General
[1] Basis of presentation
Software AG’s consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as promulgated by the International Accounting Standards Board (IASB) and as applicable in the EU and in accordance with the additional provisions required under German commercial law as set forth in Section 315a (1) of the German Commercial Code (HGB). The IFRSs applicable as of December 31, 2008 were observed, as were the interpretations of the International Financial Reporting Interpretations Committee (IFRIC – formerly SIC).
Software AG is a registered stock corporation under German law with registered offices in Darmstadt. It is the parent company of a Group that is globally active in the fields of software development, licensing, and maintenance as well as IT services. The functional currency of Software AG is the euro.
The consolidated financial statements of Software AG are expressed in thousands of euros unless otherwise stated.
[2] Scope of consolidation
The consolidated financial statements include Software AG and all of the entities it controls. Control is generally considered to exist if Software AG directly or indirectly controls the majority of voting rights of an entities subscribed capital and/or is in a position to govern the financial and operating policies of a company.
The following affiliated entities are part of the Group of Software AG (parent company):
a) Domestic entities | Shareholding in % | Abbre-
viations |
Software Financial Holding GmbH, Darmstadt | 100 | SAG-MK |
SAG East GmbH - A Software Company, Darmstadt | 100 | SAG-ME |
SAG Deutschland GmbH, Darmstadt | 100 | SAG-D |
SAG Consulting Services GmbH, Darmstadt | 100 | SAG-PS |
b) Foreign entities | Shareholding in % | Abbre-
viations |
Software AG (UK) Limited, Derby/United Kingdom and its subsidiary | 100 | SAG-UK |
| 76 | SAG-B |
in which Software AG also has a direct stake | 24 | |
Software AG Development Center Bulgaria EOOD,
| 100 | SAG-BULG |
Software AG (Gulf SPC), Manama/Kingdom of Bahrain | 100 | SAG-GULF |
Software AG France S.A.S, Gentilly/France | 100 | SAG-F |
Software AG Italia S.p.A, Segrate (MI)/Italy | 100 | SAG-I |
Software AG Nederland B.V., Amsterdam/Netherlands | 100 | SAG-NL |
Software AG Nordic A/S, Taastrup/Dänemark and its subsidiaries | 100 | SAG-DK |
| 100 | SAG-N |
| 100 | SAG-S |
| 100 | SAG-SF |
Software AG Österreich, Wien/Austria | 100 | SAG-A |
Software AG Polska Sp. z o.o., Warszawa/Poland | 100 | SAG-PL |
Software AG s.r.o., Praha/Czech Republic | 100 | SAG-CZ |
Software AG Bilgi Sistemleri Ticaret A.S.,
| 100 | SAG-TR |
Software AG Argentina S.R.L.,
| 95 | SAG-ARG |
Softinterest Holding AG, Zug/Switzerlandand its subsidiary | 100 | SIH |
| 100 | SAG-CH |
Software AG España, S.A. Unipersonal, Tres Cantos,
| 100 | SAG-E |
Software AG Latinoamérica, S.L., Tres Cantos
| 100 | SAG-LATAM |
| 100 | SAG-P |
| 100 | SAG-CL |
| 100 | SAG-BRAS |
| 100 | SAG-CLSA |
| 100 | SAG-PUER |
| 100 | SAG-VEN |
| 100 | AZA |
| 100 | SINSA |
| 100 | SAG-PAN |
| 100 | SAG-CR |
Software AG, Inc., Reston, VA/USA and its subsidiaries | 100 | SAG-USA |
| 100 | SAG-CAN |
| 100 | SAG-MEX |
| 100 | SAG-LLC |
| 100 | SAG-FUN |
| 100 | SAG-INT |
| 100 | wM-USA |
| 100 | wM-INTELLI |
| 100 | wM-DOOR |
| 100 | wM-DANTE |
| 100 | wM-MIND |
| 100 | wM-INFRAV |
| 100 | wM-INFIND |
| 100 | wM-INFIND |
| 100 | wM-CHAMEL |
| 100 | wM-WEST |
| 100 | wM-WW |
| 100 | wM-CAN |
