| SIGNIFICANT ACCOUNTING POLICIES | NOTE 2:- SIGNIFICANT
ACCOUNTING POLICIES The consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in United States (“U.S. GAAP”).
a. Use of estimates: The preparation
of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that
affect the amounts reported in the consolidated financial statements and accompanying notes. Such management estimates and assumptions
are related, but not limited to contingent liabilities, income tax uncertainties, deferred taxes assets, share-based compensation, value
of intangible assets and goodwill, as well as the determination of revenue recognition from contracts accounted for based on the estimate
of percentage of completion. The Company’s management believes that the estimates, judgment and assumptions used are reasonable based
upon information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements, and the reported
amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
b. Financial statements in United States dollars: The currency
of the primary economic environment in which the operations of Sapiens and certain subsidiaries are conducted is the U.S. dollar (“dollar”);
thus, the dollar is the functional currency of Sapiens and certain subsidiaries. Sapiens 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 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 income as financial income or expenses, as appropriate. For those subsidiaries, whose functional currency has been determined to be their local currency, assets and liabilities are translated
at year-end exchange rates and statement of income items are translated at average exchange rates prevailing during the year. Such translation
adjustments are recorded as a separate component of an accumulated other comprehensive income (loss) within equity.
c. Principles of consolidation: The consolidated
financial statements include the accounts of the Company and its majority-owned subsidiaries. All intercompany balances and transactions
have been eliminated upon consolidation. Non-controlling
interests of subsidiaries represent the non-controlling shareholders’ share of the total comprehensive income (loss) of the subsidiaries
and fair value of the net assets upon the acquisition of the subsidiaries. The non-controlling interests are presented in equity separately
from the equity attributable to the equity holders of the Company.
d. Cash equivalents: Cash equivalents
are short-term highly liquid investments that are readily convertible to cash, with original maturities of three months or less at the
date acquired.
e. Short-term bank deposits: Short-term
bank deposits with maturities of more than three months and less than one year are included in short-term bank deposits.
f. Trade receivables: Trade receivables
are stated net of credit losses allowance. The Company maintains the allowance for estimated losses resulting from the inability of the
Company’s customers to make required payments. The allowance represents the current estimate of lifetime expected credit losses
over the remaining duration of existing accounts receivable considering current market conditions and supportable forecasts when appropriate.
The estimate is a result of the Company’s ongoing evaluation of collectability, customer creditworthiness, historical levels of
credit losses, and future expectations. Estimated credit loss allowance is
recorded as general and administrative expenses on the Company’s consolidated statements of income. The following
table presents the changes in the allowance for credit losses for the years ended December 31, 2023 and 2022:
December 31,
2023 2022
Balance at the beginning of the year $ 1,130 $ 1,337
Current period provision 762 428
Write offs (330 ) (635 )
Recoveries collected (61 ) -
Balance at year end $ 1,501 $ 1,130
g. Property and equipment, net: Property and
equipment are stated at cost, net of accumulated depreciation using the straight-line method over the estimated useful lives of the assets,
at the following annual rates:
%
Computers and peripheral equipment 20 - 33
Office furniture and equipment 6 - 33
Leasehold improvements Over the shorter of the related lease period or the life of the asset
h. Leases: The Company determines if an arrangement
is a lease at inception. The Company’s assessment is based on: (1) whether the contract involves the use of an identified asset, (2) whether
the Company obtains the right to substantially all of the economic benefits from the use of the asset throughout the period of use, and
(3) whether the Company has the right to direct the use of the asset. Leases are classified as either finance
leases or operating leases. A lease is classified as a finance lease if any one of the following criteria are met: the lease transfers
ownership of the asset by the end of the lease term, the lease contains an option to purchase the asset that is reasonably certain to
be exercised, the lease term is for a major part of the remaining useful life of the asset, the present value of the lease payments equals
or exceeds substantially all of the fair value of the asset, or the underlying asset is of such a specialized nature that it is expected
to have no alternative use to the lessor at the end of lease term. A lease is classified as an operating lease if it does not meet any
one of these criteria. Since all of the Company’s lease contracts do not meet any one of the criteria above, the Company concluded that
all of its lease contracts should be classified as operation leases. For lease with terms greater than
12 months, ROU assets and liabilities are recognized on the commencement date based on the present value of remaining lease payments over
the lease term. For this purpose, the Company considers only payments that are fixed and determinable at the time of commencement. As
most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate (“IBR”) based
on the information available on the commencement date in determining the present value of lease payments. The Company’s IBR is estimated
to approximate the interest rate for collateralized borrowing with similar terms and payments and in economic environments where the leased
asset is located. Certain leases include options to extend or terminate the lease. The ROU asset also includes any lease payments made
prior to commencement and is recorded net of any lease incentives received. Moreover, the ROU asset may also include initial direct costs,
which are incremental costs of a lease that would not have been incurred if the lease had not been obtained.
