Item 8. Financial Statements and Supplementary Data

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Description	Page
Report on Management’s Assessment of Internal Control Over Financial Reporting	38
Report of Independent Registered Public Accounting Firm	39
Consolidated Statements of Income and Comprehensive Income for the Years Ended May 31, 2021, 2020, and 2019	41
Consolidated Balance Sheets as of May 31, 2021 and 2020	42
Consolidated Statements of Stockholders’ Equity for the Years Ended May 31, 2021, 2020, and 2019	43
Consolidated Statements of Cash Flows for the Years Ended May 31, 2021, 2020, and 2019	44
Notes to Consolidated Financial Statements	45
Schedule II — Valuation and Qualifying Accounts for the Years Ended May 31, 2021, 2020, and 2019	72

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REPO****RT ON MANAGEMENT’S ASSESSMENT OF

INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Paychex, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of May 31, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control — Integrated Framework” (2013). Based on our assessment, management determined that the Company maintained effective internal control over financial reporting as of May 31, 2021.

The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, is appointed by the Company’s Audit Committee. PricewaterhouseCoopers LLP has audited the Consolidated Financial Statements included in this Annual Report on Form 10-K and the effectiveness of the Company’s internal control over financial reporting as of May 31, 2021, and as a part of their integrated audit, has issued their report, included herein, on the effectiveness of the Company’s internal control over financial reporting.


/s/ Martin Mucci Martin Mucci President and Chief Executive Officer		/s/ Efrain Rivera Efrain Rivera Senior Vice President, Chief Financial Officer, and Treasurer

‎

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Paychex, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Paychex, Inc. and its subsidiaries (the “Company”) as of May 31, 2021 and 2020, and the related consolidated statements of income and comprehensive income, of stockholders’ equity, and of cash flows for each of the three years in the period ended May 31, 2021, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of May 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of May 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended May 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note A to the consolidated financial statements, the Company changed the manner in which it accounts for leases on June 1, 2019.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report on Management’s Assessment of Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (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 audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated 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 consolidated 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 consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Professional Employer Organization (PEO) Insurance Reserves - Workers’ Compensation Insurance Reserves

As described in Note A to the consolidated financial statements, the Company offers workers’ compensation insurance to clients for the benefit of client employees. Workers’ compensation insurance is primarily provided under fully insured high deductible workers’ compensation insurance policies. Workers’ compensation insurance reserves are established to provide for the estimated costs of paying claims up to per occurrence liability limits. As of May 31, 2021, the total liability for workers’ compensation insurance reserves is $183.1 million. In establishing the workers' compensation insurance reserves, management uses an independent actuarial estimate of undiscounted future cash payments that would be made to settle the claims. The determination of estimated ultimate losses by the Company’s actuary are based on accepted actuarial methods and assumptions. The estimated ultimate losses are primarily based upon loss development factors, and other factors such as the nature of employees’ job responsibilities, the historical frequency and severity of workers’ compensation claims, and an estimate of future cost trends.

The principal considerations for our determination that performing procedures relating to PEO insurance reserves - workers’ compensation insurance reserves is a critical audit matter are (i) there was significant judgment by management in determining the workers’ compensation insurance reserves, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing our procedures and evaluating management’s assumptions and actuarial estimates related to the loss development factors and other factors such as the historical frequency and severity of workers’ compensation claims and an estimate of future cost trends, and (ii) the audit effort included the involvement of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the Company’s workers’ compensation insurance reserves, including controls over the development of management’s assumptions and actuarial estimates related to the estimated loss development factors. These procedures also included, among others (i) the involvement of professionals with specialized skill and knowledge to assist in developing an independent estimate of the workers’ compensation insurance reserves and (ii) comparison of this independent estimate to management’s estimate to evaluate the reasonableness of management’s estimate. Developing an independent estimate involved (i) testing the completeness and accuracy of data provided by management and (ii) evaluating management’s model, assumptions and actuarial estimates related to the loss development factors and other factors such as the historical frequency and severity of workers’ compensation claims and an estimate of future cost trends.

/s/ PricewaterhouseCoopers LLP

Rochester, New York

July 16, 2021

We have served as the Company’s auditor since 2013.

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PA****YCHEX, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

In millions, except per share amounts




Year ended May 31,		2021		2020		2019
Revenue:
Management Solutions	$	3,023.4	$	2,963.0	$	2,877.7
PEO and Insurance Solutions		974.1		990.6		814.2
Total service revenue		3,997.5		3,953.6		3,691.9
Interest on funds held for clients		59.3		86.9		80.6
Total revenue		4,056.8		4,040.5		3,772.5
Expenses:
Cost of service revenue		1,271.2		1,280.8		1,177.8
Selling, general and administrative expenses		1,324.9		1,299.2		1,223.4
Total expenses		2,596.1		2,580.0		2,401.2
Operating income		1,460.7		1,460.5		1,371.3
Other expense, net		(26.5)		(23.4)		(3.3)
Income before income taxes		1,434.2		1,437.1		1,368.0
Income taxes		336.7		339.0		333.6
Net income	$	1,097.5	$	1,098.1	$	1,034.4

Other comprehensive (loss)/income, net of tax		(4.7)		56.4		36.3
Comprehensive income	$	1,092.8	$	1,154.5	$	1,070.7

Basic earnings per share	$	3.05	$	3.06	$	2.88
Diluted earnings per share	$	3.03	$	3.04	$	2.86
Weighted-average common shares outstanding		359.9		358.5		359.2
Weighted-average common shares outstanding, assuming dilution		362.1		361.0		361.8

See Notes to Consolidated Financial Statements.

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PA****YCHEX, INC.

CONSOLIDATED BALANCE SHEETS

In millions, except per share amounts




As of May 31,	2021		2020
Assets
Cash and cash equivalents	$	995.2	$	905.2
Restricted cash		51.3		49.8
Corporate investments		36.7		27.2
Interest receivable		24.4		26.2
Accounts receivable, net of allowance for doubtful accounts		578.3		384.1
PEO unbilled receivables, net of advance collections		450.9		380.0
Prepaid income taxes		33.5		16.8
Prepaid expenses and other current assets		249.2		244.8
Current assets before funds held for clients		2,419.5		2,034.1
Funds held for clients		3,750.0		3,430.5
Total current assets		6,169.5		5,464.6
Long-term restricted cash		37.0		21.3
Long-term corporate investments		7.1		10.2
Property and equipment, net of accumulated depreciation		395.8		407.4
Operating lease right-of-use assets, net of accumulated amortization		103.0		114.8
Intangible assets, net of accumulated amortization		275.8		330.6
Goodwill		1,820.7		1,791.1
Long-term deferred costs		384.1		372.5
Other long-term assets		34.2		38.2
Total assets	$	9,227.2	$	8,550.7
Liabilities
Accounts payable	$	89.0	$	79.4
Accrued corporate compensation and related items		209.7		131.7
Accrued worksite employee compensation and related items		586.4		512.4
Short-term borrowings		7.4		5.1
Accrued income taxes		—		50.5
Deferred revenue		37.9		39.2
Other current liabilities		336.8		277.6
Current liabilities before client fund obligations		1,267.2		1,095.9
Client fund obligations		3,671.0		3,331.0
Total current liabilities		4,938.2		4,426.9
Accrued income taxes		25.8		33.5
Deferred income taxes		218.0		240.8
Long-term borrowings, net of debt issuance costs		797.3		796.8
Operating lease liabilities		92.4		96.9
Other long-term liabilities		207.5		174.4
Total liabilities		6,279.2		5,769.3
Commitments and contingencies — Note Q
Stockholders’ equity
Common stock, $0.01 par value; Authorized: 600.0 shares; Issued and outstanding: 359.8 shares as of May 31, 2021 and 358.8 shares as of May 31, 2020		3.6		3.6
Additional paid-in capital		1,446.7		1,289.9
Retained earnings		1,445.9		1,431.4
Accumulated other comprehensive income		51.8		56.5
Total stockholders’ equity		2,948.0		2,781.4
Total liabilities and stockholders’ equity	$	9,227.2	$	8,550.7

See Notes to Consolidated Financial Statements.

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PAY****CHEX, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

In millions



								Accumulated
				Additional				other
	Common stock			paid-in		Retained		comprehensive
	Shares	Amount		capital		earnings		(loss)/income		Total
Balance as of May 31, 2018	359.0	$	3.6	$	1,126.8	$	1,262.6	$	(36.2)	$	2,356.8
Net income	—		—		—		1,034.4		—		1,034.4
Unrealized gains on securities, net of $14.2 million in tax expense	—		—		—		—		44.0		44.0
Reclassification adjustment for realized gains on securities, net of $- million in tax expense (1)	—		—		—		—		—		—
Cash dividends declared ($2.30 per share)	—		—		—		(826.8)		—		(826.8)
Repurchases of common shares (2)	(0.7)		—		(1.4)		(55.5)		—		(56.9)
Stock-based compensation	—		—		46.2		—		—		46.2
Foreign currency translation adjustment	—		—		—		—		(7.7)		(7.7)
Activity related to equity-based plans	1.0		—		34.7		(5.2)		—		29.5
Balance as of May 31, 2019	359.3		3.6		1,206.3		1,409.5		0.1		2,619.5
Net income	—		—		—		1,098.1		—		1,098.1
Unrealized gains on securities, net of $22.6 million in tax expense	—		—		—		—		68.9		68.9
Reclassification adjustment for realized gains on securities, net of $2.8 million in tax expense (1)	—		—		—		—		(8.5)		(8.5)
Cash dividends declared ($2.48 per share)	—		—		—		(889.4)		—		(889.4)
Repurchases of common shares (2)	(2.0)		—		(3.7)		(168.2)		—		(171.9)
Stock-based compensation	—		—		47.4		—		—		47.4
Foreign currency translation adjustment	—		—		—		—		(4.0)		(4.0)
Activity related to equity-based plans	1.5		—		39.9		(18.6)		—		21.3
Balance as of May 31, 2020	358.8		3.6		1,289.9		1,431.4		56.5		2,781.4
Net income	—		—		—		1,097.5		—		1,097.5
Unrealized losses on securities, net of $4.8 million in tax benefit	—		—		—		—		(14.7)		(14.7)
Reclassification adjustment for realized gains on securities, net of $0.3 million in tax expense (1)	—		—		—		—		(0.9)		(0.9)
Cash dividends declared ($2.52 per share)	—		—		—		(908.7)		—		(908.7)
Repurchases of common shares (2)	(1.7)		—		(3.1)		(152.6)		—		(155.7)
Stock-based compensation	—		—		52.5		—		—		52.5
Foreign currency translation adjustment	—		—		—		—		10.9		10.9
Activity related to equity-based plans	2.7		—		107.4		(21.7)		—		85.7
Balance as of May 31, 2021	359.8	$	3.6	$	1,446.7	$	1,445.9	$	51.8	$	2,948.0

(1)Reclassification adjustments out of accumulated other comprehensive income for realized gains, net of tax, on the sale of available-for-sale (“AFS”) securities are reflected in interest on funds held for clients and other expense, net on the Consolidated Statements of Income and Comprehensive Income.

(2)The Company maintains a program to repurchase up to $400.0 million of its common stock, with authorization expiring on May 31, 2022. The purpose of this program is to manage common stock dilution. All shares of common stock repurchased were retired.

See Notes to Consolidated Financial Statements.

