American Home Shield 2015 Annual Report Download - page 71

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Income Taxes
We record 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. Based on the evaluation of all available information,
the Company recognizes future tax benefits, such as net operating loss carryforwards, to the extent that realizing these benefits is
considered more likely than not. We record valuation allowances against our deferred tax assets, when necessary. Realization of
deferred tax assets (such as net operating loss carry-forwards) is dependent on future taxable earnings and is therefore uncertain. At
least quarterly, we assess the likelihood that our deferred tax asset balance will be recovered from future taxable income. Significant
judgment is required in evaluating the need for and magnitude of appropriate valuation allowances against deferred tax assets.
On an interim basis, we estimate what our effective tax rate will be for the full fiscal year. This estimated annual effective tax
rate is then applied to the year-to-date income before income taxes, excluding infrequently occurring or unusual items, to determine
the year-to-date income tax expense. The income tax effects of infrequent or unusual items are recognized in the interim period in
which they occur. As the year progresses, we continually refine our estimate based upon actual events and earnings by jurisdiction
during the year. This continual estimation process periodically results in a change to our expected effective tax rate for the fiscal year.
When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs. Our current and
deferred tax provisions are based on estimates and assumptions that could differ from the final positions reflected in our income tax
returns. We adjust our current and deferred tax provisions based on our income tax returns which are generally filed in the third or
fourth quarters of the subsequent year.
Our income tax returns are audited by U.S. state, U.S. federal and foreign tax authorities, and we are typically engaged in
various tax examinations at any given time. Uncertain tax positions often arise due to uncertainty or differing interpretations of the
application of tax rules throughout the various jurisdictions in which we operate. On a quarterly basis, we evaluate the probability that
a tax position will be effectively sustained and the appropriateness of the amount recognized for uncertain tax positions based on
factors including changes in facts or circumstances, changes in tax law, settled audit issues and new audit activity. Changes in our
assessment may result in the recognition of a tax benefit or an additional charge to the tax provision in the period our assessment
changes. While management believes that these judgments and estimates are appropriate and reasonable under the circumstances,
actual resolution of these matters may differ from recorded estimated amounts. We recognize interest and penalties related to income
tax matters in income tax expense.
Property and Equipment, Intangible Assets and Goodwill
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 our previous experience for similar assets, potential market obsolescence and other industry and
business data. As required by accounting standards for the impairment or disposal of long-lived assets, our fixed assets and finite-lived
intangible assets are tested for recoverability whenever events or changes in circumstances indicate their carrying amounts may not be
recoverable. If the carrying value is no longer recoverable based upon the undiscounted future cash flows of the asset, an impairment
loss would be recognized equal to the difference between the carrying amount and the fair value of the asset. Changes in the estimated
useful lives or in the asset values could cause us to adjust our book value or future expense accordingly.
As required under accounting standards for goodwill and other intangibles, goodwill is not subject to amortization, and
intangible assets with indefinite useful lives are not amortized until their useful lives are determined to no longer be indefinite.
Goodwill and intangible assets that are not subject to amortization are subject to assessment for impairment by applying a fair-value
based test on an annual basis or more frequently if circumstances indicate a potential impairment. We adopted the provisions of ASU
2011-08, ‘‘Testing Goodwill for Impairment,’’ in the fourth quarter of 2011. This Accounting Standards Update (‘‘ASU’’), gives
entities the option of performing a qualitative assessment before calculating the fair value of a reporting unit in Step 1 of the goodwill
impairment test. If entities determine, on the basis of qualitative factors, that the fair value of a reporting unit is more likely than not
greater than its carrying amount, the two-step impairment test would not be required. For the 2015, 2014 and 2013 annual goodwill
impairment analysis performed as of October 1 of each year, we did not perform qualitative assessments on any reporting unit, but
instead completed Step 1 of the goodwill impairment test for all reporting units.
Goodwill impairment is determined using a two-step process. The first step involves a comparison of the estimated fair value
of a reporting unit to its carrying amount, including goodwill. In performing the first step, we determine the fair value of a reporting
unit using a combination of a discounted cash flow, or ‘‘DCF,’’ analysis, a market-based comparable approach and a market-based
transaction approach. Determining fair value requires the exercise of significant judgment, including judgment about appropriate
discount rates, terminal growth rates, the amount and timing of expected future cash flows, as well as relevant comparable company
earnings multiples for the market-based comparable approach and relevant transaction multiples for the market-based transaction
approach. The cash flows employed in the DCF analyses are based on our most recent annual operating plan and, for years beyond the
annual operating plan, our estimates, which are based on estimated growth rates. The discount rates used in the DCF analyses are
intended to reflect the risks inherent in the future cash flows of the respective reporting units. In addition, the market-based
comparable and transaction approaches utilize comparable company public trading values, comparable company historical results,
research analyst estimates and, where available, values observed in private market transactions. If the estimated fair value of a
reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is
not necessary. If the carrying amount of a reporting unit exceeds its estimated fair value, then the second step of the goodwill
impairment test must be performed. The second step of the goodwill impairment test compares the implied fair value of the reporting
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