Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Automatic Data Processing, Inc.

Roseland, New Jersey

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Automatic Data Processing, Inc. and subsidiaries (the "Company") as of June 30, 2020 and 2019, and the related consolidated statements of earnings, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 2020, and the related notes and the schedule listed in the Index at Item 15(a) 2 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of June 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 5, 2020, expressed an unqualified opinion on the Company’s internal control over financial reporting.

Change in Accounting Principle

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

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risk of material misstatements of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Goodwill – Employer Services Reportable Segment— Refer to Notes 1 and 7 to the financial statements

Critical Audit Matter Description

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 margin. 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.

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 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, 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

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

Our audit procedures related to the Company's client funds obligations included the following, among others:

We tested the effectiveness of general information technology controls over the applications relevant to the money movement reconciliation process.
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 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 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.
We tested the Company’s reconciliation of the consolidated client funds obligations to funds held for clients.


/s/ Deloitte & Touche LLP

Parsippany, New Jersey

August 5, 2020

We have served as the Company’s auditor since 1968.

Statements of Consolidated Earnings

(In millions, except per share amounts)



Years ended June 30,	2020		2019		2018

REVENUES:
Revenues, other than interest on funds held for clients and PEO revenues	$	9,538.1	$	9,375.8	$	8,983.4
Interest on funds held for clients	545.2		561.9		466.5
PEO revenues (A)	4,506.5		4,172.5		3,824.3
TOTAL REVENUES	14,589.8		14,110.2		13,274.2

EXPENSES:
Costs of revenues:
Operating expenses	7,404.1		7,080.9		6,847.5
Systems development and programming costs	674.1		636.3		635.4
Depreciation and amortization	366.9		304.4		274.5
TOTAL COSTS OF REVENUES	8,445.1		8,021.6		7,757.4

Selling, general, and administrative expenses	3,003.0		3,064.2		2,959.4
Interest expense	107.1		129.9		102.7
TOTAL EXPENSES	11,555.2		11,215.7		10,819.5

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

EARNINGS BEFORE INCOME TAXES	3,182.6		3,005.6		2,282.6

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



DILUTED EARNINGS PER SHARE	$	5.70	$	5.24	$	4.25

Basic weighted average shares outstanding	430.8		435.0		440.6
Diluted weighted average shares outstanding	432.7		437.6		443.3

(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.

See notes to the Consolidated Financial Statements.

Statements of Consolidated Comprehensive Income

(In millions)



Years ended June 30,	2020		2019		2018

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

Other comprehensive income/loss:
Currency translation adjustments	(53.0)		(42.2)		7.8

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 notes to the Consolidated Financial Statements.

Consolidated Balance Sheets

(In millions, except per share amounts)



June 30,	2020		2019
Assets
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


Total current assets before funds held for clients	4,856.0		4,908.1
Funds held for clients	26,708.1		29,434.2
Total current assets	31,564.1		34,342.3

Long-term receivables, net of allowance for doubtful accounts of $0.5 and $0.4, respectively	18.6		23.8
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
Current liabilities:
Accounts payable	$	102.0	$	125.5
Accrued expenses and other current liabilities	1,980.7		1,759.0
Accrued payroll and payroll-related expenses	557.0		721.1
Dividends payable	387.3		340.1
Short-term deferred revenues	212.5		220.7
Obligations under reverse repurchase agreements (A)	13.6		262.0

Short-term debt	1,001.8		—
Income taxes payable	40.1		54.8

Total current liabilities before client funds obligations	4,295.0		3,483.2
Client funds obligations	25,831.6		29,144.5
Total current liabilities	30,126.6		32,627.7
Long-term debt	1,002.8		2,002.2
Operating lease liabilities	344.4		—
Other liabilities	837.0		798.7
Deferred income taxes	731.9		659.9
Long-term deferred revenues	370.6		399.3
Total liabilities	33,413.3		36,487.8

Commitments and Contingencies (Note 12)

Stockholders' equity:
Preferred stock, $1.00 par value: Authorized, 0.3 shares; issued, none	—		—
Common stock, $0.10 par value: authorized,1,000.0 shares; issued, 638.7 shares at June 30, 2020 and June 30, 2019; outstanding, 429.9 and 434.2 shares at June 30, 2020 and June 30, 2019, respectively	63.9		63.9
Capital in excess of par value	1,333.8		1,183.2
Retained earnings	18,436.3		17,500.6
Treasury stock - at cost: 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)
Total stockholders’ equity	5,752.2		5,399.9
Total liabilities and stockholders’ equity	$	39,165.5	$	41,887.7

(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.

Statements of Consolidated Stockholders' Equity

(In millions, except per share amounts)


	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)
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 (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)
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 (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
Stock-based compensation expense	—	—		117.8		—		—		—
Issuances relating to stock compensation plans	—	—		32.8		—		112.9		—

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)

(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.

Statements of Consolidated Cash Flows

(In millions)


Years ended June 30,	2020		2019		2018
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:
Depreciation and amortization	480.0		409.0		377.6
Amortization of deferred contract costs	915.0		874.0		837.4
Deferred income taxes	26.0		9.3		(152.0)
Stock-based compensation expense	130.8		167.3		175.4

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 assets	29.9		12.1		—
Gain on sale of assets	(6.0)		(19.8)		(0.7)

Other	65.4		43.9		32.2
Changes in operating assets and liabilities, net of effects from acquisitions and divestitures of businesses:
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)
(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

Cash Flows from Investing Activities:
Purchases of corporate and client funds marketable securities	(3,905.1)		(4,422.6)		(4,876.8)
Proceeds from the sales and maturities of corporate and client funds marketable securities	7,648.4		2,909.0		3,455.0

Capital expenditures	(172.7)		(162.0)		(206.1)
Additions to intangibles	(443.7)		(404.5)		(264.7)
Acquisitions of businesses, net of cash acquired	—		(125.5)		(612.4)
Proceeds from the sale of property, plant, and equipment and other assets	29.4		7.9		0.4





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

Cash Flows from Financing Activities:
Net (decrease)/increase in client funds obligations	(3,213.2)		1,696.0		340.4

Payments of debt	(2.2)		(2.1)		(7.3)
Repurchases of common stock	(1,006.3)		(937.7)		(989.3)
Net proceeds from stock purchase plan and stock-based compensation plans	50.0		72.9		69.3


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

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)

Effect of exchange rate changes on cash, cash equivalents, restricted cash, and restricted cash equivalents	(34.5)		(28.8)		5.8

Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents	257.4		254.1		(1,639.5)

Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning of year	6,796.2		6,542.1		8,181.6

Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of year	$	7,053.6	$	6,796.2	$	6,542.1





Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents to the Consolidated Balance Sheets
Cash and cash equivalents	$	1,908.5	$	1,949.2	$	2,170.0
Restricted cash and restricted cash equivalents included in funds held for clients (A)	5,145.1		4,847.0		4,372.1
Total cash, cash equivalents, restricted cash, and restricted cash equivalents	$	7,053.6	$	6,796.2	$	6,542.1

Supplemental disclosures of cash flow information:
Cash paid for interest	$	104.8	$	127.5	$	100.5
Cash paid for income taxes, net of income tax refunds	$	677.1	$	633.8	$	529.7

(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

(Tabular dollars in millions, except per share amounts)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. 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. GAAP”). Intercompany balances and transactions have been eliminated in consolidation.

