DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

DESCRIPTION OF BUSINESS

MICROS Systems, Inc. is a leading worldwide designer, manufacturer, marketer and servicer of enterprise applications for the global food and beverage, hotel, and retail industries. The Company’s solutions consist of application specific software and hardware systems, supplemented by a wide range of services. The food and beverage and hotel industries (sometimes referred to collectively as the hospitality industry) include numerous defined markets such as lodging (including individual hotel sites and hotel chains), table service restaurants, quick service restaurants, entertainment venues such as stadiums and arenas, business food service operations, casinos, transportation food service, government operations, and cruise ships. The retail industry consists of retail operations selling to consumers both general and specific products, such as clothing, shoes, food, hardware, jewelry, and other specialty items. (References to “MICROS” or the “Company” in these notes include the operations of MICROS Systems, Inc. and its subsidiaries on a consolidated basis, unless the context indicates otherwise.)

BASIS OF PREPARATION AND USE OF ESTIMATES

The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes. Although these estimates are based on assumptions that management believes are reasonable and management’s knowledge of current matters pertaining to the Company and activities that management anticipates the Company may undertake in the future, actual results may differ from these estimates.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. The net income attributable to MICROS Systems, Inc. is recorded net of non-controlling interest. Investments in 20% through 50% owned affiliated companies and any investments in other companies in which the Company exercises significant influence over operating and financial affairs, are accounted for under the equity method. Otherwise, investments are recorded at cost. All intercompany accounts and transactions have been eliminated.

FOREIGN CURRENCY TRANSLATION

The financial statements of the Company’s non-U.S. operations are translated into U.S. dollars for financial reporting purposes. The assets and liabilities of non-U.S. operations whose functional currencies are not the U.S. dollar are translated at the fiscal year-end exchange rates, while revenues and expenses are translated at month-end exchange rates during the fiscal year which approximate weighted average exchange rates. Specifically, the applicable exchange rates used in the financial statements are based on the exchange rates in effect on the last business day of each month. The cumulative translation effects are reported in accumulated other comprehensive income, a separate component of shareholders’ equity. Gains and losses on monetary transactions denominated in other than the functional currency of an operation are reflected in other income (expense).

REVENUE RECOGNITION

The Company’s revenue is generated from the sale of software licenses, hardware, professional services and maintenance support.

Software

The Company’s proprietary software consists of hotel, food and beverage, and retail software systems. The Company also resells various third party software products. All software products are offered on a stand-alone basis, and can be used either with third party hardware products or the Company’s hardware products.

Revenue from software licenses is recognized when the following four basic criteria are met as follows:


•	Persuasive evidence of an arrangement exists: The Company requires a contract signed by both parties to the agreement or a purchase order received from the customer as persuasive evidence of an arrangement.


•	Delivery has occurred or services have been rendered: Delivery occurs when risk of ownership has passed to the buyer or in the case of electronic delivery, when the customer is given access to the licensed programs. The Company deems its OPERA software to be delivered when ready to “go live” (i.e., the software is ready to be used in the ordinary course of the client’s business).

•

Fixed or determinable fee: The Company considers the license fee to be fixed or determinable if the fee is not subject to refund or adjustment and is payable within its normal payment terms, generally within 90 days of delivery, with generally no more than 20% of the contract price due at the end of the payment term. If a software license arrangement contains significant customer acceptance criteria or a cancellation right, recognition of the software revenue is deferred until the earlier of customer acceptance or the expiration of the acceptance period or cancellation right. If the arrangement fee is not fixed or determinable, the Company recognizes the revenue as amounts become due and payable.


•	Collection is probable: The Company performs a credit review to determine the creditworthiness of the customer. Collection is deemed probable if the Company expects that the customer will be able to pay amounts under the arrangement as they become due. If the Company determines collection is not probable, revenue is recognized as collection occurs.

Hardware

The Company’s main proprietary hardware is point-of-sale terminals. The Company also sells other proprietary hardware devices, such as cash drawers, handheld order entry terminals and pole displays and also resells various non-proprietary hardware products, including personal computers, servers, printers, credit card processing network cards and other related computer equipment. Hardware revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured. If these four criteria have not been satisfied at the time of shipment, recognition of the hardware revenue is deferred until the Company determines that all four criteria have been met.

The Company’s hardware includes certain embedded system software which is used solely in connection with the operation of the hardware and is incidental to the hardware product as a whole; once installed, the embedded system software is not updated for new versions that are subsequently developed.

Generally, when the Company is primarily obligated in a transaction, subject to inventory risk, has latitude in establishing prices and selecting suppliers, or has some but not all of these indicators, revenue is recorded at the gross sales price.

