1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

Compuware Corporation (the “Company”, “Compuware”, “we”, “our” and “us”) delivers services, software and best practices that enable organizations' most important technologies to perform at their peak. The Company's software products consist of four major families: Mainframe, Vantage, Changepoint and Uniface; all of which are primarily intended for use by IT organizations and IT service providers. In addition, the Company offers a broad range of web application performance management services, professional services and application services.

The Company's web application performance management services (“web performance services”), which are marketed under the brand name “Gomez”, are used by enterprises to test and monitor the performance, availability and quality of their web and mobile applications, while in development and after deployment.

The Company's professional services provide clients with a broad range of IT services for mainframe, distributed and mobile environments. Our professional services group also offers implementation, consulting and training services in tandem with the Company's product offerings which are referred to as product related services.

The Company's application services, which are marketed under the brand name “Covisint”, use business-to-business applications to integrate vital business information and processes between partners, customers and suppliers.

Application services and web performance services are delivered through SaaS platforms referred to as the application services network and the web performance services network. These networks are independent from each other and deliver their services to customers entirely through on-demand, hosted technology in which a single instance of the software serves all customers.

Our products and services are offered worldwide across a broad spectrum of technologies, including mainframe, distributed and Internet platforms.

Basis of Presentation

The consolidated financial statements include the accounts of Compuware and its wholly owned subsidiaries after elimination of all intercompany balances and transactions. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, shareholders' equity and the disclosure of contingencies at March 31, 2011 and 2010 and the results of operations for the years ended March 31, 2011, 2010 and 2009. While management has based their assumptions and estimates on the facts and circumstances existing at March 31, 2011, final amounts may differ from estimates.

Revenue Recognition

The Company derives its revenue from licensing software products, providing maintenance and support services for those products and rendering web performance, professional (including product related professional), and application services.

We sometimes enter into arrangements that include both software related deliverables (licensed software products, maintenance services and software related professional services) and non-software deliverables (web performance services, application services or professional services unrelated to our software products). Our web performance services and application services do not qualify as software deliverables because our license grant does not allow the customer the right or capability to take possession of the software. For arrangements that contain both software and non-software deliverables (almost all of these arrangements combine software deliverables with web performance services), in accordance with ASC 605 “Revenue Recognition,” we split the arrangements using the following hierarchy: vendor specific objective evidence of fair value (“VSOE,” meaning price when sold separately) if available; third-party evidence if VSOE is not available; or best estimated selling price if neither VSOE nor third-party evidence is available. We currently are unable to establish VSOE or third-party evidence for our web performance services or software deliverables taken as a group. Therefore, we create our best estimate of selling price by evaluating renewal amounts included in a contract, if any, and prices of deliverables sold separately, taking into consideration geography, volume discounts, and transaction size.

Once we have allocated the arrangement between software deliverables and non-software deliverables, we recognize revenue as described in the respective software license fee, maintenance and subscription, and professional services fees sections.

In order for a transaction to be eligible for revenue recognition, the following revenue criteria must be met: persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is reasonably assured. We evaluate collectibility based on past customer history, external credit ratings and payment terms within various customer agreements.

Software license fees

The Company's software license agreements provide its customers with a right to use its software perpetually (perpetual licenses) or during a defined term (time-based licenses).

Assuming all revenue recognition criteria are met, perpetual license fee revenue is recognized using the residual method, under which the fair value, based on VSOE, of all undelivered elements of the agreement (i.e., maintenance and software related professional services) is deferred. VSOE is based on rates charged for maintenance and professional services when sold separately. The remaining portion of the fee is recognized as license fee revenue upon delivery of the products.

For revenue arrangements where there is a lack of VSOE for any undelivered elements, license fee revenue is deferred and recognized upon delivery of those elements or when VSOE can be established. When maintenance or software related professional services are the only undelivered elements, the license fee revenue is recognized on a ratable basis over the longer of the maintenance term or the period in which the software related professional services are expected to be performed. Such transactions include time-based licenses and certain unlimited capacity licenses as the Company does not sell maintenance for these separately and therefore cannot establish VSOE for the undelivered elements in these arrangements. In order to comply with SEC Regulation S-X, Rule 5-03(b), which requires product, services and other categories of revenue to be displayed separately on the income statement, the Company separates the license fee, maintenance fee and software related professional services fee (which is included in professional services fees) associated with these types of arrangements based on its determination of fair value. The Company applies its VSOE for maintenance related to perpetual license transactions and stand alone software related professional services arrangements as a reasonable and consistent approximation of fair value to separate license fee, maintenance fee and software related professional services fee revenue for income statement classification purposes.

