Paychex 2015 Annual Report Download - page 49

additional paid-in capital. We currently have a sufficient pool of excess tax benefits in additional paid-in capital
to absorb any deficiency in tax benefits that fall short of the related deferred tax asset related to stock-based
awards.
We maintain a reserve for uncertain tax positions. We evaluate tax positions taken or expected to be taken in
a tax return for recognition in our consolidated financial statements. Prior to recording the related tax benefit in
our consolidated financial statements, we must conclude that tax positions will be more-likely-than-not to be
sustained, assuming those positions will be examined by taxing authorities with full knowledge of all relevant
information. The benefit recognized in our consolidated financial statements is the amount we expect to realize
after examination by taxing authorities. 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
and in determining the expected benefit. A change in the assessment of the more-likely-than-not standard could
materially impact our results of operations or financial position. Refer to Note I of the Notes to Consolidated
Financial Statements, contained in Item 8 of this Form 10-K, for further discussion of our reserve for uncertain
tax positions.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Factors
Changes in interest rates and interest rate risk: Funds held for clients are primarily comprised of short-
term funds and available-for-sale securities. Corporate investments are primarily comprised of available-for-sale
securities. As a result of our investing activities, we are exposed to changes in interest rates that may materially
affect our results of operations and financial position. Changes in interest rates will impact the earnings potential
of future investments and will cause fluctuations in the fair value of our longer-term available-for-sale securities.
We follow an investment strategy of protecting principal and optimizing liquidity. A substantial portion of our
portfolios is invested in high credit quality securities with AAA and AA ratings and A-1/P-1 ratings on short-
term securities. We invest predominately in municipal bonds including general obligation bonds, pre-refunded
bonds that are secured by a U.S. government escrow, and essential services revenue bonds. We limit the amounts
that can be invested in any single issuer and invest primarily in short- to intermediate-term instruments whose
fair value is less sensitive to interest rate changes. We manage the available-for-sale securities to a benchmark
duration of two and one-half to three and three-quarters years.
During fiscal 2015, our primary short-term investment vehicles were bank demand deposit accounts and
VRDNs. We have no exposure to high-risk or illiquid investments. We have insignificant exposure to European
investments. We have not and do not utilize derivative financial instruments to manage our interest rate risk.
During fiscal 2015, the average interest rate earned on our combined funds held for clients and corporate
investment portfolios was 1.0%, comparable the average interest rate earned for fiscal 2014 and fiscal 2013.
When interest rates are rising, the full impact of higher interest rates will not immediately be reflected in net
income due to the interaction of short- and long-term interest rate changes. During a rising interest rate
environment, earnings increase from our short-term investments, and over time increase earnings from our
longer-term available-for-sale securities. Earnings from the available-for-sale securities, which as of May 31,
2015 had an average duration of 3.2 years, would not reflect increases in interest rates until the investments are
sold or mature and the proceeds are reinvested at higher rates.
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