| SIGNIFICANT ACCOUNTING POLICIES | NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
a. General:
1) Nature of operations: MIND C.T.I. Ltd. (the “Company”)
is an Israeli company which, together with its subsidiaries (the “Group”), provides integrated products and services. The
Company designs, develops, markets, supports, implements and operates billing and customer care systems, including consulting and managed
services, primarily to wireless, wireline, next-generation service providers throughout the world. The Company also provides a call management
system used by enterprises for call accounting, traffic analysis, and fraud detection. The Company, through its subsidiaries, also provides
enterprise and wholesale messaging. The Company has wholly-owned subsidiaries
in the United States (MIND Software Inc.), Romania (MIND Software Srl), United Kingdom (MIND Software Limited) and Germany (MIND CTI GmbH,
Message Mobile GmbH (“Message Mobile”) and “GTX Messaging GmbH (“GTX”)).
2) Accounting principles: The consolidated financial statements
were prepared in accordance with the United States Generally Accepted Accounting Principles (“GAAP”).
3) Use of estimates in preparation of financial statements: The preparation of financial statements
in conformity with GAAP 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 dates of the financial statements and the reported amounts of revenues and
expenses during the reporting years. Actual results could differ from those estimates. The most significant estimates with regard to the
Company’s consolidated financial statements relate to revenue recognition for projects that apply the percentage of completion measurement
and goodwill impairment.
4) Functional currency: The currency of the primary economic
environment in which the operations of the Company and certain subsidiaries are conducted is the U.S. dollar (“dollar” or
“$”). Most of the Company’s and its non-German subsidiaries’ revenues are derived from sales which are denominated
primarily in dollars. In addition, the majority of the Company’s cash reserves and investments are denominated in dollars. Thus,
the functional currency of the Company and certain subsidiaries is the dollar. The Company and certain subsidiaries
transactions and balances denominated in dollars are presented at their original amounts. Non-dollar transactions and balances have been
remeasured to dollars in accordance with Accounting Standards Codification (“ASC”) 830, “Foreign Currency Matters”.
All transaction gains and losses from remeasurement of monetary balance sheet items denominated in non-dollar currencies are reflected
in the statements of operations as financial income or expenses, as appropriate. The currency of the primary economic
environment in which the operations of the Company’s German subsidiaries, Message Mobile, GTX and MIND CTI GmbH, are conducted is
the Euro. Most of the revenues of the German subsidiaries, are denominated primarily in Euros. Thus, the functional currency of such subsidiaries
is the Euro. For those subsidiaries, assets and liabilities are translated at year-end exchange rates and statement of operations’
items are translated at average exchange rates prevailing during the year. Such translation adjustments are recorded as a separate component
of accumulated other comprehensive income (loss) in shareholders’ equity.
b. Principles of consolidation: The consolidated financial statements
include the accounts of the Company and all of its wholly-owned subsidiaries. Inter-company balances and transactions
have been eliminated in consolidation. Profits from inter-company sales, not yet realized outside the Company and its subsidiaries, have
also been eliminated.
c. Comprehensive income (loss): The purpose of reporting comprehensive
income (loss) is to report a measure of all changes in equity of an entity that result from recognized transactions and other economic
events of the period resulting from transactions from non-owner sources.
d. Segment reporting: The chief operating decision maker
(the “CODM”) of the Company is the Chief Executive Officer. The CODM reviews financial information presented on a consolidated
basis for purposes of allocating resources and evaluating financial performance. The Company has two reporting segments, see Note 10.
e. Cash and cash equivalents: The Company and its subsidiaries consider
all highly liquid investments, which include short-term bank deposits (up to three months from original date of deposit) that are not
restricted as to withdrawal or use, to be cash equivalents.
