Q1-02 US GAAP - MKS

1. Significant accounting policies
a) Basis of presentation:
Mortice Kern Systems Inc.
Notes to Consolidated Financial Statements
(Dollar Amounts in US, In Thousands, Except Per Share Data, Unaudited)
The accompanying consolidated financial statements of Mortice Kern Systems Inc. (“MKS” or the
“Company”) as at July 31, 2001 and for the three month periods ended July 31, 2001 and 2000 are unaudited
and have been prepared in accordance with generally accepted accounting principles in the United States
for interim financial information, using the same accounting policies and methods of application as used in
the April 30, 2001 financial statements, except for item 1(b) and 1(c) listed below. Accordingly, they do not
include all of the information and footnotes required by generally accepted accounting principles for annual
financial statements. In the opinion of management, all adjustments, consisting only of normal recurring
adjustments necessary for a fair presentation, have been included. The results for the interim periods
presented are not necessarily indicative of the results that may be expected for any future period. The
following information should be read in conjunction with the consolidated financial statements and notes
thereto included in the Company’s Annual Report for the year ended April 30, 2001.
b) Change in classification of revenue:
As outlined in Note 1(c) to the April 30, 2001 financial statements, the Company’s revenue is derived from
license elements, comprised of license fees, upgrades and royalties from technology licenses, and service
elements, which include maintenance, installation and training. The Company delivers product upgrades in
the form of licenses to its customers and, accordingly, has changed the classification of revenue in the
statements of operations in the quarter ended July 31, 2001.
MKS bills its existing customers for ongoing maintenance, which includes both support and upgrade
licenses. The Company’s revenue recognition policy is to allocate such revenue between license and
service elements to the extent of their fair values where vendor specific objective evidence exists of the fair
value of the elements. The Company has reviewed its methodology for the classification of revenue in its
consolidated statements of operations relating to annual support contracts and has retroactively changed
the classification of license and service revenue. Although the Company continues to recognize upgrade
license revenue ratably over the term of the related support agreement and has, therefore, not changed its
accounting policy or the method of application, the Company has determined that upgrade license revenue
is more appropriately classified as license revenue and that service revenue reflects the cost of providing
maintenance service plus an estimated margin. Accordingly, the Company has increased license revenue
and decreased service revenue for the period ended July 31, 2000 by $1,793. This change in classification
has no impact on previously reported total revenue or net loss.
c) Recent accounting pronouncements:
Effective May 1, 2001, the Company adopted the recommendations in Statement of Financial Accounting
Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). This standard requires ceasing
amortization of goodwill, and allocating the goodwill to reporting units subject to at least an annual
impairment test. An impairment loss is determined under this test by comparing the book value of goodwill
to the fair value of the reporting unit to which the goodwill relates. The Company continues to amortize its
other intangible assets on the balance sheet over a three year period.