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PA****YCHEX, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

In millions




Year ended May 31,	2021		2020		2019
Operating activities
Net income	$	1,097.5	$	1,098.1	$	1,034.4
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		192.0		209.7		181.5
Amortization of premiums and discounts on available-for-sale securities, net		35.8		40.8		49.0
Amortization of deferred contract costs		191.4		186.1		180.2
Stock-based compensation costs		52.5		47.4		46.2
(Benefit)/provision for deferred income taxes		(21.0)		(4.0)		4.7
Provision for allowance for doubtful accounts		8.0		7.8		3.3
Net realized gains on sales of available-for-sale securities		(1.2)		(11.3)		—
Changes in operating assets and liabilities:
Interest receivable		1.8		1.2		4.8
Accounts receivable and PEO unbilled receivables, net		(272.9)		55.1		(117.2)
Prepaid expenses and other current assets		(15.8)		(1.6)		1.0
Accounts payable and other current liabilities		169.0		(4.9)		77.5
Deferred costs		(208.0)		(196.6)		(188.5)
Net change in other long-term assets and liabilities		32.1		12.7		(5.4)
Net change in operating lease right-of-use assets and liabilities		(0.9)		0.4		—
Net cash provided by operating activities		1,260.3		1,440.9		1,271.5
Investing activities
Purchases of available-for-sale securities		(6,089.7)		(25,218.1)		(35,145.8)
Proceeds from sales and maturities of available-for-sale securities		5,771.9		26,132.9		34,638.8
Purchases of property and equipment		(114.6)		(127.0)		(123.8)
Acquisition of businesses, net of cash acquired		(19.5)		(6.1)		(992.2)
Purchases of other assets		(8.7)		(9.8)		(5.3)
Net cash (used in)/provided by investing activities		(460.6)		771.9		(1,628.3)
Financing activities
Net change in client fund obligations		340.0		(453.3)		(950.6)
Net proceeds from short-term borrowings		2.3		5.1		—
Proceeds from borrowings to fund acquisition		—		—		796.3
Dividends paid		(908.7)		(889.4)		(826.8)
Repurchases of common shares		(155.7)		(171.9)		(56.9)
Activity related to equity-based plans		85.7		21.3		29.5
Net cash used in financing activities		(636.4)		(1,488.2)		(1,008.5)
Net change in cash, restricted cash, and equivalents		163.3		724.6		(1,365.3)
Cash, restricted cash, and equivalents, beginning of fiscal year		1,659.8		935.2		2,300.5
Cash, restricted cash, and equivalents, end of fiscal year	$	1,823.1	$	1,659.8	$	935.2

Reconciliation of cash, restricted cash, and equivalents
Cash and cash equivalents	$	995.2	$	905.2	$	673.6
Restricted cash		88.3		71.1		57.1
Restricted cash and restricted cash equivalents included in funds held for clients		739.6		683.5		204.5
Total cash, restricted cash, and equivalents	$	1,823.1	$	1,659.8	$	935.2

See Notes to Consolidated Financial Statements.

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PAY****CHEX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note A — Description of Business, Basis of Presentation, and Significant Accounting Policies

Description of business: Paychex, Inc. and its wholly owned subsidiaries (collectively, the “Company” or “Paychex”) is a leading human resource (“HR”) software and services company, offering integrated human capital management (“HCM”) solutions for HR, payroll, benefits, and insurance services for small- to medium-sized businesses in the United States (“U.S.”). The Company also has operations in parts of Europe.

Paychex, a Delaware corporation formed in 1979, reports as one segment. Substantially all of the Company’s revenue is generated within the U.S. Approximately one percent of the Company’s total revenue was generated within Europe for each of the fiscal years ended May 31, 2021 (“fiscal 2021”), May 31, 2020 (“fiscal 2020”), and May 31, 2019 (“fiscal 2019”). Long-lived assets in Europe were approximately 7% and 5% of total long-lived assets of the Company as of May 31, 2021 and May 31, 2020, respectively.

Within Paychex’s HCM solutions, Paychex offers a comprehensive portfolio of services and products that allow its clients to meet their diverse HR and payroll needs. Clients can select services on an á la carte basis or as part of various product bundles. Paychex’s offerings often leverage the information gathered in its base payroll processing service, allowing the Company to provide comprehensive outsourcing services covering the HCM spectrum.

Paychex supports its small business clients utilizing its proprietary, robust, software-as-a-service (“SaaS”) Paychex Flex® platform and the Company’s SurePayroll® SaaS-based products. Both products allow users to process payroll when they want, how they want, and on any type of device (desktop, tablet, and mobile phone). Paychex’s medium-sized clients generally have more complex payroll and employee benefit needs and can opt for an integrated suite of HCM solutions, which allows them to choose the services and software that will meet the needs of their businesses. In the current environment of increasing regulations, the Company believes the needs for HR outsourcing solutions have been moving down-market.

Total revenue is comprised of service revenue and interest on funds held for clients. Service revenue is comprised primarily of the fees earned on the portfolio of HCM services, which include payroll processing, complementary HR management and administration services, professional employer organization (“PEO”) solutions, and insurance agency commissions. Refer to Note B of this Item 8 for further discussion of the Company’s service revenue.

Basis of presentation: The consolidated financial statements include the accounts of Paychex, Inc., and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Certain disclosures are reported as zero balances due to rounding.

Reclassifications: Certain prior year amounts have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported consolidated earnings.

Subsequent Events: On July 7, 2021, our Board of Directors (the “Board”) voted to authorize a program to repurchase up to $400 million of Paychex common stock with authorization expiring on January 31, 2024. This repurchase program is in addition to the existing program with authorization expiring on May 31, 2022. On July 8, 2021, Paychex announced that its Board declared a regular quarterly dividend of $0.66 per share payable August 26, 2021 to stockholders of record as of August 2, 2021.

Cash and cash equivalents: Cash and cash equivalents consist of available cash, money market securities, and other investments with a maturity of 90 days or less at acquisition. Cash and cash equivalents include funds collected from the Company’s PEO clients for the payment of worksite employee payrolls and associated payroll taxes. Funds of $150.5 million and $136.4 million collected from PEO clients are included in cash and cash equivalents on the Company’s Consolidated Balance Sheets as of May 31, 2021 and May 31, 2020, respectively.

Restricted cash and restricted cash equivalents: Restricted cash and restricted cash equivalents are recorded at fair value, and consist of cash and cash equivalents, primarily money market securities, included in funds held for clients and cash that is restricted in use for payment of workers’ compensation claims.

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Accounts receivable, net of allowance for doubtful accounts: Accounts receivable balances are shown on the Consolidated Balance Sheets net of the allowance for doubtful accounts of $16.0 million and $12.5 million as of May 31, 2021 and May 31, 2020, respectively. These balances include trade receivables for services provided to clients and purchased receivables related to payroll funding arrangements with clients in the temporary staffing industry. Trade receivables were $98.4 million and $84.7 million as of May 31, 2021 and May 31, 2020, respectively. Purchased receivables were $495.9 million and $311.9 million as of May 31, 2021 and May 31, 2020, respectively.

The Company is exposed to credit losses through the sale of services, payment of client obligations, and collection of purchased receivables. To mitigate this credit risk, the Company has multiple programs in place to assess and continuously monitor each client’s ability to pay for these products and services. Credit monitoring programs include, but are not limited to, new client credit reviews, establishing appropriate credit limits, monitoring of credit distressed clients, and early electronic wire and collection procedures. The Company also considers contract terms and conditions, client business type or strategy and may require collateralized asset support or prepayment to mitigate credit risk.

Accounts receivable are written off and charged against the allowance for doubtful accounts when the Company has exhausted all collection efforts without success. The Company estimates its allowance for credit losses based on historical loss activity adjusted for current economic conditions and reasonable and supportable forecast factors, when applicable. The provision for the allowance for doubtful accounts and accounts written off were not material for the fiscal year ended May 31, 2021 and May 31, 2020, respectively. No single client had a material impact on total accounts receivable, service revenue, or results of operations for the fiscal year ended May 31, 2021 or May 31, 2020.

PEO unbilled receivables, net of advance collections: The Company recognizes a liability for worksite employee gross wages and related payroll tax liabilities at the end of the period in which the worksite employee performs work, and where it assumes, under applicable state regulations, the obligation for the payment of payroll and payroll tax liabilities. The estimated payroll and payroll tax liabilities are recorded in accrued worksite employee compensation and related items on the Company’s Consolidated Balance Sheets. The associated unbilled receivables, including estimated revenues, offset by advance collections from clients, are recorded as PEO unbilled receivables, net of advance collections on the Company’s Consolidated Balance Sheets. As of May 31, 2021 and May 31, 2020, advance collections included in PEO unbilled receivables, net of advance collections were $2.5 million and $6.1 million, respectively.

Funds held for clients and corporate investments: Marketable securities included in funds held for clients and corporate investments consist primarily of securities classified as AFS and are recorded at fair value obtained from an independent pricing service. The funds held for clients portfolio also includes cash and cash equivalents such as money market securities. Unrealized gains and losses, net of applicable income taxes, are reported as other comprehensive income in the Consolidated Statements of Income and Comprehensive Income. Realized gains and losses on the sale of AFS securities are determined by specific identification of the cost basis of each security. On the Consolidated Statements of Income and Comprehensive Income, realized gains and losses from the funds held for clients portfolio and corporate investments portfolio are included in interest on funds held for clients and other expense, net, respectively.

Concentrations: Substantially all the Company’s deposited cash is maintained at large well-capitalized (as defined by their regulators) financial institutions. These deposits may exceed the amount of any insurance provided. All the Company’s deliverable securities, primarily municipal bond securities, are held in custody with certain of the aforementioned financial institutions, for which that institution bears the risk of custodial loss. Non-deliverable securities are primarily time deposits and money market funds.

Property and equipment, net of accumulated depreciation: Property and equipment is stated at cost, less accumulated depreciation. Depreciation is based on the estimated useful lives of property and equipment using the straight-line method. The estimated useful lives of depreciable assets are generally as follows:



Category		Depreciable life
Buildings and improvements		10 to 35 years or the remaining life, whichever is shorter
Data processing equipment		3 to 4 years
Furniture, fixtures, and equipment		2 to 7 years
Leasehold improvements		10 years or the life of the lease, whichever is shorter

Normal and recurring repairs and maintenance costs are charged to expense as incurred. The Company reviews the carrying value of property and equipment for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.

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Software development and enhancements: Expenditures for software purchases and software developed for internal use are capitalized and depreciated on a straight-line basis over the estimated useful lives, which are generally 3 to 5 years. Software developed as part of the Company’s main processing platform is depreciated over 12 years. For software developed for internal use, certain costs are capitalized, including external direct costs of materials and services associated with developing or obtaining the software, and payroll and payroll-related costs for employees who are directly associated with internal-use software projects. Capitalization of these costs ceases no later than the point at which the project is substantially complete and ready for its intended use. Costs associated with preliminary project stage activities, training, maintenance, and other post-implementation stage activities are expensed as incurred. The carrying value of software and development costs is reviewed for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.

Goodwill and other intangible assets, net of accumulated amortization: Goodwill is not amortized, but instead is tested for impairment on an annual basis and between annual tests if an event occurs or circumstances change in a way to indicate that there has been a potential decline in the fair value of a reporting unit. The Company performs its annual impairment testing in its fiscal fourth quarter. A qualitative analysis was performed for all reporting units in fiscal 2021, 2020, and 2019 to determine if it is more-likely-than-not that the fair value of the reporting units had declined below their carrying value. The qualitative assessment considered various financial, macroeconomic, industry, and reporting unit specific qualitative factors. Based on the results of the Company’s testing, no impairment loss was recognized in the results of operations for fiscal 2021, 2020, or 2019. Subsequent to the latest review, there have been no events or circumstances that indicate any potential impairment of the Company’s goodwill balance.