f. Fair value of financial instruments: The Company records its financial
assets and liabilities at fair value. The accounting guidance for fair value provides a framework for measuring fair value, clarifies
the definition of fair value, and expands disclosures regarding fair value measurements. Fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at
the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies
in measuring fair value: Level 1 – Quoted prices in active
markets for identical assets or liabilities. Level 2 – Inputs other than
Level 1 that are observable, either directly or indirectly, such as quoted prices in markets that are not active, or other inputs that
are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 – Unobservable inputs
that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company recognizes transfers among
Level 1, Level 2 and Level 3 classifications as of the actual date of the events or change in circumstances that caused the transfers. The Company’s financial instruments,
including cash, cash equivalents, short-term bank deposits, marketable securities, accounts receivable, accounts payable and accruals
have carrying amounts which is equal or approximate fair value due to the short-term maturity of these instruments. The measurement of cash and cash equivalents
and marketable derivatives are classified within Level 1.
g. Short-term bank deposits: Bank deposits with maturities of more
than three months but less than one year are included in short-term bank deposits. These deposits are presented at cost and earn interest
at market rates which present the fair value.
h. Marketable securities: Marketable securities are classified
as “financial assets held at fair value through profit or loss” when held for trading or are designated upon initial recognition
as financial assets at fair value through profit or loss. Financial assets at fair value through
profit or loss are shown at fair value. Any gain or loss arising from changes in fair value, including those originating from changes
in exchange rates is recognized in profit or loss in the period in which the change occurred. Net gain or loss recognized in profit or
loss incorporates any dividend or interest earned on the financial asset. The Company invests in highly-rated
marketable securities, and its policy limits the amount of credit exposure to any one issuer. The Company’s investment policy requires
investments to be investment grade, rated BBB- or better, with the objective of minimizing the potential risk of principal loss. Fair
values were determined for each individual security in the investment portfolio, based on quoted prices in active markets.
i. Leases: The Company adopted ASC 842, “Leases”.
In accordance with ASC 842, the Company first determines if an arrangement contains a lease and the classification of that lease, if applicable,
at inception. ASC 842 requires the recognition of right-of-use assets and lease liabilities for the Company’s operating leases. The Company elected to adopt the package
of practical expedients permitted under ASC 842. Therefore, the Company was not required to reassess: (i) whether any expired or existing
contracts are or contain leases; (ii) the classification of any expired or existing leases; and (iii) initial direct costs for any existing
leases.
j. Property and equipment: These assets are stated at cost, less
accumulated depreciation and amortization. The assets are depreciated by the
straight-line method, on basis of their estimated useful life which best reflects the pattern of use. Annual rates of depreciation are as
follows:
%
Computers and electronic equipment 15-33
Office furniture and equipment 6-7
Vehicles 15 Leasehold improvements are amortized
by the straight-line method over the term of the lease, which is shorter than the estimated useful life of the improvements.
k. Intangible assets: Intangible assets with definite lives
are amortized over their estimated useful lives using the straight-line method which best reflects the pattern of use, at the following
annual periods ranges:
Years
Core technology 10.75
Customer relationships 5.75 Recoverability of these assets is measured
by a comparison of the carrying amount of the asset to the undiscounted future cash flows expected to be generated by the assets. If the
assets are considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair
value of the impaired assets. During the years ended December 31,
2022, 2021 and 2020, no impairment losses have been identified with respect to intangible assets.
l. Goodwill: Goodwill reflects the excess of the
purchase price of subsidiaries acquired over the fair value of net assets acquired. Under ASC 350, “Intangibles – Goodwill
and Others”, goodwill is not amortized but rather tested for impairment at least annually or most often if indicators of impairment
are present. Events or changes in circumstances
that could trigger an impairment review include macroeconomic and other industry specific factors including, among others, a significant
adverse change in business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel,
significant changes in the manner of the Company’s use of the acquired assets or the strategy for its overall business, significant
negative industry or economic trends, or significant underperformance relative to expected historical or projected future results of operations. The Company has the option to first
assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely
than not that the fair value of a reporting unit is less than its carrying value, including goodwill. If, after assessing the totality
of events or circumstances, the Company determines that it is not more likely than not that the fair value of a reporting unit is less
than its carrying amount, additional impairment testing is not required. Alternatively, the Company may elect
to proceed directly to the impairment test and bypass the qualitative assessment. Goodwill impairment should be measured by comparing
the fair value of a reporting unit with its carrying amount. The Company performed the annual impairment
tests as of September 30, 2022, 2021 and 2020 and did not identify any indication for impairment losses (see Note 4b). The impairment
test was based on a valuation performed by management. Judgments and assumptions used in the discounted cash flow model which included
projected net cash flows from operations, short-term and long-term growth rates, weighted average cost of capital, interest, capital expenditures,
cash flows, and market conditions.
