American Home Shield 2004 Annual Report Download - page 44

42 ServiceMaster 2004 annual report
As required by SFAS 142, 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 amortiza-
tion are subject to an assessment for impairment by applying a
fair-value based test on an annual basis or more frequently if
circumstances indicate a potential impairment. As permitted
under SFAS 142, the Company carries forward a reporting
unit’s valuation from the most recent valuation under the
following conditions; the assets and liabilities of the reporting
unit have not changed significantly since the most recent fair
value calculation, the most recent fair value calculation resulted
in an amount that exceeded the carrying amount of the reporting
unit by a substantial margin, and based on the facts and circum-
stances of events that have occurred since the last fair value
determination, the likelihood that a current fair value calculation
would result in an impairment would be remote. For the 2004
goodwill and trade name impairment review, the Company
carried forward the valuations for all reporting units except
ARS. A valuation analysis performed for ARS indicated no
impairment issue. As discussed in the “Goodwill and Intangible
Assets” note to the Consolidated Financial Statements, during
the third quarter of 2003 the Company recorded a pre-tax,
non-cash impairment charge of $481 million relating to TruGreen
LandCare, ARS and AMS.
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 interest 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 unrealized gains and losses
reported net-of-tax as a component of accumulated comprehensive
income (loss). The carrying amount of total debt is $805 million
and $819 million and the estimated fair value is approximately
$875 million and $882 million at December 31, 2004 and 2003,
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 contracts 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 Instru-
ments 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 Statement uses
an asset and liability approach for the expected future tax conse-
quences 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 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 securities
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 securities. Due to the fact that losses
from continuing operations were incurred in 2003, diluted
notes to the consolidated financial statements