| 100 | wM-AUS |
| 100 | wM-IN |
| 100 | wM-CHINA |
| 100 | wM-D |
| 100 | wM-HK |
| 100 | SAG-JAP |
Software AG Japan
| 100 | wM-JAP |
| 100 | wM-KOR |
| 100 | wM-MAL |
| 100 | wM-SIN |
| 100 | wM-UK |
| 100 | wM-S |
| 100 | SAG-AUS
|
| 100 | SAG-AUS
|
SGML Technologies Limited, Derby/United Kingdom | 100 | SGML |
Software AG (Hong Kong) Limited, Hong Kong/
| 100 | SAG-HK |
Software AG (Singapore) Pte Ltd, Singapore/Singapore and its subsidiary | 100 | SAG-SIN |
| 100 | SAG-AP |
Software AG (M) Sdn. Bhd., Kuala Lumpur/Malaysia | 100 | SAG-MAL |
Software AG (Philippines), Inc., Pasig City/Philippines | 100 | SAG-PHI |
Software AG South Africa (Pty) Ltd, Bryanston/South Aftica | 100 | SAG-ZA |
Software AG (India) Private Limited, Maharashtra/India | 100 | SAG-IN |
Software AG (Shenzhen) Co Ltd, Shenzhen/VR China (PRC) | 100 | SAG-CHINA |
Software A.G. (Israel) Ltd, Or-Yehuda/Israel and its subsidiary | 100 | SAG-ISR |
| 100 | SAG-ISRUS |
SAG Systems RUS Limited Liability Company, Moscow/Russland | 100 | SAG-RUS |
Software AG Saudi Arabia, LLC, Riyadh/Saudi-Arabia, | 95 | SAG-SA |
in which SAG East GmbH also has a direct stake | 5 |
|
S.P.L. Software Ltd, Or-Yehuda/Israel and its subsidiaries | 100 | SPL-ISR |
| 100 | SPL-SYS86 |
| 100 | SPL-IM |
| 100 | SPL-IBS |
| 100 | SPL-HOLD |
| 100 | SPL-SYS |
| 100 | SPL-TXT |
Changes in the consolidated group
The number of consolidated entities decreased from the level as of December 31, 2007 due to the following transactions:
The following entities were merged effective January 1, 2008:
- Software AG, Ltd., Tokyo/Japan was merged into webMethods Japan Kabushiki Kaisha (webMethods Co., Ltd.), Tokyo/Japan
- webMethods B.V., Amsterdam/Netherlands was merged into Software AG Nederland B.V., Nieuwegein/Netherlands
- webMethods France Sarl, Paris/France was merged into Software AG France S.A.S., Gentilly/France
Software AG Latinoamérica, S.L., Tres Cantos (Madrid), Spain was merged into Software AG Espana S.A. Unipersonal, Tres Cantos, (Madrid), Spain, effective September 29, 2008.
On June 5, 2008, Software AG Argentina S.R.L. was established in Buenos Aires, Argentina, with a share capital of €100 thousand.
Effective March 31, 2008, 49% of the shares in Software AG (India) Private Limited were purchased from I-Gate Global Solutions Limited at a price of €609 thousand.
Software AG Chile S.A., Santiago, Chile was liquidated effective December 3, 2008.
Software AG Funding Corporation, Reston, VA, USA was liquidated effective June 23, 2008.
[3] Accounting policies
Use of estimates
In the preparation of the consolidated financial statements, estimates and assumptions were made for certain items that have an impact on the recognition and measurement of the assets, liabilities, income, expenses, and contingent liabilities reported. Actual amounts may differ from these estimates.
Principles of consolidation
The separate financial statements of the entities included in the consolidated financial statements were prepared in accordance with uniform accounting policies pursuant to IFRS as of the balance sheet date for the consolidated financial statements (December 31, 2008).
The initial consolidation method applied to business combinations was based on the respective date of foundation in the case of companies founded by Software AG. For acquired companies, the date of acquisition was taken as the consolidation date.
