American Home Shield 2011 Annual Report Download - page 63

Table of Contents
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 discounted cash flow ("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 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 assessed annually for impairment during the fourth quarter or
earlier upon the occurrence of certain events or substantive changes in circumstances. The Company's 2011, 2010 and 2009 annual impairment analyses,
which were performed as of October 1 of each year, did not result in any goodwill impairments. However, as of the 2011 annual impairment analysis, the
following reporting
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