ADP 2008 Annual Report Download - page 31

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No.
159”). SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. This statement provides companies with an option to
measure selected financial assets and liabilities at fair value. We have not elected to measure such selected financial assets and liabilities at fair
value. As such, we do not expect the adoption of SFAS No. 159 to have a material impact on our consolidated results of operations, cash flows
or financial condition.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). This statement clarifies the definition
of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value measurements. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007. We do not expect the adoption of SFAS No. 157 to have a material impact on our
consolidated results of operations, cash flows or financial condition.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial statements requires management to make estimates, judgments and
assumptions that affect reported amounts of assets, liabilities, revenues and expenses. We continually evaluate the accounting policies and
estimates used to prepare the consolidated financial statements. The estimates are based on historical experience and assumptions believed to
be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management.
Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial
position are discussed below.
Revenue Recognition. Our revenues are primarily attributable to fees for providing services (e.g., Employer Services’ payroll processing
fees) as well as investment income on payroll funds, payroll tax filing funds and other Employer Services’ client-related funds. We enter into
agreements for a fixed fee per transaction (e.g., number of payees or number of payrolls processed). 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. Our service fees are determined based on written price quotations or service agreements having
stipulated terms and conditions that do not require management to make any significant judgments or assumptions regarding any potential
uncertainties. Interest income on collected but not yet remitted funds held for clients is recognized in revenues as earned, as the collection,
holding and remittance of these funds are critical components of providing these services.
We also recognize revenues associated with the sale of software systems and associated software licenses (e.g. Dealer Services’ dealer
management systems). For a majority of our software sales arrangements, which provide hardware, software licenses, installation and post-
contract customer support, revenues are recognized ratably over the software license term as vendor-specific objective evidence of the fair
values of the individual elements in the sales arrangement does not exist. Changes to the elements in an arrangement and the ability to establish
vendor-specific objective evidence for those elements could affect the timing of the revenue recognition.
We assess collectibility of our revenues based primarily on the creditworthiness of the customer as determined by credit checks and
analysis, as well as the customer’ s payment history. We do not believe that a change in our assumptions utilized in the collectibility
determination would result in a material change to revenues as no single customer accounts for a significant portion of our revenues.
Goodwill. We account for goodwill and other intangible assets with indefinite useful lives in accordance with 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 annually at the reporting unit level. We perform this impairment test by first comparing the fair value of our
reporting units to their carrying amount. If an indicator of impairment exists based upon comparing the fair value of our reporting units to their
carrying amount, we would then compare the implied fair value of our goodwill to the carrying amount in order to determine the amount of the
impairment, if any. We use discounted cash flows to determine fair values. When available and as appropriate, comparative market multiples
are used to corroborate discounted cash flow results. We had $2,426.7 million of goodwill as of June 30, 2008. Given the significance of our
goodwill, an adverse change to the fair value could result in an impairment charge, which could be material to our consolidated earnings.
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