The Company has a grantor trust, which holds the majority of the funds provided by its clients pending remittance to employees of those clients, tax authorities, and other payees. The Company is the sole beneficial owner of the trust. The trust meets the criteria in Accounting Standards Codification (“ASC”) 810, “Consolidation” to be characterized as a variable interest entity (“VIE”). The Company has determined that it has a controlling financial interest in the trust because it has both (1) the power to direct the activities that most significantly impact the economic performance of the trust (including the power to make all investment decisions for the trust) and (2) the right to receive benefits that could potentially be significant to the trust (in the form of investment returns) and therefore, consolidates the trust. 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.”

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:


	Year Ended
	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


	Year Ended
	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. GAAP requires management to make estimates and assumptions that affect the assets, liabilities, revenues, expenses, and other comprehensive income that are reported in the Consolidated Financial Statements and footnotes thereto. Actual results may differ from those estimates.

Certain amounts from the prior year's financial statements have been reclassified in order to conform to the current year's presentation.

B. Description of Business. The Company is a provider of cloud-based Human Capital Management (“HCM”) solutions. The Company classifies its operations into the following two reportable segments: Employer Services and Professional Employer Organization (“PEO”) Services. The primary components of the “Other” segment are certain corporate overhead charges and expenses that have not been allocated to the reportable segments, including corporate functions, costs related to our transformation office, non-recurring gains and losses, the elimination of intercompany transactions, and interest expense.

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

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

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

The payroll and payroll taxes collected from the worksite employers are presented in revenue net, as 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 primarily responsible for providing the service and has discretion in establishing wages.

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

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

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

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

D. Deferred Costs.

Incremental Costs of Obtaining a Contract

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. 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. These costs are included in selling, general and administrative expenses.

Costs to fulfill a Contract

The Company capitalizes costs incurred to fulfill its contracts that i) relate directly to the contract ii) are expected to generate resources that will be used to satisfy the Company's performance obligations under the contract and iii) are expected to be recovered through revenue generated under the contract. Costs incurred to implement clients on our solutions (e.g. direct labor) are capitalized and amortized on a straight-line basis over the expected client relationship period if the Company expects to recover those costs. The expected client relationship period ranges from three to eight years. These costs are included in operating expenses.

The Company has estimated the amortization periods for the deferred costs by using its historical retention by business units to estimate the pattern during which the service transfers.

E. Cash and Cash Equivalents. Highly liquid investment securities with a maturity of ninety days or less at the time of purchase are considered cash equivalents. The fair value of our cash and cash equivalents approximates carrying value.

F. Corporate Investments and Funds Held for Clients. All of the Company's marketable securities are considered to be “available-for-sale” and, accordingly, are carried on the Consolidated Balance Sheets at fair value. Unrealized gains and losses, net of the related tax effect, are excluded from earnings and are reported as a separate component of accumulated other comprehensive income (loss) on the Consolidated Balance Sheets until realized. Realized gains and losses from the sale of available-for-sale securities are determined on an aggregate approach basis and are included in other (income)/expense, net on the Statements of Consolidated Earnings.

If the fair value of an available-for-sale debt security is below its amortized cost, the Company assesses whether it intends to sell the security or if it is more likely than not the Company will be required to sell the security before recovery. If either of those two conditions is met, the Company would recognize a charge in earnings equal to the entire difference between the security's amortized cost basis and its fair value. If the Company does not intend to sell a security or it is not more likely than not that it will be required to sell the security before recovery, the unrealized loss is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in accumulated other comprehensive income (loss).

Premiums and discounts are amortized or accreted over the life of the related available-for-sale security as an adjustment to yield using the effective-interest method. Dividend and interest income are recognized when earned.

G. Fair Value Measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date and is based upon the Company’s principal, or most advantageous, market for a specific asset or liability.

U.S. GAAP provides for a three-level hierarchy of inputs to valuation techniques used to measure fair value, defined as follows:

Level 1 Fair value is determined based upon quoted prices for identical assets or liabilities that are traded in active markets.

Level 2 Fair value is determined based upon inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability, including:

· quoted prices for similar assets or liabilities in active markets;

· quoted prices for identical or similar assets or liabilities in markets that are not active;

· inputs other than quoted prices that are observable for the asset or liability; or

· 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).

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 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: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers and other market-related data. 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 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. While the Company is not provided access to the proprietary models of the third party pricing service, each quarterly reporting period, the Company reviews the inputs utilized by the independent pricing service and compares the valuations received from the independent pricing service to valuations from at least one other observable source for reasonableness. The Company has not adjusted the prices obtained from the independent pricing service and the Company believes the prices received from the independent pricing service are representative of the prices that would be received to sell the assets at the measurement date (exit price). The Company has no available-for-sale securities included in Level 1 and Level 3.

In fiscal 2016, the Company issued fixed-rate notes with 5-year and 10-year maturities for an aggregate principal amount of $2.0 billion (collectively the "Notes"). The fair value of the Notes are estimated in Note 9 utilizing a variety of inputs obtained from an independent pricing service, including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data. The Company reviews the values generated by the independent pricing service for reasonableness by comparing the valuations received from the independent pricing service to valuations from at least one other observable source. 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. In certain instances, the inputs used to measure fair value may meet the definition of more than one level of the fair value hierarchy. The significant input with the lowest level priority is used to determine the applicable level in the fair value hierarchy.

