Humana 2015 Annual Report Download - page 107

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
99
Income Taxes
We recognize an asset or liability for the deferred tax consequences of temporary differences between the tax bases
of assets or liabilities and their reported amounts in the consolidated financial statements. These temporary differences
will result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are
recovered or settled. We also recognize the future tax benefits such as net operating and capital loss carryforwards as
deferred tax assets. A valuation allowance is provided against these deferred tax assets if it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Future years’ tax expense may be increased or decreased
by adjustments to the valuation allowance or to the estimated accrual for income taxes.
We record tax benefits when it is more likely than not that the tax return position taken with respect to a particular
transaction will be sustained. A liability, if recorded, is not considered resolved until the statute of limitations for the
relevant taxing authority to examine and challenge the tax position has expired, or the tax position is ultimately settled
through examination, negotiation, or litigation. We classify interest and penalties associated with uncertain tax positions
in our provision for income taxes.
Derivative Financial Instruments
On October 29, 2012, we acquired a noncontrolling equity interest in MCCI Holdings, LLC, or MCCI, a privately
held Medical Services Organization, or MSO, headquartered in Miami, Florida, that primarily coordinates medical care
for Medicare Advantage beneficiaries in Florida, Texas and Georgia. Our agreement with MCCI includes a put option
that would allow the controlling interest holder to put their interest to us beginning in 2018 as well as a call option that
would allow us to purchase the controlling interest beginning in 2021. Accordingly, we recorded, at fair value, a liability
and an asset associated with the put and call, respectively. Changes in the fair value of the liability and asset during the
years ended December 31, 2015, 2014, and 2013 were not material to our results of operations, financial condition, or
cash flows.
At times, we may use interest-rate swap agreements to manage our exposure to interest rate risk. The differential
between fixed and variable rates to be paid or received is accrued and recognized over the life of the agreements as
adjustments to interest expense in the consolidated statements of income. We were not party to any interest-rate swap
agreements in 2015, 2014, or 2013.
Related Party
As noted above, MCCI is a related party to Humana. In December 2015, we purchased a note receivable directly
from a third-party bank syndicate related to the financing of MCCI's business and extended the exercise date of the put
option to 2018 and the call option to 2021 as previously discussed. The $284 million note receivable bears interest at
10% annually, payable in quarterly installments, and matures in December 2020. We have also entered into a revolving
note agreement providing a line of credit up to $55 million under which no amounts have been drawn. The note receivable
is included with other long-term assets in our consolidated balance sheet and with purchases of investment securities
in our consolidated statement of cash flows. The related interest income is included in investment income in our
consolidated statement of income. MCCI provides services to Humana Medicare Advantage members under capitation
contracts with our health plans. Under these capitation agreements with Humana, MCCI assumes the financial risk
associated with these Medicare Advantage members. We also advanced MCCI $9 million, with repayment terms tied
to the performance under the capitation agreements. We recognized benefits expense of approximately $1.0 billion in
2015, $962 million in 2014 and $873 million in 2013 under these capitation agreements with MCCI.
Stock-Based Compensation
We generally recognize stock-based compensation expense, as determined on the date of grant at fair value, on a
straight-line basis over the period during which an employee is required to provide service in exchange for the award
(the vesting period). In addition, for awards with both time and performance-based conditions, we generally recognize
compensation expense on a straight line basis over the vesting period when it is probable that the performance condition
will be achieved. However, prior to July 2, 2015, for awards granted to retirement eligible employees, compensation
expense is recognized on a straight-line basis over the shorter of the requisite service period or the period from the date