Accounting and valuation
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 accordingly to allow effective comparison.

New standards published as part of the International Accounting Standards Board Improvement Project in December 2003, whose application is not compulsory until January 1, 2005, have not been employed for these financial statements.

Of the new standards published during the previous quarter, whose application is not compulsory until January 1, 2005, or later, Software AG chose to apply the provisions of IFRS 3 relating to the impairment testing of goodwill to these financial statements.

Application of IAS/IFRS involves the following material deviations from the accounting and valuation principles set out in German law:

• Goodwill is no longer amortized, but subject to regular impairment testing.
• Securities available for sale are valued at their fair market value, even where this exceeds the cost of acquisition. Gains and losses are included in other comprehensive income under equity, but are not recognized in net profit or loss.
• Derivative instruments are valued at their fair market value, even where this exceeds the cost of acquisition. Both gains and losses are recognized in net profit or loss for the period.
• Revenues are recognized according to the percentage-of-completion method.
• Property is depreciated according to its useful economic life, and not according to tax scales.
• Capital leases, according to the more restrictive IFRS provisions, are posted as assets and leasing liabilities.
• Provisions are only formed where obligations to third parties exist, and where the probability that these obligations will be fulfilled is at least 50 percent. Medium and long-term provisions are stated at cash values. Provisions are not formed for failure to perform maintenance or for other expenses.
• Provisions for pensions are formed according to the projected unit credit method.
• Deferred taxes are calculated according to the balance-sheet liability method. Deferred taxes on loss carryforwards are formed where the Company expects to be able to make use of these loss carryforwards.
• Cash positions in foreign currencies are valued at the balance-sheet-date rate and recognized in net profit or loss for the period. However, translation differences from long-term intercompany net cash investments in non-German companies are posted in other comprehensive income under equity, but are not recognized in net profit or loss for the period.

Balance-sheet reconciliation on January 1, 2003 (HGB to IFRS)
(Table)

	Reconciliation of equity on January 1, 2003 (HGB to IFRS)

Balance-sheet reconciliation on September 30, 2003 (HGB to IFRS)
(Table)

	Reconciliation of equity on September 30, 2003 (HGB to IFRS)

	Reconciliation of net income/loss on September 30, 2003 (HGB to IFRS)