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Description of Business and Significant Accounting Policies (Policies)
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12 Months Ended | |||||||||||||||||||
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May 31, 2011
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| Description of Business and Significant Accounting Policies (Policies) [Abstract] | ||||||||||||||||||||
| Description of business |
Description of business: Paychex, Inc.
and its wholly owned subsidiaries (the “Company” or
“Paychex”) is a leading provider of payroll, human
resource, and benefits outsourcing solutions for small- to
medium-sized businesses in the United States (“U.S.”).
The Company also has a subsidiary in Germany.
Paychex, a Delaware corporation formed in 1979, reports as one
segment. Substantially all of the Company’s revenue is
generated within the U.S. The Company also generates
revenue within Germany, which was less than one percent of its
total revenue for each of the years ended May 31, 2011
(“fiscal 2011”), 2010 (“fiscal 2010”), and
2009 (“fiscal 2009”). Long-lived assets in Germany are
insignificant in relation to total long-lived assets of the
Company as of May 31, 2011 and May 31, 2010.
Total revenue is comprised of service revenue and interest on
funds held for clients. Service revenue is comprised of the
Payroll and Human Resource Services portfolios of services and
products. Payroll service revenue is earned primarily from
payroll processing, payroll tax administration services,
employee payment services, and other ancillary services. Payroll
processing services include the calculation, preparation, and
delivery of employee payroll checks; production of internal
accounting records and management reports; preparation of
federal, state, and local payroll tax returns; and collection
and remittance of clients’ payroll obligations.
In connection with the automated payroll tax administration
services, the Company electronically collects payroll taxes from
clients’ bank accounts, typically on payday, prepares and
files the applicable tax returns, and remits taxes to the
applicable tax or regulatory agencies on the respective due
dates. These taxes are typically paid between one and
30 days after receipt of collections from clients, with
some items extending to 90 days. The Company handles
regulatory correspondence, amendments, and penalty and interest
disputes, and is subject to cash penalties imposed by tax or
regulatory agencies for late filings and late or under payment
of taxes. With employee payment services, employers are offered
the option of paying their employees by direct deposit, payroll
debit card, a check drawn on a Paychex account
(Readychex®),
or a check drawn on the employer’s account and
electronically signed by Paychex. For the first three methods,
Paychex electronically collects net payroll from the
clients’ bank accounts, typically one business day before
payday, and provides payment to the employees on payday.
In addition to service fees paid by clients, the Company earns
interest on funds held for clients that are collected before due
dates and invested until remittance to the applicable tax or
regulatory agencies or client employees. The funds held for
clients and related client fund obligations are included in the
Consolidated Balance Sheets as current assets and current
liabilities. The amount of funds held for clients and related
client fund obligations varies significantly during the year.
The Human Resource Services portfolio of services and products
provides small- to medium-sized businesses with retirement
services administration, insurance services, eServices, and
other human resource services and products. Paychex HR Solutions
is available as an administrative services organization
(“ASO”) and a professional employer organization
(“PEO”). Both options provide a combined package of
services that include payroll, employer compliance, human
resource and employee benefits administration, risk management
outsourcing, and the
on-site
availability of a professionally trained human resource services
representative. These comprehensive bundles of services are
designed to make it easier for businesses to manage their
payroll and related benefits costs while providing a benefits
package equal to that of larger companies. The PEO differs from
the ASO in that Paychex serves as a co-employer of the
clients’ employees, assumes the risks and rewards of
workers’ compensation insurance, and provides health care
coverage to PEO client employees. PEO services are sold through
the Company’s registered and licensed subsidiary, Paychex
Business Solutions, Inc. Paychex HR Essentials is a new ASO
product that provides support to the Company’s clients over
the phone or online to help manage employee-related topics.
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| Basis of presentation |
Basis of presentation: The consolidated
financial statements include the accounts of Paychex, Inc. and
its wholly owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation. The
Company has evaluated subsequent events for potential
recognition
and/or
disclosure through the date of issuance of these financial
statements.
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| Cash and cash equivalents |
Cash and cash equivalents: Cash and
cash equivalents consist of available cash, money market
securities, U.S. agency discount notes, and other
investments with a maturity of three months or less at
acquisition.
