What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2020-08-05 compared with 2019-08-09 · 420 added, 376 removed, 889 unchanged (47% of the section changed)

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Change in Accounting Principle

As discussed in Note 1 to the financial statements, effective July 1, 2018, the Company adopted FASB Accounting Standards Update 2014-09, Revenue from Contracts with Customers (ASC 606), on a retrospective basis.

As discussed in Note 1 to the financial statements, effective July 1, 2019, the Company adopted FASB Accounting Standards Update 2016-02, Leases (ASC 842), under the optional transition method.

Basis for Opinion

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The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value.

The Company uses the discounted cash flow model to estimate fair value, which requires management to make significant estimates and assumptions related to forecasts of future revenue and operating margins.

In addition, the discounted cash flow model requires the Company to select an appropriate weighted average cost of capital based on current market conditions as of June 30, 2020.

Changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge, or both.

The Company's new next-gen platform for which there is limited historical data and for which the forecasted future revenue and operating margin contribute significantly to the fair value of a reporting unit with approximately $678 million of goodwill within the Employer Services reportable segment as of June 30, 2019.

Given the significant judgments made by management to estimate the fair value contributed by the next-gen platform for which there is limited historical data, including management’s judgments in selecting significant business assumptions to forecast future revenue and operating margin for the next-gen platform, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.

Forecasts of future revenue and operating margin from the Company’s next-gen platform for which there is limited historical data, contribute significantly to the estimate of fair value of a reporting unit within the Employer Services reportable segment, with approximately $678 million of goodwill, as of June 30, 2020.

Given the limited historical data associated with the Company’s next-gen platform, significant management judgment was required to forecast future revenue and operating margin to estimate the fair value of the reporting unit.

In addition, there is inherent uncertainty related to the timing of economic recovery and this condition could impact the Company’s forecasts of future revenue and operating margin, and its selection of an appropriate weighted average cost of capital as of June 30, 2020, for the reporting unit.

In turn, a high degree of auditor judgment and an increased extent of audit effort were required when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions, related to the forecasts of revenue and operating margin and selection of the weighted average cost of capital, including the involvement of our fair value specialists.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the determination of forecasts of future revenue and operating margin used by management to estimate the fair value contributed by the next-gen platform included the following, among others:

We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of the reporting units within the Employer Services reportable segment, such as controls related to management’s determination of forecasts of future revenue and operating margin.

With the assistance of our fair value specialists, we evaluated the reasonableness of the valuation methodology, including testing the mathematical accuracy of the calculation.

Our audit procedures related to the forecasts of future revenue and operating margin and the selection of the weighted average cost of capital used by management to estimate the fair value contributed by the next-gen platform included the following, among others:

• We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of the reporting unit within the Employer Services reportable segment, such as controls related to management’s forecasts of future revenue and operating margin and the selection of the weighted average cost of capital.

• With the assistance of our fair value specialists, we evaluated the reasonableness of the valuation models, methodology, and significant assumptions used by the Company, specifically the weighted average cost of capital including:

◦ Testing the mathematical accuracy of the Company’s calculation of the weighted average cost of capital.

◦ Developing a range of independent estimates and compared to the weighted average cost of capital selected by management.

◦ Evaluating management’s selection of the company-specific risk premium by comparing to the revenue growth and operating margins of peer companies.

• We evaluated management’s ability to accurately forecast future revenue and operating margin by comparing actual results to management’s historical forecasts.

Due to the limited historical data for the next-gen platform, we evaluated the reasonableness of management’s revenue and operating margin forecasts by comparing the forecasts to (1) the historical operating results of the Company’s similar existing platforms, (2) the limited operating results to date of the next-gen platform, (3) internal communications to management and the board of directors, (4) external communications made by management to analysts and investors, and (5) industry reports containing analyses of the Company’s and its competitor’s platforms.

Due to the limited historical data for the next-gen platform, we evaluated the reasonableness of management’s revenue and operating margin forecasts by comparing the forecasts to (1) the historical operating results of the Company’s similar existing platforms, (2) the limited operating results to date of the next-gen platform, (3) internal communications to management and the board of directors, and (4) external communications made by management to analysts and investors.

• Given the inherent uncertainty related to the timing of economic recovery and the resulting adverse impacts associated with the COVID-19 outbreak on the reporting unit, we evaluated the reasonableness of management’s assumptions related to the severity of business disruption associated with the COVID-19 outbreak on the reporting unit and timing of economic recovery by:

◦ Comparing management’s analysis of the expected business disruption from the COVID-19 outbreak on the reporting unit to the business impacts observed since the outbreak during the Company’s fiscal year 2020.

◦ Comparing management’s analysis of the timing of economic recovery to external economic recovery and industry forecasts to evaluate contradictory evidence related to management’s assumptions regarding the expected impact of the COVID-19 business disruption and timing of recovery.

◦ Evaluating the impact of various alternative scenarios on the discounted cash flow and fair value.

Client Fund Obligations - Refer to Note 4 to the financial statements

Critical Audit Matter Description

The liability for client funds obligations represents the Company’s contractual obligations primarily to remit funds to satisfy clients' payroll and tax payment obligations and are recorded at the time the Company impounds funds from clients (i.e., money movement).

This money movement activity involves significant amounts of client funds being impounded and remitted to third parties and results in a high volume of transactions and a current liability of $29,144.5 million as of June 30, 2019.

The Company performs complex data extracts in order to reconcile the client funds obligations to funds held for clients and records a high volume of material manual adjustments in order to properly reflect the client funds obligations’ as of period end.

Given the significant volume of data extraction required, complexity of the reconciliation process, and the process used by management to extract the relevant data, auditing the client funds obligations is complex and requires the involvement of data specialists to independently reperform the reconciliation and test the completeness and accuracy of the manual adjustments recorded by management.

Client funds obligations represent the Company's contractual obligations to remit funds to satisfy clients' payroll, tax and other payee payment obligations and are recorded as a liability at the time that the Company impounds funds from clients (i.e., money movement).

The Company has reported client funds obligations as a current liability in the consolidated financial statements totaling $25,831.6 million as of June 30, 2020.

This money movement activity involves significant amounts of client funds being impounded and remitted to third parties and results in a high volume of transactions.

To validate the accuracy and completeness of the client funds obligations reported as of period end, the Company performs complex data extracts in order to reconcile the transactional data to the client funds obligations and funds held for clients balances reported at period end.

Given the significant volume of data used in the reconciliation, the complexity of the data extraction, and the reconciliation of the data extracts to the client funds obligations balance reported, auditing the client funds obligations is complex and requires the involvement of data specialists to independently reperform the reconciliation and assist with testing of the completeness and accuracy of client funds obligations reported as of period end, including identifying the manual adjustments identified in management’s reconciliation process.

How the Critical Audit Matter Was Addressed in the Audit

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• We tested the effectiveness of (1) management’s controls over the client funds obligation data reconciliation and (2) management’s control to reconcile the consolidated client funds obligations to the corresponding consolidated funds held for clients balance.

We involved data specialists to (1) independently reperform management's client funds obligation reconciliation and (2) perform data analyses to identify and evaluate recurring and new adjustments in the current period as well as significant fluctuations from prior periods.

• We involved data specialists to (1) independently reperform management’s client funds obligation reconciliation and (2) perform data analyses to identify and evaluate recurring and new adjustments to the data extracts in the current period.

• For a selection of client funds obligations transactions, we evaluated whether the funds were impounded prior to June 30, 2020, agreed the liability to the corresponding asset balance, and evaluated whether the funds were properly included or excluded from the client funds obligations.

We made a selection of manual adjustments recorded by management to properly reflect the client funds obligations balance and tested the accuracy of the selected adjustments.

• We made a selection of adjustments identified by management’s reconciliation of the transactional data to the client funds obligations balance reported at period end and evaluated whether the adjustments were supported and appropriate to reconcile and validate the client funds obligations balance reported at period end.

• We made a selection of disbursements to third parties subsequent to the balance sheet date to evaluate whether they were properly included or excluded from client funds obligations.

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Provision for income taxes 716.1 712.8 397.7

NET EARNINGS $ 2,466.5 $ 2,292.8 $ 1,884.9

BASIC EARNINGS PER SHARE $ 5.73 $ 5.27 $ 4.28

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Diluted weighted average shares outstanding 432.7 437.6 443.3

*See Note 1 for a summary of adjustments.

(A) For the years ended June 30, 2020 (“fiscal 2020”), June 30, 2019 (“fiscal 2019”), and June 30, 2018 (“fiscal 2018”), Professional Employer Organization (“PEO”) revenues are net of direct pass-through costs, primarily consisting of payroll wages and payroll taxes, of $ 45,826.1 million , $ 42,688.8 million, and $ 39,140.9 million, respectively.

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Years ended June 30, 2020 2019 2018

Net earnings $ 2,466.5 $ 2,292.8 $ 1,884.9

Other comprehensive income/loss:

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Unrealized net gains/(losses) on available-for-sale securities 602.2 642.4 ( 460.7 )

Tax effect ( 136.4 ) ( 144.4 ) 123.4

Reclassification of net losses/(gains) on available-for-sale securities to net earnings ( 12.9 ) 0.9 2.7

Tax effect 2.9 ( 0.3 ) ( 0.6 )

Unrealized loss on cash flow hedging activities ( 40.3 ) — —

Tax effect 10.0 — —

Pension net (losses)/gains arising during the year ( 160.8 ) ( 84.7 ) 87.0

Tax effect 39.5 20.0 ( 18.7 )

Reclassification of pension liability adjustment to net earnings ( 11.8 ) 40.3 9.3

Tax effect 3.1 ( 9.5 ) ( 4.5 )

Other comprehensive income/(loss), net of tax 242.5 422.5 ( 254.3 )

Comprehensive income $ 2,709.0 $ 2,715.3 $ 1,630.6

*See Note 1 for a summary of adjustments.

See notes to the Consolidated Financial Statements.

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(In millions, except per share amounts)

June 30, 2020 2019

Current assets:

Cash and cash equivalents $ 1,908.5 $ 1,949.2

Short-term marketable securities — 10.5

Accounts receivable, net of allowance for doubtful accounts of $ 92.5 and $ 54.9 , respectively

2,441.3 2,439.3

Other current assets 506.2 509.1

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Property, plant and equipment, net 703.9 764.2

Operating lease right-of-use asset 493.7 —

Deferred contract costs 2,401.6 2,428.5

Other assets 458.4 934.4

Goodwill 2,309.4 2,323.0

Intangible assets, net 1,215.8 1,071.5

Total assets $ 39,165.5 $ 41,887.7

Liabilities and Stockholders' Equity

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Obligations under reverse repurchase agreements (A) 13.6 262.0

Short-term debt 1,001.8 —

Income taxes payable 40.1 54.8

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Long-term debt 1,002.8 2,002.2

Operating lease liabilities 344.4 —

Other liabilities 837.0 798.7

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Authorized, 0.3 shares;

issued, no ne

Common stock, $ 0.10 par value:

authorized, 1,000.0 shares;

authorized, 1,000.0 shar es;

issued, 638.7 shares at June 30, 2020 and June 30, 2019;

outstanding, 434.2 and 438.8 shares at June 30, 2019 and June 30, 2018, respectively

outstanding, 429.9 and 434.2 sh ares at June 30, 2020 and June 30, 2019, respectively

Capital in excess of par value 1,333.8 1,183.2

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208.9 and 204.5 shares at June 30, 2020 and June 30, 2019, respectively

( 14,067.0 ) ( 13,090.5 )

Accumulated other comprehensive loss ( 14.8 ) ( 257.3 )

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Total liabilities and stockholders’ equity $ 39,165.5 $ 41,887.7

*See Note 1 for a summary of adjustments.

(A) As of June 30, 2019, $261.4 million of long-term marketable securities and $0.6 million of cash and cash equivalents have been pledged as collateral under the Company's reverse repurchase agreements (see Note 10).