The Company offers flexibility to customers purchasing licenses for its products and related maintenance. Terms of these transactions range from standard perpetual license sales that include one year of maintenance to large multi-year (generally two to five years), multi-product contracts. The Company allows deferred payment terms on contracts, with installments collectible over the term of the contract. Based on the Company's successful collection history for deferred payments, license fees (net of any finance fees) are generally recognized as revenue as discussed above. In certain transactions where it cannot be concluded that the fee is fixed or determinable due to the nature of the deferred payment terms, the Company recognizes revenue as payments become due. Financing fees are recognized as interest income over the term of the receivable and amounted to $1.5 million, $2.0 million and $2.8 million for fiscal 2011, 2010 and 2009, respectively.

At March 31, 2011, current accounts receivable includes installments on multi-year contracts totaling $253.3 million due in fiscal 2012. Non-current accounts receivable at March 31, 2011 amounted to $206.9 million, of which approximately $127.0 million, $54.6 million, $22.8 million, $2.2 million and $304,000 are due in fiscal 2013 through fiscal 2017, respectively.

Maintenance and subscription fees

The Company's maintenance agreements allow customers to receive technical support and advice, including problem resolution services and assistance in product installation, error corrections and any product enhancements released during the maintenance period. The first year of maintenance is generally included with all license agreements. Maintenance fees are recognized ratably over the term of the maintenance arrangements, which may range from one to five years.

Subscription fees relate to arrangements that permit our customers to access and utilize our web performance services. We evaluate collectibility based on past customer history, external credit ratings and payment terms within various customer agreements. Subscription fees are deferred upon contract execution and are recognized ratably over the term of the subscription.

Professional services fees

The Company provides a broad range of IT services for mainframe, distributed and mobile environments, including mobile computing application development and integration, package software customization, cloud computing consulting, development and integration of legacy systems, IT portfolio management services, enterprise legacy modernization services and application performance management. The Company also offers implementation, consulting and training services in tandem with the Company's product solutions offerings, which are referred to as product related services.

Professional services fees are generally based on hourly or daily rates. Revenues from professional services are recognized in the period the services are performed provided that collection of the related receivable is reasonably assured. For development services rendered under fixed-price contracts, revenues are recognized using the percentage of completion method and if it is determined that costs will exceed revenue, the expected loss is recorded at the time the loss becomes apparent.

Our application services fees are combined with professional services fees in our consolidated statement of operations and consist of fees for our on-demand software and other services. The arrangements do not provide customers the right to take possession of the software at any time, nor do the arrangements contain rights of return. Many of our application service fee contracts include a project (one-time fee) and then ongoing SaaS operations (recurring fees) for the project. The one time fees do not qualify as a separate element of accounting as we are the only vendor to provide these services. Therefore, revenue associated the one-time fees is recognized over the expected service period as the customer derives value from the recurring fees, consistent with the proportional performance method. The recurring fees are deferred upon contract execution and are recognized ratably over the term of the software as a service contract.

Deferred revenue

Deferred revenue consists primarily of billed and unbilled maintenance fees related to the future service period of maintenance agreements in effect at the reporting date. Deferred license, subscription and professional service fees are also included in deferred revenue for those arrangements that are being recognized on a ratable basis. Sales commission costs that directly relate to revenue transactions that are deferred are recorded as “prepaid expenses and other current assets” or non-current “other assets”, as applicable, in the consolidated balance sheets and recognized as “Sales and marketing” expenses in the consolidated statements of operations over the revenue recognition period of the related customer contracts. Long term deferred revenue at March 31, 2011 amounted to $393.8 million, of which approximately $212.4 million, $109.7 million, $48.3 million, $19.7 million and $3.7 million are expected to be recognized during fiscal 2013 through fiscal 2017, respectively.

