Paychex 2011 Annual Report Download - page 57

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.
The Company performs its annual impairment testing in its fiscal fourth quarter. Based on the results of the
Company’s reviews, no impairment loss was recognized in the results of operations for fiscal years 2011, 2010, or
2009. Subsequent to the latest review, there have been no events or circumstances that indicate any potential
impairment of the Company’s goodwill balance.
Intangible assets are comprised primarily of client list acquisitions and are reported net of accumulated
amortization on the Consolidated Balance Sheets. Intangible assets are amortized over periods generally ranging
from five to twelve years using either the straight-line method, an accelerated method, or based on client attrition.
The Company tests intangible assets for potential impairment when events or changes in circumstances indicate that
the carrying value of such assets may not be recoverable.
Revenue recognition: Service revenue is 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. Certain processing services are provided under annual service arrangements with revenue recognized
ratably over the annual service period. The Company’s service revenue is largely attributable to payroll-related
processing services where the fee is based on a fixed amount per processing period or a fixed amount per processing
period plus a fee per employee or transaction processed. The revenue earned from delivery service for the
distribution of certain client payroll checks and reports is included in service revenue, and the costs for the delivery
are included in operating expenses on the Consolidated Statements of Income.
PEO revenue is included in service revenue and is reported net of direct costs billed and incurred, which
include wages, taxes, benefit premiums, and claims of PEO worksite employees. Direct costs billed and incurred
were $3.9 billion for fiscal 2011, $3.1 billion for fiscal 2010, and $2.6 billion for fiscal 2009.
Revenue from Stromberg time and attendance solutions was recognized during fiscal 2009 and fiscal 2010
until the date of disposition, when all of the following were present: persuasive evidence that an arrangement
existed, typically a non-cancelable sales order; delivery was complete for the software and hardware; the fee was
fixed or determinable and free of contingencies; and collectibility was reasonably assured. Maintenance contracts
were generally purchased by the Company’s clients in conjunction with their purchase of certain time and
attendance solutions. Revenue from these maintenance contracts was recognized ratably over the term of the
contract.
Interest on funds held for clients is earned primarily on funds that are collected from clients before due dates
for payroll tax administration services and for employee payment services, and invested until remittance to the
applicable tax or regulatory agencies or client employees. These collections from clients are typically remitted from
one to 30 days after receipt, with some items extending to 90 days. The interest earned on these funds is included in
total revenue on the Consolidated Statements of Income because the collecting, holding, and remitting of these
funds are components of providing these services. Interest on funds held for clients also includes net realized gains
and losses from the sales of available-for-sale securities.
Advantage Payroll Services Inc. (“Advantage”), a subsidiary of the Company, has license agreements with
independently owned associate offices (“Associates”). The Associates are responsible for selling and marketing
Advantage payroll services and performing certain operational functions. Paychex and Advantage provide all
centralized back-office payroll processing and payroll tax administration services for the Associates, including the
billing and collection of processing fees and the collection and remittance of payroll and payroll tax funds pursuant
to Advantage’s service arrangement with Associate customers. The marketing and selling by the Associates is
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PAYCHEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)