H. Property, Plant and Equipment. Property, plant and equipment is stated at cost less accumulated depreciation on the Consolidated Balance Sheets. Depreciation is recognized over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are amortized over the shorter of the term of the lease or the estimated useful lives of the improvements. The estimated useful lives of assets are primarily as follows:


Data processing equipment			5 to 10 years
Buildings			20 to 40 years
Furniture and fixtures			4 to 7 years

I. Leases. 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.

J. Goodwill. Goodwill represents the excess of purchase price over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. Goodwill is tested annually for impairment or more frequently when an event or circumstance indicates that goodwill might be impaired.

The Company’s annual goodwill impairment assessment as of June 30, 2020 was performed for all reporting units using a quantitative approach by comparing the fair value of each reporting unit to its carrying value. We estimated the fair value of each reporting unit using, as appropriate, the income approach, which is derived using the present value of future cash flows discounted at a risk-adjusted weighted-average cost of capital, and the market approach, which is based upon using market multiples of companies in similar lines of business. Significant assumptions used in determining the fair value of our reporting units include projected revenue growth rates, profitability projections, working capital assumptions, the weighted average cost of capital, the determination of appropriate market comparison companies, and terminal growth rates. Several of these assumptions including projected revenue growth rates and profitability projections are dependent on our ability to upgrade, enhance, and expand our technology and services to meet client needs and preferences. As such, the determination of fair value requires management to make significant estimates and assumptions related to forecasts of future revenue and operating margins. Based upon the quantitative assessment, the Company has concluded that goodwill is not impaired.

K. Impairment of Long-Lived Assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.

L. Foreign Currency. The net assets of the Company's foreign subsidiaries are translated into U.S. dollars based on exchange rates in effect for each period, and revenues and expenses are translated at average exchange rates in the periods. Gains or losses from balance sheet translation are included in accumulated other comprehensive income (loss) on the Consolidated Balance Sheets. Currency transaction gains or losses, which are included in the results of operations, are not significant for all periods presented.

M. Foreign Currency Risk Management Programs and Derivative Financial Instruments. The Company transacts business in various foreign jurisdictions and is therefore exposed to market risk from changes in foreign currency exchange rates that could impact its consolidated results of operations, financial position, or cash flows. The Company manages its exposure to these market risks through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. 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.

N. Earnings per Share (“EPS”). The Company computes EPS in accordance with ASC 260.

The calculations of basic and diluted EPS are as follows:


Years ended June 30,	Basic		Effect of Employee Stock Option Shares	Effect of Employee Restricted Stock Shares	Diluted
2020
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

2019
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

2018
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.

O. 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. 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 10 for additional information on the Company's stock-based compensation programs.

P. 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. Capitalization ceases when a computer software project is substantially complete and ready for its intended use.

The Company's policy provides for the capitalization of external direct costs of materials and services associated with developing or obtaining internal use computer software. In addition, the Company also capitalizes certain payroll and payroll-related costs for employees who are directly associated with internal use computer software projects. 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. 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.

Q. Acquisitions. Assets acquired and liabilities assumed in business combinations are recorded on the Company’s Consolidated Balance Sheets as of the respective acquisition dates based upon their estimated fair values at such dates. The results of operations of businesses acquired by the Company are included in the Statements of Consolidated Earnings since their respective dates of acquisition. The excess of the purchase price over the estimated fair values of the underlying assets acquired and liabilities assumed is allocated to goodwill. In certain circumstances, the allocations of the excess purchase price are based upon preliminary estimates and assumptions and subject to revision when the Company receives final information, including appraisals and other analysis. Accordingly, the measurement period for such purchase price allocations will end when the information, or the facts and circumstances, becomes available, but will not exceed twelve months.

R. Income Taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity's financial statements or tax returns. Judgment is required in addressing the future tax consequences of events that have been recognized in our Consolidated Financial Statements or tax returns (e.g., realization of deferred tax assets, changes in tax laws or interpretations thereof). The Company is subject to the continuous examination of our income tax returns by the Internal Revenue Service (“IRS”) and other tax authorities. A change in the assessment of the outcomes of such matters could materially impact our Consolidated Financial Statements.

There is a financial statement recognition threshold and measurement attribute for tax positions taken or expected to be taken in a tax return. Specifically, the likelihood of an entity's tax benefits being sustained must be “more likely than not,” assuming that these positions will be examined by taxing authorities with full knowledge of all relevant information prior to recording the related tax benefit in the financial statements. If a tax position drops below the “more likely than not” standard, the benefit can no longer be recognized. Assumptions, judgment, and the use of estimates are required in determining if the “more likely than not” standard has been met when developing the provision for income taxes. As of June 30, 2020 and 2019, the Company's liabilities for unrecognized tax benefits, which include interest and penalties, were $62.3 million and $54.2 million, respectively.

S. Workers' Compensation Costs. The Company employs a third-party actuary to assist in determining the estimated claim liability related to workers' compensation and employer's liability coverage for PEO Services worksite employees. In estimating ultimate loss rates, we utilize historical loss experience, exposure data, and actuarial judgment, together with a range of inputs which are primarily based upon the worksite employee's job responsibilities, their location, the historical frequency and severity of workers' compensation claims, and an estimate of future cost trends. For each reporting period, changes in the actuarial assumptions resulting from changes in actual claims experience and other trends are incorporated into our workers' compensation claims cost estimates. PEO Services has secured a workers’ compensation and employer’s liability insurance policy that has a $1 million per occurrence retention and, in fiscal years 2012 and prior, aggregate stop loss insurance that covers any aggregate losses within the $1 million retention that collectively exceed a certain level, from an admitted and licensed insurance company of AIG. The Company has obtained approximately $242 million of irrevocable standby letters of credit in favor of licensed insurance companies of AIG to secure TotalSource workers’ compensation obligations if ADP were to fail to reimburse AIG for workers’ compensation payments. The Company had no drawdowns during June 30, 2020 and 2019 under the letters of credit. 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. The Company believes the likelihood of ultimate losses exceeding this limit is remote. 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.

T. 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.

U. Recently Issued Accounting Pronouncements.

Recently Adopted Accounting Pronouncements

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.

Recently Issued Accounting Pronouncements

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 (Topic 848): 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. Additional disclosures include descriptions of significant gains and losses affecting the benefit obligation for the period. 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. 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.


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. 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. 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.	July 1, 2020 (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.

NOTE 2. REVENUE

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

HCM provides a suite of product offerings that assist employers of all types and sizes in all stages of the employment cycle, from recruitment to retirement. Global is generally consistent with the types of services provided within HCM but represent geographies outside of the United States and includes our multinational offerings. HCM and Global revenues are primarily attributable to fees for providing solutions for payroll, benefits, talent, retirement services and HR processing and fees charged to implement the Company's solutions for clients.

