American Home Shield 2008 Annual Report Download - page 80

Table of Contents
Notes to the Consolidated Financial Statements (Continued)
Note 1. Significant Accounting Policies (Continued)
known as the relief from royalty method and entails identifying the hypothetical cash flows generated by an assumed royalty rate that a third party would pay
to license the trade names and discounting them back to the valuation date. Significant judgments inherent in this analysis include the selection of appropriate
discount rates, selection of appropriate hypothetical royalty rates, estimating the amount and timing of estimated future cash flows attributable to the
hypothetical royalty rates and identification of appropriate terminal growth rate assumptions. The discount rates used in the DCF analyses are intended to
reflect the risk inherent in the projected future cash flows generated by the respective intangible assets.
Goodwill and indefinite-lived intangible assets, primarily the Company's trade names, are tested annually for impairment during the fourth quarter or
earlier upon the occurrence of certain events or substantive changes in circumstances. The Company's 2008 annual impairment analysis, which was performed
as of October 1, 2008, did not result in any goodwill impairments, but did result in a non-cash pre-tax impairment on its trade names of $60.1 million. The
impairment charge by business segment, as well as the remaining value of the trade names not subject to amortization by business segment as of
December 31, 2008, is as follows (in millions):
Balance as of
December 31, 2007 Impairment
Other
Activity
Balance as of
December 31, 2008
TruGreen LawnCare $ 783.6 $ — $ — $ 783.6
TruGreen LandCare 12.7 (1.4) — 11.3
Terminix 891.6 (16.5) — 875.1
American Home Shield 140.4 — — 140.4
Other Operations & Headquarters(1) 639.9 (42.2) — 597.7
Total $ 2,468.2 $ (60.1) $ — $ 2,408.1
The Other Operations and Headquarters segment includes the following trade names: ServiceMaster, ServiceMaster Clean, Merry Maids, Furniture
Medic and Amerispec.
The aggregate impairment charge was primarily attributable to the use of lower projected future cash flows related to the hypothetical royalty rates
utilized in the DCF valuation analyses as compared to the allocation of purchase price pursuant to the Merger. Although the Company continues to project
future growth in cash flows, such growth is lower than that estimated at the time the trade names were recorded pursuant to the Merger. Had the Company
used a discount rate in assessing the impairment of its trade names that was 1% higher across all reporting units (holding all other assumptions unchanged) the
Company would have recorded an additional impairment charge of approximately $340 million.
The reduction in estimated future cash flows since the allocation of purchase price pursuant to the Merger reflects the impact of softer than anticipated
consumer demand. In addition, the terminal growth rates used in the analyses for both the allocation of purchase price pursuant to the Merger and the
October 1, 2008 impairment tests were the same and in line with historical U.S. gross domestic product growth rates.
As a result of the trade name impairment taken in 2008, the carrying values of the Company's impaired trade names were re-set to their estimated fair
values as of October 1, 2008. Consequently, any further decline in the estimated fair values of these trade names could result in
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