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Note 2 - Summary of Significant Accounting Policies
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Jun. 30, 2013
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| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Significant Accounting Policies [Text Block] |
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The
accompanying consolidated financial statements include the
accounts of NetSol Technologies, Inc. and subsidiaries
(collectively, the “Company”) as
follows:
Wholly-owned
Subsidiaries
NetSol
Technologies North America, Inc.
(“NTNA”)
NetSol
Technologies Limited (“NetSol UK”)
NetSol-Abraxas
Australia Pty Ltd. (“Abraxas”)
NetSol
Technologies Europe Limited (“NTE”)
NTPK
(Thailand) Co. Limited (“NTPK Thailand”)
NetSol
Connect (Private), Ltd. (“Connect”)
NetSol
Technologies (Beijing) Co. Ltd. (NetSol Beijing)
Majority-owned
Subsidiaries
NetSol
Technologies, Ltd. (“NetSol PK”)
NetSol
Innovation (Private) Limited (“NetSol
Innovation”)
Vroozi,
Inc. (“Vroozi”)
Virtual
Lease Services Holdings Limited (“VLSH”)
Virtual
Lease Services Limited (“VLS”)
Virtual
Lease Services (Ireland) Limited (VLSIL) formerly Hanover
Asset Finance (Ireland) Limited (“HAFL”)
The
Company consolidates any variable interest entities of
which it is the primary beneficiary. Equity investments
through which the Company exercises significant influence
over but does not control the investee and is not
the primary beneficiary of the investee’s activities
are accounted for using the equity method. Investments
through which the Company is not able to exercise
significant influence over the investee and which do not
have readily determinable fair values are accounted for
under the cost method. All material inter-company accounts
have been eliminated in the consolidation.
The
accompanying consolidated financial statements are prepared
in accordance with accounting principles generally accepted
in the United States of America (“US GAAP”) and
pursuant to the rules and regulations of the Securities and
Exchange Commission (“SEC”).
The
preparation of consolidated financial statements in
conformity with accounting principles generally accepted in
the United States of America requires management to make
estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial
statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
For
purposes of the consolidated statement of cash flows, cash
equivalents include all highly liquid debt instruments with
original maturities of three months or less which are not
securing any corporate obligations. The Company maintains
its cash in bank deposit accounts, which, at times, may
exceed federally insured limits. The Company has not
experienced any losses in such accounts.
The
Company has certificates of deposits (“CDs”) in
various configurations and maturity dates with Habib
American Bank. A portion of these CDs are restricted as
collateral to secure outstanding balances on an existing
line of credit, and become unrestricted to the extent that
they are not required for collateralization purposes. As of
June 30, 2013, the outstanding balance on the line of
credit was $1,785,237, with a corresponding restriction to
the CDs balances. The line of credit has a maximum
available balance of $2,000,000.
In
addition, the Company has also placed $90,000 in saving
account with HSBC as collateral against standby letter of
credit issued in by the bank in favor of the landlord
of the new office space.
One
of Company’s subsidiary also has certificates of
deposits with Habib American Bank. These CDs are restricted
as collateral to secure outstanding balances on an existing
line of credit, and become unrestricted to the extent that
they are not required for collateralization purposes. As of
June 30, 2013, the outstanding balance on the line of
credit was $Nil, with a corresponding restriction to the
CDs balances. The line of credit has a maximum available
balance of $500,000.
The
Company maintains an allowance for doubtful accounts for
estimated losses inherent in its accounts receivable
portfolio. In establishing the required allowance,
management regularly reviews the composition of accounts
receivable and analyzes customer credit worthiness,
customer concentrations, current economic trends and
changes in customer payment patterns. Reserves are recorded
primarily on a specific identification basis. Account
balances are charged off against the allowance after all
means of collection have been exhausted and the potential
for recovery is considered remote. As of June 30, 2013 and
2012, the Company had recorded allowance for doubtful
accounts of $922,633 and $977,933, respectively.
Revenues
in excess of billings represent the total of the project to
be billed to the customer over the revenues recognized
under the percentage of completion method. As the customer
is billed under the terms of their contract, the
corresponding amount is transferred from this account to
“Accounts Receivable.”
