American Home Shield 2009 Annual Report Download - page 62

Table of Contents
are based on the Company's most recent budget and, for years beyond the budget, the Company's estimates, which are based on assumed growth rates. The
discount rates used in the DCF analyses are intended to reflect the risks inherent in the future cash flows of the respective reporting units. In addition, the
market-based comparable and transaction approaches utilize comparable company public trading values, comparable company historical results, research
analyst estimates and, where available, values observed in private market transactions. If the estimated fair value of a reporting unit exceeds its carrying
amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary. If the carrying amount of a reporting unit
exceeds its estimated fair value, then the second step of the goodwill impairment test must be performed. The second step of the goodwill impairment test
compares the implied fair value of the reporting unit's goodwill with its goodwill carrying amount to measure the amount of impairment, if any. The implied
fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. In other words, the estimated fair
value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had
been acquired in a business combination and the fair value of the reporting unit was the purchase price paid. If the carrying amount of the reporting unit's
goodwill exceeds the implied fair value of that goodwill, an impairment is recognized in an amount equal to that excess.
The impairment test for other intangible assets not subject to amortization involves a comparison of the estimated fair value of the intangible asset with
its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. The
estimates of fair value of intangible assets not subject to amortization are determined using a DCF valuation analysis. The DCF methodology used to value
trade names is 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 2009, 2008 and 2007 annual impairment analyses,
which were performed as of October 1 of each year, did not result in any goodwill impairments. However, as of the 2009 annual impairment analysis, the
following reporting units had an estimated fair value that the Company has determined, from both a quantitative and a qualitative perspective, was not
significantly in excess of their carrying values (in millions):
Goodwill Balance Fair Value as a Percent of Carrying Value
TruGreen LawnCare $ 1,178.4 116%
TruGreen LandCare 43.9 122%
For the TruGreen LawnCare reporting unit, the revenue growth assumption and the cost savings assumption had the most significant influence on the
estimation of fair value. The revenue growth assumption was based on expected sales growth to commercial and residential customers along with improved
retention of existing customers. The key uncertainties in the revenue growth assumption include the impact of the various marketing and selling initiatives
being undertaken by TruGreen LawnCare to increase demand for its services, along with the degree and timing of the economic recovery and whether such
recovery drives an increase in consumer demand for the
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