Total revenue

Software AG sales revenues primarily consist of revenue from granting software licenses usually of indefinite duration 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.

Revenue from maintenance business is recognized proportionately over the period of service provision.

Revenues under agreements for Professional Services, which are invoiced on the basis of hours performed, are recognized in the period in which the services are rendered by the SAG companies.

Pursuant to IAS 11 and IAS 18, revenues and expenses from fixed-price service contracts are recognized in accordance with the percentage-of-completion 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 all costs expected to be incurred by completion of the service can be reliably established.

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 (revised in 2004) are therefore not fulfilled. Software acquired for a consideration in connection with business combinations is capitalized at market value.

Selling expenses

Selling 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 contained in IAS 23, interest expenses are recognized in income in the period in which they are incurred.

Cash on hand and bank balances

Software AG classifies cash on hand, bank balances and term deposits with a maturity of up to 3 months as well as current securities as cash and cash equivalents. The securities item includes only current, highly liquid financial instruments that are readily convertible to known amounts of cash and are only subject to negligible risk of changes in value.

The Company classifies all current securities as assets held for trading. These securities are initially recognized at cost as of the settlement date. They are measured at their fair value as of the balance sheet date. Any changes in the fair value are recognized in income.

Inventories

Inventories are recognized at the lower of cost or net realizable value. The net realizable value is the estimated selling price in the ordinary course of business less estimated costs to completion and estimated costs necessary to make the sale.

Trade receivables

Receivables are carried at the fair value applicable at the time the revenues or the consideration paid are realized. They are measured at amortized cost less any allowances for bad debt.

Receivables from granting software licenses are recognized only if a contract has been signed with the customer, any rights of return have expired, and the software has been delivered in accordance with the contract.

Trade receivables are carried at their principal amounts unless specific valuation allowances were required in order to account for credit risks. Longer maturities (more than one year) are taken into account by means of market discount rates.

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 fair value in case of impairment.

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