Intangible assets are comprised primarily of client list acquisitions and are reported net of accumulated amortization on the Consolidated Balance Sheets. Intangible assets are amortized over periods generally ranging from 3 to 12 years. Certain client lists use an accelerated method, while other intangible assets use the straight-line method of amortization. In addition, the Company has intangible assets with indefinite useful lives, which are tested for impairment on an annual basis and between annual tests if an event occurs or circumstances change in a way to indicate that the carrying value may not be recoverable. The Company has determined there is no impairment of intangible assets with indefinite useful lives for fiscal 2021, 2020, or 2019.

Impairment of Long-Lived Assets: Long-lived assets, including intangible assets with finite lives and operating lease right-of-use assets, are reviewed for impairment when 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 estimated fair value of the asset. The Company has determined that there was no impairment of long-lived assets for fiscal 2021, 2020, or 2019.

Foreign Currency**:** The financial statements of the Company’s foreign subsidiaries have been translated into U.S. dollars. Assets and liabilities are translated into U.S. dollars at period-end exchange rates. Income and expenses are translated at the average exchange rate for the reporting period. The resulting non-cash foreign currency translation adjustments, representing unrealized gains or losses, are included in Consolidated Statements of Stockholders’ Equity as a component of accumulated other comprehensive (loss)/income, net of tax. The Company did not have any material realized gains or losses resulting from foreign exchange transactions during fiscal 2021, 2020, or 2019.

Revenue recognition: Revenues are primarily attributable to fees for providing services as well as investment income earned on funds held for clients. Fees associated with services are recognized in the period services are rendered and earned under service arrangements with clients where service fees are fixed or determinable and collectability is reasonably assured. The Company’s service revenue is largely attributable to processing services where the fee is based on a fixed amount per processing period or a fixed amount per processing period plus a fee per employee or transaction processed. Insurance Solutions revenues are recognized when commissions are earned on premiums billed and collected. Fees earned for funding payrolls of our clients in the temporary staffing agency via the purchase of accounts receivable are based on a percentage of funding amounts as specified in the client contract. These fees are then recognized over the average collection period of 35 to 45 days. The revenue earned from delivery service for the distribution of certain client payroll checks and reports is included in service revenue, and the costs for the delivery are included in cost of service revenue on the Consolidated Statements of Income and Comprehensive Income.

The Company receives advance payments for set-up fees from its clients. Advance payments received for certain of the Company’s service offerings for set-up fees are considered a material right. Therefore, the Company defers the revenue associated with these advance payments, recognizing the revenue and related expenses over the expected period to which the material right exists.

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PEO Solutions revenue is included in service revenue and is reported net of certain pass-through costs billed and incurred, which include payroll wages, payroll taxes, including federal and state unemployment insurance, and certain health insurance benefit premiums, primarily costs related to the Company’s guaranteed cost benefit plans. Direct costs related to workers’ compensation and certain benefit plans where the Company retains risk are recognized as cost of service revenue rather than as a reduction in service revenue. Refer to Note B of this Item 8 for further discussion of the PEO pass-through costs.

Interest on funds held for clients is earned primarily on funds that are collected from clients before due dates for payroll tax administration services and for employee payment services and invested until remittance to the applicable tax or regulatory agencies or client employees. The interest earned on these funds is included in total revenue on the Consolidated Statements of Income and Comprehensive Income because the collecting, holding, and remitting of these funds are components of providing these services.

Assets Recognized from the Costs to Obtain and Fulfill Contracts: The Company recognizes an asset for the incremental costs of obtaining a contract with a client if it is expected that the economic benefit and amortization period will be longer than one year. Incremental costs of obtaining a contract include only those costs that are directly related to the acquisition of new contracts and that would not have been incurred if the contract had not been obtained. The Company does not incur incremental costs to obtain a contract renewal. The Company determined that certain sales commissions and bonuses, including related fringe benefits, meet the capitalization criteria under Accounting Standards Codification (“ASC”) Subtopic 340-40, “Other Assets and Deferred Costs: Contracts with Customers” (“ASC 340-40”). The Company also recognizes an asset for the costs to fulfill a contract with a client if the costs are specifically identifiable, generate or enhance resources used to satisfy future performance obligations, and are expected to be recovered. The Company determined that substantially all costs related to implementation activities are administrative in nature and meet the capitalization criteria under ASC 340-40. These capitalized costs to fulfill a contract principally relate to upfront direct costs that are expected to be recovered and enhance the Company’s ability to satisfy future performance obligations.

The assets related to both costs to obtain and costs to fulfill contracts with clients are capitalized and amortized using an accelerated method over an eight-year life to closely align with the pattern of client attrition over the estimated life of the client relationship. The Company regularly reviews its deferred costs for potential impairment and did not recognize an impairment loss during fiscal 2021, 2020, or 2019.

Cost of service revenue: The Company’s costs and expenses applicable to total service revenue represent direct costs associated with providing HR, payroll, benefits, and insurance services. This includes labor-related costs, direct costs related to certain PEO offerings, postage and delivery costs, facility costs, professional services, and depreciation and amortization of property and equipment, including internally developed software.

Selling, general and administrative expenses: The Company’s selling, general and administrative expenses represent labor-related costs, including amortization of deferred sales commissions and bonuses, corporate asset depreciation and amortization, marketing, and other general and administrative expenses incurred by the Company.

PEO insurance reserves: As part of the PEO solution, the Company offers workers’ compensation insurance and health insurance to clients for the benefit of client employees. Workers’ compensation insurance is primarily provided under fully insured high deductible workers’ compensation insurance policies. Workers’ compensation insurance reserves are established to provide for the estimated costs of paying claims up to per occurrence liability limits. These reserves include estimates of certain expenses associated with processing and settling these claims. In establishing the PEO workers’ compensation insurance reserves, the Company uses an independent actuarial estimate of undiscounted future cash payments that would be made to settle claims. The determination of estimated ultimate losses by the Company’s independent actuary are based on accepted actuarial methods and assumptions. The estimated ultimate losses are primarily based upon loss development factors, and other factors such as the nature of employees’ job responsibilities, the historical frequency and severity of workers’ compensation claims, and an estimate of future cost trends. Each reporting period, changes in actuarial assumptions resulting from changes in actual claims experience and other trends are incorporated into our workers’ compensation claims cost estimates.

The Company’s maximum individual claims liability under its PEO workers’ compensation insurance policies was $1.0 million for both fiscal 2021 and fiscal 2020. As of May 31, 2021 and May 31, 2020, the Company had recorded current liabilities of $65.3 million and $72.3 million, respectively, and long-term liabilities of $117.8 million and $101.3 million, respectively, on its Consolidated Balance Sheets for workers’ compensation insurance reserves.

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With respect to the PEO health insurance, the Company offers various health insurance plans that take the form of either fully insured guaranteed cost plans or fully insured insurance arrangements where the Company retains risk. A reserve for insurance arrangements where the Company retains risk is established to provide for the payment of claims in accordance with the Company’s service contract with the carrier. The claims liability includes estimates for reported losses, plus amounts for those claims incurred but not reported, and estimates of certain expenses associated with processing and settling the claims. The Company’s maximum individual claims liability was $0.3 million under its policies during both fiscal 2021 and fiscal 2020. Amounts accrued related to the health insurance and dental and vision plan reserves were $43.9 million and $36.7 million as of May 31, 2021 and May 31, 2020, respectively. These amounts are included in current liabilities on the Consolidated Balance Sheets.

Estimating the ultimate cost of future claims is an uncertain and complex process based upon historical loss experience and independent actuarial loss projections, and is subject to change due to multiple factors, including economic trends, changes in legal liability law, and damage awards, all of which could materially impact the reserves as reported in the consolidated financial statements. Accordingly, final claim settlements may vary from the present estimates, particularly with workers’ compensation insurance where those payments may not occur until well into the future. The Company regularly reviews the adequacy of its estimated insurance reserves. Adjustments to previously established reserves are reflected in the results of operations for the period in which the adjustment is identified. Such adjustments could be significant, reflecting any combination of new and adverse or favorable trends. Adjustments to previously established reserves were not material for fiscal 2021, 2020, or 2019.

Leases: The Company adopted the requirements of ASU No. 2016-02 on June 1, 2019. At contract inception, the Company determines if the new contractual arrangement is a lease or contains a leasing arrangement. If a contract contains a lease whose term is greater than one year, the Company evaluates whether it should be classified as an operating or a finance lease. Currently, all the Company’s leases have been classified as operating leases. Upon modification of a contract, the Company will reassess to determine if a contract is or contains a leasing arrangement.

The Company records lease liabilities based on the future estimated cash payments discounted over the lease term, defined as the non-cancellable time period of the lease, together with all the following:

periods covered by an option to extend the lease if the Company is reasonably certain to exercise the extension option; and

periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise the termination option.

Leases may also include options to terminate the arrangement or options to purchase the underlying lease property. The Company does not separate lease and non-lease components of contracts. Lease components provide the Company with the right to use an identified asset, which consist of the Company’s real estate properties and office equipment. Non-lease components consist primarily of maintenance services.

As an implicit discount rate is typically not readily determinable in the Company’s lease agreements, the Company uses its estimated secured incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future lease payments. The incremental borrowing rate is determined using a portfolio approach utilizing publicly available information related to our unsecured borrowing rates. For certain leases with original terms of 12 months or less, the Company recognizes lease expense as incurred and does not recognize any lease liabilities. Short-term and long-term portions of operating lease liabilities are classified as other current liabilities and operating lease liabilities, respectively, in the Company’s Consolidated Balance Sheets.

A right-of-use (“ROU”) asset is measured as the amount of the lease liability with adjustments, if applicable, for lease incentives, initial direct costs incurred by the Company, and lease prepayments made prior to or at lease commencement. ROU assets are classified as operating lease right-of-use assets, net of accumulated amortization, on the Company’s Consolidated Balance Sheets. The Company evaluates the carrying value of ROU assets if there are indicators of potential impairment and performs the analysis concurrent with the review of the recoverability of the related asset group. If the carrying value of the asset group is determined to not be fully recoverable and is in excess of its estimated fair value, the Company will record an impairment loss in its Consolidated Statements of Income and Comprehensive Income. The Company did not recognize an impairment loss during fiscal 2021 or fiscal 2020.

Fixed lease expense payments are recognized on a straight-line basis over the lease term. Variable lease payments vary because of changes in facts or circumstances occurring after the commencement date, other than the passage of time, and are often due to changes in an external market rate or the value of an index (e.g. Consumer Price Index). Variable lease payments are expensed as incurred in the Company’s Consolidated Statements of Income and Comprehensive Income.

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Stock-based compensation costs: All stock-based awards to employees are recognized as compensation costs in the consolidated financial statements based on their fair values measured as of the date of grant. The Company estimates the fair value of stock option grants using a Black-Scholes option pricing model. This model requires various assumptions as inputs including expected volatility of the Paychex stock price and expected option life. Volatility is estimated based on a combination of historical volatility, using stock prices over a period equal to the expected option life, and implied market volatility. Expected option life is estimated based on historical exercise behavior. The Company periodically reassesses its assumptions as well as its choice of valuation model. The Company will reconsider use of this model if additional information becomes available in the future indicating that another model would provide a more accurate estimate of fair value or if characteristics of future grants would warrant such a change.

The fair value of stock awards is determined based on the stock price at the date of grant. For grants that do not accrue dividends or dividend equivalents, the fair value is the stock price reduced by the present value of estimated dividends over the vesting period or performance period.

The Company’s policy is to estimate forfeitures and only record compensation costs for those awards that are expected to vest. The assumptions for forfeitures are determined based on type of award and historical experience. Forfeiture assumptions are adjusted at the point in time a significant change is identified, with any adjustment recorded in the period of change, and the final adjustment at the end of the requisite service period to equal actual forfeitures.

