American Home Shield 2008 Annual Report Download - page 59

Table of Contents
year and the cost per claim. 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 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. 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. The Company accounts for uncertain tax positions in accordance with FIN 48. Accordingly, the Company reports a liability for
unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Company recognizes potential interest and
penalties related to its uncertain tax positions in income tax expense.
Customer acquisition costs, which are incremental and direct costs of 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.
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, potential market obsolescence, and other industry and business data. The Company also
reviews the assets for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable and a loss would be
recorded if and when the Company determined that the book value of the asset exceeded its fair value. Changes in the estimated useful lives or in asset values
would cause the Company to adjust its book value or future expense accordingly. As part of applying purchase accounting related to the Merger, the Company
has established useful lives for depreciable and amortizable assets and assigned fair values to its tangible and intangible assets.
The Company reviews its goodwill and trade names at least once a year for impairment. An impairment loss would be recorded if and when the
Company determines that the implied fair value of an asset is less than its corresponding 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 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 2008 annual goodwill and trade
name impairment review performed as of October 1, 2008, the Company did not carry forward the valuations of any reporting unit.
Goodwill impairment is determined using a two-step process. The first step involves a comparison of the estimated fair value of each of the Company's
reporting units to its carrying amount, including goodwill. In performing the first step, the Company determines the fair value of a reporting unit using a
combination of a discounted cash flow ("DCF") analysis, a market-based comparable approach and a market-based transaction approach. Determining fair
value requires the exercise of significant judgment, including judgment about appropriate discount rates, perpetual growth rates, the amount and timing of
expected future cash flows, as well as relevant comparable company earnings multiples for the market-based comparable approach and relevant transaction
multiples for the market-based transaction approach. The cash flows employed in the DCF analyses are based on the Company's most recent budget and, for
years beyond the budget, the
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