ADP 2000 Annual Report Download - page 27

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[notes to consolidated financial stat em ents]Automatic Data Processing, Inc. and Subsidiaries
Years ended June 30, 2000, 1999 and 1998
[note 1 ] Summary of Significant Accounting Policies
A. Consolidation and Basis of Preparation. The consolidated
financial statements include the financial results of Automatic
Data Processing, Inc. and its majority-owned subsidiaries.
Intercompany balances and transactions have been eliminated
in consolidation.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompa-
nying notes. Actual results could differ from these estimates.
B. Revenue Recognition. Service revenues, including monthly
license, maintenance and other fees, are recognized as services
are provided. Prepaid software licenses and the gross profit on
the sale of hardware is recognized in revenue primarily at instal-
lation and client acceptance with a portion deferred and recog-
nized on the straight-line basis over the initial contract period.
Interest earnings on collected but not yet remitted funds held for
clients are an integral part of certain of the Employer Services’
product offerings and are recognized in revenues as earned.
Professional Employer Organization (PEO) revenues are net of
pass-through costs, which include wages and taxes.
C. Cash and Cash Equivalents. Highly-liquid investments with a
maturity of ninety days or less at the time of purchase are con-
sidered cash equivalents.
D. Investments. Short-term and long-term marketable securi-
ties, and funds held for clients are primarily invested in high-
grade fixed-income instruments. All of the Company’s
marketable securities, including $3,363 million of funds held for
clients, are considered to be “available-for-sale” at June 30, 2000
and, accordingly, are carried on the balance sheet at fair market
value. The remainder of the funds held for clients are cash
equivalents. Approximately $1,702 million of the “available-for-
sale” investments mature in less than one year, $1,058 million in
1–2 years, $1,060 million in 2–3 years, $284 million in 3–4 years,
and $484 million in 5–6 years.
E. Property, Plant and Equipment. Property, plant and equip-
ment is stated at cost and depreciated over the estimated useful
lives of the assets by the straight-line method. Leasehold
improvements are amortized over the shorter of the term of the
lease or the estimated useful lives of the improvements.
The estimated useful lives of assets are primarily as follows:
Data processing equipment 2 to 3 years
Buildings 20 to 40 years
Furniture and fixtures 3 to 7 years
F. Intangibles. Intangible assets are recorded at cost and are
amortized primarily on the straight-line basis. Goodwill is
amortized over periods from 10 to 40 years, and is periodically
reviewed for impairment by comparing carrying value to undis-
counted expected future cash flows. If impairment is indicated,
a write-down to fair value (normally measured by discounting
estimated future cash flows) is taken.
G. Foreign Currency Translation. The net assets of the Com-
pany’s foreign subsidiaries are translated into U.S. dollars based
on exchange rates in effect at the end of each period, and rev-
enues and expenses are translated at average exchange rates
during the periods. Currency transaction gains or losses, which
are included in the results of operations, are immaterial for
all periods presented. Gains or losses from balance sheet trans-
lation are included in other comprehensive income on the
balance sheet.
H. Earnings Per Share (EPS). The calculation of basic and diluted
EPS is as follows:
Effect of
Zero Coupon Effect of
(In thousands, Subordinated Stock
except EPS) Basic Notes Options Diluted
2000
Net earnings $840,800 $ 2,912 $ — $843,712
Average shares 626,766 4,509 14,823 646,098
EPS $ 1.34 $ 1.31
1999
Net earnings $696,840 $ 3,607 $ — $700,447
Average shares 615,630 5,956 15,306 636,892
EPS $ 1.13 $ 1.10
1998
Net earnings $608,262 $ 7,833 $ — $616,095
Average shares 600,803 14,030 13,363 628,196
EPS $ 1.01 $ .98