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Summary Of Significant Accounting Policies
9 Months Ended
Jun. 30, 2011
Summary Of Significant Accounting Policies  
Summary Of Significant Accounting Policies

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Datawatch
Corporation (the "Company") and its wholly-owned subsidiaries and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") regarding interim financial reporting.
Accordingly, they do not include all of the information and notes required by accounting principles generally
accepted in the United States of America ("GAAP") for complete financial statements and should be read in
conjunction with the audited consolidated financial statements included in the Company's Annual Report on
Form 10-K for the year ended September 30, 2010 filed with the SEC. All intercompany accounts and
transactions have been eliminated.

In the opinion of management, the accompanying condensed consolidated financial statements have been
prepared on the same basis as the audited consolidated financial statements for the fiscal year ended September 30, 2010, and include all adjustments necessary for fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.

The preparation of financial statements in conformity with GAAP requires management to make estimates
and judgments, which are evaluated on an on-going basis, that affect the amounts reported in the Company's
condensed consolidated financial statements and accompanying notes. Management bases its estimates on
historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates and judgments. In particular, significant estimates and judgments include those related to revenue recognition, the allowance for doubtful accounts, sales returns reserve, useful lives of property and equipment, and the valuation of net deferred tax assets, intangible assets and share-based awards.

Revenue Recognition

Revenue allocated to software products, specified upgrades and enhancements is recognized upon delivery of
the related product, upgrades or enhancements. Revenue is allocated by vendor specific objective evidence
("VSOE") of fair value to post-contract customer support (primarily maintenance) and is recognized ratably over the term of the support, and revenue allocated using VSOE to service elements (primarily training and consulting) is recognized as the services are performed. The residual method of revenue recognition is used for multi-element arrangements when the VSOE of the fair value does not exist for one of the delivered elements. Under the residual method, the arrangement fee is recognized as follows: (1) the total fair value of the undelivered elements, as supported by VSOE, is deferred and subsequently recognized as such items are delivered or completed and (2) the difference between the total arrangement fee and the amount allocated to the undelivered elements is recognized as revenue related to the delivered elements.

The Company has two types of software product offerings: (1) Enterprise Software and (2) Desktop and
Server Software. Enterprise Software products are sold directly to end-users and through value added resellers.
The Company sells its Desktop and Server Software products directly to end-users and through distributors and resellers. Sales to distributors and resellers accounted for approximately 44% and 44%, respectively, of total sales for the three months ended June 30, 2011 and 2010, and 42% and 44%, respectively, of total sales for the nine months ended June 30, 2011 and 2010. Revenue from the sale of all software products (when separately sold) is generally recognized at the time of shipment, provided there are no uncertainties surrounding product acceptance, the fee is fixed or determinable, collectability is reasonably assured, persuasive evidence of the arrangement exists and there are no significant obligations remaining. Both types of the Company's software product offerings are "off-the-shelf" as such term is customarily defined. The Company's software products can be installed and used by customers on their own with little or no configuration required. Multi-user licenses marketed by the Company are sold as a right to use the number of licenses, and license fee revenue is recognized upon delivery of all software required to satisfy the number of licenses sold. Upon delivery, the licensing fee is payable without further delivery obligations to the Company.

Desktop and Server Software products and Enterprise Software products are generally sold in multiple
element arrangements which may include software licenses, professional services and post-contract customer
support. In such multiple element arrangements, the Company applies the residual method in determining revenue to be allocated to the software license. In applying the residual method, the Company deducts from the sale proceeds the VSOE of fair value of the professional services and post-contract customer support in determining the residual fair value of the software license. The VSOE of fair value of the services and post-contract customer support is based on the amounts charged for these elements when sold separately. Professional services include implementation, integration, training and consulting services with revenue recognized as the services are performed. These services are generally delivered on a time and materials basis, are billed on a current basis as the work is performed, and do not involve modification or customization of the software or any other unusual acceptance clauses or terms. Post-contract customer support is typically provided under a maintenance agreement which provides technical support and rights to unspecified software maintenance updates and bug fixes on a when-and-if available basis. Revenue from post-contract customer support services is deferred and recognized ratably over the period of support (generally one year). Such deferred amounts are recorded as part of deferred revenue in the Company's condensed consolidated balance sheets.

The Company's software products are sold under warranty against certain defects in material and
workmanship for a period of 30 days from the date of purchase. Certain software products, including desktop
versions of Monarch and Monarch Data Pump sold directly to end-users, include a guarantee under which such customers may return products within 30 days for a full refund. Additionally, the Company provides its
distributors with stock-balancing rights. Revenue from the sale of software products to distributors and resellers is recognized at the time of shipment providing all other criteria for revenue recognition as stated above are met and (i) the distributor or reseller is unconditionally obligated to pay for the products, including no contingency as to product resale, (ii) the distributor or reseller has independent economic substance apart from the Company, (iii) the Company is not obligated for future performance to bring about product resale, and (iv) the amount of future returns can be reasonably estimated. The Company's experience and history with its distributors and resellers allows for reasonable estimates of future returns. Among other things, estimates of potential future returns are made based on the inventory levels at, and the returns history with, the various distributors and resellers, which the Company monitors frequently.

Share-Based Compensation

All share-based awards, including grants of employee stock options, are recognized in the financial
statements based on their fair value.