(A) As of June 30, 2020, $ 13.6 million of long-term marketable securities have been pledged as collateral under the Company's reverse repurchase agreements.

As of June 30, 2019, $ 261.4 million of long-term marketable securities and $ 0.6 million of cash and cash equivalents have been pledged as collateral under the Company's reverse repurchase agreements (see Note 8).

See notes to the Consolidated Financial Statements.

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(In millions, except per share amounts)

Capital in Excess of Par Value

Retained Earnings

Treasury Stock

Accumulated Other Comprehensive Income/(Loss)

Common Stock Capital in Excess of Par Value Retained Earnings Treasury Stock Accumulated Other Comprehensive Income/(Loss)

Shares Amount

Balance at June 30, 2017 638.7 $ 63.9 $ 867.8 $ 15,739.4 $ ( 11,303.7 ) $ ( 383.2 )

Other comprehensive income

Net earnings — — — 1,884.9 — —

Other comprehensive loss — — — — — ( 254.3 )

Stock-based compensation expense — — 145.3 — — —

Issuances relating to stock compensation plans — — 1.7 — 144.5 —

Treasury stock acquired (13.5 shares)

Treasury stock acquired ( 8.5 shares repurchased)

— — — — ( 1,050.4 ) —

Other (A) — — — 42.3 — ( 42.3 )

Dividends ($ 2.52 per share)

— — — ( 1,120.0 ) — —

Balance at June 30, 2018 638.7 $ 63.9 $ 1,014.8 $ 16,546.6 $ ( 12,209.6 ) $ ( 679.8 )

Other comprehensive loss

Net earnings — — — 2,292.8 — —

Other comprehensive income — — — — — 422.5

Stock-based compensation expense — — 144.2 — — —

Issuances relating to stock compensation plans — — 24.2 — 124.1 —

Treasury stock acquired (8.5 shares)

Other (see Note 1)

Treasury stock acquired ( 6.5 shares repurchased)

— — — — ( 1,005.0 ) —

Dividends ($ 3.06 per share)

— — — ( 1,338.8 ) — —

Balance at June 30, 2019 638.7 $ 63.9 $ 1,183.2 $ 17,500.6 $ ( 13,090.5 ) $ ( 257.3 )

Net earnings — — — 2,466.5 — —

Other comprehensive income — — — — — 242.5

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Issuances relating to stock compensation plans — — 32.8 — 112.9 —

Treasury stock acquired (6.5 shares)

Treasury stock acquired ( 6.2 shares repurchased)

— — — — ( 1,089.4 ) —

Dividends ($ 3.52 per share)

— — — ( 1,523.9 ) — —

Other — — — ( 6.9 ) — —

Balance at June 30, 2020 638.7 $ 63.9 $ 1,333.8 $ 18,436.3 $ ( 14,067.0 ) $ ( 14.8 )

*See Note 1 for a summary of adjustments.

(A) During fiscal 2018, the Company adopted ASU 2018-02 and reclassified stranded tax effects attributable to the Tax Cuts and Jobs Act (the "Act") from AOCI to retained earnings.

The fiscal 2018 Consolidated Balance Sheets reflect the reclassification out of accumulated other comprehensive (loss)/income into retained earnings.

See notes to the Consolidated Financial Statements.

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Cash Flows from Operating Activities:

Net earnings $ 2,466.5 $ 2,292.8 $ 1,884.9

Adjustments to reconcile net earnings to cash flows provided by operating activities:

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Stock-based compensation expense 130.8 167.3 175.4

Net pension expense

Net pension (income)/expense ( 11.6 ) 55.4 330.4

Net amortization of premiums and accretion of discounts on available-for-sale securities 50.2 50.1 71.5

Impairment of intangible assets

Impairment of assets 29.9 12.1 —

Gain on sale of assets ( 6.0 ) ( 19.8 ) ( 0.7 )

Gain on sale of divested businesses, net of tax

Other 65.4 43.9 32.2

Changes in operating assets and liabilities, net of effects from acquisitions and divestitures of businesses:

(Increase)/decrease in accounts receivable

Increase in accounts receivable ( 113.8 ) ( 473.9 ) ( 291.8 )

Increase in other assets ( 910.4 ) ( 987.2 ) ( 858.3 )

Decrease in accounts payable ( 18.3 ) ( 10.7 ) ( 1.9 )

Increase in accrued expenses and other liabilities

(Decrease)/Increase in accrued expenses and other liabilities ( 77.5 ) 266.0 110.5

Net cash flows provided by operating activities 3,026.2 2,688.3 2,515.2

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Proceeds from the sale of property, plant, and equipment and other assets 29.4 7.9 0.4

Proceeds from the sale of divested businesses

Net cash flows used in investing activities

Net cash flows provided by/(used in) investing activities 3,156.3 ( 2,197.7 ) ( 2,504.6 )

Cash Flows from Financing Activities:

Net increase/(decrease) in client funds obligations

Net (decrease)/increase in client funds obligations ( 3,213.2 ) 1,696.0 340.4

Payments of debt ( 2.2 ) ( 2.1 ) ( 7.3 )

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Dividends paid ( 1,470.5 ) ( 1,293.0 ) ( 1,063.7 )

Net proceeds from reverse repurchase agreements

Net (payments)/proceeds related to reverse repurchase agreements ( 248.4 ) 262.0 —

Other — ( 5.8 ) ( 5.3 )

Net cash flows used in financing activities ( 5,890.6 ) ( 207.7 ) ( 1,655.9 )

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Cash paid for income taxes, net of income tax refunds $ 677.1 $ 633.8 $ 529.7

*See Note 1 for a summary of adjustments.

(A) See Note 4 for a reconciliation of restricted cash and restricted cash equivalents in funds held for clients on the Consolidated Balance Sheets.

See notes to the Consolidated Financial Statements.

Notes to Consolidated Financial Statements

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Basis of Preparation.

The accompanying Consolidated Financial Statements and footnotes thereto of Automatic Data Processing, Inc.its subsidiaries and variable interest entity (“ADP” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.

The accompanying Consolidated Financial Statements and footnotes thereto of Automatic Data Processing, Inc.

its subsidiaries and variable interest entity (“ADP” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.

Intercompany balances and transactions have been eliminated in consolidation.

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Further information on these funds and the Company’s obligations to remit to its clients’ employees, tax authorities, and other payees is provided in Note 4, “Corporate Investments and Funds Held for Clients.”

Effective July 1, 2018, certain prior period amounts have been restated to conform to the current period presentation in connection with the adoption of Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (ASC 606)” and ASU 2017-07, “Compensation - Retirement Benefits (Topic 715):

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost.” Also, in the first quarter of the fiscal year ending June 30, 2019 (“fiscal 2019”), the Company's chief operating decision maker (“CODM”) began reviewing segment results reported at actual interest rates and the results of the PEO segment inclusive of the results of ADP Indemnity.

Additionally, the CODM reviews results with changes to certain corporate allocations.

These changes represent a change in the measure of segment performance.

We reflected these new segment measures in fiscal 2019 and prior period segment results are restated for comparability.

Revision of Previously Reported Financial Information

The Company has historically classified certain fees collected from worksite employers for certain benefits within PEO revenues, and the associated costs of these benefits have historically been classified within operating expenses as PEO zero-margin benefits pass-through costs in the Company's Statements of Consolidated Earnings.

During fiscal 2020, management determined that the Company does not retain risk and is acting as the agent, rather than as the primary obligor, for a portion of the fees collected for worksite employee benefits and the worksite employer is primarily responsible for fulfilling certain aspects of the service and has discretion in establishing price.

Accordingly, the accompanying Statements of Consolidated Earnings for fiscal 2019 and fiscal 2018 have been revised to correct the amounts previously reported on a gross basis to a net basis by reducing PEO revenues and operating expenses for associated costs of an equal amount, as follows:

June 30, 2019

As reported Revision As revised

PEO revenues $ 4,237.5 ( 65.0 ) $ 4,172.5

TOTAL REVENUES 14,175.2 ( 65.0 ) 14,110.2

Operating expenses 7,145.9 ( 65.0 ) 7,080.9

Total Expenses 11,280.7 ( 65.0 ) 11,215.7

EARNINGS BEFORE INCOME TAXES 3,005.6 — 3,005.6

Provision for income taxes 712.8 — 712.8

NET EARNINGS $ 2,292.8 — $ 2,292.8

June 30, 2018

As reported Revision As revised

PEO revenues $ 3,877.8 ( 53.5 ) $ 3,824.3

TOTAL REVENUES 13,327.7 ( 53.5 ) 13,274.2

Operating expenses 6,901.0 ( 53.5 ) 6,847.5

Total Expenses 10,873.0 ( 53.5 ) 10,819.5

EARNINGS BEFORE INCOME TAXES 2,282.6 — 2,282.6

Provision for income taxes 397.7 — 397.7

NET EARNINGS $ 1,884.9 — $ 1,884.9

The correction of these previously reported amounts had no impact on the Company's earnings before income taxes, net earnings, consolidated financial condition or cash flows.

In addition, corresponding revisions have been made elsewhere in the Company's consolidated footnote disclosures, where applicable, including its Financial Data by Segment and Geographic Area disclosure.

The preparation of financial statements in conformity with U.S.

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The payroll and payroll taxes collected from the worksite employers are presented in revenue net, as the Company 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.

With respect to the payroll and payroll taxes, the worksite employer is primarily responsible for providing the service and has discretion in establishing wages.

The fees collected from the worksite employers for benefits (i.e.

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Incremental costs of obtaining a contract (e.g., sales commissions) that are expected to be recovered are capitalized and amortized on a straight-line basis over a period of three to eight years, depending on the Company's business unit.

Expected renewal periods are only included in the expected client relationship period if commission amounts paid upon renewal are not commensurate with amounts paid on the initial contract.

Incremental costs of obtaining a contract include only those costs the Company incurs to obtain a contract that it would not have incurred if the contract had not been obtained.

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· inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 Fair value is determined based upon inputs that are unobservable and reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability based upon the best information available in the circumstances (e.g., internally derived assumptions surrounding the timing and amount of expected cash flows).

available in the circumstances (e.g., internally derived assumptions surrounding the timing and amount of expected cash flows).

The Company's corporate investments and funds held for clients (see Note 4) are measured at fair value on a recurring basis as described below.

Over 99 % of the Company's available-for-sale securities included in Level 2 are valued based on prices obtained from an independent pricing service.

To determine the fair value of the Company's Level 2 investments, the independent pricing service uses various pricing models for each asset class that are consistent with what other market participants would use, including the market approach.

To determine the fair value of the Company's Level 2 investments, the independent pricing service uses pricing models for each asset class that are consistent with what other market participants would use, including the market approach.

Inputs and assumptions to the pricing model of the independent pricing service are derived from market observable sources including:

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Since many fixed income securities do not trade on a daily basis, the independent pricing service applies available information, as applicable, through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to prepare valuations.

For the purposes of valuing the Company’s asset-backed securities, as well as the mortgage-backed securities that are included within Other securities in Note 7, the independent pricing service includes additional inputs to the model such as monthly payment information, new issue data, and collateral performance.

For the purposes of valuing the Company’s asset-backed securities and mortgage-backed securities that are included within Other securities in Note 4, the independent pricing service includes additional inputs to the model such as monthly payment information, new issue data, and collateral performance.

For the purposes of valuing the Company’s Municipal bonds, the independent pricing service includes Municipal Market Data benchmark yield curves as additional inputs to the model.

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The Company has not adjusted the prices obtained from the independent pricing service.

In fiscal 2020, the Company entered into a series of treasury rate lock transactions to hedge its exposure to changes in interest rates.

The treasury rate lock derivatives are classified as Level 2 in the fair value hierarchy as their value is determined using observable inputs such as forward treasury rates.

