American Home Shield 2009 Annual Report Download - page 84

Table of Contents
Notes to the Consolidated Financial Statements (Continued)
Note 1. Significant Accounting Policies (Continued)
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 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 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.
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