Paychex 2016 Annual Report Download - page 45

or transaction processed. Fees earned for funding of temporary staffing clients’ payrolls via purchase of accounts
receivable are based on a percentage of funding amounts as specified in the client contract. 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 delivery are included in operating expenses on the Consolidated Statements of Income
and Comprehensive Income.
For certain of our service offerings, we receive advance payments for set-up fees from our clients. We defer
revenue associated with these advance payments and the related costs, recognizing the revenue and related
expenses over the expected life of clients.
PEO revenue is included in service revenue and is reported net of certain direct pass-through costs billed
and incurred, which include wages, taxes, and certain benefit premiums. Direct costs related to certain benefit
plans where the Company retains risk are classified as operating expenses rather than as a reduction in service
revenue.
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. These collections from clients are typically remitted
from one to 30 days after receipt, with some items extending to 90 days. The interest earned on these funds is
included in total revenue on the Consolidated Statements of Income and Comprehensive Income because the
collecting, holding, and remitting of these funds are critical components of providing these services. Interest on
funds held for clients also includes net realized gains and losses from the sales of available-for-sale securities.
PEO insurance reserves: As part of the PEO service, we offer workers’ compensation insurance and
health insurance to client companies for the benefit of client employees. Workers’ compensation insurance is
provided under a fully insured high deductible workers’ compensation policy with a national insurance carrier.
Workers’ compensation insurance reserves are established to provide for the estimated costs of paying claims up
to per occurrence liability limits. In establishing the PEO workers’ compensation insurance reserves, we use an
independent actuarial estimate of undiscounted future cash payments that would be made to settle the claims.
Estimating the ultimate cost of future claims is an uncertain and complex process based upon historical loss
experience and actuarial loss projections, and is subject to change due to multiple factors, including economic
trends, changes in legal liability law, and damage awards, all of which could materially impact the reserves as
reported in the consolidated financial statements. Accordingly, workers’ compensation final claim settlements
may vary from the present estimates, particularly when those payments may not occur until well into the future.
With respect to our PEO health insurance, we offer various health insurance plans that take the form of
either fully insured fixed cost plans with various national insurance carriers or a fully insured minimum premium
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 combination 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 the reporting unit. We performed our annual impairment
testing in our fiscal fourth quarter. A quantitative analysis was performed for our German reporting unit. For all
other reporting units, we utilized a qualitative assessment to determine if it is more-likely-than-not that the fair
value of the reporting unit had declined below its carrying value. The assessment considered various financial,
macroeconomic, industry, and reporting unit specific qualitative factors. Based on the results of our testing, no
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