See Note 9 for additional details.

The Company's assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the classification of assets and liabilities within the fair value hierarchy.

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The estimated useful lives of assets are primarily as follows:

Data processing equipment

3 to 10 years

20 to 40 years

Furniture and fixtures

The Company has obligations under various facilities and equipment leases.

The Company assesses whether these arrangements meet the criteria for capital leases by determining whether the agreement transfers ownership of the asset, whether the lease includes a bargain purchase option, whether the lease term is for greater than 75% of the asset's useful life, or whether the minimum lease payments exceed 90% of the leased equipment's fair market value.

All of the Company's leases are classified as operating leases.

Total expense under these operating lease agreements was approximately $270.1 million , $234.9 million , and $234.5 million in fiscal 2019 , 2018 , and 2017 , respectively.

Data processing equipment 5 to 10 years

Buildings 20 to 40 years

Furniture and fixtures 4 to 7 years

Operating lease ROU assets and operating lease liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term.

The lease liabilities are measured by discounting future lease payments at the Company’s collateralized incremental borrowing rate for financing instruments of a similar term, unless the implicit rate is readily determinable.

ROU assets also include adjustments related to prepaid or deferred lease payments and lease incentives.

Lease ROU assets are amortized over the life of the lease and tested for impairment in the same manner as long-lived assets as described below.

Goodwill represents the excess of purchase price over the value assigned to the net tangible and identifiable intangible assets of businesses acquired.

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The Company does not use derivative financial instruments for trading purposes.

In fiscal 2020, the Company entered into a series of treasury rate lock transactions to hedge its exposure to changes in interest rates.

See Note 9 for additional details.

Earnings per Share (“EPS”).

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The calculations of basic and diluted EPS are as follows:

Years ended June 30,

Effect of Employee Stock Option Shares

Years ended June 30, Basic Effect of Employee Stock Option Shares Effect of

Shares Diluted

Net earnings $ 2,466.5 $ 2,466.5

Weighted average shares (in millions) 430.8 0.9 1.0 432.7

EPS $ 5.73 $ 5.70

Net earnings $ 2,292.8 $ 2,292.8

Weighted average shares (in millions) 435.0 1.0 1.6 437.6

EPS $ 5.27 $ 5.24

Net earnings $ 1,884.9 $ 1,884.9

Weighted average shares (in millions) 440.6 1.1 1.6 443.3

EPS $ 4.28 $ 4.25

Options to purchase 1.2 million, 0.7 million, and 0.9 million shares of common stock for fiscal 2020, 2019, and 2018, respectively, were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.

Stock-Based Compensation.

The Company recognizes stock-based compensation expense in net earnings based on the fair value of the award on the date of the grant, and in the case of international units settled in cash, adjusts this fair value based on changes in the Company's stock price during the vesting period.

The Company determines the fair value of stock options issued using a binomial option-pricing model.

The binomial option-pricing model considers a range of assumptions related to volatility, dividend yield, risk-free interest rate, and employee exercise behavior.

Expected volatilities utilized in the binomial option-pricing model are based on a combination of implied market volatilities, historical volatility of the Company's stock price, and other factors.

Similarly, the dividend yield is based on historical experience and expected future changes.

The risk-free rate is derived from the U.S.

Treasury yield curve in effect at the time of grant.

The binomial option-pricing model also incorporates exercise and forfeiture assumptions based on an analysis of historical data.

The expected life of a stock option grant is derived from the output of the binomial model and represents the period of time that options granted are expected to be outstanding.

Restricted stock units and restricted stock awards are valued based on the closing price of the Company's common stock on the date of the grant and, in the case of performance based restricted stock units and restricted stock, are adjusted for changes to probabilities of achieving performance targets.

International restricted stock units are settled in cash and are marked-to-market based on changes in the Company's stock price.

See Note 12 for additional information on the Company's stock-based compensation programs.

S ee Note 10 for additional information on the Company's stock-based compensation programs.

Internal Use Software.

Expenditures for major software purchases and software developed or obtained for internal use are capitalized and amortized generally over a three to five-year period on a straight-line basis.

Software developed as part of the Company's next-generation platforms are depreciated over ten years .

The Company begins to capitalize costs incurred for computer software developed for internal use when the preliminary development efforts are successfully completed, management has authorized and committed to funding the project, and it is probable that the project will be completed and the software will be used as intended.

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The amount of capitalizable payroll costs with respect to these employees is limited to the time directly spent on such projects.

Costs associated with preliminary project stage activities, training, maintenance, and all other post-implementation stage activities are

expensed as incurred.

Costs associated with preliminary project stage activities, training, maintenance, and all other post-implementation stage activities are expensed as incurred.

The Company also expenses internal costs related to minor upgrades and enhancements, as it is impractical to separate these costs from normal maintenance activities.

Fees related to cloud-based subscriptions for which the Company has the right to take possession of the software at any time during the hosting period (without significant penalty) and can run the software on internal hardware, or through contract with a third party vendor to host the software, is recognized as an intangible asset and capitalized following the Internal Use Software guidance under ASC 350-40.

Subscriptions where the Company accesses the software through the cloud but cannot take

possession of the software during the hosting period is treated as a service contract, and as such hosting fees are treated as expense.

Acquisitions.

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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 $3 million and expected cash payments could be up to $10 million in the next twelve months.

The liability related to cash payments expected to be paid within the next 12 months has been reclassified from other liabilities to current liabilities on the Consolidated Balance Sheets.

Audit outcomes and the timing of audit settlements are subject to significant uncertainty.

We continually assess the likelihood and amount of potential adjustments and adjust 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.

See Note 11 for additional details.

Workers' Compensation Costs.

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The Company had no drawdowns during June 30, 2020 and 2019 under the letters of credit.

For the fiscal years 2013 to 2018, as well as in July 2018 for the year ended June 30, 2019 (“fiscal 2019 ”), ADP Indemnity paid premiums to enter into reinsurance arrangements with ACE American Insurance Company, a wholly-owned subsidiary of Chubb Limited ("Chubb"), to cover substantially all losses incurred by ADP Indemnity during these policy years.

Beginning in fiscal year 2013, ADP Indemnity paid premiums to enter into reinsurance arrangements with ACE American Insurance Company, a wholly-owned subsidiary of Chubb Limited ("Chubb"), to cover substantially all losses incurred by ADP Indemnity during these policy years.

Each of these reinsurance arrangements limit our overall exposure incurred up to a certain limit.

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ADP Indemnity paid a premium of $ 240 million in July 2020 to enter into a reinsurance arrangement to cover substantially all losses for the fiscal 2021 policy year on terms substantially similar to the fiscal 2020 policy.

Contingencies.

In the normal course of business, the Company is subject to loss contingencies, such as claims and assessments arising from litigation and other legal proceedings, contractual indemnities, and tax matters.

Accruals for loss contingencies are recorded when the Company determines that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated.

If the estimate of the amount of the loss is a range and some amount within the range appears to be a better estimate than any other amount within the range, that amount is accrued as a liability.

If no amount within the range is a better estimate than any other amount, the minimum amount of the range is accrued as a liability.

These accruals are adjusted periodically as assessments change or additional information becomes available.

The loss contingencies are included in Selling, general and administrative expenses.

If no accrual is made for a loss contingency because the amount of loss cannot be reasonably estimated, the Company will disclose contingent liabilities when there is at least a reasonable possibility that a loss or an additional loss may have been incurred.

Legal fees and other costs related to litigation and other legal proceedings or services are expensed as incurred and are included in Selling, general and administrative expenses.

Any claim for insurance recovery is recognized only when realization becomes probable.

Recently Issued Accounting Pronouncements.

Recently Adopted Accounting Pronouncements

Effective July 1, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers (ASC 606)” on a retrospective basis.

ASU 2014-09 requires an entity to recognize revenue depicting the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

ASU 2014-09 resulted in enhanced revenue-related disclosures.

The standard primarily impacted the manner in which we treat certain costs to fulfill contracts (i.e., implementation costs) and costs to acquire new contracts (i.e., selling costs).

The new standard requires the Company to capitalize and amortize additional implementation costs than those capitalized and amortized under previous U.S.

Under previous U.S.

GAAP, the Company immediately expensed all selling expenses.

The adoption of the new standard did not materially impact the timing or amount of revenue the Company recognized and did not result in significant changes in its business processes or systems.

Effective July 1, 2019, the Company adopted accounting standard update (“ASU”) 2016-02, “Leases (ASC 842)” under the optional transition method.

As a result, the Company recorded on the Consolidated Balance Sheets total operating lease ROU assets of $ 573.3 million and total operating lease liabilities of $ 522.6 million, as of the adoption date.

The adoption did not have an impact on our Statements of Consolidated Earnings or Statements of Consolidated Cash Flows.

Refer to Note 6 for further details.

Refer to the table below for a summary of the restatements required, as a result of this change, on the Company's statements of consolidated earnings, consolidated balance sheets, and consolidated cash flows for fiscal 2018 and fiscal 2017.

Effective July 1, 2018, the Company adopted ASU 2017-07, “Compensation - Retirement Benefits (Topic 715):

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost.” ASU 2017-07 requires reporting the service cost component in the same line item or items as other compensation costs arising during the period in the Statements of Consolidated Earnings.

The other components of net periodic pension cost are required to be presented in the Statements of Consolidated Earnings separately from the service cost component.

The Company retrospectively adopted the new standard, and as a result reclassified the non-service cost components of the net periodic benefit cost from within the respective line items of our Statements of Consolidated Earnings to Other (income)/expense, net.

Refer to the table below for a summary of the reclassification required, as a result of this change, on the Company's consolidated results of operations for fiscal 2018 and fiscal 2017.

The adoption of the new accounting rules only impacted the classification of expenses on the Statements of Consolidated Earnings and did not impact the Company’s consolidated earnings, balance sheets, or cash flows.

Adoption of ASC 606 and ASU 2017-07 impacted the Company's prior period Statements of Consolidated Earnings, Consolidated Balance Sheets, and Consolidated Cash Flows as follows:

Statement of Consolidated Earnings

June 30, 2018

Revenues, other than interest on funds held for clients and PEO revenues

Interest on funds held for clients

TOTAL REVENUES

Operating expenses

Systems development and programming costs

Depreciation and amortization

Selling, general, and administrative expenses

Interest expense

Total Expenses

Other expense/(income), net

EARNINGS BEFORE INCOME TAXES

Provision for income taxes

June 30, 2017

Revenues, other than interest on funds held for clients and PEO revenues

Interest on funds held for clients

TOTAL REVENUES

Operating expenses

Systems development and programming costs

Depreciation and amortization

Selling, general, and administrative expenses

Interest expense

Total Expenses

Other (income), net

EARNINGS BEFORE INCOME TAXES

Provision for income taxes

Consolidated Balance Sheets

Current assets:

Other current assets

Total current assets

Deferred contract costs

Liabilities and Stockholders' Equity

Current liabilities:

Short-term deferred revenues

Total current liabilities

Deferred income taxes

Long-term deferred revenues

Total liabilities

Stockholders' equity:

Retained earnings

Total stockholders’ equity

Total liabilities and stockholders’ equity

Statements of Consolidated Cash Flows

Cash Flows from Operating Activities:

Adjustments to reconcile net earnings to cash flows provided by operating activities:

Amortization of deferred contract costs

Deferred income taxes

Changes in operating assets and liabilities, net of effects from acquisitions:

Decrease/(increase) in other assets

Increase in accrued expenses and other liabilities

Net cash flows provided by operating activities

Cash Flows from Operating Activities:

Adjustments to reconcile net earnings to cash flows provided by operating activities:

Amortization of deferred contract costs

Deferred income taxes

Changes in operating assets and liabilities, net of effects from acquisitions:

Increase in other assets

Increase in accrued expenses and other liabilities

Net cash flows provided by operating activities

Effective October 1, 2018, the Company prospectively adopted ASU 2018-15, “Intangibles - Goodwill and Other-Internal-Use Software.” ASU 2018-15 clarifies and aligns the accounting and capitalization of implementation costs in cloud computing arrangements that are service arrangements with the accounting for implementation costs incurred to develop or obtain internal-use software under ASC 350-40.

