Since the beginning of 2004, the consolidated financial
statements of Software AG have been prepared
in accordance with the International Accounting
Standards Board’s (IASB) International Accounting
Standards (IAS) and International Financial Reporting
Standards (IFRS). Software AG complied with
the IAS and IFRS, and IFRIC (International Financial
Reporting Interpretations Committee, formerly SIC)
interpretations applicable on December 31, 2003.
Figures in the consolidated financial statements
are, unless otherwise stated, quoted in thousands
of euros (€ thousands).
Principals of consolidation
The consolidated financial statements include
Software AG and companies under its control.
Control is generally taken to be proven where the
Group holds, directly or indirectly, the majority of
voting rights for authorized capital in a company,
and/or can determine the fiscal or business policy
of the company.
The financial statements of consolidated companies
are compiled according to consistent accounting
and valuation principles.
Subsidiaries established by Software AG are consolidated
on the date they are formed. However,
first-time consolidation occurred after the date of
foundation for Softinterest Holding AG and its subsidiaries
– which were consolidated for the first time
in 1994 – as well as for Asian subsidiary SQL and
The first-time consolidation of all companies was
undertaken using the book value method. Subsequent
consolidation is derived from the figures
employed for first-time consolidation.
Debit balances arising from capital consolidation
and relating solely to goodwill from acquisitions
before January 31, 2001, were netted against capital
reserves, pursuant to Section 309, Subsection 1,
of the German Commercial Code (HGB). Goodwill
from acquisitions after January 31, 2001, was capitalized
and will be amortized over ten years. In
accordance with the option granted by IFRS 1.14,
the Company has not applied IAS 22 retrospectively,
but has continued to use the figures for mergers
and acquisitions posted according to HGB.
Revenue, expenses and income, receivables, liabilities,
and provisions arising between consolidated
companies have been eliminated. Intercompany
earnings from services provided within the Group
were also eliminated where these were not realized
from services to third parties.
On May 13, 2004, SAG Systemhaus S.L., Madrid,
Spain was founded with subscribed capital of € 60
thousand. As of this date, the new company was
consolidated as part of the Software AG Group. This
was the only change to the scope of consolidation
in comparison with December 31, 2003.
Estimates and assumptions
In a few instances, estimates and assumptions
were made which could impact the statement and
amount of figures posted for balance-sheet assets,
debt, income, expenses and contingent liabilities.
True values may deviate from these estimates and
The financial statements of foreign subsidiaries are
translated using functional currencies: As these
companies have organizational, financial, and commercial
independence, the respective local currency
is identical to the functional currency. Assets and
liabilities are translated according to the exchange
rate on the balance-sheet date, and expenses and
income according to monthly averages. Currency
translation differences are posted as such under
equity, but not recognized in net profit or loss for
In the individual financial statements for consolidated
companies, foreign-currency items are translated
on the balance-sheet date, and included in net
profit or loss for the period. Translation differences
from long-term intercompany cash items are excepted
from this rule. These are posted as other
comprehensive income under equity, but not recognized
in net profit or loss for the period.
Cash on hand and bank balances
This item includes cash and short-term investments,
plus short-term cash equivalents.
Cash equivalents are short-term, highly liquid financial
investments which can be converted to cash at
any time, and which are only subject to immaterial
fluctuations in value.
Securities and financial assets
Financial assets are initially valued at the cost of
acquisition, including transaction costs. The subsequent
valuation depends on their classification.
Financial assets which are available for sale are
valued according to their price on the balance-sheet
date (i.e. the fair market value). Price gains or losses
are posted as other comprehensive income under equity, but not recognized in net profit or
loss for the period.
Software AG uses hedging instruments to protect
against the risks posed by worldwide currency fluctuations.
Company policy is to hedge against currency
risks in their totality, and not take specific
action for each individual transaction. Open positions
in futures transactions are valued at the fair
market price, and listed on the balance sheet under
securities held for trading purposes. Price gains or
losses are included in the net income figure for the
Financial assets are recorded at their individual fair
market values where this is possible to calculate
and the assets have not been held until maturity.