i. Research and development costs: Research and
development costs incurred in the process of software production before establishment of technological feasibility are charged to expenses
as incurred. Certain internal and external costs incurred to develop software to be sold are capitalized after technological feasibility
is established in accordance with ASC 985-20, “Software - Costs of Software to be Sold Leased or Marketed”. Based on the Company’s
product development process, technological feasibility is established upon completion of a detailed program design. Costs incurred
by the Company between completion of the detailed program design and the point at which the product is ready for general release, have
been capitalized. Capitalized
software development costs are amortized using the straight-line method over the estimated useful life of the software products (primarily
seven years).
j. Business combinations: The Company accounts for its business
acquisitions in accordance with Accounting Standards Codification ASC No. 805, “Business Combinations”. The Company uses its
best estimates and assumptions as part of the purchase price allocation process to value assets acquired and liabilities assumed at the
business combination date. The total purchase price allocated to the tangible assets, liabilities assumed and intangible assets acquired
is assigned based on their fair values as of the date of the acquisition. The excess of the fair value of the purchase price over the
fair value of these identifiable assets and liabilities is recorded as goodwill. Goodwill generated from the business combinations is
primarily attributable to synergies between the Company and acquired companies’ respective products and services. Acquisition-related
expenses are recognized separately from the business combination and are expensed as incurred. The Company
accounts for a transaction that do not meet the definition of a business or if substantially all of the fair value of the gross assets
acquired is concentrated in a single identifiable asset or a group of similar identifiable assets as asset acquisitions.
k. Other intangible assets, net: Technology
and patents acquired are amortized over their estimated useful life on a straight-line basis. The acquired customer relationships are
amortized over their estimated useful lives in proportion to the economic benefits realized method. The average annual rates for other
intangible assets are as follows:
%
Technology 13 - 33
Customer relationships 7 – 17
Patents 10
l. Goodwill: Goodwill represents the
excess of the purchase price in a business combination over the fair value of the identifiable tangible and intangible assets acquired.
ASC No. 350, “Intangible-Goodwill and other” requires goodwill to be tested for impairment at least annually, in the fourth
quarter of each fiscal year, and in certain circumstances, between annual tests. The accounting guidance gives the option to perform a
qualitative assessment to determine whether further impairment testing is necessary. The qualitative assessment considers events and circumstances
that might indicate that a reporting unit’s fair value is less than its carrying amount. If it is determined, as a result of the qualitative
assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative test
is performed. Goodwill impairment is required if the carrying amount of a reporting unit exceeds its estimated fair value. The Company
operates in four reporting units: L&P (Life & Pension), P&C (Property & Casualty), Decision and IPELS. For the years ended December
31, 2023, 2022 and 2021, no impairment of goodwill has been recorded.
m. Impairment of long-lived assets: The long-lived
assets of the Company, including finite-lived intangible assets and right of use assets, are reviewed for impairment in accordance with ASC No. 360,
“Property, Plant and Equipment”, whenever events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The recoverability of assets to be held and used is measured by a comparison of the carrying amount of
an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets
are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds
the fair value of the assets. During the years ended December 31, 2023 and 2022, no impairment losses have been recognized. During 2021,
the Company recorded an impairment loss of $1,439 as outlined in Note 6.
