Automatic Data Processing Inc. (NASDAQ:ADP)

Revenues are primarily attributable to fees for providing services (e.g., Employer Services’ payroll processing fees), investment income on payroll funds, payroll tax filing funds, other Employer Services’ client-related funds, and fees charged to implement clients on ADP’s solutions. ADP enters into agreements for a fixed fee per transaction (e.g., number of payees or number of payrolls processed).

ADP enters into service agreements with clients that include anywhere from one service to a full suite of services. ADP’s agreements vary in duration having a legally enforceable term of 30 days to 5 years. The performance obligations in the agreements are generally combined into one performance obligation, as they are considered a series of distinct services, and are satisfied over time because the client simultaneously receives and consumes the benefits provided as ADP performs the services. ADP uses the output method based on a fixed fee per employee serviced to recognize revenue, as the value to the client of the goods or services transferred to date (e.g. number of payees or number of payrolls processed) appropriately depicts the performance towards complete satisfaction of the performance obligation. The fees are typically billed in the period in which services are performed.

PEO, a component of the HR Outsourcing (“HRO”) strategic pillar, provides a comprehensive human resources outsourcing solution, including offering benefits, providing workers’ compensation insurance, and administering state unemployment insurance, among other human resources functions. Amounts collected from PEO worksite employers include payroll, fees for benefits, and an administrative fee that also includes payroll taxes, fees for workers’ compensation and state unemployment taxes.

The payroll and payroll taxes collected from the worksite employers are presented in revenue net, as ADP does not retain risk and acts as an agent with respect to this aspect of the PEO arrangement. With respect to the payroll and payroll taxes, the worksite employer is the primarily responsible for providing the service and has discretion in establishing wages.

The fees collected from the worksite employers for benefits (i.e. PEO zero-margin benefits pass-throughs), workers’ compensation and state unemployment taxes are presented in revenues and the associated costs of benefits, workers’ compensation and state unemployment taxes are included in operating expenses, as ADP does retain risk and acts as a principal with respect to this aspect of the arrangement. With respect to these fees, ADP is primarily responsible for fulfilling the service and has discretion in establishing price.

ADP recognizes client fund interest income on collected but not yet remitted funds held for clients in revenues as earned, as the collection, holding and remittance of these funds are critical components of providing these services.

Set up fees received from certain clients to implement ADP’s solutions are considered a material right. Therefore, ADP defers revenue associated with these set up fees and records them over the period in which such clients are expected to benefit from the material right, which is approximately five to seven years.

Collection of consideration ADP expects to receive typically occurs within 30 to 60 days of billing. ADP assesses the collectability of revenues based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history and their intention to pay the consideration.

Source: 10-K (filing date: 2019-08-09).

Automatic Data Processing Inc., Income Statement, Revenues

US$ in thousands

Based on: 10-K (filing date: 2019-08-09), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-04), 10-K (filing date: 2016-08-05), 10-K (filing date: 2015-08-07), 10-K (filing date: 2014-08-08).