(1) Description of Business and Summary of Significant Accounting Policies

(a) Description of Business

SERENA Software, Inc. ("SERENA" or the "Company") is the largest global independent software company in terms of revenue solely focused on managing change and processes across information technology, or IT, environments. The Company's products and services primarily address the complexity of application lifecycle management, or ALM, and are used by customers to manage the development of, and control change in, mission critical applications within both mainframe and distributed systems environments. In addition, the Company provides products and services to enable customers to rapidly address IT service management, or ITSM, and business process challenges through the use of visually designed process workflows. The Company's products and services allow customers to orchestrate and manage their application development, IT and business processes by automating and integrating disparate ALM and ITSM products and processes, improving process visibility and consistency, enhancing software integrity, mitigating application development risks, supporting auditability and regulatory compliance, and boosting productivity. The Company's revenue is generated by software licenses, maintenance contracts and professional services. The Company's software products are typically installed within customer IT environments and generally accompanied by renewable annual maintenance contracts.

(b) Spyglass Merger Corp.

On March 10, 2006, Spyglass Merger Corp., an affiliate of Silver Lake, a private equity firm, merged with and into us, a transaction we refer to in this report as the Merger. As a result of the Merger, our common stock ceased to be traded on the NASDAQ National Market and we became a privately-held company, with approximately 56.5% of our common stock at the time of the merger on a fully diluted basis owned by investment funds affiliated with Silver Lake.

(c) Correction of Immaterial Errors

In fiscal 2012, the Company identified certain errors related to overstated income tax accruals of approximately $3.9 million that originated in fiscal 2009. Management concluded that the effect of correcting these errors is not material to fiscal 2009 but would have been material if corrected in fiscal 2012. Accordingly, financial data as of and for the fiscal years ended January 31, 2009, 2010 and 2011 have been revised to reflect the correction of these errors.

(d) Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Serena has prepared the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America.

(e) Foreign Currency Translation

The functional currencies of the Company's foreign subsidiaries are primarily the British Pound in the United Kingdom and the Euro in Europe, and to a lesser extent, other currencies including the Swiss Franc, Swedish Krona and Danish Krone in Europe, the Singapore Dollar, Australian Dollar, Japanese Yen, Indian Rupee and South-Korean Won in Asia and the Pacific Rim, and the Brazilian Real in Latin America. These foreign subsidiaries' financial statements are translated using current exchange rates for balance sheet accounts and average rates during the period for income statement accounts. Translation adjustments are recorded as components of other comprehensive income (loss) in the consolidated statements of stockholders' equity. Foreign currency transaction gains and losses are included in operating expenses, and have not been material to date.

(f) Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. As of January 31, 2011 and 2012, cash equivalents consisted of money market funds.

The Company has classified its investments as "available-for-sale." These investments are carried at fair value, based on quoted market prices, and unrealized gains and losses are recorded as components of other comprehensive income (loss) in the consolidated statements of stockholders' equity. Investments deemed to be other-than-temporarily impaired would be recorded as other losses in the consolidated statements of operations. Historically, unrealized losses have been insignificant and the Company has not characterized any of its investments as other-than-temporarily impaired. Realized gains and losses upon sale or maturity of these investments are determined using the specific identification method and are recorded as other income or loss in the consolidated statements of operations.

Interest income consists principally of earnings generated from interest-bearing accounts held by the Company.

Cash and cash equivalents consisted of the following as of January 31, 2011 and 2012 (in thousands):


	As of January 31, 2011						As of January 31, 2012
	Cost		Unrealized Losses		Fair Market Value		Cost		Unrealized Losses		Fair Market Value
Cash and Cash Equivalents:
Cash	$	23,571	$	—	$	23,571	$	31,019	$	—	$	31,019
Money Market Funds		102,803		—		102,803		78,669		—		78,669

	$	126,374	$	—	$	126,374	$	109,688	$	—	$	109,688

(g) Allowance for doubtful accounts

We maintain an allowance for doubtful accounts to reserve for potentially uncollectible trade receivables. We review our trade receivables by aging category to identify significant customers with known disputes or collection issues. For accounts not specifically identified, we provide reserves based on the age of the receivable. In determining the reserve, we make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. We also consider our historical level of credit losses and current economic trends that might impact the level of future credit losses.


