ADP 2010 Annual Report Download - page 51

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 collectability 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 collectability 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
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.
If the fair value of an available
- for - sale debt security is below its amortized cost, the Company assesses whether it intends to sell the
security or if it is more likely than not the Company will be required to sell the security before recovery. If either of those two
conditions were met, the Company would recognize a charge in earnings equal to the entire difference between the security ’ s
amortized cost basis and its fair value. If the Company does not intend to sell a security or it is not more likely than not that it will be
required to sell the security before recovery, the unrealized loss is separated into an amount representing the credit loss, which is
recognized in earnings, and the amount related to all other factors, which is recognized in accumulated other comprehensive income.