Paychex 2012 Annual Report Download - page 44

Exercise of stock options: Proceeds from exercise and excess tax benefit related to stock-based awards
increased for both fiscal 2012 and fiscal 2011 compared to the respective prior years. Common shares acquired
through exercise of stock options were 0.2 million shares for fiscal 2012 and 0.4 million shares for both fiscal
2011 and 2010. The increase in proceeds for fiscal 2011 was the result of a higher average exercise price than for
fiscal 2012 or 2010. Refer to Note D of the Notes to Consolidated Financial Statements, contained in Item 8 of
this Form 10-K, for additional disclosures on our stock-based compensation incentive plans.
Other
Recently adopted accounting pronouncements: Refer to Note A of the Notes to Consolidated Financial
Statements, contained in Item 8 of this Form 10-K, for a discussion of recently adopted accounting
pronouncements.
Recently issued accounting pronouncements: At this time, we do not anticipate that recently issued
accounting guidance that has not yet been adopted will have a material impact on our consolidated financial
statements. Refer to Note A of the Notes to Consolidated Financial Statements, contained in Item 8 of this Form
10-K, for a discussion of recently issued accounting pronouncements.
Critical Accounting Policies
Note A of the Notes to Consolidated Financial Statements, contained in Item 8 of this Form 10-K, discusses
the significant accounting policies of Paychex. Our discussion and analysis of our financial condition and results
of operations are based upon our consolidated financial statements, which have been prepared in accordance with
U.S. GAAP. The preparation of these financial statements requires us to make estimates, judgments, and
assumptions that affect reported amounts of assets, liabilities, revenue, and expenses. On an ongoing basis, we
evaluate the accounting policies and estimates used to prepare the consolidated financial statements. We base our
estimates on historical experience, future expectations, and assumptions believed to be reasonable under current
facts and circumstances. Actual amounts and results could differ from these estimates. Certain accounting
policies that are deemed critical to our results of operations or financial position are discussed below.
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 service period. Our 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 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.
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 critical 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.
PEO workers’ compensation insurance: Workers’ compensation insurance reserves are established to
provide for the estimated costs of paying claims underwritten by us. These reserves include estimates for
reported losses, plus amounts for those claims incurred but not reported and estimates of certain expenses
associated with processing and settling the claims. In establishing the workers’ compensation insurance reserves,
we use an independent actuarial estimate of undiscounted future cash payments that would be made to settle the
claims.
Estimating the ultimate cost of future claims is an uncertain and complex process based upon historical loss
experience and actuarial loss projections, and is subject to change due to multiple factors, including economic
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