|
Note 2 - Summary of Significant Accounting Policies
|
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Jun. 30, 2012
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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”)
Vroozi,
Inc. (“Vroozi”)
NetSol
Technologies (Beijing) Co. Ltd. (NetSol Beijing)
Majority-owned
Subsidiaries
NetSol
Technologies, Ltd. (“NetSol PK”)
NetSol
Innovation (Private) Limited (“NetSol
Innovation”)
Virtual
Lease Services Holdings Limited
(“VLSH”)
Virtual
Lease Services Limited (“VLS”)
Hanover
Asset Finance (Ireland) Limited
(“HAFL”)
The
Company consolidates any variable interest entities of
which it is the primary beneficiary. Equity investments
through which we exercise significant influence over but
do not control the investee and are not the primary
beneficiary of the investee’s activities are
accounted for using the equity method. Investments
through which we are 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 (“CD”s)
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, 2012 the outstanding balance on
the line of credit was $51,231, with a corresponding
restriction to the CD 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 land lord of 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, 2012 the
outstanding balance on the line of credit was $Nil, with
a corresponding restriction to the CD 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, 2012 and 2011, the Company had recorded allowance for
doubtful accounts of $977,933 and $2,717,745,
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 ten 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. We assess
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, we recognize 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, whichever method results in a higher
level of amortization.
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.
Fair
value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly
transaction between market participants at the
measurement date. Assets and liabilities measured at fair
value are categorized based on whether or not the inputs
are observable in the market and the degree that the
inputs are observable. The categorization of financial
assets and liabilities within the valuation hierarchy is
based upon the lowest level of input that is significant
to the fair value measurement.
The
Company's financial instruments primarily consist of cash
and cash equivalents, accounts receivable, and accounts
payable.
As
of the balance sheet dates, the estimated fair values of
the financial instruments were not materially different
from their carrying values as presented on the balance
sheet. This is primarily attributed to the short
maturities of these instruments.
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.
We
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).
VSOE
of fair value for each element is based on the price for
which the element is sold separately. We determine the
VSOE of fair value of each element based on historical
evidence of our 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.
Net
revenues by our various products and services provided
for the year ended June 30, 2012 and 2011 are as
follows:
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 $2,704,661
and $2,653,460 as of June 30, 2012 and June 30, 2011
respectively.
The
Company expenses the cost of advertising as incurred.
Advertising costs for the years ended June 30, 2012 and
2011 were $225,870 and $246,254 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.
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
2011 balances have been reclassified to conform to the
2012 presentation.
In
December 2011, the FASB issued guidance on offsetting
(netting) assets and liabilities. Entities are required
to disclose both gross information and net information
about both instruments and transactions eligible for
offset in the statement of financial position and
instruments and transactions subject to an agreement
similar to a master netting arrangement. The new guidance
is effective for annual periods beginning after January
1, 2013.
In
September 2011, the FASB issued guidance on testing
goodwill for impairment. The new guidance provides an
entity the option to first perform a qualitative
assessment to determine whether it is more likely than
not that the fair value of a reporting unit is less than
its carrying amount. If an entity determines that this is
the case, it is required to perform the currently
prescribed two-step goodwill impairment test to identify
potential goodwill impairment and measure the amount of
goodwill impairment loss to be recognized for that
reporting unit (if any). If an entity determines that the
fair value of a reporting unit is less than its carrying
amount, the two-step goodwill impairment test is not
required. The new guidance is effective for annual and
interim goodwill impairment tests performed for fiscal
years beginning after December 15, 2011, with early
adoption permitted.
In
June 2011, the FASB issued guidance on presentation of
comprehensive income. The new guidance eliminates the
current option to report other comprehensive income and
its components in the statement of changes in equity.
Instead, an entity will be required to present either a
continuous statement of net income and other
comprehensive income or in two separate but consecutive
statements. The new guidance is effective for annual
periods beginning after December 15, 2011. In December
2011, the FASB issued a deferral of certain portion of
this guidance.
In
May 2011, the FASB issued guidance to amend the
accounting and disclosure requirements on fair value
measurements. The new guidance limits the
highest-and-best-use measure to nonfinancial assets,
permits certain financial assets and liabilities with
offsetting positions in market or counterparty credit
risks to be measured at a net basis, and provides
guidance on the applicability of premiums and discounts.
Additionally, the new guidance expands the disclosures on
Level 3 inputs by requiring quantitative disclosure of
the unobservable inputs and assumptions, as well as
description of the valuation processes and the
sensitivity of the fair value to changes in unobservable
inputs. The new guidance is effective for annual periods
beginning after December 15, 2011.
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||