ADP 2009 Annual Report Download - page 38

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Notes to Consolidated Financial Statements
(Tabular dollars in millions, except per share amounts)
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 (the “Company” or “ADP”). Intercompany balances and transactions have been eliminated in
consolidation.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying
notes. Actual results could differ from these estimates.
B. Description of Business. The Company is a provider of technology-based outsourcing solutions to employers and vehicle retailers and
manufacturers. The Company classifies its operations into the following reportable segments: Employer Services, Professional Employer
Organization (“PEO”) Services, and Dealer Services. The primary components of the “Other” segment are miscellaneous processing services,
such as customer financing transactions, non-recurring gains and losses and certain expenses that have not been charged to the reportable
segments, such as stock-based compensation expense.
C. Revenue Recognition. Revenues are primarily attributable to fees for providing services (e.g., Employer Services’ payroll processing fees)
as well as investment income on payroll funds, payroll tax filing funds and other Employer Services’ client-related funds. The Company enters
into agreements for a fixed fee per transaction (e.g., number of payees or number of payrolls processed). Fees associated with services are
recognized in the period services are rendered and earned under service arrangements with clients where service fees are fixed or determinable
and collectibility is reasonably assured. Service fees are determined based on written price quotations or service agreements having stipulated
terms and conditions that do not require management to make any significant judgments or assumptions regarding any potential uncertainties.
Interest income on collected but not yet remitted funds held for clients is recognized in revenues as earned, as the collection, holding and
remittance of these funds are critical components of providing these services.
The Company also recognizes revenues associated with the sale of software systems and associated software licenses (e.g., Dealer Services’
dealer management systems). For a majority of our software sales arrangements, which provide hardware, software licenses, installation and
post-contract customer support, revenues are recognized ratably over the software license term as vendor-specific objective evidence of the fair
values of the individual elements in the sales arrangement does not exist.
The Company assesses collectibility of our revenues based primarily on the creditworthiness of the customer as determined by credit checks
and analysis, as well as the customer’ s payment history.
PEO revenues are reported on the Statements of Consolidated Earnings and are reported net of direct pass-through costs, which are costs billed
and incurred for PEO worksite employees, primarily consisting of payroll wages and payroll taxes. Benefits, workers’ compensation and state
unemployment tax fees for PEO worksite employees are included in PEO revenues and the associated costs are included in operating expenses.
D. Cash and Cash Equivalents. Investment securities with a maturity of ninety days or less at the time of purchase are considered cash
equivalents. The fair value of our cash and cash equivalents approximates carrying value.
E. Corporate Investments and Funds Held for Clients. All of the Company’ s marketable securities are considered to be “available-for-sale”
and, accordingly, are carried on the Consolidated Balance Sheets at fair value. Unrealized gains and losses, net of the related tax effect, are
excluded from earnings and are reported as a separate component of accumulated other comprehensive income (loss) on the Consolidated
Balance Sheets until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific-identification
basis and are included in other income, net on the Statements of Consolidated Earnings.
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