Document/ExhibitDescriptionPagesSize 1: 20-F/A Amendment to Annual Report of a Foreign Private HTML 664K Issuer
2: EX-12.1 Statement re: Computation of Ratios HTML 12K
3: EX-12.2 Statement re: Computation of Ratios HTML 12K
(Name, Telephone, Email and/or
Facsimile number and Address of Company Contact
Person)
Securities registered or to be
registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Class A ordinary shares, par value US$0.00005
per share
The NASDAQ Stock Market LLC*
(The NASDAQ Global Select Market)
Securities registered or to be
registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a
reporting obligation pursuant to Section 15(d) of the
Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the
Issuer’s classes of capital or common stock as of the close
of the period covered by the annual report.
27,045,340 Class A ordinary shares and 7,804,332
Class B ordinary shares, par value US$0.00005 per share, as
of December 31, 2010.
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934. Yes o No þ
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2
of the Exchange Act. (Check one):
Large
accelerated
filer þ
Accelerated
filer o
Non-accelerated
filer o
Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this
filing:
U.S. GAAP þ
International Financial Reporting Standards as issued by the
International Accounting
Standards Board o Other o
If “Other” has been checked in response to the
previous question, indicate by check mark which financial
statement item the registrant has elected to follow.
Item 17 o
Item 18 o
If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12,
13 or 15(d) of the Securities Exchange Act of 1934 subsequent to
the distribution of securities under a plan confirmed by a
court. Yes o No o
*
Not for trading, but only in
connection with the listing on The NASDAQ Global Select Market
of American depositary shares (“ADSs”). Currently, 10
ADSs represent one Class A ordinary share.
This Amendment No. 1 on
Form 20-F/A
(this “Amendment No. 1”) to our annual report on
Form 20-F
for the year ended December 31, 2010, filed with the
Securities and Exchange Commission on March 29, 2011 (the
“2010
Form 20-F”),
is filed solely for the purposes of correcting a clerical error
in the 2010
Form 20-F.
The electronic signature of Ernst & Young Hua Ming was
inadvertently omitted from the Report of Independent Registered
Public Accounting Firm, included in Item 8A and from the
Report of Independent Registered Public Accounting Firm included
in Item 15 in the 2010
Form 20-F.
As required by
Rule 12b-15
of the Securities and Exchange Act of 1934, as amended, the
Company is also filing as exhibits to Amendment No. 1 the
certifications required under Section 302 of the
Sarbanes-Oxley Act of 2002.
This Amendment No. 1 speaks as of the filing date of the
2010
Form 20-F
on March 29, 2011. Other than as set forth above, this
Amendment No. 1 does not, and does not purport to, amend,
update or restate any other information or disclosure included
in the 2010
Form 20-F
or reflect any events that have occurred since March 29,2011.
Our management, with the participation of our chief executive
officer and chief financial officer, has performed an evaluation
of the effectiveness of our disclosure controls and procedures
(as defined in
Rule 13a-15(e)
under the Exchange Act) as of the end of the period covered by
this report, as required by
Rule 13a-15(b)
under the Exchange Act.
Based upon that evaluation, our management has concluded that,
as of December 31, 2010, our disclosure controls and
procedures were effective in ensuring that the information
required to be disclosed by us in the reports that we file and
furnish under the Exchange Act was recorded, processed,
summarized and reported, within the time periods specified in
the SEC’s rules and forms, and that the information
required to be disclosed by us in the reports that we file or
submit under the Exchange Act is accumulated and communicated to
our management, including our chief executive officer and chief
financial officer, to allow timely decisions regarding required
disclosure.
Management’s
Annual Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined
in
Rule 13a-15(f)
under the Exchange Act. Our management evaluated the
effectiveness of our internal control over financial reporting,
as required by
Rule 13a-15(c)
of the Exchange Act, based on criteria established in the
framework in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation, our management has
concluded that our internal control over financial reporting was
effective as of December 31, 2010.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. In
addition, projections of any evaluation of effectiveness of our
internal control over financial reporting to future periods are
subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with
the policies and procedures may deteriorate.
Our independent registered public accounting firm,
Ernst & Young Hua Ming, has audited the effectiveness
of our internal control over financial reporting as of
December 31, 2010, as stated in its report, which appears
on
page F-2
of this annual report on
Form 20-F.
Changes
in Internal Control over Financial Reporting
There were no changes in our internal controls over financial
reporting that occurred during the period covered by this annual
report on
Form 20-F
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Baidu, Inc.
We have audited the accompanying consolidated balance sheets of
Baidu, Inc. (the “Company”) as of December 31,2010 and 2009, and the related consolidated statements of
income, shareholders’ equity, and cash flows for each of
the three years in the period ended December 31, 2010.
These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Baidu, Inc. as of December 31, 2010
and 2009, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
December 31, 2010, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Baidu, Inc.’s internal control over financial reporting as
of December 31, 2010, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our
report dated March 29, 2011 expressed an unqualified
opinion thereon.
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Baidu, Inc.
We have audited Baidu, Inc.’s internal control over
financial reporting as of December 31, 2010, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Baidu, Inc.’s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting
included in the accompanying Management’s Report on
Internal Control over Financial Reporting. Our responsibility is
to express an opinion on the company’s internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Baidu, Inc. maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
accompanying consolidated balance sheets of Baidu, Inc. as of
December 31, 2010 and 2009, and the related consolidated
statements of income, shareholders’ equity, and cash flows
for each of the three years in the period ended
December 31, 2010 of Baidu, Inc., and our report dated
March 29, 2011, expressed an unqualified opinion thereon.
The consolidated financial statements of Baidu, Inc. and its
subsidiaries are included on
page F-1
through F-42 of the 2010
Form 20-F,
which was filed on March 29, 2011.
Registrant’s Specimen American Depositary Receipt
(incorporated by reference to Exhibit 1 of the prospectus
filed with the Securities and Exchange Commission on
January 5, 2009 pursuant to Rule 424(b)(3) under the
Securities Act)
2.2
Registrant’s Specimen Certificate for Class A Ordinary
Shares (incorporated by reference to Exhibit 4.2 of
Amendment No. 5 to our Registration Statement on
Form F-1
(file
no. 333-126534)
filed with the Securities and Exchange Commission on
August 2, 2005)
2.3
Form of Deposit Agreement among the Registrant, the depositary
and holder of the American Depositary Receipts (incorporated by
reference to Exhibit 4.3 to our Registration Statement on
Form F-1
(file
no. 333-126534)
filed with the Securities and Exchange Commission on
July 12, 2005)
4.1
Second Amended and Restated Shareholders Agreement, dated as of
June 9, 2004, among the Registrant and other parties
therein (incorporated by reference to Exhibit 4.4 of our
Registration Statement on
Form F-1
(file
no. 333-126534)
filed with the Securities and Exchange Commission on
July 12, 2005)
Translation of Technology Consulting and Services Agreement
dated as of March 22, 2005 between Baidu Online and Baidu
Netcom (incorporated by reference to Exhibit 99.2 of our
Registration Statement on
Form F-1
(file
no. 333-126534)
filed with the Securities and Exchange Commission on
July 12, 2005)
4.7
Translation of Business Cooperation Agreement dated as of
March 22, 2005 between Baidu Online and Baidu Netcom
(incorporated by reference to Exhibit 99.3 of our
Registration Statement on
Form F-1
(file
no. 333-126534)
filed with the Securities and Exchange Commission on
July 12, 2005)
4.8
Translation of Operating Agreement dated as of March 22,2005 between Baidu Online and Baidu Netcom (incorporated by
reference to Exhibit 99.4 of our Registration Statement on
Form F-1
(file
no. 333-126534)
filed with the Securities and Exchange Commission on
July 12, 2005)
Translation of Software License Agreement dated as of
March 22, 2005 between Baidu Online and Baidu Netcom
(incorporated by reference to Exhibit 99.5 of our
Registration Statement on
Form F-1
(file
no. 333-126534)
filed with the Securities and Exchange Commission on
July 12, 2005)
4.10
Translation of Trademark License Agreement dated as of
March 1, 2004 between Baidu Online and Baidu Netcom and the
supplementary agreement dated as of January 18, 2005
(incorporated by reference to Exhibit 99.6 of our
Registration Statement on
Form F-1
(file
no. 333-126534)
filed with the Securities and Exchange Commission on
July 12, 2005)
4.11
Translation of Domain Name License Agreement dated as of
March 1, 2004 between Baidu Online and Baidu Netcom and the
supplementary agreement dated August 9, 2004 (incorporated
by reference to Exhibit 99.7 of our Registration Statement
on
Form F-1
(file
no. 333-126534)
filed with the Securities and Exchange Commission on
July 12, 2005)
4.12
Translation of Web Layout Copyright License Agreement dated as
of March 1, 2004 between Baidu Online and Baidu Netcom and
the supplementary agreement dated as of August 9, 2004
(incorporated by reference to Exhibit 99.8 of our
Registration Statement on
Form F-1
(file
no. 333-126534)
filed with the Securities and Exchange Commission on
July 12, 2005)
4.13
Translation of Proxy Agreement dated as of August 9, 2004
among Baidu Online, Baidu Netcom, Robin Yanhong Li and Eric Yong
Xu (incorporated by reference to Exhibit 99.9 of our
Registration Statement on
Form F-1
(file
no. 333-126534)
filed with the Securities and Exchange Commission on
July 12, 2005)
4.14
Translation of Equity Pledge Agreement dated as of
March 22, 2005 among Baidu Online, Robin Yanhong Li and
Eric Yong Xu (incorporated by reference to Exhibit 99.10 of
our Registration Statement on
Form F-1
(file
no. 333-126534)
filed with the Securities and Exchange Commission on
July 12, 2005)
4.15
Translation of Exclusive Equity Purchase Option Agreement dated
as of March 22, 2005 among Baidu Online, Robin Yanhong Li
and Eric Yong Xu (incorporated by reference to
Exhibit 99.11 of our Registration Statement on
Form F-1
(file
no. 333-126534)
filed with the Securities and Exchange Commission on
July 12, 2005)
4.16
Translation of Loan Agreement dated as of March 22, 2005
among Baidu Online, Robin Yanhong Li and Eric Yong Xu
(incorporated by reference to Exhibit 99.12 of our
Registration Statement on
Form F-1
(file
no. 333-126534)
filed with the Securities and Exchange Commission on
July 12, 2005)
4.17
Translation of Form of Irrevocable Powers of Attorney issued by
the shareholders of Baidu Netcom (incorporated by reference to
Exhibit 99.13 of our Registration Statement on
Form F-1
(file
no. 333-126534)
filed with the Securities and Exchange Commission on
July 12, 2005)
4.18
Translation of the form of Technology Consulting and Services
Agreement between Baidu Online and a consolidated affiliated PRC
entity (incorporated by reference to Exhibit 4.19 of our
Annual Report on
Form 20-F
filed with the Securities and Exchange Commission on
June 5, 2008)
4.19
Translation of the form of Operating Agreement between Baidu
Online and a consolidated affiliated PRC entity (incorporated by
reference to Exhibit 4.20 of our Annual Report on
Form 20-F
filed with the Securities and Exchange Commission on
June 5, 2008)
4.20
Translation of the form of Web Layout Copyright License
Agreement between Baidu Online and a consolidated affiliated PRC
entity (incorporated by reference to Exhibit 4.21 of our
Annual Report on
Form 20-F
filed with the Securities and Exchange Commission on
June 5, 2008)
Translation of the form of Proxy Agreement among Baidu Online, a
consolidated affiliated PRC entity and the shareholders of the
consolidated affiliated PRC entity (incorporated by reference to
Exhibit 4.22 of our Annual Report on
Form 20-F
filed with the Securities and Exchange Commission on
June 5, 2008)
4.22
Translation of the form of Equity Pledge Agreement between Baidu
Online and the shareholder of a consolidated affiliated PRC
entity (incorporated by reference to Exhibit 4.23 of our
Annual Report on
Form 20-F
filed with the Securities and Exchange Commission on
June 5, 2008)
4.23
Translation of the form of Exclusive Equity Purchase Option
Agreement between Baidu Online and the shareholder of a
consolidated affiliated PRC entity (incorporated by reference to
Exhibit 4.24 of our Annual Report on
Form 20-F
filed with the Securities and Exchange Commission on
June 5, 2008)
4.24
Translation of the form of Loan Agreement between Baidu Online
and the shareholder of a consolidated affiliated PRC entity
(incorporated by reference to Exhibit 4.25 of our Annual
Report on
Form 20-F
filed with the Securities and Exchange Commission on
June 5, 2008)
4.25*
Translation of the Technology Consulting and Services Agreement
dated as of June 23, 2006 between Baidu Online and Beijing
Perusal
4.26*
Translation of the Operating Agreement dated as of June 23,2006 between Baidu Online, Beijing Perusal, Jiping Liu and Yazhu
Zhang and the supplementary agreement dated as of April 22,2010
4.27*
Translation of the Webpage Layout Copyright License Agreement
dated as of June 23, 2006 between Baidu Online and Beijing
Perusal
4.28*
Translation of the Proxy Agreement dated as of June 23,2006 among Jiping Liu, Yazhu Zhang and Baidu Online
4.29*
Translation of the Equity Pledge Agreements between Baidu Online
and Jiping Liu, and between Baidu Online and Yazhu Zhang, both
dated as of June 19, 2006
4.30*
Translation of the Exclusive Equity Purchase Option Agreements
between Baidu Online, Jiping Liu and Beijing Perusal, and
between Baidu Online, Yazhu Zhang and Beijing Perusal, both
dated as of May 19, 2006, and supplemental agreements dated
as of April 22, 2010
4.31*
Translation of Form of Irrevocable Powers of Attorney issued by
Jiping Liu and Yazhu Zhang, the shareholders of Baidu Perusal,
both dated June 23, 2006
4.32*
Translation of the Loan Agreements between Baidu Online and
Jiping Liu and between Baidu Online and Yazhu Zhang, both dated
as of May 19, 2006
4.33*
Translation of the Technology Consulting and Services Agreement
dated as of February 28, 2008 between Baidu Online and
BaiduPay and the supplementary agreement dated as of
April 22, 2010
4.34*
Translation of the Operating Agreement dated as of
February 28, 2008 between Baidu Online, BaiduPay, Jun Yu
and Beijing Netcom and the supplementary agreement dated as of
April 22, 2010
4.35*
Translation of the Webpage Layout Copyright License Agreement
dated as of February 28, 2008 between Baidu Online and
BaiduPay
4.36*
Translation of the Proxy Agreement between Hu Cai and Baidu
Online, dated as of March 5, 2010
4.37*
Translation of the Equity Pledge Agreement between Baidu Online
and Hu Cai, dated March 5, 2010
4.38*
Translation of the Exclusive Equity Purchase Option Agreement
between Baidu Online, Hu Cai and BaiduPay dated as of
March 5, 2010
4.39*
Translation of Form of Irrevocable Powers of Attorney issued by
Hu Cai, the individual shareholder of BaiduPay, dated as of
March 5, 2010
Translation of the Loan Agreement between Baidu Online and Hu
Cai, dated March 5, 2010
4.41*
Translation of the Technology Consulting and Services Agreement
dated as of December 28, 2010 between Baidu HR and Baidu
Online
4.42*
Translation of the Operating Agreement dated as of
December 28, 2010 between Baidu HR, Baidu Online and
Yanhong Li
4.43*
Translation of the Proxy Agreement between Yanhong Li and Baidu
Online, dated December 28, 2010
4.44*
Translation of the Equity Pledge Agreement between Yanhong Li
and Baidu Online, dated December 28, 2010
4.45*
Translation of the Exclusive Equity Purchase Option Agreement
between Baidu HR, Baidu Online and Yanhong Li, dated
December 28, 2010
4.46*
Translation of the Loan Agreement between Baidu Online and
Yanhong Li, dated December 28, 2010
4.47*
Translation of the Trademark Transfer Agreement between Baidu
Online and Baidu Netcom, dated March 1, 2010
4.48*
Translation of the supplementary agreements, dated as of
March 11, 2010 and April 22, 2010 to the Software
License Agreement dated as of March 22, 2005 between Baidu
Online and Baidu Netcom
4.49*
Translation of the supplementary agreements, dated March 1,2010 and April 22, 2010 to the Trademark License Agreement
dated as of March 1, 2004 between Baidu Online and Baidu
Netcom and the supplementary agreement dated as of
January 18, 2005
4.50*
Translation of the supplementary agreement dated as of
March 1, 2010 to the Web Layout Copyright License Agreement
dated as of March 1, 2004 between Baidu Online and Baidu
Netcom and the supplementary agreement dated as of
August 9, 2004
4.51*
Translation of the supplementary agreement dated April 22,2010 to the Operating Agreement dated as of March 22, 2005
between Baidu Online and Baidu Netcom
4.52*
Translation of the supplementary agreement dated March 1,2010 to the Domain Name License Agreement dated as of
March 1, 2004 between Baidu Online and Baidu Netcom and the
supplementary agreement dated August 9, 2004
4.53*
Translations of the supplementary agreement dated April 22,2010 to the Exclusive Equity Purchase Option Agreement dated as
of March 22, 2005 among Baidu Online, Robin Yanhong Li and
Eric Yong Xu
4.54*
Translation of the Baidu
Pay-for-Performance
Distributors Management Agreement between Baidu Online and Baidu
Netcom, dated as of December 22, 2010
8.1*
List of Subsidiaries and Consolidated Affiliated Entities
11.1
Code of Business Conduct and Ethics (incorporated by reference
to Exhibit 99.14 of our Registration Statement on
Form F-1
(file
no. 333-126534)
filed with the Securities and Exchange Commission on
July 12, 2005)
The registrant hereby certifies that it meets all of the
requirements for filing its annual report on
Form 20-F
and that it has duly caused and authorized the undersigned to
sign this Amendment No. 1 to its annual report on its
behalf.
We have audited the accompanying consolidated balance sheets of
Baidu, Inc. (the “Company”) as of December 31,2010 and 2009, and the related consolidated statements of
income, shareholders’ equity, and cash flows for each of
the three years in the period ended December 31, 2010.
These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Baidu, Inc. as of December 31, 2010
and 2009, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
December 31, 2010, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Baidu, Inc.’s internal control over financial reporting as
of December 31, 2010, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our
report dated March 29, 2011 expressed an unqualified
opinion thereon.
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Baidu, Inc.
We have audited Baidu, Inc.’s internal control over
financial reporting as of December 31, 2010, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Baidu, Inc.’s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting
included in the accompanying Management’s Report on
Internal Control over Financial Reporting. Our responsibility is
to express an opinion on the company’s internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Baidu, Inc. maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
accompanying consolidated balance sheets of Baidu, Inc. as of
December 31, 2010 and 2009, and the related consolidated
statements of income, shareholders’ equity, and cash flows
for each of the three years in the period ended
December 31, 2010 of Baidu, Inc., and our report dated
March 29, 2011, expressed an unqualified opinion thereon.
Accounts receivable, net of allowance of RMB9,015 for 2009 and
RMB2,223 (US$337) for 2010
4
161,610
296,900
44,985
Other assets, current
5
91,067
103,654
15,706
Due from related parties
16
—
98,660
14,948
Deferred tax assets, net
9
9,157
86,487
13,104
Total current assets
4,842,872
8,782,447
1,330,674
Non-current assets:
Fixed assets, net
6
997,557
1,622,412
245,820
Intangible assets, net
7
122,595
115,798
17,545
Goodwill
7
63,691
63,686
9,649
Long-term investments, net
3
14,308
287,968
43,632
Deferred tax assets, net
9
33,799
30,843
4,673
Other assets, non-current
82,153
145,285
22,013
Total non-current assets
1,314,103
2,265,992
343,332
TOTAL ASSETS
6,156,975
11,048,439
1,674,006
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities
8
749,861
1,317,771
199,662
Customer advances and deposits
607,828
1,029,344
155,961
Deferred revenue
42,035
109,032
16,520
Due to related parties
16
—
95,700
14,500
Total current liabilities
1,399,724
2,551,847
386,643
Non-current liabilities:
Long-term payable for business acquisition
4,150
—
—
Deferred income
—
5,000
758
Loans payable, noncurrent
10
—
86,000
13,030
Total non-current liabilities
4,150
91,000
13,788
Total liabilities
1,403,874
2,642,847
400,431
Commitments and contingencies
12
Shareholders’ equity
Class A Ordinary Shares, par value US$0.00005 per share,
825,000,000 shares authorized, and 26,298,960 shares
and 27,045,340 shares issued and outstanding as at
December 31, 2009 and 2010
13
11
12
2
Class B Ordinary Shares, par value US$0.00005 per share,
35,400,000 shares authorized, and 8,454,332 shares and
7,804,332 shares issued and outstanding as at
December 31, 2009 and 2010
13
4
3
—
Additional paid-in capital
1,426,070
1,557,258
235,948
Accumulated other comprehensive loss
13
(113,513
)
(117,378
)
(17,784
)
Retained earnings
13
3,440,529
6,965,697
1,055,409
Total shareholders’ equity
4,753,101
8,405,592
1,273,575
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
6,156,975
11,048,439
1,674,006
The accompanying notes are an integral part of the consolidated
financial statements.
ORGANIZATION,
CONSOLIDATION AND PRESENTATION OF FINANCIAL STATEMENTS
Baidu, Inc. (“Baidu” or the “Company”) was
incorporated under the laws of the Cayman Islands on
January 18, 2000. The Company was formerly known as
Baidu.com, Inc. and changed its name to Baidu, Inc. on
December 16, 2008. The Company is the sole shareholder of
Baidu Holdings Ltd. (“Baidu Holdings”) incorporated in
the British Virgin Islands.
Baidu Online Network Technology (Beijing) Co., Ltd. (“Baidu
Online”) incorporated under the laws of the People’s
Republic of China (“PRC”) on January 18, 2000,
•
Baidu Japan Inc. (“Baidu Japan”) incorporated under
the laws of Japan on December 13, 2006,
•
Baidu (Hong Kong) Limited (“Baidu HK”) incorporated
under the laws of Hong Kong on November 27, 2007, and
•
Baidu International Technology (Shenzhen) Co., Ltd. (“Baidu
International”) incorporated under the laws of the PRC on
November 23, 2010.
Baidu HK owns the following subsidiaries in the PRC:
•
Baidu (China) Co., Ltd. (“Baidu China”) incorporated
under the laws of the PRC on June 6, 2005,
•
Baidu.com Times Technology (Beijing) Co., Ltd. (“Baidu
Times”) incorporated under the laws of the PRC on
April 19, 2006, and
•
Baidu Interaction (Shenzhen) Network Technology Co., Ltd.
(“Baidu Interaction”), which obtained its business
license in March 2009, was incorporated under the laws of the
PRC. Baidu Interaction is in the process of being dissolved, but
is not presented as a discontinued operation since the entity
has not started operating since its inception.
Baidu Japan has established the following wholly-owned
subsidiaries in Japan and the USA:
•
Hyakudo Inc. (“Hyakudo”) incorporated under the laws
of Japan on April 14, 2008,
•
Baido, Inc. (“Baido”) incorporated under the laws of
Japan on April 14, 2008, and
•
Baidu USA LLC incorporated under the laws of the USA on
November 12, 2010.
As of December 31, 2010, the Company also effectively
controls the following variable interest entities
(“VIEs”):
•
Beijing Baidu Netcom Science Technology Co., Ltd. (“Baidu
Netcom”) incorporated under the laws of the PRC on
June 5, 2001,
•
Beijing Perusal Technology Co., Ltd. (“Beijing
Perusal”) incorporated under the laws of the PRC on
June 6, 2006,
•
Beijing BaiduPay Science and Technology Co., Ltd.
(“BaiduPay”) incorporated under the laws of the PRC on
February 27, 2008, and
•
Baidu HR Consulting (Shanghai) Co., Ltd. (“Baidu HR”)
incorporated under the laws of the PRC on December 28, 2010.
The Company, its subsidiaries and VIEs are hereinafter
collectively referred to as the “Group.” The Group
offers Internet search solutions and online marketing solutions,
operates an
e-commerce
platform with an online payment tool which enables
e-commerce
merchants and customers to make payments online, develops and
markets
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
scalable web application software and provides related services,
as well as provides human resource related services including
employment agency services. The Group’s principal
geographic market is in the PRC and Japan. The Company does not
conduct any substantive operations of its own but conducts its
primary business operations through its wholly-owned
subsidiaries and VIEs in the PRC.
PRC laws and regulations prohibit or restrict foreign ownership
of Internet content and advertising businesses. To comply with
these foreign ownership restrictions, the Group operates its
websites and primarily provides online advertising services in
the PRC through VIEs, the PRC legal entities that were
established by the individuals authorized by the Group. The
paid-in capital of the VIEs was funded by the Group through
loans extended to the authorized individuals. The Group has
entered into certain exclusive agreements with the VIEs through
Baidu Online, which obligate Baidu Online to absorb a majority
of the risk of loss from the VIEs’ activities and entitles
Baidu Online to receive a majority of their residual returns. In
addition, the Group has entered into certain agreements with the
authorized individuals through Baidu Online, including loan
agreements for the paid-in capital of the VIEs, option
agreements to acquire the equity interests in the VIEs when
permitted by the PRC laws, and share pledge agreements for the
equity interests in the VIEs held by the authorized individuals.
Despite the lack of technical majority ownership, there exists a
parent-subsidiary relationship between the Company and VIEs
through certain agreements with the authorized individuals
through Baidu Online, including loan agreements for the paid-in
capital of the VIEs, option agreements to acquire the equity
interests in the VIEs when permitted by the PRC laws, and share
pledge agreements for the equity interests in the VIEs held by
the authorized individuals. The equity holders of VIEs
effectively assigned all of their voting rights underlying their
equity interest in VIEs to Baidu Online. In addition, through
the other aforementioned agreements, the Company demonstrates
its ability and intention to continue to exercise the ability to
absorb substantially all of the profits and all of the expected
losses of VIEs. The VIEs are subject to operating risks, which
determine the variability of the Company’s interest in
those entities. Based on these contractual arrangements, the
Company consolidates the VIEs as required by Accounting
Standards Codification (“ASC”) subtopic
810-10
(“ASC
810-10”),
Consolidation: Overall, because the Company holds all the
variable interests of VIEs through Baidu Online, which is the
primary beneficiary of the VIEs.
The carrying amount of the total assets of VIEs was
RMB1.19 billion (US$180.92 million) as of
December 31, 2010 and there was no pledge or
collateralization of their assets. The amount of the net assets
of VIEs, which are restricted under PRC laws and regulations
(Note 13), was RMB341.10 million
(US$51.68 million) as of December 31, 2010.
Basis
of Accounting
The consolidated financial statements have been prepared in
accordance with United States generally accepted accounting
principles (“U.S. GAAP”).
Principles
of Consolidation
The consolidated financial statements include the financial
statements of the Company, its subsidiaries and VIEs in which
the Company holds all the variable interests of VIEs through
Baidu Online. All inter-company transactions and balances
between the Company, its subsidiaries and VIEs are eliminated
upon consolidation. The Company has included the results of
operations of acquired businesses from the respective dates of
acquisition.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the period. Management evaluates estimates,
including those
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
related to the accounts receivable allowances, fair values of
options to purchase the Company’s ordinary shares, fair
values of certain equity investments, and deferred tax valuation
allowance, among others. Management bases the estimates on
historical experience and on various other assumptions that are
believed to be reasonable, the results of which form the basis
for making judgments about the carrying values of assets and
liabilities. Actual results could differ from these estimates.
Comparative
Information
Certain items in prior years’ consolidated financial
statements have been reclassified to conform to the current
year’s presentation in accordance with the requirement
under eXtensible Business Reporting Language (“XBRL”)
to facilitate comparison.
Currency
Translation for Financial Statements Presentation
Translations of amounts from RMB into US$ for the convenience of
the reader have been calculated at the exchange rate of
RMB6.6000 per US$1.00 on December 30, 2010 as published on
the website of the Federal Reserve Board. No representation is
made that the RMB amounts could have been, or could be,
converted into U.S. dollars at such rate.
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Foreign
Currency
The Company’s functional currency is the US$. The
Company’s subsidiaries and VIEs determine their functional
currencies based on the criteria of ASC subtopic
830-10
(“ASC
830-10”),
Foreign Currency Matters: Overall, and have determined
their functional currencies to be their respective local
currency. The Company uses the RMB as its reporting currency.
The Company uses the average exchange rate for the year and the
exchange rate at the balance sheet date to translate its
operating results and financial position, respectively. Any
translation gains (losses) are recorded in accumulated other
comprehensive income (loss) as a component of shareholders’
equity. Transactions denominated in foreign currencies are
translated into the functional currency at the exchange rates
prevailing on the transaction dates. Assets and liabilities
denominated in foreign currencies are translated into the
functional currency at the exchange rates prevailing at the
balance sheet date. Exchange gains and losses are included in
the consolidated statements of income as a component of other
income.
Cash
and Cash Equivalents
Cash
and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximates
fair value, and primarily consist of cash and investments in
interest bearing demand deposit accounts, time deposits, highly
liquid investments and money market funds. All highly liquid
investments with original maturities of three months or less
from the date of purchase are classified as cash equivalents.
Restricted
Cash
Restricted cash consists of the cash balances deposited by the
customers of the Company’s
e-commerce
platform.
In 2008, the Company introduced an
e-commerce
platform and an online payment platform which enables
e-commerce
merchants and customers to send and receive payments online.
Cash balances deposited by the customers of the Company’s
e-commerce
platform are considered restricted because they cannot be used
for the operations of the Group or any other purpose not
designated by customers. When customers fund their accounts in
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
the
e-commerce
platform using their bank accounts, the deposited balance is
included in the Company’s bank account until customers
either use the cash to settle their online transactions or
withdraw the cash.
Investments
Short-Term
Investments
All highly liquid investments with original maturities of
greater than three months, but less than 12 months, are
classified as short-term investments which are stated at their
approximate fair value. The Company accounts for short-term
investments in accordance with ASC subtopic
320-10
(“ASC
320-10”),
Investments — Debt and Equity Securities: Overall.
The Company classifies the short-term investments in debt
and equity securities as
“held-to-maturity”,
“trading” or
“available-for-sale”,
whose classification determines the respective accounting
methods stipulated by
ASC 320-10.
Dividend and interest income, including amortization of the
premium and discount arising at acquisition, for all categories
of investments in securities are included in earnings. Any
realized gains or losses on the sale of the short-term
investments are determined on a specific identification method,
and such gains and losses are reflected in the consolidated
statements of income.
The securities that the Company has positive intent and ability
to hold to maturity are classified as
held-to-maturity
securities and stated at amortized cost. For individual
securities classified as
held-to-maturity
securities, the Company evaluates whether a decline in fair
value below the amortized cost basis is other than temporary in
accordance with the Company’s policy and
ASC 320-10.
If the Company concludes that it does not intend or is not
required to sell an impaired debt security before the recovery
of its amortized cost basis, the impairment is considered
temporary and the
held-to-maturity
securities continue to be recognized at the amortized costs.
When the Company intends to sell an impaired debt security or it
is more likely than not that it will be required to sell prior
to recovery of its amortized cost basis, an
other-than-temporary
impairment is deemed to have occurred. In these instances, the
other-than-temporary
impairment loss is recognized in the consolidated statements of
income equal to the entire excess of the debt security’s
amortized cost basis over its fair value at the balance sheet
date of the reporting period for which the assessment is made.
When the Company does not intend to sell an impaired debt
security and it is more likely than not that it will not be
required to sell prior to recovery of its amortized cost basis,
the Company must determine whether or not it will recover its
amortized cost basis. If the Company concludes that it will not,
an
other-than-temporary
impairment exists and that portion of the credit loss is
recognized in the consolidated statements of income, while the
portion of loss related to all other factors is recognized in
other comprehensive income.
The securities that are bought and held principally for the
purpose of selling them in the near term are classified as
trading securities. Unrealized holding gains and losses for
trading securities are included in earnings.
Investments not classified as trading or as
held-to-maturity
are classified as
available-for-sale
securities.
Available-for-sale
investment is reported at fair value, with unrealized gains and
losses recorded in accumulated other comprehensive income in
shareholders’ equity. Realized gains or losses are charged
to earnings during the period in which the gain or loss is
realized. An impairment loss on the
available-for-sale
debt securities would be recognized in the consolidated
statements of income when the decline in value is determined to
be
other-than-temporary.
Long-term
Investments
The Company’s long-term investments consist of cost method
investments, equity method investments and
available-for-sale
securities.
In accordance with ASC subtopic
325-20
(“ASC
325-20”),
Investments-Other: Cost Method Investments, for
investments in an investee over which the Company does not have
significant influence, the Company carries the investment at
cost and only adjusts for
other-than-temporary
declines in fair value and distributions of earnings. The
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
management regularly evaluates the impairment of the cost method
investments based on performance and financial position of the
investee as well as other evidence of market value. Such
evaluation includes, but is not limited to, reviewing the
investee’s cash position, recent financing, projected and
historical financial performance, cash flow forecasts and
financing needs. An impairment loss is recognized in the
consolidated statements of income equal to the excess of the
investment’s cost over its fair value at the balance sheet
date of the reporting period for which the assessment is made.
The fair value would then become the new cost basis of
investment.
Investments in entities in which the Company can exercise
significant influence but does not own a majority equity
interest or control are accounted for using the equity method of
accounting in accordance with ASC subtopic
323-10
(“ASC
323-10”),
Investments-Equity Method and Joint Ventures: Overall.
Under the equity method, the Company initially records its
investment at cost and adjusts the carrying amount of the
investment to recognize the Company’s proportionate share
of each equity investee’s net income or loss into
consolidated statements of income after the date of acquisition.
The difference between the cost of the equity investee and the
amount of the underlying equity in the net assets of the equity
investee is recognized as equity method goodwill included in
equity method investment on the consolidated balance sheets. The
Company evaluates the equity method investments for impairment
under
ASC 323-10.
An impairment loss on the equity method investments is
recognized in the consolidated statements of income when the
decline in value is determined to be
other-than-temporary.
The Company’s long-term investments in
available-for-sale
securities are the investments which are neither classified as
cost method investments nor equity method investments. In
accordance with
ASC 320-10,
Investments — Debt and Equity Securities: Overall,
available-for-sale
securities are reported at fair value, with unrealized gains and
losses recorded in accumulated other comprehensive income in
shareholders’ equity. Realized gains or losses are charged
to earnings during the period in which the gain or loss is
realized.
Fair
Value Measurements of Financial Instruments
Financial instruments include cash and cash equivalents,
short-term investments, accounts receivable, accounts payable
and accrued liabilities, customer advances and deposits,
deferred revenue, deferred income and loans payable. The
carrying amounts of these financial instruments except for loans
payable approximate fair value because of their generally short
maturities. The carrying amount of loans payable approximates
its fair value due to the fact that the related interest rates
are reset each year based on prevailing market interest rates.
Research,
Development, and Computer Software
Capitalization
of Software Developed for Internal Use
The Company has capitalized certain internal use software
development costs in accordance with ASC subtopic
350-40
(“ASC
350-40”),
Intangibles-Goodwill and Other: Internal-Use Software,
amounting to RMB19.49 million, RMB12.59 million and
RMB10.38 million (US$1.57 million) for the years ended
December 31, 2008, 2009 and 2010, respectively. The Company
capitalizes certain costs relating to software acquired,
developed, or modified solely to meet the Company’s
internal requirements and for which there are no substantive
plans to market the software. These costs mainly include payroll
and payroll-related costs for employees who are directly
associated with and who devote time to the internal-use software
projects during the application development stage. Capitalized
internal-use software costs are included in fixed assets, net.
The amortization expense for capitalized software costs amounted
to RMB3.44 million, RMB9.77 million and
RMB8.86 million (US$1.34 million) for the years ended
December 31, 2008, 2009 and 2010, respectively. The
unamortized amount of capitalized internal use software
development costs was RMB26.16 million and
RMB15.28 million (US$2.32 million) as of
December 31, 2009 and 2010, respectively.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Research
and Development Expenses
Research and development expenses consist primarily of
personnel-related costs. The Company has expensed substantially
all development costs included in the research and development
of products and new functionality added to the existing products
as incurred, except for certain internal-use software and
certain core technologies with alternative future uses.
Fixed
Assets
Fixed assets are stated at cost less accumulated depreciation.
Depreciation or amortization is recorded on a straight-line
basis over the shorter of the estimated useful lives of the
assets or the term of the related lease, as follows:
Office building
— 45 years
Office building related facility, machinery and equipment
— 15 years
Computer equipment
— 3 or 5 years
Internal use software development costs
— 3 years
Office equipment
— 3 or 5 years
Vehicles
— 5 years
Leasehold improvements
— over the shorter of lease terms or estimated useful lives
of the assets
Fixed assets have no estimated residual value except for the
office building and its related facility, machinery and
equipment, which have an estimated residual value of 4% of the
cost.
Repair and maintenance costs are charged to expense as incurred,
whereas the cost of renewals and betterments that extend the
useful life of fixed assets are capitalized as additions to the
related assets. Retirements, sales and disposals of assets are
recorded by removing the cost and accumulated depreciation from
the asset and accumulated depreciation accounts with any
resulting gain or loss reflected in the consolidated statements
of income.
All direct and indirect costs that are related to the
construction of fixed assets and incurred before the assets are
ready for their intended use are capitalized as construction in
progress. Construction in progress is transferred to specific
fixed assets items and depreciation of these assets commences
when they are ready for their intended use.
Goodwill
and Intangible Assets
Goodwill
Goodwill represents the excess of the purchase price over the
fair value of the identifiable net assets acquired in a business
combination. The Company assesses goodwill for impairment in
accordance with ASC subtopic
350-20
(“ASC
350-20”),
Intangibles — Goodwill and Other: Goodwill,
which requires that goodwill be tested for impairment at the
reporting unit level at least annually and more frequently upon
the occurrence of certain events, as defined by
ASC 350-20.
Baidu’s chief operating decision maker only reviews the
Company’s discrete financials at its consolidated level and
there are no segment managers who are held accountable by the
Company’s chief operating officer or anyone else, for
operations, operating results, and planning for levels or
components below the consolidated level. Accordingly, consistent
with the management’s operational perspective, the Company
determines that it has only one reporting unit. Goodwill was
tested for impairment in the annual impairment tests on December
31 in each year using the two-step process required by
ASC 350-20.
First, the Company reviewed the carrying amount of the reporting
unit compared to the “fair value” of the reporting
unit based on quoted market prices of the ordinary shares. If
the fair value of the reporting unit exceeds the carrying value
of the reporting unit, goodwill is not impaired and the Company
is not required to perform further testing. If the carrying
value of the
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
reporting unit exceeds the fair value of the reporting unit,
then the Company must perform the second step of the impairment
test in order to determine the implied fair value of the
reporting unit’s goodwill. That is, the Company would then
prepare the discounted cash flow analyses. Such analyses are
based on cash flow assumptions that are consistent with the
plans and estimates being used to manage the business. An excess
carrying value compared to fair value would indicate that
goodwill may be impaired. Finally, if the Company determined
that goodwill may be impaired, the implied fair value of the
goodwill, as defined by
ASC 350-20,
would be compared to its carrying amount to determine the
impairment loss, if any. There has been no impairment of
goodwill in any of the years presented.
Intangible
Assets
Intangible assets with finite lives are carried at cost less
accumulated amortization. The land use right is amortized using
a straight-line method over the shorter of its estimated
economic life or the term of related land use right contract.
All other intangible assets with finite lives are amortized
using the straight-line method over the estimated economic life.
Intangible assets have weighted average useful lives from the
date of purchase as follows:
Intangible assets with an indefinite useful life are not
amortized. There have been no impairment charges on the
Company’s intangible assets with finite useful lives in any
of the years presented.
If the intangible assets that are not being amortized are
subsequently determined to have a finite useful life, the assets
will be tested for impairment in accordance with ASC subtopic
350-30
(“ASC
350-30”),
Intangibles-Goodwill and Other: General Intangibles Other
than Goodwill, and then amortized prospectively over their
estimated remaining useful lives and accounted for in the same
manner as other intangible assets that are subject to
amortization. Intangible assets with indefinite useful lives are
tested for impairment annually or more frequently if events or
changes in circumstances indicate that they might be impaired.
There have been no impairment charges on the Company’s
intangible assets with indefinite useful lives in any of the
years presented.
Impairment
of Long-Lived Assets Other Than Goodwill
The Company evaluates long-lived assets, such as fixed assets
and purchased or internally developed intangible assets with
finite lives, for impairment whenever events or changes in
circumstances indicate the carrying value of an asset may not be
recoverable in accordance with ASC subtopic
360-10
(“ASC
360-10”),
Property, Plant and Equipment: Overall. When such events
occur, the Company assesses the recoverability of the assets
group based on the undiscounted future cash flow the assets
group is expected to generate and recognizes an impairment loss
when estimated undiscounted future cash flow expected to result
from the use of the assets group plus net proceeds expected from
disposition of the assets group, if any, is less than the
carrying value of the assets group. If the Company identifies an
impairment, the Company reduces the carrying amount of the
assets group to its estimated fair value based on a discounted
cash flow approach or, when available and appropriate, to
comparable market values. The Company uses estimates and
judgments in its impairment tests and if different estimates or
judgments had been utilized, the timing or the amount of any
impairment charges could be different. Asset groups to be
disposed of would be reported at the lower of the carrying
amount or fair value less costs to sell, and no longer
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
depreciated. The assets and liabilities of a disposal group
classified as held for sale would be presented separately in the
appropriate asset and liability sections of the balance sheet.
Accounts
Receivable
Accounts receivable are recognized and carried at original
invoiced amount less an allowance for any potential
uncollectible amounts. An estimate for doubtful debts is made
when collection of the full amount is no longer probable. Bad
debts are written off as incurred. The Company generally does
not require collateral from its customers.
The Company maintains allowances for doubtful accounts for
estimated losses resulting from the failure of customers to make
payments on time. The Company reviews the accounts receivable on
a periodic basis and makes general and specific allowances when
there is doubt as to the collectibility of individual balances.
In evaluating the collectibility of individual receivable
balances, the Company considers many factors, including the age
of the balance, the customer’s historical payment history,
its current credit-worthiness and current economic trends.
Revenue
Recognition
The Company recognizes revenue based on the following principles:
Online
marketing services
(1) Auction-based
pay-for-performance
service
The Company’s auction-based
pay-for-performance
(“P4P”) platform enables a customer to place its
website link and related description on the Company’s
search result list. The customers make bids on keywords based on
how much they are willing to pay for each click to their
listings in the search results listed on the Company’s
website and the relevance between the keywords and the
customer’s businesses. Internet users’ search of the
keyword will trigger the display of the listings. The ranking of
the customer’s listing depends on both the bidding price
and the listing’s relevance to the keyword searched.
Customer pays the Company only when a user clicks on one of its
website links. Revenue is recognized when a user clicks on one
of the customer-sponsored website links, as there is persuasive
evidence of an arrangement, the fee is fixed or determinable and
collection is reasonably assured, as prescribed by ASC subtopic
605-10
(“ASC
605-10”),
Revenue Recognition: Overall.
For certain P4P customers engaged through direct sales, the
Company may provide certain value-added consultative support
services to help its customers to better utilize its P4P online
marketing system. Fees for such services are recognized as
revenue on a pro-rata basis over the contracted service period.
(2) Other performance-based online marketing services
To the extent the Company provides online marketing services
based on performance criteria other than click-throughs, such as
the number of telephone calls brought to its customers, the
number of users registered with its customers, or the number of
minimum click-throughs, revenue is recognized when the specified
performance criteria are met together with satisfaction of other
applicable revenue recognition criteria as prescribed by
ASC 605-10.
(3) Time-based online advertising services
For time-based online advertising services such as text links,
banners, or other forms of graphical advertisements, the Company
recognizes revenue, in accordance with
ASC 605-10,
on a pro-rata basis over the contractual term commencing on the
date the customer’s advertisement is displayed in a
specified webpage. For certain time-based contractual
agreements, the Company may also provide certain performance
guarantees, in which cases revenue is recognized at the later of
the completion of the time commitment or performance guarantee.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(4) Online marketing services involving Baidu Union
Baidu Union is the program through which the Company expands
distribution of its customers’ sponsored links or
advertisements by leveraging traffic of the Baidu Union
members’ internet properties. The Company makes payments to
Baidu Union members for acquisition of traffic. The Company
recognizes gross revenue for the amount of fees it receives from
its customers. Payments made to Baidu Union members are included
in cost of revenues as traffic acquisition costs.
(5) Barter transactions
The Company engages in barter transactions from time to time and
in such situations follows the guidance set forth in ASC
subtopic
845-10
(“ASC
845-10”),
Nonmonetary Transactions: Overall. While nonmonetary
transactions are generally recorded at fair value, if such value
is not determinable within reasonable limits, the transaction is
recognized based on the carrying value of the product or
services provided. The amount of revenues recognized for barter
transactions was insignificant for each of the periods presented.
In addition, the Company recognized revenues for barter
transactions involving advertising in accordance with ASC
subtopic
605-20
(“ASC
605-20”),
Revenue recognition: Services. However, neither the
amount recognized nor the volume of such transactions qualified
for income recognition was material for any of the periods
presented.
In certain instances, the Company may be granted equity
instruments in exchange for services. In accordance with ASC
subtopic
505-50
(“ASC
505-50”),
Equity: Equity-based Payments to Non-Employees, if the
Company provides services in exchange for equity instruments,
the Company measures the fair value of those equity instruments
for revenue recognition purposes as of the earlier of either of
the following dates:
•
The date the parties come to a mutual understanding of the terms
of the equity-based compensation arrangement and a commitment
for performance by the Company to earn the equity instruments is
reached;
•
The date at which the Company’s performance necessary to
earn the equity instruments is completed.
If, as of the measurement date, the fair value of the equity
instruments received is not determinable within reasonable
limits, the transaction is recognized based on the fair value of
the services provided. If the fair value of both the equity
instruments received and the services provided cannot be
determined, no revenue is recognized for the services provided
and the equity instrument received is recorded at zero carrying
value. The amount of revenues recognized for such transactions
was insignificant in each of the years presented.
(6) Other revenue recognition related policies
If a sales arrangement involves multiple deliverables, and the
arrangement is divided into separate units of accounting in
accordance with ASC subtopic
605-25
(“ASC
605-25”),
Revenue recognition: Multiple-Element Arrangements, the
total revenue on such arrangement is allocated to the individual
deliverables based on their relative fair values. If sufficient
vendor-specific objective evidence of fair value does not exist
for the allocation of revenue, the fee for the entire
arrangement is recognized ratably over the term of the
arrangement or upon the delivery of the last deliverable, when
other revenue recognition criteria have been met.
The Company delivers some of its online marketing services to
end customers through engaging third party distributors. In this
context, the Company may provide cash incentives to
distributors. The cash incentives are accounted for as reduction
of revenue in accordance with ASC subtopic
605-50
(“ASC
605-50”),
Revenue recognition: Customer Payments and Incentives.
The Company provides sales incentives to customers to entitle
customers to receive reductions in the price of the online
marketing services by meeting certain cumulative consumption
requirements. The Company accounts for these award credits
granted to members in conjunction with a current sale of
products or services as a multiple-element arrangement by
analogizing to ASC
605-25. The
consideration allocated to the award credits, as deferred
revenue is based on an assumption that the customer will
purchase the minimum amount of future service necessary
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
to obtain the maximum award credits available. The deferred
revenue is recognized as revenue proportionately as the future
services are delivered to the customer or when the loyalty
points expire.
Cash received in advance from customers is recorded as customer
advances and deposits. The unused cash balances remaining in
customers’ accounts are included as a liability of the
Company. Deferred revenue is recorded when services are provided
before the other revenue recognition criteria set forth in
ASC 605-10
are fulfilled.
The Company operates an online game platform, on which
registered users could access games provided by online game
developers. The rights and obligations of each party to the
arrangement indicate that the Company is acting as an agent
whereas the online game developer is the principal as a result
of being the primary obligor in the arrangement. The Company
recognizes the shared revenue, on a net basis, based on the
ratios pre-determined with the online game developers when all
the revenue recognition criteria set forth in
ASC 605-10
are met, which is generally when the user purchases virtual
currencies issued by the game developers through the
Company’s payment channel. The amount of revenues
recognized was not significant in each of the years presented.
Cost
of Revenues
Cost of revenues consists primarily of business taxes and
surcharges, traffic acquisition costs, bandwidth costs,
depreciation, payroll and related costs of operations.
The Company incurs business taxes and surcharges in connection
with the provision of online marketing services, technical and
consultative service fees charged by Baidu Online to VIEs and
other taxable services in the PRC. According to ASC subtopic
605-45
(“ASC
605-45”),
Revenue Recognition: Principal Agent Considerations, the
Company includes the business tax and surcharges incurred on its
online marketing revenues in cost of revenues. The business tax
and surcharges in cost of revenues for the years ended
December 31, 2008, 2009 and 2010 were
RMB200.09 million, RMB275.92 million and
RMB504.85 million (US$76.49 million), respectively.
Traffic acquisition costs represent the amounts paid or payable
to Baidu Union members who direct search queries to the
Company’s websites or distribute the Company’s
customers’ paid links through their properties. These
payments are primarily based on revenue sharing arrangements
under which the Company pays its Baidu Union members a
percentage of the fees it earns from its online marketing
customers.
Advertising
Expenses
Advertising expenses, primarily advertisements through various
forms of media, are included in “Selling, general and
administrative expense” in the consolidated statements of
income and are expensed when incurred. Advertising expenses for
the years ended December 31, 2008, 2009 and 2010 were
RMB29.22 million, RMB77.80 million and
RMB74.76 million (US$11.33 million), respectively.
Other
Income, net
Other income, net consists primarily of interest income,
government subsidies, impairment of long-term investments and
non-operating expenses. Interest income is mainly generated from
bank deposits and other interest-earning financial assets and is
recognized on an accrual basis. Other income, net primarily
consists of financial subsidies received from provincial and
local governments for operating a business in their
jurisdictions and compliance with specific policies promoted by
the local governments. During the years ended December 31,2008, 2009 and 2010, the Group received financial subsidies of
RMB22.72 million, RMB42.50 million and
RMB49.14 million (US$7.45 million), respectively, from
various local PRC government authorities. There are no defined
rules and regulations to govern the criteria necessary for
companies to receive such benefits, and the amount of financial
subsidy is determined at the discretion of the relevant
government authorities. Such amounts are recorded as other
income when received and there are no further conditions to be
met before recognition.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Leases
Leases have been classified as either capital or operating
leases. Leases that transfer substantially all the benefits and
risks incidental to the ownership of assets are accounted for as
if there was an acquisition of an asset and incurrence of an
obligation at the inception of the lease. All other leases are
accounted for as operating leases wherein rental payments are
expensed as incurred. The Company had no capital leases for the
years ended December 31, 2008, 2009 and 2010.
Income
Taxes
The Company recognizes income taxes under the liability method.
Deferred income taxes are recognized for differences between the
financial reporting and tax bases of assets and liabilities at
enacted tax rates in effect for the years in which the
differences are expected to reverse. The Company records a
valuation allowance against the amount of deferred tax assets
that it determines is not more likely than not being realized.
The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment
date.
The Company adopted the provisions of ASC subtopic
740-10
(“ASC
740-10”),
Income Taxes: Overall, on January 1, 2007.
ASC 740-10
clarified the accounting for uncertainty in income taxes by
prescribing the recognition threshold a tax position is required
to meet before being recognized in the financial statements. The
Company has elected to classify interest and penalties related
to an uncertain tax position (if and when required) as part of
income tax expense in the consolidated statements of income. As
of and for the years ended December 31, 2008, 2009 and
2010, no unrecognized tax benefits or interest and penalties
associated with uncertainty in income taxes have been recognized.
Share-based
Compensation
The Company adopted ASC subtopic
718-10
(“ASC
718-10”),
Compensation-Stock Compensation: Overall, using the
modified prospective transition approach from January 1,2006. Pursuant to ASC
718-10, the
Company recognized share-based compensation expense over the
requisite service periods for any share-based awards granted
after January 1, 2006 based on the fair values of all
share-based awards on the dates of grant.
The Company has elected to recognize share-based compensation
after the date of adoption of
ASC 718-10
using the straight-line method for all share-based awards
issued. Forfeitures have been estimated based on historical
experience and periodically reviewed. Cancellation of an award
accompanied by the concurrent grant of a replacement award is
accounted for as a modification of the terms of the cancelled
award (“modification awards”). The compensation costs
associated with the modification awards are recognized if either
the original vesting condition or the new vesting condition has
been achieved. Such compensation costs cannot be less than the
grant-date fair value of the original award. The incremental
compensation cost is measured as the excess of the fair value of
the replacement award over the fair value of the cancelled award
at the cancellation date. Therefore, in relation to the
modification awards, the Company recognizes share-based
compensation over the vesting periods of the new options, which
comprises, (1) the amortization of the incremental portion
of share-based compensation over the remaining vesting term and
(2) any unrecognized compensation cost of original award,
using either the original term or the new term, whichever is
higher for each reporting period.
The Company accounts for share awards issued to non-employees in
accordance with the provisions of ASC subtopic
505-50
(“ASC
505-50”),
Equity: Equity-based Payments to Non-Employees. Under ASC
505-50, the
Company uses the Black-Scholes option pricing model method to
measure the value of options granted to non-employees at each
vesting date to determine the appropriate charge to share-based
compensation.
ASC 718-10
also requires share-based compensation to be presented in the
same manner as cash compensation rather than as a separate line
item.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Earnings
Per Share (“EPS”)
The Company computes earnings per Class A and Class B
ordinary shares in accordance with ASC subtopic
260-10
(“ASC
260-10”),
Earnings Per Share: Overall, using the two class method.
Under the provisions of
ASC 260-10,
basic net income per share is computed using the weighted
average number of ordinary shares outstanding during the period
except that it does not include unvested ordinary shares subject
to repurchase or cancellation. Diluted net income per share is
computed using the weighted average number of ordinary shares
and, if dilutive, potential ordinary shares outstanding during
the period. Potentially dilutive securities have been excluded
from the computation of diluted net income per share if their
inclusion is anti-dilutive. Potential ordinary shares consist of
the incremental ordinary shares issuable upon the exercise of
stock options, restricted shares subject to forfeiture, and
contracts that may be settled in the Company’s stock or
cash. The dilutive effect of outstanding stock options and
restricted shares is reflected in diluted earnings per share by
application of the treasury stock method. The computation of the
diluted net income per share of Class A ordinary shares
assumes the conversion of Class B ordinary shares, while
the diluted net income per share of Class B ordinary shares
does not assume the conversion of those shares.
The liquidation and dividend rights of the holders of the
Company’s Class A and Class B ordinary shares are
identical, except with respect to voting. As a result, and in
accordance with ASC subtopic
260-10
(“ASC
260-10”),
Earnings Per Share: Overall, the undistributed earnings
for each year are allocated based on the contractual
participation rights of the Class A and Class B ordinary
shares as if the earnings for the year had been distributed. As
the liquidation and dividend rights are identical, the
undistributed earnings are allocated on a proportionate basis.
Further, as the conversion of Class B ordinary shares is
assumed in the computation of the diluted net income per share
of Class A ordinary shares, the undistributed earnings are
equal to net income for that computation.
For the purposes of calculating the Company’s basic and
diluted earnings per Class A and Class B ordinary shares,
the ordinary shares relating to the options that were exercised
are assumed to have been outstanding from the date of exercise
of such options.
Concentration
of Risks
Concentration
of credit risk
Financial instruments that potentially subject the Company to
significant concentration of credit risk primarily consist of
cash and cash equivalents, restricted cash, short-term
investments and accounts receivable. The Company has
RMB8.20 billion (US$1.24 billion) in cash and cash
equivalents, restricted cash and short-term investments. The
Company has approximately RMB8.06 billion
(US$1.22 billion) in cash, bank deposits and money market
funds in the PRC, which constitute about 98.29% of total cash
and cash equivalents and short-term investments. In the event of
bankruptcy of one of the financial institutions in which the
Company has deposits or investments, it may be unlikely to claim
its deposits or investments back in full.
Accounts receivable are typically unsecured and derived from
revenue earned from customers and agents in China, which are
exposed to credit risk. The risk is mitigated by credit
evaluations the Company performs on its customers and its
ongoing monitoring process of outstanding balances. The Company
maintains reserves for estimated credit losses and these losses
have generally been within its expectations.
Business
and economic risks
The Company participates in a dynamic high technology industry
and believes that changes in any of the following areas could
have a material adverse effect on the Company’s future
financial position, results of operations or cash flows: changes
in the overall demand for services and products; changes in
business offerings; competitive pressures due to new entrants;
advances and new trends in new technologies and industry
standards; changes in bandwidth suppliers; changes in certain
strategic relationships or customer relationships; regulatory
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
considerations; copyright regulations; and risks associated with
the Company’s ability to attract and retain employees
necessary to support its growth.
No customer or any Baidu Union member generated greater than 10%
of total revenues in any of the periods presented.
The Company’s operations could be adversely affected by
significant political, economic and social uncertainties in the
PRC.
Currency
convertibility risk
Substantially all of the Company’s businesses are
transacted in RMB, which is not freely convertible into foreign
currencies. All foreign exchange transactions take place either
through the People’s Bank of China or other banks
authorized to buy and sell foreign currencies at the exchange
rates quoted by the People’s Bank of China. Approval of
foreign currency payments by the People’s Bank of China or
other regulatory institutions requires submitting a payment
application form together with suppliers’ invoices,
shipping documents and signed contracts.
Foreign
currency exchange rate risk
The Company’s exposure to foreign currency exchange rate
risk primarily relates to cash and cash equivalents and
short-term investments denominated in the U.S. dollar. The
functional currency of the Company is US$, and the reporting
currency is RMB. Since July 21, 2005, the RMB has been
permitted to fluctuate within a narrow and managed band against
a basket of certain foreign currencies. On June 19, 2010,
the People’s Bank of China announced the end of the
RMB’s de facto peg to US$, a policy which was instituted in
late 2008 in the face of the global financial crisis, to further
reform the RMB exchange rate regime and to enhance the
RMB’s exchange rate flexibility. The exchange rate floating
bands will remain the same as previously announced in the
inter-bank foreign exchange market. The depreciation of the US$
against RMB was approximately 3.31% in 2010. Any significant
revaluation of RMB may materially and adversely affect the
Company’s cash flows, revenues, earnings and financial
position, and the value of, and any dividends payable on, the
ADS in U.S. dollars. As a result, an appreciation of RMB
against the U.S. dollar would result in foreign currency
translation losses when translating the net assets of the
Company from the U.S. dollar into RMB.
The functional currency of the subsidiaries in Japan is Japanese
Yen (“JPY”), and the reporting currency is RMB. During
2010, JPY appreciated by approximately 10.23% against RMB. The
appreciation of JPY against RMB results in foreign currency
translation gains when translating the net assets into RMB.
For the years ended December 31, 2008, 2009 and 2010, the
net foreign currency translation loss resulting from the
translation from the respective functional currencies to the RMB
reporting currency recorded in the Company’s other
comprehensive loss was RMB27.60 million,
RMB3.96 million and RMB3.87 million
(US$0.59 million), respectively.
Recent
Accounting Pronouncements
In October 2009, the FASB issued ASU
No. 2009-13
(“ASU
2009-13”),
Multiple-Deliverable Revenue Arrangements. ASU
2009-13
amends ASC
sub-topic
605-25
(“ASC
605-25”),
Revenue Recognition: Multiple-Element Arrangements,
regarding revenue arrangements with multiple deliverables. This
standard addresses how to determine whether an arrangement
involving multiple deliverables contains more than one unit of
accounting, and how the arrangement consideration should be
allocated among the separate units of accounting. This standard
establishes a selling price hierarchy for determining the
selling price of a deliverable, which is based on:
(a) vendor-specific objective evidence;
(b) third-party evidence; or (c) estimated selling
price. This standard also eliminates the residual method of
allocation and requires that arrangement consideration be
allocated at the inception of the arrangement to all
deliverables using the relative selling price method. In
addition, this standard significantly expands required
disclosures related to a vendor’s multiple-deliverable
revenue arrangements. This standard is
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
effective for fiscal years beginning after June 15, 2010
and to be applied retrospectively or prospectively for new or
materially modified arrangements. In addition, early adoption is
permitted. The Company will adopt ASU
2009-13
beginning January 1, 2011 and the Company is in the process
of assessing the impact of the adoption of the standard on its
consolidated financial statements.
In April 2010, the FASB issued ASU
No. 2010-13
(“ASU
2010-13”),
Compensation-Stock Compensation (“ASC 718”):
Effect of Denominating the Exercise Price of a Share-Based
Payment Award in the Currency of the Market in Which the
Underlying Equity Security Trades. The objective of this
standard is to address the classification of an employee
share-based payment award with an exercise price dominated in
the currency of a market in which the underlying equity security
trades. ASC 718 provides guidance on the classification of
a share-based payment award as either equity or liability. A
share-based payment award that contains a condition that is not
a market, performance, or service condition is required to be
classified as a liability. ASU
2010-13
provide amendments to ASC 718 to clarify that an employee
share-based payment award with an exercise price denominated in
the currency of a market in which a substantial portion of the
entity’s equity securities trades should not be considered
to contain a condition that is not a market, performance, or
service condition. Therefore, an entity would not classify such
an award as a liability if it otherwise qualifies as equity.
Then amendments in this standard are effective for fiscal years,
and interim periods within those fiscal years, beginning on or
after December 31, 2010. Early application is permitted.
The Company does not expect the adoption of ASU
2010-13 will
have a material impact on its consolidated financial statements.
In December 2010, the FASB issued ASU
No. 2010-28
(“ASU
2010-28”),
Intangibles — Goodwill and Other (“ASC
350”): When to Perform Step 2 of the Goodwill Impairment
Test for Reporting Units with Zero or Negative Carrying
Amounts. The objective of this standard is to address
questions about entities with reporting units with zero or
negative carrying amounts because some entities concluded that
Step 1 of the test is passed in those circumstances because the
fair value of their reporting unit will generally be greater
than zero. The amendments in this standard modify Step 1 of the
goodwill impairment test for reporting units with zero or
negative carrying amounts. For those reporting units, an entity
is required to perform Step 2 of the goodwill impairment test if
it is more likely than not that a goodwill impairment exists.
This standard is effective for fiscal years, and interim periods
within those years, beginning after December 15, 2010.
Early adoption is not permitted. The Company does not expect the
adoption of ASU
2010-28 will
have a material impact on its consolidated financial statements.
In December 2010, the FASB issued ASU
No. 2010-29
(“ASU
2010-29”),
Disclosure of Supplementary Pro Forma Information for
Business Combinations (“ASC 805”). The objective
of this standard is to address diversity in practice about the
interpretation of the pro forma revenue and earnings disclosure
requirements for business combinations. This standard specifies
that if a public entity presents comparative financial
statements, the entity should disclose revenue and earnings of
the combined entity as though the business combination(s) that
occurred during the current year had occurred as of the
beginning of the comparable prior annual reporting period only.
This standard also expands the supplemental pro forma
disclosures under ASC 805 to include a description of the
nature and amount of material, nonrecurring pro forma
adjustments directly attributable to the business combination
included in the reported pro forma revenue and earnings. This
standard is effective prospectively for business combinations
for which the acquisition date is on or after the beginning of
the first annual reporting period beginning on or after
December 15, 2010. Early adoption is permitted. The Company
does not expect the adoption of ASU
2010-29 will
have a material impact on its consolidated financial statements.
3.
INVESTMENTS
Short-term
investments
As of December 31, 2009 and 2010, the Company’s
short-term investments, which were fixed-rate investments
classified as
held-to-maturity
securities, totaled approximately RMB381.15 million and
RMB376.49 million (US$57.04 million), respectively. As
of December 31, 2010, all the fixed-rate investments were
time deposits in commercial banks and financial institutions
with an original maturity of less than one year.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
During the years ended December 31, 2008, 2009 and 2010,
the Company recorded short-term investment gains and interest
income of RMB8.75 million, RMB8.18 million and
RMB37.21 million (US$5.64 million) in the consolidated
statements of income, respectively.
The Company’s
held-to-maturity
securities are stated at amortized cost and the fair value is
determined based on a discounted cash flow model using the
discount curve of market interest rates.
Long-term
investments
The Company’s long-term investments consist of cost method
investments, equity method investments and
available-for-sale
securities.
Long-term
available-for-sale
securities
The Company’s long-term investments in
available-for-sale
securities are investments which are neither classified as cost
method investments nor equity method investments.
In May 2010, the Company acquired 4,942,784
series A-1
convertible redeemable preferred shares of 6DXchange Inc. with a
total cash consideration of US$3.79 million. The Company
holds 11.60% of equity interests of 6DXchange on an as-converted
basis. In accordance with
ASC 320-10,
investments in securities which are redeemable at the option of
the investor are considered debt securities. The investment in
6DXchange Inc. was classified as
available-for-sale
debt securities because it was not classified as either
held-to-maturity
or trading securities as the convertible redeemable preferred
shares have no stated maturity date and the Company does not
have the intent to sell it in the near term. As the Company does
not expect to sell or redeem it within one year and has the
intent to hold it for long-term returns, the investment is
classified as long-term
available-for-sale
securities.
As of December 31, 2010, the fair value of long-term
investments in available-for sale securities approximates the
cost of the investment of US$3.79 million. For further
information, see Note 18.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Cost
method investments
The Company’s carrying amount of cost method investments
was RMB12.29 million and RMB204.35 million
(US$30.96 million) as of December 31, 2009 and 2010,
respectively. The increase is primarily due to the investment in
the ordinary shares of a privately-held, PRC-based home
furnishing
E-commerce
company in 2010, in which the Company does not have significant
influence. The impairment charges on cost method investments
were RMB7.99 million, nil and nil for the years ended
December 31, 2008, 2009 and 2010, respectively.
Equity
method investments
In July 2009, Beijing Perusal, together with Paibo Online
(Beijing) Technology Co., Ltd. (“Paibo”), a subsidiary
of Beijing News, set up a joint venture, Beijing Paibo Times
Technology Co., Ltd. (“Paibo Times”), to operate a
community website and provide information of interest to Beijing
local residents. The registered capital of Paibo Times is
RMB5.34 million (US$0.81 million). The Company holds
42.12% equity interest in Paibo Times and accounts for the
investment under the equity method.
In February 2010, the Company, Providence Equity Partners
(“Providence”), and Dragon Ventures Limited
(“Dragon”) signed an agreement, pursuant to which
Providence and Dragon agreed to acquire US$50.00 million in
convertible redeemable preferred shares and US$1.00 million
in convertible preferred shares, respectively, of Qiyi.com,
Inc., a Cayman Islands company established by the Company.
Qiyi.com, Inc., and entities under its control, develop and
operate an advertising supported online video business. The
Company accounts for the investment in Qiyi.com, Inc. under the
equity method despite holding 100% of its common shares due to
certain substantive participating rights provided to the
convertible redeemable preferred shareholder.
On January 27, 2010, the Company signed an agreement with
Rakuten, Inc. (“Rakuten”), an
e-commerce
website in Japan, to establish a joint venture, RakuBai Limited,
to build a B2B2C online shopping mall for PRC Internet users.
B2B2C refers to an online marketplace that links and provides
value-added services to both business to business and business
to consumer. On February 12, 2010, RakuBai Limited was
incorporated in Hong Kong. The registered capital of RakuBai
Limited is US$20.0 million. The Company holds 49% equity
interest in RakuBai Limited and accounts for the investment
under the equity method.
On August 25, 2010, Baidu Netcom, together with Chongqing
Yubao Culture Communication Co., Ltd. (“Yubao”),
Chongqing Service News Office (“Service News”) and a
third party individual, established Chongqing Rongdu Technology
Co., Ltd. (“Chongqing Rongdu”) to operate a community
website and provide daily information of interest to Chongqing
local residents. The registered capital of Chongqing Rongdu is
RMB2.50 million (USD$0.38 million). Baidu Netcom,
Yubao, Service News and the third party individual hold 40%,
30%, 15% and 15% of the JV’s equity interest, respectively.
The Company accounts for its investment in Chongqing Rongdu
under the equity method.
On December 22, 2010, Henan Ruizhiqi Information Technology
Co., Ltd. (“Henan Ruizhiqi”), a third party company,
transferred its 40% of the equity interest in Henan Feidian
Network Technology Co., Ltd. (“Henan Feidian”) to
Baidu Netcom at the nominal amount of RMB1.00 (USD$0.15). Henan
Feidian operates a community website and provides daily
information of interest to Henan local residents. The registered
capital of Henan Feidian is RMB2.00 million
(US$0.30 million). Baidu Netcom, Henan Ruizhiqi, Henan
Business News and a third party individual hold 40%, 10%, 35%
and 15% of Henan Feidian’s equity interest, respectively.
The Company accounts for its investment in Henan Feidian under
the equity method. Henan Feidian had limited operation as of
December 31, 2010.
Office building related facility, machinery and equipment
118,844
137,542
20,840
Internal-use software development costs
44,925
37,022
5,609
Vehicles
4,020
6,829
1,035
Office equipment
57,687
82,431
12,490
Leasehold improvements
31,118
74,793
11,332
Construction in progress
15,637
14,797
2,242
1,764,273
2,701,951
409,387
Less: Accumulated depreciation
(766,716
)
(1,079,539
)
(163,567
)
997,557
1,622,412
245,820
Depreciation expense was RMB259.64 million,
RMB285.20 million and RMB380.89 million
(US$57.71 million) for the years ended December 31,2008, 2009 and 2010, respectively.
7.
GOODWILL
AND INTANGIBLE ASSETS
Goodwill
The changes in the carrying amount of goodwill are as follows:
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company’s indefinite-lived intangible assets include
one domain name asset and the Company’s trademark of
“BAIDU”. This domain name asset was acquired in July
2006 and is not subject to amortization, as the remaining useful
life is indefinite. In addition, the Company’s trademark of
“BAIDU” qualified as a China well-known trademark by
the State Trademark Office in March 2008. The registration costs
were recorded as an intangible asset not subject to
amortization, as the remaining useful life is indefinite.
Amortization expense for the years ended December 31, 2008,
2009 and 2010 was RMB12.08 million, RMB10.73 million
and RMB10.25 million (US$1.55 million), respectively.
Estimated amortization expense relating to the existing
intangible assets with finite lives for each of next five years
is as follows:
The increase in accrued operating expenses resulted primarily
from the incentives accrued for advertising agents.
The increase in purchase of fixed assets was mainly due to the
purchase of computer equipment.
The increase in traffic acquisition costs was primarily due to
the growth of revenue contribution from Baidu Union members.
9.
INCOME
TAXES
The Company is incorporated in the Cayman Islands and conducts
its primary business operations through the subsidiaries and
VIEs in the PRC and Japan. It also has intermediate holding
companies in the British Virgin Islands (“BVI”) and
Hong Kong. Under the current laws of the Cayman Islands and BVI,
the Company is not subject to tax on income or capital gains.
Additionally, upon payments of dividends by the Company to its
shareholders, no
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Cayman Islands and BVI withholding tax will be imposed. Under
the Hong Kong tax laws, Baidu Hong Kong is exempted from income
tax on its foreign-derived income and there are no withholding
taxes in Hong Kong on remittance of dividends.
China
Under the current EIT Law which has been effective since 2008,
domestic enterprises and Foreign Investment Enterprises (the
“FIE”) are subject to a unified 25% enterprise income
tax rate, except for certain entities that enjoyed the tax
holidays.
An enterprise recognized as a qualified “High and New
Technology Enterprise” (“HNTE”) after 2008 is
granted the preferential EIT rate of 15%. If an enterprise,
which was recognized as a “HNTE” before 2008, is also
verified as a HNTE after 2008, it is entitled to its remaining
tax holiday granted before 2008 and a preferential EIT rate of
15% upon expiration of the tax holiday thereafter. In accordance
with tax circular Guoshuihan [2010] No. 157, a qualified
HNTE which is in the transitional period of the preferential
reduction of tax rates may choose to enjoy a subsequent 50%
reduction on the transitional tax rate, or a preferential EIT
rate of 15% without further 50% reduction.
A qualified “Software Enterprise” is entitled to
2-year
exemption and subsequent 50% tax rate reduction for
3 years. If the applicable preferential EIT rate for a
“ Software Enterprise” before 2008 is 15%, it enjoys
gradual increase in tax rate from 2008 to 2012, specifically,
18% in 2008, 20% in 2009, 22% in 2010, 24% in 2011, and 25% in
2012 according to Guofa [2007] No. 39. Thus, if an enterprise
was recognized as a qualified “Software Enterprise”
before 2008 and still retains this qualification after 2008, the
tax exemptions and deductions enjoyed by the qualified
“Software Enterprise” are based on the applicable tax
rates.
Baidu Online, recognized as a qualified “HNTE” after
2008, has enjoyed the preferential EIT rate of 15% from 2008.
Baidu Times, a qualified “HNTE” before 2008, was
granted prior to the effectiveness of the current EIT Law, tax
holidays for several years, that is, a
3-year tax
exemption from 2006 to 2008, and a subsequent 50% tax reduction
on the transitional tax rate for 2 years from 2009 to 2010,
namely, 10% in 2009 and 11% in 2010.
Baidu China, was recognized as a qualified “Software
Enterprise” before 2008 and still retains this
qualification after 2008, and thus is entitled to
2-year
exemption from 2006 to 2007 and subsequent 50% tax rate
reduction for 3 years from 2008 to 2010 at 9% in 2008, 10%
in 2009, and 11% in 2010.
Under the current EIT Law, dividends paid by a FIE to any of its
foreign non-resident enterprise investors are subject to a 10%
withholding tax. Thus, the dividends, if and when payable by
Baidu Online to Baidu BVI, would be subject to 10% withholding
tax. A lower tax rate will be applied if such foreign
non-resident enterprise investor’s jurisdiction of
incorporation has signed a tax treaty or arrangement for the
avoidance of double taxation and the prevention of fiscal
evasion with respect to taxes on income with China. There is
such a tax arrangement between PRC and Hong Kong. Thus, the
dividends, if and when payable by Baidu Times and Baidu China to
Baidu HK, would be subject to 5% withholding tax rather than
statutory rate of 10% provided that Baidu HK meets the
requirements stipulated by relevant PRC tax regulations.
Furthermore, pursuant to the applicable circular and
interpretations of the current EIT Law, dividends from earnings
created prior to 2008 but distributed after 2008 are not subject
to withholding income tax.
Moreover, the current EIT Law treats enterprises established
outside of China with “effective management and
control” located in China as PRC resident enterprises for
tax purposes. The term “effective management and
control” is generally defined as exercising overall
management and control over the business, personnel, accounting,
properties, etc. of an enterprise. The Company, if considered a
PRC resident enterprise for tax purposes, would be subject to
the PRC Enterprise Income Tax at the rate of 25% on its
worldwide income for the
Baidu Japan with a paid-in capital in excess of
JPY100.00 million is subject to national income tax of 30%.
Baidu Japan is also subject to inhabitants tax, assessed by both
prefectures and municipalities. Inhabitants tax is computed as a
percentage of national income tax. The per capita tax is based
on the Company’s capitalization and the number of
employees. In addition, Baidu Japan is subject to a corporate
enterprise tax on a pro forma basis based on the amount of
taxable profit subject to the corporate tax, added-value
components, (e.g. labor costs, net interest and rental payments,
income/loss for current year) and a capital component. Baidu
Japan has been in a cumulative loss position since its inception.
The Company had minimal operations in jurisdictions other than
the PRC. Income (loss) before income taxes consists of:
The pre-tax losses from non-PRC operations consists primarily of
the operating costs, administration expenses, interest income
and charges for share-based compensation. Income taxes consist
of:
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The reconciliation of tax computed by applying respective
statutory income tax rate to pre-tax income is as follows
(Amounts in thousands of Renminbi (“RMB”), and in
thousands of U.S. Dollars (“US$”), except for per
share data):
Effect of differing tax rates in different jurisdictions
3,533
5,101
8,416
1,275
Permanent differences — non-taxable income
(2,121
)
(6,640
)
(733
)
(111
)
Permanent differences — non-deductible expenses
2,703
9,001
10,935
1,656
Tax incentives relating to R&D expenditures
(17,848
)
(9,125
)
(22,925
)
(3,473
)
Effect of tax exemption and reduction inside PRC
(205,980
)
(258,647
)
(533,802
)
(80,879
)
Income tax refund due to overpaid provisional tax
—
(13,923
)
(6,625
)
(1,004
)
Addition of under-provided EIT for previous years
—
—
10,359
1,570
Addition to valuation allowance
44,739
51,470
55,041
8,340
Taxation for the year
116,071
198,017
535,995
81,211
Effective tax rate
9.97
%
11.76
%
13.20
%
13.20
%
Basic earnings per share for Class A and Class B
ordinary shares effect of tax exemptions and reductions inside
the PRC
6.02
7.48
15.34
2.32
The Company’s effective tax rate increased in fiscal year
2010 compared with 2009, primarily due to the increase of the
preferential EIT rates for Baidu China and Baidu Times, which
increased from 10% to 11% and 7.5% to 11%, respectively.
The tax effects of temporary differences that give rise to the
deferred tax balance at December 31, 2009 and 2010 are as
follows:
The Company does not believe that sufficient positive evidence
exists to conclude that the recoverability of Baidu Japan’s
net deferred tax assets is more likely than not to be realized.
Consequently, the Company has provided full valuation allowances
on the related net deferred tax assets.
As of December 31, 2010, the Company had net operating
losses of approximately RMB461.00 million
(US$69.85 million) from Baidu Japan, Baidu HK and PRC
entities, which can be carried forward to offset future net
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
profit for income tax purposes. The Japan net operating loss
will expire beginning 2015; the PRC net operating loss will
expire beginning 2014; and the HK net operating loss can be
carried forward without an expiration date.
The Company has evaluated its income tax uncertainty under
ASC 740-10.
ASC 740-10
clarifies the accounting for uncertainty in income taxes by
prescribing the recognition threshold a tax position is required
to meet before being recognized in the financial statements. The
Company has elected to classify interest and penalties related
to an uncertain tax position, if and when required, as part of
income tax expense in the consolidated statements of operations.
As of December 31, 2010, there is no significant tax
uncertainty impact on the Company’s financial position and
result of operations.
The Company did not provide for deferred income taxes and
foreign withholding taxes on the undistributed earnings of
foreign subsidiaries as of December 31, 2009 and 2010 on
the basis of its intent to permanently reinvest foreign
subsidiaries’ earnings. If these foreign earnings were to
be repatriated in the future, the related tax liability may be
reduced by any foreign income taxes previously paid on these
earnings. Determination of the amount of unrecognized deferred
tax liability related to these earnings is not practicable. In
the case of its VIEs, undistributed earnings were insignificant
as of each of the balance sheet dates.
In general, the PRC and Japanese tax authorities have up to five
and seven years respectively to conduct examinations of the
Company’s tax filings. Accordingly, the PRC
subsidiaries’ tax years
2007-2010
and the Japanese subsidiary’s tax years
2007-2010
remain open to examination by the respective taxing
jurisdictions.
10.
LOANS
PAYABLE, NONCURRENT
On October 27, 2010, Baidu Netcom borrowed a loan from the
Export-Import Bank of China to finance some of its
government-sponsored research projects, at the annual interest
rate of 5.60%, with respect to which the government will provide
a cash subsidy at the amount that approximates the interest of
the loan. The commitment of the unsecured bank loan amounts to
RMB140.00 million (US$21.21 million) and can be
borrowed from time to time within 3 years. As of
December 31, 2010, Baidu Netcom borrowed
RMB86.00 million (US$13.03 million) under the
commitment. The loan will be repaid according to the following
schedule from July 30, 2012. Baidu Netcom has the right to
repay and may terminate the loan upon a notice in advance.
Full time employees of the Group in the PRC participate in a
government mandated multi-employer defined contribution plan
pursuant to which certain pension benefits, medical care,
unemployment insurance, employee housing fund and other welfare
benefits are provided to employees. Chinese labor regulations
require that the Group make contributions to the government for
these benefits based on certain percentages of the
employees’ salaries. The Company has no legal obligation
for the benefits beyond the contributions. The total amounts for
such employee benefits, which were expensed as incurred, were
RMB98.18 million, RMB141.84 million and
RMB218.88 million (US$33.16 million) for the years
ended December 31, 2008, 2009 and 2010, respectively.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
12.
COMMITMENTS
AND CONTINGENCIES
Capital
commitments
The Company’s capital commitments relate primarily to
expenditures on computer equipment and the consideration in
relation to a business combination that will be closed in 2011.
Total capital commitments contracted but not yet reflected in
the financial statements amounted to RMB168.40 million
(US$25.52 million) at December 31, 2010. All of these
capital commitments are to be fulfilled within the next year.
Operating
lease commitments
The Company leases facilities in the PRC under non-cancelable
operating leases expiring on different dates. Payments under
operating leases are expensed on a straight-line basis over the
periods of the respective leases. Total rental expense under all
operating leases was RMB68.86 million,
RMB84.43 million and RMB76.87 million
(US$11.65 million) for the years ended December 31,2008, 2009 and 2010, respectively.
Future minimum payments under non-cancelable operating leases
with initial terms of one-year or more consist of the following
at December 31, 2010:
RMB
US$
(In thousands)
2011
259,927
39,383
2012
171,275
25,951
2013
151,748
22,992
2014
111,659
16,918
2015
75,457
11,433
Thereafter
79,749
12,083
849,815
128,760
Guarantees
The Company accounts for guarantees in accordance with ASC
subtopic
460-10
(“ASC
460-10”),
Guarantees: Overall. Accordingly, the Company evaluates
its guarantees to determine whether (a) the guarantee is
specifically excluded from the scope of
ASC 460-10,
(b) the guarantee is subject to
ASC 460-10
disclosure requirements only, but not subject to the initial
recognition and measurement provisions, or (c) the
guarantee is required to be recorded in the financial statements
at fair value.
The corporate by-laws require that the Company indemnify its
officers and directors, as well as those who act as directors
and officers of other entities at the Company’s request,
against expenses, judgments, fines, settlements and other
amounts actually and reasonably incurred in connection with any
proceedings arising out of their services to the Company. In
addition, the Company has entered into separate indemnification
agreements with each director and each executive officer of the
Company that provide for indemnification of these directors and
officers under similar circumstances and under additional
circumstances. The indemnification obligations are more fully
described in the by-laws and the indemnification agreements. The
Company purchases standard directors and officers insurance to
cover claims or a portion of the claims made against its
directors and officers. Since a maximum obligation is not
explicitly stated in the Company’s by-laws or in the
indemnification agreements and will depend on the facts and
circumstances that arise out of any future claims, the overall
maximum amount of the obligations cannot be reasonably estimated.
Historically, the Company has not been required to make payments
related to these obligations, and the fair value for these
obligations is zero in the consolidated balance sheets as of
December 31, 2009 and 2010.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Baidu Online has unconditionally guaranteed the repayment of
RMB-denominated bank loans from Export-Import Bank of China and
related interest and fees of Baidu Netcom. The guarantees
continue until the loans, including accrued interest and fees,
have been repaid in full. These guarantees expire in 2012. The
maximum exposure to the Company under this commitment is
RMB140.00 million (US$21.21 million) as of
December 31, 2010 and is limited to the sum of unpaid
principal and interest, as well as other related expenses.
Litigation
Baidu Netcom, Baidu China, Baidu Online and Baidu Times were
involved in certain cases pending in various PRC courts and
arbitration as of December 31, 2010. These cases include
copyright infringement cases, unfair competition cases, and
defamation cases, among others. Adverse results in these
lawsuits may include awards of damages and may also result in,
or even compel, a change in the Company’s business
practices, which could result in a loss of revenue or otherwise
harm the business of the Company.
As of December 31, 2010, the plaintiffs claimed
compensation of RMB132.95 million (US$20.14 million).
Although the results of litigation and claims cannot be
predicted with certainty, the Company does not expect the
outcome of the matters discussed above will result in a material
adverse effect on its business, consolidated financial position,
results of operations or cash flows.
13.
SHAREHOLDERS’
EQUITY
Ordinary
shares
Upon completion of the Company’s initial public offering
(“IPO”) in August 2005, 16,648,877 Class B Ordinary
shares were issued upon conversion of all convertible preferred
shares. In addition, immediately following the closing of the
IPO, the Memorandum and Articles of Association were amended and
restated such that the authorized share capital consisted of
870,400,000 ordinary shares at a par value of US$0.00005 per
share, of which 825,000,000 shares were designated as
Class A ordinary shares, 35,400,000 as Class B
ordinary shares, and 10,000,000 shares designated as
preferred shares. The rights of the holders of Class A and
Class B ordinary shares are identical, except with respect
to voting and conversion rights. Each share of Class A
ordinary shares is entitled to one vote per share and is not
convertible into Class B ordinary shares under any
circumstances. Each share of Class B ordinary shares is
entitled to ten votes per share and is convertible into one
Class A ordinary share at any time by the holder thereof.
Upon any transfer of Class B ordinary shares by the holder
thereof to any person or entity that is not an affiliate of such
holder, such Class B ordinary shares would be automatically
converted into an equal number of Class A ordinary shares.
There were 122,856, 419,654 and 650,000 Class B ordinary
shares transferred to Class A ordinary shares in 2008, 2009
and 2010, respectively.
As of December 31, 2010 there were 27,045,340 and 7,804,332
Class A and Class B ordinary shares outstanding,
respectively. As of December 31, 2009 and 2010, there were
no preferred shares issued and outstanding.
Comprehensive
Income
Comprehensive income is defined as the change in equity of the
Company during a period from transactions and other events and
circumstances excluding transactions resulting from investments
by owners and distributions to owners. Comprehensive income is
reported in the consolidated statements of shareholders’
equity. Accumulated other comprehensive income (loss) of the
Company consists of foreign currency translation adjustments.
Retained
earnings
In accordance with the Regulations on Enterprises with Foreign
Investment of China and their articles of association, the
Company’s PRC subsidiaries, being foreign invested
enterprises established in China, are required to make
appropriations to certain statutory reserves, namely a general
reserve fund, an enterprise expansion fund, a
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
staff welfare fund and a bonus fund, all of which are
appropriated from net profit as reported in their PRC statutory
accounts. Each of the Company’s subsidiaries is required to
allocate at least 10% of its after-tax profits to a general
reserve fund until such fund has reached 50% of its respective
registered capital. Appropriations to the enterprise expansion
fund and staff welfare and bonus funds are at the discretion of
the board of directors of the Company’s subsidiaries.
In accordance with the China Company Laws, the Company’s
VIEs must make appropriations from their after-tax profits as
reported in their PRC statutory accounts to non-distributable
reserve funds, namely a statutory surplus fund, a statutory
public welfare fund and a discretionary surplus fund. Each of
the Company’s VIEs is required to allocate at least 10% of
its after-tax profits to the statutory surplus fund until such
fund has reached 50% of its respective registered capital.
Appropriation to the statutory public welfare fund is 5% to 10%
of the after-tax profits as reported in the PRC statutory
accounts. Effective from January 1, 2006, under the revised
China Company Laws, appropriation to the statutory public
welfare fund is no longer mandatory. Appropriations to the
discretionary surplus fund are made at the discretion of the
Company’s VIEs.
General reserve and statutory surplus funds are restricted to
set-off against losses, expansion of production and operation
and increasing registered capital of the respective company.
Staff welfare and bonus fund and statutory public welfare funds
are restricted to capital expenditures for the collective
welfare of employees. The reserves are not allowed to be
transferred to the Company in terms of cash dividends, loans or
advances, nor are they allowed for distribution except under
liquidation.
Under PRC laws and regulations, there are restrictions on the
Company’s PRC subsidiaries and VIEs with respect to
transferring certain of their net assets to the Company either
in the form of dividends, loans, or advances. Amounts restricted
include paid up capital and statutory reserve funds of the
Company’s PRC subsidiaries and the net assets of VIEs in
which the Company has no legal ownership, totaling approximately
RMB879.43 million and RMB1.15 billion
(US$174.59 million) as of December 31, 2009 and 2010,
respectively.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
14.
EARNINGS
PER SHARE (“EPS”)
On April 28, 2010, the Company announced a change in the
ratio of its American depositary shares (“ADSs”)
representing Class A ordinary shares from one ADS for one
share to ten ADSs for one share, effective on May 12, 2010.
For Baidu’s ADS holders, this ratio change has the same
effect as
ten-for-one
ADS split.
The following table sets forth the computation of basic and
diluted net income per share for Class A and Class B
ordinary shares.
(Amounts in thousands of Renminbi (“RMB”), and in
thousands of U.S. Dollars (“US$”), except for
number of shares, per share and per ADS data)
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
15.
SHARE-BASED
AWARDS PLAN
Incentive
Compensation Plans
In January 2000, the Company adopted the 2000 Option Plan (the
“2000 Plan”). The 2000 Plan provided for the granting
of share options and restricted ordinary shares to employees and
consultants of the Company. All the options granted to Company
employees and consultants under the 2000 Plan were nonqualified
share options (“NSO”). The Company reserved 5,040,000
ordinary shares for issuance under the 2000 Plan. Under the 2000
Plan, which has expired during 2010, options granted generally
vest 25% after the first year of service and ratably each month
over the remaining
36-month
period.
In December 2008, the Company amended the 2000 Plan by adding a
new section regarding adjustment of exercise price. The exercise
price per share subject to an option might be amended or
adjusted in the absolute discretion of the 2000 Plan
administrator, which was the Board of Directors, and the
determination of which should be final, binding and conclusive.
A downward adjustment of the exercise prices should be effective
without the approval of the Company’s shareholders or the
approval of the affected grantees.
In December 2008, the Company adopted a share incentive plan
(the “2008 Plan”). The 2008 Plan provides for the
granting of share incentives, which include incentive share
option (“ISO”), restricted shares and any other form
of award pursuant to the 2008 Plan, to members of the board,
employees and consultants of the Company. However, the Company
may grant ISOs only to its employees. The Company has reserved
3,428,777 ordinary shares for issuance under the 2008 Plan,
which will expire in the year 2018. The vesting schedule, time
and condition to exercise options will be determined by the
compensation committee. The term of the options may not exceed
ten years from the date of the grant, except that five years is
the maximum term of an ISO granted to an employee who holds more
than 10% of the voting power of the Company’s share capital.
Under the 2008 Plan, the exercise price per share subject to an
option may be amended or adjusted at the discretion of the
compensation committee, the determination of which shall be
final, binding and conclusive. To the extent not prohibited by
applicable laws or exchange rules, a downward adjustment of the
exercise prices shall be effective without the approval of the
Company’s shareholders or the approval of the affected
grantees. If the Company grants an ISO to an employee who, at
the time of that grant, owns shares representing more than 10%
of the voting power of all classes of the Company’s share
capital, the exercise price cannot be less than 110% of the fair
market value of the Company’s ordinary shares on the date
of that grant.
Starting from February 15, 2006, the Company has granted
restricted Class A ordinary shares (“Restricted
Shares”) of the Company. Terms for Restricted Shares are
the same as share options except that Restricted Shares do not
require exercise and have a two to four years vesting term.
The aggregate intrinsic value in the table above represents the
difference between the Company’s closing stock price on the
last trading day in 2010 and the exercise price.
Total intrinsic value of options exercised for the three years
ended December 31, 2008, 2009 and 2010 was
RMB465.25 million, RMB340.13 million and
RMB263.97 million (US$40.00 million), respectively.
As of December 31, 2010, there was RMB51.32 million
(US$7.78 million) unrecognized share-based compensation
cost related to share options. That deferred cost is expected to
be recognized over a weighted-average vesting period of
2.90 years. To the extent the actual forfeiture rate is
different from original estimate, actual share-based
compensation costs related to these awards may be different from
the expectation.
On February 11, 2009, the Company cancelled options
previously granted to certain executives with the exercise price
significantly higher than the fair market value at that time,
and concurrently re-granted the same number of options at the
then current fair market value. The vesting of the replacement
option starts from the date of grant, and all other terms remain
the same as the original option. The cancellation and re-grant
was intended to provide incentives for these executives. In
accordance with
ASC 718-10,
the Company accounted for the cancellation of an award
accompanied by the concurrent grant of a replacement award as a
modification of the terms of the cancelled award. Therefore,
incremental compensation cost was measured as the excess of the
fair value of the replacement award over the fair value of the
cancelled award at the cancellation date. The incremental cost
resulting from the cancellation and replacement was
US$0.60 million. The cost is being amortized on a
straight-line basis over the vesting term of four years of the
replacement option.
Restricted
Shares
Restricted shares activity for the year ended December 31,2010 was as follows:
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As of December 31, 2010, there was RMB162.53 million
(US$24.63 million) unrecognized share-based compensation
cost related to restricted shares. That deferred cost will be
recognized over a weighted-average vesting period of
2.66 years. To the extent the actual forfeiture rate is
different from the original estimate, actual share-based
compensation costs related to these awards may be different from
the expectation.
The fair value of each option award was estimated on the date of
grant using the Black-Scholes Method valuation model. The
volatility assumption was estimated based on implied volatility
and historical volatility of the Company’s share price
applying the guidance provided by ASC subtopic
718-10
(“ASC
718-10”),
Compensation-Stock Compensation: Overall. The Company
considered the comparable data in 2008 because the Company had
limited relevant historical information to support the expected
volatility assumption as the Company has been a public company
only since August 2005. The Company begins to estimate the
volatility assumption solely based on its historical information
since 2009. Assumptions about the expected term were based on
the vesting and contractual terms and employee demographics. The
risk-free rate for periods within the contractual life of the
option is based on the U.S. Treasury yield curve in effect
at the time of grant.
The following table presents the assumptions used to estimate
the fair values of the share options granted in the periods
presented:
2008
2009
2010
Risk-free interest rate
1.74%~2.60%
1.18%
0.61%~1.13%
Dividend yield
—
—
—
Expected volatility range
63.52%~70.82%
85.43%
64.76%~69.70%
Weighted average expected volatility
66.54%
85.43%
68.12%
Expected life (in years)
1.63~2.64
2.65
2.65~2.66
In addition, the Company recognizes share-based compensation
expense net of an estimated forfeiture rate and therefore only
recognizes compensation cost for those shares expected to vest
over the service period of the award. The estimation of the
forfeiture rate is based primarily upon historical experience of
employee turnover. To the extent the Company revises this
estimate in the future, the share-based payments could be
materially impacted in the year of revision, as well as in
following years. During the year ended December 31, 2010,
the estimated forfeiture rate decreased for the employee group
primarily due to changes in historical employee turnover rates.
The exercise price of options granted during the years 2008,
2009, and 2010 equaled the market price of the ordinary shares
on the grant date. The weighted-average grant-date fair value of
options granted during the years 2008, 2009, and 2010 was
US$136.97, US$94.10, and US$279.69, respectively.
The total fair value of shares vested during the years ended
December 31, 2008, 2009 and 2010 was RMB37.57 million,
RMB201.83 million, RMB237.71 million
(US$36.02 million), respectively.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
16.
RELATED
PARTY TRANSACTIONS
The amounts due from related parties mainly represent payments
due from advertising services provided and borrowings provided
by the Company to its equity investees. The amounts due from
equity investees are unsecured and repayable on contract terms,
which arose in the ordinary course of business.
The amounts due to related parties represent unsecured and
interest free short-term loans provided by the Company’s
equity investees, which arose in the ordinary course of business.
17.
SEGMENT
REPORTING
In accordance with ASC subtopic
280-10
(“ASC
280-10”),
Segment Reporting: Overall, the Company’s chief
operating officer relies upon consolidated results of operations
when making decisions about allocating resources and assessing
performance of the Company; hence, the Company has only one
single operating segment. The Company does not distinguish
between markets or segments for the purpose of internal
reporting.
The Company’s revenue and long-lived assets are primarily
derived from and located in the PRC. The Company has only
minimal operations in Japan and other countries.
The following table sets forth revenues by geographic area:
ASC subtopic
820-10
(“ASC
820-10”),
Fair Value Measurements and Disclosures: Overall,
establishes a three-tier fair value hierarchy, which prioritizes
the inputs used in measuring fair value as follows:
Level 1 — Observable inputs that reflect
quoted prices (unadjusted) for identical assets or liabilities
in active markets
Level 2 — Include other inputs that are
directly or indirectly observable in the marketplace
Level 3 — Unobservable inputs which are
supported by little or no market activity
ASC 820-10
describes three main approaches to measuring the fair value of
assets and liabilities: (1) market approach;
(2) income approach and (3) cost approach. The market
approach uses prices and other relevant
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
information generated from market transactions involving
identical or comparable assets or liabilities. The income
approach uses valuation techniques to convert future amounts to
a single present value amount. The measurement is based on the
value indicated by current market expectations about those
future amounts. The cost approach is based on the amount that
would currently be required to replace an asset.
Assets
and liabilities measured at fair value on a recurring
basis
In accordance with
ASC 820-10,
the Company measures cash equivalents and debt and equity
securities, including
held-to-maturity,
trading and
available-for-sale
securities, at fair value. Cash equivalents are valued using
quoted market prices. The Company’s
held-to-maturity
securities, including fixed-rate investments and adjustable-rate
investments, are stated at amortized cost with the fair value
determined based on the discounted cash flow model using the
discount curve of market interest rates. The Company’s
short-term
available-for-sale
securities were recorded at fair value based on quoted market
prices. The Company’s long-term
available-for-sale
securities were initially recognized at the market price. The
fair value on December 31, 2010 was determined by using the
income approach based on inputs that are unobservable in the
market.
In May 2010, the Company acquired a long-term investment in
6DXchange Inc., which is classified as an
available-for-sale
security. As there was no readily determinable fair value for
the investment in 6DXchange Inc., the Company estimated its fair
value as of December 31, 2010 using an income approach by
considering cash flow forecasts, discount rate, actual and
projected operational performance and certain market data
related to the business of 6DXchange Inc. As of
December 31, 2010, the fair value of long-term investments
in available-for sale securities approximates the cost of the
investment of US$3.79 million. There has been no impairment
charge of this long-term
available-for-sale
security during the year ended December 31, 2010.
Assets measured at fair value on a recurring basis are
summarized below (in thousands):
The following table presents a reconciliation for the
Company’s assets measured and recorded at fair value on a
recurring basis, using significant unobservable inputs
(Level 3) for the year ended December 31, 2010
(in thousands):
Assets
and liabilities measured at fair value on a nonrecurring
basis
The Company measures certain financial assets, including equity
method investments and cost method investments, at fair value on
a nonrecurring basis only if an impairment charge were to be
recognized. The Company’s non-financial assets, such as
intangible assets, goodwill and fixed assets, would be measured
at fair value only if they were determined to be
other-than-temporarily
impaired.
For the year ended December 31, 2010, the Company
recognized an impairment loss on fixed assets, with a charge to
earnings, based on the fair value measurement
(Level 3) on a non-recurring basis. The fair value was
determined using a discounted cash flow model under income
approach based on future revenues and operating costs, using
internal projections. The impairment charge amounted to
RMB12.40 million (US$1.88 million) for the year ended
December 31, 2010, which resulted from reduced use of
certain capitalized internal-use software due to changes in
operations.
19.
SUBSEQUENT
EVENTS
On January 31, 2011, the Company entered into agreements
with NTT DOCOMO, INC. (“DCM”), pursuant to which the
parties agreed to establish a joint venture to operate mobile
value-added telecommunications services and provide multiple
categories of digital content. According to the agreements, DCM
will subscribe for new ordinary shares in the new joint venture
in two installments in 2011, with a total consideration of
US$22.50 million. The
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Company and DCM will ultimately hold 80% and 20% of the equity
interest in the new joint venture respectively, upon the
completion of the ordinary shares subscription.
On February 28, 2011, the Company entered into agreements
with ANJUKE INC. (“ANJUKE”), a company incorporated
and existing under the laws of the Cayman Islands, pursuant to
which the Company agreed to subscribe for 1,981,378
series C preferred shares of ANJUKE with a total cash
consideration of US$23.0 million. The Company will hold 5%
of equity interest in ANJUKE on an as-converted basis and
account for the investment under the cost method upon the
completion of the preferred shares subscription.
F-42
Dates Referenced Herein and Documents Incorporated by Reference