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 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:



	Years Ended
	June 30,
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
Total Revenues	$	14,589.8	$	14,110.2	$	13,274.2

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


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

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


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

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


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

Contract Balances

The timing of revenue recognition for our HCM, HRO and Global Solutions is consistent with the invoicing of clients, as invoicing occurs in the period the services are provided. Therefore, the Company does not recognize a contract asset or liability resulting from the timing of revenue recognition and invoicing.

Changes in deferred revenue related to set up fees for the twelve months ended June 30, 2020 were as follows:


Contract Liability
Contract liability, July 1, 2019	$	563.4
Recognition of revenue included in beginning of year contract liability	(168.5)
Contract liability, net of revenue recognized on contracts during the period	134.2
Currency adjustments	(6.4)
Contract liability, June 30, 2020	$	522.7

Deferred costs

Deferred costs are periodically reviewed for impairment. There were no impairment losses incurred during the period.

The balance is as follows:



June 30,	2020		2019
Deferred costs to obtain a contract	$	977.8	$	992.3
Deferred costs to fulfill a contract	1,423.8		1,436.2
Total deferred contract costs (1)	$	2,401.6	$	2,428.5

(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.

NOTE 3. OTHER (INCOME)/EXPENSE, NET

Other (income)/expense, net consists of the following:


Years ended June 30,	2020		2019		2018
Interest income on corporate funds	$	(84.5)	$	(97.6)	$	(83.5)


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)		—

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

In fiscal 2020, 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. 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.

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.

NOTE 4. CORPORATE INVESTMENTS AND FUNDS HELD FOR CLIENTS

Corporate investments and funds held for clients at June 30, 2020 and 2019 were as follows:


	June 30, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value (A)
Type of issue:
Money market securities, cash and other cash equivalents	$	7,053.6	$	—	$	—	$	7,053.6
Available-for-sale securities:
Corporate bonds	9,188.7		473.4		—		9,662.1
Asset-backed securities	3,274.6		96.0		(0.5)		3,370.1
U.S. Treasury securities	3,580.6		120.8		—		3,701.4
U.S. government agency securities	1,128.2		35.6		—		1,163.8
Canadian government obligations and 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
Other securities	1,018.1		41.1		(0.2)		1,059.0

Total available-for-sale securities	20,699.8		877.5		(0.7)		21,576.6

Total corporate investments and funds held for clients	$	27,753.4	$	877.5	$	(0.7)	$	28,630.2

(A) Included within available-for-sale securities are corporate investments with fair values of $13.6 million and funds held for clients with fair values of $21,563.0 million. All available-for-sale securities are included in Level 2 of the fair value hierarchy.


	June 30, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value (B)
Type of issue:
Money market securities, cash and other cash equivalents	$	6,796.2	$	—	$	—	$	6,796.2
Available-for-sale securities:
Corporate bonds	10,691.8		182.8		(6.7)		10,867.9
Asset-backed securities	4,658.3		37.8		(5.4)		4,690.7
U.S. Treasury securities	2,933.0		23.8		(8.0)		2,948.8
U.S. government agency securities	2,612.0		17.7		(5.8)		2,623.9
Canadian government obligations and 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
Municipal bonds	596.1		16.4		(0.1)		612.4
Other securities	1,116.1		20.6		(0.6)		1,136.1

Total available-for-sale securities	24,571.6		320.6		(33.1)		24,859.1

Total corporate investments and funds held for clients	$	31,367.8	$	320.6	$	(33.1)	$	31,655.3

(B) Included within available-for-sale securities are corporate investments with fair values of $271.9 million and funds held for clients with fair values of $24,587.2 million. All available-for-sale securities were included in Level 2 of the fair value hierarchy.

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.” The Company did not transfer any assets between Levels during fiscal 2020 or 2019. In addition, the Company concurred with and did not adjust the prices obtained from the independent pricing service. The Company has no available-for-sale securities included in Level 1 or Level 3 as of June 30, 2020.

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, 2020, are as follows:


	June 30, 2020
	Securities in unrealized loss position less than 12 months						Securities in unrealized loss position greater than 12 months						Total
	Gross Unrealized Losses		Fair Market Value		Gross Unrealized Losses		Fair Market Value		Gross Unrealized Losses		Fair Market Value
Corporate bonds	$	—	$	—	$	—	$	—	$	—	$	—
Asset-backed securities	(0.5)		43.9		—		—		(0.5)		43.9
U.S. Treasury securities	—		2.0		—		—		—		2.0
U.S. government agency securities	—		—		—		—		—		—
Canadian government obligations and Canadian government agency obligations	—		—		—		—		—		—
Commercial Mortgage-Backed Securities	—		—		—		1.5		—		1.5
Canadian provincial bonds	—		—		—		—		—		—
Other securities	(0.2)		17.1		—		—		(0.2)		17.1
	$	(0.7)	$	63.0	$	—	$	1.5	$	(0.7)	$	64.5


	June 30, 2019
	Securities in unrealized loss position less than 12 months						Securities in unrealized loss position greater than 12 months						Total
	Gross Unrealized Losses		Fair Market Value		Gross Unrealized Losses		Fair Market Value		Gross Unrealized Losses		Fair Market Value
Corporate bonds	$	(0.6)	$	151.9	$	(6.1)	$	2,055.6	$	(6.7)	$	2,207.5
Asset-backed securities	(0.2)		171.9		(5.2)		2,083.5		(5.4)		2,255.4
U.S. Treasury securities	—		1.8		(8.0)		1,159.4		(8.0)		1,161.2
U.S. 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
Municipal bonds	—		1.5		(0.1)		23.3		(0.1)		24.8
Other securities	(0.1)		36.4		(0.5)		148.1		(0.6)		184.5
	$	(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. The primary risk associated with these securities is the collection risk of the underlying receivables. All collateral on such asset-backed securities has performed as expected through June 30, 2020.

At June 30, 2020, U.S. 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. U.S. 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 July 2020 through December 2029.

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	—		10.5
Long-term marketable securities (a)	13.6		261.4
Total corporate investments	$	1,922.1	$	2,221.1

(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:
Restricted cash and cash equivalents held to satisfy client funds obligations	$	5,145.1	$	4,847.0
Restricted short-term marketable securities held to satisfy client funds obligations	5,541.2		5,013.9
Restricted long-term marketable securities held to satisfy client funds obligations	16,021.8		19,573.3
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 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. The Company has reported client funds obligations as a current liability on the Consolidated Balance Sheets totaling $25,831.6 million and $29,144.5 million as of June 30, 2020 and 2019, respectively. The Company has classified funds held for clients as a current asset since these funds are held solely for the purposes of satisfying the client funds obligations. Of the Company’s funds held for clients at June 30, 2020, $23,740.0 million are held in the grantor trust. The liabilities held within the trust are intercompany liabilities to other Company subsidiaries and eliminate in consolidation.

