ADP 2005 Annual Report Download - page 45

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The significant components of deferred income tax assets and
liabilities and their balance sheet classifications are as follows:
June 30, 2005 2004
Deferred tax assets:
Accrued expenses not currently deductible $221.0 $190.6
Net operating losses 34.1 45.9
Other 12.8 30.1
267.9 266.6
Less: Valuation allowances (32.5) (25.9)
Deferred tax assets — net $235.4 $240.7
Deferred tax liabilities:
Unrealized investment gains, net $ 12.2 $ 22.4
Accrued retirement benefits 114.3 112.3
Depreciation and amortization 299.7 275.8
Other 45.1 47.3
Deferred tax liabilities $471.3 $457.8
Net deferred tax liabilities $235.9 $217.1
There are $72.5 million and $84.0 million of current deferred tax
assets included in other current assets on the Consolidated
Balance Sheets at June 30, 2005 and 2004, respectively. There
are $1.4 million of long-term deferred tax assets included in
other assets on the Consolidated Balance Sheets at June 30,
2005. There are $19.3 million and $17.3 million of current
deferred tax liabilities included in accrued expenses and
other current liabilities on the Consolidated Balance Sheets
at June 30, 2005 and 2004, respectively.
Income taxes have not been provided on undistributed earnings
of foreign subsidiaries as the Company considers such earnings
to be permanently reinvested as of June 30, 2005 and 2004.
The Company has estimated domestic and foreign net operating
loss carry forwards of approximately $17.5 million and $76.5
million, respectively, at June 30, 2005.
The Company has recorded valuation allowances of $32.5 mil-
lion and $25.9 million at June 30, 2005 and 2004, respectively,
to reflect the estimated amount of domestic and foreign
deferred tax assets that may not be realized. A portion of the
valuation allowances in the amounts of approximately $2.1 mil-
lion and $3.4 million at June 30, 2005 and 2004, respectively,
relate to net deferred tax assets which were recorded in pur-
chase accounting. Any recognition of such amounts in future
years will be a reduction to goodwill.
Income tax payments were approximately $490.1 million, $539.1
million and $686.3 million for fiscal 2005, 2004 and 2003,
respectively.
On October 22, 2004, the American Jobs Creation Act (the
“AJCA”) was signed into law. The AJCA includes a deduction of
85% of certain foreign earnings that are repatriated, as defined
in the AJCA. The Company may elect to apply this provision to
qualifying earnings repatriations in fiscal 2006. The Company is
continuing to evaluate the effects of the repatriation provision.
The range of possible amounts that the Company could repatri-
ate under this provision is between zero and $500 million.
The related potential range of income tax is between zero and
$35 million.
The Company is routinely examined by the Internal Revenue
Service (the “IRS”) and tax authorities in countries in which it
conducts business, as well as states in which it has significant
business operations. The tax years under examination vary by
jurisdiction. The Company expects an IRS examination for fiscal
1998 through fiscal 2002 to be substantially completed in fiscal
2006. The Company also expects several state examinations to
be completed in fiscal 2006. The Company regularly considers
the likelihood of assessments in each of the jurisdictions result-
ing from examinations. The Company has established tax
reserves which it believes are adequate in relation to the poten-
tial assessments. Once established, reserves are adjusted when
there is more information available, when an event occurs
necessitating a change to the reserves or the statute of limita-
tions for the relevant taxing authority to examine the tax position
has expired. The resolution of tax matters should not have a
material effect on the consolidated financial condition of the
Company, although a resolution could have a material impact on
the Company’s Statements of Consolidated Earnings for a par-
ticular future period and on the Company’s effective tax rate.
NOTE 14. CONTRACTUAL COMMITMENTS,
CONTINGENCIES AND OFF-BALANCE SHEET
ARRANGEMENTS
The Company has obligations under various facilities and equip-
ment leases and software license agreements. Total expense
under these agreements was approximately $321.8 million,
$317.5 million and $319.2 million in fiscal 2005, 2004 and 2003,
respectively, with minimum commitments at June 30, 2005 as
follows:
Years Ending June 30,
2006 285.8
2007 226.8
2008 181.8
2009 137.1
2010 108.5
Thereafter 144.1
$1,084.1
In addition to fixed rentals, certain leases require payment of
maintenance and real estate taxes and contain escalation provi-
sions based on future adjustments in price indices.
As of June 30, 2005, the Company has purchase commitments of
approximately $205.5 million relating to software and equipment
purchases and maintenance contracts, of which $134.3 million
AUTOMATIC DATA PROCESSING, INC. AND SUBSIDIARIES