ADP 2013 Annual Report Download - page 49

Automatic Data Processing, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
(Tabular dollars in millions, except per share amounts)
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Basis of Preparation.
The accompanying Consolidated Financial Statements and footnotes thereto of Automatic Data Processing, Inc. and its
subsidiaries (“ADP” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of
America (“U.S. GAAP”). Intercompany balances and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the
assets, liabilities, revenue, costs, expenses, and accumulated other comprehensive income that are reported in the Consolidated Financial
Statements and footnotes thereto. Actual results may differ from those estimates.
B. Description of Business. The Company is a provider of technology-based outsourcing solutions to employers and vehicle retailers and
manufacturers. The Company classifies its operations into the following reportable segments: Employer Services, Professional Employer
Organization (“PEO”) Services, and Dealer Services. The primary components of the “Other” segment are the results of operations of ADP
Indemnity (a wholly-owned captive insurance company that provides workers' compensation and employer's liability deductible reimbursement
insurance protection for PEO Services worksite employees), non-
recurring gains and losses, miscellaneous processing services, such as customer
financing transactions, and certain charges and expenses that have not been allocated to the reportable segments, such as stock-based
compensation expense and the goodwill impairment charge.
C. Revenue Recognition. 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. The Company enters
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. 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.
The Company also recognizes 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.
The Company assesses the collectability of revenues based primarily on the creditworthiness of the customer as determined by credit checks and
analysis, as well as the customer's payment history.
PEO revenues are reported on the Statements of Consolidated Earnings and are reported net of direct pass-through costs, which are costs billed
and incurred for PEO Services worksite employees, primarily consisting of payroll wages and payroll taxes. Benefits, workers' compensation,
and state unemployment tax fees for worksite employees are included in PEO revenues and the associated costs are included in operating
expenses.
D. Cash and Cash Equivalents. Investment securities with a maturity of ninety days or less at the time of purchase are considered cash
equivalents. The fair value of our cash and cash equivalents approximates carrying value.
E. Corporate Investments and Funds Held for Clients. All of the Company's marketable securities are considered to be “available-for-sale”
and, accordingly, are carried on the Consolidated Balance Sheets at fair value. Unrealized gains and losses, net of the related tax effect, are
excluded from earnings and are reported as a separate component of accumulated other comprehensive income on the Consolidated Balance
Sheets until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific-identification basis and
are included in other income, net on the Statements of Consolidated Earnings.
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