchange losses related to the acquisition of our own common stock in the Argentine market. Based on Management’s assessment, the Company maintained a valuation allowance on deferred tax assets of $415 million and $360 million as of June 30, 2023 and December 31, 2022, respectively. This valuation allowance includes $176 million and $156 million to fully reserve the outstanding U.S. foreign tax credits as of June 30, 2023 and December 31, 2022, respectively. During the six-month period ended June 30, 2023, the Company increased its valuation allowance mainly on U.S foreign tax credits by $20 million and in certain subsidiaries in its Mexican operations by $32 million. Knowledge-based economy promotional regime in Argentina In August 2021, the Under Secretariat of Knowledge Economy issued the Disposition 316/2021 approving MercadoLibre S.R.L.’s application for eligibility under the knowledge-based economy promotional regime, established by the Law No. 27,506 and complemented by Argentina’s Executive Power Decree No. 1034/2020, Argentina’s Ministry of Productive Development’s Resolution No. 4/2021 and the Under Secretariat of Knowledge Economy’s Disposition No. 11/2021. As a result, the Company recorded an income tax benefit of $21 million and $11 million, and $4 million and $3 million during the six and three-month periods ended June 30, 2023 and 2022, respectively. The aggregate per share effect of the income tax benefit amounted to $0.42 and $0.23, and $0.08 and $0.06 for the six and three-month periods ended June 30, 2023 and 2022, respectively. Furthermore, the Company recorded a social security benefit of $33 million and $15 million, and $26 million and $11 million during the six and three-month peri ods ended June 30, 2023 and 2022, respectively. Fair value option applied to certain financial instruments Under ASC 825, U.S. GAAP provides an option to elect fair value with impact on the statement of income as an alternative measurement for certain financial instruments and other items on the balance sheet. The Company has elected to measure certain financial assets at fair value with impact on the statement of income for several reasons including to avoid the mismatch generated by the recognition of certain linked instruments / transactions, separately, in the unaudited interim condensed consolidated statement of income and unaudited interim condensed consolidated statement of comprehensive income and to better reflect the financial model applied for selected instruments. The Company’s election of the fair value option applies to the: i) Brazilian federal government bonds and ii) U.S. treasury notes. Accumulated other comprehensive loss The following tables summarize the changes in accumulated balances of other comprehensive income (loss) for the six-month periods ended June 30, 2023 and 2022:
| Unrealized (Loss) Gains on hedging activities, net |  | Foreign Currency Translation |  | Estimated tax benefit (expense) |  | Total
| (In millions)
Balances as of December 31, 2022 | $ | (5) |  |  | $ | (462) |  |  | $ | 3 |  |  | $ | (464) |
Other comprehensive income (loss) before reclassifications | (10) |  |  | 175 |  |  | 3 |  |  | 168 |
Amount of (gain) loss reclassified from accumulated other comprehensive income (loss) | 2 |  |  | — |  |  | (1) |  |  | 1 |
Net current period other comprehensive income (loss) | (8) |  |  | 175 |  |  | 2 |  |  | 169 |
Balances as of June 30, 2023 | $ | (13) |  |  | $ | (287) |  |  | $ | 5 |  |  | $ | (295) |
| Unrealized Gains (Loss) on hedging activities, net |  | Foreign Currency Translation |  | Estimated tax benefit (expense) |  | Total
| (In millions)
Balances as of December 31, 2021 | $ | 8 |  |  | $ | (523) |  |  | $ | — |  |  | $ | (515) |
Other comprehensive income (loss) before reclassifications | (24) |  |  | 38 |  |  | 5 |  |  | 19 |
Amount of (gain) loss reclassified from accumulated other comprehensive income (loss) | 9 |  |  | — |  |  | (2) |  |  | 7 |
Net current period other comprehensive income (loss) | (15) |  |  | 38 |  |  | 3 |  |  | 26 |
Balances as of June 30, 2022 | $ | (7) |  |  | $ | (485) |  |  | $ | 3 |  |  | $ | (489) |
The following table provides details about reclassifications out of accumulated other comprehensive loss for the six months ended June 30, 2023 and 2022:
Details about Accumulated Other Comprehensive loss Components | Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive loss |  | Affected Line Item in the Statement of Income
| Six Months Ended June 30, |  |
| 2023 |  | 2022 |  |
| (In millions) |  |
Unrealized losses on hedging activities | $ | (2) |  |  | $ | (9) |  |  | Cost of net revenues, interest expense and foreign currency losses
Estimated tax benefit on unrealized losses | 1 |  |  | 2 |  |  | Income tax expense
Total reclassifications for the period | $ | (1) |  |  | $ | (7) |  |  | Total, net of income taxes
Recently Adopted Accounting Standards On October 28, 2021, the FASB issued the Accounting Standards Update (“ASU”) 2021-08 “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.” The amendments in this update improve comparability for the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination by specifying for all acquired revenue contracts regardless of their timing of payment (1) the circumstances in which the acquirer should recognize contract assets and contract liabilities that are acquired in a business combination and (2) how to measure those contract assets and contract liabilities. The amendments provide consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. The Company adopted this standard effective as of January 1, 2023 and it did not have a material impact on the Company’s financial statements. On March 31, 2022, the FASB issued the ASU 2022-02 “Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures (Topic 326): Financial Instruments – Credit Losses,” which eliminates the accounting guidance on TDRs, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, the guidance requires disclosure of current-period gross write-offs by year of origination for financing receivables and net investment in leases. The amendments should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, where an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. The Company adopted this standard effective as of January 1, 2023 and it did not have a material impact on the Company’s financial statements. On September 29, 2022, the FASB issued the ASU 2022-04 “Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations.” The amendments in this update require entities that use supplier finance programs in connection with the purchase of goods and services to disclose the key terms of the programs and information about their obligations outstanding at the end of the reporting period, including a rollforward of those obligations. The guidance does not affect the recognition, measurement or financial statement presentation of supplier finance program obligations. The Company adopted this standard effective as of January 1, 2023, except for the rollforward requirement, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The guidance should be applied retrospectively to all periods in which a balance sheet is presented, except for the rollforward requirement, which should be applied prospectively. The Company and certain financial institutions participate in a supplier finance program (“SFP”) that enables certain of the Company’s suppliers, at their own election, to request the payment of their invoices to the financial institutions earlier than the terms stated in the Company’s payment policy. Suppliers’ voluntary inclusion of invoices in the SFP does not change the Company’s payment terms, the amounts paid or liquidity. The Company has no economic interest in a supplier’s decision to participate in the SFP and has no financial impact in connection with the SFP. As of June 30, 2023 and December 31, 2022, the obligations outstanding that the Company has confirmed as valid to the financial institutions amounted to $273 million and $227 million, respectively, and are included in the unaudited interim condensed consolidated balance sheets within accounts payable and accrued expenses line. Recently issued accounting pronouncements not yet adopted As of the date of issuance of these unaudited interim condensed consolidated financial statements there were no accounting pronouncements issued not yet adopted expected to have a material impact on the Company’s financial statements.

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