Loans and receivables included under this item
which are not held for trading purposes, and assets
with no publicly available price on an active market,
where it is not possible to reliably calculate a fair
market price, are valued at the adjusted cost of
acquisition. All values are subject to regular, objective
impairment testing, and value impairment,
where it has occurred, is reflected in earnings for
Inventories are recorded at the lower of cost of
acquisition/manufacture or net realizable value.
Net realizable value is the estimated amount that
would be raised from a sale during normal operations,
less the estimated costs arising until manufacture
is complete, and less sales costs.
Trade receivables are posted at the fair value applicable
when revenues are realized or services provided,
and valued at the net book value, less any
necessary value adjustments.
This item also includes unbilled services from projects
for which a fixed price has been agreed, but
for which the percentage of completion method is
Other current assets
Other current assets are valued at cost of acquisition,
which corresponds to fair market value.
Concessions, industrial and similar rights and assets,
and licenses to such rights are capitalized at cost of
acquisition and amortized over their useful economic
lives according to the straight-line method.
These assets are regularly subject to impairment
Debit balances arising from capital consolidation as
defined by HGB are calculated according to book
value, with no disclosure of hidden reserves. Before
January 31, 2001, balances were offset against capital
reserves, pursuant to Section 309, Subsection 1
of HGB. After this date, goodwill was capitalized
and amortized over ten years according to the
straight-line method. The term over which goodwill
is amortized is established at the time of the
acquisition, based on the useful economic life of
the goodwill. Software AG makes use of IFRS 1.13,
which allows the Company to retain HGB valuations
of goodwill arising before the transition to IFRS
accounting on January 1, 2003. In accordance with
IFRS 3, the historical HGB valuation of goodwill was
posted at € 176,591 thousand on this date. IFRS 3
requires that goodwill is no longer amortized, but
subject to annual impairment testing and examination
of its future useful economic life. The residual
book value is written down to its fair value where
the value has been impaired.
Property, plant and equipment
Property, plant and equipment are stated at cost
of acquisition or manufacture less accumulated depreciation
and impairment costs. Where items are
sold or scrapped, the relevant cost of acquisition
and accumulated write-downs are eliminated – any
realized income/loss from the disposal of the asset
is shown on the income statement.
Tangible assets acquired for € 410 or less are fully
written down in the year they are first posted.
Cost of acquisition/manufacture comprises purchase
price, including any customer payments and
non-refundable income tax, and costs that are
directly attributable to preparing the asset for its
intended use. Expenditure such as maintenance
incurred once the asset is in use is posted in the
period during which it is incurred. Subsequent expenditure
is only booked under assets where this
improves the condition of the asset beyond its
originally assessed standard of performance.
Financing costs are not included under cost of
Property, plant and equipment are depreciated over
their useful economic lives according to the
Buildings 50 years
Leasehold improvements 8 – 10 years
Office equipment 3 – 13 years
Computer hardware and accessories 1 – 4 years
Useful economic lives and methods of depreciation
are periodically examined to ensure that theoretical
values correspond with actual expected values.
Assets under construction are allocated to unfinished
property, plant and equipment, and stated at
cost of acquisition/manufacture. Depreciation only
takes place once manufacture is complete and the
asset is in use.
Impairment of the value of intangible assets
and property, plant and equipment
Where there is evidence that the value of intangible
assets, property, plant and equipment has been
impaired, these are immediately written down to
their recoverable values, i.e. the higher of net realizable
value and value in use. Value in use is the
cash value of forecast future cash flows from the
continued use of an asset and from disposal at the
end of its useful economic life.
Fixed assets include assets provided under leasing
contracts. Software AG leases property, plant, and
equipment. According to IAS 17, leasing contracts
are classified 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 items are posted on the
balance sheet under both assets and leasing liabilities
(at the same amount). The fair market value of
the leased item at the beginning of the contract
is used, or, where less, the cash value of the total
minimum leasing payments. Calculation of this cash
value is based on the interest rate of the overall
lease agreement, where this figure can be practically
identified. Otherwise, the lessee’s threshold
borrowing interest rate is used. Capital leases are
amortized over their scheduled useful economic
lives according to the straight-line method. Future
lease installments are posted as financial liabilities.
