American Home Shield 2005 Annual Report Download - page 36

SERVICEMASTER 2005 ANNUAL REPORT P.34
Notes to the Consolidated Financial Statements
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. In 2005, the Company
reported its gross debt borrowings and payments in the
Consolidated Statements of Cash Flows. Historically, the
Company netted debt borrowings and payments. The
2004 and 2003 information has been changed to conform
to the 2005 presentation.
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 manage-
ment estimates relate to the allowance for receivables,
accruals for self-insured retention limits related to medical,
workers’ compensation, auto and general liability insurance
claims, accruals for home warranty and termite damage
claims, the possible outcomes of outstanding litigation,
accruals for income tax liabilities as well as deferred tax
accounts, the deferral and amortization of customer acquisi-
tion costs, 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 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 the adjust-
ments are 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 value of the tax
basis. The Company adjusts tax estimates when required
to reflect changes based on factors such as changes in tax
laws, results of tax authority reviews and statutory limitations.
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, 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 (October
1st) by applying a fair-value based test. An impairment loss
would be recorded if and when the Company determines
that the expected present value of the future cash flows is
less than the 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 significantly since the most recent fair value calcu-
lation, 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
circumstances 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.