ADP 2004 Annual Report Download - page 38

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Automatic Data Processing, Inc. and Subsidiaries
The following table illustrates the effect on net earnings and
earnings per share if the Company had applied the fair value recog-
nition provisions of SFAS No. 123 to stock-based employee com-
pensation.
Years ended June 30, 2004 2003 2002
Net earnings, as reported $ 935,570 $1,018,150 $1,100,770
Add: Stock-based employee
compensation expense
included in reported net
earnings, net of related tax
effects 7,861 6,784 6,592
Deduct: Total stock-based
employee compensation
expense determined using
the fair value-based method
for all awards, net of
related tax effects (120,393) (129,846) (126,602)
Pro forma net earnings $ 823,038 $ 895,088 $ 980,760
Earnings per share:
Basic – as reported $1.58 $1.70 $1.78
Basic – pro forma $1.39 $1.49 $1.58
Diluted – as reported $1.56 $1.68 $1.75
Diluted – pro forma $1.38 $1.48 $1.56
The fair value for these instruments was estimated at the
date of grant using a Black-Scholes valuation model with the fol-
lowing assumptions:
Years ended June 30, 2004 2003 2002
Risk-free interest rate 3.9%-4.5% 3.2%-4.1% 4.3%-5.2%
Dividend yield 1.0%-1.1% .8%-.9% .7%-.8%
Volatility factor 29.0%-29.3% 29.5%-31.7% 25.9%-27.9%
Expected life (in years):
Options 6.5 6.4 6.3
Stock purchase plans 2.0 2.0 2.0
Weighted average fair value
(in dollars):
Options $13.96 $12.85 $16.54
Stock purchase plans $11.95 $12.94 $21.55
See Note 10, Employee Benefit Plans, for additional infor-
mation relating to the Company’s stock plans.
O. Reclassification of Prior Financial Statements. Certain
reclassifications have been made to previous years’ financial
statements to conform to the 2004 presentation.
P. Income Taxes. The provisions for income taxes, income
taxes payable and deferred income taxes are determined using the
liability method. Deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax basis
of assets and liabilities and are measured 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 balance will not be realized.
Q. Adoption of New Accounting Pronouncements. In Novem-
ber 2003, the Emerging Issues Task Force (EITF) published Issue
No. 03-1, “The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments” (EITF 03-1). EITF 03-1
reached a consensus that certain quantitative and qualitative dis-
closures are required for debt and marketable equity securities
classified as available-for-sale or held-to-maturity that are impaired
at the balance sheet date but for which an other-than-temporary
impairment has not been recognized. The disclosure requirements
of EITF 03-1 are effective for fiscal periods ending after December
15, 2003 and are included in Note 4, herein.
In December 2003, the Financial Accounting Standards
Board (FASB) revised Interpretation No. 46R, “Consolidation
of Variable Interest Entities,” with certain modifications and
clarifications. Application of this guidance was effective
for interests in certain variable interest entities commonly
referred to as special purpose entities as of December 31, 2003.
Application for all other types of variable interest
entities created prior to February 1, 2003 is required for the
period ended after March 15, 2004 unless previously applied.
The adoption of the revised interpretation did not impact the
Company’s consolidated financial statements as the Company
does not have investments in unconsolidated special purpose or
variable interest entities.
In December 2003, the FASB revised SFAS No. 132,
“Employer’s Disclosures about Pensions and Other Post-retire-
ment Benefits” (SFAS No. 132). SFAS No. 132 (revised) retains
the disclosure requirements of the original statement and requires
additional disclosures about the assets, obligations, cash flows
and net periodic benefit cost of defined benefit plans and other
defined benefit post-retirement plans. The annual financial state-
ment disclosures required by SFAS No. 132 are effective for the
Company for fiscal 2004 and are included in Note 10, herein.
In March 2003, the EITF published Issue No. 00-21,
“Accounting for Revenue Arrangements with Multiple Deliver-
ables” (EITF 00-21). EITF 00-21 addresses certain aspects of the
accounting by a vendor for arrangements under which it performs
multiple revenue-generating activities and how to determine
whether such an arrangement involving multiple deliverables con-
tains more than one unit of accounting for purposes of revenue
recognition. The guidance in EITF 00-21 is effective for revenue
arrangements entered in fiscal periods beginning after June 15,
2003. The adoption of EITF 00-21, effective July 1, 2003, did not
have a material impact on the consolidated financial statements.
NOTE 2 Other Income, Net, Consists of the Following:
Years ended June 30, 2004 2003 2002
Interest income on
corporate funds $ (79,941) $(119,413) $(118,672)
Interest expense 15,993 21,838 21,164
Realized gains on
available-for-sale securities (9,665) (34,491) (22,657)
Realized losses on
available-for-sale securities 17,319 4,937 6,203
Total other income, net $ (56,294) $(127,129) $(113,962)
Proceeds from the sale of available-for-sale securities were
$5.3 billion, $4.0 billion, and $4.2 billion for the years ended
June 30, 2004, 2003 and 2002, respectively.
Notes to Consolidated Financial Statements