Notes to the consolidated income statement

Significant differences in accounting practices between I FRS/IAS and German commercial law (HGB)

Accounting policies
Pursuant to IFRS 1, International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS) are applied retrospectively upon their initial adoption. Figures from previous periods are adjusted as if they were originally reported under IAS/IFRS.

The application of new standards published as part of the International Accounting Standards Board Improvement Project in December 2003 was not compulsory until January 1, 2005. They have only been applied to these financial statements where explicitly stated in these notes.

During fiscal 2004, new standards were published that come into force January 1, 2005 or later. Of these, Software AG chose to apply the provisions of IFRS 3 relating to the impairment testing of goodwill.

Accounting and valuation rules that differ significantly from the German Commercial Code include:

• Goodwill is subject to regular impairment tests; no scheduled amortization is undertaken.
• Securities available-for-sale are measured at fair value, even if this exceeds cost. Price gains or losses are excluded from income and recorded as other reserves in shareholders’ equity.
• Derivatives are measured at market value, even if this exceeds cost. Price losses and gains are reported in the income statement.
• Revenue of fixed price contracts is recognized according to the stage of completion.
• Buildings are depreciated according to the anticipated useful life and not according to tax scales.
• Leases that qualify as finance leases under the more restrictive IFRS requirements are reported under both assets and lease liabilities in the balance sheet.
• Provisions are only created for obligations to third parties provided the probability of an outflow of resources is regarded as more likely to occur than not. Medium and long-term provisions are recorded at net present value. Provisions for neglected maintenance and other expense provisions are no longer created.
• Pension provisions are calculated according to the projected unit credit method.
• Under IFRS deferred tax liabilities and deferred tax assets should be recognized for all temporary differences arising between taxable balance and trade balance; quasi-permanent differences are also classified as temporary. Deferred taxes are measured on the basis of tax rates expected to apply at the anticipated time of the reversal of the deferral – i.e. when the asset is realized or the liability settled – according to the legal situation prevailing in the individual countries at the time the financial statements are prepared. According to the provisions of the German Commercial Code only deferred tax assets and deferred tax liabilities related to consolidation measures are required to be recorded. Deferred taxes are thereby calculated based on tax rates applicable at the balance sheet date. Deferred taxes may not be recorded for quasi-permanent differences between amounts in the financial statements for tax purposes and the consolidated financial statements that will only be realized in the longer term or in the case of sale of an asset or liquidation. A deferred tax asset should be recognized for the carry forward of unused tax losses to the extent that it is probable that future taxable profit will be available against which the unused tax losses can be utilized. Under German accounting law, deferred tax assets for tax loss carry forwards were only permitted to be created starting in fiscal 2003 pursuant to DRS 10. Deferred tax assets, netted against deferred tax liabilities that may be offset, increase by €38,060 thousand as of January 1, 2003. This is to a great degree the result of additional utilization of tax loss carry forwards, as well as the accounting and measurement of provisions. According to IFRS deferred tax liabilities of €17,006 thousand should be recorded; they pertain mainly to deferred taxes arising from deferred revenue and carrying amounts in property, plant and equipment.
• Monetary items in foreign currency are measured at the rate applicable on the balance sheet date and recognized in net income for the period. Translation differences from long-term, intercompany monetary items that are part of a net investment in a foreign company constitute an exception to the above and are included in other reserves in shareholders’ equity without impacting income.

Reconciliation of the Balance Sheet
from HGB to IFRS at January 1, 2003
(Table)

Comments to the reconciliation of the Balance Sheet from HGB to IFRS at January 1, 2003:

(1)
Work in progress as defined by HGB was recognized and posted as non-invoiced receivables according to the per-centage of completion method (including a portion of the margin).

(2)
Derivative instruments are valued at fair market value, even where this exceeds the cost of acquisition.

(3)
Depreciation of property was adjusted to take account of expected useful economic life. Assets from capital leases were capitalized.

(4)
This change is a result of the fair-market valuation of securities. The change is included in other comprehensive income under equity, but not recognized in net profit or loss for the period.

(5)
Deferred tax assets are primarily formed for loss carryforwards and provisions. Deferred tax liabilities are primarily formed for deferred expense and property, plant and equipment.

(6)
Long and short-term financial liabilities include capitalized liabilities from capital leases.

(7)
Certain provisions under HGB were reclassified as short or long-term liabilities to comply with IFRS.

(8)
The adjustment of provisions (recognized in net profit or loss) primarily comprises dissolved provisions for expenses (maintenance, guarantees) and provisions where the probability of the obligation having to be settled is less than 50 percent (legal costs, contingent losses, general risks). Reclassifications comprise provisions which, according to IFRS, are to be posted as liabilities. See also note (7).

(9)
The increase in pension provisions is primarily a result of the requirement under IFRS to include indirect pension obligations at SAG UK. These were not previously included, in accordance with the option granted by Article 28 of the Introductory Act to the German Commercial Code (EGHGB).

(10)
Other reserves includes unrealized gains from the fair-market valuation of securities and differences from the translation of long-term intra-Group cash positions in foreign currencies (i.e. not in euros).

Reconciliation of the Balance Sheet
from HGB to IFRS at December 31, 2003
(Table)

Comments to the reconciliation of the Balance Sheet from HGB to IFRS at December 31, 2003:

(1)
Work in progress as defined by HGB was recognized and posted as non-invoiced receivables according to the percentage of completion method (including a portion of the margin).

(2)
Scheduled amortization of goodwill pursuant to HGB was reversed as, according to IFRS 1, where IFRS 3 is voluntarily applied to 2004, must be applied to 2003. Accordingly, 2003 goodwill was not amortized according to the straightline method.

(3)
Depreciation of property was adjusted to take account of expected useful economic life. Assets from capital leases were capitalized.

(4)
This change is a result of the fair-market valuation of securities. The change is included in other comprehensive income under equity, but not recognized in net profit or loss for the period. Derivative instruments are valued at fair market value, even where this exceeds the cost of acquisition.

(5)
Deferred tax assets are primarily formed for loss carryforwards and provisions. Deferred tax liabilities are primarily formed for deferred expense and property, plant and equipment.

(6)
Long and short-term financial liabilities include capitalized liabilities from capital leases.

(7)
Certain provisions under HGB were reclassified as short or long-term liabilities to comply with IFRS.

(8)
The adjustment of provisions (recognized in net profit or loss) primarily comprises dissolved provisions for expenses (maintenance, guarantees) and provisions where the probability of the obligation having to be settled is less than 50 percent (legal costs, contingent losses, general risks). Reclassifications comprise provisions which, according to IFRS, are to be posted as liabilities. See also note (7).

(9)
The increase in pension provisions is primarily a result of the requirement under IFRS to include indirect pension obligations at SAG UK. These were not previously included, in accordance with the option granted by Article 28 of the Introductory Act to the German Commercial Code (EGHGB).

(10)
All currency translation differences were posted since the changeover to IFRS accounting methods. As permitted by IFRS 1.22, the HGB figure was reset to zero for the IFRS statements on January 1, 2003.

(11)
Other reserves includes unrealized gains from the fair-market valuation of securities and differences from the translation of long-term intercompany cash positions in foreign currencies (i.e. not in euros).