The initial consolidation of the entities that were first consolidated prior to December 31, 2002 was performed on the basis of the book value method in accordance with Section 301 (1) Sentence 1 of the German Commercial Code (HGB). Accordingly, the acquisition and start-up costs were offset against the Group’s share in equity of the consolidated subsidiaries. Initial consolidation after the transition to IFRS on January 1, 2003 (date of transition) was performed in accordance with IFRS 3 regulations. Subsequent consolidations were derived from the relevant initial consolidation.
Goodwill arising from business combinations was offset against retained earnings for acquisitions prior to January 31, 2001 in accordance with Section 309 (1) of the Commercial Code. Goodwill arising after January 31, 2001 was capitalized in accordance with previously applicable HGB (German Commercial Code) accounting principles and amortized over 10 years using the straight-line method. In accordance with the option set out in IFRS 1.14, the Company continues to account for business combinations and the resulting goodwill on the date of transition to IFRS in accordance with the German Commercial Code.
Since the transition to IFRS on January 1, 2003, goodwill previously capitalized in line with the Commercial Code has been measured in accordance with IAS 36. Thus goodwill was frozen at the carrying amount stated on the date of transition from HGB to IFRS (January 1, 2003) and only written down in the case of impairment. Goodwill reported on the balance sheet is tested annually for impairment.
Revenue, expenses and income, and receivables and payables arising between consolidated entities have been eliminated. Intercompany earnings are eliminated where they have not arisen from services to third parties. Group equity and net income attributable to minority interests are reported separately from equity and net income attributable to the shareholders in the parent company.
Currency translation
Financial statements of foreign subsidiaries are translated in accordance with the functional currency concept using the modified closing rate as set out in IAS 21. Since the subsidiaries operate independently from an organizational, financial, and business standpoint, the respective local currency is identical with the functional currency.
Income and expenses are translated at the relevant monthly average rate, assets and liabilities are translated at the closing rate, and the respective equity of the subsidiaries is translated at historical rates.
Currency translation differences arising from the equity consolidation are offset against equity and reported on a separate line in the statement of changes in equity.
Currency translation differences resulting from the elimination of intragroup balances are recognized under “other operating income” and “other operating expenses” on the income statement.
In the fixed assets schedule, the balances at the beginning and the end of the fiscal year are translated at the applicable closing rates, and other items are translated at average rates. Any differences arising from exchange rate fluctuations are shown as currency translation differences on a separate line under both “cost” and “accumulated depreciation/amortization.”
In the separate financial statements of the consolidated entities, foreign currency receivables and payables are translated at the closing rate. Exchange rate gains and losses not yet realized as of the balance sheet date are included in profit or loss for the period, except for translation differences from long-term, intercompany monetary items that are part of a net investment in a foreign company. These differences are recognized directly in equity under “other reserves.”
The exchange rates used for the translation of the most important currencies changed as follows compared to the previous year:
Average rate (€1) | Dec. 31, 2008 | Dec. 31, 2007 | Exchange rate change in % |
U.S. dollar | 1.3976 | 1.4718 | 5.0% |
Brazilian real | 3,2574 | 2.6208 | -24.3% |
Pound sterling | 0,9589 | 0.7347 | -30.5% |
Japanese yen | 126.40 | 165.10 | 23.4% |
Closing rate (€1) | 2008 | 2007 | Exchange rate change in % |
U.S. dollar | 1.4705 | 1.3700 | -7.3% |
Brazilian real | 2.6714 | 2.6629 | -0.3% |
Pound sterling | 0.7967 | 0.6845 | -16.4% |
Japanese yen | 152.28 | 161.18 | 5.5% |
Total revenue
Software AG sales revenues primarily consist of revenue from granting software licenses (usually of indefinite duration), in exceptional cases rental licenses, maintenance revenue, and revenue from Professional Services. Revenue from granting perpetual licenses is only recognized once a contract has been signed with the customer, any rights to return have expired, the software has been delivered in accordance with the contract, a price has been agreed or can be established, and there is sufficient probability that payment will be made.
In the case of multiple element arrangements, revenue recognition is based on the individually identifiable elements. Accordingly, revenue is allocated to the individual elements on the basis of their respective market values.
