American Home Shield 2008 Annual Report Download - page 77

Table of Contents
Notes to the Consolidated Financial Statements (Continued)
Note 1. Significant Accounting Policies (Continued)
fair-value based test. An impairment loss would be recorded if and when the Company determines that the estimated fair value is less than the 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.
Revenue: Revenues from lawn care and pest control services, as well as liquid and fumigation termite applications, are recognized as the services are
provided. Revenues from landscaping services are recognized as they are earned based upon contractual arrangements or when services are performed for
non-contractual arrangements. The Company eradicates termites through the use of baiting systems, as well as through non-baiting methods (e.g., fumigation
or liquid treatments). Termite services using baiting systems, termite inspection and protection contracts, as well as home warranty services, are frequently
sold through annual contracts for a one-time, upfront payment. Direct costs of these contracts (service costs for termite contracts and claim costs for warranty
contracts) are expensed as incurred. The Company recognizes revenue over the life of these contracts in proportion to the expected direct costs. Those costs
bear a direct relationship to the fulfillment of the Company's obligations under the contracts and are representative of the relative value provided to the
customer (proportional performance method). Home warranty contract revenue is recognized based on the expected emergence of total claim costs. The
Company regularly reviews its estimates of direct costs for its termite bait and home warranty contracts and adjusts the estimates when appropriate. Revenue
from trade name licensing arrangements is recognized when earned. The Company has franchise agreements in its TruGreen LawnCare, Terminix,
ServiceMaster Clean, Merry Maids, AmeriSpec and Furniture Medic businesses. Franchise revenue (which in the aggregate represents approximately four
percent of consolidated revenue from continuing operations) consists principally of continuing monthly fees based upon the franchisee's customer level
revenue. Monthly fee revenue is recognized when the related customer level revenue is reported by the franchisee and collectibility is assured. Franchise
revenue also includes initial fees resulting from the sale of a franchise. These fees are fixed and are recognized as revenue when collectibility is assured and
all material services or conditions relating to the sale have been substantially performed. Total profits from the franchised operations (excluding trade name
licensing) were approximately $63.7 million, $24.1 million, $31.6 million, and $51.3 million for the year ended December 31, 2008, the Successor period
from July 25, 2007 to December 31, 2007, the Predecessor period from January 1, 2007 to July 24, 2007 and the year ended December 31, 2006, respectively.
Consolidated operating income from continuing operations was approximately $197.8 million, $33.2 million, $143.9 million and $324.1 million for the year
ended December 31, 2008, the Successor period from July 25, 2007 to December 31, 2007, the Predecessor period from January 1, 2007 to July 24, 2007 and
the year ended December 31, 2006. We evaluate the performance of our franchise businesses based primarily on operating profit before corporate general and
administrative expenses, interest expense and amortization of intangible assets. The portion of total franchise fee income related to initial fees received from
the sale of a franchise was immaterial to the Company's consolidated financial statements for all periods.
The Company had $443 million and $408 million of deferred revenue at December 31, 2008 and 2007, respectively. Deferred revenue consists primarily
of payments received for annual
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