American Home Shield 2006 Annual Report Download - page 50

Notes To The Consolidated Financial Statements
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.
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 and stock appreciation rights (SARS) whose market price is in excess of the grant price. Shares
potentially issuable under convertible securities have been considered outstanding for purposes of the diluted earnings per share
calculations. 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.
Stock-Based Compensation: Beginning in 2003, the Company has been accounting for employee stock options as compensation
expense in accordance with SFAS 123, "Accounting for Stock-Based Compensation." SFAS 148, "Accounting for Stock-Based
Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123", provides alternative methods of
transitioning to the fair-value based method of accounting for employee stock options as compensation expense. The Company is
using the "prospective method" of SFAS 148 and is expensing the fair value of new employee option grants awarded subsequent to
2002.
Prior to 2003, the Company had accounted for employee share options under the intrinsic method of Accounting Principles Board
Opinion 25. Compensation expense determined under the fair-value based method of SFAS 123 relating to newly issued awards as
well as the unvested portion of the previously issued awards would have resulted in proforma reported net income and net earnings
per share as follows:
(In thousands, except per share data) 2005 2004 2003
Net income (loss) as reported $198,925 $331,227 $(224,687)
Add back: Stock-based compensation expense included in reported net income, net of related tax
effects 2,280 1,729 609
Deduct: Stock-based compensation expense determined under fair-value method, net of related
tax effects (5,742) (6,346) (6,179)
Proforma net income (loss) $195,463 $326,610 $(230,257)
Basic Earnings Per Share:
As reported $ 0.68 $ 1.14 $ (0.76)
Proforma 0.67 1.12 (0.78)
Diluted Earnings Per Share:
As reported $ 0.67 $ 1.11 $ (0.76)
Proforma 0.66 1.09 (0.78)
See the "Shareholders' Equity" note to the Consolidated Financial Statements for a description of the assumptions used to compute
the above stock based compensation expense.
Newly Issued Accounting Statements and Positions: In December 2004, the FASB issued 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 effective 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.
Recently Adopted Accounting Principles: The Company adopted the provisions of FASB Interpretation 47, "Accounting for
Conditional Asset Retirement Obligations" (FIN 47), an interpretation of FASB Statement 143 "Accounting for Asset Retirement
Obligations (SFAS 143). FIN 47 clarifies that an entity is required to recognize a liability for a conditional asset retirement
obligation when incurred if the fair value of the obligation can be reasonably estimated. This interpretation further clarified the term
"conditional asset retirement obligation", as used in SFAS 143, as a legal obligation to perform an asset retirement activity in which
the timing and/or method of settlement are conditional on a future event that may or may not be within control of the entity. FIN 47
is effective for companies no later than the end of their first fiscal year ending after December 15, 2005. The adoption of FIN 47 did
not have a significant impact on the Company.
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