If reliable market values cannot be determined for all elements, revenue recognition is based on the residual method. Under the residual method, all determinable market values are deducted from the total contract value. The residual amount is then allocated to the elements for which no reliable market values can be determined, using list prices.
Revenue from maintenance business is recognized proportionately over the period of service provision.
Revenue resulting from contracts for Professional Services, which are invoiced on the basis of hours performed, is recognized in the period in which the services are rendered by the SAG entities.
Pursuant to IAS 18 in conjunction with IAS 11, revenues and expenses from fixed-price service contracts are recognized in accordance with the percentage-of-completion (POC) method if the revenues can be reliably measured, there is sufficient probability that Software AG will receive the economic benefits from the transaction, and all costs incurred for the transaction and the costs to complete the service can be reliably established. The stage of completion of a contract is calculated on the basis of the proportion that contract costs incurred for work performed as of the balance sheet date bear to the estimated total contract costs.
Revenues are reported net of discounts, price rebates, customer bonuses, and allowances.
Cost of sales
Cost of sales includes all production-related full costs based on normal capacity utilization. In particular, the cost of sales includes the individual unit costs that can be directly allocated to the orders as well as fixed and variable overheads. Borrowing costs are not capitalized as part of cost. No write-downs on inventories were required during the reporting period.
Research and development expenses
Research and development expenses are recognized in the income statement as they are incurred.
The creation and development of software involves the use of closely linked, iterative processes between the 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 are therefore not fulfilled. Software acquired for a consideration in connection with business combinations is capitalized at market value.
Sales, marketing and distribution expenses
Sales, marketing and distribution expenses include costs for personnel, materials, depreciation allocated to the sales cost center, and advertising costs.
Administrative expenses
Administrative expenses include costs for personnel, materials, and depreciation allocated to the administration cost center.
Borrowing costs
In accordance with the provisions of IAS 23, interest expenses are recognized in income in the period in which they are incurred.
Share-based payment
In accordance with IFRS 2, share-based payment transactions are divided into cash-settled and equity-settled transactions. Both types of payment transactions are measured at the fair value as of the grant date and then amortized as personnel expense over the period in which the employees acquire an unconditional right to the cash settlement or equity instrument. Rights granted under cash-settled share-based payment transactions are remeasured at fair value on each reporting date until settlement.
If Software AG has a choice of settling either in cash or by providing equity instruments (shares), the right granted is accounted for as an equity-settled transaction, unless there is a present obligation to settle in cash.
The fair values are determined using either an option pricing model (Black-Scholes) or, if the rights granted are hedged with derivatives, by reference to the fair values of such derivatives.
Cash and cash equivalents
Cash and cash equivalents include cash on hand, bank balances and term deposits with maturities of up to three months as well as short-term, highly liquid securities classified as current assets that are readily convertible to known amounts of cash and are only subject to negligible risk of changes in value.
Trade receivables
The carrying amount of trade receivables corresponds to their respective invoiced amount, less sales deductions and valuation allowances. If there is objective evidence that the receivables may be impaired, we recognize specific valuation allowances. In addition, certain classes of receivables are subject to portfolio-based valuation allowances based on past experience, taking into account the age of receivables. Non-interest bearing receivables with maturities of more than one year are discounted using an adequate interest rate.
This item also includes services performed under fixed-price contracts that have not yet been invoiced and that are recognized in accordance with the percentage-of-completion method.
Other receivables and other assets
Other receivables and other assets are measured at cost and written down to the relevant market price, if applicable.
Prepaid expenses
Prepaid expenses are recognized for prepayments of expenses relating to future periods.
Intangible assets
Intangible assets for which a useful life can be established are measured at cost less any accumulated amortization and impairment losses. Amortization is applied in accordance with the straight-line method over the estimated useful life of the asset. Intangible assets with an indefinite useful life are measured at cost less any accumulated impairment losses.
Goodwill
In accordance with IFRS 3, goodwill is not amortized, but tested for impairment on an annual basis and written down to its recoverable amount in case of impairment.
Property, plant and equipment
Property, plant and equipment are carried at cost less any accumulated depreciation and impairment losses. When items of property, plant and equipment are sold or scrapped, the corresponding cost and any accumulated depreciation are derecognized, and any gains or losses from disposal are recognized in the consolidated income statement.