n. Revenue recognition: The Company
implements the provisions of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC
606”). See Note 18 for further disclosures. Revenues are
recognized when control of the promised goods or services are transferred to the customers, in an amount that reflects the consideration
that the Company expects to receive in exchange for those goods or services. The Company
generates revenues mainly from sales of software licenses which include significant implementation and customization services. In addition,
the Company generates revenues from post implementation consulting services and maintenance services. Revenues from these contracts are
based on either fixed price or time and material. Revenue from
long term contracts which involve significant implementation, customization, or integration of the Company’s software license to customer-specific
requirements are considered one performance obligation satisfied over-time. The Company
recognizes revenue from such contracts over time, using the percentage of completion accounting method. The Company recognizes
revenue as the work is performed, based on a ratio between labor effort incurred to date compared to the total estimated labor
effort for the contract. Incurred labor effort represents work performed that corresponds with, and thereby best depicts, the
transfer of control of the goods and services to the customer. Determining the projected labor costs requires understanding the
project-specific circumstances, including the specific terms and conditions of each contract, changes to the project schedule, and
complexity of the project. Provisions for estimated losses on uncompleted contracts are made during the period in which such losses
become probable, in the amount of the estimated loss on the entire contract. When post implementation
and consulting services do not involve significant customization, the Company accounts for such services as performance obligations satisfied
over time and revenues are recognized as the services are provided. When the Company
enters into a contract for the sale of software license which does not require significant implementation services, and the customer receives
the rights to use the perpetual or term-based software license, the Company recognizes revenue from the sale of the software license at
the time of delivery, when the customer receives control of the software license. The software license is considered a distinct performance
obligation recognized at a point-in-time, as the customer can benefit from the software on its own or together with other readily available
resources. The Company
allocates the transaction price for each contract to each performance obligation identified in the contract based on the relative
standalone selling price (SSP). The Company determines SSP for the purposes of allocating the transaction price to each performance
obligation by considering several external and internal factors including, but not limited to, transactions where the specific
performance obligation is sold separately, historical actual pricing practices and geographies in which the Company offers its
services. If a specific
performance obligation, such as the software license, is sold for a broad range of amounts (that is, the selling price is highly variable)
or if the Company has not yet established a price for that good or service, and the good or service has not previously been sold on a
standalone basis (that is, the selling price is uncertain), the Company applies the residual approach whereby all other performance obligations
within a contract are first allocated a portion of the transaction price based upon their respective SSPs with any residual amount of
transaction price allocated to the remaining specific performance obligation. In addition
to software license fees, contracts with customers may contain an agreement to provide maintenance services. The Company considers the
maintenance performance obligation as a distinct performance obligation that is satisfied over time and recognized on a straight-line
basis over the contractual period. The Company
pays sales commissions primarily to sales personnel based on their attainment of certain predetermined sales goals. Sales commissions
are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions paid for initial contracts,
which are not commensurate with sales commissions paid for renewal contracts, are capitalized and amortized over an expected period of
benefit. Sales commissions for initial contracts, which are commensurate with sales commissions paid for renewal contracts, are capitalized
and amortized correspondingly to the recognized revenue of the related initial contracts. If the expected amortization period is one-year
or less, the Company uses the practical expedient and the commission fee is expensed as incurred. Amortization
expense related to these costs are included in sales, marketing, general and administrative expenses .
o. Income taxes: The Company
accounts for income taxes in accordance with ASC 740, “Income Taxes”. This topic prescribes the use of the asset and liability
method, whereby deferred tax asset and liability account balances are determined based on the differences between the financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. Deferred income
tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and
are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. Deferred tax assets are evaluated
for future realization and reduced by a valuation allowance to the extent the Company believes they will not be realized. The Company
considers all available evidence, including historical information, long range forecast of future taxable income and evaluation of tax
planning strategies. Amounts recorded for valuation allowance can result from a complex series of judgments about future events and can
rely on estimates and assumptions. The Company
implements a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position taken
or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that,
on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or
litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% (cumulative basis) likely
to be realized upon ultimate settlement. The Company
classifies interest as financial expense and penalties as selling, marketing, general and administrative expenses.
p. Concentrations of credit risks: Financial instruments
that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, bank deposits,
trade receivables, unbilled receivables and contract assets, and foreign currency derivative contracts. The Company’s cash and cash equivalents
and short-term bank deposit are invested in bank deposits mainly in US dollars. The Company’s
trade receivables are generally derived from sales to large and solid organizations located mainly in North America, Europe and the rest
of the world. The Company
performs ongoing credit evaluations of its customers and to date has not experienced any material losses. In certain circumstances, the
Company may require prepayment. The Company
entered into forward contracts, and option contracts intended to protect against the increase in value of forecasted non-dollar currency
cash flows. The derivative instruments hedge a portion of the Company’s non-dollar currency exposure. No off-balance
sheet concentrations of credit risk exist.