Services

The Company also provides maintenance, support, and professional services, such as implementation, customer specific development, software hosting, software as a service and ecommerce design and development. Revenue from maintenance support, software-hosting services and software as a service contracts is initially recorded as deferred revenue and is recognized ratably over the contract term. Customer setup fees in hosting and software as a service arrangements are recognized over the estimated customer relationship period and have not been significant to date. Revenue related to professional services is recognized as the service is rendered provided all the other criteria for revenue recognition have been met.

The Company’s software is ready for use by the customer upon receipt. While many clients’ may choose to tailor the software to fit their specific needs or request the Company’s assistance activating the programs, the Company’s implementation services do not typically involve significant customization to, or development of, the underlying source code. Accordingly, while revenue from implementation services is recognized as the service is rendered, provided all the other criteria for revenue recognition have been met, the provision of implementation services does not generally change when software revenue is recognized as set forth above in “Software;” however, in those instances where the Company does provide significant customization to or further development of the underlying software as part of implementation, software revenue recognition is deferred until delivery (or, where applicable, customer acceptance) of the customized software has occurred.

Revenue from fixed price ecommerce design and development contracts, where the software product is designed, developed or modified to the client’s specifications is recognized on a percentage of completion basis based on the estimated costs incurred compared to total estimated costs. This method is used because reasonably dependable estimates of the revenues and the project progress applicable to various states of an arrangement can be made, based on historical experience and milestones set in the contract. The Company defers the recognition of all revenue if the Company’s ability to estimate its progress is not reasonably dependable.

Multiple Element Arrangements

The Company accounts for multiple element arrangements that consist of software and software-related services, collectively referred to as “software elements” in accordance with industry specific accounting guidance for software and software-related transactions. For such transactions, the fee is allocated to the various elements based on vendor-specific objective evidence of fair value, which is either the price charged when the same element is sold separately or, if the element is not sold separately, the price established by management having the relevant authority, if it is probable that the price, once established, will not change before the separate introduction of the element into the marketplace. Except as set forth in the following sentence, if sufficient vendor-specific objective evidence of fair value does not exist, all revenue from the arrangement is deferred until all elements of the arrangement have been delivered or, if earlier, such sufficient vendor-specific objective evidence of fair value does exist. However, when the fair value of a delivered element has not been established, but fair value exists for the undelivered elements, the Company uses the residual method to recognize revenue. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue upon delivery, provided the other revenue recognition criteria are met.

For multiple element arrangements that include tangible products with incidental embedded software and other related services, collectively referred to as “non-software elements”, the Company allocates revenue to all deliverables based on their relative selling prices. In such circumstances, the Company uses the following hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value, (ii) third-party evidence of selling price, and (iii) best estimate of the selling price. Best estimate of selling price reflects the Company’s estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis. Factors considered by the Company in developing relative selling prices for products and services include the clients' geographical region, customer concentrations, the use of typical discounts from list prices, prices charged by the Company for similar offerings and the Company’s historical pricing practices.

For multiple element arrangements that include a combination of software elements and non-software elements, the Company first allocates the arrangement revenue to the software elements as a group and the non-software elements as a group based on each group’s relative selling prices. In such circumstances, the Company uses the hierarchy described above to determine the relative selling price to be used to allocating revenue to each the group. After this initial allocation has occurred, the Company allocates revenue to any separate deliverables within each group using the methodology described above.

Other

Costs related to shipping and handling and billable travel expenses are included in cost of sales.

FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

The fair market values of cash and cash equivalents, marketable securities, accounts receivable, accounts payable, accrued expenses and income taxes payable at both June 30, 2014 and 2013 approximate their carrying amounts.

The Company considers all highly liquid investments with a maturity of generally three months or less at the date of purchase to be cash equivalents. These investments are recorded at cost which approximates fair value. Investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. These investments are classified as available-for-sale securities and are recorded at fair value which approximates cost.

The Company periodically reviews each investment to identify any unrealized losses and evaluates whether the losses are temporary in nature. Unrealized losses that are determined to be temporary in nature are reported, net of tax, in accumulated other comprehensive income. Other-than-temporary “credit loss” (loss due to the security issuer’s credit risk) is recognized, net of tax and valuation allowances, in the consolidated statements of operations, while other-than-temporary impairment losses related to factors other than credit loss is recognized, net of tax, in accumulated other comprehensive income.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company maintains allowances for doubtful accounts for estimated losses that may result from the inability of the Company’s clients to make required payments. The Company’s methodology for determining this allowance requires estimates and is based on the age of the receivable, actual collection experience, the client’s payment practices and history, inquiries, credit reports from third parties and other financial information.