The assumptions of volatility, expected option life, and forfeitures all require significant judgment and are subject to change in the future due to factors such as employee exercise behavior, stock price trends, and changes to type or provisions of stock-based awards. Any material change in one or more of these assumptions could have an impact on the estimated fair value of a future award.

Refer to Note F of this Item 8 for further discussion of the Company’s stock-based compensation plans.

Income taxes: The Company accounts for deferred taxes by recognizing deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities, using enacted tax rates in effect for the fiscal year in which the differences are expected to reverse.

The Company also maintains a reserve for uncertain tax positions. The Company evaluates tax positions taken or expected to be taken in a tax return for recognition in its consolidated financial statements. Prior to recording the related tax benefit in the consolidated financial statements, the Company must conclude that tax positions will be more-likely-than-not to be sustained, assuming those positions will be examined by taxing authorities with full knowledge of all relevant information. The benefit recognized in the consolidated financial statements is the amount the Company expects to realize after examination by taxing authorities. 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 and in determining the expected benefit. A change in the assessment of the more-likely-than-not standard could materially impact the Company’s results of operations or financial position. Refer to Note L of this Item 8 for further discussion of the Company’s reserve for uncertain tax positions.

Use of estimates**:** The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates, judgments, and assumptions that affect reported amounts of assets, liabilities, revenue, and expenses during the reporting period. Actual amounts and results could differ from these estimates.

Recently adopted accounting pronouncements: In June 2020, the Company adopted the following Accounting Standards Updates (“ASUs”), none of which had a material impact on its consolidated financial statements:

ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting;”

ASU No. 2019-08, “Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements – Share-Based Consideration Payable to a Customer;”

ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments;”

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ASU No. 2018-18, “Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606;”

ASU No. 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the Financial Accounting Standards Board (“FASB”) Emerging Issues Task Force);”

ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement;”

ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairments;” and

ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” as amended by subsequent ASUs on the topic, using a modified retrospective transition method.

Recently issued accounting pronouncements: In October 2020, the FASB issued ASU No. 2020-08, “Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs.” The amendments in ASU No. 2020-08 clarify that an entity should reevaluate whether a callable debt security is within the scope of the Accounting Standards Codification (“ASC”) paragraph 310-20-35-33 for each reporting period. This guidance is effective for public business entities for fiscal years beginning after December 15, 2020, and for interim periods within those fiscal years. This guidance is applicable to the Company’s fiscal year beginning June 1, 2021. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” ASU No. 2019-12 is intended to simplify various aspects related to accounting for income taxes, eliminates certain exceptions to the general principles in the ASC Topic 740 related to intra-period tax allocation, simplifies when companies recognize deferred taxes in an interim period, and clarifies certain aspects of the current guidance to promote consistent application. This guidance is effective for public business entities for fiscal years beginning after December 15, 2020, and for interim periods within those fiscal years, with early adoption permitted. This guidance is applicable to the Company’s fiscal year beginning June 1, 2021. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.

Other recent authoritative guidance issued by the FASB (including technical corrections to the FASB ASC), the American Institute of Certified Public Accountants, and the SEC did not, or are not expected to have a material impact on the Company’s consolidated financial statements.

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Note B — Service Revenue

Service revenue is primarily attributable to fees for providing services to the Company’s clients and is recognized when control of the contracted services is transferred to its clients, in an amount that reflects the consideration it expects to receive in exchange for such services. Insurance Solutions revenue is commissions earned on premiums collected and remitted to insurance carriers. The Company’s contracts generally do not contain specified contract periods and may be terminated by either party with 30-days notice of termination. Sales and other applicable non-payroll related taxes are excluded from service revenue.

Based upon similar operational and economic characteristics, the Company’s service revenue is disaggregated by Management Solutions and PEO and Insurance Solutions as reported in the Company’s Consolidated Statements of Income and Comprehensive Income. 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.

Management Solutions Revenue

Management Solutions revenue is primarily derived from the Company’s payroll processing, payroll-related ancillary services, and HR outsourcing solutions. Clients can select services on an á la carte basis or as part of various product bundles. The Company’s offerings often leverage the information gathered in its base payroll processing service, allowing it to provide comprehensive outsourcing services covering the HCM spectrum. Management Solutions revenue is generally recognized over time as services are performed and the customer simultaneously receives and controls the benefits from these services.

Revenue earned from delivery service for the distribution of certain client payroll checks and reports is also included in Management Solutions revenue in the Company’s Consolidated Statements of Income and Comprehensive Income. Delivery service revenue is recognized at a point in time following the delivery of payroll checks, reports, quarter-end packages, and tax returns to the Company’s clients.

PEO and Insurance Solutions Revenue

PEO solutions are sold through the Company’s registered and licensed subsidiaries and offer businesses a combined package of services that includes payroll, employer compliance, HR and employee benefits administration, risk management outsourcing, and the on-site availability of a professionally trained HR representative, among other services. The Company serves as a co-employer of its clients’ employees, offers health insurance coverage to client employees, and assumes the risks and rewards of workers’ compensation insurance and certain health insurance offerings. PEO Solutions revenue is recognized over time as the services are performed and the customer simultaneously receives and controls the benefits from these services. PEO Solutions revenue is reported net of certain pass-through costs billed and incurred, which include payroll wages, payroll taxes, including federal and state unemployment insurance, and health insurance premiums on guaranteed cost benefit plans. For workers’ compensation and health insurance plans where the Company retains risk, revenues and costs are recorded on a gross basis.

PEO pass-through costs netted within the PEO and Insurance Solutions revenue are as follows:


	Year ended May 31,
In billions	2021		2020		2019
Payroll wages and payroll taxes	$	20.6	$	20.5	$	14.5
In millions
State unemployment insurance (included in payroll wages and payroll taxes)	$	119.0	$	85.7	$	82.3
Guaranteed cost benefit plans	$	586.4	$	647.0	$	451.8

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Insurance solutions are sold through the Company’s licensed insurance agency, Paychex Insurance Agency, Inc., which provides insurance through a variety of carriers, allowing companies to expand their employee benefit offerings at an affordable cost. Insurance offerings include property and casualty coverage such as workers’ compensation, business-owner policies, commercial auto, cyber security, and health and benefits coverage, including health, dental, vision, and life. Insurance Solutions revenue reflects commissions earned on remitted insurance services premiums billed and is recognized over time as services are performed and the customer simultaneously receives and controls the benefits from these services.

Contract Balances

The timing of revenue recognition for Management Solutions and PEO and Insurance Solutions is consistent with the invoicing of clients as they both occur during the respective client payroll period for which the services are provided. Therefore, the Company does not recognize a contract asset or liability resulting from the timing of revenue recognition and invoicing.

Payments received for certain of the Company’s service offerings for set-up fees are considered a material right. Therefore, the Company defers revenue associated with these performance obligations, which exceed one year, and subsequently recognizes them as future services are provided, over approximately three years to four years.

Changes in deferred revenue related to material rights that exceed one year were as follows:


	Year ended May 31,
In millions	2021		2020
Balance, beginning of period	$	42.6	$	45.7
Deferral of revenue		23.5		24.7
Recognition of unearned revenue		(25.9)		(27.8)
Balance, end of period	$	40.2	$	42.6

Deferred revenue related to material rights is reported in the deferred revenue and other long-term liabilities line items on the Company’s Consolidated Balance Sheets. As of May 31, 2021, the Company expects to recognize $20.3 million of deferred revenue related to material rights during its fiscal year ending May 31, 2022 and $19.9 million of deferred revenue thereafter.

Assets Recognized from the Costs to Obtain and Fulfill Contracts

The Company recognizes an asset for the incremental costs of obtaining a contract with a client if it is expected that the economic benefit and amortization period will be longer than one year. The Company also recognizes an asset for the costs to fulfill a contract with a client if the costs are specifically identifiable, generate or enhance resources used to satisfy future performance obligations, and are expected to be recovered.

Deferred costs to obtain and fulfill contracts are reported in the prepaid expenses and other current assets and long-term deferred costs line items on the Company’s Consolidated Balance Sheets. Amortization expense related to costs to obtain and fulfill a contract are included in cost of service revenue and selling, general and administrative expenses in the Company’s Consolidated Statements of Income and Comprehensive Income. Refer to Note A of this Item 8 for additional disclosures on our policies for assets recognized from the costs to obtain and fulfill contracts.

The Company regularly reviews its deferred costs for potential impairment and did not recognize an impairment loss during fiscal 2021, 2020, or 2019.

Changes in deferred costs to obtain and fulfill contracts were as follows:



Costs to fulfill contracts:
	Year ended May 31,
In millions	2021		2020
Balance, beginning of period	$	67.3	$	66.1
Capitalization of costs		26.2		24.9
Amortization		(24.2)		(23.7)
Balance, end of period	$	69.3	$	67.3

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Costs to obtain contracts:
	Year ended May 31,
In millions	2021		2020
Balance, beginning of period	$	473.6	$	464.3
Capitalization of costs		181.8		171.7
Amortization		(167.2)		(162.4)
Balance, end of period	$	488.2	$	473.6

Note C — Basic and Diluted Earnings Per Share

Basic and diluted earnings per share were calculated as follows:



	Year ended May 31,
In millions, except per share amounts	2021		2020		2019
Basic earnings per share:
Net income	$	1,097.5	$	1,098.1	$	1,034.4
Weighted-average common shares outstanding		359.9		358.5		359.2
Basic earnings per share	$	3.05	$	3.06	$	2.88
Diluted earnings per share:
Net income	$	1,097.5	$	1,098.1	$	1,034.4
Weighted-average common shares outstanding		359.9		358.5		359.2
Dilutive effect of common share equivalents		2.2		2.5		2.6
Weighted-average common shares outstanding, assuming dilution		362.1		361.0		361.8
Diluted earnings per share	$	3.03	$	3.04	$	2.86
Weighted-average anti-dilutive common share equivalents		0.6		0.7		0.4

Weighted-average common share equivalents that had an anti-dilutive impact are excluded from the computation of diluted earnings per share.

Note D — Business Combinations

Effective December 20, 2018, the Company acquired Oasis. Upon closing, Oasis became a wholly owned subsidiary of the Company. Oasis is an industry leader in providing HR outsourcing services. The purchase price was $992.2 million, net of $262.3 million in cash acquired, including $132.1 million of restricted cash.

The results of operations for Oasis have been included in the Company’s Consolidated Statements of Income and Comprehensive Income since the date of acquisition. During fiscal 2019, Oasis contributed $163.7 million of total revenues and $5.1 million of operating income, including the impact of certain one-time charges related to the acquisition and integration of the Oasis business, in the Company’s consolidated results of operations. The Company incurred $5.3 million of acquisition and integration costs associated with Oasis during fiscal 2019, which was included within selling, general and administrative expenses in the Company’s Consolidated Statements of Income and Comprehensive Income.

Pro Forma Financial Results (Unaudited): The following table summarizes the Company’s unaudited pro forma operating results for fiscal 2019 as if the acquisition of Oasis had been consummated as of June 1, 2017. The following pro forma information does not include the impact of any costs incurred to integrate Oasis’ operations:


	Year ended
	May 31, 2019
Revenues	$	3,958.0
Net income	$	1,021.7

The unaudited pro forma operating results have been calculated after applying the Company’s accounting policies and include the acquisition of Oasis adjusted, net of tax, for depreciation and amortization expense resulting from the determination of fair values of the acquired property and equipment and amortizable intangible assets, the inclusion of interest expense related to borrowings used to fund the acquisition, the amortization of debt issuance costs related to the permanent financing of debt, the elimination of interest income related to available cash used for the acquisition, and the elimination of Oasis’ interest expense related to debt not assumed in the acquisition. Since the pro forma financial results assume the acquisition was consummated on June 1, 2017, the unaudited pro forma operating results for fiscal 2019 excluded $2.7 million ($2.0 million, net of tax) of costs incurred by the Company related to the acquisition of Oasis.

