American Home Shield 2010 Annual Report Download - page 58

Table of Contents
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.
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 and 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. Based on the results of operations at TruGreen LandCare in the first six
months of 2010 and the outlook for the remainder of 2010 at that time, the Company concluded there was an impairment indicator requiring the performance
of an interim goodwill impairment test for the TruGreen LandCare reporting unit as of June 30, 2010. The Company determined that the implied fair value of
goodwill was less than the carrying value for TruGreen LandCare by $43.0 million, which was recorded as a goodwill impairment charge in the second
quarter of 2010. As of December 31, 2010, there was no remaining goodwill at TruGreen LandCare. As a result of the aforementioned goodwill impairment
indicators and in accordance with applicable accounting standards, the Company performed an impairment analysis on its indefinite lived intangible asset
related to TruGreen LandCare's trade name to determine its fair value as of June 30, 2010. Based on the lower projected cash flows for TruGreen LandCare as
discussed above, the Company determined the fair value attributable to the indefinite lived intangible asset was less than the carrying value for TruGreen
LandCare by $3.9 million, which was recorded as a trade name impairment in the second quarter of 2010.
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