American Home Shield 2011 Annual Report Download - page 61

Table of Contents
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. 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.
The Company has franchise agreements in its TruGreen, 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 earned by the franchisee and collectability is reasonably assured. Franchise revenue also includes initial
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