American Home Shield 2005 Annual Report Download - page 29

P. 2 7 SERVICEMASTER 2005 ANNUAL REPORT
Fixed assets, 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, potential
market obsolescence, and other industry and business
data. The Company also periodically reviews the assets for
impairment and a loss would be recorded if and when the
Company determined that the book value of the asset
exceeded its fair value. Changes in the estimated useful
lives or in asset values would cause the Company to adjust
its book value or future expense accordingly.
The Company reviews its goodwill and trade names at least
once a year for impairment. An impairment loss would be
recorded if and when the Company determines that the
expected present value of the future cash flows deemed to
be derived from the asset is less than its corresponding
book value. 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 signifi-
cantly 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 2005 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.
Revenue 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.
Revenue from landscaping services are recognized as they
are earned based upon monthly contract arrangements or
when services are performed for non-contractual arrange-
ments. Revenue from the Company’s commercial installation
contracts, primarily relating to HVAC and electrical installations
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 treatments). Termite services
using baiting stations, as well as home warranty services,
frequently 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 recog-
nizes 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 revenue consists principally of monthly fee
revenue, which is recognized when the related customer
level revenue is reported by the franchisee and collectibility
is assured. Franchise revenue also includes initial fees
resulting from the sale of franchises. These fees 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.
Customer acquisition costs, which are incremental and
direct costs of obtaining a customer, are deferred and
amortized over the life of the related 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.
Newly Issued Accounting Statements and Positions
In December 2004, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) 123 (revised 2004), “Share-Based
Payment” (SFAS 123(R)). This Statement replaces SFAS
123, “Accounting for Stock-Based Compensation”, and
supersedes APB Opinion No. 25, “Accounting for Stock
Issued to Employees”. SFAS 123(R) requires that stock
options and share grants be recorded at fair value and this
value is recognized as compensation expense over the
vesting period. The Statement requires that compensation
expense be recorded for newly issued awards as well as
the unvested portion of previously issued awards that
remain outstanding as of the effective date of this
Statement. The provisions of this Statement become effec-
tive beginning with the Company’s 2006 fiscal year
(January 1, 2006). The Company had previously disclosed
that it had expected to restate prior periods as if this
Statement were in effect for all periods. As permitted by this
Statement, the Company will instead prospectively apply
the provisions of this Statement effective January 1, 2006.
The Company currently estimates that the adoption of this
Statement will reduce earnings per share in 2006 by
approximately $.01.
Quantitative and Qualitative Disclosures about
Market Risk
The economy and its impact on discretionary consumer
spending, labor wages, fuel prices, home re-sales, unem-
ployment rates, insurance costs and medical inflation rates
could be significant to future operating earnings.
The Company does not hold or issue derivative financial
instruments for trading or speculative purposes. The
Company has entered into specific financial arrangements,
primarily fuel hedges, 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 financial
statements.
Management Discussion and Analysis of Financial Condition and Results of Operations