The Company has reported the cash flows related to the purchases of corporate and client funds marketable securities and related to the proceeds from the sales and maturities of corporate and client funds marketable securities on a gross basis in the investing section of the Statements of Consolidated Cash Flows. The Company has reported the cash and cash equivalents related to client funds investments with original maturities of ninety days or less, within the beginning and ending balances of cash, cash equivalents, restricted cash, and restricted cash equivalents. 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-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.

Expected maturities of available-for-sale securities at June 30, 2020 are as follows:


One year or less	$	5,541.2
One year to two years	3,962.2
Two years to three years	4,761.5
Three years to four years	3,005.6
After four years	4,306.1

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.

NOTE 5. 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:
Land and buildings	$	737.2	$	781.2
Data processing equipment	847.9		749.0
Furniture, leaseholds and other	643.6		651.6
	2,228.7		2,181.8
Less: accumulated depreciation	(1,524.8)		(1,417.6)
Property, plant and equipment, net	$	703.9	$	764.2

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 Sheets.

NOTE 6. LEASES

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:


	Year ended
	June 30,
	2020
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:


	Year ended
	June 30,
	2020
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
Less: 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.

NOTE 7. GOODWILL AND INTANGIBLE ASSETS, NET

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


	Employer Services		PEO Services		Total
Balance at June 30, 2018	$	2,238.7	$	4.8	$	2,243.5
Additions and other adjustments	94.3		—		94.3
Currency translation adjustments	(14.8)		—		(14.8)

Balance at June 30, 2019	$	2,318.2	$	4.8	$	2,323.0
Additions and other adjustments	(2.5)		—		(2.5)
Currency translation adjustments	(11.1)		—		(11.1)

Balance at June 30, 2020	$	2,304.6	$	4.8	$	2,309.4

Components of intangible assets, net, are as follows:


June 30,	2020		2019

Intangible assets:
Software and software licenses	$	2,719.1	$	2,519.3
Customer contracts and lists	1,021.2		860.7
Other intangibles	239.2		237.9
	3,979.5		3,617.9
Less accumulated amortization:
Software and software licenses	(1,912.0)		(1,762.3)
Customer contracts and lists	(628.3)		(566.4)
Other intangibles	(223.4)		(217.7)
	(2,763.7)		(2,546.4)

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

Other intangibles consist primarily of purchased rights, purchased content, trademarks and trade names (acquired directly or through acquisitions). All intangible assets have finite lives and, as such, are subject to amortization. The weighted average remaining useful life of the intangible assets is 6 years (6 years for software and software licenses, 5 years for customer contracts and lists, and 4 years for other intangibles). Amortization of intangible assets was $287.2 million, $228.4 million, and $204.5 million for fiscal 2020, 2019, and 2018, respectively.

Estimated future amortization expenses of the Company's existing intangible assets are as follows:


	Amount
Twelve months ending June 30, 2021	$	285.3
Twelve months ending June 30, 2022	$	243.7
Twelve months ending June 30, 2023	$	203.8
Twelve months ending June 30, 2024	$	161.5
Twelve months ending June 30, 2025	$	108.7

NOTE 8. SHORT TERM FINANCING

The Company has a $3.2 billion, 364-day credit agreement that matures in June 2021 with a one year term-out option. The Company also has a $2.75 billion five year credit facility that matures in June 2024 that also contains an accordion feature under which the aggregate commitment can be increased by $500 million, subject to the availability of additional commitments. In addition, the Company has a five year $3.75 billion credit facility maturing in June 2023 that contains an accordion feature under which the aggregate commitment can be increased by $500 million, subject to the availability of additional commitments. The interest rate applicable to committed borrowings is tied to LIBOR, the effective federal funds rate, or the prime rate depending on the notification provided by the Company to the syndicated financial institutions prior to borrowing. The Company is also required to pay facility fees on the credit agreements. The primary uses of the credit facilities are to provide liquidity to the commercial paper program and funding for general corporate purposes, if necessary. The Company had no borrowings through June 30, 2020 and 2019 under the credit agreements.

The Company's U.S. 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. 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, 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, 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		%

NOTE 9. DEBT

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”). The Notes are senior unsecured obligations, and interest is payable in arrears, semi-annually.

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, 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
Less: current portion		(1,001.8)		(2.5)
Less: unamortized discount and debt issuance costs		(3.8)		(6.2)
Total long-term debt		$	1,002.8	$	2,002.2

The effective interest rates for the Notes include the interest on the Notes and amortization of the discount and debt issuance costs.

As of June 30, 2020, the fair value of the Notes, based on Level 2 inputs, was $2,124.7 million. 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.

NOTE 10. EMPLOYEE BENEFIT PLANS

A. Stock-based Compensation Plans. Stock-based compensation consists of the following:

Stock Options. Stock options are granted to employees at exercise prices equal to the fair market value of the Company's common stock on the dates of grant. Stock options generally vest ratably over 4 years and have a term of 10 years. Compensation expense is measured based on the fair value of the stock option on the grant date and recognized on a straight-line basis over the vesting period. 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.**
Time-Based Restricted Stock and Time-Based Restricted Stock Units.** Time-based restricted stock and time-based restricted stock units granted September 1, 2018 and after generally vest ratably over 3 years. Time-based restricted stock and time-based restricted stock units granted prior to September 1, 2018 are generally subject to a vesting period of 2 years. Awards are forfeited if the employee ceases to be employed by the Company prior to vesting.

Time-based restricted stock cannot be transferred during the vesting period. Compensation expense relating to the issuance of time-based restricted stock is measured based on the fair value of the award on the grant date and recognized on a straight-line basis over the vesting period. Dividends are paid on shares awarded under the time-based restricted stock program.

Time-based restricted stock units are settled in cash and cannot be transferred during the vesting period. Compensation expense relating to the issuance of time-based restricted stock units is recorded over the vesting period and is initially based on the fair value of the award on the grant date and is subsequently remeasured at each reporting date during the vesting period based on the change in the ADP stock price. No dividend equivalents are paid on units awarded under the time-based restricted stock unit program.

