Paychex, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Fair Value Measurements

Fair Value Measurements

12 Months Ended

May 31, 2011


Note F —	Fair Value Measurements

The carrying values of cash and cash equivalents, accounts receivable, net of allowance for doubtful accounts, and accounts payable approximate fair value due to the short maturities of these instruments. Marketable securities included in funds held for clients and corporate investments consist primarily of securities classified as available-for-sale and are recorded at fair value on a recurring basis.

The accounting standards related to fair value measurements include a hierarchy for information and valuations used in measuring fair value that is broken down into three levels based on reliability, as follows:


	•	Level 1 valuations are based on quoted prices in active markets for identical instruments that the Company has the ability to access.

	•	Level 2 valuations are based on quoted prices for similar, but not identical, instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; or other significant observable inputs besides quoted prices.

	•	Level 3 valuations are based on information that is unobservable and significant to the overall fair value measurement.

The Company’s financial assets and liabilities measured at fair value on a recurring basis were as follows:


	May 31, 2011
			Quoted
			prices in		Significant		Significant
	Carrying		active		other observable		unobservable
	value		markets		inputs		inputs
In millions	(Fair value)		(Level 1)		(Level 2)		(Level 3)

Assets:
Available-for-sale securities:
General obligation municipal bonds	$	1,050.5	$	—	$	1,050.5	$	—
Pre-refunded municipal bonds		484.7		—		484.7		—
Revenue municipal bonds		373.7		—		373.7		—
Variable rate demand notes		828.3		—		828.3		—

Total available-for-sale securities	$	2,737.2	$	—	$	2,737.2	$	—
Other securities	$	8.9	$	8.9	$	—	$	—
Liabilities:
Other long-term liabilities	$	8.9	$	8.9	$	—	$	—


	May 31, 2010
			Quoted
			prices in		Significant		Significant
	Carrying		active		other observable		unobservable
	value		markets		inputs		inputs
In millions	(Fair value)		(Level 1)		(Level 2)		(Level 3)

Assets:
Available-for-sale securities:
General obligation municipal bonds	$	984.5	$	—	$	984.5	$	—
Pre-refunded municipal bonds		559.3		—		559.3		—
Revenue municipal bonds		381.7		—		381.7		—
Variable rate demand notes		226.3		—		226.3		—

Total available-for-sale securities	$	2,151.8	$	—	$	2,151.8	$	—
Other securities	$	7.3	$	7.3	$	—	$	—
Liabilities:
Other long-term liabilities	$	7.3	$	7.3	$	—	$	—

In determining the fair value of its assets and liabilities, the Company predominately uses the market approach. In determining the fair value of its available-for-sale securities, the Company utilizes the Interactive Data Pricing service. Other securities are mutual fund investments, consisting of participants’ eligible deferral contributions under the Company’s non-qualified and unfunded deferred compensation plans. The related liability is reported as other long-term liabilities. The mutual funds are valued based on quoted market prices in active markets.

The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

- Definition

This item represents the complete disclosure regarding the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments, assets, and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the Company is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risk is are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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