ADP 2003 Annual Report Download - page 32

ADP 2003 Annual Report
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The Company continues to account for its stock option
and employee stock purchase plans under the recognition and
measurement principles of Accounting Principles Board (APB)
Opinion No. 25, “Accounting for Stock Issued to Employees,”
and related Interpretations. No stock-based employee com-
pensation expense related to the Company’s stock option and
stock purchase plans is reflected in net earnings, as all options
granted under the stock option plans had an exercise price
equal to the market value of the underlying common stock on
the date of grant, and for the stock purchase plan the discount
does not exceed fifteen percent.
The following table illustrates the effect on net earnings
and earnings per share if the Company had applied the fair
value recognition provisions of SFAS No. 123 to stock-based
employee compensation.
Years ended June 30, 2003 2002 2001
Net earnings, as reported $1,018,150 $1,100,770 $924,720
Deduct: Total stock-based employee
compensation expense determined
using the fair value-based method
for all awards, net of related
tax effects (123,062) (120,010) (106,628)
Pro forma net earnings $ 895,088 $ 980,760 $818,092
Earnings per share:
Basic - as reported $ 1.70 $ 1.78 $ 1.47
Basic - pro forma $ 1.49 $ 1.58 $ 1.30
Diluted - as reported $ 1.68 $ 1.75 $ 1.44
Diluted - pro forma $ 1.48 $ 1.56 $ 1.27
The fair value for these instruments was estimated at the date
of grant using a Black-Scholes valuation model with the follow-
ing weighted average assumptions:
Years ended June 30, 2003 2002 2001
Risk-free interest rate 3.2%-4.1% 4.3%-5.2% 5.3%-6.0%
Dividend yield .8%-.9% .7%-.8% .7%-.8%
Volatility factor 29.5%-31.7% 25.9%-27.9% 27.9%-28.2%
Expected life:
Options 6.4 6.3 6.3
Stock purchase plans 2.0 2.0 2.0
Weighted average fair value:
Options $12.85 $16.54 $21.31
Stock purchase plans $12.94 $21.55 $20.58
See Note 9, Employee Benefit Plans, for additional information
relating to the Company’s stock plans.
L. Reclassification of Prior Financial Statements. Cer-
tain reclassifications have been made to previous years’ finan-
cial statements to conform to the 2003 presentation.
M. Income taxes. The provisions for income taxes,
income taxes payable and deferred income taxes are deter-
mined using the liability method. Deferred tax assets and liabil-
ities are determined based on differences between the financial
reporting and tax basis of assets and liabilities and are meas-
ured by applying enacted tax rates and laws to taxable years in
which such differences are expected to reverse. A valuation
allowance is provided when the Company determines that it is
more likely than not that a portion of the deferred tax asset bal-
ance will not be realized.
N. Adoption of New Accounting Pronouncements. In
November 2002, the FASB issued Interpretation No. 45, “Guar-
antor’s Accounting and Disclosure Requirements for Guaran-
tees, Including Indirect Guarantees of Indebtedness of Others,”
which elaborates on the disclosures to be made by a guarantor
in its interim and annual financial statements about its obliga-
tions under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation under-
taken in issuing the guarantee. The initial recognition and meas-
urement provisions of this Interpretation are applicable on a
prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements in this Inter-
pretation are effective for financial statements of interim or
annual periods ending after December 15, 2002. The Company
has provided information regarding commitments and contin-
gencies relating to guarantees in Note 11. There have been no
material commitments and contingencies requiring recognition
in the Consolidated Financial Statements since December 31,
2002.
In June 2002, the FASB issued SFAS No. 146, “Account-
ing for Costs Associated with Exit or Disposal Activities” (SFAS
No. 146), which nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3 (EITF 94-3), “Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring).”
SFAS No. 146 requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is
incurred. Under EITF 94-3, a liability for an exit cost as defined
in EITF 94-3 was recognized at the date of an entity’s commit-
ment to an exit plan. The provisions of SFAS No. 146 are effec-
tive and are being applied to all exit or disposal activities
initiated since December 31, 2002. These provisions affect the
timing of the recognition of the Company’s exit and disposal
costs.
Notes to Consolidated Financial Statements