Annual Report 2019

2 Summary of significant accounting policies

SoftwareONE Holding’s consolidated financial statements are prepared in accordance with IFRS as issued by the International Accounting Standards Board (IASB). The principal accounting policies applied in the preparation of these consolidated financial statements are set out below.

Basis of presentation

New and amended standards and interpretations

The Group has initially adopted IFRS 16 “Leases” from 1 January 2019 without restating comparative information. Several other changes in IFRS are also effective from 1 January 2019 but they do not have a material effect on the Group’s consolidated financial statements. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

IFRS 16 “Leases”

IFRS 16 replaces IAS 17 “Leases” and related interpretations. The new standard requires lessees to recognize a lease liability reflecting future lease payments and a right-of-use asset for most lease contracts. The Group adopted IFRS 16 using the modified retrospective approach and has not restated comparative information. The Group elected to use the recognition exemptions for lease contracts that, at the commencement date, have a lease term of 12 months or less and do not contain a purchase option (“short-term leases”) and lease contracts for which the underlying asset is of low value (“low-value assets”).

The Group has lease contracts for office locations, vehicles and other equipment. Before the adoption of IFRS 16, all leases of the Group were classified as operating leases. Upon adoption of IFRS 16, SoftwareONE recognized right-of-use assets and lease liabilities for its leases, except for short-term leases and leases of low-value assets. The right-of-use assets have been recognized at the same amount as the lease liabilities. Lease liabilities were determined based on the present value of the remaining lease payments, discounted using the incremental borrowing rate at the date of initial application.

The effect of adoption of IFRS 16 on the balance sheet as at 1 January 2019 is as follows:

• Right-of-use assets      TCHF 20,217
• Financial liabilities       TCHF 20,217

The lease liabilities as at 1 January 2019 can be reconciled to the operating lease commitments as at 31 December 2018, as follows:

New standards and interpretations not yet adopted

The IASB has issued a number of potentially relevant changes to IFRS that will be effective in future accounting periods. New standards that are expected to have only a minor impact on the Group and the effective date are described below:

• IFRS 3: Business Combinations: Definition of a Business – adoption by 1 January 2020
  
• IAS 1 and IAS 8: Presentation of Financial Statements and Accounting Policies, Changes in Accounting Estimates and Errors: Definition of Material – adoption by 1 January 2020
• IFRS 9/IAS 39/IFRS 7: Interest Rate Benchmark Reform – adoption by 1 January 2020
• Amendments to References to the Conceptual Framework in IFRS Standards – adoption by 1 January 2020
• IAS 1: Presentation of Financial Statements: Classifications of Liabilities as Current or Non-Current – adoption by 1 January 2022

There are no other IFRS or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group.

Consolidation

Subsidiaries

Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.

Intercompany transactions, balances and unrealized gains on transactions between Group companies are eliminated in full.

Business combinations and goodwill

Business combinations are accounted for using the acquisition method of accounting. The cost of a business combination is equal to the fair values at the date of acquisition of assets given, liabilities incurred or assumed, and equity instruments issued by SoftwareONE Group, in exchange for control over the acquired company. Any difference between the cost of the business combination and the net fair value of the identifiable assets, liabilities and contingent liabilities so recognized is treated as goodwill. Goodwill is not amortized but is assessed for impairment annually. Acquisition-related costs are expensed. For each business combination, the Group recognizes the non-controlling interests in the acquiree at the non-controlling interests’ proportionate share in the recognized amounts of the acquiree’s identifiable net assets.

If a business combination is achieved in stages (control obtained over an associate or joint venture) the previously held equity interest in an associate or joint venture is remeasured to its acquisition-date fair value and any resulting gain or loss is recognized in “financial income/expenses” in the income statement.

Non-controlling interests

Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the Group’s equity therein. Non-controlling interests consist of the amount of those interests at the date of the original business combination and the non-controlling shareholder’s share of changes in equity since the date of the combination.

Foreign currency translation

Functional and presentation currency

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in Swiss francs (CHF) which is the Group’s presentation currency.

Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are remeasured.

Monetary assets and liabilities of Group companies which are denominated in foreign currencies are translated using closing exchange rates. Exchange rate differences are recorded as income or expense. Non-monetary assets and liabilities are translated at historical exchange rates. Translation differences on non-monetary financial assets and liabilities such as equity securities held at fair value through profit or loss are recognized in the income statement as part of the fair value gain or loss.

Foreign currency translation

When translating foreign currency financial statements into Swiss francs, year-end exchange rates are applied to assets and liabilities while average rates for the period are applied to income statement accounts. The resulting exchange differences are recognized in other comprehensive income.

Goodwill and fair value adjustments arising from the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at closing rate. The resulting exchange differences are recognized in other comprehensive income (OCI).

The following exchange rates were used:

Financial assets

Initial recognition and measurement

The Group classifies its financial assets at initial recognition in the following categories: subsequently measured at amortized cost, fair value through OCI and fair value through profit or loss. The classification depends on the financial asset’s contractual cash flow characteristics and the Group’s business model for managing them. With the exception of trade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient, the Group initially measures a financial asset at its fair value plus transaction costs in the case of a financial asset not at fair value through profit or loss. Trade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient are measured at the transaction price determined under IFRS 15.

In order for a financial asset to be classified and measured at amortized cost or fair value through OCI, it needs to give rise to cash flows that are “solely payments of principal and interest (SPPI)” on the principal amount outstanding. This assessment is performed at an instrument level.

SoftwareONE’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both.

Financial assets are classified as current if payments are due within one year or less. If not, they are presented as non-current receivables.

Subsequent measurement

For purposes of subsequent measurement, SoftwareONE has financial assets at amortized cost (debt instruments), financial assets at fair value through profit or loss and derivatives designated as hedging instruments.

Financial assets at amortized cost are subsequently measured using the effective interest (EIR) method and are subject to impairment. Gains and losses are recognized in the income statement when the asset is derecognized, modified or impaired.

The Group’s financial assets at amortized cost comprise trade and other receivables, loans and cash and cash equivalents.

Cash and cash equivalents

The position includes cash on hand, bank accounts and short-term bank deposits with original maturities of three months or less.

Trade receivables

Trade receivables are initially recorded at a transaction price determined in accordance with IFRS 15 less impairments.

Financial assets

The Group has listed equity instruments presented as short-term financial assets which are subsequently measured at fair value through profit or loss as it had not irrevocably elected to classify those at fair value through OCI at initial recognition. Financial assets at fair value through profit or loss are carried in the balance sheet at fair value with net changes in fair value recognized in the income statement. Dividends on equity investments are recognized as other income in the income statement when the right to payment has been established

Derecognition

The Group derecognizes financial assets when:

• The rights to receive cash flows from the asset have expired or
  
• the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third-party under a ”pass-through” arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset but has transferred control of the asset.

Receivables subject to factoring arrangements may be derecognized on sale and these assets are not held to collect contractual cash flows and would be measured at fair value through profit or loss. However, due to their short-term nature, the difference between transaction price and fair value is not considered to be material. Where the factored receivables continue to be recognized in the balance sheet, they are treated as held to collect contractual cash flows and measured at amortized cost.

Impairment of financial assets

The Group recognizes an allowance for expected credit losses (ECLs) for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms.

For trade receivables and contract assets the Group applies a simplified approach in calculating ECLs. Therefore, the Group does not track changes in credit risk but instead recognizes a loss allowance based on lifetime ECLs at each reporting date. The Group has established a provision matrix that is based on its historical credit loss experience and SoftwareONE’s business knowledge, adjusted for forward-looking factors specific to the debtors and the economic environment.

