American Home Shield 2007 Annual Report Download - page 57

Notes to the Consolidated Financial Statements
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 amounts 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 $690 million
and $658 million and the estimated fair value is approximately $653 million and $666 million at December 31, 2006 and 2005,
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. The Company has historically hedged approximately two-thirds of its
annual fuel consumption of approximately 30 million gallons. The Company's fuel hedges are classified as a cash flow hedges and
as such, the hedging instruments are recorded on the balance sheet as either an asset or liability at fair value, with the effective
portion of changes in the fair value attributable to the hedged risks recorded in other comprehensive income.
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 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. The
majority of the Company's receivables have little concentration of credit risk due to the large number of customers with relatively
small balances and their dispersion across geographical areas. InStar has receivables from customers in Florida that were insured by
a carrier that was placed in liquidation in 2006 and whose claims are being administered by the state insurance guarantee
association. 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 includes 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: In December 2004, the Financial Accounting Standards Board issued SFAS 123 (revised 2004),
"Share-Based Payment" (SFAS 123(R)). SFAS 123(R) replaces SFAS 123, "Accounting for Stock-Based Compensation" (SFAS
123), and supersedes Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees" (APB 25). 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. SFAS 123(R) 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 adoption of SFAS 123(R). The Company adopted
the provisions of SFAS 123(R) effective January 1, 2006 using the modified prospective method. Prior to adopting SFAS 123(R),
and beginning in 2003, the Company was using the "Prospective Method" as permitted under SFAS 148, "Accounting for Stock-
Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123", which required the Company to
expense the fair value of new employee option grants awarded subsequent to 2002.
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