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 solutions consist of four major families: Application Performance Management (APM), Mainframe, Changepoint and Uniface; all of which are primarily intended for use by IT organizations and IT service providers. Along with these solutions, some of which are delivered through software-as-a-service ("SaaS") models, the Company offers implementation, consulting and training services. In addition, the Company offers a broad range of professional services and application services.

The Company's products and services are offered worldwide to the largest IT organizations across a broad spectrum of technologies, including mainframe, distributed, Internet and mobile platforms and provide the following capabilities:

APM includes both software licensed for use on the customer's premises and hosted software delivered through a SaaS model. The SaaS solutions are designed to test and monitor the performance, availability and quality of companies' web and mobile applications. Services are delivered to customers entirely through on-demand, hosted technology in which a single instance of the software serves multiple customers. The on-premises licensed solutions provide detailed application insight that identifies and helps correct the causes of poor application performance within client workstations, network, server, Java and .NET environments and enable continuous tracking of transactions and provide exact identification of performance problems.

Mainframe solutions are designed to improve the productivity of development, maintenance and support teams in application analysis, testing, defect detection and remediation, fault management, file and data management, data compliance and application performance management specifically within IBM mainframe environments.

Changepoint is a business portfolio management and professional services automation solution that addresses the needs of executives within technology companies, enterprise IT and professional services organizations, allowing for management of the entire customer lifecycle, as well as for improved process efficiency, planning and visibility across program, project and product portfolios.

Uniface is a rapid application development environment for building, renewing and integrating the largest and most complex enterprise applications. Uniface enables enterprises to meet increasing demand for developing complex, secure and global Web 2.0 applications, deployable on any platform including the cloud.

Professional services include 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, and development and integration of legacy systems.

The Company's Covisint application services ("Covisint") use business-to-business applications to integrate vital business information and processes between partners, customers and suppliers. Application services are delivered through a platform-as-a-service ("PaaS") model referred to as the application services network, which delivers services to customers entirely through on-demand, hosted technology in which a single instance of the platform serves multiple customers.

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, 2013 and 2012 and the results of operations for the years ended March 31, 2013, 2012 and 2011. While management has based their assumptions and estimates on the facts and circumstances existing at March 31, 2013, 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; providing hosted software; and rendering professional and application services. Our software solutions are comprised of license fees, maintenance fees, subscription fees for hosted software and software related professional services fees.

We sometimes enter into arrangements that include both software related deliverables (licensed software products, maintenance services or software related professional services) and non-software deliverables (hosted software, professional services unrelated to our software products or application services). Our hosted software 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, in accordance with ASC 605 "Revenue Recognition," we allocate the arrangement consideration to the non-software deliverables as a group, and to the software deliverables as a group (the "Deliverable Groups"). We determine the selling price to allocate the arrangement consideration to the Deliverable Groups based on the following hierarchy of evidence: vendor specific objective evidence of selling price ("VSOE," meaning price when sold separately) if available; third-party evidence of selling price 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 of selling price for either our software related deliverables or our non-software deliverables as a group. Therefore, the best estimate of selling price for each Deliverable Group is determined primarily by considering various factors, including, but not limited to stated renewal rates in a contract, if any, the historical selling price of these deliverables in similar stand-alone transactions and pricing practices. Total arrangement consideration is then allocated on the basis of the Deliverable Group's relative selling price.

Once we have allocated the arrangement consideration between the Deliverable Groups, we recognize revenue as described in the respective software license fees, maintenance fees, subscription fees, professional services fees and application services fees sections below.

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 collectability is reasonably assured. We evaluate collectability 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 our customers with a right to use our 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. However, 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 the software related professional services are expected to be performed. Such transactions include time-based licenses and certain unlimited capacity licenses, as the Company has not established 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 VSOE for maintenance related to perpetual license transactions and standalone 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 with installments collectable over the term of the contract. Based on the Company's successful collection history for deferred payments, license fees (net of any financing 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 related receivable.

Maintenance fees

The Company's maintenance arrangements 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 generally range from one to five years.

Subscription fees

Subscription fees relate to arrangements that permit our customers to access and utilize our hosted software delivered on a SaaS basis. 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, web 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 software solutions offerings, which are referred to as software related professional 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 proportional performance method and if it is determined that costs will exceed revenue, the expected loss is recorded at the time the loss becomes apparent.

Application services fees

Our application services fees consist of fees related to our Covisint on-demand software including associated 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 services contracts include a services project fee and a recurring fee for ongoing PaaS operations. Certain services related to these projects have stand-alone value (e.g., other vendors provide similar services) and qualify as a separate unit of accounting. Services that have stand-alone value are recognized as delivered. For those services that do not have stand-alone value, the revenue is deferred and recognized over the longer of the committed term of the subscription agreement (generally one to five years) or the expected period over which the customer will receive benefit (generally five years). The recurring fees are recognized ratably over the applicable service period.