Derivative financial instruments and hedge accounting

The Group reviews the currency exposure regularly and covers its risks in two ways:

• The Group hedges the net exposure from foreign currency balance sheet positions with forward contracts. Such contracts, however, are not accounted for using hedge accounting.
• Highly probable future transactions are hedged with forward transactions (sales and purchase). Those contracts are designated as cash flow hedges. The transactions are expected to affect profit and loss within the next 24 months. At inception of a hedge relationship the Group designates and documents the hedge relationship to apply hedge accounting. The hedge relationship includes the hedging instrument, the hedged item and the nature of the risk being hedged. The hedges are expected to be highly effective.

Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value through profit or loss except for the effective portion of cash flow hedges, which is recognized in OCI and later reclassified to the income statement when the hedged item affects profit or loss. The ineffective portion is recognized immediately in the income statement.

In case of a positive value, the derivative is recognized as an asset and in case of a negative value, as a liability (classified as non-current when the remaining maturity of the hedged item is more than 12 months and as current when the remaining maturity of the hedged item is less than 12 months).

Tangible assets

Tangible assets are stated at historical cost less depreciation and impairments. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

Repair and maintenance costs are recognized in the income statement in the period in which they are incurred.

Depreciation is calculated using the straight-line method over the expected useful life as follows:

• Land and Buildings: max. 33 years
• Furniture, fittings and equipment: max. 5 years
• Leasehold improvements: max. 10 years or shorter duration lease contract
• Vehicles: max. 5 years
• IT equipment: max. 3 years
• Assets under construction: no depreciation
  

Intangible assets

Purchased intangible assets such as software and customer relationships are measured at cost less accumulated amortization (applying the straight-line method) and any impairment. The useful life is as follows:

• Software: 3–10 years
• Acquired customer relationships: max. 10 years
• Other intangible assets: 3–10 years

Internally generated intangible assets are capitalized only if the identifiable asset is commercially and technically feasible, can be completed, its costs can be measured reliably and will generate probable future economic benefits. In addition to the internal costs (including all attributable direct costs) total costs also include externally contracted development work. Such capitalized intangibles are recognized at cost less accumulated amortization over a useful life of three to ten years. In-process capitalized development costs are tested annually for impairment.

Acquired customer relationships are capitalized and amortized over their useful lives. They are assessed for impairment if events or changes in circumstances indicate that their value may be impaired. The significant assumptions are future cash flows and the discount rate.

Impairment test of goodwill and intangibles with indefinite useful life

With regard to impairment testing of goodwill and other intangible assets deemed to have indefinite lives, the Group determines the higher of value in use and fair value less costs of disposal of the respective cash generating units to which goodwill and intangibles have been allocated. The calculation of value in use is based on the current budget approved by the Board of Directors and the expectations regarding the future development of the respective markets, market shares and profitability. The planning period covers five years. Assumptions are made for the subsequent years taking into account macroeconomic trends and historical information adjusted for current developments.

The impairment test is performed at least once a year and additionally when there are indications of impairment in the cash-generating unit. Impairment losses for goodwill are never reversed.

Investments in joint ventures and associates

Companies in which SoftwareONE has joint control and associates in which the Group has significant influence are accounted for using the equity method. Under the equity method, the investment in a joint venture or associate is initially recognized at cost. The statement of profit or loss reflects SoftwareONE’s share of the results of the joint ventures and associates and SoftwareONE’s share of OCI of those investees is presented in OCI. The financial statements of the joint ventures and associates are prepared using uniform accounting policies as applied by SoftwareONE.

Financial liabilities

Initial recognition and measurement

SoftwareONE classifies financial liabilities at initial recognition as financial liabilities at fair value through profit or loss, financial liabilities subsequently measured at amortized cost or as derivatives designated as hedging instruments in an effective hedge as appropriate.

All financial liabilities are recognized initially at fair value and in the case of instruments not subsequently measured at fair value through profit or loss net of directly attributable transaction costs.

The Group’s financial liabilities include trade and other payables, accrued expenses, contingent consideration liabilities and other financial liabilities including bank overdrafts and derivative financial instruments.

Subsequent measurement

Contingent consideration liabilities are subsequently measured at fair value through profit or loss.

