RETALIX LTD.

RETALIX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES (continued):
r. Advertising expenses:
These costs are charged to selling and marketing expenses as incurred. Advertising expenses totaled $2,716,872, $1,368,000 and
$938,000 in the years ended December 31, 2005, 2004 and 2003, respectively.
s. Derivative financial instruments:
The Company has only limited involvement with foreign exchange derivative financial instruments (forward exchange
contracts). These contracts do not qualify for hedge accounting under U.S. GAAP. As a result, changes in the fair value of
derivatives are reflected in the statements of income and included in “financial expenses - net”.
t. Sale of receivables:
The Company factors some of its trade receivables. The factoring is effected through banks, on a non-recourse basis. The
transfer of accounts receivable qualify as a sales transaction under the provisions of FASB Statement No.140, “Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“FAS 140”). The resulting costs are charged to
financial expenses - net, as incurred. The expenses resulting from these sales in the years ended December 31, 2005 and 2004
amounted to $1,835,512 and $658,000, respectively, and are included in financial expenses.
u. Recently issued accounting pronouncements:
1) In December 2004, the FASB issued Statement No. 123 (revised 2004), “Share-Based Payment” (FAS 123(R)). FAS 123
(R) will provide investors and other users of financial statements with more complete and neutral financial information
by requiring that the compensation cost relating to share-based payment transactions be recognized in financial
statements. That cost will be measured based on the fair value of the equity or liability instruments issued. FAS 123(R)
covers a wide range of share-based compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights and employee share purchase plans. FAS 123(R) replaces SFAS
No. 123, “Accounting for Stock-Based Compensation” (FAS 123), and supersedes APB No. 25, “Accounting for Stock
Issued to Employees” (APB 25). FAS 123, as originally issued in 1995, established as preferable a fair-value-based
method of accounting for share-based payment transactions with employees. However, that Statement permitted entities
the option of continuing to apply the guidance in APB 25, as long as the footnotes to financial statements disclosed what
net income would have been had the preferable fair-value-based method been used. The Company will be required to
apply FAS 123(R) as of the first annual reporting period that begins after June 15, 2005. As permitted by FAS 123, the
Company currently accounts for share-based payments to employees using APB 25’s intrinsic value method.
Accordingly, the adoption of FAS 123(R)’s fair value method will have a significant impact on the Company’s result of
operations, although it will have no impact on its overall financial position. The Company plans to adopt FAS 123(R)
using the “modified prospective” method. The “modified prospective” method requires compensation cost to be
recognized beginning with the effective date (a) based on the requirements of FAS 123(R) for all share-based payments
granted after the effective date and (b) based on the requirements of FAS 123 for all awards granted to employees prior
to the effective date of FAS 123(R) that remain unvested on the effective date. The impact of adoption of FAS 123(R) on
future periods cannot be predicted at this time because it will depend on levels of share-based payments granted in the
future. However, had the Company adopted FAS 123(R) in prior periods, the impact of that standard would have
approximated the impact of FAS 123 as described in the disclosure of pro forma net income and earnings per share in
Note 1(q) to the financial statements.
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