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text-decoration-style: initial; text-decoration-color: initial;">Magic Software Enterprises Ltd., an Israeli company (&#8220;the Group&#8221; or &#8220;the Company&#8221;), is a global provider of: (i) proprietary application development and business process integration platforms that accelerate the planning, development, deployment and integration of on-premise, mobile and cloud business applications (&#8220;the Magic Technology&#8221;); (ii) selected packaged vertical software solutions; and (iii) a vendor of software services and IT outsourcing software services.</p><p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 0.75in; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-size-adjust: none; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;">&#160;</p><p style="font: 10pt/normal 'times new 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To complement its software products and to increase its traction with customers, the Group also offers a complete portfolio of software services in the areas of infrastructure design and delivery, application development, technology planning and implementation services, communications services and solutions, and supplemental IT professional outsourcing services. 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Judgments and assumptions related to revenue, operating income, future short-term and long-term growth rates, weighted average cost of capital, interest, capital expenditures, cash flows, and market conditions are inherent in developing the discounted cash flow model. The Company considers historical rates and current market conditions when determining the discount and growth rates to use in its analyses. 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When services are considered essential to the software, revenues under the arrangement are recognized using contract accounting based on ASC 605-35, &#8220;Construction-Type and Production-Type Contracts&#8221;, on a percentage of completion method based on inputs measures. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are first determined, in the amount of the estimated loss for the entire contract. 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Employees are entitled to one month&#8217;s salary for each year of employment or a portion thereof. 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U.S. employees may contribute up to 100% of their pretax or post-tax salary, but not more than statutory limits. 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font-size: 10pt;"><font style="font-size: 8pt;">&#160;</font></td><td style="text-align: left; font-size: 10pt;"><font style="font-size: 8pt;">&#160;</font></td><td style="font-size: 10pt;"><font style="font-size: 8pt;">&#160;</font></td><td style="text-align: left; font-size: 10pt;"><font style="font-size: 8pt;">&#160;</font></td><td style="text-align: right; font-size: 10pt;"><font style="font-size: 8pt;">&#160;</font></td><td style="text-align: left; font-size: 10pt;"><font style="font-size: 8pt;">&#160;</font></td><td style="font-size: 10pt;"><font style="font-size: 8pt;">&#160;</font></td><td style="text-align: left; font-size: 10pt;"><font style="font-size: 8pt;">&#160;</font></td><td style="text-align: right; font-size: 10pt;"><font style="font-size: 8pt;">&#160;</font></td><td style="text-align: left; font-size: 10pt;"><font style="font-size: 8pt;">&#160;</font></td><td style="font-size: 10pt;"><font style="font-size: 8pt;">&#160;</font></td><td style="text-align: left; font-size: 10pt;"><font style="font-size: 8pt;">&#160;</font></td><td style="text-align: right; font-size: 10pt;"><font style="font-size: 8pt;">&#160;</font></td><td style="text-align: left; font-size: 10pt;"><font style="font-size: 8pt;">&#160;</font></td><td style="font-size: 10pt;"><font style="font-size: 8pt;">&#160;</font></td><td style="text-align: left; font-size: 10pt;"><font style="font-size: 8pt;">&#160;</font></td><td style="text-align: right; font-size: 10pt;"><font style="font-size: 8pt;">&#160;</font></td><td style="text-align: left; font-size: 10pt;"><font style="font-size: 8pt;">&#160;</font></td><td style="font-size: 10pt;"><font style="font-size: 8pt;">&#160;</font></td><td style="text-align: left; font-size: 10pt;"><font style="font-size: 8pt;">&#160;</font></td><td style="text-align: right; font-size: 10pt;"><font style="font-size: 8pt;">&#160;</font></td><td style="text-align: left; font-size: 10pt;"><font style="font-size: 8pt;">&#160;</font></td><td style="font-size: 10pt;"><font style="font-size: 8pt;">&#160;</font></td><td style="text-align: left; font-size: 10pt;"><font style="font-size: 8pt;">&#160;</font></td><td style="text-align: right; 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Certain changes were scheduled to come into effect beginning January 1, 2017, provided that regulations are promulgated by the Finance Ministry to implement the &#8220;Nexus Principles&#8221; based on OECD guidelines recently published as part of the Base Erosion and Profit Shifting (BEPS) project. The regulations were approved on May 1, 2017 and accordingly, these changes have come into effect. 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The Industrial Encouragement Law defines an &#8220;Industrial Company&#8221; as a company that is resident in Israel and that derives at least 90% of its income in any tax year, other than income from defense loans, capital gains, interest and dividends, from an enterprise whose major activity in a given tax year is industrial production. 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If earnings are distributed to Israel in the form of dividends or otherwise, the Company may be subject to additional Israeli income taxes (subject to an adjustment for foreign tax credits) and foreign withholding tax rates.</p><p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 1.25in; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-size-adjust: none; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;"><b>&#160;</b></p><p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 1.25in; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-size-adjust: none; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;">Neither Israeli income taxes, foreign withholding taxes nor deferred income taxes were provided in relation to undistributed earnings of the non-Israeli subsidiaries. This is because the Company intends to permanently reinvest undistributed earnings in the foreign subsidiaries in which those earnings arose. 