Health Net 2005 Annual Report Download - page 101

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
unit’s carrying amount, including goodwill. Under the second step, the impairment loss is then measured as the
excess of recorded goodwill over the fair value of goodwill, as calculated. The fair value of goodwill is
calculated by allocating the fair value of the reporting unit to all the assets and liabilities of the reporting unit as
if the reporting unit was purchased in a business combination and the purchase price was the fair value of the
reporting unit. We also re-assess the useful lives of our other intangible assets to determine that they properly
reflect the estimated useful lives of these assets.
Our measurement of fair value is 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. The income approach is 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 are
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 are calculated using an appropriate capitalization
technique and then discounted. The market approach uses a market valuation methodology which includes 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 involves 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, 2005
for our Health Plans reporting unit and also re-evaluated the useful lives of our other intangible assets. 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:
Health Plan
Services Subacute Total
(Dollars in millions)
Balance as of January 1, 2004 .............................. $723.6 $ 5.9 $729.5
Goodwill written off related to sale of business unit ............ — (5.9) (5.9)
Balance as of December 31, 2004 ........................... $723.6 $— $723.6
Balance as of December 31, 2005 ........................... $723.6 $— $723.6
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