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| Accounts receivable, net of allowance for doubtful accounts |
Accounts receivable, net of allowance for doubtful
accounts: Accounts receivable balances are
shown on the Consolidated Balance Sheets net of the allowance
for doubtful accounts of $2.1 million as of May 31,
2011 and $1.9 million as of May 31, 2010. Accounts
receivable are written off and charged against the allowance for
doubtful accounts when the Company has exhausted all collection
efforts without success. No single client had a material impact
on total accounts receivable, service revenue, or results of
operations.
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| Funds held for clients and corporate investments |
Funds held for clients and corporate
investments: 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 obtained from an independent
pricing service. The funds held for clients portfolio also
includes cash, money market securities, and short-term
investments. Unrealized gains and losses, net of applicable
income taxes, are reported as comprehensive income in the
Consolidated Statements of Stockholders’ Equity. Realized
gains and losses on the sale of
available-for-sale
securities are determined by specific identification of the cost
basis of each security. On the Consolidated Statements of
Income, realized gains and losses from their respective
portfolios are included in interest on funds held for clients
and investment income, net.
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| Concentrations |
Concentrations: Substantially all of
the Company’s deposited cash is maintained at two large
credit-worthy financial institutions. These deposits may exceed
the amount of any insurance provided. All of the Company’s
deliverable securities are held in custody with one of the two
aforementioned financial institutions, for which that
institution bears the risk of custodial loss. Non-deliverable
securities, primarily time deposits and money market mutual
funds, are restricted to credit-worthy financial institutions.
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| Property and equipment, net of accumulated depreciation |
Property and equipment, net of accumulated
depreciation: Property and equipment is
stated at cost, less accumulated depreciation and amortization.
Depreciation is based on the estimated useful lives of property
and equipment using the straight-line method. The estimated
useful lives of depreciable assets are generally:
Normal and recurring repairs and maintenance costs are charged
to expense as incurred. The Company reviews the carrying value
of property and equipment for impairment when events or changes
in circumstances indicate that the carrying value of such assets
may not be recoverable.
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| Software development and enhancements |
Software development and
enhancements: Expenditures for software
purchases and software developed for internal use are
capitalized and depreciated on a straight-line basis over the
estimated useful lives, which are generally three to fifteen
years. For software developed for internal use, certain costs
are capitalized, including external direct costs of materials
and services associated with developing or obtaining the
software, and payroll and payroll-related costs for employees
who are directly associated with internal-use software projects.
Capitalization of these costs ceases no later than the point at
which the project is substantially complete and ready for its
intended use. Costs associated with preliminary project stage
activities, training, maintenance, and other post-implementation
stage activities are expensed as incurred. The carrying value of
software and development costs is reviewed for impairment when
events or changes in circumstances indicate that the carrying
value of such assets may not be recoverable.
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| Goodwill and other intangible assets, net of accumulated amortization |
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 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. 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 2011,
2010, or 2009. 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, an accelerated method, or based
on client attrition. 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.
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| Revenue recognition |
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 annual
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 $3.9 billion for fiscal
2011, $3.1 billion for fiscal 2010, and $2.6 billion
for fiscal 2009.
Revenue from Stromberg time and attendance solutions was
recognized during fiscal 2009 and fiscal 2010 until the date of
disposition, when all of the following were present: persuasive
evidence that an arrangement existed, typically a non-cancelable
sales order; delivery was complete for the software and
hardware; the fee was fixed or determinable and free of
contingencies; and collectibility was reasonably assured.
Maintenance contracts were generally purchased by the
Company’s clients in conjunction with their purchase of
certain time and attendance solutions. Revenue from these
maintenance contracts was recognized ratably over the term of
the contract.
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.
Advantage Payroll Services Inc. (“Advantage”), a
subsidiary of the Company, has license agreements with
independently owned associate offices (“Associates”).
The Associates are responsible for selling and marketing
Advantage payroll services and performing certain operational
functions. Paychex and Advantage provide all centralized
back-office payroll processing and payroll tax administration
services for the Associates, including the billing and
collection of processing fees and the collection and remittance
of payroll and payroll tax funds pursuant to Advantage’s
service arrangement with Associate customers. The marketing and
selling by the Associates is
conducted under their respective logos. Commissions earned by
the Associates are based on the processing activity for the
related clients. Revenue generated from customers as a result of
these relationships and commissions paid to Associates are
included in the Consolidated Statements of Income as service
revenue and selling, general and administrative expenses,
respectively.
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| PEO workers' compensation insurance |
PEO workers’ compensation
insurance: 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 reported in the consolidated financial
statements. Accordingly, final claim settlements may vary from
the present estimates, particularly when those payments may not
occur until well into the future.
