Health Net 2004 Annual Report Download - page 98

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
effect of a change in accounting principle in the consolidated statement of operations during the first quarter ended March 31, 2002.
We perform our annual impairment test as of June 30 in each year. During the three months ended December 31, 2003, we sold our
dental, vision and employer services group subsidiaries. During the three months ended March 31, 2004, we sold our subacute
subsidiaries (see Note 3). As a result of our 2003 and 2004 divestitures, Health Plans is our only reporting unit with goodwill as of
December 31, 2004. All goodwill balances related to the reporting units sold in 2003 and 2004 were recovered and written off as part
of the sale transactions.
Our measurement of fair value was based on utilization of both the income and market approaches to fair value determination.
As a part of assessing impairments of goodwill and other intangible assets, we perform fair value measurements. This includes using
an independent third-party professional services firm. The income approach was based on a discounted cash flow methodology. The
discounted cash flow methodology is based upon converting expected cash flows to present value. Annual cash flows were estimated
for each year of a defined multi-year period until the growth pattern becomes stable. The interim cash flows expected after the growth
pattern becomes stable were calculated using an appropriate capitalization technique and then discounted. The market approach used
a market valuation methodology which included the selection of companies engaged in a line (or lines) of business similar to the
Company to be valued and an analysis of the comparative operating results and future prospects of the Company in relation to the
guideline companies selected. The market price multiples are selected and applied to the Company based on the relative performance,
future prospects and risk profiles of the Company in comparison to the guideline companies. Methodologies for selecting guideline
companies include the exchange methodology and the acquisition methodology. The exchange methodology is based upon
transactions in minority interests in publicly traded companies engaged in a line (or lines) of business similar to those of the
Company. The public companies selected are defined as guideline companies. The acquisition methodology involved analyzing the
transaction involving similar companies that have been bought and sold in the public marketplace.
We performed our annual impairment test on our goodwill and other intangible assets as of June 30, 2004 at our Health Plans
reporting unit and also re-evaluated the useful lives of our other intangible assets with the assistance of the same independent third-
party professional services firm that assisted us in the impairment testing and measurement process in the prior year. No goodwill
impairment was identified in our Health Plans reporting unit. We also determined that the estimated useful lives of our other
intangible assets properly reflected the current estimated useful lives.
The changes in the carrying amount of goodwill by reporting unit are as follows (amounts in millions):
F-12
Health
Plans
Dental
/
Vision Subacute
Employer
Services
Group
Total
Balance as of January 1, 2003 $723.6 $0.7 $ 5.9 $31.9 $762.1
Goodwill written off related to sale of business
uni
t
—
(0.7)
—
(31.9) (32.6)
Balance as of December 31, 2003 $723.6 $
—
$5.9 $
—
$729.5
Goodwill written off related to sale of business
uni
t
—
—
(5.9)
—
(5.9)
Balance as of December 31, 2004 $723.6 $
—
$
—
$
—
$723.6