Health Net 2005 Annual Report Download - page 100

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 three to ten 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.
Property and equipment and costs related to computer software developed for internal use for areas of the Health
Net One system which are currently in use are amortized over a ten-year period.
Expenditures for maintenance and repairs are expensed as incurred. Major improvements which increase the
estimated useful life of an asset are capitalized. Upon the sale or retirement of assets, the recorded cost and the
related accumulated depreciation are removed from the accounts, and any gain or loss on disposal is reflected in
operations.
During the years ended December 31, 2004 and 2003, we recorded impairment charges of $3.0 million for
certain information technology-related assets and $2.6 million for real estate we had owned, respectively (see
Note 14). There were no asset impairment charges recorded during the year ended December 31, 2005.
We periodically assess long-lived assets or asset groups including property and equipment for recoverability
when events or changes in circumstances indicate that their carrying amount may not be recoverable. If we
identify an indicator of impairment, we assess recoverability by comparing the carrying amount of the asset to
the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset. An
impairment loss is recognized when the carrying amount is not recoverable and is measured as the excess of
carrying value over fair value. Long-lived assets are classified as held for sale when certain criteria are met. We
measure long-lived assets to be disposed of by sale at the lower of carrying amount or fair value less cost to sell.
Fair value is determined using quoted market prices or the anticipated cash flows discounted at a rate
commensurate with the risk involved.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets arise primarily as a result of various business acquisitions and consist
of identifiable intangible assets acquired and the excess of the cost of the acquisitions over the tangible and
intangible assets acquired and liabilities assumed (goodwill). Identifiable intangible assets consist of the value of
employer group contracts and provider networks.
We perform our annual impairment test on our recorded goodwill and intangible assets not subject to
amortization as of June 30 or more frequently if events or changes in circumstances indicate that we might not
recover the carrying value of these assets for each of our reporting units. As a result of our 2003 and 2004
divestitures (see Note 3), Health Plans Services is our only reporting unit with goodwill as of December 31, 2005
and 2004. The impairment test follows a two-step approach. The first step determines if the goodwill is
potentially impaired, and the second step measures the amount of the impairment loss, if necessary. Under the
first step, goodwill is considered potentially impaired if the value of the reporting unit is less than the reporting
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