The Company recognizes the fair value of share-based awards over the requisite service period of the
individual awards, which generally equals the vesting period. All of the Company's share-based awards are
accounted for as equity instruments and there have been no liability awards granted. See additional share-based compensation disclosure in Note 4 to the Company's condensed consolidated financial statements.

Concentration of Credit Risks and Major Customers

The Company sells its products and services to U.S. and non-U.S. dealers and other software distributors, as
well as to end users, under customary credit terms. Two customers, Ingram Micro, Inc. and Lifeboat Distribution, individually accounted for the following percentages of total revenue and accounts receivable for the periods indicated:

 

 

 

Percentage of total

 

Percentage of total

 

 

 

 

 

 

revenue for the three

 

revenue for the nine

 

Percentage of total

 

 

months ended

 

months ended

 

accounts receivable at

 

 

June 30,

 

 

 

June 30,

 

 

 

June 30,

 

September 30,

 

 

2011

 

2010

 

2011

 

2010

 

2011

 

2010

 

 

Ingram Micro, Inc.

11

%

11

%

14

%

12

%

17

%

11

%

Lifeboat Distribution

21

%

12

%

16

%

11

%

24

%

21

%

 

The Company sells to Ingram Micro, Inc. and Lifeboat Distribution under separate distribution agreements
which automatically renew for successive one-year terms unless terminated. Other than these two customers, no other customer constitutes a significant portion (more than 10%) of revenues or accounts receivable. The
Company performs ongoing credit evaluations of its customers and generally does not require collateral.
Allowances are provided for anticipated doubtful accounts and sales returns based on management's review of
receivables, inventory and historical trends.

Capitalized Software Development Costs

The Company capitalizes certain software development costs as well as purchased software upon achieving
technological feasibility of the related products. Software development costs incurred and software purchased
prior to achieving technological feasibility are charged to research and development expense as incurred.
Commencing upon initial product release, capitalized costs are amortized to cost of software licenses using the
straight-line method over the estimated life of the product (which approximates the ratio that current gross
revenues for a product bear to the total of current and anticipated future gross revenues for that product), which is generally 18 to 24 months. The net amount of capitalized software development costs and purchased software was approximately $34,000 and $396,000 at June 30, 2011 and September 30, 2010, respectively. The Company did not capitalize any software development costs during the nine months ended June 30, 2011. During the nine months ended June 30, 2010, the Company capitalized approximately $3,000 of software development costs related to new products in development.

Intangible Assets

Intangible assets consist of internally developed software, patents and customer lists acquired through
business combinations. The values allocated to the majority of these intangible assets are amortized using the
straight-line method over the estimated useful life of the related asset and are recorded in cost of software licenses and subscriptions. The values allocated to customer relationships are amortized using the straight-line method over the estimated useful life of the related asset and are recorded in sales and marketing expenses. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable and an impairment loss is recognized when it is probable that the estimated cash flows are less than the carrying amount of the asset.

Income Taxes

Deferred income taxes are provided for the tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and operating loss carryforwards and credits. Valuation allowances are recorded to reduce the net deferred tax assets to amounts the Company believes are more likely than not to be realized.

Cash and Equivalents

Cash and equivalents include cash on hand, cash deposited with banks and highly liquid securities consisting
of money market investments with original maturities of 90 days or less. The Company's cash equivalents are
carried at fair value, which is defined as 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. The Company classifies the inputs used to measure fair value into the following hierarchy:

  • Level 1 – Observable inputs such as quoted prices in active markets;
  • Level 2 – Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
  • Level 3 – Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The following table represents information about the Company's cash equivalents measured at fair value on a
recurring basis at June 30, 2011 (in thousands):

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

in Active

 

Significant

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

 

Assets

 

Inputs

 

Inputs

 

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Money market funds

$

2,233

$

2,233

$

-

$

-

 

Recent Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update
No. 2009-13, "Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task
Force" ("ASU 2009-13"). ASU 2009-13 provides principles for allocation of consideration among its multiple-
elements, allowing more flexibility in identifying and accounting for separate deliverables under an arrangement. This ASU introduces an estimated selling price method for valuing the elements of a bundled arrangement if vendor-specific objective evidence or third-party evidence of selling price is not available, and significantly expands related disclosure requirements. This standard is effective on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010.
Alternatively, adoption may be on a retrospective basis, and early application was permitted. The adoption of this standard did not have a material effect on the Company's condensed consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, "Fair Value Measurements (Topic 820): Amendments to
Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs" ("ASU
2011-04"). ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for
measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. This standard also expands the disclosure requirements particularly for level 3 fair value measurements. This new guidance is to be applied prospectively for reporting periods beginning on or after December 15, 2011. The Company does not expect that the adoption of this standard will have a material effect on its condensed consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, "Comprehensive Income (Topic 220): Presentation of
Comprehensive Income" ("ASU 2011-05"). ASU 2011-05 eliminates the option to report other comprehensive
income and its components in the statement of changes in equity. Under this standard, an entity can elect to
present items of net income and other comprehensive income in one continuous statement of comprehensive
income or in two separate but consecutive statements. This new guidance is to be applied retrospectively for
interim and annual periods beginning after December 15, 2011. The Company is currently evaluating what
impact, if any, this standard will have on its condensed consolidated financial statements.