INVENTORY

Inventory is stated at the lower of cost or market. Cost is determined principally on a first-in, first-out basis. Inventory quantities on hand, future purchase commitments provided to the Company’s suppliers and the estimated utility of the Company’s inventory is reviewed regularly. If the review indicates a reduction in utility of inventory below carrying value, the inventory is adjusted and a charge to cost of sales is recorded in an amount equal to the adjustment.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives, ranging from three to ten years. Leasehold improvements are amortized over the life of the lease or estimated useful lives, whichever is shorter. Maintenance and repairs are charged to expense as incurred, and the costs of additions and improvements are capitalized. Any gain or loss from the retirement or sale of an asset is credited or charged to operations in the current period. Internally used computer software is amortized on a straight-line basis over the estimated life of the software ranging up to seven years.

PURCHASED AND INTERNALLY DEVELOPED SOFTWARE COSTS

Costs incurred in the research and development of new software products to be licensed to others, primarily consisting of salaries, employee benefits and administrative costs, are expensed as incurred and included in research and development expenses until technological feasibility is established. The capitalization of software development costs on a product-by-product basis starts when a product’s technological feasibility has been established and ends when the product is available for general release to clients, at which time amortization of the capitalized software development costs begins. Technological feasibility is established when the product reaches the working model stage. The fair values of software purchased with acquisitions are also included in capitalized software development costs.

Annual amortization of purchased and internally developed software costs is either included in software cost of sales or services cost of sales. For each capitalized software product, the annual amortization is equal to the greater of: (i) the amount computed using the ratio that the software product’s current fiscal year gross revenue bears to the total current fiscal year and anticipated future gross revenues for that product or (ii) the amount computed based on straight-line method over the remaining estimated economic life of the product. Amortization expenses for fiscal years 2014, 2013 and 2012 were approximately $6.5 million, $5.2 million and $7.1 million, respectively.

LONG-LIVED ASSETS INCLUDING FINITE-LIVED PURCHASED INTANGIBLE ASSETS

The Company evaluates long-lived assets, including finite-lived purchased intangible assets, for impairment whenever events and changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. The Company compares the fair value of the assets based on the undiscounted cash flows the assets are expected to generate (or market value, if available) to the net book value of the assets. If the fair value is less than net book value, the asset is impaired and the Company recognizes an impairment loss equal to the excess of the net book value over the fair value.

During the fiscal years ended June 30, 2014, 2013 and 2012, the Company recorded approximately $0.1 million, $0.7 million and $1.3 million, respectively, in accelerated amortization expenses related to finite-lived customer relationship intangible assets due to increased attrition of customer relationships. During fiscal years 2014, 2013 and 2012, the Company did not recognize any impairment losses on long-lived assets, including finite-lived purchased intangible assets.

GOODWILL AND INDEFINITE-LIVED PURCHASED INTANGIBLE ASSETS

The Company assesses annually, in the first quarter of the fiscal year, whether goodwill and certain of its trademarks, which are the Company’s only indefinite-lived purchased intangible assets, are impaired. Goodwill is evaluated for impairment by comparing the fair value of each of the Company’s reporting units (U.S./Canada, EAME, the Asia-Pacific, and Latin America) to its respective book value. The Company first determines, based on a qualitative assessment, whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then the Company determines the fair value of the reporting unit based on a weighting of future income approach (i.e., discounted future income) and market approach (i.e., a comparison to the purchase and sale of similar assets in the relevant industry). If the fair value of the reporting unit exceeds the book value of the net assets assigned to that unit, goodwill is not impaired. If goodwill is impaired, the Company recognizes an impairment loss based on the amount by which the book value of goodwill exceeds its implied fair value. The implied fair value of goodwill is determined by deducting the fair value of a reporting unit’s identifiable assets and liabilities from the fair value of the reporting unit as a whole, as if that reporting unit had just been acquired and the fair value of the individual assets acquired and liabilities assumed were being determined initially.

Additional impairment assessments may be performed on an interim basis if the Company encounters events or changes in circumstances indicating that it is more likely than not that the book value of goodwill and/or indefinite-lived trademarks has been impaired.

The process of evaluating the potential impairment of goodwill and/or indefinite-lived trademarks is subjective and requires judgment at many points during the analysis. In estimating the fair value of the reporting units with recognized goodwill for the purposes of its annual or interim analyses, the Company makes estimates and judgments about the future cash flows of these reporting units. The cash flow forecasts are based on assumptions that are consistent with the plans and estimates used to manage the underlying reporting units. The Company also considers its market capitalization on the date the analysis is performed which, in the three years ended June 30, 2014 has been significantly in excess of its carrying value.

ADVERTISING COSTS

Advertising costs are charged to expense as incurred. Advertising expenses for fiscal years 2014, 2013 and 2012 were approximately $6.2 million, $5.5 million and $5.0 million, respectively.

RESEARCH AND DEVELOPMENT COSTS

Research and development costs, primarily consisting of salaries, employee benefits (including shared-based compensation expenses) and administrative costs (other than capitalized software development costs) are charged to operations as incurred.

