Health Net 2004 Annual Report Download - page 96

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
claims. These amounts are included in other noncurrent assets on the accompanying condensed consolidated balance sheets.
Due to the downgrade of our senior unsecured debt rating, we were required to post collateral for the unrealized loss position
above the minimum threshold level as required under the interest rate swap agreements relating to our 8.375% senior notes due 2011
of which $400 million in aggregate principal amount is outstanding (Senior Notes). As of December 31, 2004, the posted collateral
was $3.7 million and was included in other noncurrent assets. See Note 6 for additional information on the downgrade of our senior
unsecured debt rating.
During 2002, we recorded an impairment charge of $3.6 million related to an other-than-temporary decline in the fair value of
certain investments available for sale (see Note 14).
Interest Rate Swap Contracts
We enter into interest rate swap contracts (“Swap Contracts”) from time to time as a part of our hedging strategy to manage
certain exposures related to the effect of changes in interest rates on the fair value of our 8.375% senior notes due 2011, of which
$400 million in aggregate principal amount is outstanding Senior Notes. The Swap Contracts are reflected at fair value in our
consolidated balance sheet and the related Senior Notes are reflected at an amount equal to the sum of their carrying value plus or
minus an adjustment representing the change in fair value of the Senior Notes attributable to the interest risk being hedged. See Note
6 for additional information on our Swap Contracts.
Government Contracts
Amounts receivable under government contracts include both amounts billed and estimates for amounts to be received under
cost and performance incentive provisions, price adjustments and change orders for services not originally specified in the contracts.
Such estimates are determined based on information available as well as historical performance and collection of which could extend
for periods beyond a year. Differences, which may be material, between the amounts estimated and final amounts collected are
recorded in the period when determined.
Under the new TRICARE contract for the North Region we recognize amounts receivable and payable under the government
contracts related to estimated health care IBNR expenses which are reported separately on the accompanying consolidated balance
sheet as of December 31, 2004. These amounts are the same since all of the estimated health care IBNR expenses incurred are offset
by an equal amount of revenues earned.
Property and Equipment
Property and equipment are stated at historical cost less accumulated depreciation. Depreciation is computed using the straight-
line method over the lesser of estimated useful lives of the various classes of assets or the lease term. The useful life for buildings and
improvements is estimated at 35 to 40 years, and the useful lives for furniture, equipment and software range from two to five years
(see Note 5).
We capitalize certain consulting costs, payroll and payroll-related costs for employees related to computer software developed
for internal use. We amortize such costs over a three to five-year period.
Since September 2002, we have been converting a number of information systems in our Health Plan business to a single
information system. This project, known as Health Net One, also includes consolidation initiatives for other functional areas, such as
claims handling, customer service and product development.
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