Humana 2015 Annual Report Download - page 105

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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a result, we defer policy acquisition costs, primarily consisting of commissions, and amortize them over the estimated
life of the policies in proportion to premiums earned. Deferred acquisition costs are reviewed to determine if they are
recoverable from future income. See Note 18.
Beginning in 2014, health policies sold to individuals that conform to the Health Care Reform Law are accounted
for under a short-duration model and accordingly policy acquisition costs are expensed as incurred because premiums
received in the current year are intended to pay anticipated benefits in that year. In addition, as previously underwritten
members transition to plans compliant with the Health Care Reform Law, it results in policy lapses and the recognition
of previously deferred acquisition costs.
Long-Lived Assets
Property and equipment is recorded at cost. Gains and losses on sales or disposals of property and equipment are
included in operating costs. Certain costs related to the development or purchase of internal-use software are capitalized.
Depreciation is computed using the straight-line method over estimated useful lives ranging from 3 to 10 years for
equipment, 3 to 7 years for computer software, and 20 to 40 years for buildings. Improvements to leased facilities are
depreciated over the shorter of the remaining lease term or the anticipated life of the improvement.
We periodically review long-lived assets, including property and equipment and other intangible assets, for
impairment whenever adverse events or changes in circumstances indicate the carrying value of the asset may not be
recoverable. Losses are recognized for a long-lived asset to be held and used in our operations when the undiscounted
future cash flows expected to result from the use of the asset are less than its carrying value. We recognize an impairment
loss based on the excess of the carrying value over the fair value of the asset. A long-lived asset held for sale is reported
at the lower of the carrying amount or fair value less costs to sell. Depreciation expense is not recognized on assets
held for sale. Losses are recognized for a long-lived asset to be abandoned when the asset ceases to be used. In addition,
we periodically review the estimated lives of all long-lived assets for reasonableness.
Goodwill and Other Intangible Assets
Goodwill represents the unamortized excess of cost over the fair value of the net tangible and other intangible
assets acquired. We are required to test at least annually for impairment at a level of reporting referred to as the reporting
unit, and more frequently if adverse events or changes in circumstances indicate that the asset may be impaired. A
reporting unit either is our operating segments or one level below the operating segments, referred to as a component,
which comprise our reportable segments. A component is considered a reporting unit if the component constitutes a
business for which discrete financial information is available that is regularly reviewed by management. We aggregate
the components of an operating segment into one reporting unit if they have similar economic characteristics. Goodwill
is assigned to the reporting unit that is expected to benefit from a specific acquisition.
We use a two-step process to review goodwill for impairment. The first step is a screen for potential impairment,
and the second step measures the amount of impairment, if any. Impairment tests are performed, at a minimum, in the
fourth quarter of each year supported by our long-range business plan and annual planning process. We rely on an
evaluation of future discounted cash flows to determine fair value of our reporting units. Impairment tests completed
for 2015, 2014, and 2013 did not result in an impairment loss.
Other intangible assets primarily relate to acquired customer contracts/relationships and are included with other
long-term assets in the consolidated balance sheets. Other intangible assets are amortized over the useful life, based
upon the pattern of future cash flows attributable to the asset. This sometimes results in an accelerated method of
amortization for customer contracts because the asset tends to dissipate at a more rapid rate in earlier periods. Other
than customer contracts, other intangible assets generally are amortized using the straight-line method. We review other
finite-lived intangible assets for impairment under our long-lived asset policy.
Benefits Payable and Benefits Expense Recognition
Benefits expense includes claim payments, capitation payments, pharmacy costs net of rebates, allocations of
certain centralized expenses and various other costs incurred to provide health insurance coverage to members, as well
as estimates of future payments to hospitals and others for medical care and other supplemental benefits provided on