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The pro forma financial information does not purport to be indicative of the results that would have been obtained had the transactions been completed as of June 1, 2017 for the period presented and are not intended to be a projection of future results or trends.

Note E — Other Expense, Net

Other expense, net, consisted of the following items:



	Year ended May 31,
In millions	2021		2020		2019
Interest income on corporate investments	$	2.3	$	12.3	$	13.3
Interest expense		(35.8)		(38.8)		(17.6)
Other		7.0		3.1		1.0
Other expense, net	$	(26.5)	$	(23.4)	$	(3.3)

**Note F — Stock-**Based Compensation Plans

The Paychex, Inc. 2002 Stock Incentive Plan, as last amended and restated effective October 15, 2020 (the “2002 Plan”), authorizes grants of up to 44.1 million shares of the Company’s common stock. As of May 31, 2021, there were 16.4 million shares available for future grants under the 2002 Plan.

All stock-based awards to employees are recognized as compensation costs in the consolidated financial statements based on their fair values measured as of the date of grant. These costs are recognized as an expense in the Consolidated Statements of Income and Comprehensive Income on a straight-line basis over the requisite service period and an increase in additional paid-in capital.

Stock-based compensation expense was $52.5 million, $47.4 million, and $46.2 million for fiscal years 2021, 2020, and 2019, respectively. Related income tax benefits recognized were $8.6 million, $9.0 million, and $8.9 million for the respective fiscal years.

As of May 31, 2021, the total unrecognized compensation cost related to all unvested stock-based awards was $72.2 million and is expected to be recognized over a weighted-average period of 2.8 years.

Black-Scholes fair value assumptions: The fair value of stock option grants and performance-based stock option grants was estimated at the date of grant using a Black-Scholes option pricing model. The weighted-average assumptions used for valuation under the Black-Scholes option pricing model are as follows:



	Year ended May 31,
	2021			2020			2019
	Stock options
Risk-free interest rate		0.5	%		2.0	%		2.9	%
Dividend yield		3.2	%		3.3	%		3.5	%
Volatility factor		0.29			0.18			0.18
Expected option life in years		6.1			6.2			6.1
Weighted-average grant-date ‎ fair value of stock options granted (per share)	$	13.52		$	9.86		$	8.87

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	Year ended May 31,
	2019
	Performance-based
	stock options
Risk-free interest rate		2.9	%
Dividend yield		3.5	%
Volatility factor		0.18
Expected option life in years		6.5
Weighted-average grant-date ‎ fair value of stock options granted (per share)	$	9.02

No performance-based stock options were granted during fiscal 2021 or fiscal 2020.

Risk-free interest rates are yields for zero coupon U.S. Treasury notes maturing approximately at the end of the expected option life. The estimated volatility factor is based on a combination of historical volatility, using stock prices over a period equal to the expected option life, and implied market volatility. The expected option life is based on historical exercise behavior.

Stock options: Stock options entitle the holder to purchase, at the end of the vesting term, a specified number of shares of Paychex common stock at an exercise price per share equal to the closing market price of the common stock on the date of grant. All stock options have a contractual life of ten years from the date of the grant and a vesting schedule as established by the Board. The Company issues new shares of common stock to satisfy stock option exercises. Stock option grants to executives and outside directors are typically approved by the Board in July. Grants of stock options to executives vest one-third per annum. Grants to members of the Board vest after one year. Vesting is generally achieved on these dates with active employment or participation as a member of the Board on the date of vesting.

The following table summarizes stock option activity for fiscal 2021:



				Weighted-
		Weighted-		average
	Shares	average		remaining	Aggregate
	subject	exercise price		contractual	intrinsic
In millions, except per share amounts	to options	per share		term (years)	value(1)
Outstanding as of May 31, 2020	4.4	$	55.02
Granted	0.7	$	73.55
Exercised	(1.4)	$	42.66
Forfeited	(0.1)	$	78.69
Expired	—	$	36.79
Outstanding as of May 31, 2021	3.6	$	62.89	6.2	$	136.8
Exercisable as of May 31, 2021	2.4	$	56.25	5.0	$	108.0

(1)Total shares valued at the market price of the underlying stock as of May 31, 2021 less the exercise price.

Other information pertaining to stock option grants is as follows:



	Year ended May 31,
In millions	2021		2020		2019
Total intrinsic value of stock options exercised	$	58.5	$	22.0	$	25.7
Total grant-date fair value of stock options vested	$	6.0	$	5.0	$	4.3

Restricted Stock Units (“RSUs”): The Board grants RSUs to certain executive and non-executive employees. An RSU is an agreement to issue shares at the time of vesting with no associated exercise cost for the employee. For each unit granted, the holder will receive one share of Paychex common stock at the time of vesting. If the recipient does not vest in the shares due to leaving Paychex, all shares or units of RSUs, and any dividends accrued thereon, when applicable, will be forfeited and returned to the Company.

Time-based RSUs: Time-based RSUs granted to non-executives vest one-fifth per annum over five years, while those granted to executives vest one-third per annum over three years. Vesting is generally achieved on these dates with active employment. The fair value of time-based RSUs is equal to the closing market price of the underlying common stock as of the date of grant, adjusted for the present value of expected dividends over the vesting period. Time-based RSUs may, or may not, earn dividend equivalents depending on the terms of the specific grant.

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Performance-based RSUs: Performance-based RSUs primarily have a two year performance period, after which the number of underlying RSUs earned will be determined based on achievement against pre-established performance targets. The RSUs earned are then subject to a one year service period. Performance-based RSUs do not earn dividend equivalents during the performance period. The fair value of the RSUs is equal to the closing market price of the underlying common stock as of the date of grant, adjusted for the present value of expected dividends over the performance period.

The following table summarizes RSU activity for fiscal 2021:




		Weighted-			Weighted-
		average			average
	Time-	grant-date		Performance-	grant-date
	Based	fair value		based	fair value
In millions, except per share amounts	RSUs	per share		RSUs	per share
Nonvested as of May 31, 2020	1.4	$	61.60	0.1	$	80.59
Granted (1)	0.7	$	67.92	—	$	—
Vested	(0.5)	$	57.10	—	$	—
Forfeited	(0.1)	$	64.40	—	$	—
Nonvested as of May 31, 2021	1.5	$	65.64	0.1	$	80.59

(1)For performance-based RSUs, granted number assumes achievement of performance goals at target. Actual number of shares to be earned may differ from this amount.

Other information pertaining to RSUs is as follows:



	Year ended May 31,
In millions, except per share amounts	2021		2020		2019
Time-based RSUs:
Weighted-average grant-date fair value per share of RSUs granted	$	67.92	$	73.28	$	62.20
Weighted-average remaining vesting period (years)		3.0		2.9		2.9
Total intrinsic value of RSUs vested	$	32.6	$	40.0	$	1.2
Aggregate intrinsic value of nonvested RSUs (1)	$	152.7	$	99.9	$	127.0
Total grant-date fair value of RSUs vested	$	25.6	$	23.6	$	0.8

Performance-based RSUs(2):
Weighted-average grant-date fair value per share of RSUs granted	$	—	$	80.59	$	—
Weighted-average remaining vesting period (years)		1.1		2.1		—
Total intrinsic value of RSUs vested	$	—	$	—	$	—
Aggregate intrinsic value of nonvested RSUs (1)	$	6.2	$	4.4	$	—
Total grant-date fair value of RSUs vested	$	—	$	—	$	—

(1)Based on the market price of the underlying common stock as of May 31, 2021, 2020 and 2019.

(2)No performance-based RSUs were granted during fiscal 2021 or fiscal 2019.

Restricted stock awards: The Board approves grants of restricted stock awards to the Company’s executives and outside directors. All shares underlying awards of restricted stock are restricted in that they are not transferable until they vest. Recipients of the restricted stock earn dividends, which are paid to the recipient at the time the awards vest. If the recipient does not vest in the shares due to leaving Paychex, all shares of restricted stock, and the dividends accrued thereon, when applicable, will be forfeited and returned to the Company.

Time-based restricted stock awards: Time-based restricted stock awards granted to executives vest one-third per annum. Time-based restricted stock awards granted to outside directors vest on the one year anniversary of the grant date. Vesting is generally achieved on these dates with active employment or participation as a member of the Board on the date of vesting. The fair value of time-based restricted stock awards is equal to the closing market price of the underlying common stock as of the date of grant.

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Performance-based restricted stock awards: Performance-based restricted stock awards primarily have a two year performance period, after which the number of shares earned will be determined based on achievement against pre-established performance targets. The restricted shares earned are then subject to a one year service period. Performance-based shares do not earn dividend equivalents during the performance period. The fair value of performance-based shares is equal to the closing market price of the underlying common stock as of the date of grant, adjusted for the present value of expected dividends over the performance period.

The following table summarizes time-based and performance-based restricted stock award activity for fiscal 2021:



		Weighted-			Weighted-
		average			average
		grant-date		Performance-	grant-date
	Time-based	fair value		based	fair value
In millions, except per share amounts	shares	per share		shares	per share
Nonvested as of May 31, 2020	0.1	$	73.20	0.3	$	61.97
Granted (1)	0.1	$	73.93	—	$	65.17
Vested	(0.1)	$	70.11	(0.2)	$	54.28
Forfeited	—	$	76.45	—	$	72.31
Nonvested as of May 31, 2021	0.1	$	74.60	0.1	$	69.28

(1)For performance-based shares, granted number assumes achievement of performance goals at target. Actual number of shares to be earned may differ from this amount.

Other information pertaining to time-based and performance-based restricted stock awards is as follows:



	Year ended May 31,
In millions, except per share amounts	2021		2020		2019
Weighted-average grant-date fair value per share of time-based shares granted	$	73.93	$	84.46	$	69.80
Total grant-date fair value of time-based restricted stock vested	$	3.0	$	3.2	$	3.0
Weighted-average grant-date fair value per share of performance-based shares granted	$	65.17	$	80.59	$	65.17
Total grant-date fair value of performance-based restricted stock vested	$	8.4	$	5.8	$	5.3

Long-term Incentive Plan (“LTIP”): The Company has two long-term incentive performance-based stock awards under its LTIP. In July 2011, the Board approved a special award of performance-based non-qualified stock options. Subsequent grants of this award were made upon the hire of new executives. Under this award, stock options were granted to executives with vesting dependent on achievement against long-term strategic and financial objectives. Total stock options earned and vested were based on achievement against pre-established targets for the fiscal year ended May 31, 2016 (“fiscal 2016”). The performance period was completed in fiscal 2016. Although the performance period was completed and the stock options were earned and vested, some stock options remained outstanding as of May 31, 2020; there are no stock options outstanding as of May 31, 2021.

In July 2016, the Board approved an LTIP award comprised of both performance-based non-qualified stock options and performance-based restricted stock. This award was granted to executives down to the vice president level with vesting dependent on achievement against long-term strategic and financial objectives. Total stock options and restricted shares earned are based on achievement against pre-established targets for fiscal 2020.