Derivatives are subsequently measured at fair value with fair value changes in the income statement, except for the effective portion of cash flow hedges that is initially recognized in other comprehensive income.

All other financial liabilities are subsequently measured at amortized cost using the effective interest method.

Trade payables and financial liabilities are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities.

Current and deferred income tax

The tax expense for the period comprises current and deferred tax. Tax is recognized in the income statement except to the extent that it relates to items recognized in OCI or directly in equity. In this case the tax is also recognized in OCI or directly in equity, respectively.

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company and its subsidiaries operate and generate taxable income. Periodically, management evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

Deferred income tax is recognized on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled.

Deferred income tax liabilities are provided on taxable temporary differences arising from investments in subsidiaries except for deferred income tax liabilities where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred income tax assets are recognized on deductible temporary differences arising from investments in subsidiaries. They are only recognized to the extent that it is probable that the temporary difference will reverse in the future and there needs to be a sufficient taxable profit available against which the temporary difference can be utilized.

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

Employee benefits

The Group operates various post-employment schemes including both defined benefit and defined contribution pension plans.

Defined contribution plans

A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. The contributions are recognized as employee benefit expense when they are due. Prepaid contributions are recognized as an asset.

Defined benefit plans

A defined benefit plan is a pension plan that is not a defined contribution plan.

Typically, defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.

The liability recognized in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. Actuarial gains or losses are recognized in OCI. Service costs, interest costs and return on plan assets are netted in personnel expenses.

Other employee benefits

Obligations to employees not paid at the balance sheet date, such as bonuses, holiday entitlements or compensations are presented as accrued expenses.

Contingent consideration arrangements related to business acquisitions in which payments are contingent on continued employment and thus compensation for future service are presented as provisions.

Share-based payments

Certain management members and senior employees participate in equity compensation plans. The fair value of all equity-settled compensation awards granted to employees is determined at the grant date and recorded as an expense over the vesting period. The expense for equity compensation awards is part of personnel expense and a corresponding increase in equity is recorded.

Provisions

Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events, when it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. If the effect of the time value of money is material, provisions are discounted.

Share capital

Ordinary shares are classified as equity. Dividends on ordinary shares are recorded in equity in the period in which they are approved by the parent Company’s shareholders.

Where the Group purchases shares of the parent Company, the consideration paid (including any attributable transaction costs) is deducted from equity as treasury shares. Any consideration received from the sale of own shares is recognized in equity, net of any taxes.

Revenue recognition

Revenue from contracts with customers comprises revenue from sale of software and solutions and services. Revenue from contracts with customers is recognized either when the performance obligation in the contract has been performed either at the “point in time” or ”over time” as control of the promised good or service is transferred to the customer at an amount that reflects the consideration to which the Group expects to be entitled in exchange for those goods or services.

Sale of software

SoftwareONE enters into contracts with customers to sell software products of several third-party software providers. Revenue from the sale of software is recognized at the point in time control of the license is transferred to the customer, generally on delivery of the product key. The normal credit term is 30 to 90 days upon delivery.

SoftwareONE distinguishes two types of software selling arrangements:

• Direct business: As an approved channel partner, SoftwareONE sells software products provided by third parties to end customers in several areas worldwide. The Group’s obligation in these arrangements is only to arrange for another entity to provide the software license to the end customer. Hence, SoftwareONE acts as an agent and recognizes revenue at the net amount that it retains from its agency services.
• Indirect business: SoftwareONE acts as a value-added software reseller and provides consulting services in connection with the sale of the software licenses to its customers. These services include aspects of strategic and operational software procurement, complex technology advice or customized solutions. They are bundled with the sale of the software products and are regarded as an integral part of the performance obligation to the customer. The software licenses only deliver benefits together with the extensive consulting services that are not distinct from the services in the contractual context and constitute a bundled performance obligation. As the Group is primarily responsible for fulfilling this promise, SoftwareONE concluded that it acts as a principal in these arrangements. For further details on the principal vs. agent assessment please refer to section “Significant judgments”. SoftwareONE therefore recognizes revenue from such contracts gross in the consolidated financial statements. The purchase from the supplier is presented as cost of software purchased.
  

