Sally Beauty Supply 2007 Annual Report Download - page 69

Retention of Risk
Employee Health Insurance Liability
We maintain a largely self-funded program for healthcare benefits for employees who work for us on a full-time basis. We cover the majority of expenses
associated with these benefits, other than payroll deductions and out-of pocket expenses paid by the employees. Payments for healthcare benefits below specified
amounts (currently $350,000 per individual per year and $1,000,000 per individual for a lifetime maximum) are self-insured by us. We base our estimate of
ultimate liability on trends in claim payment history, historical trends in claims incurred but not yet reported, and other components such as expected increases in
medical costs, projected premium costs and the number of plan participants. We review our liability on a regular basis and adjust our accruals accordingly. As of
September 30, 2007, we have accrued an estimated liability relating to employee health insurance of $6.1 million. Prior to the Separation Transactions, our
employees were covered by healthcare plans provided by Alberto-Culver.
Changes in facts and circumstances may lead to a change in the estimated liability due to revisions of the estimated ultimate costs of our employee healthcare
benefits. Estimates of medical costs and trends in claims are some of the key factors used by our management in determining the liability. This liability could be
significantly affected if actual results differ from management's expectations.
Workers' Compensation Liability, General Liability and Automobile and Property Liability
We maintain a large deductible insurance plan for workers' compensation liability, general liability and automobile and property liability loss exposures. We
base our estimates of ultimate liability on an actuarial analysis performed by an independent third party actuary. We review our liability on a regular basis and
adjust our accruals accordingly. As of September 30, 2007, our balance sheet included an estimated liability related to the deductible and retention limits of
approximately $10.7 million. Prior to the Separation Transactions, we were covered by the workers' compensation, general liability and automobile and property
liability plans provided by Alberto-Culver.
Changes in facts and circumstances may lead to a change in the estimated liability due to revisions of the estimated ultimate costs that affect our workers'
compensation, general liability and automobile and property liability insurance coverage. Changes in estimates occur over time due to factors such as claims
incidence and severity of injury or damages. The liabilities could be significantly affected if actual results differ from management's expectations.
Income Taxes
We record tax provisions in our consolidated financial statements based on an estimation of current income tax liabilities. The development of these provisions
requires judgments about tax issues, potential outcomes and timing. If we prevail in tax matters for which provisions have been established or are required to
settle matters in excess of established provisions, our effective tax rate for a particular period could be significantly affected.
Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which temporary differences are estimated to be recovered or settled. We believe that it is more likely than not that results of future operations will generate
sufficient taxable income to realize our deferred tax assets, net of the valuation allowance currently recorded. In the future, if we determine that certain deferred
tax assets will not be realizable, the related adjustments could significantly affect our effective tax rate at that time.
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Source: Sally Beauty Holding, 10-K, November 29, 2007