The cost of items of property, plant and equipment consists of the purchase price, including any import duties and non-refundable purchase taxes and any directly attributable costs required to prepare the asset for its intended use. Any subsequent expenditure, such as service and maintenance charges arising once the asset is put into operation, is recognized as an expense in the period in which it is incurred. Subsequent expenditures relating to an item of property, plant and equipment are only added to the carrying amount of the asset if the expenditure improves the condition of the asset beyond its originally assessed standard of performance. Financing costs are not capitalized as part of cost.
Items of property, plant and equipment are generally depreciated using the straight-line method in accordance with their useful economic lives.
Buildings | 50 years |
Improvements to buildings/leasehold improvements | 8-10 years |
Operating and office equipment | 3-13 years |
Computer hardware and accessories | 1-7 years |
The terms of useful economic life and methods of depreciation are reviewed on a regular basis to ensure that they are in accordance with the expected pattern of economic benefits of the asset in question.
Assets under construction are recognized at cost. Depreciation on these items begins only after they have been put into operation.
Impairment of intangible assets and property, plant and equipment
As soon as there are indications that an intangible asset or an 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 in income. The recoverable amount is the higher of the asset’s fair value less costs to sell and its value in use. The value in use is the present value of estimated future cash flows expected to arise from the continued use of the asset and from its disposal at the end of its useful life.
Impairments losses are reported under costs of the relevant functional area or under other operating expenses.
Derivative financial instruments
Derivative financial instruments such as forward currency contracts, interest rate swaps and stock options are recognized at fair value. Instruments for which hedge accounting is not applied are classified as held for trading. Changes in the fair value of the instruments are recognized directly in profit or loss.
If the criteria for hedge accounting in accordance with IAS 39 are met, the derivative financial instrument is designated as a hedging instrument and accounted for pursuant to the hedge accounting provisions of IAS 39.
Accordingly, in the case of cash flow hedges, the effective portion of changes in the fair value of derivatives is recognized directly in equity. The ineffective portion is recognized directly in profit or loss. Cumulative amounts previously recognized in equity are reclassified to the income statement for the fiscal years in which the hedged item affects profit or loss.
The Company did not have any derivative financial instruments to be accounted for as fair value hedges.
Deferred taxes
Deferred tax assets and liabilities are recognized for temporary differences between the carrying amounts of the tax base and the consolidated balance sheet. Deferred tax assets also include claims for tax reductions resulting from the anticipated use of tax loss carryforwards in subsequent years, the realization of which is deemed highly probable.
Deferred taxes are calculated on the basis of tax rates anticipated to apply in the relevant countries in accordance with the legal situation prevailing at the time of realization (reversal of tax deferrals).
Deferred tax assets and liabilities are not discounted. The carrying amounts of the recognized assets and liabilities are regularly examined and adjusted if necessary.
Liabilities
Current liabilities are recognized 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 reported in the event the Company has a current legal or constructive obligation towards a third party due to a past event that is likely to result in a future outflow of resources and for which the amount of the obligation can be reliably estimated. Estimates are regularly reviewed and adjusted.
If the effect of discounting is significant, the provision is recognized in the amount of the present value of the expected future cash flows.
Provisions for pensions and similar obligations
Defined benefit plans and defined contribution plans exist with respect to company pensions. The pension provisions are calculated using actuarial principles in accordance with 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 as of the balance sheet date.
Employees do not receive illness-related allowances either in Germany or abroad.
Pension provisions are measured by recognizing actuarial gains and losses directly in equity. Accordingly, pension provisions are reported at the full present value of the defined obligation, less the fair value of the reinsurance cover taken out for defined benefit obligations or the fair value of the plan assets accumulated to cover pension entitlements.
The changes in the actuarial gains/losses compared to the previous year are excluded from income and allocated directly to retained earnings.
Software AG does not incur any obligations for defined contribution plans other than premium payments on life insurance policies and contributions to special-purpose funds. These payments are recognized in profit or loss for the period.
Deferred income
Deferred income consists of advance payments received from customers for maintenance services to be rendered in future periods. The deferred item is reversed and taken to income in the period in which the service is rendered.
