American Home Shield 2002 Annual Report Download - page 43

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 state-
ments requires management to make certain estimates
and assumptions required under generally accepted
accounting principles ("GAAP") 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 at levels which it believes to be appropriate. 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 made based on the Company’s claims experi-
ence 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 for market obsolescence and other
industry and business data. In accordance with Statement
of Financial Accounting Standards (SFAS) No. 144,
“Accounting for the Impairment or Disposal of Long-
Lived Assets”, these assets are tested for recoverability
whenever events or changes in circumstances indicate
that their carrying amounts may not be recoverable. In
performing this test, if the undiscounted future cash
flows from the asset are less than the carrying amount
of the asset, an impairment loss would be recognized
based on the asset’s fair value, and the carrying amount
of the asset would be reduced accordingly.
In accordance with SFAS No. 142, “Goodwill and Other
Intangible Assets”, the Company does not amortize its
goodwill or indefinite-lived intangible assets. The
Company tests these assets for impairment, at a minimum,
on an annual basis by applying a fair-value based test.
Revenues: Revenues from lawn care, pest control, liquid
and fumigation termite applications, as well as heat-
ing/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 (which in the aggregate
represent less than three percent of consolidated revenue)
consist principally of continuing monthly fees based
upon the franchisee revenue. Monthly fee revenue is
recognized when the related franchise revenue is
reported from the franchisee 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. Total
franchise fee income (excluding trade name licensing)
comprised 11.4 percent, 10.2 percent and 9.8 percent of
consolidated operating income in 2002, 2001 and 2000,
respectively. The portion of total franchise fee income
related to initial fees received from the sale of a fran-
chise were immaterial to the Company’s consolidated
financial statements for all periods.
The Company had $397 million and $344 million of
deferred revenues at December 31, 2002 and 2001,
respectively, which consist primarily of payments
received for annual contracts relating to home warranty,
termite baiting and lawn care services. The revenue
related to these services is recognized as the service is
performed over the contractual period.
Deferred Customer Acquisition Costs: 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.
ServiceMaster 39
Notes to Consolidated Financial Statements