Deferred revenue

Deferred revenue consists primarily of billed and unbilled maintenance and subscription fees related to the future service period of maintenance and subscription agreements in effect at the reporting date. Deferred license, software related services and application services fees are also included in deferred revenue for those arrangements that are being recognized over time. 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 "cost of application services" or "sales and marketing" expenses, as applicable, in the consolidated statements of comprehensive income (loss) over the revenue recognition period of the related customer contracts. Long term deferred revenue at March 31, 2013 amounted to $310.5 million, of which approximately $172.6 million, $86.9 million, $37.4 million, $11.1 million and $2.5 million are expected to be recognized during fiscal 2015 through fiscal 2019, 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 comprehensive income (loss).

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, 2013, 2012 and 2011 were as follows (in thousands):

Balance at April 1, 2010	$	5,998

Increase in allowance primarily from acquisition		717

Accounts charged against the allowance (1)		(937	)

Balance at March 31, 2011		5,778

Decrease in allowance recorded to income		(715	)

Accounts charged against the allowance (1)		(774	)

Balance at March 31, 2012		4,289

Increase in allowance recorded to expense		1,065

Accounts charged against the allowance (1)		(259	)

Balance at March 31, 2013	$	5,095

(1)	Write-offs related primarily to accounts deemed uncollectible and maintenance and subscription 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 forty 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 hosted software and application services.

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.

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 comprehensive income (loss): (1) amortization of software products licensed to customers for on-premises use is recorded as "cost of license fees"; (2) amortization of hosted software that is not licensed to customers for on-premises use is recorded as "cost of subscription fees"; and (3) amortization of application services software is recorded as "cost of application 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 $102.7 million, $87.2 million and $69.2 million during fiscal 2013, 2012 and 2011, respectively, of which $31.8 million, $23.2 million and $15.5 million, respectively, was capitalized for internally developed software technology. R&D costs related to our software solutions are reported as "technology development and support" and for our application services network, the costs are reported as "cost of application services" in the consolidated statements of comprehensive income (loss).

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 does not permanently reinvest any earnings in its foreign subsidiaries and recognizes all deferred tax liabilities that arise from outside basis differences in its investment in subsidiaries.

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.

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. For stock awards which vest more quickly than a straight-line basis, additional expense is taken in the early year(s) to ensure the expense is commensurate with the vest schedule.

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. Historically, the Company has used the simplified method to determine the expected life of stock options granted as described in SAB Topic 14, "Share-Based Payment" and during fiscal 2013 , it was determined that the exercise history of Compuware's stock option participants is comparable to the expected life estimated using the simplified method. Dividend yields have not been a factor in past years for determining fair value of stock options granted as the Company has never issued cash dividends. However, in January 2013, our Board of Directors announced its intention to begin paying cash dividends totaling $0.50 per share annually, to be paid quarterly beginning in the first quarter of fiscal 2014. For options granted after that date, an average dividend yield assumption of 4.14% was included in the fair value calculation to consider the future dividend payment.

The following is the average fair value per share estimated on the date of grant and the average assumptions used for each option granted during fiscal 2013, 2012 and 2011:

	Year Ended March 31,
	2013 (1)			2012			2011
Expected volatility		40.97	%		39.96	%		42.08	%
Risk-free interest rate		0.96	%		1.65	%		2.43	%
Expected lives at date of grant (in years)		6.3			5.8			6.1
Weighted average fair value of the options granted	$	4.08		$	3.96		$	4.16

(1)	Although a dividend assumption was included for options granted subsequent to January 2013, the average dividend assumption had a minimal impact on the weighted average fair value, as the majority of options were granted prior to the announcement of the intended dividend.

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

Recently Issued Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income". This ASU requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. The amendments in this Update supersede and replace the presentation requirements for reclassifications out of accumulated other comprehensive income in ASUs 2011-05 (issued in June 2011) and 2011-12 (issued in December 2011) for all public and private organizations. For public entities, the amendments of this ASU are effective prospectively for reporting periods beginning after December 15, 2012. The requirements of this ASU were adopted during our quarter ended March 31, 2013 and did not have a significant impact on our disclosures.

In July 2012, the FASB issued ASU No. 2012-02, "Intangibles – Goodwill and Other (Topic 350)." The amendments in this ASU allow an entity to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that an indefinite-lived intangible asset is impaired. If an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Subtopic 350-30. This ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The requirements of this ASU were adopted during our quarter ended September 30, 2012 and did not have a significant impact on our disclosures.

In December 2011, the FASB issued ASU No. 2011-11, "Balance Sheet (Topic 210)". The amendments in this ASU require improved disclosure information about financial instruments and derivative instruments that are either offset or subject to an enforceable master netting arrangement or similar agreement. Subsequently in January 2013, the FASB issued ASU 2013-01, "Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities", which clarifies the types of instruments and transactions that are subject to the offsetting disclosure requirements established by ASU 2011-11. These ASUs should be applied retrospectively for all comparative periods presented for annual periods beginning on or after January 1, 2013 and interim periods within those annual periods. We plan to adopt these ASUs in fiscal 2014 and do not expect them to have a significant impact on our disclosures.

In September 2011, the FASB issued ASU No. 2011-08, "Intangibles – Goodwill and Other (Topic 350)". The amendments in this ASU allow an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before performing the first step of the two-step impairment test. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the entity must perform additional impairment testing. Otherwise, performing the two-step impairment test is not necessary. This ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The requirements of this ASU were adopted during our quarter ended June 30, 2012 and did not have a significant impact on our disclosures.