Collection and remittance of taxes

The Company records the collection of taxes from customers and the remittance of these taxes to governmental authorities on a net basis in its consolidated statements of operations.

Cash and Cash Equivalents

The Company considers all investments with an original maturity of three months or less to be cash equivalents.

Concentration of Credit Risk

The Company's financial instruments that are potentially subject to concentrations of credit risk consist primarily of cash and trade receivables. The Company has cash investment policies which, among other things, limit investments to investment-grade securities. The Company performs ongoing credit evaluations of its customers, and the risk with respect to trade receivables is further mitigated by the diversity, both by geography and by industry, of the customer base.

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. We use an internal risk rating system to determine a customer's credit risk. This process considers the payment status of the receivable, collection and loss experience associated with other outstanding and previously paid account receivable balances, discussions with the customer, the risk environment of our geographic operations and review of public financial information if available. A receivable is designated a pass rating if no issues are identified during the process, otherwise a watch rating is designated. The allowance is reviewed and adjusted based on the Company's best estimates.

Changes in the allowance for doubtful accounts balance for the years ended March 31, 2011, 2010 and 2009 were as follows (in thousands):

Balance at April 1, 2008	$	6,429
Increase in allowance charged against income		2,747
Accounts charged against the allowance (1)		(1,750	)
Balance at March 31, 2009		7,426
Increase in allowance primarily from acquistion		1,034
Accounts charged against the allowance (1)		(2,462	)
Balance at March 31, 2010		5,998
Increase in allowance charged against income		717
Accounts charged against the allowance (1)		(937	)
Balance at March 31, 2011	$	5,778

(1)	Write-offs related primarily to accounts deemed uncollectible and maintenance and subscriptions cancellations.

Property and Equipment

The Company states property and equipment at the lower of cost or fair value for impaired assets. Depreciation is recorded using the straight-line method over the estimated useful lives of the related assets, which are generally estimated to be 40 years for buildings and three to ten years for furniture and fixtures, computer equipment and software. Leasehold improvements are amortized over the term of the lease, or the estimated life of the improvement, whichever period is less.

Capitalized Software

The Company's capitalized software includes the costs of internally developed software technology and software technology purchased through acquisitions and is stated at the lower of unamortized cost or net realizable value.

Our internally developed software technology consists of development costs associated with software products to be sold (“software products”) and internal use software associated with our web performance services and application services networks.

We begin capitalizing development costs associated with our software products when technological feasibility of the product is established. For our internal use software, capitalization begins during the application development stage. Capitalized costs associated with our software products and web performance services network are recorded within the consolidated statement of operations against “technology, development and support” expense and “cost of professional services” for the application services network.

The amortization of capitalized software technology is computed on a project-by-project basis. The annual amortization is the greater of the amount computed using (a) the ratio of current gross revenues compared with the total of current and anticipated future revenues for the software technology or (b) the straight-line method over the remaining estimated economic life of the software technology, including the period being reported on. Amortization begins when the software technology is available for general release to customers. The amortization period for capitalized software is generally three to five years. Amortization of capitalized software technology is recorded as follows in the consolidated statement of operations: (1) software product amortization is recorded to “cost of license fees”; (2) web performance services network amortization is recorded to “cost of maintenance and subscription fees”; and (3) application services network amortization is recorded to “cost of professional services”.

Capitalized software is reviewed for impairment each balance sheet date or when events and circumstances indicate an impairment. Asset impairment charges are recorded when estimated future undiscounted cash flows are not sufficient to recover the carrying value of the capitalized software. The impairment charge is the amount by which the present value of future cash flows is less than the carrying value of these assets.

Research and development

Research and development (“R&D”) costs include primarily the cost of programming personnel and amounted to $69.2 million, $65.8 million and $64.3 million, respectively, during fiscal 2011, 2010 and 2009 of which $15.5 million, $9.8 million and $15.1 million, respectively, was capitalized for internally developed software technology. R&D costs related to our software products and web performance services network in the consolidated statements of operations are reported as “technology development and support” and for our application services network, the costs are reported as “cost of professional services”.