q. Accrued severance pay and retirement plans: The Company’s
liability for severance pay for its Israeli employees is calculated pursuant to Israel’s Severance Pay Law based on the most recent monthly
salary of the employees multiplied by the number of years of employment as of the balance sheet date. Employees are entitled to one month’s
salary for each year of employment, or a portion thereof. The Company’s liability is fully provided by monthly deposits with insurance
policies and severance pay funds and by an accrual. The deposited
funds include profits (losses) accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment
of the obligation pursuant to Israel’s Severance Pay Law or employment agreements. The value of the deposited funds is based on the cash
surrendered value of these policies and recorded as an asset in the Company’s consolidated balance sheet. In addition, the
Company signed a collective agreement with certain employees, according to which the Company’s contributions for severance pay shall
be in lieu of severance compensation and that upon release of the policy to the employee, no additional payments shall be made by
the Company to the employee. Generally, the Company, under its sole discretion, pays to these employees the entire liability,
irrespective of the collective agreement described per above. Therefore, the net obligation related to those employees is stated on
the balance sheet as accrued severance pay. The Company’s agreements
with certain employees in Israel are in accordance with Section 14 of the Severance Pay Law, whereas, the Company’s contributions
for severance pay shall be in lieu of its severance liability. Upon contribution of the full amount of the employee’s monthly
salary, and release of the policy to the employee, no additional calculations shall be conducted between the parties regarding the
matter to severance pay and no additional payments shall be made by the Company to the employee. Further, the related obligation and
amounts deposited on behalf of such obligation are not stated on the balance sheet, as they are legally released from obligation to
employees once the deposit amounts have been paid. Severance expense
for the years 2023, 2022 and 2021 amounted to $4,877, $5,199 and $4,538, respectively. The Company
has a 401(k) retirement savings plan for most of its U.S. employees. Each eligible employee may elect to contribute a portion of its employee’s
compensation to the plan. The Company has a discretionary employer match. In the reporting periods, this match ranges from 1.25-3% if
an employee contributed 5-6%. Such 401(k)
employer match expense for the years 2023, 2022 and 2021 amounted to $1,356, $1,280 and $1,282, respectively.
r. Basic and diluted net earnings per share: Basic net earnings
per share are computed based on the weighted average number of common shares outstanding during each year. Diluted net earnings per share
are computed based on the weighted average number of common shares outstanding during each year plus dilutive potential equivalent common
shares considered outstanding during the year, in accordance with ASC 260, “Earnings Per Share”.
s. Stock-based compensation: The Company
accounts for stock-based compensation to employees, including grants of share options and Restricted Shares Units (“RSUs”),
in accordance with ASC 718, “Compensation - Stock Compensation” (“ASC 718”), which requires the measurement and recognition
of compensation expense based on estimated fair values for all share-based payment awards made. 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 Company
uses the Binomial Lattice (“Binomial model”) option-pricing model to estimate the fair value for grants of share options. The
Binomial model takes into account variables such as volatility, dividend yield rate, and risk-free interest rate and also allows for the
use of dynamic assumptions and considers the contractual term of the option, and the probability that the option will be exercised prior
to the end of its contractual life. The Company recognizes forfeitures of equity-based awards as they occur. The fair value of RSUs without
market conditions, is based on the closing market value of the underlying shares at the date of grant. Stock-based
compensation cost is measured at the grant date, based on the fair value of the award. The Company recognizes compensation expense for
the value of its awards, which have graded vesting, on a straight-line basis when the only condition to vesting is continued service.
If vesting is subject to a performance condition, recognition is based on the implicit service period of the award. Expense for awards
with performance conditions is estimated and adjusted on a quarterly basis based upon the assessment of the probability that the performance
condition will be met. The fair value
of each option granted in 2023, 2022 and 2021 using the Binomial model, was estimated on the date of grant with the following assumptions:
Year ended December 31,
2023 2022 2021
Contractual life 6 years 6 years 6 years
Expected exercise factor 2-2.8 2-2.8 2-2.8
Dividend yield 0% 0% 0%
Expected volatility (weighted average) 37.25%-39.28% 35.5%-36.4% 36.3%-36.9%
Risk-free interest rate 3.32%-4.2% 3.0%-4.3% 0.5%-1.3% The risk-free interest rate assumption
is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term as of the Company’s employee stock options. Since dividend
payment is applied to reduce the exercise price of the option, the effect of the dividend protection is reflected by using an expected
dividend assumption of zero. The expected life of options granted
is derived from the output of the option valuation model and represents the period of time the options are expected to be outstanding.