The following table summarizes LTIP performance-based stock option activity for fiscal 2021:



				Weighted-
		Weighted-		average
	Shares	average		remaining	Aggregate
	subject	exercise price		contractual	intrinsic
In millions, except per share amounts	to options	per share		term (years)	value(1)
Outstanding as of May 31, 2020	1.3	$	56.13
Granted(2)	0.2	$	60.92
Exercised	(0.8)	$	53.34
Outstanding as of May 31, 2021	0.7	$	60.71	5.0	$	27.8
Exercisable as of May 31, 2021	0.7	$	60.71	5.0	$	27.8

(1)Shares valued at the market price of the underlying stock as of May 31, 2021 less the exercise price.

(2)Shares issued above target achievement level upon final performance measurement.

‎

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Other information pertaining to LTIP performance-based stock options is as follows:



	Year ended May 31,
In millions	2021		2020		2019
Total intrinsic value of stock options exercised	$	26.3	$	23.0	$	8.2

No performance-based stock options vested in fiscal years 2020 or 2019.

LTIP performance-based restricted stock do not earn dividend equivalents during the performance period. The fair value of LTIP performance-based restricted stock is equal to the closing market price of the underlying common stock as of the date of grant, adjusted for the present value of expected dividends over the performance period. If the recipient leaves Paychex prior to the vesting date for any reason, the shares of performance-based restricted stock will be forfeited and returned to the Company.

The following table summarizes LTIP performance-based restricted stock activity for fiscal 2021:


		Weighted-
		average grant
	Restricted	date fair value
In millions, except per share amounts	shares	per share
Nonvested as of May 31, 2020	0.1	$	53.97
Granted	—	$	53.97
Exercised	(0.1)	$	53.97
Nonvested as of May 31, 2021	—	$	—

Non-compensatory employee benefit plan: The Company offers a qualified Employee Stock Purchase Plan (“ESPP”) to all employees. The Company’s common stock can be purchased through a payroll deduction at a discount to the market price. The qualified ESPP allows for a discount of up to 15% based on the sole discretion of the committee established to administer the plan. For offering periods during fiscal years 2021, 2020, and 2019 the discount was set at 5% of the market price. Transactions under the non-qualified ESPP occurred directly through the Company’s transfer agent and no brokerage fees were charged to employees. Transactions under the qualified ESPP occur through the Company’s third-party stock plan administrator. The plans have been deemed non-compensatory and therefore, no stock-based compensation costs have been recognized for fiscal years 2021, 2020, or 2019 related to the plan.

Note G — Funds Held for Clients and Corporate Investments

Funds held for clients and corporate investments are as follows:



	May 31, 2021
			Gross		Gross
	Amortized		unrealized		unrealized		Fair
In millions	cost		gains		losses		value
Type of issue:
Funds held for clients' money market securities and other ‎ restricted cash equivalents	$	739.6	$	—	$	—	$	739.6
AFS securities:
Asset-backed securities		86.5		1.4		—		87.9
Corporate bonds		635.8		28.8		(0.2)		664.4
Municipal bonds		1,669.0		33.0		(2.3)		1,699.7
U.S. government agency and treasury securities		549.6		20.1		(1.5)		568.2
Total AFS securities		2,940.9		83.3		(4.0)		3,020.2
Other		26.4		7.7		(0.1)		34.0
Total funds held for clients and corporate investments	$	3,706.9	$	91.0	$	(4.1)	$	3,793.8

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	May 31, 2020
			Gross		Gross
	Amortized		unrealized		unrealized		Fair
In millions	cost		gains		losses		value
Type of issue:
Funds held for clients' money market securities and other ‎ restricted cash equivalents	$	683.5	$	—	$	—	$	683.5
AFS securities:
Asset-backed securities		68.0		1.7		—		69.7
Corporate bonds		649.6		34.1		(0.1)		683.6
Municipal bonds		1,373.8		37.4		(1.6)		1,409.6
U.S. government agency and treasury securities		565.8		28.5		—		594.3
Total AFS securities		2,657.2		101.7		(1.7)		2,757.2
Other		25.4		2.2		(0.4)		27.2
Total funds held for clients and corporate investments	$	3,366.1	$	103.9	$	(2.1)	$	3,467.9

Included in funds held for clients’ money market securities and other restricted cash equivalents as of May 31, 2021 were bank demand deposit accounts and money market funds.

Included in asset-backed securities as of May 31, 2021 were investment-grade securities primarily collateralized by fixed-rate auto loans and credit card receivables and all have credit ratings of AAA. The primary risk associated with these securities is the collection of the underlying receivables. Collateral on these asset-backed securities has performed as expected through May 31, 2021.

Included in corporate bonds as of May 31, 2021 were investment-grade securities covering a wide range of issuers, industries, and sectors and primarily carry credit ratings of A or better and having maturities ranging from June 1, 2021 through May 12, 2028.

Included in municipal bonds as of May 31, 2021 were general obligation bonds and revenue bonds primarily carrying credit ratings of AA or better and have maturities ranging from June 1, 2021 through August 1, 2028.

A substantial portion of our portfolios are invested in high credit quality securities with ratings of AA or higher, and A-1/P-1 ratings on short-term securities.

The classification of funds held for clients and corporate investments on the Consolidated Balance Sheets is as follows:



	May 31,
In millions	2021		2020
Funds held for clients	$	3,750.0	$	3,430.5
Corporate investments		36.7		27.2
Long-term corporate investments		7.1		10.2
Total funds held for clients and corporate investments	$	3,793.8	$	3,467.9

Funds held for clients’ money market securities and other restricted cash equivalents is collected from clients before due dates for payroll tax administration services and employee payment services and is invested until remitted to the applicable tax or regulatory agencies or client employees. Based upon the Company’s intent and its contractual obligation to clients, these funds are considered restricted until they are remitted to fund these client obligations.

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The Company’s AFS securities reflected net unrealized gains of $79.3 million and $100.0 million as of May 31, 2021 and May 31, 2020 respectively. Included in net unrealized gains as of May 31, 2021 and May 31, 2020 were 137 and 19 AFS securities in an unrealized loss position, representing approximately 11% and 2% of the total securities held, respectively. AFS securities in an unrealized loss position for which a credit loss has not been recognized were as follows:



	May 31, 2021
	Securities in an unrealized‎loss position for less than‎twelve months				Securities in an unrealized‎loss position for more than‎twelve months				Total
	Gross				Gross				Gross
	unrealized		Fair		unrealized		Fair		unrealized		Fair
In millions	losses		value		losses		value		losses		value
Type of issue:
Asset-backed securities	$	—	$	7.1	$	—	$	—	$	—	$	7.1
Corporate bonds		(0.2)		22.0		—		—		(0.2)		22.0
Municipal bonds		(2.3)		288.2		—		—		(2.3)		288.2
U.S. government agency and treasury securities		(1.5)		102.6		—		—		(1.5)		102.6
Total	$	(4.0)	$	419.9	$	—	$	—	$	(4.0)	$	419.9



	May 31, 2020
	Securities in an unrealized‎loss position for less than‎twelve months				Securities in an unrealized‎loss position for more than‎twelve months				Total
	Gross				Gross				Gross
	unrealized		Fair		unrealized		Fair		unrealized		Fair
In millions	losses		value		losses		value		losses		value
Type of issue:
Corporate bonds	$	(0.1)	$	6.5	$	—	$	—	$	(0.1)	$	6.5
Municipal bonds		(1.6)		60.3		—		—		(1.6)		60.3
Total	$	(1.7)	$	66.8	$	—	$	—	$	(1.7)	$	66.8

The Company regularly reviews its investment portfolios to determine if any investment is impaired due to changes in credit risk or other potential valuation concerns. The Company believes the investments held as of May 31, 2021 that had gross unrealized losses of $4.0 million were not impaired due to credit risk or other valuation concerns and was not required to record a credit loss or an allowance for credit losses on its AFS securities. The Company believes it is probable that the principal and interest will be collected in accordance with contractual terms and that the unrealized losses on these securities were due to changes in interest rates and were not due to increased credit risk or other valuation concerns. Most of the securities in an unrealized loss position as of May 31, 2021 and May 31, 2020 held an AA rating or better. The Company does not intend to sell these investments until the recovery of their amortized cost basis or maturity and further believes that it is not more-likely-than-not that it will be required to sell these investments prior to that time. The Company’s assessment that an investment is not impaired due to credit risk or other valuation concerns could change in the future due to new developments, including developments related to the COVID-19 pandemic, or changes in the Company’s strategies or assumptions related to any particular investment.

Realized gains and losses from the sale of AFS securities were as follows:



	Year ended May 31,
In millions	2021		2020		2019
Gross realized gains	$	1.2	$	11.6	$	0.6
Gross realized losses		—		(0.3)		(0.6)
Net realized gains	$	1.2	$	11.3	$	—

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The amortized cost and fair value of AFS securities that had stated maturities as of May 31, 2021 are shown below by expected maturity.



	May 31, 2021
	Amortized		Fair
In millions	cost		value
Maturity date:
Due in one year or less	$	335.7	$	338.6
Due after one year through three years		731.6		759.0
Due after three years through five years		970.6		1,008.3
Due after five years		903.0		914.3
Total	$	2,940.9	$	3,020.2

Variable rate demand notes (“VRDNs”) are primarily categorized as due after five years in the table above as the contractual maturities on these securities are typically 20 to 30 years. Although these securities are issued as long-term securities, they are priced and traded as short-term instruments because of the liquidity provided through the tender feature.

Note H — 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. The accounting standards related to fair value measurements include a hierarchy for information and valuations used in measuring fair value that is broken down into three levels based on reliability, as follows:

Level 1 valuations are based on quoted prices in active markets for identical instruments that the Company can access at the measurement date.

Level 2 valuations are based on inputs other than quoted prices included in Level 1 that are observable for the instrument, either directly or indirectly, for substantially the full term of the asset or liability including the following:

quoted prices for similar, but not identical, instruments in active markets;

quoted prices for identical or similar instruments in markets that are not active;

inputs other than quoted prices that are observable for the instrument; or

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

Level 3 valuations are based on information that is unobservable and significant to the overall fair value measurement.

The carrying values of cash and cash equivalents, restricted cash and restricted cash equivalents, accounts receivable, net of allowance for doubtful accounts, PEO unbilled receivables, net of advance collections, accounts payable and short-term borrowings, when used by the Company, approximate fair value due to the short maturities of these instruments. Marketable securities included in funds held for clients and corporate investments consist primarily of securities classified as AFS and are recorded at fair value on a recurring basis.

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The Company’s financial assets and liabilities measured at fair value on a recurring basis were as follows:



	May 31, 2021
			Quoted		Significant
			prices in		other		Significant
	Carrying		active		observable		unobservable
	value		markets		inputs		inputs
In millions	(Fair value)		(Level 1)		(Level 2)		(Level 3)
Assets:
Restricted and unrestricted cash equivalents:
Money market securities	$	2.9	$	2.9	$	—	$	—
Total restricted and unrestricted cash equivalents	$	2.9	$	2.9	$	—	$	—
AFS securities:
Asset-backed securities	$	87.9	$	—	$	87.9	$	—
Corporate bonds		664.4		—		664.4		—
Municipal bonds		1,699.7		—		1,699.7		—
U.S. government agency and treasury securities		568.2		—		568.2		—
Total AFS securities	$	3,020.2	$	—	$	3,020.2	$	—
Other	$	34.0	$	34.0	$	—	$	—
Liabilities:
Other long-term liabilities	$	32.6	$	32.6	$	—	$	—



	May 31, 2020
			Quoted		Significant
			prices in		other		Significant
	Carrying		active		observable		unobservable
	value		markets		inputs		inputs
In millions	(Fair value)		(Level 1)		(Level 2)		(Level 3)
Assets:
Restricted and unrestricted cash equivalents:
Money market securities	$	43.5	$	43.5	$	—	$	—
Total restricted and unrestricted cash equivalents	$	43.5	$	43.5	$	—	$	—
AFS securities:
Asset-backed securities	$	69.7	$	—	$	69.7	$	—
Corporate bonds		683.6		—		683.6		—
Municipal bonds		1,409.6		—		1,409.6		—
U.S. government agency and treasury securities		594.3		—		594.3		—
Total AFS securities	$	2,757.2	$	—	$	2,757.2	$	—
Other	$	27.2	$	27.2	$	—	$	—
Liabilities:
Other long-term liabilities	$	26.8	$	26.8	$	—	$	—

In determining the fair value of its assets and liabilities, the Company predominately uses the market approach. Money market securities, which are cash equivalents, are considered Level 1 investments as they are valued based on quoted market prices in active markets. AFS securities, including asset-backed securities, corporate bonds, municipal bonds, U.S. government agency and treasury securities, and VRDNs, when held by the Company, are included in Level 2 and are valued utilizing inputs obtained from an independent pricing service. To determine the fair value of the Company’s Level 2 AFS securities, the independent pricing service uses a variety of inputs, 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 Company has not adjusted the prices obtained from the independent pricing service because it believes that they are appropriately valued.