	Balance at Beginning of Period		Additions- Charges to Expenses		(a) Deductions & Write- offs			Balance at End of Period
	(in thousands)
Year Ended January 31, 2010:
Allowance for doubtful accounts	$	649	$	898	$	(67	)	$	1,480
Year Ended January 31, 2011:
Allowance for doubtful accounts	$	1,480	$	50	$	(435	)	$	1,095
Year Ended January 31, 2012:
Allowance for doubtful accounts	$	1,095	$	4	$	(136	)	$	963

(a)	Deductions related to the allowance for doubtful accounts represent amounts written off against the allowance.

(h) Property and Equipment

Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets, generally three to five years.

(i) Goodwill and Other Intangible Assets

Goodwill represents the excess of cost over the fair value of net assets of businesses acquired. Goodwill and intangible assets acquired in a purchase business combination that are determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives and are reviewed for impairment.

Acquired technologies are being amortized over periods ranging from 1.5 years to 5 years and the amortization expense associated with acquired technologies is reflected in cost of revenue in the consolidated statements of operations.

Other intangible assets are being amortized over periods ranging from 3 years to 8 years and the amortization expense associated with other intangible assets is reflected in operating expenses in the consolidated statements of operations. Other intangible assets also include certain capitalized internal use software costs.

For website development costs and the development costs related to the Company's on-demand application services, the Company capitalized qualifying computer software costs, incurred during the application development stage. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. The Company capitalized $3.6 million of such costs in the fiscal year ended January 31, 2010. No such costs were capitalized in the fiscal years ended January 31, 2011 and 2012. The Company has also capitalized certain other costs totaling $0.0 million, $0.4 million and $0.3 million in fiscal 2010, 2011 and 2012, respectively, associated with computer software it has acquired for internal use. These capitalized costs will be amortized on a straight line basis over the expected useful life of the software, ranging from three to five years, beginning on the date the application becomes available for its intended use.

(j) Impairment or Disposal of Long-lived Assets

Long-lived assets, such as property, plant and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet.

In the fourth quarter of the fiscal year ended January 31, 2010, the Company discontinued marketing one of its on-demand application services and identified a triggering event for its other on-demand application services due to sales falling below expectations. As a result, the Company tested its capitalized software costs related to its on-demand application services for impairment and concluded that the carrying amount for these long-lived assets were not recoverable and were fully impaired. Accordingly, the Company recorded an impairment charge in the fourth quarter of fiscal year 2010 totaling $6.8 million.

Goodwill is tested annually for impairment in the fourth quarter of each fiscal year, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, 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.

The Company completed this test during the fourth quarters of fiscal year 2010, 2011 and 2012 and did not record an impairment loss on goodwill in any of those fiscal years.

(k) Software Development Costs

Development costs related to software products to be sold are expensed as incurred until technological feasibility of the product has been established. Based on the Company's product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working model and the point at which the product is ready for general release have not been significant. Accordingly, no costs have been capitalized to date.

(l) Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are recognized for deductible temporary differences, along with net operating loss carryforwards, if it is more likely than not that the tax benefits will be realized. To the extent a deferred tax asset cannot be recognized under the preceding criteria, allowances are established. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The Company includes interest and penalties related to uncertain income taxes in the provision for income taxes.

(m) Use of Estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles 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 consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(n) Revenue Recognition

The Company recognizes revenue when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the fee is fixed or determinable and (4) collectibility is probable. Serena defines each of these four criteria as follows:

Persuasive evidence of an arrangement exists. It is Serena's customary practice to have a written contract signed by both the customer and Serena, or a purchase order or purchase authorization from those customers whose standard practice is to employ such instruments.