Performance-Based Restricted Stock and Performance-Based Restricted Stock Units.** Performance-based restricted stock and performance-based restricted stock units generally vest over a one to three year performance period and a subsequent service period of up to 38 months. Under these programs, the Company communicates “target awards” at the beginning of the performance period with possible payouts at the end of the performance period ranging from 0% to 150% of the “target awards.” Awards are generally forfeited if the employee ceases to be employed by the Company prior to vesting.

Performance-based restricted stock cannot be transferred during the vesting period. Compensation expense relating to the issuance of performance-based restricted stock is recognized over the vesting period based on the fair value of the award on the grant date with subsequent adjustments to the number of shares awarded during the performance period based on probable and actual performance against targets. After the performance period, if the performance targets are achieved, employees are eligible to receive dividends during the remaining vesting period on shares awarded under the performance-based restricted stock program.

Performance-based restricted stock units cannot be transferred and are settled in either cash or stock, depending on the employee's home country. Compensation expense relating to the issuance of performance-based restricted stock units settled in cash is recognized over the vesting period initially based on the fair value of the award on the grant date with subsequent adjustments to the number of units awarded during the performance period based on probable and actual performance against targets. In addition, compensation expense is remeasured at each reporting period during the vesting period based on the change in the ADP stock price. Compensation expense relating to the issuance of performance-based restricted stock units settled in stock is recorded over the vesting period based on the fair value of the award on the grant date with subsequent adjustments to the number of units awarded based on the probable and actual performance against targets. Dividend equivalents are paid on awards under the performance-based restricted stock unit program.

Employee Stock Purchase Plan.** The Company offers an employee stock purchase plan that allows eligible employees to purchase shares of common stock at a price equal to 95% of the market value for the Company's common stock on the last day of the offering period. This plan has been deemed non-compensatory and, therefore, no compensation expense has been recorded.

The Company currently utilizes treasury stock to satisfy stock option exercises, issuances under the Company's employee stock purchase plan, and restricted stock awards. 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. The Company considers several factors in determining when to execute share repurchases, including, among other things, actual and potential acquisition activity, cash balances and cash flows, issuances due to employee benefit plan activity, and market conditions. Cash payments related to the settlement of vested time-based restricted stock units and performance-based restricted stock units were approximately $34.6 million, $26.6 million, and $27.1 million during fiscal years 2020, 2019, and 2018, respectively.

The following table represents stock-based compensation expense and related income tax benefits in each of fiscal 2020, 2019, and 2018, respectively:


Years ended June 30,	2020		2019		2018
Operating expenses	$	13.7	$	16.9	$	22.9
Selling, general and administrative expenses	99.1		131.2		128.7
System development and programming costs	18.0		19.2		23.8
Total pretax stock-based compensation expense	$	130.8	$	167.3	$	175.4

Income tax benefit	$	32.2	$	41.6	$	44.1

As of June 30, 2020, the total remaining unrecognized compensation cost related to non-vested stock options, restricted stock units, and restricted stock awards amounted to $18.2 million, $30.8 million, and $102.1 million, respectively, which will be amortized over the weighted-average remaining requisite service periods of 2.3 years, 1.5 years, and 1.9 years, respectively.

In fiscal 2020, the following activity occurred under the Company’s existing plans.

Stock Options:


	Number of Options (in thousands)	Weighted Average Price (in dollars)
Options outstanding at July 1, 2019	3,608	$	103
Options granted	1,015	$	170
Options exercised	(968)	$	86
Options forfeited/cancelled	(145)	$	136
Options outstanding at June 30, 2020	3,510	$	126
Options exercisable at June 30, 2020	1,273	$	96
Shares available for future grants, end of year	24,853
Shares reserved for issuance under stock option plans, end of year	28,363

Time-Based Restricted Stock and Time-Based Restricted Stock Units:


	Number of Shares (in thousands)	Number of Units (in thousands)
Restricted shares/units outstanding at July 1, 2019	1,272	290
Restricted shares/units granted	572	101
Restricted shares/units vested	(856)	(194)
Restricted shares/units forfeited	(83)	(17)
Restricted shares/units outstanding at June 30, 2020	905	180

Performance-Based Restricted Stock and Performance-Based Restricted Stock Units:


	Number of Shares (in thousands)	Number of Units (in thousands)
Restricted shares/units outstanding at July 1, 2019	250	867
Restricted shares/units granted	112	391
Restricted shares/units vested	(171)	(376)
Restricted shares/units forfeited	(12)	(31)
Restricted shares/units outstanding at June 30, 2020	179	851

The aggregate intrinsic value of outstanding stock options and exercisable stock options as of June 30, 2020 was $102.1 million and $66.8 million, respectively, which have a remaining life of 7 years and 6 years, respectively. The aggregate intrinsic value for stock options exercised in fiscal 2020, 2019, and 2018 was $78.0 million, $78.2 million, and $60.0 million, respectively.

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		%
Dividend yield	1.9		%	1.9		%	2.1		%
Weighted average volatility factor	19.3		%	20.9		%	21.7		%
Weighted average expected life (in years)	5.4			5.4			5.4
Weighted average fair value (in dollars)	$	24.40		$	26.60		$	17.50

The weighted average fair values of shares granted were as follows:


Year ended June 30,	2020		2019		2018

Performance-based restricted stock	$	169.84	$	146.93	$	107.43
Time-based restricted stock	$	167.16	$	146.80	$	108.10

B. Pension Plans

The Company has a defined benefit cash balance pension plan under which employees are credited with a percentage of base pay plus interest. The U.S. 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. Treasury rate. Employees are fully vested upon completion of three years of service. 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 (“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. employees and maintains a Supplemental Officers Retirement Plan (“SORP”). 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, 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.

The Company is required to (a) recognize in its Consolidated Balance Sheets an asset for a plan's net overfunded status or a liability for a plan's net underfunded status, (b) measure a plan's assets and its obligations that determine its funded status as of the end of the employer's fiscal year, and (c) recognize changes in the funded status of a defined benefit plan in the year in which the changes occur in accumulated other comprehensive (loss)/income.

