American Home Shield 2015 Annual Report Download - page 72

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unit’s goodwill with its goodwill carrying amount to measure the amount of impairment, if any. The implied fair value of goodwill is
determined in the same manner as the amount of goodwill recognized in a business combination. In other words, the estimated fair
value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if
the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid. If
the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment is recognized in an
amount equal to that excess.
The impairment test for other intangible assets not subject to amortization involves a comparison of the estimated fair value
of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is
recognized in an amount equal to that excess. The estimates of fair value of intangible assets not subject to amortization are
determined using a DCF valuation analysis. The DCF methodology used to value trade names is known as the relief from royalty
method and entails identifying the hypothetical cash flows generated by an assumed royalty rate that a third-party would pay to license
the trade names and discounting them back to the valuation date. Significant judgments inherent in this analysis include the selection
of appropriate discount rates and hypothetical royalty rates, estimating the amount and timing of estimated future cash flows
attributable to the hypothetical royalty rates and identification of appropriate terminal growth rate assumptions. The discount rates
used in the DCF analyses are intended to reflect the risk inherent in the projected future cash flows generated by the respective
intangible assets.
Goodwill and indefinite-lived intangible assets, primarily our trade names, are assessed annually for impairment during the
fourth quarter or earlier upon the occurrence of certain events or substantive changes in circumstances. Our goodwill is assigned to
four reporting units: Terminix, American Home Shield, ServiceMaster Clean and Merry Maids. The ServiceMaster Clean and Merry
Maids reporting units are aggregated into the Franchise Services Group segment. The October 1, 2015 estimated fair values for all
reporting units were substantially in excess of their respective carrying values, and we do not believe the reporting units were at risk of
impairment as of December 31, 2015. Our 2015, 2014, and 2013 annual impairment analyses, which were performed as of October 1
of each year, did not result in any goodwill or trade name impairments to continuing operations.
Stock-Based Compensation
Stock-based compensation expense for stock options is estimated at the grant date based on an award’s fair value as
calculated by the Black-Scholes option-pricing model and is recognized as expense over the requisite service period. The Black-
Scholes model requires various highly judgmental assumptions including expected volatility and option life. If any of the assumptions
used in the Black-Scholes model change significantly, stock-based compensation expense for future grants may differ materially from
that recorded in the current period related to options granted to date. In addition, we estimate the expected forfeiture rate and only
recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience. To the extent our
actual forfeiture rate is different from our estimate, stock-based compensation expense is adjusted accordingly. See Note 17 to the
consolidated financial statements for more details.
Contingent Liabilities
Accruals for contingent liabilities, including legal and environmental matters, are recorded when it is probable that a liability
has been incurred or an asset impaired and the amount of the loss can be reasonably estimated. Liabilities accrued for legal matters
require judgments regarding projected outcomes and range of loss based on historical experience and recommendations of legal
counsel. Liabilities for environmental matters require evaluations of relevant environmental regulations and estimates of future
remediation alternatives and costs.
Newly Issued Accounting Standards
New accounting rules and disclosure requirements can significantly impact our reported results and the comparability
of our financial statements. Effective December 31, 2015, we adopted Accounting Standards Update (“ASU”) 2015-03,
“Simplifying the Presentation of Debt Issuance Costs” and ASU 2015-17, “Balance Sheet Classification of Deferred Taxes.”
See Note 2 to the consolidated financial statements for further information on these adoptions and other newly issued
accounting standards.
Information Regarding Forward-Looking Statements
This report contains forward-looking statements and cautionary statements. Some of the forward-looking statements can be
identified by the use of forward-looking terms such as “believes,” “expects,” “may,” “will,” “shall,” “should,” “would,” “could,”
“seeks,” “aims,” “projects,” “is optimistic,” “intends,” “plans,” “estimates,” “anticipates” or other comparable terms. Forward-looking
statements include, without limitation, all matters that are not historical facts. They appear in a number of places throughout this report
and include, without limitation, statements regarding our intentions, beliefs, assumptions or current expectations concerning, among
other things, financial position; results of operations; cash flows; prospects; growth strategies or expectations; customer retention; the
continuation of acquisitions, including the integration of any acquired company and risks relating to any such acquired company; fuel
prices; attraction and retention of key personnel; the impact of fuel swaps; the valuation of marketable securities; estimates of accruals
for self-insured claims related to workers’ compensation, auto and general liability risks; estimates of accruals for home warranty
claims; estimates of future payments under operating and capital leases; estimates on current and deferred tax provisions; the outcome
(by judgment or settlement) and costs of legal or administrative proceedings, including, without limitation, collective, representative
or class action litigation; and the impact of prevailing economic conditions.
70 2015 Annual Report