Paychex 2015 Annual Report Download - page 64

PAYCHEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company is required to estimate forfeitures and only record compensation costs for those awards that are
expected to vest. The 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 material change in one or more of these assumptions could have
an impact on the estimated fair value of a future award.
Refer to Note D for further discussion of the Company’s stock-based compensation plans.
Income taxes: The Company accounts 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. The Company records a deferred tax asset related to
the stock-based compensation costs recognized for certain stock-based awards. At the time of the exercise of
non-qualified stock options or vesting of stock awards, the Company accounts for the resulting tax deduction by
reducing its 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 additional paid-in capital. The Company currently has 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.
The Company also maintains a reserve for uncertain tax positions. The Company evaluates tax positions
taken or expected to be taken in a tax return for recognition in its consolidated financial statements. Prior to
recording the related tax benefit in the consolidated financial statements, the Company 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 the consolidated financial
statements is the amount the Company expects 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 the Company’s results of operations or financial
position. The Company’s reserve for uncertain tax positions, including interest and net of federal benefits, was
$29.1 million as of May 31, 2015 and $29.8 million as of May 31, 2014. Refer to Note I for further discussion of
the Company’s reserve for uncertain tax positions.
Use of estimates: The preparation of financial statements in conformity with U.S. generally accepted
accounting principles (“GAAP”) requires management to make estimates, judgments, and assumptions that affect
reported amounts of assets, liabilities, revenue, and expenses during the reporting period. Actual amounts and
results could differ from these estimates.
Recently adopted accounting pronouncements: In November 2014, the Company adopted Financial
Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2014-17, “Business
Combinations (Topic 805): Pushdown Accounting (a consensus of the FASB Emerging Issues Task Force).” This
guidance provides the option for an acquired entity to apply pushdown accounting in its separately issued
financial statements when a change-in-control event occurs. This guidance was effective for change-in-control
events after November 18, 2014. Adoption of this guidance did not have any effect on the Company’s
consolidated financial statements.
In June 2014, the Company adopted FASB ASU 2013-11, “Income Taxes (Topic 740): Presentation of an
Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit
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