The adoption of ASU 2018-15 did not have an impact on the Company’s consolidated results of operations, financial condition, or cash flows.

In March 2018, the Company adopted ASU 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." ASU 2018-02 allows companies to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Act”) from accumulated other comprehensive (loss)/income to retained earnings.

The June 30, 2018 Consolidated Balance Sheets reflect the reclassification out of accumulated other comprehensive income and into retained earnings of $42.3 million .

The Company's policy for releasing disproportionate income tax effects from AOCI utilizes the aggregate approach.

Refer to Note 15 for additional detail regarding the components of the reclassification.

The adoption of ASU 2018-02 did not have an impact on the Company's consolidated results of operations or cash flows.

Recently Issued Accounting Pronouncements

The following table summarizes recent ASU's issued by the Financial Accounting Standards Board ("FASB"):

Effective Date

Effect on Financial Statements or Other Significant Matters

ASU 2018-14 Compensation-Retirement Benefits-Defined Benefit Plans

This update modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans by removing and adding certain disclosures for these plans.

The following table summarizes recent ASU's issued by the Financial Accounting Standards Board (“FASB”) which have been assessed:

Standard Description Effective Date Effect on Financial Statements or Other Significant Matters

ASU 2020-04 Reference Rate Reform

Facilitation of the Effects of Reference Rate Reform on Financial Reporting This update provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate (LIBOR) reform on financial reporting.

March 12, 2020

(Fiscal 2020) through

December 31, 2022

(Fiscal 2023) The Company is assessing the effects of the Reference Rate Reform.

The Company has not yet determined the impact of this ASU on its consolidated results of operations, financial condition, or cash flows.

ASU 2018-14 Compensation-Retirement Benefits-Defined Benefit Plans This update modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans by removing and adding certain disclosures for these plans.

The eliminated disclosures include (a) the amounts in accumulated other comprehensive income expected to be recognized in net periodic benefit costs over the next fiscal year, and (b) the effects of a one percentage point change in assumed health care cost trend rates on the net periodic benefit costs and the benefit obligation for post-retirement health care benefits.

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The amendments in ASU 2018-14 would need to be applied on a retrospective basis.

July 1, 2021 (“Fiscal 2022”)

The adoption of this guidance will modify disclosures but will not have an impact on the Company's consolidated results of operations, financial condition, or cash flows.

ASU 2018-13 Fair Value Measurement

This update modifies the disclosure requirements on fair value measurements.

(Fiscal 2022) The adoption of this guidance will modify disclosures but will not have an impact on the Company's consolidated results of operations, financial condition, or cash flows.

ASU 2018-13 Fair Value Measurement This update modifies the disclosure requirements on fair value measurements.

Certain disclosures in ASU 2018-13 would need to be applied on a retrospective basis and others on a prospective basis.

July 1, 2020 (“Fiscal 2021”)

The adoption of this guidance will modify disclosures but will not have an impact on the Company's consolidated results of operations, financial condition, or cash flows.

(Fiscal 2021) The adoption of this guidance will modify disclosures but will not have an impact on the Company's consolidated results of operations, financial condition, or cash flows.

ASU 2016-13 Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments

This update introduces the current expected credit loss (CECL) model, which will require an entity to measure credit losses for certain financial instruments and financial assets, including trade receivables.

Measurement of Credit Losses on Financial Instruments This update introduces the current expected credit loss (CECL) model, which will require an entity to measure credit losses for certain financial instruments and financial assets, including trade receivables.

Under this update, on initial recognition and at each reporting period, an entity will be required to recognize an allowance that reflects the entity’s current estimate of credit losses expected to be incurred over the life of the financial instrument.

In addition, this update modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination.

July 1, 2020 (“Fiscal 2021”)

The adoption of this guidance will not have a material impact on its consolidated results of operations, financial condition, or cash flows.

Effective Date

Effect on Financial Statements or Other Significant Matters

Leases (Topic 842)

This update amends the existing accounting standards for lease accounting and requires lessees to recognize most lease assets and lease liabilities on the balance sheet and to disclose key information about leasing arrangements.

In July 2018, the FASB issued Accounting Standards Update 2018-10-Codification Improvements to Topic 842 (Leases), and Accounting Standards Update 2018-11-Leases (Topic 842)-Targeted Improvements, which (i) narrow amendments to clarify how to apply certain aspects of the new lease standard, (ii) provide entities with an additional transition method to adopt the new standard, and (iii) provide lessors with a practical expedient for separating components of a contract.

In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842) to be more general and/or to correct unintended application of guidance.

July 1, 2019 (“Fiscal 2020”)

The Company has finalized the assessment of the impacts of the new standard.

The Company will use the optional transition method with a cumulative adjustment to retained earnings.

There is no adjustment to retained earnings.

The Company has reached a decision as to the systems it will use to manage the accounting for leases, determined the contracts that are considered leases under the new guidance and is currently in the process of implementing the systems and establishing the appropriate controls and procedures.

The Company will utilize the transition package of practical expedients permitted within the new guidance which, among other things, will allow the Company to carry forward the historical lease classification.

Upon adoption, the Company anticipates a material impact to its Consolidated Balance Sheets but expects no impact to the Statements of Consolidated Earnings or Statements of Consolidated Cash Flows.

The most significant impact will be the recognition of the right-of-use (“ROU”) assets and lease liabilities for operating leases.

We estimate the adoption of the guidance will result in the recognition and presentation of total operating lease ROU assets to be approximately $600 million to $700 million and total operating lease liabilities to be approximately $500 million to $600 million, upon the adoption date.

In November 2019, the FASB issued Accounting Standard Update 2019-11 Codification Improvements to Topic 326, Financial-Credit Losses which provides clarification and eliminates inconsistencies to amendments included in Update 2016-13.

(Fiscal 2021) Upon adoption of the CECL standard, in fiscal 2021, the Company intends to book an immaterial cumulative-effect adjustment to retained earnings.

The most notable impact relates to the newly implemented processes around the assessment of the adequacy of our allowance for doubtful accounts on accounts receivable.

The adoption of this guidance will not have a material impact on the Company's consolidated results of operations, financial condition, or cash flows.

Based upon similar operational and economic characteristics, the Company’s revenues are disaggregated by its three strategic pillars:

HCM (“HCM”), HR Outsourcing (“HRO”), and Global Solutions with separate disaggregation for PEO zero-margin benefits pass-through revenues and client fund interest revenues.

Human Capital Management (“HCM”), HR Outsourcing (“HRO”), and Global (“Global”) Solutions, with separate disaggregation for PEO zero-margin benefits pass-through revenues and client fund interest revenues.

The Company believes these revenue categories depict how the nature, amount, timing, and uncertainty of its revenue and cash flows are affected by economic factors.

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HRO provides a comprehensive human resources outsourcing solution, including offering benefits, providing workers’ compensation insurance, and administering state unemployment insurance, among other human resources functions.

This revenue is primarily driven by the Professional Employer Organization Services (“PEO”).

This revenue is primarily driven by PEO.

The Company has further disaggregated HRO to separate out its PEO zero-margin benefits pass-through revenues.

The Company recognizes client fund interest revenues 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.

The following tables provide details of revenue by our strategic pillars with disaggregation for PEO zero-margin benefits pass-throughs and client fund interest, and includes a reconciliation to the Company’s reportable segments (in millions):

Types of Revenues 2020 2019 2018

HCM $ 6,540.9 $ 6,441.8 $ 6,204.9

HRO, excluding PEO zero-margin benefits pass-throughs 2,543.2 2,444.4 2,261.9

PEO zero-margin benefits pass-throughs 2,907.7 2,647.5 2,409.6

Global 2,052.8 2,014.6 1,931.3

Interest on funds held for clients 545.2 561.9 466.5

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Reconciliation of disaggregated revenue to our reportable segments for the fiscal year ended June 30, 2020:

Types of Revenues

Employer Services

Types of Revenues Employer Services PEO Other Total

HCM $ 6,546.4 $ — $ ( 5.5 ) $ 6,540.9

HRO, excluding PEO zero-margin benefits pass-throughs 947.2 1,598.8 ( 2.8 ) 2,543.2

PEO zero-margin benefits pass-throughs — 2,907.7 — 2,907.7

Global 2,052.8 — — 2,052.8

Interest on funds held for clients 540.2 5.0 — 545.2

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Reconciliation of disaggregated revenue to our reportable segments for the fiscal year ended June 30, 2019:

Types of Revenues

Employer Services

Types of Revenues Employer Services PEO Other Total

HCM $ 6,447.5 $ — $ ( 5.7 ) $ 6,441.8

HRO, excluding PEO zero-margin benefits pass-throughs 924.0 1,525.0 ( 4.6 ) 2,444.4

PEO zero-margin benefits pass-throughs — 2,647.5 — 2,647.5

Global 2,014.6 — — 2,014.6

Interest on funds held for clients 556.7 5.2 — 561.9

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Reconciliation of disaggregated revenue to our reportable segments for the fiscal year ended June 30, 2018:

Types of Revenues

Employer Services

Types of Revenues Employer Services PEO Other Total

HCM $ 6,210.2 $ — $ ( 5.3 ) $ 6,204.9

HRO, excluding PEO zero-margin benefits pass-throughs 851.3 1,414.7 ( 4.1 ) 2,261.9

PEO zero-margin benefits pass-throughs — 2,409.6 — 2,409.6

Global 1,931.3 — — 1,931.3

Interest on funds held for clients 462.0 4.5 — 466.5

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The balance is as follows:

June 30, 2020 2019

Deferred costs to obtain a contract $ 977.8 $ 992.3

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(1) The amount of total deferred costs amortized during the twelve months ended June 30, 2020, June 30, 2019, and June 30, 2018 were $ 915.0 million , $ 874.0 million, and $ 837.4 million, respectively.

In October 2017 , the Company acquired 100% of the outstanding shares of Global Cash Card, Inc.

(“GCC”), a leader in digital payments, including paycards and other electronic accounts, for approximately $490 million in cash, net of cash acquired.

The acquisition of GCC makes ADP the only human capital management provider with a proprietary digital payments processing platform.

The results of GCC are reported within the Company’s Employer Services segment.

The final purchase price allocation for GCC is as follows:

Identifiable intangible assets

Total assets acquired

Total liabilities assumed

The Company determined the purchase price allocations for this acquisition based on estimates of the fair value of tangible and intangible assets acquired and liabilities assumed, utilizing recognized valuation techniques, including the income and market approaches.

The goodwill recorded as a result of the GCC transaction represents future economic benefits we expect to achieve as a result of the acquisition and expected cost synergies.

None of the goodwill resulting from the acquisition is tax deductible.

Intangible assets for GCC, which totaled $ 132.5 million , included technology and software, and customer contracts and lists which are being amortized over a weighted average life of approximately 8 years .

In January 2018 , the Company acquired 100% of the outstanding shares of Work Market, Inc.

("WorkMarket"), a leading provider of cloud-based freelance management solutions, for approximately $125 million in cash.

In July 2018 , the Company acquired 100% of outstanding shares of Celergo Holdings, Inc.

(“Celergo”), a leading provider of multi-country payroll management services.

These acquisitions, individually or in aggregate, were not material to the Company's results of operations, financial position, or cash flows and, therefore, the pro forma impact of these acquisitions is not presented.

The results of these acquisitions are reported within the Company’s Employer Services segment.

