American Home Shield 2003 Annual Report Download - page 42

40    ServiceMaster
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, accruals
for home warranty claims, the possible outcomes of out-
standing 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 2003, there have been no changes in
the significant areas that require estimates or in the method-
ologies which underlie these estimates. As discussed in the
“Goodwill and Intangible Assets”note to the consolidated
financial statements, the Company recorded a charge to
reduce the carrying value of its goodwill and intangible
assets. This impairment charge represented the excess of the
book values over their corresponding estimated fair values.
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 proceedings. 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 ultimate value of the tax basis. The
Company’s tax estimates are adjusted when required to
reflect changes based on factors such as changes in tax laws,
results of tax authority reviews and statutory limitations. In
the event that actual results differ from these estimates, the
Company would reflect those changes in the period that the
difference is identified.
Fixed assets and intangible assets with finite lives are depreci-
ated and amortized on a straight-line basis over their estimated
useful lives. These lives are based on the Company’s pre-
vious experience for similar assets, the potential for market
obsolescence and other industry and business data. An
impairment loss would be recognized 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
impairment, 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 pre-
sent value of the future cash flows is less than the book value.
Revenues: Revenues from lawn care, pest control, liquid
and fumigation termite applications, as well as heating/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 con-
tractual arrangements or when services are performed for
non-contractual arrangements. Revenues from the Company’s
commercial installation contracts, primarily relating to
HVAC, are recognized using the percentage of completion
method based on the ratio that total costs incurred to date 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 treatments).
Termite services using baiting stations as well as home war-
ranty services typically are sold through annual contracts for a
one-time, upfront payment. Direct costs of these contracts
Notes to Consolidated Financial Statements