Operating lease payments are
expensed throughout the life of the leasing agreement.
Tax assets and liabilities are deferred according to
the balance-sheet liability method for temporary
differences between figures stated for tax purposes
and those on the consolidated balance sheets.
Taxes are also deferred on loss carryforwards.
Deferred taxes are calculated according to the tax
rate expected to apply in the year in which they
will be realized. Dividends are only included once
the annual shareholders’ meeting has voted on the
use of earnings.
Deferred tax assets and liabilities are not discounted.
The book values of deferred taxes are regularly
examined and, where necessary, adjusted.
This item includes prepayments made by Software
AG within the scope of license and rental agreements.
Amounts are reversed and booked as expense
in the accounting period when the service is
delivered to Software AG.
Short-term liabilities are stated at their repayment
or fulfillment value.
Long-term liabilities are stated at adjusted cost of
acquisition, calculated according to the effective
interest method, i.e. by discounting expected future
Provisions are formed where the Company has a
de jure or de facto obligation to a third party arising
from an event in the past, where it is likely that
the Company will have to settle this obligation, and
a reliable estimate can be made of the value of the
liability. Estimates are subject to regular scrutiny
Where the effect of the time value of money is
material, the amount of a provision is the present
value of the expenditures expected to be required
to settle the obligation.
Provisions for pensions
Software AG operates both defined-benefit and
defined-contribution pension plans. The actuarial
calculation of provisions for pensions follows the
projected unit credit method described in IAS 19,
whereby expected future increases in pensions and
salaries are also included.
For the defined-contribution plan, Software AG has
no obligations beyond its undertaking to pay all
contributions to earmarked funds.
Deferred income includes prepayments from
customers for maintenance services. Amounts are
reversed and posted as revenue in the period
Software AG delivers the service.
Other comprehensive income
Other comprehensive income comprises differences
arising from the translation of the financial statements
of commercially independent non-German
subsidiaries, and effects from the valuation of financial
instruments. Also included are translation
differences from cash positions that are primarily
part of a net investment in a commercially independent
non-German subsidiary. Figures are quoted
Development of shareholders equity is shown here.
In addition, contingent capital at June 30, 2004,
comprised the following amounts:
Up to € 3,357 thousand in up to 1,118,962 nopar
value shares, reserved to cover subscription
rights granted under the first share-option plan
(Management Incentive Plan I, MIP I) for Executive
Board members and senior executives of
the Software AG Group. The terms and conditions
of this plan, as well as the numbers of shares
allocated/exercised, are given on page 32.
Up to € 3,000 thousand in up to 1,000,000 nopar
value shares, reserved to cover subscription
rights granted under the second share-option
plan (Management Incentive Plan II, MIP II)
for Executive Board members and senior executives
of the Software AG Group. The terms
and conditions of this plan, as well as the numbers
of shares allocated/exercised, are given
Up to € 13,515 thousand in up to 4,505,000 nopar
value shares, reserved to grant option rights
to holders of warrants from cum-warrant bonds,
and to grant conversion options to holders of
convertible bonds in accordance with the bonds’
terms. The Executive Board is authorized to
issue such bonds, with a term of up to 10
years, once or more than once in the period to
April 27, 2006, up to a total nominal value of
€ 500,000 thousand. The Executive Board had
not made use of this authorization by June 30,
2004. At the annual shareholders’ meeting on
April 30, 2004, the entitlement to draw on this
capital was withdrawn and replaced by that
detailed under section 4 below.
Up to € 36,000 thousand in up to 12,000,000
bearer shares, each with a € 3 share of capital
stock, reserved to grant option rights and to
agree option obligations arising from optionbonds,
and to grant conversion options and option
obligations to holders of convertible bonds
in accordance with the bonds’ terms (agreed at
the annual shareholders’ meeting on April 30,
2004). Subject to the approval of the Supervisory
Board, the Executive Board may authorize
the exercise of these rights by Software AG or a
(directly or indirectly) wholly owned subsidiary
by April 29, 2009.