On November 28, 2016 , the Company completed the sale of its Consumer Health Spending Account ("CHSA") and Consolidated Omnibus Reconciliation Act ("COBRA") businesses for a pre-tax gain of $205.4 million , and recorded such gain within Other (income)/expense, net on the Statements of Consolidated Earnings in fiscal 2017.

The historical results of operations of these businesses are included in the Employer Services segment.

The Company determined that the CHSA and COBRA divestitures did not meet the criteria for reporting discontinued operations under ASU 2014-08 as the disposition of these businesses does not represent a strategic shift that has a major effect on the Company's operations or financial results.

SERVICE ALIGNMENT INITIATIVE

On July 28, 2016, the Company announced a Service Alignment Initiative that simplified the Company's service organization by aligning the Company's service operations to its strategic platforms and locations.

In fiscal 2016, the Company entered into leases in Norfolk, Virginia and Maitland, Florida, and in fiscal 2017, the Company entered into a lease in Tempe, Arizona as part of this effort.

The Company began incurring charges during the first quarter of fiscal 2017.

The charges primarily relate to employee separation benefits recognized under ASC 712, and also include charges for the relocation of certain current Company employees, lease termination costs, and accelerated depreciation of fixed assets.

The Company does not expect to recognize any additional material pre-tax restructuring charges related to the Service Alignment Initiative.

The table below summarizes the composition of the Company's Service Alignment Initiative (reversals)/charges:

Cumulative amount from inception through

Employee separation benefits (a)

Other initiative costs (b)

Gain on sale of assets (c)

(a) - Net (reversals)/ charges are recorded in selling, general and administrative expenses on the Statements of Consolidated Earnings.

(b) - Other initiative costs include costs to relocate certain current Company employees to new locations, lease termination charges (both included within selling, general and administrative expenses on the Statements of Consolidated Earnings), and accelerated depreciation on fixed assets (included within depreciation and amortization on the Statements of Consolidated Earnings).

(c) - In fiscal 2019, the Company sold assets related to the Service Alignment Initiative, and as a result recorded a gain of $4.1 million in Other (income)/expense, net, on the Statement of Consolidated Earnings.

Refer to Note 6 .

(d) - All charges are included within the Other segment.

Activity for the Service Alignment Initiative liability for fiscal 2019 and fiscal 2018 was as follows:

separation benefits

Other initiative costs

Balance at June 30, 2017

Charged to expense

Cash payments

Non-cash utilization

Balance at June 30, 2018

Charged to expense

Cash payments

Balance at June 30, 2019

OTHER (INCOME)/EXPENSE, NET

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Interest income on corporate funds $ ( 84.5 ) $ ( 97.6 ) $ ( 83.5 )

Realized gains on available-for-sale securities

Realized losses on available-for-sale securities

Impairment of intangible assets

Realized (gains) / losses on available-for-sale securities, net ( 12.9 ) 0.9 2.5

Impairment of assets 29.9 12.1 —

Gain on sale of assets ( 5.8 ) ( 4.1 ) ( 0.7 )

Gain on sale of investment ( 0.2 ) ( 15.7 ) —

Gain on sale of business

Non-service components of pension expense, net

Non-service components of pension (income)/expense, net (see Note 10) ( 74.5 ) ( 6.7 ) 253.8

Other (income)/expense, net $ ( 148.0 ) $ ( 111.1 ) $ 172.1

The charges within non-service components of pension expense, net include $48.2 million of non-cash settlement charges and of special termination benefits related to the Voluntary Early Retirement Program (“VERP”), for the twelve months ended June 30, 2019 , offset by $54.9 million related to other components of net periodic pension cost for the twelve months ended June 30, 2019 .

Refer to Note 1 and Note 12 for further information.

In fiscal 2020, the Company recorded impairment charges of $ 25.3 million as a r esult of recognizing certain owned facilities at fair value given intent to sell and accordingly classified as held for sale.

In addition, the Company vacated certain leased locations early and recorded total impairment charges of $ 4.6 million to operating right-of-use assets and certain related fixed assets associated with the vacated locations.

In fiscal 2019, the Company wrote down $ 12.1 million of internally developed software which was determined to have no future use due to redundant software identified as part of a recent acquisition.

Additionally in fiscal 2019, the Company recognized a gain of $4.1 million for the sale of assets in relation to the Service Alignment Initiative, and a gain $15.7 million in relation to the sale of investment held at cost acquired in prior years and subsequently sold, in Other (income)/expense, net, on the Statement of Consolidated Earnings.

In fiscal 2019, the Company recognized a gain of $ 15.7 million in relation to the sale of an investment held at cost acquired in prior years and subsequently sold during fiscal 2019.

CORPORATE INVESTMENTS AND FUNDS HELD FOR CLIENTS

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June 30, 2020

Fair Value (A)

Losses Fair Value (A)

Type of issue:

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Treasury securities

3,580.6 120.8 — 3,701.4

government agency securities 1,128.2 35.6 — 1,163.8

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Canadian government agency obligations

1,018.7 23.1 — 1,041.8

Commercial Mortgage-Backed Securities 814.3 53.9 — 868.2

Canadian provincial bonds 676.6 33.6 — 710.2

Municipal bonds

Other securities 1,018.1 41.1 ( 0.2 ) 1,059.0

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June 30, 2019

Fair Value (B)

Losses Fair Value (B)

Type of issue:

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Treasury securities

2,933.0 23.8 ( 8.0 ) 2,948.8

government agency securities 2,612.0 17.7 ( 5.8 ) 2,623.9

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Canadian government agency obligations

1,164.1 7.0 ( 6.0 ) 1,165.1

Canadian provincial bonds 800.2 14.5 ( 0.5 ) 814.2

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Securities in unrealized loss position less than

Securities in unrealized loss position greater than 12 months

Gross Unrealized

12 months Securities in unrealized loss position greater than 12 months Total

Gross Unrealized

Losses Fair Market

Value Gross Unrealized

Losses Fair Market

Corporate bonds $ — $ — $ — $ — $ — $ —

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Treasury securities

— 2.0 — — — 2.0

government agency securities

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Canadian government agency obligations

Commercial Mortgage-Backed Securities — — — 1.5 — 1.5

Canadian provincial bonds — — — — — —

Municipal bonds

Other securities ( 0.2 ) 17.1 — — ( 0.2 ) 17.1

$ ( 0.7 ) $ 63.0 $ — $ 1.5 $ ( 0.7 ) $ 64.5

The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of June 30, 2019 are as follows:

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Securities in unrealized loss position less than

Securities in unrealized loss position greater than 12 months

Gross Unrealized

12 months Securities in unrealized loss position greater than 12 months Total

Gross Unrealized

Losses Fair Market

Value Gross Unrealized

Losses Fair Market

Corporate bonds $ ( 0.6 ) $ 151.9 $ ( 6.1 ) $ 2,055.6 $ ( 6.7 ) $ 2,207.5

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Treasury securities

— 1.8 ( 8.0 ) 1,159.4 ( 8.0 ) 1,161.2

government agency securities

— — ( 5.8 ) 1,671.4 ( 5.8 ) 1,671.4

Canadian government obligations and

Canadian government agency obligations

( 6.0 ) 662.7 — 1.1 ( 6.0 ) 663.8

Canadian provincial bonds ( 0.3 ) 81.5 ( 0.2 ) 50.1 ( 0.5 ) 131.6

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Other securities ( 0.1 ) 36.4 ( 0.5 ) 148.1 ( 0.6 ) 184.5

At June 30, 2019 , Corporate bonds include investment-grade debt securities, with a wide variety of issuers, industries, and sectors, primarily carry credit ratings of A and above, and have maturities ranging from July 2019 through July 2029 .

At June 30, 2019 , asset-backed securities include AAA rated senior tranches of securities with predominately prime collateral of fixed-rate auto loan, credit card, equipment lease and rate reduction receivables with fair values of $2,073.2 million , $1,960.1 million , $495.1 million , and $162.3 million , respectively.

$ ( 7.2 ) $ 1,107.7 $ ( 25.9 ) $ 7,192.5 $ ( 33.1 ) $ 8,300.2

At June 30, 2020, Corporate bonds include investment-grade debt securities, with a wide variety of issuers, industries, and sectors, primarily carry credit ratings of A and above, and have maturities ranging from July 2020 through March 2030 .

At June 30, 2020, asset-backed securities primarily include AAA-rated senior tranches of securities with predominately prime collateral of fixed-rate auto loan, credit card, equipment lease and rate reduction receivables with fair values of $ 1,666.6

million, $ 1,256.0 million, $ 344.4 million, and $ 102.4 million, respectively.

These securities are collateralized by the cash flows of the underlying pools of receivables.

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government agency securities primarily include debt directly issued by Federal Home Loan Banks and Federal Farm Credit Banks with fair values of $ 561.1 million and $ 432.0 million, respectively.

government agency securities represent senior, unsecured, non-callable debt that primarily carry ratings of Aaa by Moody's and AA+ by Standard & Poor's with maturities ranging from August 2019 through January 2029 .

At June 30, 2019 , other securities and their fair value primarily include U.S.

government agency commercial mortgage-backed securities of $615.6 million issued by Federal Home Loan Mortgage Corporation and Federal National Mortgage Association, Aa2 rated United Kingdom Gilt securities of $193.8 million , AAA and AA rated supranational bonds of $119.0 million , and AAA and AA rated sovereign bonds of $90.0 million .

At June 30, 2020, U.S.

government agency commercial mortgage-backed securities of $ 868.2 million include those issued by Federal Home Loan Mortgage Corporation and Federal National Mortgage Association.

At June 30, 2020, other securities and their fair value primarily include municipal bonds, diversified with a variety of issuers, with credit ratings of A and above, with fair values of $ 592.7 million, AA-rated United Kingdom Gilt securities of $ 189.9 million, and AAA-rated and AA-rated supranational bonds of $ 91.4 million.

Classification of corporate investments on the Consolidated Balance Sheets is as follows:

June 30, 2020 2019

Corporate investments:

Cash and cash equivalents $ 1,908.5 $ 1,949.2

Short-term marketable securities (a)

Long-term marketable securities (b)

Short-term marketable securities — 10.5

Long-term marketable securities (a) 13.6 261.4

Total corporate investments $ 1,922.1 $ 2,221.1

(a) - Short-term marketable securities are included within Other current assets on the Consolidated Balance Sheets.

(b) - Long-term marketable securities are included within Other assets on the Consolidated Balance Sheets.

(a) - Long-term marketable securities are included within Other assets on the Consolidated Balance Sheets.

Funds held for clients represent assets that, based upon the Company's intent, are restricted for use solely for the purposes of satisfying the obligations to remit funds relating to the Company’s payroll and payroll tax filing services, which are classified as client funds obligations on our Consolidated Balance Sheets.

Funds held for clients have been invested in the following categories:

June 30, 2020 2019

Funds held for clients:

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Total funds held for clients $ 26,708.1 $ 29,434.2

Client funds obligations represent the Company's contractual obligations to remit funds to satisfy clients' payroll, tax and other payee payment obligations are recorded on the Consolidated Balance Sheets at the time that the Company impounds funds from clients.

Client funds obligations represent the Company's contractual obligations to remit funds to satisfy clients' payroll, tax and other payee payment obligations and are recorded on the Consolidated Balance Sheets at the time that the Company impounds funds from clients.

The client funds obligations represent liabilities that will be repaid within one year of the balance sheet date.

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These amounts have been reconciled to the Consolidated Balance Sheets on the Statements of Consolidated Cash Flows.

The Company has reported the cash flows related to the cash

received from and paid on behalf of clients on a net basis within net increase in client funds obligations in the financing activities section of the Statements of Consolidated Cash Flows.

Approximately 79% of the available-for-sale securities held a AAA or AA rating at June 30, 2019 , as rated by Moody's, Standard & Poor's, DBRS for Canadian dollar denominated securities, and Fitch for asset-backed and commercial mortgage backed securities.

