Aetna 2006 Annual Report Download - page 50

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On January 27, 2006, our Board of Directors (the “Board”) declared a two-for-one stock split of our common stock
which was effected in the form of a 100% common stock dividend. All shareholders of record at the close of
business on February 7, 2006 received one additional share of common stock for each share held on that date
distributed in the form of a stock dividend on February 17, 2006. On February 9, 2005, the Board declared a two-
for-one stock split of our common stock which was effected in the form of a 100% common stock dividend. All
shareholders of record at the close of business on February 25, 2005 received one additional share of common stock
for each share held on that date distributed in the form of a stock dividend on March 11, 2005. All share and per
share amounts in the accompanying consolidated financial statements and related notes have been adjusted to reflect
these two stock splits for all periods presented. In connection with the stock splits, the Board approved two
amendments to our Articles of Incorporation. The amendments increased the number of our authorized common
shares to 1.5 billion shares effective March 11, 2005 and again to 2.9 billion effective February 17, 2006. These
increases are in the same proportion that the shares distributed in the stock dividend increased the number of issued
common shares.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally
accepted accounting principles (“GAAP”) and include the accounts of Aetna and the subsidiaries that we control.
All significant intercompany balances have been eliminated in consolidation. Certain reclassifications have been
made to the 2005 and 2004 financial information to conform to the 2006 presentation.
New Accounting Standards
Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (“FAS”) No. 123 Revised,
“Share-Based Payment” (“FAS 123R”), which is a revision of FAS 123, “Accounting for Stock-Based
Compensation.” FAS 123R also supercedes Accounting Principles Board Opinion No. 25, “Accounting for Stock
Issued to Employees” (“APB 25”) and amends FAS 95, “Statement of Cash Flows.”
Prior to the adoption of FAS 123R, we applied the provisions of FAS 123 to our stock-based compensation
arrangements. FAS 123 permitted us to account for our stock-based compensation using the intrinsic value method
prescribed by APB 25, accompanied by pro forma disclosures of net income and earnings per share as if we had
applied the fair value method to such compensation.
FAS 123R requires companies to expense the fair value of all stock-based compensation awards (including stock
options, stock appreciation rights, restricted stock units and other stock-based awards) issued to employees and
non-employees, eliminating the alternative of measuring such awards using the intrinsic value method. FAS 123R
requires the fair value to be calculated using a quoted market price or a valuation model (such as the modified
Black-Scholes or binomial-lattice models) if a quoted market price is not available. Consistent with our historical
practice of measuring the fair value of stock-based compensation for our pro forma disclosures, we utilize a
modified Black-Scholes model to determine the fair value of our stock-based compensation awards for stock
options and stock appreciation rights. Stock-based compensation expense is measured at the grant date, based on
the fair value of the award and is recognized as expense over the requisite service period, which primarily is the
vesting period, except for retirement eligible individuals for whom a majority of the expense is recognized in the
year of grant.
The amendment to FAS 95 requires the benefits of tax deductions in excess of recognized compensation cost to be
reported as financing cash inflows rather than as a reduction in income taxes paid, which is included within
operating cash flows.