ADP 2011 Annual Report Download - page 34

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 collectability 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 collectability 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 collectability
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 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 $3,073.6
million of goodwill as of June 30, 2011. Given the significance of our goodwill, an adverse change to the fair value of goodwill and
intangible assets could result in an impairment charge which could be material to our consolidated earnings if we are unable to
generate the anticipated revenue growth, synergies and/or cost savings associated with our acquisitions.
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.
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