The Company has reported the cash flows related to the cash received from and paid on behalf of clients on a net basis within net increase in client funds obligations in the financing activities section of the Statements of Consolidated Cash Flows.

Approximately 79 % of the available-for-sale securities held a AAA-rating or AA-rating at June 30, 2020, as rated by Moody's, Standard & Poor's, DBRS for Canadian dollar denominated securities, and Fitch for asset-backed and commercial mortgage backed securities.

All available-for-sale securities were rated as investment grade at June 30, 2020.

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Total available-for-sale securities $ 21,576.6

During the three months ended June 30, 2020, the Company made a decision to sell certain available-for-sale securities in the funds held for clients as the Company anticipated client fund obligations would decline due to reduction in employment levels from a slowdown in the economy as a result of the COVID-19 pandemic.

To maintain the size of the funds held for clients in line with client fund obligations, the Company reduced its holdings of available-for-sale securities in the funds held for clients and sold approximately $ 1.6 billion of its available-for-sale securities.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment at cost and accumulated depreciation at June 30, 2020 and 2019 are as follows:

June 30, 2020 2019

Property, plant and equipment:

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Furniture, leaseholds and other 643.6 651.6

2,228.7 2,181.8

accumulated depreciation ( 1,524.8 ) ( 1,417.6 )

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Depreciation of property, plant and equipment was $ 192.8 million, $ 180.6 million, and $ 173.1 million for fiscal 2020, 2019 and 2018, respectively.

The Company recorded impairment charges of $ 25.3 million as a result of recognizing certain owned facilities at fair value given intent to sell and accordingly classified as held for sale.

The fair value of these owned buildings subsequent to the write down is approximately $ 6.7 million and is not material for reclassification separately on the Consolidated Balance Sheet s .

In fiscal 2020, the Company adopted ASC 842 using the optional transition method under which financial results reported in periods prior were not adjusted and continue to be reported in accordance with historic accounting under ASC 840 - Leases.

The Company elected the following practical expedients permitted under the lease standard:

• The Company did not reassess prior conclusions about lease identification, lease classification or initial direct costs, and did not use hindsight for leases existing at adoption date.

• The Company did not record leases with an initial term of 12 months or less on the consolidated balance sheets but continues to expense them on a straight-line basis over the lease term.

• The Company elected to combine lease and non-lease components for our facilities leases only.

Non-lease components consist primarily of maintenance services.

The Company records leases on the consolidated balance sheets as operating lease ROU assets, records the current portion of operating lease liabilities within accrued expenses and other current liabilities and, separately, records long-term operating lease liabilities.

The Company has entered into operating lease agreements for facilities and equipment.

The Company's leases have remaining lease terms of up to approximately eleven years .

As of June 30, 2020, total operating lease ROU assets were $ 493.7 million, current and long-term operating lease liabilities were approximately $ 95.5 million and $ 344.4 million, respectively.

The difference between total ROU assets and total lease liabilities are primarily attributable to pre-payments of our obligations and the recognition of various lease incentives.

The components of operating lease expense were as follows:

Operating lease cost $ 163.7

Short-term lease cost 6.1

Variable lease cost 6.7

Total operating lease cost $ 176.5

Information related to our operating lease ROU assets and operating lease liabilities was as follows:

Cash paid for operating lease liabilities $ 224.7

Operating lease ROU assets obtained in exchange for new operating lease liabilities $ 160.4

Weighted-average remaining lease term (in years) 6

Weighted-average discount rate 2.3 %

As of June 30, 2020, maturities of operating lease liabilities are as follows:

Twelve months ending June 30, 2021 $ 105.6

Twelve months ending June 30, 2022 90.8

Twelve months ending June 30, 2023 78.0

Twelve months ending June 30, 2024 57.9

Twelve months ending June 30, 2025 42.6

Thereafter 96.7

Total undiscounted lease obligations 471.6

Imputed interest ( 31.7 )

Net lease obligations $ 439.9

During fiscal 2020, the Company recorded impairment charges of $ 4.6 million in the United States and $ 2.2 million outside of the United States to our operating right-of-use assets associated with various vacated locations.

GOODWILL AND INTANGIBLE ASSETS, NET

Changes in goodwill for the fiscal years ended June 30, 2020 and 2019 are as follows:

Services Total

Balance at June 30, 2018 $ 2,238.7 $ 4.8 $ 2,243.5

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Components of intangible assets, net, are as follows:

June 30, 2020 2019

Intangible assets:

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Other intangibles 239.2 237.9

3,979.5 3,617.9

Less accumulated amortization:

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Other intangibles ( 223.4 ) ( 217.7 )

( 2,763.7 ) ( 2,546.4 )

Intangible assets, net $ 1,215.8 $ 1,071.5

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short-term funding requirements related to client funds are sometimes obtained on an unsecured basis through the issuance of commercial paper, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities.

The Company increased its U.S.

short-term commercial paper program to provide for the issuance of up to $10.3 billion from $9.8 billion in aggregate maturity value in June 2019.

The Company’s commercial paper program is rated A-1+ by Standard & Poor’s and Prime-1 by Moody’s.

In June 2020, the Company decreased its U.S short-term commercial paper program to provide for the issuance of up to $ 9.7 billion from $ 10.3 billion in aggregate maturity value.

The Company’s commercial paper program is rated A-1+ by Standard & Poor’s and Prime-1 (“P-1”) by Moody’s.

These ratings denote the highest quality commercial paper securities.

Maturities of commercial paper can range from overnight to up to 364 days .

At June 30, 2019 and 2018 , the Company had no commercial paper borrowing outstanding.

In fiscal 2019 and 2018 , the Company's average daily borrowings were $2.8 billion at a weighted average interest rate of 2.2% and 1.4% , respectively.

The weighted average maturity of the Company’s commercial paper in fiscal 2019 and 2018 was approximately two days .

by government and government agency securities, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities.

At June 30, 2020 and June 30, 2019, the Company had no commercial paper borrowing outstanding.

Details of the borrowings under the commercial paper program are as follows:

Years ended June 30, 2020 2019

Average daily borrowings (in billions) $ 2.7 $ 2.8

Weighted average interest rates 1.6 % 2.2 %

Weighted average maturity (approximately in days) 2 days 2 days

The Company’s U.S., Canadian and United Kingdom short-term funding requirements related to client funds obligations are sometimes obtained on a secured basis through the use of reverse repurchase agreements, which are collateralized principally by government and government agency securities, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities.

These agreements generally have terms ranging from overnight to up to five business days .

At June 30, 2019 , the Company had $262.0 million of outstanding obligations related to the reverse repurchase agreements.

All outstanding reverse repurchase obligations matured and were fully paid in early July 2019.

At June 30, 2018 , there were no outstanding obligations related to the reverse repurchase agreements.

In fiscal 2019 and 2018 , the Company had average outstanding balances under reverse repurchase agreements of $316.7 million and $374.4 million , respectively, at weighted average interest rates of 1.9% and 1.3% , respectively.

LONG TERM DEBT

At June 30, 2020 and 2019, the Company had $ 13.6 million and $ 262.0 million, respectively, of outstanding obligations related to the reverse repurchase agreements.

Details of the reverse repurchase agreements are as follows:

Years ended June 30, 2020 2019

Average outstanding balances $ 263.4 $ 316.7

Weighted average interest rates 1.6 % 1.9 %

The Company has fixed-rate notes with 5 -year and 10 -year maturities for an aggregate principal amount of $ 2.0 billion (collectively the “Notes”).

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The principal amounts and associated effective interest rates of the Notes and other debt as of June 30, 2020 and 2019 are as follows:

Debt instrument

Effective Interest Rate

June 30, 2019

June 30, 2018

Debt instrument Effective Interest Rate June 30, 2020 June 30, 2019

Fixed-rate 2.250 % notes due September 15, 2020

2.37 % $ 1,000.0 $ 1,000.0

Fixed-rate 3.375 % notes due September 15, 2025

3.47 % 1,000.0 1,000.0

Other 8.4 10.9

2,008.4 2,010.9

current portion ( 1,001.8 ) ( 2.5 )

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For a description of the fair value hierarchy and the Company's fair value methodologies, including the use of an independent third-party pricing service, see Note 1 “Summary of Significant Accounting Policies.”

In anticipation of the refinancing of our fixed-rate 2.25 % notes due September 15, 2020, from December 3, 2019 through March 4, 2020, the Company entered into a series of treasury rate lock transactions, with an aggregate notional amount totaling $ 400.0 million, to hedge its exposure to changes in interest rates through the completion of the refinancing.

The derivative contracts entered into during fiscal 2020 have been designated as cash-flow hedges and will be terminated upon completion of the refinancing.

Changes in the derivative’s fair value are recorded each period in other comprehensive income with a corresponding current asset or liability and, upon settlement, the aggregate amount in accumulated other comprehensive income will be amortized into net income over the term of the future debt instrument.

Refer to Note 13 for the impact to accumulated other comprehensive income.

There are no cash flows associated with the derivative until settlement occurs with the counter-parties.

On July 15, 2020, the Company gave notice to the current holders of our intention to redeem the $ 1.0 billion 2.25 % Senior Notes due September 15, 2020 on the call date of August 15, 2020.

It is the Company's intent to issue new long-term notes to fund this redemption and which also may be used for general corporate purposes.

If necessary in the interim, the Company intends to issue commercial paper to fund the Notes’ redemption until such time as the new Notes are issued.

EMPLOYEE BENEFIT PLANS

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Stock options are forfeited if the employee ceases to be employed by the Company prior to vesting.

The Company determines the fair value of stock options issued using a binomial option-pricing model.

The binomial option-pricing model considers a range of assumptions related to volatility, dividend yield, risk-free interest rate, and employee exercise behavior.

Expected volatilities utilized in the binomial option-pricing model are based on a combination of implied market volatilities, historical volatility of the Company's stock price, and other factors.

Similarly, the dividend yield is based on historical experience and expected future changes.

The risk-free rate is derived from the U.S.

Treasury yield curve in effect at the time of grant.

The binomial option-pricing model also incorporates exercise and forfeiture assumptions based on an analysis of historical data.

The expected life of a stock option grant is derived from the output of the binomial model and represents the period of time that options granted are expected to be outstanding.

• Restricted Stock.

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From time to time, the Company may repurchase shares of its common stock under its authorized share repurchase programs.

During fiscal 2020, the Board of Directors authorized the repurchase of $ 5 billion of our common stock, replacing in its entirety the previous 2015 authorization to purchase up to 25 million shares of our common stock.

The Company repurchased 6.2 million shares in fiscal 2020 as compared to 6.5 million shares repurchased in fiscal 2019.

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Stock Options:

(in thousands)

(in thousands) Weighted

Average Price

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Number of Shares

(in thousands)

Number of Units

(in thousands) Number of Units

(in thousands)

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Number of Shares

(in thousands)

Number of Units

(in thousands) Number of Units

(in thousands)

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The fair value for stock options granted was estimated at the date of grant using the following assumptions:

2020 2019 2018

Risk-free interest rate 1.4 % 2.7 % 1.8 %

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The Company has a defined benefit cash balance pension plan under which employees are credited with a percentage of base pay plus interest.

Effective January 1, 2015, associates hired on or after this date are not eligible to participate in this pension plan.

In addition, associates rehired on or after January 1, 2015 will no longer be eligible to earn additional contributions but will continue to earn interest on any balance that remains in the pension plan.

pension plan, which is currently closed to new entrants, was frozen effective July 1, 2020.

As of July 1, 2020 and onward, participants will retain their accrued benefits and will not accrue any future benefits due to pay and/or service.

The plan interest credit rate varies from year-to-year based on the ten-year U.S.

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The Company's policy is to make contributions within the range determined by generally accepted actuarial principles.

In fiscal 2018, the Company offered a voluntary early retirement program to certain eligible U.S.-based associates aged 55 or above with at least 10 years of service.

