Note 1. Summary of Significant Accounting
Policies
A. Consolidation and Basis of Preparation. The consolidated financial
statements include the accounts of Automatic Data Processing,
Inc. and its majority-owned subsidiaries. Intercompany balances
and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could
differ from these estimates.
B. Cash and Cash Equivalents. Highly liquid investments with a
maturity of three months or less at the time of purchase are considered
cash equivalents.
C. Marketable Securities. Marketable securities consist primarily
of high grade fixed income investments. Most of the Company's
marketable securities are considered to be "available-for-sale",
and, accordingly, are carried on the balance sheet at fair market
value, which approximates cost. Gains/losses from the sale of
marketable securities have not been material. Approximately $131
million of the Company's long-term marketable securities mature
in 1-2 years, $158 million in 2-3 years, $115 million in 3-4 years,
and the remainder in less than 7 years.
D. Property, Plant and Equipment. Property, plant and equipment
is depreciated over the estimated useful lives of the assets by
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 | |
| Buildings | |
| Furniture and Fixtures |
E. Intangibles. Intangible assets are recorded at cost and are
amortized primarily on a straight-line basis. Goodwill is amortized
over periods from 15 to 40 years, and is periodically reviewed
for impairment by comparing carrying value to undiscounted expected
future cash flows. If impairment is indicated, a write-down to
fair value (normally measured by discounting estimated future
cash flows) is taken.
F. Revenue Recognition. Service revenue, including software license
fees, maintenance fees and other ancillary fees, is recognized
as services are provided. In those instances where hardware is
sold to clients as part of a bundled service offering, the gross
profit on the sale of hardware and prepaid software license fees,
less costs of selling and installation, is deferred and recognized
on a straight-line basis over the initial contract period, which
generally is from 5 to 7 years.
G. Foreign Currency Translation. The net assets of the Company's
foreign subsidiaries are translated into U.S. dollars based on
exchange rates in effect at the end of each period, and revenue
and expenses are translated at average exchange rates during the
periods. Currency transaction gains or losses, which are included
in the results of operations, are immaterial for all periods presented.
Gains or losses from balance sheet translation are included as
a separate component of shareholders' equity.
H. Earnings Per Share. Earnings per share are based upon the weighted
average number of shares outstanding during the respective periods.
I. Line of Business. The Company is engaged in the computing services
business.
J. Reclassification of Prior Financial Statements. Certain reclassifications
have been made to previous years' financial statements to conform
to current classifications.