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Income Tax Accounting Policy

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. ADP is subject to the continuous examination of the 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, 2017 and 2016, ADP's liabilities for unrecognized tax benefits, which include interest and penalties, were $74.6 million and $27.4 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, favorable settlements related to various jurisdictions and tax periods could increase earnings by up to $35 million in the next twelve months. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. ADP continually assesses the likelihood and amount of potential adjustments and adjusts 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.

Source: Automatic Data Processing Inc., Annual Report

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Income Tax Expense (Benefit)

Automatic Data Processing Inc., income tax expense (benefit), continuing operations

USD $ in thousands

 
12 months ended Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014 Jun 30, 2013 Jun 30, 2012
Federal
Foreign
State
Current
Federal
Foreign
State
Deferred
Provision for income taxes

Source: Based on data from Automatic Data Processing Inc. Annual Reports

Item Description The company
Current The component of income tax expense for the period representing amounts of income taxes paid or payable (or refundable) for the period for all income tax obligations as determined by applying the provisions of relevant enacted tax laws to relevant amounts of taxable income (loss) from continuing operations. Automatic Data Processing Inc.'s current increased from 2015 to 2016 and from 2016 to 2017.
Deferred The component of income tax expense for the period representing the net change in the entity's deferred tax assets and liabilities pertaining to continuing operations. Automatic Data Processing Inc.'s deferred increased from 2015 to 2016 and from 2016 to 2017.
Provision for income taxes The sum of the current income tax expense (benefit) and the deferred income tax expense (benefit) pertaining to pretax income (loss) from continuing operations; income tax expense (benefit) may include interest and penalties on tax uncertainties based on the entity's accounting policy. Automatic Data Processing Inc.'s provision for income taxes increased from 2015 to 2016 and from 2016 to 2017.

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Effective Income Tax Rate (EITR)

Automatic Data Processing Inc., effective income tax rate (EITR) reconciliation

 
Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014 Jun 30, 2013 Jun 30, 2012
U.S. federal statutory rate % % % % % %
State taxes, net of federal tax benefit % % % % % %
U.S. tax on foreign income % % % % % %
Utilization of foreign tax credits % % % % % %
Section 199, Qualified production activities % % % % % %
Section 199, Qualified production activities and research tax credit refund claim, net of reserves % % % % % %
Excess tax benefit, Stock-based compensation % % % % % %
Other % % % % % %
Effective tax rate % % % % % %

Source: Based on data from Automatic Data Processing Inc. Annual Reports

Item Description The company
Effective tax rate A ratio calculated by dividing the reported amount of income tax expense attributable to continuing operations for the period by GAAP-basis pretax income from continuing operations. Automatic Data Processing Inc.'s effective tax rate declined from 2015 to 2016 and from 2016 to 2017.

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Components of Deferred Tax Assets and Liabilities

Automatic Data Processing Inc., components of deferred tax assets and liabilities

USD $ in thousands

 
Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014 Jun 30, 2013 Jun 30, 2012
Accrued expenses not currently deductible
Stock-based compensation expense
Foreign Tax Credits
Net operating losses
Other
Deferred tax assets
Valuation allowances
Deferred tax assets, net
Prepaid retirement benefits
Deferred revenue
Fixed and intangible assets
Prepaid expenses
Unrealized investment gains, net
Tax on unrepatriated earnings
Other
Deferred tax liabilities
Net deferred tax assets (liabilities)