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However, a determination of the amount of the unrecognized deferred tax liability for temporary difference related to those undistributed earnings of foreign subsidiaries is not practicable due to the complexity of the structure of our group of subsidiaries for tax purposes and the difficulty of projecting the amount of future tax liability.</p><p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 1.25in; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-size-adjust: none; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;"><b>&#160;</b></p><p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 1.25in; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-size-adjust: none; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;">Tax Reform- United States of America</p><p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 1.25in; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-size-adjust: none; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;">&#160;</p><p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 1.25in; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-size-adjust: none; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;">The U.S. Tax Cuts and Jobs Act of 2017 (&#8220;TCJA&#8221;) was approved by the U.S. Congress on December 20, 2017 and signed into law by U.S. President Donald J. 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Such changes include a reduction in the corporate tax rate and limitations on certain corporate deductions and credits, among other changes.</p><p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 1.25in; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-size-adjust: none; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;">&#160;</p><p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 1.25in; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-size-adjust: none; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;">The TCJA reduces the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018. 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The Company has concluded that a reasonable estimate could be developed for the effects of the tax reform. 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If the qualitative assessment does not result in a more likely than not indication of impairment, no further impairment testing is required. If it does result in a more likely than not indication of impairment, the two-step impairment test is performed. Alternatively, ASC 350 permits an entity to bypass the qualitative assessment for any reporting unit and proceed directly to performing the first step of the goodwill impairment test.</p><p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 0.75in; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;"></p><p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 0.75in; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;"></p><p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 0.75in; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;">The provisions of ASC 350 require that the quantitative two-step impairment test will be performed on goodwill at the level of the reporting units. 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Judgments and assumptions related to revenue, operating income, future short-term and long-term growth rates, weighted average cost of capital, interest, capital expenditures, cash flows, and market conditions are inherent in developing the discounted cash flow model. The Company considers historical rates and current market conditions when determining the discount and growth rates to use in its analyses. 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VSOE is based on the price charged when an element is sold separately or renewed. 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When services are considered essential to the software, revenues under the arrangement are recognized using contract accounting based on ASC 605-35, &#8220;Construction-Type and Production-Type Contracts&#8221;, on a percentage of completion method based on inputs measures. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are first determined, in the amount of the estimated loss for the entire contract. 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The application of these indicators for gross and net reporting of revenue depends on the relative facts and circumstances of each sale and requires significant judgment.</p></div> <div><p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 0.75in; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;"><b>Accrued severance pay and retirement plans</b></p><p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 0.75in; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;">&#160;</p><p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 0.75in; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;">The Company&#8217;s and its Israeli subsidiaries&#8217; obligation for severance pay with respect to their Israeli employees (for the period for which the employees were not included under Section 14 of the Severance Pay Law, 1963) is calculated pursuant to the Israeli Severance Pay Law based on the most recent salary of the employees multiplied by the number of years of employment as of the balance sheet date, and are presented on an undiscounted basis (referred to as the &#8220;Shut Down Method&#8221;). Employees are entitled to one month&#8217;s salary for each year of employment or a portion thereof. The Company&#8217;s obligation for all of its Israeli employees is fully provided for by monthly deposits with insurance policies and severance pay funds and by an accrual.</p><p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 0.75in; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;"></p><p style="font: 10pt/normal 'times new roman', times, serif; margin: 0pt 0px 0pt 0.75in; text-align: justify; color: #000000; text-transform: none; text-indent: 0px; letter-spacing: normal; word-spacing: 0px; white-space: normal; orphans: 2; widows: 2; font-stretch: normal; -webkit-text-stroke-width: 0px; text-decoration-style: initial; text-decoration-color: initial;">The Group has a number of savings plans in the United States that qualify under Section 401(k) of the Internal Revenue Code. U.S employees may contribute up to 100% of their pretax or post-tax salary, but not more than statutory limits. 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The new standard requires financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The standard will be effective for the Company beginning January 1, 2020, with early adoption permitted. 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