New accounting provisions of which Software AG has not opted for early application
The IASB has published the following standards, interpretations, and amendments to standards that are not yet required to be applied and with regard to which Software AG has not opted for early application to the consolidated financial statements for the year ended December 31, 2008. For these IFRSs to be applied, they must first be endorsed by the EU.
- Amendment to IAS 1 Presentation of Financial Statements
- The revised IAS 23 Borrowing Costs will come into effect for fiscal year 2009
- Amendments to IAS 27 Consolidated and Separate Financial Statements
- Amendments to IAS 32 and IAS 1 relating to puttable financial instruments and obligations arising on liquidation
- Amendments to IFRS 2 for the purpose of clarifying the terms “vesting conditions” and “cancellations”
- Amendments to IFRS 3 Business Combinations
- IFRIC 13 Customer Loyalty Programes
- IFRIC 15 Agreements for the Construction of Real Estate
- IFRIC 16 Hedges of a Net Investment in a Foreign Operation
- IFRIC 17 Distributions of Non-cash Assets to Owners
- IFRIC 18 Transfers of Assets from Customers
All standards and interpretations mentioned above are required to be applied for the first time for fiscal year 2009, except the amendments to IFRS 3, IAS 27, IFRIC 17 and IFRIC 18 which are required to be applied for the first time for fiscal year 2010. Software AG does not expect initial application of the aforementioned standards and interpretations to have a significant influence on the consolidated financial statements.
[4] BUSINESS COMBINATIONS
Software AG acquired the application modernization business of Jacada Ltd., Israel, through the purchase of the net assets in the context of an asset deal as of January 1, 2008. Acquisition of the application modernization division has expanded Software AG’s ETS business division.
The cost of the business combination amounted to € 17,839 thousand and was allocated as follows:
€ thousands | Fair value as of January 1, 2008 | Carrying amount prior to acquisition |
Intangible assets | 18,549 | 0 |
Deferred income | -583 | -990 |
Acquired assets and assumed liabilities, net | 17,966 |
|
Excess of the net fair value of acquired assets and liabilities assumed over the cost of the business combination | -127 |
|
Cost of the business combination | 17,839 |
|
The customer base valued at €18,518 thousand represents the major part of the acquired intangible assets; it will be amortized over an expected useful life of 15 years. Deferred income includes future maintenance obligations for which customers had already made advance payments as of the acquisition date. Based on the requirements of IFRS 3, this item was stated in the opening balance sheet at only the fair value of future maintenance obligations. In 2008, it was reversed and reported as revenue.
The excess of the net fair value of acquired assets and liabilities assumed over the cost of the business combination was recognized immediately in profit or loss after reassessment in accordance with IFRS 3.56.
Since the date of acquisition (January 1, 2008), the software division acquired from Jacada has contributed €5,317 thousand to Group revenues and €1,250 thousand to net income.
As the Jacada software division was completely integrated into the Software AG Group, the contribution to Group net income could be determined only by means of an estimate.
The former owners of SPL Software Ltd, Israel, which had been acquired in 2007, exercised their put option with respect to the remaining shares in 2008. The payment for the remaining shares amounted to €18,935 thousand. In accordance with the provisions of IFRS 3 concerning the accounting method for combined call and put options, 100 percent of the shares in the SPL companies had been included in the consolidated financial statements in 2007.
In 2008, Software AG also acquired the remaining minority interests in the following entities:
49.0 percent of the shares in Software AG (India) Private Limited, India for €609 thousand, effective March 14, 2008
49.0 percent of the shares in SPL Idor E Business Solutions, Israel and 49.0 percent of the shares in SPL Idor Management Ltd., Israel for a total of €327 thousand, effective January 1, 2008
Acquisitions of remaining minority interests eliminated the need to report minority interests in equity and net income in the consolidated financial statements as of December 31, 2008.
In addition, the acquisitions of Software A.G. (Israel) Ltd. (previously Sabratec Ltd., Israel) and of Casabac Technologies GmbH resulted in contingent purchase price payments from prior periods in the amount of €1,144 thousand.
