Health Net 2000 Annual Report Download - page 40

38 HEALTH NET 2000 Annual Report
Fair Value of Financial Instruments
The estimated fair value amounts of cash equivalents,
investments available for sale, trade accounts and notes
receivable and notes payable approximate their carrying
amounts in the financial statements and have been deter-
mined by the Company using available market informa-
tion and appropriate valuation methodologies.The
carrying amounts of cash equivalents approximate fair
value due to the short maturity of those instruments.The
fair values of investments are estimated based on quoted
market prices and dealer quotes for similar investments.
The fair value of notes payable is estimated based on the
quoted market prices for the same or similar issues or on
the current rates offered to the Company for debt with
the same remaining maturities.The carrying value of
long-term notes receivable approximates the fair value of
such receivables. Considerable judgment is required to
develop estimates of fair value. Accordingly, the estimates
are not necessarily indicative of the amounts the
Company could have realized in a current market
exchange.The use of different market assumptions and/or
estimation methodologies may have a material effect on
the estimated fair value amounts.
The fair value estimates are based on pertinent infor-
mation available to management as of December 31, 2000
and 1999. Although management is not aware of any fac-
tors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since
that date, and therefore, current estimates of fair value
may differ significantly.
Stock-Based Compensation
The Financial Accounting Standards Board (“FASB”)
issued SFAS No. 123, “Accounting for Stock-Based
Compensation” (“SFAS 123”). As permitted under SFAS
123, the Company has elected to continue accounting
for stock-based compensation under the intrinsic value
method prescribed in APB Opinion No. 25,“Accounting
for Stock Issued to Employees.”Under the intrinsic value
method, compensation cost for stock options is measured
at the date of grant as the excess, if any, of the quoted
market price of the Company’s stock over the exercise
price of the option (see Note 7).
In March 2000, the FASB issued Interpretation No.
44, (“Interpretation 44”) “Accounting for Certain
Transactions Involving Stock Compensation.”
Interpretation 44 provides guidance on certain imple-
mentation issues related to APB Opinion No. 25.
Interpretation 44 was effective July 1, 2000 and did not
have an impact on the Company’s consolidated financial
position or results of operations.
Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS
No. 130 “Reporting Comprehensive Income” (“SFAS
130”). SFAS 130 establishes standards for reporting and
presenting comprehensive income and its components.
Comprehensive income includes all changes in stockhold-
ers’equity (except those arising from transactions with
stockholders) and includes net income and net unrealized
appreciation (depreciation), after tax, on investments avail-
able for sale. Reclassification adjustments for net (losses)
gains realized in net income were $(0.04) million, $0.4
million, and $2.0 million for the years ended December
31, 2000, 1999 and 1998, respectively. See Consolidated
Statements of Stockholders’Equity.
Recently Issued Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133,
“Accounting for Derivative Instruments and Hedging
Activities” (“SFAS 133”), which is required to be adopted
in fiscal years beginning after June 15, 2000. In June
1999, the FASB issued SFAS No. 137, “Accounting for
Derivative Investments and Hedging Activities – Deferral
of the Effective Date of FASB Statement No. 133”which
delayed the adoption of SFAS 133 until January 1, 2001.
The Company has completed its assessment of the impact
of SFAS 133, as amended, and has concluded that the
adoption of SFAS 133 will not have a material impact on
its financial condition or results of operations.
Taxes Based On Premiums
The Company provides services in certain states which
require premium taxes to be paid by the Company based
on membership or billed premiums.These taxes are paid
in lieu of or in addition to state income taxes and totaled
$9.9 million in 2000, $11.7 million in 1999 and $13.9
million in 1998.These amounts are recorded in selling,
general and administrative expenses on the Company’s
consolidated statements of operations.
Income Taxes
The Company records deferred tax assets and liabilities
based on differences between the book and tax bases of
assets and liabilities.The deferred tax assets and liabilities
are calculated by applying enacted tax rates and laws to
taxable years in which such differences are expected to
reverse (see Note 10).