American Home Shield 2011 Annual Report Download - page 79

Table of Contents
Notes to the Consolidated Financial Statements (Continued)
Note 1. Significant Accounting Policies (Continued)
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.
Revenue: 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 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 were $74.1 million, $70.9 million and $66.5 million for the years ended
December 31, 2011, 2010 and 2009, respectively. Consolidated operating income from continuing operations was $375.5 million, $306.7 million and $243.8
for the years ended December 31, 2011, 2010 and 2009, 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.
Revenues are presented net of sales taxes collected and remitted to government taxing authorities in the accompanying Consolidated Statements of
Operations.
The Company had $473.2 million and $449.6 million of deferred revenue as of December 31, 2011 and 2010, 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. Deferred customer acquisition costs amounted to $30.4 million and $34.4 million as of December 31, 2011 and
2010, respectively.
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