Source: Based on data from Automatic Data Processing Inc. Annual Reports

Item Description The company
Deferred tax assets The sum of the tax effects as of the balance sheet date of the amounts of all future tax deductions arising from temporary differences between tax basis and generally accepted accounting principles basis recognition of assets, liabilities, revenues and expenses, which can only be deducted for tax purposes when permitted under enacted tax laws (before the valuation allowance, if any, to reduce such sum amount to net realizable value). Includes any tax benefit realized in deferred tax assets for significant impacts of tax planning strategies. Automatic Data Processing Inc.'s deferred tax assets increased from 2015 to 2016 and from 2016 to 2017.
Deferred tax assets, net The aggregate tax effects as of the balance sheet date of all future tax deductions arising from temporary differences between tax basis and generally accepted accounting principles basis recognition of assets, liabilities, revenues and expenses, which can only be deducted for tax purposes when permitted under enacted tax laws; net of deducting the allocated valuation allowance, if any, to reduce such amount to net realizable value. Automatic Data Processing Inc.'s deferred tax assets, net increased from 2015 to 2016 and from 2016 to 2017.
Net deferred tax assets (liabilities) For entities that net deferred tax assets and tax liabilities, represents the unclassified net amount of deferred tax assets and liabilities as of the balance sheet date, which result from applying the applicable enacted tax rate to net temporary differences and carryforwards pertaining to assets or liabilities. A temporary difference is a difference between the tax basis of an asset or liability and its carrying amount in the financial statements prepared in accordance with generally accepted accounting principles that will reverse in ensuing periods. Automatic Data Processing Inc.'s net deferred tax assets (liabilities) declined from 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level.

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Deferred Tax Assets and Liabilities, Classification

Automatic Data Processing Inc., deferred tax assets and liabilities, classification

USD $ in thousands

 

Source: Based on data from Automatic Data Processing Inc. Annual Reports

Item Description The company
Current deferred tax assets (included in Other current assets) The current portion of the aggregate tax effects as of the balance sheet date of all future tax deductions arising from temporary differences between tax basis and generally accepted accounting principles basis recognition of assets, liabilities, revenues and expenses, which can only be deducted for tax purposes when permitted under enacted tax laws; after deducting the allocated valuation allowance, if any, to reduce such amount to net realizable value. Deferred tax liabilities and assets shall be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. A deferred tax liability or asset that is not related to an asset or liability for financial reporting, including deferred tax assets related to carryforwards, shall be classified according to the expected reversal date of the temporary difference. An unrecognized tax benefit that is directly related to a position taken in a tax year that results in a net operating loss carryforward should be presented as a reduction of the related deferred tax asset.
Current deferred tax liabilities (included in Accrued expenses and other current liabilities) Represents the current portion of deferred tax liabilities, which result from applying the applicable tax rate to net taxable temporary differences pertaining to each jurisdiction to which the entity is obligated to pay income tax. A current taxable temporary difference is a difference between the tax basis and the carrying amount of a current asset or liability in the financial statements prepared in accordance with generally accepted accounting principles. In a classified statement of financial position, an enterprise shall separate deferred tax liabilities and assets into a current amount and a noncurrent amount. Deferred tax liabilities and assets shall be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. A deferred tax liability or asset that is not related to an asset or liability for financial reporting, including deferred tax assets related to carryforwards, shall be classified according to the expected reversal date of the temporary difference.
Long-term deferred tax assets (included in other assets) The noncurrent portion as of the balance sheet date of the aggregate carrying amount of all future tax deductions arising from temporary differences between tax basis and generally accepted accounting principles basis recognition of assets, liabilities, revenues and expenses, which can only be deducted for tax purposes when permitted under enacted tax laws; after the valuation allowance, if any, to reduce such amount to net realizable value. Deferred tax liabilities and assets shall be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. A deferred tax liability or asset that is not related to an asset or liability for financial reporting, including deferred tax assets related to carryforwards, shall be classified according to the expected reversal date of the temporary difference. Automatic Data Processing Inc.'s long-term deferred tax assets (included in other assets) increased from 2015 to 2016 but then slightly declined from 2016 to 2017.
Long-term deferred tax liabilities Represents the noncurrent portion of deferred tax liabilities, which result from applying the applicable tax rate to net taxable temporary differences pertaining to each jurisdiction to which the entity is obligated to pay income tax. A noncurrent taxable temporary difference is a difference between the tax basis and the carrying amount of a noncurrent asset or liability in the financial statements prepared in accordance with generally accepted accounting principles. In a classified statement of financial position, an enterprise shall separate deferred tax liabilities and assets into a current amount and a noncurrent amount. Deferred tax liabilities and assets shall be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. A deferred tax liability or asset that is not related to an asset or liability for financial reporting, including deferred tax assets related to carryforwards, shall be classified according to the expected reversal date of the temporary difference. Automatic Data Processing Inc.'s long-term deferred tax liabilities increased from 2015 to 2016 but then declined significantly from 2016 to 2017.