m. Income taxes: The Company accounts for income taxes,
in accordance with the provisions of ASC 740, “Income Taxes”, under the liability method of accounting. Under the liability
method, deferred taxes are determined based on the differences between the financial statement and tax basis of assets and liabilities
at enacted tax rates in effect in the year in which the differences are expected to reverse. Valuation allowances in respect of the deferred
tax assets are provided for if, based upon the weight of available evidence, it is more likely than not that all or a portion of the deferred
income tax assets will not be realized. Deferred tax liabilities and assets
are classified as non-current. For uncertain tax positions, the Company
follows a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition
by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit.
The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate resolution.
The Company’s policy is to include interest and penalties related to unrecognized tax benefits within income tax expenses.
n. Revenue recognition: The Company generates its revenues
from software licensing, sales of professional services including integration and implementation, maintenance services, managed services
and mobile messaging services. The Company applies ASC 606, “Revenue
from Contracts with Customers”. Under ASC 606, revenue is measured as the amount of consideration the Company expects to be entitled
to, in exchange for transferring products or providing services to its customers and is recognized when performance obligations under
the terms of contracts with the Company’s customers are satisfied. ASC 606 prescribes a five-step model for recognizing revenue
from contracts with customers: (i) identify contract(s) with the customer; (ii) identify the separate performance obligations in the contract;
(iii) determine the transaction price; (iv) allocate the transaction price to the separate performance obligations in the contract; and
(v) recognize revenue when (or as) each performance obligation is satisfied. The Company applies the provisions
of ASC 606, as follows:
i) Sale of standard licensed products Revenue from perpetual licenses is
classified as software license revenue. Software license revenue is recognized as a point in time upon transfer of control to the customer
which usually occurs when the licensed product and the utility that enables the customer to access authorization keys is delivered, provided
that a signed contract has been received.
ii) Services Revenues from ongoing maintenance
and support fees are recognized over time on a pro-rated basis over the duration of the contract. Revenues earned from time and material
arrangements, usually based on a pre agreed monthly rates, recognized over time, based on the duration of the contract and the service
time provided to date. Ongoing work on customizations performed
for existing customers is generally provided on a fixed price basis and as such revenue is recognized when the related services are performed. Contracts may include a combination
of the Company’s various products and services offerings, software, consulting services, and maintenance. For contracts with multiple
performance obligations, the Company accounts for individual performance obligations separately if they are distinct. Significant judgment
may be required to identify distinct obligations within a contract. The total transaction price is allocated
to the individual performance obligations based on the ratio of the relative established standalone selling prices (SSP), or the Company’s
best estimate of SSP, of each distinct product or service in the contract. Revenue is then recognized for each distinct performance obligation. Measuring Progress towards Completion Where a performance obligation is
satisfied over time for an upgrade or implementation project that requires significant customer modifications and complex implementation,
revenue is recognized over time, as the Company’s performance does not create an asset with an alternative
use and the Company has an enforceable right to payment, including a reasonable profit, Managed Services Revenues from managed services include
a monthly fee for services and a right to access the Company’s software and are recorded as service revenues. The Company does not
provide the customer with the contractual right to take possession of the software at any time during the period under these contracts.
