ADP 2004 Annual Report Download - page 36

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Notes to Consolidated Financial Statements
NOTE 1 Summary of Significant Accounting Policies
A. Consolidation and Basis of Preparation. The consolidated
financial statements include the financial results of Automatic
Data Processing, Inc. and its majority-owned subsidiaries (the
“Company” or “ADP”). Intercompany balances and transactions
have been eliminated in consolidation.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ
from these estimates.
B. Description of Business. The Company is a provider of
technology-based outsourcing solutions to employers, the broker-
age and financial services community, vehicle retailers and their
manufacturers and the property and casualty insurance, auto col-
lision repair and auto recycling industries. The Company classifies
its operations into the following reportable segments: Employer
Services, Brokerage Services, Dealer Services and Other. “Other”
consists primarily of Claims Services, miscellaneous processing
services, and corporate allocations and expenses.
C. Revenue Recognition. A majority of the Company’s rev-
enues are attributable to fees for providing services (e.g., Employer
Services’ payroll processing fees and Brokerage Services’ trade pro-
cessing fees) as well as interest income on payroll funds, tax filing
funds and other Employer Services’ client-related funds. The Com-
pany typically enters into agreements for a fixed fee per transaction
(e.g., number of payees or number of trades). Fees associated with
services are recognized in the period services are rendered and
earned under service arrangements with clients where service fees
are fixed or determinable and collectibility is reasonably assured.
Interest income on collected but not yet remitted funds held
for clients is earned on funds that are collected from clients and
are invested (funds held for clients) until remitted to the applica-
ble tax agencies or client employees. The interest earned on these
funds is included in revenues because the collection, holding and
remittance of these funds are critical components of providing
these services.
The Company also recognizes revenues associated with the
sale of software systems and associated software licenses. For a
majority of the Company’s software sales arrangements, which pro-
vide hardware, software licenses, installation and post-contract
customer support, revenues are recognized ratably over the soft-
ware license term as vendor-specific objective evidence of the fair
values of the individual elements in the sales arrangement does not
exist. As part of the sale of software systems, the Company recog-
nizes revenues from the sale of hardware, which is recorded net of
the associated costs.
Postage fees for client mailings are included in revenues and
the associated postage expenses are included in operating
expenses. Professional Employer Organization (PEO) revenues
are included in revenues and are reported net of direct costs billed
and incurred for PEO worksite employees, which primarily include
payroll wages and payroll taxes.
Notes to Consolidated Financial Statements
D. Cash and Cash Equivalents. Highly-liquid investments
with a maturity of ninety days or less at the time of purchase are
considered cash equivalents.
E. Corporate Investments and Funds Held for Clients. All of
the Company’s marketable securities are considered to be “avail-
able-for-sale” and, accordingly, are carried on the Consolidated
Balance Sheets at fair value. Unrealized gains and losses, net of
the related tax effect, on available-for-sale securities are excluded
from earnings and are reported as a separate component of accu-
mulated other comprehensive income until realized. Realized
gains and losses from the sale of available-for-sale securities are
determined on a specific-identification basis and are included in
other income, net.
If the market value of any available-for-sale security declines
below cost and it is deemed to be other-than-temporary, an impair-
ment charge is recorded to earnings for the difference between the
carrying amount of the respective security and the fair value.
Premiums and discounts are amortized or accreted over the
life of the related available-for-sale security as an adjustment to
yield using the effective-interest method. Dividend and interest
income are recognized when earned.
F. Long-term Receivables. Long-term receivables relate to
notes receivable from the sale of computer systems, primarily to
automobile and truck dealerships. Unearned income from finance
receivables represents the excess of gross receivables over the
sales price of the computer systems financed. Unearned income
is amortized using the effective-interest method to maintain a con-
stant rate of return on the net investment over the term of each
contract. The allowance for doubtful accounts on long-term receiv-
ables is the Company’s best estimate of the amount of probable
credit losses in the Company’s existing note receivables.
G. Property, Plant and Equipment. Property, plant and
equipment is stated at cost and depreciated over the estimated
useful lives of the assets using the straight-line method. Lease-
hold improvements are amortized over the shorter of the term of
the lease or the estimated useful lives of the improvements. The
estimated useful lives of assets are primarily as follows:
Data processing equipment 2 to 5 years
Buildings 20 to 40 years
Furniture and fixtures 3 to 7 years
H. Goodwill and Other Intangible Assets. The Company
accounts for goodwill and other intangible assets in accordance
with Statement of Financial Accounting Standards (SFAS) No.
142, “Goodwill and Other Intangible Assets,” which states that
goodwill and intangible assets with indefinite useful lives should
not be amortized, but instead tested for impairment at least annu-
ally at the reporting unit level. If an impairment exists, a write-
down to fair value (normally measured by discounting estimated
future cash flows) is recorded. Intangible assets with finite lives
are amortized primarily on the straight-line basis over their esti-
mated useful lives and are reviewed for impairment in accordance
with SFAS No. 144, “Accounting for Impairment or Disposal of
Long-Lived Assets” (SFAS No. 144).
Years ended June 30, 2004, 2003 and 2002 (Unless otherwise noted, amounts in thousands, except per share amounts)
Automatic Data Processing, Inc. and Subsidiaries