Cigna 2012 Annual Report Download - page 98

PART II
ITEM 8 Financial Statements and Supplementary Data
that are estimated quarterly based on claim experience, compare adjusted regardless of the final outcome. For strategic performance
actual incurred drug benefit costs to estimated costs submitted in shares with payment dependent on performance conditions, expense
original contracts and may result in more or less revenue from CMS. is initially accrued based on the most likely outcome, but evaluated for
Final revenue adjustments are determined through an annual adjustment each period for updates in the expected outcome. At the
settlement with CMS that occurs after the contract year. end of the performance period, expense is adjusted to the actual
outcome (number of shares awarded times the share price at the grant
Revenue for investment-related products is recognized as follows: date).
Net investment income on assets supporting investment-related
products is recognized as earned.
U. Participating Business
Contract fees, that are based upon related administrative expenses, The Company’s participating life insurance policies entitle
are recognized in premiums and fees as they are earned ratably over policyholders to earn dividends that represent a portion of the
the contract period. earnings of the Company’s life insurance subsidiaries. Participating
Benefits and expenses for investment-related products consist insurance accounted for approximately 1% of the Company’s total life
primarily of income credited to policyholders in accordance with insurance in force at the end of 2012, 2011 and 2010.
contract provisions.
Revenue for universal life products is recognized as follows:
V. Income Taxes
Net investment income on assets supporting universal life products The Company and its domestic subsidiaries file a consolidated United
is recognized as earned. States federal income tax return. The Company’s foreign subsidiaries
Fees for mortality and surrender charges are recognized as assessed, file tax returns in accordance with foreign law. U.S. taxation of these
that is as earned. foreign subsidiaries may differ in timing and amount from taxation
under foreign laws. Reportable U.S. taxable income for these
Administration fees are recognized as services are provided. subsidiaries is reflected in the U.S. tax return of the affiliates’ domestic
Benefits and expenses for universal life products consist of benefit parent.
claims in excess of policyholder account balances. Expenses are The Company recognizes deferred income taxes when the financial
recognized when claims are submitted, and income is credited to statement and tax-based carrying values of assets and liabilities are
policyholders in accordance with contract provisions. different. In addition, deferred income tax liabilities are recognized on
Contract fees and expenses for administrative services only programs the unremitted earnings of foreign subsidiaries that are not
and pharmacy programs and services are recognized as services are permanently invested overseas. For subsidiaries whose earnings are
provided net of estimated refunds under performance guarantees. In considered permanently invested overseas, income taxes are accrued at
some cases, the Company provides performance guarantees associated the local foreign tax rate. The Company establishes valuation
with meeting certain service standards, clinical outcomes or financial allowances against deferred tax assets if it is determined more likely
metrics. If these service standards, clinical outcomes or financial than not that the deferred tax asset will not be realized. The need for a
metrics are not met, the Company may be financially at risk up to a valuation allowance is determined based on the evaluation of various
stated percentage of the contracted fee or a stated dollar amount. The factors, including expectations of future earnings and management’s
Company establishes deferred revenues for estimated payouts judgment. Note 20 contains detailed information about the
associated with these performance guarantees. Approximately 16% of Company’s income taxes.
ASO fees reported for the year ended December 31, 2012 were at risk, The Company recognizes interim period income taxes by determining
with reimbursements estimated to be approximately 1%. an estimated annual effective tax rate and applying that rate to
Mail order pharmacy revenues and cost of goods sold are recognized as year-to-date pretax results. The estimated annual effective tax rate is
each prescription is shipped. updated periodically based on revised projections of full year income.
Although the effective tax rate approach is generally used for interim
periods, taxes on significant, unusual and infrequent items are
T. Stock Compensation
recognized at the statutory tax rate entirely in the period the amounts
The Company records compensation expense for stock awards and are realized.
options over their vesting periods primarily based on the estimated fair
value at the grant date. Compensation expense is recorded for stock
W. Earnings Per Share
options over their vesting period based on fair value at the grant date
which is calculated using an option-pricing model. Compensation The Company computes basic earnings per share using the weighted-
expense is recorded for restricted stock grants and units over their average number of unrestricted common and deferred shares
vesting periods based on fair value, which is equal to the market price outstanding. Diluted earnings per share also includes the dilutive
of the Company’s common stock on the date of grant. Compensation effect of outstanding employee stock options and unvested restricted
expense for strategic performance shares is recorded over the stock granted after 2009 using the treasury stock method and the
performance period. For strategic performance shares with payment effect of strategic performance shares.
dependent on market condition, fair value is determined at the grant
date using a Monte Carlo simulation model and not subsequently
76 CIGNA CORPORATION - 2012 Form 10-K
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