American Home Shield 2009 Annual Report Download - page 61

Table of Contents
Franchise revenue consists principally of continuing monthly fees based on the franchisee's customer level revenue. Monthly fee revenue is recognized
when the related customer level revenue is reported by the franchisee and collectability is reasonably assured. Franchise revenue also includes initial fees
resulting from the sale of a franchise. These fees are fixed and are recognized as revenue when collectability is reasonably assured and all material services or
conditions relating to the sale have been substantially performed.
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. As required by accounting
standards for the impairment or disposal of long-lived assets, the Company's long-lived 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. If the
carrying value is no longer recoverable based upon the undiscounted future cash flows of the asset, an impairment loss would be recognized equal to the
difference between the carrying amount and the fair value of the asset. Changes in the estimated useful lives or in the asset values could 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.
As required under accounting standards for goodwill and other intangibles, goodwill is not subject to amortization, and intangible assets with indefinite
useful lives are not amortized until their useful lives are determined to no longer be indefinite. Goodwill and intangible assets that are not subject to
amortization are subject to an assessment for impairment by applying a fair-value based test on an annual basis or more frequently if circumstances indicate a
potential impairment. As permitted under accounting standards for goodwill and other intangibles, 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 2007 annual goodwill and trade name impairment review performed as of
October 1, 2007, the Company carried forward the valuations of each reporting unit completed as of July 24, 2007 in conjunction with the Merger. For the
2009 and 2008 annual goodwill and trade name impairment reviews performed as of October 1, 2009 and 2008, respectively, the Company did not carry
forward the valuations of any reporting units.
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, terminal 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
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