American Home Shield 2010 Annual Report Download - page 74

Table of Contents
Notes to the Consolidated Financial Statements (Continued)
Note 1. Significant Accounting Policies (Continued)
previous experience for similar assets, potential market obsolescence and other industry and business data. As required by accounting standards for the
impairment or disposal of long- lived assets, the Company's long-lived assets, including fixed assets and intangible assets (other than goodwill), are tested for
recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. If the carrying value is no longer
recoverable based upon the undiscounted future cash flows of the asset, an impairment loss would be recognized equal to the difference between the carrying
amount and the fair value of the asset. Changes in the estimated useful lives or in the asset values could cause the Company to adjust its book value or future
expense accordingly. As part of applying purchase accounting related to the Merger, the Company has established useful lives for depreciable and amortizable
assets and assigned fair values to its tangible and intangible assets.
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 2010 annual goodwill impairment review performed as of October 1, 2010, the
Company carried forward the valuations of the Terminix and ServiceMaster Clean reporting units completed as of October 1, 2009. The Company did not
carry forward the valuations for any trade names for the 2010 annual trade name impairment review. 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 or trade
names.
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
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