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:
Fair value of plan assets at beginning of year	$	1,910.5	$	2,178.1
Actual return on plan assets	172.1		142.0
Employer contributions	9.8		10.0
Currency translation adjustments	(3.5)		(7.0)
Benefits paid	(100.1)		(412.6)
Fair value of plan assets at end of year	$	1,988.8	$	1,910.5

Change in benefit obligation:
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	210.7		95.8
Currency translation adjustments	(3.6)		(8.7)
Plan changes	0.4		0.8
Curtailments and special termination benefits	—		2.2
Benefits paid	(100.1)		(412.6)
Projected benefit obligation at end of year	$	2,180.1	$	1,951.2

Funded status - plan assets less benefit obligations	$	(191.3)	$	(40.7)

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
Current liabilities	(5.4)		(5.9)
Noncurrent liabilities	(205.7)		(142.8)
Net amount recognized	$	(191.3)	$	(40.7)

The accumulated benefit obligation for all defined benefit pension plans was $2,167.5 million and $1,938.0 million at June 30, 2020 and 2019, respectively.

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
Accumulated benefit obligation	$	2,034.4	$	149.9
Fair value of plan assets	$	1,835.4	$	13.8

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
Interest cost on projected benefits	61.8		78.6		65.4
Expected return on plan assets	(117.9)		(131.8)		(137.5)
Net amortization and deferral	6.8		0.1		8.4
Special termination benefits and plan curtailments	(22.0)		48.7		319.5
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 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:


Years ended June 30,	2020		2019

Discount rate	2.45	%	3.40	%
Increase in compensation levels	4.00	%	4.00	%

Assumptions used to determine the net pension expense generally were:


Years ended June 30,	2020		2019		2018

Discount rate	3.40	%	4.10	%	3.70	%
Expected long-term rate of return on assets	6.75	%	6.75	%	6.75	%
Increase in compensation levels	4.00	%	4.00	%	4.00	%

The discount rate is based upon published rates for high-quality fixed-income investments that produce cash flows that approximate the timing and amount of expected future benefit payments.

The expected long-term rate of return on assets is determined based on historical and expected future rates of return on plan assets considering the target asset mix and the long-term investment strategy.

Plan Assets

The Company's pension plans' asset allocations at June 30, 2020 and 2019 by asset category were as follows:


	2020		2019

Cash and cash equivalents	1	%	1	%
Fixed income securities	44	%	44	%
U.S. equity securities	17	%	17	%
International equity securities	13	%	13	%
Global equity securities	25	%	25	%
	100	%	100	%

The Company's pension plans' asset investment strategy is designed to ensure prudent management of assets, consistent with long-term return objectives and the prompt fulfillment of all pension plan obligations. The investment strategy and asset mix were developed in coordination with an asset liability study conducted by external consultants to maximize the funded ratio with the least amount of volatility.

The pension plans' assets are currently invested in various asset classes with differing expected rates of return, correlations, and volatilities, including large capitalization and small capitalization U.S. equities, international equities, U.S. fixed income securities, and cash.

The target asset allocation ranges for the U.S. plan are generally as follows:


U.S. fixed income securities			35% - 45%
U.S. equity securities			14% - 24%
International equity securities			11% - 21%
Global equity securities			20% - 30%

As of June 30, 2020 and June 30, 2019, the U.S. pension plan asset allocation is within the target ranges.

The pension plans' fixed income portfolio is designed to match the duration and liquidity characteristics of the pension plans' liabilities. In addition, the pension plans invest only in investment-grade debt securities to ensure preservation of capital. The pension plans' equity portfolios are subject to diversification guidelines to reduce the impact of losses in single investments. Investment managers are prohibited from buying or selling commodities and from the short selling of securities.

None of the pension plans' assets are directly invested in the Company's stock, although the pension plans may hold a minimal amount of Company stock to the extent of the Company's participation in equity indices.

The pension plans' investments included in Level 1 are valued using closing prices for identical instruments that are traded on active exchanges. The pension plans' investments included in Level 2 are valued utilizing inputs obtained from an independent pricing service, which are reviewed by the Company for reasonableness. To determine the fair value of our Level 2 plan assets, a variety of inputs are utilized, including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, new issue data, and monthly payment information. The pension plans have no Level 3 investments at June 30, 2020.

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
Mortgage-backed security bonds	—		38.5		—		38.5
Total pension asset investments	$	7.3	$	1,961.4	$	—	$	1,968.7

In addition to the investments in the above table, the pension plans also held cash and cash equivalents of $20.1 million as of June 30, 2020, which have been classified as Level 1 in the fair value hierarchy.

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
U.S. government securities	—		417.9		—		417.9
Mutual funds	6.5		—		—		6.5
Corporate and municipal bonds	—		394.3		—		394.3
Mortgage-backed security bonds	—		30.2		—		30.2
Total pension asset investments	$	6.5	$	1,889.0	$	—	$	1,895.5

In addition to the investments in the above table, the pension plans also held cash and cash equivalents of $15.0 million as of June 30, 2019, which have been classified as Level 1 in the fair value hierarchy.

Contributions

During fiscal 2020, the Company contributed $9.8 million to the pension plans. The Company expects to contribute $9.3 million to the pension plans during fiscal 2021.

Estimated Future Benefit Payments

The benefits expected to be paid in each year from fiscal 2021 to the year ended June 30, 2025 are $99.5 million, $117.8 million, $99.3 million, $106.3 million, and $119.4 million, respectively. The aggregate benefits expected to be paid in the five fiscal years from the year ended June 30, 2026 to the year ended June 30, 2030 are $639.4 million. The expected benefits to be paid are based on the same assumptions used to measure the Company's pension plans' benefit obligations at June 30, 2020 and includes estimated future employee service.

C. Retirement and Savings Plan. The Company has a 401(k) retirement and savings plan, which allows eligible employees to contribute up to 50% of their compensation annually and allows highly compensated employees to contribute up to 12% of their compensation annually. The Company matches a portion of employee contributions, which amounted to approximately $112.7 million, $110.9 million, and $100.6 million for the calendar years ended December 31, 2019, 2018, and 2017, respectively.

NOTE 11. INCOME TAXES

Earnings before income taxes shown below are based on the geographic location to which such earnings are attributable.


