ADP 2008 Annual Report Download - page 32

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Income Taxes. We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which establishes
financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the
amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that
have been recognized in an entity’ s financial statements or tax returns. Judgment is required in addressing the future tax consequences of events
that have been recognized in our consolidated financial statements or tax returns (e.g., realization of deferred tax assets, changes in tax laws or
interpretations thereof). In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service
and other tax authorities. A change in the assessment of the outcomes of such matters could materially impact our consolidated financial
statements.
We adopted the provisions of FIN 48 on July 1, 2007. FIN 48 prescribes a financial statement recognition threshold and measurement
attribute for tax positions taken or expected to be taken in a tax return. Specifically, it clarifies that an entity’ s tax benefits must be “more likely
than not” of being sustained assuming that position will be examined by taxing authorities with full knowledge of all relevant information prior
to recording the related tax benefit in the financial statements. If the position drops below the “more likely than not” standard, the benefit can
no longer be recognized. Assumptions, judgment and the use of estimates are required in determining if the “more likely than not” standard has
been met when developing the provision for income taxes. A change in the assessment of the “more likely than not” standard could materially
impact our consolidated financial statements.
Stock-Based Compensation. SFAS No. 123R requires the measurement of stock-based compensation expense based on the fair value of the
award on the date of grant. We determine the fair value of stock options issued by using a binominal option-pricing model. The binomial
option-pricing model considers a range of assumptions related to volatility, dividend yield, risk-free interest rate and employee exercise
behavior. Expected volatilities utilized in the binomial option-pricing model are based on a combination of implied market volatilities,
historical volatility of our stock price and other factors. Similarly, the dividend yield is based on historical experience and expected future
changes. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The binomial option-pricing model also
incorporates exercise and forfeiture assumptions based on an analysis of historical data. The expected life of the stock option grants is derived
from the output of the binomial model and represents the period of time that options granted are expected to be outstanding. Determining these
assumptions is subjective and complex, and therefore, a change in the assumptions utilized could impact the calculation of the fair value of our
stock options.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information called for by this item is provided under the caption “Quantitative and Qualitative Disclosures About Market Risk” under
“Item 7 – Management’ s Discussion and Analysis of Financial Condition and Results of Operations.”
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