In this instance, shareholders are entitled to subscription
rights, with the following exceptions:
- The Executive Board is authorized to exclude
- Subject to the approval of the Supervisory Board,
the Executive Board is authorized to totally exclude
shareholders’ subscription rights in the following
instance: Where, upon due examination,
the issue price of options or convertible bonds is
not thought to be significantly less than its hypothetical
market value (i.e. such value being calculated
by accepted financial industry methods).
However, this right to exclusion only applies to
options and convertible bonds with rights or obligations
for shares totaling no more than € 8,180
thousand, or, where lower, 10 percent of capital
stock at the time the subscription rights are
The Executive Board had not made use of this authorization
by June 30, 2004.
At the balance-sheet date, the Executive Board is
further authorized, with the consent of the Supervisory
Board, to increase the Company’s subscribed
capital by up to € 37,989 thousand once or more
than once in the period to April 27, 2006, by issuing
up to 12,663,036 registered shares against
cash and/or non-cash contributions (authorized
capital). With the exception of the cases detailed
below, shareholders will be granted pre-emptive
- The Executive Board is authorized to deviate from
shareholders’ pre-emptive subscription rights
with respect to fractional amounts.
- The Executive Board is further authorized, with
the consent of the Supervisory Board, to deviate
from shareholders’ pre-emptive subscription
rights with respect to capital increases against non-cash contributions effected for the purpose
of acquiring participations, holdings, companies
or business units.
- The Executive Board is also authorized, with the
consent of the Supervisory Board, to deviate
from shareholders’ pre-emptive subscription
rights provided that the capital increase against
cash effected on the basis of this authorization
does not exceed 10 percent of the subscribed
capital at the time this authorization is first exercised,
and provided that the issue price is not
significantly lower than the market value.
- Finally, the Executive Board is authorized, with
the consent of the Supervisory Board, to deviate
from shareholders’ pre-emptive subscription
rights with respect to a nominal amount not exceeding
€ 6,503 thousand in order to offer new
shares to employees of Software AG and its affiliated
companies (in accordance with sections 15
ff. of the German Stock Corporation Act) under an
employee share option plan. The new shares can
also be transferred to a bank on condition that
sale is restricted to entitled persons in accordance
with the Company’s instructions.
At June 30, 2004, the Executive Board had not
exercised its power to increase subscribed capital.
Software AG primarily generates revenues from
software licenses (for unlimited periods of usage),
maintenance, and other services. Incoming monies
from software licenses are only posted as revenues
once a contract has been signed with the customer,
all possible rights of return have expired, the software
has been supplied, and 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.
Revenues from contract work invoiced according to
man-hours are recognized once the services have
been provided by Software AG.
Pursuant to IAS 11 and IAS 18, revenues from fixedprice
service contracts are recognized according to
the percentage of completion method where the
revenues can be reliably measured, there is sufficient
probability that Software AG will receive the
economic benefits of the transaction, and that all
related costs expected until completion of the
service can be reliably measured.
Revenues figures are net of all discounts and
Costs of manufacture
Costs of manufacture include all production-related
costs on the basis of normal utilization levels. They
include individual unit costs that can be directly
allocated to projects, plus fixed and variable overheads.
Borrowing costs are not capitalized in costs
of acquisition/manufacture. No unscheduled writedowns
on inventories were required during the
Research and development costs
Research and development costs are expensed in
the income statement as they are incurred.
The creation of and subsequent improvements to
software involve closely linked, highly interwoven
research and development phases. Accordingly, it is
not possible to strictly separate expenses incurred
for research from those incurred for development,
and the criteria for separately reporting development
costs laid out in IAS 38, Section 41, in conjunction
with 42, cannot be met.
Sales, marketing and distribution
These include personnel and materials costs, writedowns,
and advertising expenses.
These include personnel and materials costs, and
applicable depreciation and amortization.
Earnings per share
Earnings per share are calculated by dividing net
income allocable to shareholders for the period by
the weighted number of shares outstanding during
the period. Software AG only has common stock.