American Home Shield 2015 Annual Report Download - page 81

Table of Contents
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establish both the current year accrual and the underlying provision for future losses. This actuarially determined provision and related
accrual include 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.
The Company seeks to reduce the potential amount of loss arising from self-insured claims by insuring certain levels of risk.
While insurance agreements are designed to limit the Company’s losses from large exposure and permit recovery of a portion of direct
unpaid losses, insurance does not relieve the Company of its ultimate liability. Accordingly, the accruals for insured claims represent
the Company’s total unpaid gross losses. Insurance recoverables, which are reported within Prepaid expenses and other assets and
Other assets, relate to estimated insurance recoveries on the insured claims reserves.
Accruals for home warranty claims in the American Home Shield business are made based on the Company’s claims
experience and actuarial projections. Termite damage claim accruals in the Terminix business 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 the adjustments are 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.
Revenue
Revenues from 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 and termite inspection and protection contracts are frequently sold through annual
contracts. Service costs for these 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 contracts and termite inspection and protection contracts and adjusts
the estimates when appropriate.
Home warranty contracts are typically one year in duration. Home warranty claims costs 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 claims costs and adjusts the
estimates when appropriate.
The Company has franchise agreements in its Terminix, ServiceMaster Restore, ServiceMaster Clean, Merry Maids,
Furniture Medic and AmeriSpec businesses. Franchise revenue (which in the aggregate represents approximately five 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 generating activity is performed
by the franchisee and collectability is reasonably assured. Franchise revenue also includes initial fees resulting from the sale of a
franchise or a license. These initial franchise or license fees are pre-established fixed amounts 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 $75 million, $71 million, and $68 million for the years ended December 31, 2015, 2014
and 2013, respectively. The portion of total franchise fee income related to initial fees received from the sale of franchises 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 on the consolidated
statements of operations and comprehensive income (loss).
The Company had $552 million and $514 million of deferred revenue as of December 31, 2015 and 2014, respectively.
Deferred revenue consists primarily of payments received for annual contracts relating to home warranties, termite baiting, termite
inspection and pest control 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 $32 million and
$35 million as of December 31, 2015 and 2014, respectively.
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