Paychex 2015 Annual Report Download - page 62

PAYCHEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
external direct costs of materials and services associated with developing or obtaining the software, and payroll
and payroll-related costs for employees who are directly associated with internal-use software projects.
Capitalization of these costs ceases no later than the point at which the project is substantially complete and
ready for its intended use. Costs associated with preliminary project stage activities, training, maintenance, and
other post-implementation stage activities are expensed as incurred. The carrying value of software and
development costs is reviewed for impairment when events or changes in circumstances indicate that the carrying
value of such assets may not be recoverable.
Goodwill and other intangible assets, net of accumulated amortization: The Company has $561.5
million of goodwill as of May 31, 2015. 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. Impairment is determined by comparing the
estimated fair value of a reporting unit to its carrying amount, including goodwill. The Company has 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. The Company performs its annual impairment testing in its fiscal
fourth quarter. Based on the results of the Company’s reviews, no impairment loss was recognized in the results
of operations for fiscal years 2015, 2014, or 2013. Subsequent to the latest review, there have been no events or
circumstances that indicate any potential impairment of the Company’s goodwill balance.
Intangible assets are comprised primarily of client list acquisitions and are reported net of accumulated
amortization on the Consolidated Balance Sheets. Intangible assets are amortized over periods generally ranging
from three to twelve years. Client lists use an accelerated method, while other intangible assets use the straight-
line method of amortization. The Company tests intangible assets for potential impairment when events or
changes in circumstances indicate that the carrying value of such assets may not be recoverable.
Revenue recognition: Revenues are primarily attributable to fees for providing services as well as
investment income earned on funds held for clients. 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. Certain processing services are provided under annual
service arrangements with revenue recognized ratably over the service period. The Company’s service revenue is
largely attributable to processing services where the fee is based on a fixed amount per processing period or a
fixed amount per processing period plus a fee per employee or transaction processed. The revenue earned from
delivery service for the distribution of certain client payroll checks and reports is included in service revenue, and
the costs for the delivery are included in operating expenses on the Consolidated Statements of Income and
Comprehensive Income.
For certain of the Company’s service offerings, it receives advance payments for set-up fees from its clients.
The Company defers revenue associated with these advance payments, recognizing the revenue and related
expenses costs over the expected life of its clients.
PEO revenue is included in service revenue and is reported net of certain direct pass-through costs billed
and incurred, which primarily include payroll wages, payroll taxes, and certain benefit premiums. In fiscal 2014,
with the addition of a new health care offering within the PEO, we began classifying direct costs related to
certain benefit plans where the Company retains risk as operating expenses rather than as a reduction in service
revenue. Direct pass-through costs billed and incurred that were a reduction in service revenue were $4.2 billion,
$3.4 billion, and $3.0 billion for fiscal years 2015, 2014, and 2013, respectively.
Interest on funds held for clients is earned primarily on funds that are collected from clients before due dates
for payroll tax administration services and for employee payment services, and invested until remittance to the
applicable tax or regulatory agencies or client employees. The interest earned on these funds is included in total
revenue on the Consolidated Statements of Income and Comprehensive Income because the collecting, holding,
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