American Home Shield 2005 Annual Report Download - page 38

SERVICEMASTER 2005 ANNUAL REPORT P.36
As required by SFAS 142, goodwill is not subject to amorti-
zation 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 amortization 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 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.
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.
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 notes 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 com-
prehensive income (loss). The carrying amount of total debt
is $658 million and $805 million and the estimated fair value
is approximately $666 million and $875 million at
December 31, 2005 and 2004, 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 derivative 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
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 recog-
nized in current earnings.
Derivative 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 secu-
rities. 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 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 tax bases of assets and liabilities
and their reported amounts in the financial statements.
Notes to the Consolidated Financial Statements