Health Net 2005 Annual Report Download - page 74

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sale of the assets is probable and their transfer is expected to qualify for recognition as a completed sale within
one year, whether the assets are being marketed at reasonable prices in relation to their fair value and how
unlikely it is that significant changes will be made to the plan to sell the assets.
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.
Long-lived Assets To Be Disposed Of Other Than By Sale
We classify an asset or asset group that will be disposed of other than by sale as held and used until the
disposal transaction occurs. The asset or asset group continues to be depreciated based on revisions to its
estimated useful life until the date of disposal or abandonment.
Recoverability is assessed based on the carrying amount of the asset and the sum of the undiscounted cash
flows expected to result from the remaining period of use and the eventual disposal of the asset. An impairment
loss is recognized when the carrying amount is not recoverable and exceeds the fair value of the asset.
Income Taxes
We record deferred tax assets and liabilities based on differences between the book and tax bases of assets
and liabilities (see Note 10 to the consolidated financial statements). 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. We establish a valuation allowance in accordance with the provisions of Statement of Financial
Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes.” We continually review the adequacy of
the valuation allowance and recognize the benefits from our deferred tax assets only when an analysis of both
positive and negative factors indicate that it is more likely than not that the benefits will be realized.
We file tax returns in many tax jurisdictions and, often, application of tax rules within the various
jurisdictions is subject to differing interpretation. Despite our belief that our tax return positions are fully
supportable, we believe that it is probable certain positions will be challenged by taxing authorities, and we may
not prevail on the positions as filed. Accordingly, we maintain a reserve for the estimated amount of contingent
tax challenges by taxing authorities upon examination, in accordance with SFAS No. 5, “Accounting for
Contingencies.” The reserve is comprised of amounts for specific issues arising in periods subject to
examination, and amounts are released from the reserve upon closure of such examinations or upon closure of the
statute of limitations for assessment. The estimates of contingent tax costs comprising the reserve balance have
been developed after careful analysis of the applicable statutory authority and court case precedent. As such, we
believe that the reserve reflects the probable outcome of contingent tax challenges and that the probability of
material assessments above the reserve balance is remote. The reserve is included in accounts payable and other
liabilities in our consolidated balance sheets.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to interest rate and market risk primarily due to our investing and borrowing activities.
Market risk generally represents the risk of loss that may result from the potential change in the value of a
financial instrument as a result of fluctuations in interest rates, credit profiles and in equity prices. Interest rate
risk is a consequence of maintaining variable interest rate earning investments and fixed rate liabilities or fixed
income investments and variable rate liabilities. We are exposed to interest rate risks arising from changes in the
level or volatility of interest rates, prepayment speeds and/or the shape and slope of the yield curve. In addition,
we are exposed to the risk of loss related to changes in credit spreads. Credit spread risk arises from the potential
that changes in an issuer’s credit rating or credit perception may affect the value of financial instruments.
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