American Home Shield 2006 Annual Report Download - page 48

Notes To The Consolidated Financial Statements
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.
Interim Reporting: TruGreen ChemLawn has significant seasonality in its business. In the winter and early spring, this business
sells a series of lawn applications to customers which are rendered primarily in March through October (the production season).
This business incurs incremental selling expenses at the beginning of the year that directly relate to successful sales for which the
revenues are recognized in later quarters. On an interim basis, TruGreen ChemLawn defers these incremental selling expenses, pre-
season advertising costs and annual repairs and maintenance procedures that are performed in the first quarter. These costs are
deferred and recognized in proportion to the revenue over the production season, and are not deferred beyond the calendar year-end.
Other business segments of the Company also defer, on an interim basis, advertising costs incurred early in the year. These costs are
deferred and recognized approximately in proportion to revenue over the balance of the year, and are not deferred beyond the
calendar year-end.
Advertising: As discussed in the "Interim Reporting" note above, certain pre-season advertising costs are deferred and recognized
approximately in proportion to the revenue over the year. Certain other advertising costs are expensed when the advertising occurs.
The cost of direct-response advertising at Terminix, consisting primarily of direct-mail promotions, is capitalized and amortized
over its expected period of future benefits, which is the one-year contract life.
Inventory Valuation: Inventories are valued at the lower of cost (primarily on a weighted average cost basis) or market. The
inventory primarily represents finished goods to be used on the customers' premises or sold to franchisees.
Property and Equipment, Intangible Assets and Goodwill: Buildings and equipment used in the business are stated at cost and
depreciated over their estimated useful lives using the straight-line method for financial reporting purposes. The estimated useful
lives for building and improvements range from 10 to 40 years, while the estimated useful lives for equipment range from three to
10 years. Leasehold improvements relating to leased facilities are depreciated over the remaining life of the lease. Technology
equipment as well as software and development have an estimated useful life of three to seven years. Intangible assets consist
primarily of goodwill ($1.5 billion), trade names ($215 million) and other intangible assets ($15 million).
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
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 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 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 comprehensive 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 recognized 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 securities. The Company
periodically reviews its portfolio of investments to
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