Paychex 2015 Annual Report Download - page 48

insurance arrangement with coverage provided through a single national carrier. Under the minimum premium
arrangement, our health benefits insurance reserves are established to provide for the payment of claims liability
charges in accordance with our service contract with the carrier. The claims liability charges include estimates
for reported losses, plus amounts for those claims incurred but not reported, and estimates of certain expenses
associated with processing and settling the claims.
We regularly review the adequacy of our estimated insurance reserves. Adjustments to previously
established reserves are reflected in the results of operations for the period in which the adjustment is identified.
Such adjustments could possibly be significant, reflecting any variety of new and adverse or favorable trends.
Goodwill and other intangible assets: Goodwill is not amortized, but instead is tested for impairment on
an annual basis and between annual tests if an event occurs or circumstances change in a way to indicate that
there has been a potential decline in the fair value of a reporting unit. We have the option to perform a qualitative
assessment to determine if it is more-likely-than-not that the fair value of a reporting unit has declined below its
carrying value. This assessment considers various financial, macroeconomic, industry, and reporting unit specific
qualitative factors. Our business is largely homogeneous and, as a result, goodwill is associated with one
reporting unit. We perform our annual impairment testing in our fiscal fourth quarter. Based on the results of our
reviews, no impairment loss was recognized in the results of operations for fiscal years 2015, 2014, or 2013.
Subsequent to this review, there have been no events or circumstances that indicate any potential impairment of
our goodwill balance.
We also test intangible assets for potential impairment when events or changes in circumstances indicate
that the carrying value may not be recoverable.
Stock-based compensation costs: All stock-based awards to employees, including grants of stock options,
are recognized as compensation costs in our consolidated financial statements based on their fair values
measured as of the date of grant. We estimate the fair value of stock option grants using a Black-Scholes option
pricing model. This model requires various assumptions as inputs including expected volatility of the Paychex
stock price and expected option life. We estimate volatility based on a combination of historical volatility using
stock prices over a period equal to the expected option life and implied market volatility. Expected option life is
estimated based on historical exercise behavior. We periodically reassess our assumptions as well as our choice
of valuation model, and will reconsider use of this model if additional information becomes available in the
future indicating that another model would provide a more accurate estimate of fair value, or if characteristics of
future grants would warrant such a change.
We are required to estimate forfeitures and only record compensation costs for those awards that are
expected to vest. Our assumptions for forfeitures were determined based on type of award and historical
experience. Forfeiture assumptions are adjusted at the point in time a significant change is identified, with any
adjustment recorded in the period of change, and the final adjustment at the end of the requisite service period to
equal actual forfeitures.
The assumptions of volatility, expected option life, and forfeitures all require significant judgment and are
subject to change in the future due to factors such as employee exercise behavior, stock price trends, and changes
to type or provisions of stock-based awards. Any change in one or more of these assumptions could have a
material impact on the estimated fair value of a future award.
Refer to Note D of the Notes to Consolidated Financial Statements, contained in Item 8 of this Form 10-K,
for further discussion of our stock-based compensation plans.
Income taxes: We account for deferred taxes by recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the consolidated financial statements or
tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between
the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse. We record a deferred tax asset related to the stock-based compensation
costs recognized for certain stock-based awards. At the time of non-qualified stock options are exercised or stock
awards vest, we account for the resulting tax deduction by reducing our accrued income tax liability with an
offset to the deferred tax asset and any excess of the tax benefit over the deferred tax asset as an increase to
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