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Accounting and Valuation Principles


Basis of Presentation
Software AG’s consolidated financial statements are prepared in accordance with the accounting principles of the International Accounting Standards Board (IASB) – the International Financial Reporting Standards (IFRS). The IAS, IFRS applicable for December 31, 2004 were observed, as were the corresponding interpretations of the International Financial Reporting Interpretations Committee (IFRIC – previously SIC). The same accounting and valuation methods as in the 2004 annual financial statements were applied.

The consolidated financial statements of Software AG are expressed in thousands of euro (“TEUR”) unless otherwise stated.

Principles of consolidation
The separate financial statements of the companies included in the consolidated financial statements were prepared according to uniform accounting and valuation policies in accordance with IFRS as of the balance sheet date of the consolidated financial statements (March 31, 2005).In applying the method of initial consolidation used to consolidate equity, the respective date upon which a company was established was used for companies established by Software AG itself. The date of first inclusion in the consolidated financial statements was selected as the date of consolidation for the companies initially consolidated in 1994, i.e. SOFTWARE AG-E, SOFTWARE AG-P, SOFTWARE AG-CH und SIH, for the Asian subsidiaries, for SQL and for SOFTWARE AG-IRL. The date of acquisition was selected as the consolidation date for all other companies included in the annual financial statements.

The initial consolidation of the companies which were first consolidated prior to December 31, 2002 was performed on the basis of the book value method in accordance with § 301 para. 1 no. 1 German Commercial Code (Handelsgesetzbuch; “HGB”). In doing so, the acquisition and start-up costs were offset against the Group’s investment in shareholders’ equity. Initial consolidation after the transition to IFRS on January 1, 2003 was in accordance with the IFRS 3 regulations. The subsequent consolidations were based on the initial consolidation.

Goodwill arising from the consolidation of equity was offset against retained earnings for acquisitions prior to January 31, 2001 in accordance with § 309 para. 1 HGB. Goodwill arising after January 31, 2001 was capitalized in accordance with previously applicable HGB 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 HGB.

The valuation of the goodwill previously capitalized pursuant to the HGB is performed in accordance with provisions of IAS 36 since the transition to IFRS accounting on January 1, 2003 (Transition Date). Thus, the goodwill was frozen at the carrying amount stated on the date of transition from HGB to IFRS on January 1, 2003 and only written down in the event of actual impairments. The value of the goodwill reported on the balance sheet is tested annually for impairment.

Revenue, expenses and income, receivables and payables arising between consolidated companies have been eliminated. Inter-company earnings from deliveries and services provided within the Group are eliminated to the extent they are not realized from services to third parties. Consolidated equity and net income allocable to minority interests are reported separately from consolidated equity and net income allocable to the parent company.

Scope of consolidation
The consolidated financial statements include Software AG and all companies it controls. Control is generally considered to exist if Software AG directly or indirectly controls the majority of voting rights of a company’s subscribed capital and/or can determine the financial and operating policies of a company.

The scope of consolidation has changed compared to December 31, 2004 as a result of the initial consolidation of the two companies in the Sabratec group, Software AG Israel (previously Sabratec Ltd., Israel) and its subsidiary Sabratec Technologies, Inc. USA, effective as of the closing date under the purchase agreement of February 3, 2005. The purchase price including the ancillary costs for the acquisition of 100 percent of the shares was €5,909 thousand. At the time of the acquisition, these companies had a consolidated equity of €1,213 thousand and in fiscal year 2004 generated revenues in the amount of €2,185 thousand. There were no other changes in the scope of consolidation compared to December 31, 2004.

Use of estimates
Estimates and assumptions were made in the a few cases for the consolidated financial statements which have an effect on the amount and disclosure of assets, liabilities, income, expenses and contingent liabilities reflected in the balance sheet. The actual amounts may differ from these estimates.

Currency translation
The financial statements of foreign subsidiaries are translated according to 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 local currency is identical with the functional currency.

Expenses and income are translated at the monthly average rates; assets and liabilities are translated at the closing rates, and the respective equity is translated at historical rates. The difference resulting from the currency translation relating to equity is offset against the equity in a manner not affecting the results and is reported in a separate column in the statement of changes in equity.

The differences in currency arising when consolidating liabilities are recognized as income or loss under other operating income and expenses on the income statement.

In the statement of fixed assets movements, the balances at the beginning and end of the fiscal year are translated at the respective closing rates, and the other items are translated at average rates. Any difference arising from exchange rate changes is shown in a separate column under both acquisition and manufacturing costs and accumulated depreciation/ amortization as an exchange rate difference.

In the local individual financial statements of the consolidated companies, receivables and payables in foreign currency are valued at the closing rate. Exchange rate gains and losses not yet realized on the balance sheet date are included in net income for the period except for translation differences for long-term, inter-company monetary items that are part of a net investment in a foreign company. These differences are excluded from income and are recorded as other reserves in shareholders’ equity.

  Interim Report Q1/05 (PDF)
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