Application of the entity method
The MAGIX Group chose the entity method for presentation of the acquisition of minority interests in the consolidated financial statements as of September 30, 2007. According to the entity method, the difference between the purchase price for minority interests in a subsidiary that is already fully consolidated and the pro rata equity acquired is offset against the capital reserves and thus does not lead to capitalization of goodwill in the consolidated financial statements. The amount of the difference offset against the capital reserves totals kEUR 711 in the fiscal year 2006/07 (reduction of capital reserves). There were no corresponding transactions for equity investments in the prior year.
Currency Translation
The consolidated financial statements are prepared in euro, which is the functional and presentation currency of the Group. Every entity within the Group determines its own functional currency. The items contained in the financial statements of an entity are measured using that functional currency. Transactions in foreign currency are initially recorded at the spot rate between the functional currency and the foreign currency at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency using the closing rate. All exchange differences are recognized in the net income or loss for the period.
The functional currency of the foreign operations is the US dollar for Magix Computer Products International Corp., Reno, Nevada, and Catooh Corp., Las Vegas, Nevada, and the pound sterling for Magix Limited, Hampshire, and Xara Group Ltd., Hemel Hempstead. The assets and liabilities of these subsidiaries are translated into the presentation currency of MAGIX AG (euro) at the closing rate. Income and expenses are translated at the weighted average exchange rate for the fiscal year. The exchange differences arising on translation are recognized as a separate component of equity.
Intangible Assets
Software and Industrial Rights
Intangible assets acquired separately are initially measured at cost. The cost of an intangible asset acquired in a business combination corresponds to its fair value at the acquisition date. After initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. Except for capitalized development costs, internally generated intangible assets are not capitalized. Incremental costs on these items are recognized as expenses when incurred.
As regards intangible assets, it is initially important to determine whether they have a defined or an undefined useful life. Intangible assets with a defined useful life are amortized over their useful life and tested for impairment whenever there is an indication that the intangible asset could be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at the end of each fiscal year at the latest. The amortization expense for intangible assets is recorded in the consolidated income statement in the expense category consistent with the use of the intangible asset.
Software and industrial rights acquired from third parties or in a business combination primarily comprise software for the development of products, software integrated in products or software for other business purposes. The assets reported under the software and industrial rights item are written off over an estimated useful life of three to fifteen years.
Goodwill
Goodwill arising from a business combination is initially measured at cost, which is the excess of the cost of the business combination over the interest of the MAGIX Group in the fair values of the identifiable assets, liabilities and contingent liabilities acquired. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is tested for impairment at least once a year or whenever facts or changes in circumstances indicate that the carrying amount could be impaired. To determine whether or not the item is impaired, the goodwill acquired in a business combination must be allocated to a cash-generating unit. An impairment loss is recorded if the recoverable amount of the cash-generating unit is lower than its carrying amount.
Research and Development Costs
Research costs are expensed in the period in which they are incurred. An intangible asset resulting from development in the course of an individual project is only recognized if the MAGIX Group can provide evidence of the technical feasibility of completing the intangible asset so that it will be available for internal use or for sale and of the intention to complete the intangible asset and to use or sell it. In addition, the Group must substantiate the creation of a future economic benefit by the asset, the availability of resources to complete the asset and the ability to determine reliably the expenses allocable to the intangible asset during its development. Following the initial recognition of the development expenditure, the cost model is applied. This requires that the asset to be carried at cost less any accumulated amortization and accumulated impairment losses. The amounts capitalized are amortized over the period of expected future sales revenue from the related project. The carrying amount of the capitalized development costs is reviewed for impairment annually when the asset is not yet in use, or when there is any indication during the reporting year that the carrying amount may not be recoverable.
Software development costs chiefly include the costs for five software platforms and the software products purchased in the course of business combinations. The technical feasibility of these platforms can be substantiated by the successful sales in recent years. All software development costs are amortized over an expected useful life of five years based on past sales experience and the expected sales proceeds for the future.