Delivery has occurred. Serena's software is physically or electronically delivered to the customer. If an arrangement includes undelivered products or services that are essential to the functionality of the delivered product, or includes acceptance criteria, delivery is not considered to have occurred until these essential products or services are delivered and acceptance criteria are met.

The fee is fixed or determinable. Serena's policy is to not provide customers the right to a refund of any portion of their license fees paid. The Company's customary payment terms require customers to pay at least 80% of the license fee within one year or less. With respect to these arrangements where 20% or less of the arrangement fee is due beyond one year, the Company considers these arrangements to be fixed and determinable since such arrangements are standard business practice and the Company has a history of successful collections without making concessions. Arrangements with payment terms extending beyond these customary payment terms are considered not to be fixed or determinable, and revenues from such arrangements are recognized as payments become due and payable.

Collectibility is probable. Collectibility is assessed on a customer-by-customer basis. Serena typically sells to customers for whom there is a history of successful collection. If it is determined from the outset of an arrangement that collectibility is not probable, revenues are recognized as cash is collected.

For multiple element arrangements (e.g., license and maintenance), revenue is allocated to each component of the contract based on vendor specific objective evidence ("VSOE") of its fair value, which is the price charged when the elements are sold separately. VSOE must exist for the undelivered elements to allocate the total fee among all delivered and non-essential undelivered elements of the arrangement. Since VSOE of fair value has been established for maintenance but not for software licenses, the residual method is used to allocate revenue to the license portion of multiple-element arrangements.

Our VSOE for certain elements of an arrangement is based upon the pricing in comparable transactions when the element is sold separately or through the existence of stated renewal rates. VSOE for post contract support services are primarily based upon customer renewal history where the services are sold separately. VSOE for professional services is also based upon the price charged when the services are sold separately.

For multiple element arrangements, VSOE must exist for the undelivered elements to allocate the total fee among all delivered and non-essential undelivered elements of the arrangement. If the undelivered elements of the arrangement are essential to the functionality of the product, revenue is deferred until the essential elements are delivered. If VSOE does not exist for one or more non-essential undelivered elements, revenue is deferred until such evidence does exist for the undelivered elements, or until all elements are delivered, whichever is earlier. If VSOE of all non-essential undelivered elements exists but VSOE does not exist for one or more delivered elements, revenue is recognized using the residual method. Under the residual method, the revenue for the undelivered elements is deferred based upon VSOE and the remaining portion of the arrangement fee is recognized as revenue for the delivered elements, assuming all other criteria for revenue recognition have been met.

The Company sells products to its end users and distributors under license agreements or purchase orders. Each new license includes maintenance, which includes the right to receive telephone support, "bug fixes" and unspecified upgrades and enhancements, for a specified duration of time, usually one year. The fee associated with such agreements is allocated between software license revenue and maintenance revenue based on the residual method. Software license revenue from these agreements or purchase orders is recognized upon receipt and acceptance of a signed contract or purchase order and delivery of the software, provided the related fee is fixed or determinable and collectibility of the revenue is probable. If an acceptance period is required, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period, as defined in the applicable software license agreement.

The Company recognizes maintenance revenue ratably over the life of the related maintenance contract. Maintenance contracts on perpetual licenses generally renew annually, although the Company does on occasion enter into multi-year maintenance agreements. The Company typically invoices and collects maintenance fees on an annual basis at the anniversary date of the license. Deferred revenue represents amounts received by the Company in advance of performance of the maintenance obligation. Professional services revenue includes fees derived from the delivery of training, installation, and consulting services. Revenue from training, installation, and consulting services is recognized on a time and materials basis as the related services are performed. These services have not historically involved significant production, modification or customization of the software and the services have not been essential to the functionality of the software.

(o) Stock-Based Compensation

Stock-based compensation cost is measured at the grant date based on the fair value of the award. The Company has elected the graded-vesting attribution method for recognizing stock-based compensation expense over the requisite service period for each separately vesting tranche of awards as though the awards were, in substance, multiple awards.

