American Home Shield 2004 Annual Report Download - page 42

40 ServiceMaster 2004 annual report
Significant Accounting Policies
Summary: The consolidated financial statements include the
accounts of ServiceMaster and its majority-owned subsidiary
partnerships and corporations, collectively referred to as the
Company. Intercompany transactions and balances have been
eliminated.
The preparation of the consolidated financial statements
requires management to make certain estimates and assumptions
required under generally accepted accounting principles
(“GAAP”) which may differ from 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 claims, accruals for home warranty
claims, the possible outcomes of outstanding litigation, accruals
for income tax liabilities as well as deferred tax accounts, useful
lives for depreciation and amortization expense, and the valuation
of tangible and intangible assets. In 2004, there have been no
changes in the significant areas that require estimates or in the
methodologies which underlie these associated estimates.
The allowance for receivables is developed based on several factors
including overall customer credit quality, historical write-off
experience and specific account analyses that project the ultimate
collectibility of the outstanding balances. As such, these factors
may change over time causing the reserve level to vary.
The Company carries insurance policies on insurable risks at
levels which it believes to be appropriate, including workers’
compensation, auto and general liability risks. The Company
has self-insured retention limits and insured layers of excess
insurance coverage above those limits. Accruals for self-insurance
losses and warranty claims in the American Home Shield
business are made based on the Company’s claims experience
and actuarial projections. Current activity could differ causing a
change in estimates. The Company has certain liabilities with
respect to existing or potential claims, lawsuits, and other pro-
ceedings. The Company accrues for these liabilities when it is
probable that future costs will be incurred and such costs can be
reasonably estimated. Any resulting adjustments, which could
be material, are recorded in the period identified.
The Company records deferred income tax balances based on
the net tax effects of temporary differences between the carrying
value of assets and liabilities for financial reporting purposes
and income tax purposes. There are significant amortizable
intangible assets for tax reporting purposes (not for financial
reporting purposes) which arose as a result of the Company’s
reincorporation from partnership to corporate form in 1997.
The Company records its deferred tax items based on the
estimated value of the tax basis. As discussed in the “Income
Taxes” note to the Consolidated Financial Statements, the Com-
pany reached a comprehensive agreement with the Internal
Revenue Service (IRS) regarding its examination of the Company’s
federal income taxes through the year 2002. As a result of this
agreement, certain deferred tax assets which had previously
not been recorded, due to uncertainties associated with the
complexity of the matters under review and the extended period
of time effectively covered by the examination were recorded.
The Company adjusts tax estimates when required to reflect
changes based on factors such as changes in tax laws, results of
tax authority reviews and statutory limitations. As occurred this
year when the IRS audit concluded, the Company reflected the
changes from previously estimated amounts in the period that
the need for adjustment was identified.
Fixed assets 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 for market obsolescence and other
industry and business data. An impairment loss would be recog-
nized if and when the undiscounted future cash flows derived
from the asset are less than its carrying amount. Changes in the
estimated useful lives or in the asset values could cause the
Company to adjust its book value or future expense accordingly.
The Company does not amortize its goodwill or indefinite-lived
intangible assets. The Company tests these assets for impair-
ment, at a minimum, on an annual basis by applying a fair-value
based test. 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. As permitted
under SFAS 142, the Company carries forward a reporting
unit’s valuation from the most recent valuation under the fol-
lowing conditions; the assets and liabilities of the reporting unit
have not changed significantly since the most recent fair value
calculation, the most recent fair value calculation resulted in an
amount that exceeded the carrying amount of the reporting unit by
a substantial margin, and based on the facts and circumstances of
events that have occurred since the last fair value determination,
the likelihood that a current fair value calculation would result
in an impairment would be remote.
notes to the consolidated financial statements