Assets included as other are mutual fund investments, consisting of participants’ eligible deferral contributions under the Company’s non-qualified and unfunded deferred compensation plans. The related liability is reported as other long-term liabilities. The mutual funds are considered Level 1 investments as they are valued based on quoted market prices in active markets.

The Company’s long-term borrowings are accounted for on a historical cost basis. As of May 31, 2021 and May 31, 2020, the fair value of long-term borrowings, net of debt issuance costs was $450.2 million and $441.9 million for the Senior Notes, Series A, respectively, and $457.7 million and $448.7 million for the Senior Notes, Series B, respectively.

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The Company’s long-term borrowings are not traded in active markets, and as a result, its fair values were estimated using a market approach employing Level 2 valuation inputs, including borrowing rates the Company believes are currently available based on loans with similar terms and maturities.

The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

Note I: Leases

The Company’s lease portfolio consists primarily of operating leases for office space and equipment and has remaining terms from less than one year up to ten years, with contractual terms expiring from 2021 to 2031. Lease contracts may include one or more renewal options that allow the Company to extend the lease term, typically from one year to five years per each renewal option. The exercise of lease options is generally at the discretion of the Company. None of the Company’s leases contain residual value guarantees, substantial restrictions, or covenants.

Supplemental balance sheet information related to the Company’s leases were as follows:


	May 31,
$ in millions	2021		2020
Operating lease right-of-use assets, net of accumulated amortization	$	103.0	$	114.8
Operating lease liabilities, current(1)		28.9		37.2
Operating lease liabilities, non-current		92.4		96.9

Weighted average remaining lease term (in years)		5.2		4.6
Weighted average discount rate		1.81%		2.06%

(1) The current portion of operating lease liabilities is reported in the other current liabilities line item on the Company’s Consolidated Balance Sheets.

The components of lease expense were as follows:


	Year ended May 31,
In millions	2021		2020
Fixed payment operating lease expense	$	34.6	$	38.2
Variable payment operating lease expense		8.3		8.6
Short-term lease expense		0.1		0.2

Fixed payment lease expense was $34.6 million, $38.2 million, and $42.9 million for fiscal years 2021, 2020, and 2019, respectively.

During the three months ended August 31, 2020, the Company ceased the use of certain leased property and accelerated the amortization of operating lease right-of-use assets, resulting in an additional $24.4 million of expense. The accelerated amortization expense recognized subsequent to August 31, 2020 is immaterial. This expense was included in selling, general and administrative expenses on the Consolidated Statements of Income and Comprehensive Income. The related lease liabilities will be satisfied under the original terms of the lease arrangements, unless buy-outs can be negotiated.

Supplemental cash flow information related to the Company’s leases were as follows:


	Year ended May 31,
In millions	2021		2020
Cash paid for amounts included in the measurement of lease liabilities	$	32.2	$	41.6
Amortization of ROU assets		29.2		34.4
ROU assets obtained in exchange for new operating lease liabilities		26.8		21.5
Lease incentives received in the form of tenant allowances and free rent		0.8		6.1

Lease incentives received in the form of tenant allowances and free rent was $0.8 million, $6.1 million, and $3.5 million for fiscal years 2021, 2020, and 2019, respectively.

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Future lease payments are as follows:


	May 31,
In millions	2021
2022	$	31.5
2023		25.4
2024		21.5
2025		18.2
2026		11.4
Thereafter		19.4
Total future lease payments		127.4
Less: Imputed interest		6.1
Total operating lease liabilities	$	121.3
Current portion	$	28.9
Non-current portion	$	92.4

As of May 31, 2021, the Company has entered into four lease agreements that have not yet commenced for terms up to ten years. These leases will require lease payments over their terms of approximately $13.9 million.

Note J — Property and Equipment, Net of Accumulated Depreciation

The components of property and equipment, at cost, consisted of the following:



	May 31,
In millions	2021		2020
Land and improvements	$	10.3	$	10.8
Buildings and improvements		158.3		166.5
Data processing equipment		211.4		222.4
Software (1)		748.3		690.9
Furniture, fixtures, and equipment		99.8		116.3
Leasehold improvements		83.5		110.6
Construction in progress (1)		50.3		47.1
Total property and equipment, gross		1,361.9		1,364.6
Less: Accumulated depreciation		966.1		957.2
Property and equipment, net of accumulated depreciation	$	395.8	$	407.4

(1)Software includes both purchased software and costs capitalized related to internally developed software placed in service. Capitalized costs related to internally developed software that has not yet been placed in service is included in construction in progress.

Depreciation expense was $123.4 million, $127.8 million, and $125.7 million for fiscal 2021, 2020, and 2019, respectively. During the three months ended August 31, 2020, the Company disposed of certain furniture and fixtures associated with abandoned leased property and recorded a loss on disposal of $5.1 million. The loss was included in selling, general and administrative expenses on the Consolidated Statements of Income and Comprehensive Income.

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Note K — Goodwill and Intangible Assets, Net of Accumulated Amortization

Goodwill and changes in goodwill as of and for the years ended May 31, 2021 and May 31, 2020 were as follows:


	May 31,
In millions	2021		2020
Balance, beginning of fiscal year	$	1,791.1	$	1,782.6
Changes during the period:
Goodwill acquired		19.6		4.1
Acquisition accounting adjustments		—		4.5
Currency translation adjustment		10.0		(0.1)
Balance, end of fiscal year	$	1,820.7	$	1,791.1

The Company had certain intangible assets on its Consolidated Balance Sheets. The components of intangible assets, at cost, consisted of the following:



	May 31,
In millions	2021		2020
Client lists	$	632.3	$	618.4
Other intangible assets		24.1		23.3
Total intangible assets, gross		656.4		641.7
Less: Accumulated amortization		380.6		311.1
Intangible assets, net of accumulated amortization	$	275.8	$	330.6

During fiscal 2021, the Company acquired customer lists with a weighted-average amortization of 8.9 years.

Amortization expense relating to intangible assets was $68.6 million, $81.9 million, and $55.8 million for fiscal 2021, 2020, and 2019, respectively.

The Company did not recognize an impairment loss as it relates to its goodwill or intangible assets during fiscal 2021, 2020, or 2019.

The estimated amortization expense for the next five fiscal years relating to intangible asset balances is as follows:


In millions	Estimated amortization
Year ending May 31,	expense
2022	$	61.7
2023		57.0
2024		54.1
2025		51.5
2026		30.1

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Note L — Income Taxes

The components of deferred tax assets and liabilities are as follows:



	May 31,
In millions	2021		2020
Deferred tax assets:
Compensation and employee benefit liabilities	$	53.0	$	37.6
Other current liabilities		19.8		8.0
Tax credit carry forward		0.2		0.2
Stock-based compensation		12.0		16.8
Leases		29.0		34.2
Net operating loss ("NOL") carry forwards		7.6		9.7
Tax benefit of uncertain tax positions		5.3		7.0
Other		—		0.5
Gross deferred tax assets		126.9		114.0
Deferred tax liabilities:
Deferred contract costs		127.5		122.8
Capitalized software		49.0		45.7
Depreciation		8.9		11.4
Goodwill and intangible assets		111.3		117.4
Operating lease right-of-use assets		26.1		29.3
Revenue not subject to current taxes		1.9		3.7
Unrealized gains on available-for-sale securities		20.2		24.5
Gross deferred tax liabilities		344.9		354.8
Net deferred tax liability	$	(218.0)	$	(240.8)

The deferred tax asset related to NOL carry forward is comprised of $2.2 million of federal NOL carry forwards and $5.4 million of state NOL carry forwards. The federal NOL carry forwards were acquired through various acquisitions and expire between the fiscal years ending May 31, 2022 and May 31, 2037. The state NOL carry forwards expire between the fiscal years ending May 31, 2022 through May 31, 2040.

The components of the provision for income taxes are as follows:



	Year ended May 31,
In millions	2021		2020		2019
Current:
Federal	$	271.8	$	265.5	$	258.2
State		85.9		77.5		70.7
Total current		357.7		343.0		328.9
Deferred:
Federal		(13.4)		(0.5)		0.7
State		(7.6)		(3.5)		4.0
Total deferred		(21.0)		(4.0)		4.7
Income taxes	$	336.7	$	339.0	$	333.6

A reconciliation of the U.S. federal statutory tax rate to the Company’s effective income tax rate is as follows:



	Year ended May 31,
	2021		2020		2019
Federal statutory tax rate	21.0	%	21.0	%	21.0	%
Increase/(decrease) resulting from:
State income taxes, net of federal tax benefit	4.3	%	3.9	%	4.3	%
Tax-exempt municipal bond interest	(0.3)	%	(0.4)	%	(0.5)	%
Stock option windfall benefit	(1.3)	%	(0.8)	%	(0.5)	%
Other items, including adoption of ASC 606	(0.2)	%	(0.1)	%	0.1	%
Effective income tax rate	23.5	%	23.6	%	24.4	%

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The effective income tax rates in all periods were impacted by recognition of net discrete tax benefits related to employee stock-based compensation payments. In fiscal 2019, the effective income tax rate included discrete tax expense for changes in tax reserves and the revaluation of deferred tax balances for legislative updates.

Uncertain income tax positions: The Company is subject to U.S. federal income tax, numerous local and state tax jurisdictions within the U.S., and taxes in Europe. The Company maintains a reserve for uncertain tax positions. As of May 31, 2021 and May 31, 2020, the total reserve for uncertain tax positions, including interest and net of federal benefits, was $20.4 million and $26.5 million, respectively, and was included in long-term liabilities on the Consolidated Balance Sheets.

A reconciliation of the beginning and ending amounts of the Company’s gross unrecognized tax benefits, not including interest or other potential offsetting effects, is as follows:



	Year ended May 31,
In millions	2021		2020		2019
Balance as of beginning of fiscal year	$	26.2	$	22.1	$	14.9
Additions for tax positions of the current year		5.5		4.1		3.8
Additions for tax positions of prior years		9.2		1.2		5.2
Reductions for tax positions of prior years		—		(0.6)		—
Settlements with tax authorities		(15.2)		—		(1.2)
Expiration of the statute of limitations		(3.3)		(0.6)		(0.6)
Balance as of end of fiscal year	$	22.4	$	26.2	$	22.1

The reserve as of May 31, 2021 substantially relates to the Company’s uncertain tax positions for certain state income tax matters. The Company believes the reserve for uncertain tax positions, including interest and net of federal benefits, of $20.4 million as of May 31, 2021 adequately covers open tax years and uncertain tax positions up to and including fiscal 2021 for major taxing jurisdictions. As of May 31, 2021 and May 31, 2020, the entire $20.4 million and $26.5 million, respectively, of unrecognized tax benefits, including interest and net of federal benefit, if recognized, would impact the Company’s effective income tax rate.