The Company regularly reviews the adequacy of its estimated
workers’ compensation insurance reserves. Adjustments to
previously established reserves are reflected in the results of
operations for the period in which the adjustment is identified.
Such adjustments could possibly be significant, reflecting any
variety of new and adverse or favorable trends.
The Company’s maximum individual claims liability was
$1.0 million under both its fiscal 2011 and fiscal 2010
policies. As of May 31, 2011 and May 31, 2010, the
Company had recorded current liabilities of $7.3 million
and $5.8 million, respectively, and long-term liabilities
of $20.6 million and $20.1 million, respectively, on
its Consolidated Balance Sheets for workers’ compensation
claims.
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| Stock-based compensation costs |
Stock-based compensation costs: All
stock-based awards to employees, including grants of stock
options, are recognized as compensation costs in the
consolidated financial statements based on their fair values
measured as of the date of grant. The Company estimates the fair
value of stock option grants using a Black-Scholes option
pricing model. This model requires various assumptions as inputs
including expected volatility of the Paychex stock price and
expected option life. Volatility is estimated based on a
combination of historical volatility using weekly stock prices
over a period equal to the expected option life and implied
market volatility. Expected option life is estimated based on
historical exercise behavior.
The Company is required to estimate forfeitures and only record
compensation costs for those awards that are expected to vest.
The assumptions for forfeitures were determined based on type of
award and historical experience. Forfeiture assumptions are
adjusted at the point in time a significant change is identified
with any adjustment recorded in the period of change, and the
final adjustment at the end of the requisite service period to
equal actual forfeitures.
The assumptions of volatility, expected option life, and
forfeitures all require significant judgment and are subject to
change in the future due to factors such as employee exercise
behavior, stock price trends, and changes to type or provisions
of stock-based awards. Any change in one or more of these
assumptions could have a material impact on the estimated fair
value of an award and on stock-based compensation costs
recognized in the Company’s results of operations.
The Company has determined that the Black-Scholes option pricing
model, as well as the underlying assumptions used in its
application, is appropriate in estimating the fair value of
stock option grants. The Company periodically reassesses its
assumptions as well as its choice of valuation model, and will
reconsider use of this model if additional information becomes
available in the future indicating that another model would
provide a more accurate estimate of fair value, or if
characteristics of future grants would warrant such a change.
Refer to Note D for further discussion of the
Company’s stock-based compensation plans.
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| Income taxes |
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.
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| Use of estimates |
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.
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| Reclassifications |
Reclassifications: Certain prior period
amounts have been reclassified to conform to the current period
presentation. These reclassifications had no effect on reported
consolidated earnings.
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| Recently adopted accounting pronouncements |
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:
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| Recently issued accounting pronouncements |
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.
In December 2010, the FASB also issued guidance to clarify the
reporting of pro forma financial information related to business
combinations of public entities and to expand certain
supplemental pro forma disclosures. This guidance is effective
prospectively for business combinations that occur on or after
the beginning of the fiscal year beginning on or after
December 15, 2010, with early adoption permitted. 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.
In May 2011, the FASB issued guidance to amend certain
measurement and disclosure requirements related to fair value
measurements to improve consistency with international reporting
standards. This guidance is effective prospectively for public
entities for interim and annual reporting periods beginning
after December 15, 2011, with early adoption by public
entities prohibited, and is applicable to the Company’s
fiscal quarter beginning March 1, 2012. The Company is
currently evaluating this guidance, but does not expect its
adoption will have a material effect on its consolidated
financial statements.
In June 2011, the FASB issued new guidance on the presentation
of comprehensive income that will require a company to present
components of net income and other comprehensive income in one
continuous statement or in two separate, but consecutive
statements. There are no changes to the components that are
recognized in net income or other comprehensive income under
current GAAP. This guidance is effective for fiscal years, and
interim periods within those fiscal years, beginning after
December 15, 2011, with early adoption permitted. It is
applicable to the Company’s fiscal year beginning
June 1, 2012. The Company is currently evaluating this
guidance, but does not expect its adoption will have a material
effect on its consolidated financial statements.
Other recent authoritative guidance issued by the FASB
(including technical corrections to the FASB Accounting
Standards Codification), the American Institute of Certified
Public Accountants, and the Securities and Exchange Commission
(“SEC”) did not, or are not expected to have a
material effect on the Company’s consolidated financial
statements.
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