Paychex 2010 Annual Report Download - page 56

Cash and cash equivalents: Cash and cash equivalents consist of available cash, money market securities,
U.S. agency discount notes, and other investments with a maturity of three months or less as of the balance sheet
date.
Accounts receivable, net of allowance for doubtful accounts: Accounts receivable balances are shown on
the Consolidated Balance Sheets net of the allowance for doubtful accounts of $1.9 million as of May 31, 2010 and
$4.0 million as of May 31, 2009. The decrease in allowance for doubtful accounts from May 31, 2009 was the result
of the sale of Paychex Time and Attendance Inc. (“Stromberg”), an immaterial component of the Company. No
single client had a material impact on total accounts receivable, service revenue, or results of operations.
Funds held for clients and corporate investments: Marketable securities included in funds held for clients
and corporate investments consist primarily of securities classified as available-for-sale and are recorded at fair
value obtained from an independent pricing service. The funds held for clients portfolio also includes cash, money
market securities, and short-term investments. Unrealized gains and losses, net of applicable income taxes, are
reported as comprehensive income in the Consolidated Statements of Stockholders’ Equity. Realized gains and
losses on the sale of available-for-sale securities are determined by specific identification of the cost basis of each
security. On the Consolidated Statements of Income, realized gains and losses from their respective portfolios are
included in interest on funds held for clients and investment income, net.
Concentrations: Substantially all of the Company’s deposited cash is maintained at two large credit-worthy
financial institutions. These deposits may exceed the amount of any insurance provided. All of the Company’s
deliverable securities are held in custody with one of the two aforementioned financial institutions, for which that
institution bears the risk of custodial loss. Non-deliverable securities, primarily time deposits and money market
mutual funds, are restricted to credit-worthy financial institutions.
Property and equipment, net of accumulated depreciation: Property and equipment is stated at cost, less
accumulated depreciation and amortization. Depreciation is based on the estimated useful lives of property and
equipment using the straight-line method. The estimated useful lives of depreciable assets are generally ten to
35 years or the remaining life, whichever is shorter, for buildings and improvements; two to seven years for data
processing equipment; seven years for furniture and fixtures; and ten years or the life of the lease, whichever is
shorter, for leasehold improvements. Normal and recurring repair and maintenance costs are charged to expense as
incurred. The Company reviews the carrying value of property and equipment for impairment when events or
changes in circumstances indicate that the carrying value of such assets may not be recoverable.
Software development and enhancements: Expenditures for software purchases and software developed for
internal use are capitalized and depreciated on a straight-line basis over the estimated useful lives, which are
generally three to five years, except for substantial changes in the functionality of processing applications, for which
the estimated useful life may be longer. For software developed for internal use certain costs are capitalized
including external direct costs of materials and services associated with developing or obtaining the software, and
payroll and payroll-related costs for employees who are directly associated with internal-use software projects.
Capitalization of these costs ceases no later than the point at which the project is substantially complete and ready
for its intended use. Costs associated with preliminary project stage activities, training, maintenance, and other
post-implementation stage activities are expensed as incurred. The carrying value of software and development
costs is reviewed for impairment when events or changes in circumstances indicate that the carrying value of such
assets may not be recoverable.
Goodwill and other intangible assets, net of accumulated amortization: The Company has recorded
goodwill in connection with the acquisitions of businesses. Goodwill is not amortized, but instead tested for
impairment on an annual basis and between annual tests if an event occurs or circumstances change in a way to
indicate that there has been a potential decline in the fair value of the reporting unit. Impairment is determined by
comparing the estimated fair value of the reporting unit to its carrying amount, including goodwill. The Company’s
business is largely homogeneous and, as a result, substantially all the goodwill is associated with one reporting unit.
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PAYCHEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)