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ValleyCrest Holding Co. and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. Summary of Significant Accounting Policies (continued) Long Lived Assets In accordance with FASB Statement No. 144, Accounting for Impairment or Disposal of Long - Lived Assets, long -lived assets, such as property and equipment, and intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. Income Taxes The Company files a consolidated federal income tax return and a combined California state tax return with its various subsidiaries. Additionally, certain of the Company's subsidiaries file separate state income tax returns in the state in which they operate. The consolidated group allocates income taxes to its subsidiaries based upon their pretax earnings under a tax sharing arrangement. The Company uses the asset and liability method of accounting for income taxes pursuant to Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Under this approach, differences between the financial statement and the tax bases of assets and liabilities are determined annually, and deferred income tax assets and liabilities are recorded for those differences that have future tax consequences. Valuation allowances are established, if necessary, to reduce the deferred tax assets to an amount that will more likely than not be realized in future periods. Income tax expense is composed of the current tax payable or receivable for the period plus or minus the net change in deferred tax assets and liabilities. 2� #la3 Val!eyCrest Landscape Mairit. 11 16400 NJW 127th Ave. Miami, FL 3301 8 -1051