SHARE-BASED COMPENSATION

The Company estimates the fair value of its option awards granted under its stock option program as of the date of grant, and recognizes non-cash share-based compensation expense, adjusted for expected pre-vesting forfeitures, ratably over the requisite service (i.e. vesting) period of options in the consolidated statement of operations. The Company values stock options using the Black-Scholes option pricing model, which was developed for use in estimating the fair value of traded options that are fully transferable and have no vesting restrictions. Therefore, the Company is required to make assumptions about volatility rates, expected term of options, dividend yields and applicable interest rates in determining the estimated fair value. Expected volatility is based on historical stock prices. The expected term of options granted is based on historical option activities, adjusted for the remaining option life cycle by assuming ratable exercise of any unexercised vested options over the remaining term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. See Note 4, “Share-Based Compensation” for further detail.

WARRANTIES

The Company’s hardware products are sold under warranty for defects in material and workmanship for a period ranging generally from three to 48 months. The Company establishes an accrual for estimated warranty costs at the time of sale. Historically, the Company’s warranty expense has not been material.

INCOME TAXES

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on the deferred tax assets and liabilities of a change in tax rate is recognized in the results of operations in the period that includes the enactment date of the change. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized. If the Company determines that it will not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset is charged to the deferred income tax provision in the period such determination is made.

The Company reviews its uncertain income tax positions and applies a “more likely than not” threshold to the recognition and derecognition of tax positions in the financial statements.

NET INCOME PER SHARE ATTRIBUTABLE TO MICROS SYSTEMS, INC. COMMON SHAREHOLDERS

Basic net income per share attributable to MICROS Systems, Inc. common shareholders is computed by dividing net income available to MICROS Systems, Inc. by the weighted-average number of shares outstanding. Diluted net income per share attributable to MICROS Systems, Inc. common shareholders includes additional dilution from potential common stock issuable upon the exercise of outstanding stock options.

The following table provides a reconciliation of the net income attributable to MICROS Systems, Inc. to basic and diluted net income per share:



	Fiscal Year Ended June 30,
(in thousands, except per share data)	2014		2013		2012
Net income attributable to MICROS Systems, Inc.	$	182,014	$	171,418	$	166,983

Average common shares outstanding	75,217		79,247		80,300
Dilutive effect of outstanding stock options	1,586		1,525		1,938
Average common shares outstanding assuming dilution	76,803		80,772		82,238

Basic net income per share attributable to MICROS Systems, Inc. common shareholders	$	2.42	$	2.16	$	2.08
Diluted net income per share attributable to MICROS Systems, Inc. common shareholders	$	2.37	$	2.12	$	2.03

Anti-dilutive weighted shares excluded from reconciliation	1,820		2,498		1,702

Fiscal years 2014, 2013 and 2012 include approximately $22.1 million ($15.1 million, net of tax), $21.1 million ($14.4 million, net of tax) and $16.5 million ($11.3 million, net of tax), respectively, in non-cash share-based compensation expense. These non-cash share-based compensation expenses reduced diluted net income per share attributable to MICROS Systems, Inc. common shareholders by $0.20, $0.18 and $0.14 for fiscal years 2014, 2013 and 2012, respectively. See Note 4 “Share-based Compensation” for further detail.

RECENT ACCOUNTING STANDARDS

Recently Adopted Accounting Pronouncements

On July 1, 2013, the Company adopted Financial Accounting Standards Board (“FASB”) revised guidance on how an entity tests indefinite-lived intangible assets for impairment. Under the new guidance, an entity is no longer required to calculate the fair value of the indefinite-lived intangible assets and perform the quantitative impairment test unless the entity determines, based on a qualitative assessment, that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. The adoption of this guidance did not have an impact on the Company's consolidated financial statements.

On July 1, 2013, the Company adopted FASB guidance on disclosure requirements for items reclassified out of Accumulated Other Comprehensive Income (“AOCI”). This new guidance requires entities to present (either on the face of the income statement or in the notes to the financial statements) the effects on the line items of the income statement when amounts are reclassified out of AOCI. The adoption of this guidance did not have a significant impact on the Company's consolidated financial statements.

Recent Accounting Guidance Not Yet Adopted

In May 2014, the FASB issued a new guidance related to revenue recognition. Under the new guidance, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services. In addition, the guidance requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The guidance will be effective for the Company beginning on July 1, 2017 and early adoption is not permitted. The Company is currently evaluating the effects that the adoption of this guidance will have on the Company’s consolidated financial statements.

In July 2013, the FASB issued guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance requires that 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. However, to the extent that the deferred tax asset 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 the tax position, or if the tax law of the 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. This guidance is effective for the Company beginning in its fiscal year ending June 30, 2015, and will result only in presentation changes in the consolidated balance sheet, which we do not expect to be significant.