American Home Shield 2010 Annual Report Download - page 72

Table of Contents
Notes to the Consolidated Financial Statements (Continued)
Note 1. Significant Accounting Policies (Continued)
Revenue: 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 contractual arrangements or when services are performed for
non-contractual arrangements. The Company eradicates termites through the use of non-baiting methods (e.g., fumigation or liquid treatments) and baiting
systems. 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 value provided to the
customer (proportional performance method). The Company regularly reviews its estimates of direct costs for its termite bait and home service contracts and
adjusts the estimates when appropriate. Revenue from trade name licensing arrangements is recognized when earned.
The Company has franchise agreements in its TruGreen LawnCare, Terminix, ServiceMaster Clean, AmeriSpec, Furniture Medic and Merry Maids
businesses. Franchise revenue (which in the aggregate represents approximately four percent of annual consolidated revenue from continuing operations)
consists principally of continuing monthly fees based upon 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. Total profits from the franchised operations (excluding trade name licensing) were $70.9 million, $66.5 million
and $63.7 million for the years ended December 31, 2010, 2009 and 2008, respectively. Consolidated operating income from continuing operations was
$257.9 million, $257.2 million and $197.8 for the years ended December 31, 2010, 2009 and 2008, respectively. The Company evaluates the performance of
its franchise businesses based primarily on operating profit before corporate general and administrative expenses, interest expense and amortization of
intangible assets. The portion of total franchise fee income related to initial fees received from the sale of a franchise was immaterial to the Company's
Consolidated Financial Statements for all periods.
The Company had $449.8 million and $449.7 million of deferred revenue at December 31, 2010 and 2009, respectively. Deferred revenue consists
primarily of payments received for annual contracts relating to home service contracts, termite baiting, termite inspection, pest control and lawn care services.
Deferred Customer Acquisition Costs: 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.
Interim Reporting: TruGreen LawnCare has significant seasonality in its business. In the winter and spring, this business sells a series of lawn
applications to customers which are rendered primarily in March through October (the production season). This business incurs incremental selling expenses
at the beginning of the year that directly relate to successful sales for which the
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