The Group also enters into non-cancellable multi-year licensing contracts with customers. In such contracts SoftwareONE transfers control of the software license at the beginning of the contract and collects the consideration over the contract duration. As the customer pays in arrears, SoftwareONE is effectively providing financing to the customer. Hence, there are two components in such arrangements: a revenue component (for the notional cash sales price); and a loan component (for the effect of the deferred payment terms). Interest income on the loan component is calculated based on the rate that would be reflected in a separate financing transaction between the Group and its customers at contract inception and is presented under finance income. SoftwareONE uses the practical expedient in IFRS 15 and does not adjust the promised amount of consideration for the effects of a significant financing component if it expects at contract inception that the period between the transfer of the promised good or service to the customer and when the customer pays for that good or service will be one year or less.

Revenue from solutions and services

SoftwareONE also provides a wide range of technology consulting services. Revenue from solutions and services is recognized over time using an input method based on labor hours to measure progress towards complete satisfaction of the service because the customer simultaneously receives and consumes the benefits provided by SoftwareONE. The Group determined that the input method based on labor hours incurred in relation to total expected hours is the best method in measuring progress of the consulting services because there is a direct relationship between SoftwareONE’s effort and the transfer of service to the customer. Payment is due 30 days after the solutions and services have been performed.

Contract balances

• Contract assets
  A contract asset is the right to consideration in exchange for goods or services transferred to the customer. If the Group performs by transferring goods or services to a customer before the customer pays consideration or before payment is due, a contract asset is recognized for the earned consideration that is conditional.
• Trade receivables
  A trade receivable represents the Group’s right to an amount of consideration that is unconditional (in other words only the passage of time is required before payment of the consideration is due).
  
• Contract liabilities
  A contract liability is the obligation to transfer goods or services to a customer for which the Group has received consideration (or an amount of consideration is due) from the customer. If a customer pays consideration before the Group transfers goods or services to the customer a contract liability is recognized when the payment is made or the payment is due (whichever is earlier). Contract liabilities are recognized as revenue when the Group performs under the contract.
  

Transaction price of unsatisfied performance obligations

SoftwareONE uses the practical expedient in IFRS 15.121 and does not disclose information about the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied when the original expected duration of the underlying contract is one year or less. After applying this practical expedient, the remaining performance obligations to be disclosed 31 December 2019 and 2018 are not material.

Leases

Right-of-use assets

The Group recognizes right-of-use assets at the commencement date of the lease (that is the date the underlying asset is available for use). Right-of-use assets are measured at cost less any accumulated depreciation and impairment losses and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognized, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. For leased vehicles, SoftwareONE makes use of the option not to separate lease and non-lease components and ancillary costs are therefore included in the calculation of the entire lease component.

Unless the Group is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the recognized right-of-use assets are depreciated on a straight-line basis over the shorter of their estimated useful life and the lease term. The useful life is as follows:

• Buildings: max. 10 years
• Vehicles: max. 5 years
• Other equipment: max. 5 years

Right-of-use assets are subject to impairment.

Lease liabilities

At the commencement date of the lease, the Group recognizes lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Group and payments of penalties for terminating a lease if the lease term reflects the Group exercising the option to terminate.

The variable lease payments that do not depend on an index or a rate are recognized as expense in the period in which the event or condition that triggers the payment occurs.

In calculating the present value of lease payments, the Group uses the incremental borrowing rate at the lease commencement date, if the interest rate implicit in the lease is not readily determinable. After the commencement date the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset.

Short-term leases and leases of low-value assets

The Group applies the short-term lease recognition exemption to its short-term leases of other machinery and equipment (these are those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases of office equipment that are considered of low value (in other words below CHF 5,000). Lease payments on short-term leases and leases of low-value assets are recognized as expense on a straight-line basis over the lease term.