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Analyst Adjustments: Removal of Deferred Taxes

Automatic Data Processing Inc., adjustments to financial data

USD $ in thousands

 
Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014 Jun 30, 2013 Jun 30, 2012
Adjustment to Current Assets
Current assets (as reported)
Less: Current deferred tax assets, net
Current assets (adjusted)
Adjustment to Total Assets
Total assets (as reported)
Less: Current deferred tax assets, net
Less: Noncurrent deferred tax assets, net
Total assets (adjusted)
Adjustment to Current Liabilities
Current liabilities (as reported)
Less: Current deferred tax liabilities, net
Current liabilities (adjusted)
Adjustment to Total Liabilities
Total liabilities (as reported)
Less: Current deferred tax liabilities, net
Less: Noncurrent deferred tax liabilities, net
Total liabilities (adjusted)
Adjustment to Stockholders' Equity
Stockholders' equity (as reported)
Less: Net deferred tax assets (liabilities)
Stockholders' equity (adjusted)
Adjustment to Net Earnings
Net earnings (as reported)
Add: Deferred income tax expense (benefit)
Net earnings (adjusted)

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Adjusted Ratios: Removal of Deferred Taxes (Summary)

Automatic Data Processing Inc., adjusted ratios

 
Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014 Jun 30, 2013 Jun 30, 2012
Current Ratio
Reported current ratio
Adjusted current ratio
Net Profit Margin
Reported net profit margin % % % % % %
Adjusted net profit margin % % % % % %
Total Asset Turnover
Reported total asset turnover
Adjusted total asset turnover
Financial Leverage
Reported financial leverage
Adjusted financial leverage
Return on Equity (ROE)
Reported ROE % % % % % %
Adjusted ROE % % % % % %
Return on Assets (ROA)
Reported ROA % % % % % %
Adjusted ROA % % % % % %
Ratio Description The company
Adjusted current ratio A liquidity ratio calculated as adjusted current assets divided by adjusted current liabilities. Automatic Data Processing Inc.'s adjusted current ratio improved from 2015 to 2016 but then slightly deteriorated from 2016 to 2017.
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by total revenue. Automatic Data Processing Inc.'s adjusted net profit margin deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Automatic Data Processing Inc.'s adjusted total asset turnover deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.
Adjusted financial leverage A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity.
Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.
Automatic Data Processing Inc.'s adjusted financial leverage increased from 2015 to 2016 but then slightly declined from 2016 to 2017.
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity. Automatic Data Processing Inc.'s adjusted ROE improved from 2015 to 2016 and from 2016 to 2017.
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. Automatic Data Processing Inc.'s adjusted ROA deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.

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Adjusted Current Ratio

 
Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014 Jun 30, 2013 Jun 30, 2012
As Reported
Current assets (USD $ in thousands)
Current liabilities (USD $ in thousands)
Current ratio1
Adjusted for Deferred Taxes
Adjusted current assets (USD $ in thousands)
Adjusted current liabilities (USD $ in thousands)
Adjusted current ratio2

2017 Calculations

1 Current ratio = Current assets ÷ Current liabilities
= ÷ =

2 Adjusted current ratio = Adjusted current assets ÷ Adjusted current liabilities
= ÷ =

Ratio Description The company
Adjusted current ratio A liquidity ratio calculated as adjusted current assets divided by adjusted current liabilities. Automatic Data Processing Inc.'s adjusted current ratio improved from 2015 to 2016 but then slightly deteriorated from 2016 to 2017.