(p) Segment Reporting

The Company's chief operating decision-maker is considered to be the Company's chief executive officer ("CEO"). The CEO reviews financial information presented on an entity level basis accompanied by disaggregated information about revenues by product type and certain information about geographic regions for purposes of making operating decisions and assessing financial performance. The entity level financial information is identical to the information presented in the accompanying consolidated statements of operations. The Company has determined that it operates in a single operating and reportable segment: enterprise change management software.

Geographic information


	Fiscal Years Ended January 31,
	2010		2011		2012
	(in thousands)
Revenues:
United States of America:
Software licenses	$	32,008	$	31,075	$	32,817
Maintenance and professional services		120,848		111,679		110,218

Total United States of America		152,856		142,754		143,035

Europe, Asia and South America:
Software licenses		17,389		20,307		22,096
Maintenance and professional services		53,769		51,325		54,410

Total Europe, Asia and South America		71,158		71,632		76,506

Total	$	224,014	$	214,386	$	219,541

The Company operates in the United States of America, Europe, the Asia Pacific region and Latin America. In general, revenues are attributed to the country in which the contract originates.


	As of January 31,
	2011		2012
	(In thousands)
Property and equipment:
United States of America	$	1,964	$	2,909
Europe, Asia and South America		1,638		1,970

Total	$	3,602	$	4,879

Other information

In each of the fiscal years ended January 31, 2010, 2011 and 2012, 58% of the Company's total software license revenue came from the Company's distributed systems products and 42% came from the Company's mainframe products.

Major customers

No customer accounted for 10% or more of consolidated revenues in fiscal 2010, 2011 or 2012.

(q) Advertising

Advertising costs are expensed as incurred. Advertising expense is included in sales and marketing expense and amounted to $3.8 million, $3.1 million and $3.5 million in the fiscal years ended January 31, 2010, 2011 and 2012, respectively.

(r) Recently Issued Accounting Standards

In September 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2011-08, Intangibles—Goodwill and Other (Topic 350)—Testing Goodwill for Impairment (ASU 2011-08), to allow an entity to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity 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 value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. ASU 2011-08 is effective for fiscal years beginning after December 15, 2011, and early adoption is permitted. The implementation of this accounting guidance is not expected to have a material impact on the Company's consolidated financial position or results of operations.

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220)—Presentation of Comprehensive Income (ASU 2011-05), to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. ASU 2011-05 is effective for interim and annual periods beginning on or after December 15, 2011. The implementation of this accounting guidance is not expected to have a material impact on the Company's consolidated financial position or results of operations.

In January 2010, the FASB issued an amendment regarding improving disclosures about fair value measurements. This new guidance requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company's adoption of this guidance did not have any material impact on its consolidated financial position or results of operations.

In October 2009, the FASB issued Accounting Standards Updated ("ASU") No. 2009–13, Multiple–Deliverable Revenue Arrangements, ("ASU 2009–13"). ASU 2009–13 amends existing revenue recognition accounting pronouncements that are currently within the scope of FASB ASC Subtopic 605-25. The new standard provides accounting principles and application guidance on whether certain non-software multiple deliverables exist, how the arrangement should be separated, and the consideration allocated. This guidance eliminates the requirement to establish the fair value of undelivered products and services and also eliminates the residual method of allocating arrangement consideration. The new guidance provides for separate revenue recognition based upon management's estimate of the selling price for an undelivered item when there is no other means to determine the fair value of that undelivered item. Under the previous guidance, if the fair value of all of the undelivered elements in the arrangement was not determinable, then revenue was generally deferred until all of the items were delivered or fair value was determined. This new approach is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. This guidance will not be effective for the Company until the first quarter of fiscal 2012. The Company's adoption of this guidance on February 1, 2011 did not have any material impact on its consolidated financial position or results of operations.