The early retirement offer was extended to about 3,500 eligible associates, or approximately 6 percent of the Company’s workforce, with approximately 2,200 ADP associates opting to participate.

The Company also extended to all employees participating in the VERP the opportunity to continue health care coverage at active employee contribution rates for up to 24 months following retirement.

In fiscal 2019, the Company recorded $23.6 million of expenses within selling, general, and administrative expenses related to the continuing health coverage for VERP participants who have exited the Company as of June 30, 2019.

In addition, during fiscal 2019, the Company recorded $48.2 million of non-cash settlement charges and special termination benefits, and during fiscal 2018, the Company recorded $319.6 million of special termination benefits within Other (income)/expense, net on the Statement of Consolidated Earnings.

In fiscal 2018, the Company offered a Voluntary Early Retirement Program (“VERP”) to certain eligible U.S.-based associates aged 55 or above with at least 10 years of service.

In fiscal 2019 and 2018, the Company recorded $ 48.2 million and $ 319.6 million of non-cash settlement charges and special termination benefits, respectively.

The Company also has various retirement plans for its non-U.S.

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The SORP is a defined benefit plan pursuant to which the Company pays supplemental pension benefits to certain corporate officers upon retirement based upon the officers' years of service and compensation.

The SORP, which is currently closed to new entrants, will be frozen effective July 1, 2019 with no future accruals due to pay and/or service.

The SORP, which is currently closed to new entrants, was frozen effective July 1, 2019 , with no future accruals due to pay and/or service.

A June 30 measurement date was used in determining the Company's benefit obligations and fair value of plan assets.

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The Company's pension plans' funded status as of June 30, 2020 and 2019 is as follows:

June 30, 2020 2019

Change in plan assets:

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Benefit obligation at beginning of year $ 1,951.2 $ 2,135.3

Service cost 59.7 59.8

Interest cost 61.8 78.6

Actuarial loss/(gain)

Actuarial loss 210.7 95.8

Currency translation adjustments ( 3.6 ) ( 8.7 )

Plan changes 0.4 0.8

Curtailments and special termination benefits — 2.2

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The amounts recognized on the Consolidated Balance Sheets as of June 30, 2020 and 2019 consisted of:

June 30, 2020 2019

Noncurrent assets $ 19.8 $ 108.0

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The Company's pension plans with accumulated benefit obligations in excess of plan assets as of June 30, 2020 and 2019 had the following projected benefit obligation, accumulated benefit obligation, and fair value of plan assets:

June 30, 2020 2019

Projected benefit obligation $ 2,046.5 $ 162.4

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The components of net pension expense were as follows:

2020 2019 2018

Service cost – benefits earned during the period $ 59.7 $ 59.8 $ 74.6

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Special termination benefits and plan curtailments ( 22.0 ) 48.7 319.5

Net pension expense

The net actuarial loss and prior service credit for the defined benefit pension plans that are included in accumulated other comprehensive income (loss) that have not yet been recognized as components of net periodic benefit cost are $281.9 million and $16.1 million , respectively, at June 30, 2019 .

Net pension (income)/expense $ ( 11.6 ) $ 55.4 $ 330.4

As a result of the freeze of the U.S.

pension plan, described above, the Company recognized $ 17.0 million of prior service credits during fiscal 2020 within Other Income, net, which were previously recognized within accumulated other comprehensive income (see Note 13).

The net actuarial loss and prior service cost for the defined benefit pension plans that are included in accumulated other comprehensive income (loss) that have not yet been recognized as components of net periodic benefit cost are $ 429.6 million and $ 2.5 million, respectively, at June 30, 2020.

There is no remaining transition obligation for the defined benefit pension plans included in accumulated other comprehensive income.

The estimated net actuarial loss and prior service credit for the defined benefit pension plans that will be amortized from accumulated other comprehensive income (loss) into net periodic pension cost in fiscal 2020 are $8.0 million and $2.2 million , respectively.

The estimated net actuarial loss and prior service cost for the defined benefit pension plans that will be amortized from accumulated other comprehensive income (loss) into net periodic pension cost in fiscal 2021 are $ 9.0 million and $ 0.2 million, respectively.

Assumptions used to determine the actuarial present value of benefit obligations were:

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Global equity securities 20 % - 30 %

pension plan's fixed income asset allocation for fiscal 2018 was outside of the target range due to the previously mentioned VERP in order to meet anticipated lump sum payments to participants.

As of June 30, 2019, the U.S.

As of June 30, 2020 and June 30, 2019, the U.S.

pension plan asset allocation is within the target ranges.

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The following table presents the investments of the pension plans measured at fair value at June 30, 2020:

Level 1 Level 2 Level 3 Total

Commingled trusts $ — $ 798.6 $ — $ 798.6

Government securities — 414.7 — 414.7

Mutual funds 7.3 274.8 — 282.1

Corporate and municipal bonds — 434.8 — 434.8

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The following table presents the investments of the pension plans measured at fair value at June 30, 2019:

Level 1 Level 2 Level 3 Total

Commingled trusts $ — $ 1,046.6 $ — $ 1,046.6

government securities — 417.9 — 417.9

Mutual funds 6.5 — — 6.5

Corporate and municipal bonds — 394.3 — 394.3

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United States $ 2,815.4 $ 2,584.6 $ 1,937.2

Foreign 367.2 421.0 345.4

$ 3,182.6 $ 3,005.6 $ 2,282.6

The provision (benefit) for income taxes consists of the following components:

Years ended June 30, 2020 2019 2018

Federal $ 468.3 $ 464.3 $ 366.6

Foreign 119.5 129.1 105.5

State 102.3 110.1 77.6

Total current 690.1 703.5 549.7

Federal 23.7 7.9 ( 193.0 )

Foreign ( 5.4 ) 12.8 26.1

State 7.7 ( 11.4 ) 14.9

Total deferred 26.0 9.3 ( 152.0 )

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State taxes, net of federal tax benefit 85.6 2.7 80.7 2.7 58.1 2.5

Valuation Allowance Release on Foreign tax credits ( 20.3 ) ( 0.6 ) — — — —

tax on foreign income — — — — 12.0 0.5

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Re-measurement of deferred tax balances — — — — ( 253.3 ) ( 11.1 )

Section 199 - Qualified production activities and research tax credit refund claim - net of reserves

Resolution of tax matters - Section 199 Qualified production activities and research tax credit refund claim — — — — ( 33.3 ) ( 1.5 )

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Excess tax benefit - Stock-based compensation ( 26.9 ) ( 0.8 ) ( 29.8 ) ( 1.0 ) ( 26.7 ) ( 1.2 )

Other ( 35.6 ) ( 1.2 ) ( 16.2 ) ( 0.6 ) 51.9 2.4

$ 716.1 22.5 $ 712.8 23.7 $ 397.7 17.4

The effective tax rate for fiscal 2020 and 2019 was 22.5 % and 23.7 %, respectively.

The decrease in the effective tax rate is primarily due to the release of a valuation allowance related to foreign tax credit carryforwards, a reduction in the operating tax rate due to the mix between domestic and foreign earnings, the benefit of a foreign tax law change and lower reserves for uncertain tax positions during fiscal 2020 partially offset by favorable adjustments to prior year tax liabilities during fiscal 2019.

The effective tax rate for fiscal 2019 and 2018 was 23.7 % and 17.4 %, respectively.

The increase in the effective tax rate is primarily due to the one-time benefit recognized on the re-measurement of deferred tax balances, primarily as a result of ASC 606, using the lower tax rates enacted under the Act, the release of reserves for uncertain tax positions during fiscal 2018 and the loss of the qualified production activities tax deduction as a result of the Act during fiscal 2019.

This is partially offset by the reduction in the federal corporate statutory tax rate to 21 % from our blended rate for fiscal 2018 of 28.1 % as a result of the Act.

The Act reduced the U.S.

federal corporate income tax rate from 35% to 21% .

In accordance with ASC 740, companies re-measured deferred tax balances using the new enacted tax rates.

The Act required the Company to pay a one-time transition tax on earnings of the Company's foreign subsidiaries that were previously tax deferred for U.S.

income taxes and created new taxes on the Company's foreign sourced earnings.

At December 31, 2018, the Company completed its accounting for all of the income tax effects of the Act.

The adjustments were as follows:

The Act’s foreign tax credit provisions may limit the Company’s ability to utilize existing foreign tax credits in future periods, accordingly we have estimated that approximately $19.2 million could expire unutilized.

During fiscal 2018, the Company recorded $28.3 million related to foreign withholding taxes on future distributions of earnings and profits ("E&P") that may not be utilizable as foreign tax credits.

During fiscal 2018, the Company recorded a benefit of $253.3 million (restated for ASC 606) to account for the effects of the rate change on deferred tax balances.

The one-time transition tax is based on the total post-1986 E&P that was previously deferred from US income taxes.

During fiscal 2018, the Company recorded an amount for the one-time transition tax liability of $22.9 million for the Company's foreign subsidiaries.

Since June 30, 2018, the Company made no significant adjustments to the amounts recorded during the measurement period.

The significant components of deferred income tax assets and liabilities and their balance sheet classifications are as follows:

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Net operating losses 52.0 54.0

Unrealized investment losses, net

Retirement Benefits 46.0 5.6

Other 25.9 20.2

valuation allowances ( 12.0 ) ( 31.6 )

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Deferred tax liabilities:

Prepaid retirement benefits

Deferred revenue $ 475.0 $ 475.9

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Tax on unrepatriated earnings 22.2 31.6

Other 6.4 7.2

Deferred tax liabilities 1,062.0 943.4

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The Company has estimated foreign net operating loss carry-forwards of approximately $ 55.3 million as of June 30, 2020, of which $ 0.9 million expire through June 2025 and $ 54.4 million have an indefinite utilization period.

As of June 30, 2019 , the

Company has approximately $70.3 million of federal net operating loss carry-forwards from acquired companies.

As of June 30, 2020, the Company has approximately $ 58.7 million of federal net operating loss carry-forwards from acquired companies.

The net operating losses have an annual utilization limitation pursuant to section 382 of the Internal Revenue Code and expire through June 2036.

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A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:

2020 2019 2018

Unrecognized tax benefits at beginning of the year $ 54.2 $ 45.2 $ 74.6

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During the fiscal years 2020, 2019, and 2018, the Company recorded interest expense of $ 1.6 million, $ 1.9 million, and $ 3.2 million, respectively.

Penalties incurred during fiscal years 2019 , 2018 , and 2017 were not significant.

During fiscal year 2020, the Company recorded a benefit for penalties of $ 0.3 million, penalties incurred during fiscal years 2019, and 2018 were not significant.

At June 30, 2020, the Company had accrued interest of $ 8.8 million recorded on the Consolidated Balance Sheets, of which $ 1.0 million was recorded within income taxes payable, and the remainder was recorded within other liabilities.

At June 30, 2019, the Company had accrued interest of $ 9.3 million recorded on the Consolidated Balance Sheets, of which $ 4.3 million was recorded within income taxes payable, and the remainder was recorded within other liabilities.

At June 30, 2019 , the Company had accrued penalties of $0.3 million recorded on the Consolidated Balance Sheets within other liabilities.

At June 30, 2020, the Company’s accrued penalties recorded on the Consolidated Balance Sheets within other liabilities were not material.

At June 30, 2019, the Company had accrued penalties of $ 0.3 million recorded on the Consolidated Balance Sheets within other liabilities.

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Examinations in progress in which the Company has significant business operations are as follows:

Taxing Jurisdiction

Fiscal Years under Examination

2003-2007, 2008-2010, 2013-2015

Taxing Jurisdiction Fiscal Years under Examination

(IRS) 2019 - 2020

Wisconsin 2015 - 2018

Michigan 2012 - 2014, 2015 - 2018

New York State 2016 - 2018

New York City 2016 - 2017

Florida 2016 - 2018

India 2003 - 2007, 2008 - 2010, 2013 - 2016

The Company regularly considers the likelihood of assessments resulting from examinations in each of the jurisdictions.