Years ended June 30,	2020		2019		2018

Earnings before income taxes:
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

Current:
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

Deferred:
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)
Total provision for income taxes	$	716.1	$	712.8	$	397.7

A reconciliation between the Company's effective tax rate and the U.S. federal statutory rate is as follows:


Years ended June 30,	2020		%	2019		%	2018		%

Provision for taxes at U.S. statutory rate	$	668.4	21.0	$	631.2	21.0	$	640.5	28.1

Increase/(decrease) in provision from:

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)	—		—	—		—
U.S. tax on foreign income	—		—	—		—	12.0		0.5
Utilization of foreign tax credits	—		—	—		—	(19.6)		(0.9)
Tax settlements	—		—	—		—	(31.9)		(1.4)
Re-measurement of deferred tax balances	—		—	—		—	(253.3)		(11.1)


Resolution of tax matters - Section 199 Qualified production activities and research tax credit refund claim	—		—	—		—	(33.3)		(1.5)
Foreign rate differential	44.9		1.4	46.9		1.6	—		—
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 significant components of deferred income tax assets and liabilities and their balance sheet classifications are as follows:


Years ended June 30,	2020		2019

Deferred tax assets:
Accrued expenses not currently deductible	$	203.0	$	228.9
Stock-based compensation expense	33.8		45.3
Foreign tax credits	20.1		25.1

Net operating losses	52.0		54.0

Retirement Benefits	46.0		5.6
Other	25.9		20.2
	380.8		379.1
Less: valuation allowances	(12.0)		(31.6)
Deferred tax assets, net	$	368.8	$	347.5

Deferred tax liabilities:

Deferred revenue	$	475.0	$	475.9
Fixed and intangible assets	288.2		279.5
Prepaid expenses	82.3		86.2
Unrealized investment gains, net	187.9		63.0
Tax on unrepatriated earnings	22.2		31.6
Other	6.4		7.2
Deferred tax liabilities	1,062.0		943.4
Net deferred tax liabilities	$	693.2	$	595.9

There are $38.8 million and $64.0 million of long-term deferred tax assets included in other assets on the Consolidated Balance Sheets at June 30, 2020 and 2019, respectively.

Income taxes have not been provided on undistributed earnings of certain foreign subsidiaries in an aggregate amount of approximately $274.1 million as the Company considers such earnings to be permanently reinvested outside of the United States. As of June 30, 2020, it is not practicable to estimate the unrecognized tax liability that would occur upon distribution.

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, 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.

The Company has state net operating loss carry-forwards of approximately $374.8 million as of June 30, 2020, which expire through June 2039. The Company has recorded valuation allowances of $12.0 million and $31.6 million at June 30, 2020 and 2019, respectively, to reflect the estimated amount of domestic and foreign deferred tax assets that may not be realized.

Income tax payments were approximately $677.1 million, $633.8 million, and $529.7 million for fiscal 2020, 2019, and 2018, respectively.

As of June 30, 2020, 2019, and 2018 the Company's liabilities for unrecognized tax benefits, which include interest and penalties, were $62.3 million, $54.2 million, and $45.2 million respectively. The amount that, if recognized, would impact the effective tax rate is $49.9 million, $43.3 million, and $36.1 million, respectively. The remainder, if recognized, would principally impact deferred taxes.

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
Additions for tax positions	13.2		9.5		4.0

Additions for tax positions of prior periods	6.3		18.3		19.8
Reductions for tax positions of prior periods	(4.3)		(7.7)		(40.5)
Settlement with tax authorities	(4.0)		(10.3)		(11.7)
Expiration of the statute of limitations	(2.8)		(0.6)		(1.0)
Impact of foreign exchange rate fluctuations	(0.3)		(0.2)		—
Unrecognized tax benefit at end of year	$	62.3	$	54.2	$	45.2

Interest expense and penalties associated with uncertain tax positions have been recorded in the provision for income taxes on the Statements of Consolidated Earnings. 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. 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, 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.

The Company is routinely examined by the IRS and tax authorities in foreign countries in which it conducts business, as well as tax authorities in states in which it has significant business operations. The tax years currently under examination vary by jurisdiction. Examinations in progress in which the Company has significant business operations are as follows:


Taxing Jurisdiction						Fiscal Years under Examination
U.S. (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. The resolution of tax matters is not expected to have a material effect on the consolidated financial condition of the Company, although a resolution could have a material impact on the Company's Statements of Consolidated Earnings for a particular future period and on the Company's effective tax rate.

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, settlements related to various jurisdictions and tax periods could increase earnings up to $4 million and expected cash payments could be up to $4 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.

NOTE 12. COMMITMENTS AND CONTINGENCIES

As of June 30, 2020, the Company has purchase commitments of approximately $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 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.

The Company is subject to various claims, litigation, and regulatory compliance matters in the normal course of business. When a loss is considered probable and reasonably estimable, the Company records a liability in the amount of its best estimate for the ultimate loss. Management currently believes that the resolution of these claims, litigation and regulatory compliance matters against us, individually or in the aggregate, will not have a material adverse impact on our consolidated results of operations, financial condition or cash flows. These matters are subject to inherent uncertainties and management's view of these matters may change in the future.

It is not the Company’s business practice to enter into off-balance sheet arrangements. In the normal course of business, the Company may enter into contracts in which it makes representations and warranties that relate to the performance of the Company’s services and products. The Company does not expect any material losses related to such representations and warranties.

NOTE 13. RECLASSIFICATION OUT OF ACCUMULATED OTHER COMPREHENSIVE (LOSS)/INCOME

Comprehensive income is a measure of income that includes both net earnings and other comprehensive income (loss). Other comprehensive income/(loss) results from items deferred on the Consolidated Balance Sheets in stockholders' equity. Other comprehensive income/(loss) was $242.5 million, $422.5 million, and ($254.3) million in fiscal 2020, 2019, and 2018, respectively. Changes in Accumulated Other Comprehensive (Loss)/Income (“AOCI”) by component are as follows:


	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	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	(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 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 (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.

NOTE 14. FINANCIAL DATA BY SEGMENT AND GEOGRAPHIC AREA

Based upon similar economic and operational characteristics, the Company’s strategic business units have been aggregated into the following two reportable segments: Employer Services and PEO Services. The primary components of the “Other” segment are certain corporate overhead charges and expenses that have not been allocated to the reportable segments, including corporate functions, costs related to our transformation office, non-recurring gains and losses, the elimination of intercompany transactions, and interest expense. Certain revenues and expenses are charged to the reportable segments at a standard rate for management reasons. Other costs are recorded based on management responsibility. 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
Depreciation and amortization	388.0		3.4		88.6		480.0

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
Depreciation and amortization	321.0		3.5		84.5		409.0

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		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

NOTE 15. 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, 2020	First Quarter		Second Quarter		Third Quarter		Fourth Quarter

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:
Basic earnings per share	$	1.35	$	1.51	$	1.91	$	0.96

Diluted per common share amounts:
Diluted earnings per share	$	1.34	$	1.50	$	1.90	$	0.96


Year ended June 30, 2019	First Quarter		Second Quarter		Third Quarter		Fourth Quarter

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:
Basic earnings per share	$	1.16	$	1.28	$	1.74	$	1.10

Diluted per common share amounts:
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.

NOTE 16. 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.

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