Goodwill and Other Intangible Assets

Goodwill and intangible assets with indefinite lives are tested for impairment annually at March 31 or more frequently if management believes indicators of impairment exist. With respect to goodwill, carrying values are compared with fair values, and when the carrying value exceeds the fair value, the carrying value of the impaired goodwill is reduced to fair value. The impairment test involves a two-step process with Step 1 comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. If the carrying amount of a reporting unit exceeds the reporting unit's fair value, the Company performs Step 2 of the goodwill impairment test to determine the amount of impairment loss by comparing the implied fair value of the respective reporting unit's goodwill with the carrying amount of that goodwill.

Income Taxes

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax bases of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that includes the enactment date.

The Company records net deferred tax assets to the extent it believes these assets will more likely than not be realized. These deferred tax assets are subject to periodic assessments as to recoverability and if it is determined that it is more likely than not that the benefits will not be realized, valuation allowances are recorded which would increase the provision for income taxes. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations.

Interest and penalties related to uncertain tax positions are included in the income tax provision.

Foreign Currency Translation

The Company's foreign subsidiaries use their respective local currency as their functional currency. Accordingly, assets and liabilities in the consolidated balance sheets have been translated at the rate of exchange at the respective balance sheet dates, and revenues and expenses have been translated at average exchange rates prevailing during the period the transactions occurred. Translation adjustments have been excluded from the results of operations and are reported as accumulated other comprehensive income (loss) within our consolidated statements of shareholders' equity and comprehensive income.

Stock-Based Compensation

Stock award compensation expense is recognized, net of an estimated forfeiture rate, on a straight-line basis over the requisite service period of the award, which is the vesting term.

The Company calculates the fair value of stock option awards using the Black-Scholes option pricing model, which incorporates various assumptions including volatility, expected term, risk-free interest rates and dividend yields. The expected volatility assumption is based on historical volatility of the Company's common stock over the most recent period commensurate with the expected life of the stock option granted. The Company uses historical volatility because management believes such volatility is representative of prospective trends. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected life of the stock option awarded. The expected life of the stock option is based on either historical exercise data if available or the simplified method as described in SAB Topic 14, “Share-Based Payment”. Dividend yields have not been a factor in determining fair value of stock options granted as the Company has never issued cash dividends and does not anticipate issuing cash dividends in the future.

The following is the average fair value per share estimated on the date of grant and the assumptions used for each option granted during fiscal 2011, 2010 and 2009:

	Year Ended March 31,
	2011			2010			2009
Expected volatility		42.08	%		43.94	%		54.17	%
Risk-free interest rate		2.43	%		2.85	%		3.23	%
Expected lives at date of grant (in years)		6.1			6.3			6.3
Weighted average fair value of the options granted	$	4.16		$	3.54		$	4.27

The Company measures the grant date fair value of restricted stock units using the Company's closing common stock price on the trading date immediately preceding the grant date.

See note 18 for additional information regarding our stock-based compensation including the impact on net income during the reported periods.

Recently Issued Accounting Pronouncements

In July 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”. The ASU requires enhanced disclosures about the credit quality of financing receivables and the allowance for credit losses; including disclosures regarding credit quality indicators, past due information, and modifications of original terms. The requirements of this ASU were adopted during our quarter ending December 31, 2010. See note 5 for the related disclosure.

In October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue Arrangements,” which amends Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition.” ASU 2009-13 amends the ASC to eliminate the residual method of allocation for multiple-deliverable revenue arrangements, and requires that arrangement consideration be allocated at the inception of an arrangement to all deliverables using the relative selling price method. The ASU also establishes a selling price hierarchy for determining the selling price of a deliverable, which includes: (1) vendor-specific objective evidence if available; (2) third-party evidence if vendor-specific objective evidence is not available; and (3) estimated selling price if neither vendor-specific nor third-party evidence is available. Additionally, ASU 2009-13 expands the disclosure requirements related to a vendor's multiple-deliverable revenue arrangements. The Company early adopted ASU 2009-13 during the quarter ended December 31, 2009 and retrospectively applied the guidance as of April 1, 2009 which did not result in adjustments to previously presented periods.