ADP 2014 Annual Report Download - page 36

Revenue Recognition. Our revenues are primarily attributable to fees for providing services ( e.g., Employer Services' payroll processing fees), investment
income on payroll funds, payroll tax filing funds and other Employer Services' client-related funds, and fees charged to implement clients on the Company's
solutions. We enter 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.
We report PEO revenues net of direct pass-through costs, which are costs billed and incurred for PEO Services worksite employees, primarily consisting of payroll
wages and payroll taxes. Benefits, workers' compensation, and state unemployment tax fees for worksite employees are included in PEO revenues and the
associated costs are included in operating expenses.
We recognize interest income on collected but not yet remitted funds held for clients in revenues as earned, as the collection, holding and remittance of these funds
are critical components of providing these services.
Client implementation fees are charged to set clients up on our solutions and are deferred until the client has gone live and services have begun. These fees are
amortized to revenue over the longer of the contractual term or expected client life, including estimated renewals of client contracts.
We assess the collectability of revenues based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the
customer's payment history.
Goodwill . We account for goodwill in accordance with ASC 350-10, which states that goodwill should not be amortized, but instead tested for
impairment annually and whenever events or changes in circumstances indicate the carrying value may not be recoverable. We perform this impairment test by
first comparing the fair value of each reporting unit to its carrying amount. If the carrying value for a reporting unit exceeds its fair value, we then compare the
implied fair value of our goodwill to the carrying amount in order to determine the amount of the impairment, if any. We determine the fair value of our reporting
units using an equal weighted blended approach, which combines the income approach, which is the present value of expected cash flows, discounted at a risk-
adjusted weighted-average cost of capital; and the market approach, which is based on using market multiples of companies in similar lines of business. Significant
assumptions used in determining the fair value of our reporting units include projected revenue growth rates, profitability projections, working capital assumptions,
the weighted-average cost of capital, the determination of appropriate market comparison companies, and terminal growth rates. We had $1,793.5 million of
goodwill as of J une 30, 2015 . Based on the fair value analysis completed in the fourth quarter of 2015 , management concluded that fair value exceeded carrying
value for all reporting units and that no reporting units were at risk of goodwill impairment. In completing the annual impairment test for fiscal 2015 , we evaluated
the reasonableness of differences noted between the fair value and carrying value of each reporting unit. Given the significance of our goodwill, an adverse change
to the fair value of goodwill and intangible assets could result in an impairment charge which could be material to our consolidated earnings if we are unable to
generate the anticipated revenue growth, synergies and/or cost savings associated with our acquisitions. In fiscal 2014 , the Company performed the required
annual impairment tests of goodwill and determined that there were no impairments. During the fourth quarter of fiscal 2013, there was an impairment charge of
$42.7 million for the ADP AdvancedMD reporting unit.
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. Judgment is required
in addressing the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns ( e.g. , realization of deferred
tax assets, changes in tax laws or interpretations thereof). In addition, we are subject to the continuous examination of our income tax returns by the IRS and other
tax authorities. A change in the assessment of the outcomes of such matters could materially impact our consolidated financial statements.
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 those 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. A change in the assessment of the “more likely than not” standard could materially impact
our consolidated financial statements. As of June 30, 2015 and 2014 , the Company's liabilities for unrecognized tax benefits, which include interest and penalties,
were $27.1 million and $56.5 million , respectively.
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