American Home Shield 2010 Annual Report Download - page 56

Table of Contents
allowance for uncollectible receivables; accruals for self-insured retention limits related to medical, workers' compensation, auto and general liability
insurance claims; accruals for home service contracts and termite damage claims; the possible outcome of outstanding litigation; accruals for income tax
liabilities as well as deferred tax accounts; the deferral and amortization of customer acquisition costs; useful lives for depreciation and amortization expense;
the valuation of marketable securities; and the valuation of tangible and intangible assets. In 2010, there have been no changes in the significant areas that
require estimates or in the underlying methodologies used in determining the amounts of these associated estimates.
The allowance for receivables is developed based on several factors, including overall customer credit quality, historical write-off experience and
specific account analyses that project the ultimate collectability of the outstanding balances. As such, these factors may change over time causing the reserve
level to vary.
The Company carries insurance policies on insurable risks at levels which it believes to be appropriate, including workers' compensation, auto and
general liability risks. The Company purchases insurance from third party insurance carriers. These policies typically incorporate significant deductibles or
self-insured retentions. The Company is responsible for all claims that fall within the retention limits. In determining the Company's accrual for self-insured
claims, the Company uses historical claims experience to establish both the current year accrual and the underlying provision for future losses. This
actuarially determined provision and related accrual include both known claims, as well as incurred but not reported claims. The Company adjusts its estimate
of accrued self-insured claims when required to reflect changes based on factors such as changes in health care costs, accident frequency and claim severity.
Accruals for home service contract claims in the American Home Shield business are made based on the Company's claims experience and actuarial
projections. Termite damage claim accruals are recorded based on both the historical rates of claims incurred within a contract year and the cost per claim.
Current activity could differ causing a change in estimates. The Company has certain liabilities with respect to existing or potential claims, lawsuits, and other
proceedings. The Company accrues for these liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Any
resulting adjustments, which could be material, are recorded in the period identified.
The Company records deferred income tax balances based on the net tax effects of temporary differences between the carrying value of assets and
liabilities for financial reporting purposes and income tax purposes. The Company records its deferred tax items based on the estimated value of the tax basis.
The Company adjusts tax estimates when required to reflect changes based on factors such as changes in tax laws, relevant court decisions, results of tax
authority reviews and statutes of limitations. The Company records a liability for unrecognized tax benefits resulting from uncertain tax positions taken or
expected to be taken in a tax return. The Company recognizes potential interest and penalties related to its uncertain tax positions in income tax expense.
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 contract 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 service contracts, 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 home service
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
52