The monthly fee is based mainly on the number of subscribers or customer’s business volume and the contracts include a minimum monthly
charge. These revenues are recognized over time on a monthly basis when those services are satisfied.
iii) Mobile Messaging Transactions Certain of the Company’s subsidiaries
provide mobile messaging services, via text messages (SMS) and IP (Internet Protocol) messaging channels. Revenues from mobile messaging
services are recognized when the messaging service has been rendered, i.e., the messages are delivered to recipient. The revenue amount
is based on the price specified in the contract.
o. Research and development expenses: Pursuant to ASC 985-20, “Software
- Costs of Software to be Sold, Leased, or Marketed”, development costs related to software products are expensed as incurred until
the “technological feasibility” of the product has been established. Because of the relatively short time period between “technological
feasibility” and product release, and the insignificant amount of costs incurred during such period, no software development costs
have been capitalized.
p. Allowance for doubtful accounts: The allowance is determined for specific
debts doubtful of collection.
q. Share-based compensation: The Company accounts for share-based
compensation in accordance with ASC 718, “Compensation - Stock Compensation”, which requires the measurement and recognition
of compensation expense based on estimated fair values for all share-based payment awards made to employees. ASC 718 requires companies
to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion
of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s
consolidated statements of operations. The Company recognizes compensation
cost for an award with only service conditions that has a graded vesting schedule using the straight-line method over the requisite service
period for the entire award, net of estimated forfeitures.
r. Earnings per share (“EPS”): Basic EPS is computed by dividing
net income by the weighted average number of shares outstanding during the year, net of treasury shares. Diluted EPS reflects the increase in
the weighted average number of shares outstanding that would result from the assumed exercise of employee stock options, calculated using
the treasury stock method.
s. Treasury shares: Treasury shares are presented as a reduction of shareholders’
equity, at their cost to the Company, under “Treasury shares.”
t. Concentration of credit risks: Most of the cash and cash equivalents
and short-term deposits of the Company and its subsidiaries are deposited with Israeli, European and U.S. banks. The Company is not aware
of any specific credit risks in respect of these banks. The Company’s revenues have
been generated from a large number of customers. Consequently, the exposure to credit risks relating to trade receivables is limited.
The Company performs ongoing credit evaluations of its customers for the purpose of determining the appropriate allowance for doubtful
accounts.
u. Recently adopted accounting pronouncements: In November 2021, the Financial Accounting
Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2021-10, ASC Topic 832, “Disclosures
by Business Entities about Government Assistance”, which requires annual disclosures that increase the transparency of transactions
involving government grants, including (i) information about the nature of the transactions and the related accounting policy used to
account for the transactions, (ii) the line items on the balance sheet and statement of operations that are affected by the transactions,
and the amounts applicable to each financial statement line item, and (iii) significant terms and conditions of the transactions. The
Company applied the guidance prospectively to all in-scope transactions beginning fiscal year 2022. The adoption of this guidance did
not have a material impact on the Company’s consolidated financial statements. In October 2021, the FASB issued ASU
2021-08, “Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”,
which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer
on the acquisition date in accordance with ASC 606, “Revenue from Contracts with Customers”. The guidance will result in the
acquirer recognizing contract assets and contract liabilities at the same amounts recorded by the acquiree. The guidance should be applied
prospectively to acquisitions occurring on or after the effective date. The guidance is effective for the fiscal years beginning after
December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including in interim periods, for
any financial statements that have not yet been issued. Adopting the new guidance in an interim period other than the first fiscal quarter
requires an entity to apply the new guidance to all prior business combinations that have occurred since the beginning of the annual period
in which the new guidance was adopted. The Company plans to adopt the new accounting standard effective January 1, 2023 and will apply
the guidance prospectively to business combinations with an acquisition date occurring on or after January 2023. The Company has evaluated other recently
issued accounting pronouncements and does not currently believe that any of these pronouncements will have a material impact on its consolidated
financial statements and related disclosures. |
