Health Net 2010 Annual Report Download - page 112

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We capitalize certain consulting costs, payroll and payroll-related costs for employees associated with
computer software developed for internal use. We amortize such costs primarily over a five-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.
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 and included as part of current
assets 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. During the year ended
December 31, 2010, we recorded $1.4 million in impairment charges to general and administrative expenses for
software under development, cabling and leasehold improvements. During the year ended December 31, 2009,
we recorded $35.0 million in impairment charges, including $31.6 million in connection with the Northeast Sale
(see Note 3) and $3.4 million in connection with our operations strategy recorded in general and administrative
expenses. During the year ended December 31, 2008, we recorded $26.9 million in impairment charges to
general and administrative expenses in connection with our operations strategy.
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 primarily consist of
the value of employer group contracts, provider networks and customer relationships, which are all subject to
amortization.
We perform our annual impairment test on our recorded goodwill 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. We performed our annual impairment test on our goodwill and other intangible assets as of
June 30, 2010 for our Western Region Operations and Northeast Operations reporting units. As a result, we
recorded an impairment of $6 million related to the goodwill for our Northeast Operations in the three months
ended June 30, 2010. We performed a two-step impairment test to determine the existence of impairment and the
amount of the impairment. In the first step, we compared the fair values to the related carrying values and
concluded that the carrying value of the Northeast Operations was impaired and that the carrying value of the
Western Region Operations was not impaired. The ratio of the carrying value of our Western Region Operations
to its fair value was approximately 80%. In the second step, we measured the amount by comparing the implied
value of the Northeast Operations’ goodwill to the carrying amount of such goodwill. Based on the results of our
Step 2 test, we concluded that the implied value of the Northeast Operations’ goodwill was zero, which resulted
in an impairment charge for the total carrying value of $6 million.
We also re-evaluated the useful lives of our other intangible assets and determined that the estimated useful
lives of our other intangible assets properly reflected the current estimated useful lives.
In connection with the then pending Northeast Sale, we previously assessed the recoverability of goodwill
and our long-lived assets, including other intangible assets, property and equipment and other long-term assets
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