Paychex 2016 Annual Report Download - page 46

impairment loss was recognized in the results of operations for fiscal years 2016, 2015, or 2014. 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 E 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 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
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 J 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.
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