The expected exercise factor is based on industry acceptable rates since no actual historical behavior by option holders exists. Expected
volatility is based on the historical volatility of the Company.
t. Fair value of financial instruments: ASC 820, “Fair Value Measurements
and Disclosures” (“ASC 820”), defines fair value as the price that would be received to sell an asset or paid to transfer
a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. In determining
fair value, the Company uses various valuation approaches. ASC 820 establishes a hierarchy for inputs used in measuring fair value that
maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used
when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market
data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the
assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value
hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring
fair value. As a basis
for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation
methodologies in measuring fair value:
Level 1 - Observable inputs that reflect quoted prices (unadjusted)
for identical assets or liabilities in active markets.
Level 2 - Include other inputs that are directly or indirectly
observable in the marketplace.
Level 3 - Unobservable inputs which are supported by little or
no market activity. The Company
measures its foreign currency derivative instruments at fair value. Foreign currency
derivative contracts are classified within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar
instruments. The carrying
amounts of cash and cash equivalents, short-term bank deposit, trade receivables, other receivables, prepaid expenses (excluding derivatives),
accounts payable, accrued expenses and other current liabilities approximate their fair value due to the short-term maturities of such
instruments. The following
table presents assets measured at fair value on a recurring basis as of December 31, 2023 and 2022:
December 31,
2023 2022
Fair value measurement using input Level 2
Other receivables and prepaid expenses:
Derivative instruments $ - $ 109
u. Derivatives and hedging: The Company
enters into options contracts and forward contracts to hedge certain transactions denominated in foreign currencies. The purpose of the
Company’s foreign currency hedging activities is to protect the Company from the risk that the eventual dollar cash flows from international
activities will be adversely affected by changes in the exchange rates. The Company’s option and forward contracts do not qualify as hedging
instruments under ASC 815, “Derivatives and hedging”. Changes in the fair value of a hedging strategy are reflected in the
consolidated statements of income as financial income or expense. In 2023, 2022,
and 2021 the Company entered into forward contracts in the aggregate notional amounts of $82,078, $168,850, and $140,688, respectively,
and in 2023, 2022, and 2021, the Company entered into option contracts in the notional amounts of $121,080, $0 and $27,138, respectively,
in order to protect against foreign currency fluctuations. As of December
31, 2023, 2022 and 2021, the Company had outstanding options and forward contracts, in the notional amount of $ 0, $15,900 and $20,000,
respectively. In 2023 and 2022 the Company recorded financial expense, net of $2,991
and $1,193, respectively and in 2021 the Company recorded financial income, net of $3,338, with respect to the above transactions.
v. Treasury shares: Repurchased
common shares are held as treasury shares. The Company presents the cost to repurchase treasury stock as a reduction of shareholders’
equity.
w. Comprehensive income (loss): The Company accounts for comprehensive
income (loss) in accordance with ASC 220, “Comprehensive Income”. Comprehensive income (loss) generally represents all changes
in shareholders’ equity during the period except those resulting from investments by, or distributions to, shareholders. The Company records
transactions under comprehensive income net of income tax. The Company determined that its other comprehensive income (loss) relates to
foreign currency translation adjustments.
x. Recently adopted accounting standards: In October 2021, the FASB issued ASU
2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”.
The standard requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities acquired
in a business combination in accordance with ASC 606, Revenue from Contracts with Customers, as if it had originated the contracts. The
standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The adoption
of this ASU did not have a significant effect on the Company’s financial statements and disclosures.
y. Recently issued accounting pronouncements: In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires public entities to disclose information
about their reportable segments’ significant expenses and other segment items on an annual basis. Public entities with a single
reportable segment are required to apply the disclosure requirements in ASU 2023-07, as well as all existing segment disclosures and reconciliation
requirements in ASC 280 on an annual basis. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, with early adoption
permitted. The Company is currently evaluating the impact of adopting ASU 2023-07. In December 2023, the FASB issued
ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires public entities, on an annual basis, to
provide disclosure of specific categories in the rate reconciliation, as well as disclosure of income taxes paid disaggregated by jurisdiction.
ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating
the impact of adopting ASU 2023-09. |
