American Home Shield 2002 Annual Report Download - page 49

American Home Shield Deferred Acquisition Costs
In July 2002, the Company changed its method of
accounting for deferred customer acquisition costs in
its American Home Shield business from SFAS No. 60,
“Accounting and Reporting by Insurance Enterprises,”
pursuant to which the Company believed it was appro-
priate to amortize deferred acquisition costs over the
expected customer life to FASB Technical Bulletin No.
90-1, “Accounting for Separately Priced Extended
Warranty and Product Maintenance Contracts,” pursuant
to which deferred acquisition costs are amortized over
the initial contract life.
The new method of accounting reduced after-tax earnings
by $.03 per diluted share in 2002, but had no material
impact on cash flow in current or future years. In the
second quarter of 2002, the Company recorded a
cumulative charge of $45 million ($.14 per diluted
share) to effect this change.
Following discussions with the Staff of the Securities
and Exchange Commission, the Company has restated
prior years to account for deferred acquisition costs in
accordance with FASB Technical Bulletin No. 90-1. The
effect of this restatement is to reduce net income by $8.5
million or $.03 per diluted share in 2001, and $6.1 million
or $.02 per diluted share in 2000. In addition, this
change results in a reduction of retained earnings of
$30 million at January 1, 2000.
Trade Name License Fee
In connection with the sale of its Management Services
business in the fourth quarter of 2001, the Company
entered into a three-year licensing arrangement with
ARAMARK Corporation for the use of the ServiceMaster
trade name. This agreement was valued at $15 million
and accordingly, a like amount was allocated from the
purchase price. The Company intended to recognize
this amount over the three-year contractual period, and
as such, recognized $2 million related thereto in each of
the first and second quarters of 2002. In November
2002, the Company announced that it had determined
that it was appropriate to recognize the entire $15 million
licensing fee in the fourth quarter of 2001. The effect of
this correction is to increase net income by $9 million
and earnings per share by $.03 in 2001, and to reduce
net income by $2.5 million and earnings per share by
$.01 in the first half of 2002.
Insurance (TruGreen)
In January 2002, the Company reported that it had
recognized a $9 million pretax expense in 2001 relating
to a revised estimate of the 2000 insurance reserve
requirements. Net income has been restated for this
item which results in an increase to income from continuing
operations of $3.7 million (or $.01) in 2001 and a
decrease to income from continuing operations of the
same amount in 2000. The remaining adjustment
results in a decrease to income from discontinued
operations of $1.1 million.
Reincorporation Tax
Prior to 1997, the Company was in partnership form
and therefore was not a federal taxpayer. Consequently,
the Company did not record deferred tax balances
reflecting the differences between the book and tax
basis of its assets and liabilities. When the Company
converted to corporate form in 1997, it realized a signif-
icant step-up in the tax basis of its assets, which was
largely reflected as an increase in the basis of the tax
intangibles and provided for significant tax deductions
over the next 15 years. In accounting for this event in
1997, the Company recorded the net deferred tax asset
associated with differences between the book and tax
basis of its assets and liabilities. As it related to intangible
assets, the Company made a determination that the tax
basis of intangibles equaled the overall book balance of
intangible assets on an enterprise basis. Subsequently
it was determined that intangible assets needed to be
considered at the individual business unit level which
resulted in a situation where tax basis exceeded book
basis. This created a deferred tax asset. The Company
restated the financial statements to reflect the deferred
tax asset as if it had been recorded in 1997.
This change results in an increase to retained earnings
as of January 1, 2000 of $92.6 million, and an increase
to the tax provision for continuing operations of
$.8 million in both 2001 and 2000 and an increase to the
tax provision for discontinued operations of $.8 million
and $1.2 million in 2001 and 2000, respectively. This
restatement also results in an increase to the tax provision
relating to the gain on certain businesses sold in 2001
of $45.8 million. The net impact of these items was to
increase deferred tax assets by $33.4 million and equity
by $43.2 million as of December 31, 2001.
Other, Net
Other items primarily relate to adjustments in accruals,
timing of revenue and expense items and other miscella-
neous items. The Company also determined it was
appropriate to expense the costs associated with
telephone directory placements when the directory is
published rather than expensing the cost over the
contract period. In addition, certain operating leases of
constructed properties have been included in the balance
sheet as assets with associated debt. The financial state-
ments have been restated from the amounts previously
reported for these items.
ServiceMaster 45
Notes to Consolidated Financial Statements