Paychex 2011 Annual Report Download - page 59

Refer to Note D for further discussion of the Company’s stock-based compensation plans.
Income taxes: The Company accounts for deferred taxes by recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in the consolidated financial statements
or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between
the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The Company records a deferred tax asset related to the stock-based
compensation costs recognized for certain stock-based awards. At the time of the exercise of non-qualified stock
options or vesting of stock awards, the Company accounts for the resulting tax deduction by reducing its accrued
income tax liability with an offset to the deferred tax asset and any excess tax benefit increasing additional paid-in
capital. The Company currently has a sufficient pool of excess tax benefits in additional paid-in capital to absorb
any deficient tax benefits related to stock-based awards.
The Company maintains a reserve for uncertain tax positions. The Company evaluates tax positions taken or
expected to be taken in a tax return for recognition in its consolidated financial statements. Prior to recording the
related tax benefit in the consolidated financial statements, the Company must conclude that tax positions must be
more-likely-than-not to be sustained, assuming those positions will be examined by taxing authorities with full
knowledge of all relevant information. The benefit recognized in the consolidated financial statements is the amount
the Company expects to realize after examination by taxing authorities. 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 and in determining the expected benefit. A change in the assessment of the more-likely-than-not
standard could materially impact the Company’s results of operations or financial position. The Company’s reserve
for uncertain tax positions was $34.4 million as of May 31, 2011 and $27.5 million as of May 31, 2010. Refer to
Note I for further discussion of the Company’s reserve for uncertain tax positions.
Use of estimates: The preparation of financial statements in conformity with U.S. generally accepted
accounting principles (“GAAP”) requires management to make estimates, judgments, and assumptions that affect
reported amounts of assets, liabilities, revenue, and expenses during the reporting period. Actual amounts and
results could differ from these estimates.
Reclassifications: Certain prior period amounts have been reclassified to conform to the current period
presentation. These reclassifications had no effect on reported consolidated earnings.
Recently adopted accounting pronouncements: Effective June 1, 2010, the Company adopted the following
Financial Accounting Standards Board (“FASB”) authoritative guidance, neither of which had a material impact on
its consolidated financial statements:
• Guidance amending the accounting and reporting standards for transfers and servicing of financial assets,
including the removal of the concept of a qualifying special purpose entity; and
• Guidance to require a qualitative analysis rather than a quantitative-based risks and rewards calculation to
determine the primary beneficiary of a variable interest entity (“VIE”) for consolidation purposes. This
qualitative approach focuses on identifying which entity has the power to direct the activities of a VIE with
the most significant impact on the VIE’s economic performance.
Recently issued accounting pronouncements: In December 2010, the FASB issued updated guidance on
when and how to perform certain steps of the periodic goodwill impairment test for public entities that may have
reporting units with zero or negative carrying amounts. This guidance is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2010, with early adoption prohibited. It is applicable to
the Company’s fiscal year beginning June 1, 2011. The Company is currently evaluating this guidance, but does not
expect its adoption will have a material effect on its consolidated financial statements.
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PAYCHEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)