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COMMITMENTS AND CONTINGENCIES

The Company has obligations under various facilities and equipment leases.

Minimum commitments under these obligations with a future life of greater than one year at June 30, 2019 are as follows:

Years ending June 30,

In addition to fixed rentals, certain leases require payment of maintenance and real estate taxes and contain escalation provisions based on future adjustments in price indices.

As of June 30, 2020 , the Company has purchase commitments of appro ximately $ 613.2 million, including a reinsurance premium with Chubb for the fiscal 2021 policy year, as well as obligations related to software license agreements and purchase and maintenance agreements on our software, equipment, and other assets, of which $ 415.6 million relates to fiscal 2021, $ 165.3 million relates to the fiscal year ending June 30, 2022, and the remaining relates to fiscal years ending June 30, 2023 through fiscal 2025.

In June 2018, a potential class action complaint was filed against the Company in the Circuit Court of Cook County, Illinois.

The complaint asserts that the Company violated the Illinois Biometric Privacy Act, was negligent and unjustly enriched itself in connection with its collection, use and storage of biometric data of employees of its clients who are residents of Illinois in connection with certain services provided by the Company to clients in Illinois.

The complaint seeks statutory and other unspecified monetary damages, injunctive relief and attorney’s fees.

In addition, similar potential class action complaints have been filed in Illinois state courts against the Company and/or certain of its clients with respect to the collection, use and storage of biometric data of the employees of these clients.

All of these claims are still in their earliest stages and the Company is unable to estimate any reasonably possible loss, or range of loss, with respect to these matters.

In June 2018, a potential class action complaint was filed against the Company in the Circuit Court of Cook County, Illinois asserting that ADP violated the Illinois Biometric Privacy Act in connection with its collection, use and storage of biometric data of employees of its clients who are residents of Illinois.

In addition, similar potential class action complaints have been filed in Illinois state courts against ADP and/or certain of its clients with respect to the collection, use and storage of biometric data of the employees of these clients.

In June 2020, the Company reached a settlement of all outstanding claims against ADP for $ 25.0 million, subject to the court's preliminary approval.

The Company does not expect that any of the remaining cases against ADP's clients will result in any material liabilities to the Company.

In May 2020, two potential class action complaints were filed against ADP, TotalSource and related defendants in the U.S.

District Court, District of New Jersey.

The complaints assert violations of the Employee Retirement Income Security Act of 1974 (“ERISA”) in connection with the ADP TotalSource Retirement Savings Plan’s fiduciary administrative and investment decision-making.

The complaints seek statutory and other unspecified monetary damages, injunctive relief and attorney’s fees.

These claims are still in their earliest stages and the Company is unable to estimate any reasonably possible loss, or range of loss, with respect to these matters.

The Company intends to vigorously defend against these lawsuits.

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Changes in Accumulated Other Comprehensive (Loss)/Income (“AOCI”) by component are as follows:

Currency Translation Adjustment

Net Gains on Available-for-sale Securities

Pension Liability

Accumulated Other Comprehensive (Loss) / Income

Currency Translation Adjustment Net Gains on Available-for-sale Securities Cash Flow Hedging Activities Pension Liability Accumulated Other Comprehensive (Loss) /Income

Balance at June 30, 2017 $ ( 234.8 ) $ 68.3 $ — $ ( 216.7 ) $ ( 383.2 )

Other comprehensive income/(loss) before

reclassification adjustments

Reclassification adjustments to

Other comprehensive income/(loss) before reclassification adjustments 7.8 ( 460.7 ) — 87.0 ( 365.9 )

Tax effect — 123.4 — ( 18.7 ) 104.7

Reclassification adjustments to net earnings — 2.7 (A) — 9.3 (B) 12.0

Tax effect — ( 0.6 ) — ( 4.5 ) ( 5.1 )

Reclassification to retained earnings (C) — ( 7.1 ) (C) — ( 35.2 ) (C) ( 42.3 )

Balance at June 30, 2018 $ ( 227.0 ) $ ( 274.0 ) $ — $ ( 178.8 ) $ ( 679.8 )

Other comprehensive income/(loss) before

reclassification adjustments

Reclassification adjustments to net earnings

Reclassification to retained earnings (C)

Other comprehensive income/(loss) before reclassification adjustments ( 42.2 ) 642.4 — ( 84.7 ) 515.5

Tax effect — ( 144.4 ) — 20.0 ( 124.4 )

Reclassification adjustments to net earnings — 0.9 (A) — 40.3 (B) 41.2

Tax effect — ( 0.3 ) — ( 9.5 ) ( 9.8 )

Balance at June 30, 2019 $ ( 269.2 ) $ 224.6 $ — $ ( 212.7 ) $ ( 257.3 )

Other comprehensive (loss)/income before

reclassification adjustments

Reclassification adjustments to

Other comprehensive income/(loss) before reclassification adjustments ( 53.0 ) 602.2 ( 40.3 ) ( 160.8 ) 348.1

Tax effect — ( 136.4 ) 10.0 39.5 ( 86.9 )

Reclassification adjustments to net earnings — ( 12.9 ) (A) — ( 11.8 ) (B) ( 24.7 )

Tax effect — 2.9 — 3.1 6.0

Balance at June 30, 2020 $ ( 322.2 ) $ 680.4 $ ( 30.3 ) $ ( 342.7 ) $ ( 14.8 )

(A) Reclassification adjustments out of AOCI are included within Other (income)/expense, net, on the Statements of Consolidated Earnings.

(B) Reclassification adjustments out of AOCI are included in net pension expense (see Note 12 ).

(B) Reclassification adjustments out of AOCI are included in net pension (income)/expense (see Note 10).

In fiscal 2020, reclassification includes $ 17.0 million of prior service credits which were recognized as a component of net pension (income)/expense as a result of the US pension plan freeze.

(C) During fiscal 2018, the Company adopted ASU 2018-02 and reclassified stranded tax effects attributable to the Act from AOCI to retained earnings.

The fiscal 2018 Consolidated Balance Sheets reflect the reclassification out of accumulated other comprehensive (loss)/income into retained earnings (see Note 1).

The fiscal 2018 Consolidated Balance Sheets reflect the reclassification out of accumulated other comprehensive (loss)/income into retained earnings.

FINANCIAL DATA BY SEGMENT AND GEOGRAPHIC AREA

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Other costs are recorded based on management responsibility.

In the first quarter of fiscal 2019, the Company's CODM began reviewing segment results reported at actual interest rates and the results of the PEO segment inclusive of the results of ADP Indemnity.

Additionally, the CODM reviews results with changes to certain corporate allocations.

These changes represent a change in the measure of segment performance.

Effective July 1, 2018, the Company adopted ASC 606 (see Note 1).

The segment results in the table below reflect the impacts of adoption of ASC 606, the inclusion of client funds interest in the segments at actual interest rates, the inclusion of ADP Indemnity in the PEO segment, and changes to certain corporate allocations.

The Company reflects these new segment measures beginning in the first quarter of fiscal 2019 and prior period segment results are restated for comparability.

Employer Services

In fiscal 2020, the Company made changes to the allocation methodology for certain corporate allocations, in both the current period and the prior period in the table below, which did not materially affect reportable segment results.

In addition, the segment results in the table below reflects the impact of the revision to PEO revenues for comparability.

Refer to Note 1 to our consolidated financial statements for more information on this revision.

Employer Services PEO Services Other Total

Year ended June 30, 2020

Revenues $ 10,086.6 $ 4,511.5 $ ( 8.3 ) $ 14,589.8

Earnings before income taxes 3,063.0 605.5 ( 485.9 ) 3,182.6

Assets 37,071.7 1,443.2 650.6 39,165.5

Capital expenditures 115.7 — 52.6 168.3

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Year ended June 30, 2019

Revenues $ 9,942.8 $ 4,177.7 $ ( 10.3 ) $ 14,110.2

Earnings before income taxes 2,960.9 616.2 ( 571.5 ) 3,005.6

Assets 34,606.3 1,584.1 5,697.3 41,887.7

Capital expenditures 98.2 — 64.5 162.7

1 unchanged sentence

Year ended June 30, 2018

Revenues $ 9,454.8 $ 3,828.8 $ ( 9.4 ) $ 13,274.2

Earnings before income taxes 2,601.1 541.6 ( 860.1 ) 2,282.6

Assets 31,984.2 1,329.8 5,535.1 38,849.1

Capital expenditures 113.9 — 78.0 191.9

Depreciation and amortization 291.9 3.0 82.7 377.6

United States

United States Europe Canada Other Total

Year ended June 30, 2020

Revenues $ 12,740.1 $ 1,236.3 $ 329.8 $ 283.6 $ 14,589.8

Assets $ 33,891.0 $ 2,162.7 $ 2,435.3 $ 676.5 $ 39,165.5

Year ended June 30, 2019

Revenues $ 12,262.6 $ 1,236.8 $ 326.6 $ 284.2 $ 14,110.2

Assets $ 36,508.3 $ 2,807.9 $ 1,950.5 $ 621.0 $ 41,887.7

Year ended June 30, 2018

Revenues $ 11,439.8 $ 1,242.2 $ 321.6 $ 270.6 $ 13,274.2

Assets $ 33,586.6 $ 2,608.6 $ 2,073.1 $ 580.8 $ 38,849.1

QUARTERLY FINANCIAL RESULTS (UNAUDITED)

Summarized quarterly results of our operations for the fiscal years ended June 30, 2020 and June 30, 2019 are as follows:

Year ended June 30, 2019

Second Quarter

Year ended June 30, 2020 First

Quarter Second Quarter Third

Quarter Fourth

Revenues $ 3,495.7 $ 3,669.5 $ 4,047.8 $ 3,376.8

Costs of revenues $ 2,044.8 $ 2,094.1 $ 2,239.1 $ 2,067.2

Gross profit $ 1,450.9 $ 1,575.4 $ 1,808.7 $ 1,309.6

Earnings before income taxes $ 739.1 $ 835.5 $ 1,076.7 $ 531.3

Net earnings $ 582.4 $ 651.6 $ 820.9 $ 411.5

Basic per common share amounts:

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Diluted earnings per share $ 1.34 $ 1.50 $ 1.90 $ 0.96

Year ended June 30, 2018

Second Quarter

Costs of revenues

Year ended June 30, 2019 First

Quarter Second Quarter Third

Quarter Fourth

Revenues (A) $ 3,310.3 $ 3,492.4 $ 3,828.2 $ 3,479.3

Costs of revenues (A) $ 1,927.6 $ 2,000.2 $ 2,092.6 $ 2,001.1

Gross profit $ 1,382.7 $ 1,492.2 $ 1,735.6 $ 1,478.2

Earnings before income taxes $ 646.8 $ 741.0 $ 984.5 $ 633.3

Net earnings $ 505.4 $ 558.2 $ 753.7 $ 475.5

Basic per common share amounts:

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Diluted earnings per share $ 1.15 $ 1.27 $ 1.73 $ 1.09

(A) The prior period amounts presented have been revised to correct the amounts previously reported on a gross basis to a net basis by reducing PEO revenues and operating expenses for associated costs of an equal amount of $ 12.9 million, $ 13.5 million, $ 19.2 million and $ 19.4 million for the first quarter, second quarter, third quarter and fourth quarter, respectively.

Refer to Note 1 to our consolidated financial statements for more information on this revision.

SUBSEQUENT EVENTS

On July 15, 2020, the Company gave notice to the current holders of its intention to redeem the $ 1.0 billion 2.25 % Senior Notes due September 15, 2020 on the call date of August 15, 2020, discussed in Note 9.

There are no other subsequent events for disclosure.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data