The Company has concluded all U.S. federal income tax matters through fiscal 2017. With limited exception, state income tax audits by taxing authorities are closed through fiscal 2014, primarily due to expiration of the statute of limitations.

The Company continues to follow its policy of recognizing interest and penalties accrued on tax positions as a component of income taxes on the Consolidated Statements of Income and Comprehensive Income. The amount of accrued interest and penalties associated with the Company’s tax positions is immaterial to the Consolidated Balance Sheets. The amount of interest and penalties recognized for fiscal years 2021, 2020, and 2019 was immaterial to the Company’s results of operations.

Note M — Short-term Financing

The Company maintains committed and unsecured credit facilities and irrevocable letters of credit as part of its normal and recurring business operations. The purpose of these credit facilities is to meet short-term funding requirements, finance working capital needs, and for general corporate purposes. The Company typically borrows on an overnight or short-term basis on its credit facilities.

Details of the Company’s credit facilities are as follows:


		Maximum		Amount Outstanding
		Amount		May 31,
$ in millions	Expiration Date	Available		2021		2020
Credit facilities:
JP Morgan Chase Bank, N.A. ("JPM") (1)	July 31, 2024	$	1,000.0	$	—	$	—
JPM (1)	August 17, 2022	$	500.0		—		—
PNC Bank, National Association (“PNC”) (weighted-average interest rate of 1.16% at May 31, 2021 (2)	February 6, 2023	$	250.0		7.4		5.1
Outstanding short-term financing (3)				$	7.4	$	5.1

(1)JPM acts as the administrative agent for this syndicated credit facility.

(2)This agreement replaced the Company’s predecessor four year unsecured $150.0 million credit facility dated March 17, 2016, which was terminated on February 6, 2020.

(3)The total amount available under these credit facilities as of May 31, 2021 was approximately $1.7 billion. Amounts under the PNC credit facility remain outstanding as of the date of this report.

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Upon the expiration date of any credit facility, any borrowings outstanding under that facility will mature and be payable.

Interest rates on each of the Company’s credit facilities can be based upon (1) an alternate base rate that is established by the lending institution at the highest of several publicly available interest rates, plus an applicable interest rate margin, or (2) at our election, the adjusted London Interbank Offered Rate (“LIBOR”) or an alternate interest rate as determined by the administrative agent, plus an applicable interest rate margin. The Company is also required to pay a commitment fee, ranging from 0.05% to 0.15%, related to the unutilized portion of each credit facility. The commitment fee is determined on a sliding-scale basis based upon the Company’s consolidated leverage ratio.

Obligations under the credit facilities are guaranteed by the Company and certain of its subsidiaries. The credit facilities contain financial and operational covenants with which the Company must maintain compliance. The Company’s ability to borrow under the credit facilities may be restricted in the event of certain covenant breaches or events of default. In addition, the terms of the credit facilities could restrict the Company’s ability to engage in certain business transactions. The Company was in compliance with all these covenants as of May 31, 2021.

Certain lenders under these credit facilities, and their respective affiliates, have performed, and may in the future perform for the Company, various commercial banking, investment banking, underwriting, and other financial advisory services, for which they have received, and will continue to receive in the future, customary fees and expenses.

Letters of credit: The Company had irrevocable standby letters of credit outstanding totaling $180.4 million and $147.9 million as of May 31, 2021 and May 31, 2020, respectively, required to secure commitments for certain insurance policies. The letters of credit expire at various dates between June 26, 2021 and July 15, 2022. No amounts were outstanding on these letters of credit during fiscal 2021 or fiscal 2020, or as of May 31, 2021 and May 31, 2020. Subsequent to May 31, 2021, a $41.2 million letter of credit was cancelled, and letters of credit expiring on June 26, 2021 were renewed through June 26, 2022.

Note N — Long-term Financing

Long-term debt, at amortized cost, consisted of the following as of:



	May 31,
In millions	2021		2020
Senior Notes, Series A	$	400.0	$	400.0
Senior Notes, Series B		400.0		400.0
Total long-term borrowings		800.0		800.0
Less: Debt issuance costs, net of accumulated amortization		(2.7)		(3.2)
Long-term borrowings, net of debt issuance costs	$	797.3	$	796.8

Certain information related to the Senior Notes, Series A and Senior Notes, Series B (collectively the “Notes”) issued pursuant to the Note Purchase and Guarantee Agreement (the “Agreement”) for fiscal 2021 and fiscal 2020 are as follows:


	Senior Notes	Senior Notes
	Series A	Series B
Stated interest rate	4.07%	4.25%
Effective interest rate	4.15%	4.31%
Interest rate type	Fixed	Fixed
Interest payment dates	Semi-annual, in arrears	Semi-annual, in arrears
Principal payment dates	March 13, 2026	March 13, 2029
Note type	Unsecured	Unsecured

The effective interest rates for each note series includes the interest on the note and amortization of debt issuance costs.

Proceeds from the Notes were used to pay off $800.0 million in short-term borrowings under the Company’s JPM credit facilities used to temporarily finance the acquisition of Oasis in fiscal 2019. Payment of all amounts due with respect to the Notes and performance under the Agreement is guaranteed by the Company, Paychex of New York LLC, and certain other subsidiaries of the Company. The Company may, at its option, prepay at any time all, or any part of, the Notes, subject to certain conditions as described in the Agreement.

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The Agreement contains customary representations, warranties, affirmative and negative covenants, including financial covenants that are usual and customary for such arrangements. The Company was in compliance with all these covenants as of May 31, 2021.

Note O — Supplemental Cash Flow Information

Income taxes paid were $421.4 million, $298.8 million, and $317.9 million for fiscal 2021, 2020, and 2019, respectively.

Interest expense paid was $34.9 million, $38.0 million, and $10.4 million for fiscal 2021, 2020, and 2019, respectively.

Note P — Employee Benefit Plans

401(k) plan: The Company maintains a contributory savings plan that qualifies under section 401(k) of the Internal Revenue Code. The Paychex, Inc. 401(k) Incentive Retirement Plan (the “Plan”) allows all employees to immediately participate in the salary deferral portion of the Plan, contributing up to a maximum of 50% of their salary, subject to Internal Revenue Service limitations. Employees who have completed one year of service and a minimum of 1,000 hours worked are eligible to receive a Company matching contribution, when such contribution is in effect. The Company provides a matching contribution of 100% of the first 3% and 50% on the next 2% of eligible pay for a total matching contribution of 4%. The Company temporarily suspended its matching contribution effective July 31, 2020 through December 31, 2020. The Company’s matching contribution was reinstated on January 1, 2021 at the percentages in effect at the time of the temporary suspension. Company contributions to the Plan for fiscal 2021, 2020, and 2019 were $19.2 million, $30.1 million, and $29.3 million, respectively.

The Plan is 100% participant directed. Plan participants can fully diversify their portfolios by choosing from any or all investment fund choices in the Plan. Transfers in and out of investment funds, including the Paychex, Inc. Employee Stock Ownership Plan Stock Fund, are not restricted, except for certain restricted trading periods for individuals designated as insiders as specified in the Company’s Insider Trading Policy. The Company matching contribution, when in effect, follows the same fund elections as the employee compensation deferrals.

Deferred compensation plans: The Company and certain subsidiaries offer non-qualified and unfunded deferred compensation plans to a select group of key employees, executive officers, and outside directors. Eligible employees are provided with the opportunity to defer up to 50% of their annual base salary and bonus and outside directors may defer 100% of their Board cash compensation. Gains and losses are credited based on the participant’s election of a variety of investment choices. The Company does not match any participant deferral or guarantee its return. Distributions are paid at one of the following dates selected by the participant: the participant’s termination date, the date the participant retires from any active employment, or a designated specific date. The amounts accrued under these plans were $32.6 million and $26.8 million as of May 31, 2021 and May 31, 2020, respectively, and are reflected in other long-term liabilities on the accompanying Consolidated Balance Sheets.

Note Q — Commitments and Contingencies

Contingencies: The Company is subject to various claims and legal matters that arise in the normal course of its business. These include disputes or potential disputes related to breach of contract, tort, employment-related claims, tax claims, statutory, and other matters.

The Company’s management currently believes that resolution of any outstanding legal matters will not have a material adverse effect on the Company’s financial position or results of operations. However, legal matters are subject to inherent uncertainties and there exists the possibility that the ultimate resolution of these matters could have a material adverse impact on the Company’s financial position and the results of operations in the period in which any such effect is recorded.

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Other commitments: As of May 31, 2021, the Company had outstanding commitments under existing workers’ compensation insurance agreements and legally binding contractual arrangements with minimum future payment obligations of approximately $345.8 million. The Company also enters into various purchase commitments with vendors in the ordinary course of business and had outstanding commitments to purchase approximately $7.0 million of capital assets. These minimum future payment obligations relate to the following fiscal years:


	Payments due by period

In millions	2022		2023		2024		2025		2026		Thereafter
Workers' compensation estimated obligations	$	65.3	$	36.0	$	21.3	$	13.2	$	9.5	$	37.8
Purchase obligations		91.0		46.2		17.5		8.0		—		—

In the normal course of business, the Company makes representations and warranties that guarantee the performance of services under service arrangements with clients. Historically, there have been no material losses related to such guarantees. The Company has also entered into indemnification agreements with its officers and directors, which require the Company to defend and, if necessary, indemnify these individuals for certain pending or future claims as they relate to their services provided to the Company.

The Company currently self-insures the deductible portion of various insured exposures under certain corporate employee and PEO employee health and medical benefit plans. The Company’s estimated loss exposure under these insurance arrangements is recorded in other current liabilities on the Consolidated Balance Sheets. Historically, the amounts accrued have not been material and were not material as of May 31, 2021. The Company also maintains insurance coverage in addition to its purchased primary insurance policies for gap coverage for employment practices liability, errors and omissions, warranty liability, theft and embezzlement, cyber threats, and acts of terrorism; and capacity for deductibles and self-insured retentions through its captive insurance company.

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Sch****edule II — Valuation and Qualifying Accounts

PAYCHEX, INC.

CONSOLIDATED FINANCIAL STATEMENT SCHEDULE

FOR THE YEAR ENDED MAY 31,

(In millions)



					Additions to/
	Balance as of		Additions		(deductions				Balance as
	beginning		charged to		from) other		Costs and		of end
Description	of fiscal year		expenses		accounts (1)		deductions (2)		of fiscal year
2021
Allowance for expected credit losses	$	12.5	$	8.0	$	—	$	4.5	$	16.0
Reserve for client fund losses	$	—	$	3.5	$	—	$	3.5	$	—
2020
Allowance for expected credit losses	$	7.5	$	7.8	$	3.0	$	5.8	$	12.5
Reserve for client fund losses	$	2.7	$	5.2	$	(3.0)	$	4.9	$	—
2019
Allowance for expected credit losses	$	7.0	$	3.3	$	0.7	$	3.5	$	7.5
Reserve for client fund losses	$	2.4	$	3.7	$	—	$	3.4	$	2.7

(1)Amounts related to business acquisitions in fiscal 2019 and the reclassification of the reserve for client fund losses in fiscal 2020.

(2)Uncollectible amounts written off, net of recoveries, and other adjustments.

Previous: Item 7A. Quantitative and Qualitative Disclosures About Market Risk · Next: Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 8. Financial Statements and Supplementary Data

RE****PORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM