ADP 2010 Annual Report Download - page 41

Goodwill. We account for goodwill and other intangible assets with indefinite useful lives in accordance with ASC 350 - 10, 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 determine the fair value of our reporting units using the income approach, which utilizes a discounted cash
flow model. In addition, we use comparative market multiples to corroborate our discounted cash flow results. We had $2,383.3
million of goodwill as of June 30, 2010. 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. 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 IRS and other tax
authorities. A change in the assessment of the outcomes of such matters could materially impact our consolidated financial
statements.
There is a financial statement recognition threshold and measurement attribute for tax positions taken or expected to be taken in a tax
return. Specifically, 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, 2010 and 2009, the Company
’ s liabilities for unrecognized tax benefits, which
include interest and penalties, were $107.2 million and $92.8 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 $10.0 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. We measure 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 binomial 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.
34