Property
and equipment are stated at cost. Expenditures for
maintenance and repairs are charged to earnings as
incurred; additions, renewals and betterments are
capitalized. When property and equipment are retired or
otherwise disposed of, the related cost and accumulated
depreciation are removed from the respective accounts, and
any gain or loss is included in operations. Depreciation is
computed using various methods over the estimated useful
lives of the assets, ranging from three to twenty
years.
The
Company capitalizes costs of materials, consultants, and
payroll and payroll-related costs for employees incurred in
developing internal-use computer software. These costs are
included with “Computer equipment and
software.” Costs incurred during the preliminary
project and post-implementation stages are charged to
general and administrative expense as incurred.
The
Company tests long-lived assets for impairment whenever
events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable through
the estimated undiscounted cash flows expected to result
from the use and eventual disposition of the assets.
Whenever any such impairment exists, an impairment loss
will be recognized for the amount by which the carrying
value exceeds the fair value.
Intangible
assets consist of product licenses, renewals, enhancements,
copyrights, trademarks, trade names, and customer lists.
Intangible assets with finite lives are amortized over the
estimated useful life and are evaluated for impairment at
least on an annual basis and whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. The Company assesses recoverability by
determining whether the carrying value of such assets will
be recovered through the undiscounted expected future cash
flows. If the future undiscounted cash flows are less than
the carrying amount of these assets, the Company recognizes
an impairment loss based on the excess of the carrying
amount over the fair value of the assets.
Costs
incurred to internally develop computer software products
or to enhance an existing product are recorded as research
and development costs and expensed when incurred until
technological feasibility for the respective product is
established. Thereafter, all software development costs are
capitalized and reported at the lower of unamortized cost
or net realizable value. Capitalization ceases when the
product or enhancement is available for general release to
customers.
The
Company makes on-going evaluations of the recoverability of
its capitalized software projects by comparing the amount
capitalized for each product to the estimated net
realizable value of the product. If such evaluations
indicate that the unamortized software development costs
exceed the net realizable value, the Company writes off the
amount which the unamortized software development costs
exceed net realizable value. Capitalized and purchased
computer software development costs are being amortized
ratably based on the projected revenue associated with the
related software or on a straight-line basis.
Goodwill
represents the excess of the aggregate purchase price over
the fair value of the net assets acquired in a purchase
businesses combination. Goodwill is reviewed for impairment
on an annual basis, or more frequently if events or changes
in circumstances indicate that the carrying amount of
goodwill may be impaired. The goodwill impairment test is a
two-step test. Under the first step, the fair value of the
reporting unit is compared with its carrying value
(including goodwill). If the fair value of the reporting
unit is less than its carrying value, an indication of
goodwill impairment exists for the reporting unit and the
enterprise must perform step two of the impairment test
(measurement). Under step two, an impairment loss is
recognized for any excess of the carrying amount of the
reporting unit’s goodwill over the implied fair value
of that goodwill. The implied fair value of goodwill is
determined by allocating the fair value of the reporting
unit in a manner similar to a purchase price allocation.
The residual fair value after this allocation is the
implied fair value of the reporting unit goodwill. Fair
value of the reporting unit is determined using a
discounted cash flow analysis. If the fair value of the
reporting unit exceeds its carrying value, step two does
not need to be performed.
The
Company applies the provisions of ASC 820-10, “Fair
Value Measurements and Disclosures.” ASC
820-10 defines fair value, and establishes a three-level
valuation hierarchy for disclosures of fair value
measurement that enhances disclosure requirements for fair
value measures. For certain financial instruments,
including cash and cash equivalents, restricted cash,
accounts receivable, accounts payable and short-term debt,
the carrying amounts approximate fair value due to their
relatively short maturities. The carrying amounts of the
long-term debt approximate their fair values based on
current interest rates for instruments with similar
characteristics.
The
three levels of valuation hierarchy are defined as
follows:
Management
analyzes all financial instruments with features of both
liabilities and equity under ASC 480, “Distinguishing
Liabilities From Equity” and ASC 815, “Derivatives
and Hedging.” Derivative liabilities are
adjusted to reflect fair value at each period end, with any
increase or decrease in the fair value being recorded in
results of operations as adjustments to fair value of
derivatives. The effects of interactions between embedded
derivatives are calculated and accounted for in arriving at
the overall fair value of the financial instruments. In
addition, the fair values of freestanding derivative
instruments such as warrant and option derivatives are
valued using the Black-Scholes model.
