Paychex 2012 Annual Report Download - page 59

PAYCHEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 is 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. During fiscal
2012, the Company adopted guidance that allows it the option to perform a qualitative assessment to determine if
it is more likely than not that the fair value of the reporting unit has declined below carrying value. This
assessment considers various financial, macroeconomic, industry, and reporting unit specific qualitative factors.
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
2012, 2011, or 2010. 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 or an accelerated method. 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 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 $3.3 billion for fiscal 2012, $3.9 billion for fiscal 2011, and $3.1 billion for fiscal 2010.
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.
PEO workers’ compensation insurance: Workers’ compensation insurance for PEO worksite employees
is provided under a deductible workers’ compensation policy with a national insurance company. Workers’
compensation insurance reserves are established to provide for the estimated costs of paying claims underwritten
by the Company. 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, the Company uses 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
trends, changes in legal liability law, and damage awards, all of which could materially impact the reserves as
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