American Home Shield 2003 Annual Report Download - page 44

42    ServiceMaster
As required by SFAS 144 “Accounting for the Impairment or
Disposal of Long-Lived Assets”, the Company’s long-lived
assets, including fixed assets and intangible assets (other
than goodwill), are tested for recoverability whenever events
or changes in circumstances indicate that their carrying
amounts may not be recoverable. Based on these reviews,
when the undiscounted future cash flows derived from using
the asset are less than the carrying amount of the asset, an
impairment loss is recognized based on the asset’s fair value,
and the carrying amount of the asset is reduced accordingly.
Fair Value of Financial Instruments and Credit Risk:
The carrying amounts of receivables, accounts payable, and
accrued liabilities approximate fair value because of the
short maturity of these instruments. The carrying amounts
of long-term receivables approximate fair value as the effective
rates for these instruments are comparable to market rates at
year-end. The carrying amount of current and long-term
marketable securities also approximate fair value, with unre-
alized gains and losses reported net-of-tax as a component of
accumulated comprehensive income (loss). The carrying
amount of total debt is $819 million and $835 million and
the estimated fair value is approximately $882 million and
$880 million at December 31, 2003 and 2002, respectively.
The estimated fair value of debt is based upon borrowing
rates currently available to the Company for long-term
borrowings with similar terms and maturities.
The Company does not hold or issue financial instruments
for trading or speculative purposes. The Company has
entered into specific financial arrangements in the normal
course of business to manage certain market risks, with a
policy of matching positions and limiting the terms of con-
tracts to relatively short durations. The effect of derivative
financial instrument transactions is not material to the
Company’s consolidated financial statements.
In accordance with SFAS 133 “Accounting for Derivative
Instruments and Hedging Activities”, the Company’s interest
rate swap agreements are classified as fair value hedges
and, as such,gains and losses on the swaps as well as the gains
and losses on the related hedged items are recognized in
current earnings.
Financial instruments, which potentially subject the
Company to financial and credit risk, consist principally of
investments and receivables. Investments consist primarily
of publicly traded debt and common equity securities. The
Company periodically reviews its portfolio of investments to
determine whether there has been an other than temporary
decline in the value of the investments from factors such as
deterioration in the financial condition of the issuer or
the market(s) in which it competes. Receivables have little
concentration of credit risk due to the large number of
customers with relatively small balances and their dispersion
across geographical areas. The Company maintains an
allowance for losses based upon the expected collectibility
of receivables.
Income Taxes: The Company accounts for income taxes
under SFAS 109,“Accounting for Income Taxes.”This state-
ment uses an asset and liability approach for the expected
future tax consequences of events that have been recognized
in the Company’s financial statements or tax returns.
Deferred income taxes are provided to reflect the differences
between the ultimate tax bases of assets and liabilities and
their reported amounts in the financial statements.
Earnings Per Share: Basic earnings per share is based on
the weighted-average number of common shares outstanding
during the year. The weighted average number of common
shares used in the diluted earnings per share calculation
include the incremental effect related to outstanding options
whose market price is in excess of the exercise price,as well as
shares potentially issuable under convertible securities. In
computing diluted earnings per share, the after-tax interest
expense related to convertible debentures is added back to
net income in the numerator, while the number of shares
used in the denominator include the shares issuable upon
conversion of the debentures.Due to the fact that losses from
continuing operations were incurred in 2003 and 2001,
diluted shares do not include the effects of options, because
doing so would result in a less dilutive computation. Shares
potentially issuable under convertible securities have not
been considered outstanding in the diluted earnings per
share computation for all periods presented as the inclusion
would result in a less dilutive computation.
Stock-Based Compensation: Beginning in 2003, the
Company is accounting for employee stock options as com-
pensation expense in accordance with SFAS 123,“Accounting
for Stock-Based Compensation.”SFAS 148,“Accounting for
Stock-Based Compensation – Transition and Disclosure, an
amendment of FASB Statement No. 123”, provides alternative
methods of transitioning to the fair-value based method of
accounting for employee stock options as compensation
expense. The Company is using the “prospective method”of
SFAS 148 and is expensing the fair value of new employee
option grants awarded subsequent to 2002.
Notes to Consolidated Financial Statements