The
Company recognizes revenue from license contracts without
major customization when a non-cancelable, non-contingent
license agreement has been signed, delivery of the software
has occurred, the fee is fixed or determinable, and
collectability is probable. Revenue from the sale of
licenses with major customization, modification, and
development is recognized on a percentage of completion
method. Revenue from the implementation of software is
recognized on a percentage of completion method.
Revenue
from consulting services is recognized as the services are
performed for time-and-materials contracts. Revenue from
training and development services is recognized as the
services are performed. Revenue from maintenance agreements
is recognized ratably over the term of the maintenance
agreement, which in most instances is one year.
The
Company may enter into multiple element revenue
arrangements in which a customer may purchase a number of
different combinations of software licenses, consulting
services, maintenance and support, as well as training and
development (multiple-element arrangements).
Vendor
specific objective evidence (“VSOE”) of fair
value for each element is based on the price for which the
element is sold separately. The Company determines the VSOE
of fair value of each element based on historical evidence
of the Company’s stand-alone sales of these elements
to third-parties or from the stated renewal rate for the
elements contained in the initial software license
arrangement. When VSOE of fair value does not exist for any
undelivered element, revenue is deferred until the earlier
of the point at which such VSOE of fair value exists or
until all elements of the arrangement have been delivered.
The only exception to this guidance is when the only
undelivered element is maintenance and support or other
services, then the entire arrangement fee is recognized
ratably over the performance period.
Unearned
revenue represents billings in excess of revenue earned on
contracts and are recognized on a pro-rata basis over the
life of the contract. Unearned revenue was $2,446,018 and
$2,704,661 as of June 30, 2013 and June 30, 2012,
respectively.
The
Company expenses the cost of advertising as incurred.
Advertising costs for the years ended June 30, 2013 and
2012 were $244,498 and $225,870, respectively.
The
Company measures stock-based compensation cost at the grant
date based on the fair value of the award and recognize it
as expense over the applicable vesting period of the stock
award (generally four to five years) using the
straight-line method.
Income
taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences
between the financial statement carrying amounts of
existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is
recognized in income in the period that includes the
enactment date. A valuation allowance is provided for
deferred tax assets if it is more likely than not these
items will either expire before the Company is able to
realize their benefits, or that future deductibility is
uncertain.
When
tax returns are filed, it is highly certain that some
positions taken would be sustained upon examination by the
taxing authorities, while others are subject to uncertainty
about the merits of the position taken or the amount of the
position that would be ultimately sustained. The benefit of
a tax position is recognized in the financial statements in
the period during which, based on all available evidence,
management believes it is more likely than not that the
position will be sustained upon examination, including the
resolution of appeals or litigation processes, if any. Tax
positions taken are not offset or aggregated with other
positions. Tax positions that meet the more-likely-than-not
recognition threshold are measured as the largest amount of
tax benefit that is more than 50 percent likely of
being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax
positions taken that exceeds the amount measured as
described above is reflected as a liability for
unrecognized tax benefits in the balance sheets along with
any associated interest and penalties that would be payable
to the taxing authorities upon
examination. Applicable interest and penalties
associated with unrecognized tax benefits are classified as
additional income taxes in the statements of
operations.
Assets
and liabilities recorded in foreign currencies are
translated at the exchange rate on the balance sheet date.
Revenue and expenses are translated at average rates of
exchange prevailing during the year. Translation
adjustments resulting from this process are recorded to
other comprehensive income.
The
Company's cash flows from operations are calculated based
upon the local currencies. As a result, amounts related to
assets and liabilities reported on the statement of cash
flows will not necessarily agree with changes in the
corresponding balances on the balance sheet.
The
Company defines operating segments as components about
which separate financial information is available that is
evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing
performances. The Company allocates its resources and
assesses the performance of its sales activities based on
geographic locations of its subsidiaries (see Note
20).
Certain
2012 balances have been reclassified to conform to the 2013
presentation.
Accounting
Standards Update No. 2013-11, Presentation of an
Unrecognized Tax Benefit When a Net Operating Loss
Carryforward, a Similar Tax Loss, or a Tax Credit
Carryforward Exists: An unrecognized tax benefit, or a
portion of an unrecognized tax benefit, should be presented
in the financial statements as a reduction to a deferred
tax asset for a net operating loss carryforward, a similar
tax loss, or a tax credit carryforward, except as follows.