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Adjusted Net Profit Margin

 
Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014 Jun 30, 2013 Jun 30, 2012
As Reported
Net earnings (USD $ in thousands)
Revenues (USD $ in thousands)
Net profit margin1 % % % % % %
Adjusted for Deferred Taxes
Adjusted net earnings (USD $ in thousands)
Adjusted net profit margin2 % % % % % %

2017 Calculations

1 Net profit margin = 100 × Net earnings ÷ Revenues
= 100 × ÷ = %

2 Adjusted net profit margin = 100 × Adjusted net earnings ÷ Revenues
= 100 × ÷ = %

Ratio Description The company
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by total revenue. Automatic Data Processing Inc.'s adjusted net profit margin deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.

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Adjusted Total Asset Turnover

 
Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014 Jun 30, 2013 Jun 30, 2012
As Reported
Revenues (USD $ in thousands)
Total assets (USD $ in thousands)
Total asset turnover1
Adjusted for Deferred Taxes
Adjusted total assets (USD $ in thousands)
Adjusted total asset turnover2

2017 Calculations

1 Total asset turnover = Revenues ÷ Total assets
= ÷ =

2 Adjusted total asset turnover = Revenues ÷ Adjusted total assets
= ÷ =

Ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Automatic Data Processing Inc.'s adjusted total asset turnover deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.

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Adjusted Financial Leverage

 
Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014 Jun 30, 2013 Jun 30, 2012
As Reported
Total assets (USD $ in thousands)
Stockholders' equity (USD $ in thousands)
Financial leverage1
Adjusted for Deferred Taxes
Adjusted total assets (USD $ in thousands)
Adjusted stockholders' equity (USD $ in thousands)
Adjusted financial leverage2

2017 Calculations

1 Financial leverage = Total assets ÷ Stockholders' equity
= ÷ =

2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted stockholders' equity
= ÷ =

Ratio Description The company
Adjusted financial leverage A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity.
Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.
Automatic Data Processing Inc.'s adjusted financial leverage increased from 2015 to 2016 but then slightly declined from 2016 to 2017.

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Adjusted Return on Equity (ROE)

 
Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014 Jun 30, 2013 Jun 30, 2012
As Reported
Net earnings (USD $ in thousands)
Stockholders' equity (USD $ in thousands)
ROE1 % % % % % %
Adjusted for Deferred Taxes
Adjusted net earnings (USD $ in thousands)
Adjusted stockholders' equity (USD $ in thousands)
Adjusted ROE2 % % % % % %

2017 Calculations

1 ROE = 100 × Net earnings ÷ Stockholders' equity
= 100 × ÷ = %

2 Adjusted ROE = 100 × Adjusted net earnings ÷ Adjusted stockholders' equity
= 100 × ÷ = %

Ratio Description The company
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity. Automatic Data Processing Inc.'s adjusted ROE improved from 2015 to 2016 and from 2016 to 2017.

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Adjusted Return on Assets (ROA)

 
Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014 Jun 30, 2013 Jun 30, 2012
As Reported
Net earnings (USD $ in thousands)
Total assets (USD $ in thousands)
ROA1 % % % % % %
Adjusted for Deferred Taxes
Adjusted net earnings (USD $ in thousands)
Adjusted total assets (USD $ in thousands)
Adjusted ROA2 % % % % % %

2017 Calculations

1 ROA = 100 × Net earnings ÷ Total assets
= 100 × ÷ = %

2 Adjusted ROA = 100 × Adjusted net earnings ÷ Adjusted total assets
= 100 × ÷ = %

Ratio Description The company
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. Automatic Data Processing Inc.'s adjusted ROA deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.

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