ADP 2012 Annual Report Download - page 55

N. Internal Use Software. Expenditures for major software purchases and software developed or obtained for internal use are capitalized and
amortized over a three- to five-year period on a straight-line basis. For software developed or obtained for internal use, the Company
capitalizes costs. The Company’s policy provides for the capitalization of external direct costs of materials and services associated with
developing or obtaining internal use computer software. In addition, the Company also capitalizes certain payroll and payroll-related costs for
employees who are directly associated with internal use computer software projects. The amount of capitalizable payroll costs with respect to
these employees is limited to the time directly spent on such projects. Costs associated with preliminary project stage activities, training,
maintenance and all other post-implementation stage activities are expensed as incurred. The Company also expenses internal costs related to
minor upgrades and enhancements, as it is impractical to separate these costs from normal maintenance activities.
O. Computer Software to be Sold, Leased or Otherwise Marketed. The Company capitalizes certain costs of computer software to be sold,
leased or otherwise marketed. The Company’s policy provides for the capitalization of all software production costs upon reaching
technological feasibility for a specific product. Technological feasibility is attained when software products have a completed working model
whose consistency with the overall product design has been confirmed by testing. Costs incurred prior to the establishment of technological
feasibility are expensed as incurred. The establishment of technological feasibility requires judgment by management and in many instances is
only attained a short time prior to the general release of the software. Upon the general release of the software product to customers,
capitalization ceases and such costs are amortized over a three-year period on a straight-line basis. Maintenance-related costs are expensed as
incurred.
P. Income Taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current
year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity
’s financial
statements or tax returns. The Company is subject to the continuous examination of our income tax returns by the Internal Revenue Service
(“IRS”) and other tax authorities.
There is a financial statement recognition threshold and measurement attribute for tax positions taken or expected to be taken in a tax return.
Specifically, the likelihood of an entity’s tax benefits being sustained must be “more likely than not,” assuming that these positions will be
examined by taxing authorities with full knowledge of all relevant information prior to recording the related tax benefit in the financial
statements. If a tax position drops below the “more likely than not” standard, the benefit can no longer be recognized. Assumptions, judgment
and the use of estimates are required in determining if the “more likely than not” standard has been met when developing the provision for
income taxes. As of June 30, 2012 and 2011, the Company’
s liabilities for unrecognized tax benefits, which include interest and penalties, were
$84.7 million, and $105.7 million respectively.
If certain pending tax matters settle within the next twelve months, the total amount of unrecognized tax benefits may increase or decrease for
all open tax years and jurisdictions. Based on current estimates, settlements related to various jurisdictions and tax periods could increase
earnings up to $10.0 million. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. We continually assess
the likelihood and amount of potential adjustments and adjust the income tax provision, the current tax liability and deferred taxes in the period
in which the facts that give rise to a revision become known.
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