Summary Of Significant Accounting Policies (Policy)

12 Months Ended

Jun. 30, 2011

Summary Of Significant Accounting Policies

Basis Of Preparation

A. Basis of Preparation.  The accompanying Consolidated Financial Statements and footnotes thereto of Automatic Data Processing, Inc. and its subsidiaries ("ADP" or the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").  Intercompany balances and transactions have been eliminated in consolidation. 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the assets, liabilities, revenue, costs, expenses and accumulated other comprehensive income that are reported in the Consolidated Financial Statements and footnotes thereto.  Actual results may differ from those estimates. 

Description Of Business

B. Description of Business.  The Company is a provider of technology-based outsourcing solutions to employers and vehicle retailers and manufacturers. The Company classifies its operations into the following reportable segments: Employer Services, Professional Employer Organization ("PEO") Services, and Dealer Services.  The primary components of the "Other" segment are miscellaneous processing services, such as customer financing transactions, non-recurring gains and losses, results of operations of ADP Indemnity, and certain expenses that have not been charged to the reportable segments, such as stock-based compensation expense.

Revenue Recognition

C. Revenue Recognition.  Revenues are primarily attributable to fees for providing services (e.g., Employer Services' payroll processing fees) as well as investment income on payroll funds, payroll tax filing funds and other Employer Services' client-related funds.  The Company enters into agreements for a fixed fee per transaction (e.g., number of payees or number of payrolls processed).  Fees associated with services are recognized in the period services are rendered and earned under service arrangements with clients where service fees are fixed or determinable and collectability is reasonably assured.  Service fees are determined based on written price quotations or service agreements having stipulated terms and conditions that do not require management to make any significant judgments or assumptions regarding any potential uncertainties. 

Interest income on collected but not yet remitted funds held for clients is recognized in revenues as earned, as the collection, holding and remittance of these funds are critical components of providing these services.

The Company also recognizes revenues associated with the sale of software systems and associated software licenses (e.g., Dealer Services' dealer management systems).  For a majority of our software sales arrangements, which provide hardware, software licenses, installation, and post-contract customer support, revenues are recognized ratably over the software license term, as vendor-specific objective evidence of the fair values of the individual elements in the sales arrangement does not exist.  

The Company assesses collectability of our revenues based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer's payment history. 

PEO revenues are reported on the Statements of Consolidated Earnings and are reported net of direct pass-through costs, which are costs billed and incurred for PEO Services worksite employees, primarily consisting of payroll wages and payroll taxes.  Benefits, workers' compensation and state unemployment tax fees for worksite employees are included in PEO revenues and the associated costs are included in operating expenses.

Cash And Cash Equivalents

D. Cash and Cash Equivalents.  Investment securities with a maturity of ninety days or less at the time of purchase are considered cash equivalents.  The fair value of our cash and cash equivalents approximates carrying value.

Corporate Investments And Funds Held For Clients

E. Corporate Investments and Funds Held for Clients.  All of the Company's marketable securities are considered to be "available-for-sale" and, accordingly, are carried on the Consolidated Balance Sheets at fair value.  Unrealized gains and losses, net of the related tax effect, are excluded from earnings and are reported as a separate component of accumulated other comprehensive income on the Consolidated Balance Sheets until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific-identification basis and are included in other income, net on the Statements of Consolidated Earnings.

If the fair value of an available-for-sale debt security is below its amortized cost, the Company assesses whether it intends to sell the security or if it is more likely than not the Company will be required to sell the security before recovery.  If either of those two conditions were met, the Company would recognize a charge in earnings equal to the entire difference between the security's amortized cost basis and its fair value.  If the Company does not intend to sell a security or it is not more likely than not that it will be required to sell the security before recovery, the unrealized loss is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in accumulated other comprehensive income.  

Premiums and discounts are amortized or accreted over the life of the related available-for-sale security as an adjustment to yield using the effective-interest method. Dividend and interest income are recognized when earned.

Long-term Receivables

F. Long-term Receivables.  Long-term receivables relate to notes receivable from the sale of computer systems, primarily to auto, truck, motorcycle, marine, recreational vehicle and heavy equipment dealers.  Unearned income from finance receivables represents the excess of gross receivables over the sales price of the computer systems financed. Unearned income is amortized using the effective-interest method to maintain a constant rate of return over the term of each contract. 

The allowance for doubtful accounts on long-term receivables is the Company's best estimate of the amount of probable credit losses related to the Company's existing note receivables.

Property, Plant And Equipment

G. Property, Plant and Equipment.  Property, plant and equipment is stated at cost and depreciated over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are amortized over the shorter of the term of the lease or the estimated useful lives of the improvements. The estimated useful lives of assets are primarily as follows:

Data processing equipment	2 to 5 years
Buildings	20 to 40 years
Furniture and fixtures	3 to 7 years

Goodwill And Other Intangible Assets

H. Goodwill and Other Intangible Assets.   Goodwill and intangible assets with indefinite useful lives are not amortized, but are instead tested for impairment at least annually at the reporting unit level.  The Company performs this impairment test by first comparing the fair value of our reporting units to their carrying amount.  If an indicator of impairment exists based upon comparing the fair value of our reporting units to their carrying amount, the Company would then compare the implied fair value of our goodwill to the carrying amount in order to determine the amount of the impairment, if any.  The Company determines the estimated fair value of its reporting units using an equal weighted blended approach which combines the income approach, which is the present value of expected cash flows, discounted at a risk-adjusted weighted-average cost of capital; and the market approach, which is based on using market multiples of companies in similar lines of business.

Impairment Of Long-Lived Assets

I. Impairment of Long-Lived Assets.  Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Foreign Currency Translation

J. Foreign Currency Translation.  The net assets of the Company's foreign subsidiaries are translated into U.S. dollars based on exchange rates in effect for each period, and revenues and expenses are translated at average exchange rates in the periods.  Gains or losses from balance sheet translation are included in accumulated other comprehensive income on the Consolidated Balance Sheets.  Currency transaction gains or losses, which are included in the results of operations, are immaterial for all periods presented.

Derivative Financial Instruments

K. Derivative Financial Instruments.  Derivative financial instruments are measured at fair value and are recognized as assets or liabilities on the Consolidated Balance Sheets with changes in the fair value of the derivatives recognized in either net earnings from continuing operations or accumulated other comprehensive income, depending on the timing and designated purpose of the derivative.

There were no derivative financial instruments outstanding at June 30, 2011 or June 30, 2010.

Earnings Per Share ("EPS")

L. Earnings per Share ("EPS"). The calculations of basic and diluted EPS are as follows:

		Effect of	Effect of
		Employee	Employee
		Stock Option	Restricted Stock
Years ended June 30,	Basic	Shares	Shares	Diluted
2011
Net earnings from continuing operations	$1,254.2			$1,254.2
Weighted average shares (in millions)	493.5	3.8	1.0	498.3
EPS from continuing operations	$2.54			$2.52
2010
Net earnings from continuing operations	$1,207.3			$1,207.3
Weighted average shares (in millions)	500.5	2.2	1.0	503.7
EPS from continuing operations	$2.41			$2.40
2009
Net earnings from continuing operations	$1,325.1			$1,325.1
Weighted average shares (in millions)	503.2	1.2	1.4	505.8
EPS from continuing operations	$2.63			$2.62

Options to purchase 0.9 million, 14.0 million, and 32.9 million shares of common stock for the year ended June 30, 2011, ("fiscal 2011"), the year ended June 30, 2010 ("fiscal 2010"), and the year ended June 30, 2009 ("fiscal 2009"), respectively, were excluded from the calculation of diluted earnings per share because their exercise prices exceeded the average market price of outstanding common shares for the respective fiscal year.

Stock-Based Compensation

M. Stock-Based Compensation.  The Company recognizes stock-based compensation expense in net earnings based on the fair value of the award on the date of the grant.  The Company determines the fair value of stock options issued using a binomial option-pricing model.  The binomial option-pricing model considers a range of assumptions related to volatility, dividend yield, risk-free interest rate and employee exercise behavior.  Expected volatilities utilized in the binomial option-pricing model are based on a combination of implied market volatilities, historical volatility of the Company's stock price and other factors.  Similarly, the dividend yield is based on historical experience and expected future changes.  The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant.  The binomial option-pricing model also incorporates exercise and forfeiture assumptions based on an analysis of historical data.  The expected life of a stock option grant is derived from the output of the binomial model and represents the period of time that options granted are expected to be outstanding. 

Internal Use Software

N. Internal Use Software.  Expenditures for major software purchases and software developed or obtained for internal use are capitalized and amortized over a three- to five-year period on a straight-line basis. For software developed or obtained for internal use, the Company capitalizes costs.  The Company's policy provides for the capitalization of external direct costs of materials and services associated with developing or obtaining internal use computer software. In addition, the Company also capitalizes certain payroll and payroll-related costs for employees who are directly associated with internal use computer software projects. The amount of capitalizable payroll costs with respect to these employees is limited to the time directly spent on such projects. Costs associated with preliminary project stage activities, training, maintenance and all other post-implementation stage activities are expensed as incurred.  The Company also expenses internal costs related to minor upgrades and enhancements, as it is impractical to separate these costs from normal maintenance activities.

Computer Software To Be Sold, Leased Or Otherwise Marketed

O. Computer Software to be Sold, Leased or Otherwise Marketed.  The Company capitalizes certain costs of computer software to be sold, leased or otherwise marketed.  The Company's policy provides for the capitalization of all software production costs upon reaching technological feasibility for a specific product.  Technological feasibility is attained when software products have a completed working model whose consistency with the overall product design has been confirmed by testing.  Costs incurred prior to the establishment of technological feasibility are expensed as incurred.  The establishment of technological feasibility requires judgment by management and in many instances is only attained a short time prior to the general release of the software.  Upon the general release of the software product to customers, capitalization ceases and such costs are amortized over a three-year period on a straight-line basis.  Maintenance-related costs are expensed as incurred.

Income Taxes

P. Income Taxes.  The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity's financial statements or tax returns.  The Company is subject to the continuous examination of our income tax returns by the Internal Revenue Service ("IRS") and other tax authorities. 

There is a financial statement recognition threshold and measurement attribute for tax positions taken or expected to be taken in a tax return.  Specifically, the likelihood of  an entity's tax benefits being sustained must be "more likely than not"  , assuming that these positions will be examined by taxing authorities with full knowledge of all relevant information prior to recording the related tax benefit in the financial statements.  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.  As of June 30, 2011 and 2010, the Company's liabilities for unrecognized tax benefits, which include interest and penalties, were $105.7 million, and $107.2 million respectively.

If certain pending tax matters settle within the next twelve months, the total amount of unrecognized tax benefits may increase or decrease for all open tax years and jurisdictions.  Based on current estimates, settlements related to various jurisdictions and tax periods could increase earnings up to $10.0 million.  Audit outcomes and the timing of audit settlements are subject to significant uncertainty. We continually assess the likelihood and amount of potential adjustments and adjust the income tax provision, the current tax liability and deferred taxes in the period in which the facts that give rise to a revision become known.

Workers' Compensation Costs

Q. Workers' Compensation Costs.  The Company employs a third party actuary to assist in determining the estimated claim liability related to workers' compensation and employer liability coverage for PEO Services worksite employees. In estimating loss development rates, we utilize historical loss experience, exposure data, and actuarial judgment, together with a range of inputs which are primarily based upon the worksite employee's job responsibilities, their location, the historical frequency and severity of workers' compensation claims, and an estimate of future cost trends. For each reporting period, changes in the actuarial assumptions resulting from changes in actual claims experience and other trends are incorporated into our workers' compensation claims cost estimates. The Company has secured specific per occurrence reinsurance that caps the exposure for each individual claim at $1 million per occurrence, and has also secured aggregate stop loss reinsurance that caps aggregate losses at a certain level in each policy year.