ADP 2009 Annual Report Download - page 32

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. We had $2,375.5 million of goodwill as of June 30, 2009. 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.
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.
The Company accounts for tax positions taken or expected to be taken in a tax return in accordance with the provisions of FIN 48, which
was adopted by the Company 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 those positions 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 a tax 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. As of June 30, 2009 and 2008, the Company’ s liabilities for unrecognized tax benefits, which
include interest and penalties, were $92.8 million and $404.2 million, respectively.
If certain pending tax matters settle within the next twelve months, the total amount of unrecognized tax benefits may increase or decrease
for all open tax years and jurisdictions. Based on current estimates, settlements related to various jurisdictions and tax periods could increase
earnings up to $20.5 million in the next twelve months. We do not expect any cash payments related to unrecognized tax benefits in the next
twelve months. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. We continually assess the likelihood
and amount of potential adjustments and adjust the income tax provision, the current tax liability and deferred taxes in the period in which the
facts that give rise to a revision become known.
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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