To the extent a net operating loss carryforward, a similar
tax loss, or a tax credit carryforward is not available at
the reporting date under the tax law of the applicable
jurisdiction to settle any additional income taxes that
would result from the disallowance of a tax position or the
tax law of the applicable jurisdiction does not require the
entity to use, and the entity does not intend to use, the
deferred tax asset for such purpose, the unrecognized tax
benefit should be presented in the financial statements as
a liability and should not be combined with deferred tax
assets. The assessment of whether a deferred tax asset is
available is based on the unrecognized tax benefit and
deferred tax asset that exist at the reporting date and
should be made presuming disallowance of the tax position
at the reporting date. For example, an entity should not
evaluate whether the deferred tax asset expires before the
statute of limitations on the tax position or whether the
deferred tax asset may be used prior to the unrecognized
tax benefit being settled. The amendments in this Update do
not require new recurring disclosures. ASU Topic
No. 2013 is effective for fiscal years, and interim
periods within those years, beginning after
December 15, 2013. The adoption of this guidance is
not expected to have a material impact on our consolidated
financial statements.
Accounting
Standards Update No. 2013-05, Parent’s
Accounting for the Cumulative Translation Adjustment upon
Derecognition of Certain Subsidiaries or Groups of Assets
within a Foreign Entity or of an Investment in a Foreign
Entity: This ASU addresses the accounting for the
cumulative translation adjustment when a parent either
sells a part or all of its investment in a foreign entity
or no longer holds a controlling financial interest in a
subsidiary or group of assets that is a nonprofit
activity or a business within a foreign entity. ASU Topic
No. 2013-05 is effective for our fiscal year 2014,
although early adoption is permitted. The adoption of
this guidance is not expected to have a material impact
on our consolidated financial statements.
In
July 2012, the Financial Accounting Standards Board
issued Accounting Standards Update 2012-02 (“ASU
2012-02”), Intangibles — Goodwill and Other
(Topic 350): Testing Indefinite-Lived Intangible Assets
for Impairment. The purpose of ASU 2012-02, which amends
the guidance to Topic 350, Intangibles — Goodwill
and Other, is to simplify the guidance for testing the
decline in the realizable value (impairment) of
indefinite-lived intangible assets other than goodwill.
ASU 2012-02 allows an entity to perform a qualitative
assessment to determine whether further impairment
testing of indefinite-lived intangible assets is
necessary, similar in approach to the qualitative
goodwill impairment test. The amendments in ASU 2012-02
permit an entity to first assess qualitatively whether it
is more likely than not (more than 50%) that an
indefinite-lived intangible asset is impaired, thus
necessitating that it perform the quantitative impairment
test. An entity is not required to calculate the fair
value of an indefinite lived intangible asset and perform
the quantitative impairment test unless the entity
determines that it is more likely than not that the asset
is impaired. ASU 2012-02 is effective for annual and
interim impairment tests performed for fiscal years
beginning after September 15, 2012 and early adoption is
permitted. The adoption of this standard is not expected
to have a material impact on the Company’s
financial statements.
In March 2013,
the FASB issued guidance on a parent’s accounting for
the cumulative translation adjustment upon derecognition of
a subsidiary or group of assets within a foreign entity.
This new guidance requires that the parent release any
related cumulative translation adjustment into net income
only if the sale or transfer results in the complete or
substantially complete liquidation of the foreign entity in
which the subsidiary or group of assets had resided. The
new guidance will be effective for the
Company beginning July 1, 2014. The
adoption of this standard is not expected to have a
material impact on the Company’s financial
statements.
In
December 2011, the FASB issued ASU No. 2011-11,
“Balance Sheet
(Topic 210): Disclosures about Offsetting Assets and
Liabilities.” This ASU requires an entity to
disclose information about offsetting and related
arrangements to enable users of its financial statements to
understand the effect of those arrangements on its
financial position. In January 2013, this guidance was
amended by ASU 2013-01, “Clarifying the
Scope of Disclosure about Offsetting Assets and
Liabilities,” which limits the scope of ASU
No. 2011-11 to certain derivatives, repurchase and reverse
repurchase agreements, and securities borrowing and lending
transactions. This guidance is effective for
annual and interim reporting periods beginning on or after
January 1, 2013. The adoption of this standard is not
expected to have a material impact on the Company’s
financial statements.
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