American Home Shield 2002 Annual Report Download - page 38

34 ServiceMaster
Critical Accounting Policies
The preparation of the consolidated financial state-
ments requires management to make certain estimates
and assumptions required under generally accepted
accounting principles which may differ from the actual
results. The more significant areas requiring the use of
management estimates relate to the allowance for
receivables, accruals for self-insured retention limits
related to medical, workers compensation, auto and
general liability insurance, settlement of home warranty
claims, the possible outcomes of outstanding litigation,
the useful lives for depreciation and amortization expense
and the valuation of tangible and intangible assets.
The allowance for receivables is developed based on
several factors including overall customer credit quality,
historical write-off experience and specific account
analysis that project the ultimate collectibility of the
account. As such, these factors may change over time
causing the reserve level to vary.
The Company carries insurance policies on insurable
risks. The Company generally has self-insured retention
limits and has obtained insured layers of coverage
above such self-insured retention limits. Accruals for
self-insurance losses are recorded based on the Company’s
claims experience and actuarial assumptions. The
establishment of appropriate reserves is an inherently
uncertain process. Reserve estimates are regularly
reviewed and updated using the most current information
available. Any resulting adjustments, which could be
material, are reflected in the period identified.
Tangible (fixed) and intangible assets with finite lives
are depreciated and amortized, on a straight-line basis,
over their estimated useful lives. These lives are based
on the Company’s previous experience for similar
assets, the potential market obsolescence and other
industry and business data. The Company also periodi-
cally reviews the assets for impairment and a loss would
be recorded, if and when, the Company determines that
the book value of the asset exceeds the true value to the
Company. Changes in the estimated useful lives or in
asset values could cause the Company to adjust its book
value or future expense accordingly. The Company also
reviews its goodwill and trade names at least once a year
for impairment. An impairment loss would be recorded,
if and when, the Company determines that the expected
present value of the future cash flows is less than the
book value.
Revenues from lawn care, pest control, liquid and
fumigation termite applications, as well as heating/air
conditioning and plumbing services are recognized as
the services are provided. Revenues from landscaping
services are recognized as they are earned based upon
monthly contractual arrangements or when services are
performed for non-contractual arrangements. Revenues
from the Company’s commercial installation contracts,
primarily relating to HVAC, are recognized on the
percentage of completion method in the ratio that total
incurred costs bear to total estimated costs. The Company
eradicates termites through the use of baiting stations,
as well as through non-baiting methods (e.g., fumigation
or liquid treatment). Termite services using baiting
stations as well as home warranty services typically are
sold through annual contracts for a one-time, upfront
payment. Direct costs of these contracts (service costs
for termite contracts and claim costs for warranty
contracts) are expensed as incurred. The Company
recognizes revenue over the life of these contracts in
proportion to the expected direct costs. Revenue from
trade name licensing arrangements is recognized when
earned. Franchised revenues consist principally of
monthly fee revenue which is recognized when the
related franchise revenue is reported from the fran-
chisee and collectibility is assured. Franchise revenue
also includes initial franchise fees resulting from the
sale of the franchise, which are fixed and are recognized
as revenue when collectibility is assured and all material
services or conditions relating to the sale have been
substantially performed.
Customer acquisition costs, which are incremental
and direct costs of obtaining the customer, are deferred
and amortized over the life of the contract in proportion
to revenue recognized. These costs include sales
commissions and direct selling costs which can be
shown to have resulted in a successful sale.
Forward-Looking Statements
The Company’s Annual Report contains statements
concerning future results and other matters that may
be deemed to be “forward-looking statements” within
the meaning of the Private Securities Litigation Reform
Act of 1995. The Company intends that these forward-
looking statements, which look forward in time and
include everything other than historical information,
be subject to the safe harbors created by such legislation.
The Company notes that these forward-looking
statements involve risks and uncertainties that could
affect its results of operations, financial condition or
cash flows. Factors that could cause actual results
to differ materially from those expressed or implied
in a forward-looking statement include the following
(among others): extreme weather conditions that
affect the demand for the Company’s services;
competition in the markets served by the Company;
labor shortages or increases in wage rates; unex-
pected increases in operating costs, such as higher
insurance, health care or fuel prices; increased
governmental regulation of telemarketing; general
economic conditions in the United States, especially
as they may affect home sales or consumer spending
levels; time and expenses associated with integrating
and winding down businesses; and other factors
described from time to time in documents filed by the
Company with the Securities and Exchange Commission.
Management Discussion & Analysis of Financial Condition & Results of Operations