Accounting Policies

Revenue
Software AG primarily generates revenue from software licenses of usually unlimited periods of usage, maintenance, and other services. Sales from perpetual software licenses are only posted as revenue once a contract has been signed with the customer, all possible rights of return have expired, the software has been delivered, a price has been agreed or can be established, and there is sufficient probability that payment will be made.

Maintenance revenues are prorated over the period of service provision.

Service agreements that are invoiced based on hours performed are recognized in relation to the services rendered by the Group companies.

Pursuant to IAS 11 and IAS 18, revenues and expenses from fixed-price service contracts are recognized according to the percentage-of-completion method if revenues can be reliably measured, there is sufficient probability that Software AG will receive the economic benefits of the transaction, and all related costs expected by completion of the service can be reliably established.

Revenues are reported net of discounts, price rebates, customer bonuses and allowances.

Cost of sales
Costs of sales include all production-related costs based on normal capacity utilization. They include individual unit costs that can be directly allocated to projects, plus fixed and variable overheads. Financing costs are not capitalized as part of manufacturing costs. No write-downs on inventories were required during the reporting period.

Research and development costs
Research and development costs are recorded as expense in the income statement as they are incurred.

The creation and development of software involves closely linked research and development phases. As a result, expenses incurred for research cannot be strictly separated from those incurred for development. The criteria for the capitalization of development expenses defined in IAS 38.57 in conjunction with 38.53 (revised 2004) are thus not met.

Financing costs
Interest expense is recognized in the period in which it is incurred in accordance with IAS 23.

Cash and cash equivalents
Software AG treats cash on hand, deposits with bank, fixed-term deposits with terms of up to 3 months and securities under current assets as cash and cash equivalents. The securities account includes exclusively short-term, highly liquid financial investments that can be converted to cash immediately and are subject only to minor price fluctuation risks.

The Company classifies all securities under current assets as “held-for-trading”. Securities are initially recognized at cost on the day they are acquired. Measurement at the balance sheet date is at market value. Changes in value are included in income.

Inventories
Inventories are recognized at the lower of cost and net realizable value. The net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

Trade receivables
Trade receivables are carried at the fair value applicable when revenues are realized or services provided, and measured at amortized cost less bad debt provisions.

Receivables from software licenses are recognized only if there is a signed contract with the customer, any rights of return have expired and the software has been delivered in accordance with the terms of the contract.

Trade receivables are carried at their nominal value, unless specific write-downs were necessary to cover default risks. Receivables with maturities in excess of one year are discounted at market rates.

Trade receivables also cover performance under fixed-price projects not yet invoiced, which are recognized according to their degree of completion.

Other receivables and other assets
Other receivables and other assets are initially measured at cost, and are subsequently written down to their fair value.

Intangible assets
Intangible assets for which a useful life can be established, are measured at cost less any accumulated amortization and any accumulated impairment losses. Intangible assets with an indefinite useful life, such as goodwill, are carried at cost less any accumulated impairment losses.

Goodwill
In accordance with IFRS 3, goodwill is not amortized, but written down in case of impairment. The residual amount is annually tested for impairment and written down to its fair value if there are any indications for impairment.

Property, plant and equipment
Property, plant and equipment is carried at cost less any accumulated depreciation and any accumulated impairment losses. Where items are sold or scrapped, the relevant cost and any accumulated depreciation and any accumulated impairment losses are eliminated. Gains or losses arising from the disposal of the asset are recognized as income or expense in the income statement.

The cost of an item of property, plant and equipment includes the purchase price as well as any applicable import duties and non-refundable sales tax and all directly attributable costs required to prepare the asset for its intended use. Subsequent expenditure, such as service and maintenance charges that arise once the asset is put into operation, are recognized as expense in the period in which they are incurred. Subsequent expenditure relating to an item of property, plant and equipment is only added to the carrying amount of the asset where this improves the condition of the asset beyond its originally assessed standard of performance. Financing costs are not capitalized as part of costs.

In accordance with their useful economic lives, items of property, plant and equipment are generally depreciated using the straight-line method:

The terms of useful life and depreciation methods are reviewed on a regular basis to ensure they are in accordance with the anticipated economic life of the asset in question.

Assets under construction are recorded as such. Depreciation on these items begins only after they have been completed and put into operation.

Impairment of intangible assets and property, plant and equipment
As soon as there are indications that an intangible asset or item of property, plant and equipment is impaired, the carrying amount of the asset is reduced to its recoverable amount and an impairment loss is recognized. The recoverable amount is the higher of the asset’s market value and its value in use. The value in use is the present value of estimated future cash flows expected to arise from the continuing use of the asset and from its disposal at the end of its useful life.

Impairment losses are reported under costs of the relevant functional area or under other operating expense.

Financial assets
Securities in the amount of €231 thousand comprise investments in securities’ funds to cover the value of employee time accounts in case of insolvency.

Leases
Fixed assets include assets provided under leasing contracts. Software AG leases computer hardware and accessories, and office equipment. In accordance with IAS 17, leasing contracts are classified, according to opportunities and risks, as capital leases (where the leased asset is allocated to the lessee) or operating leases (where the leased asset is allocated to the lessor).

Leased objects are recognized on the balance sheet as both assets and lease obligations, in equal amounts. They are carried at the lower of the fair value of the lease object at the beginning of the lease and the present value of minimum lease payments. Capitalized leased objects are depreciated according to the straight-line method over their useful lives, or, if shorter, the lease term. Future lease payments are recognized as financial liabilities.

Financial assets and hedging instruments
Financial assets are initially recognized at cost, including transaction costs. The subsequent measurement depends on their classification.

Financial assets available for sale are recognized according to their market value at the balancesheet date. Gains or losses are excluded from income and reported in equity as other reserves.

Financial assets are recorded at their fair value where this can be reliably established. Loans and receivables included under this item which are not held for trading purposes, and assets with no published price quotation on an active market, the fair value of which can not be reliably determined, are measured at amortized cost. Carrying amounts are regularly reviewed for significant objective indications of impairment. Impairment losses are charged against net income for the period.

Deferred taxes
Deferred tax assets and liabilities have been recognized for all temporary differences between the carrying amounts in accounts prepared for tax purposes and the carrying amounts in the financial statements, as well as with respect to consolidation measures with an impact on income. Deferred tax assets also include claims for tax reductions resulting from the anticipated use of loss carry forwards in subsequent years, the realization of which is deemed reasonably certain.

Deferred taxes are calculated on the basis of tax rates which apply or are anticipated in the relevant countries according to the legal situation prevailing at the time of realization (reversal of tax deferrals).

Deferred tax assets and liabilities are not discounted. The carrying values of deferred taxes are regularly examined and, where necessary, adjusted.

Liabilities
Current liabilities are reported at their repayment or settlement amount.

Non-current liabilities are recorded at amortized cost. Amortized cost is determined using the effective interest rate method by discounting the repayment amount.

Provisions
Provisions are set up in the event that a current legal or constructive obligation towards a third party exists due to a past event, which is likely to result in a future outflow and for which the amount of the obligation can be reliably estimated. Estimates are regularly reviewed and adjusted.

If the interest rate impact is significant, the net present value of required expenditures anticipated in fulfillment of the application is recorded.

Provisions for pensions and similar obligations
Pension plans may be either defined benefit plans or defined contribution plans. Pension provisions are calculated on an actuarial basis using the projected unit credit method set out in IAS 19. This approach takes into account anticipated future increases in pensions and salaries in addition to the pensions known at the balance sheet date.

Provisions for pensions are accounted for in line with the amendment to IAS 19, issued in December 2004. Accordingly, they are created at the full present value of the defined obligation, adjusted for the present value of the cover taken out to protect defined benefit obligations, and reduced by the fair value of plan assets. Changes to actuarial gains/losses in comparison to 2003 are excluded from income and allocated to retained earnings. Due to their absolute and relative immateriality (€–214 thousand), these amounts were included in income in the previous year.

German pension obligations are calculated on the basis of the 1998 mortality tables compiled by Prof. Dr. Klaus Heubeck.

Since employees do not receive illness-related allowances either domestically or abroad, calculation of costs related to health care plans is not required.

In the case of defined contribution plans the Group incurs no obligations.

For the defined contribution plan, Software AG has no obligations other than the payment of contributions to special-purpose funds. Contribution payments are recorded against current income.