Health Net 1998 Annual Report Download - page 42

4 0 F O U N D ATIO N H EALTH SYST EMS, I N C.
statements and have been determined by the
Company using available market information and
appropriate valuation methodologies.The carrying
amounts of cash equivalents approximate fair value
due to the short maturity of those instruments.The
fair values of investments are estimated based on
quoted market prices and dealer quotes for similar
investments.The fair value of notes payable is esti-
mated based on the quoted market prices for the
same or similar issues or on the current rates offered
to the Company for debt with the same remaining
maturities.Considerable judgment is required to
develop estimates of fair value.Accordingly, the esti-
mates are not necessarily indicative of the amounts
the Company could have realized in a current mar-
ket exchange.The use of different market assump-
tions and/ or estimation methodologies may have a
material effect on the estimated fair value amounts.
The fair value estimates are based on perti-
nent information available to management as of
December 31,1998 and 1997.Although manage-
ment is not aware of any factors that would signifi-
cantly affect the estimated fair value amounts, such
amounts have not been comprehensively revalued
for purposes of these financial statements since that
date, and therefore, current estimates of fair value
may differ significantly.
Stock-based Compensation
The Financial Accounting Standards Board issued
SFAS No. 123,“Accounting for Stock-Based
Compensation”(“SFAS 123”).As permitted under
SFAS 123, the Company has elected to continue
accounting for stock-based compensation under the
intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25,“Accounting for
Stock Issued to Employees.” Under the intrinsic
value method,compensation cost for stock options
is measured at the date of grant as the excess,if any,
of the quoted market price of the Company’s stock
over the exercise price of the option (see Note 7).
Comprehensi ve Income
Effective January 1,1998,the Company adopted
SFAS No. 130 “Reporting Comprehensive Income”
(“SFAS 130”).SFAS 130 establishes standards for
reporting and presenting comprehensive income and
its components.Comprehensive income includes all
changes in stockholders’equity (except those arising
from transactions with stockholders) and includes
net income and net unrealized appreciation (depre-
ciation),after tax,on investments available for sale.
The adoption of SFAS 130 had no impact on
total stockholders ’e q u i t y.A c c u mulated other com-
p re h e n s i ve income at December 31, 1 9 9 8 , 1997 and
1996 consisted entirely of unrealized gains (losses),
net of income taxe s .The changes in unrealized gains
(losses) during each of the three ye a rs ended Decem-
ber 31, 1998 include reclassification adjustments
for gains (losses) realized in net income relating to
u n realized gains (losses) previously re c og n i z e d .S u c h
reclassification adjustments net of income tax, a re not
m a t e rial to the financial statements.
Recently Issued Accounting Pronouncements
In June 1998,the Financial Accounting Standards
B o a rd issued SFAS No. 1 3 3 ,“Accounting for
Derivative Instruments and Hedging Activities”
(“SFAS 133”),which is required to be adopted in
years beginning after June 15,1999.Management
does not anticipate that the adoption of SFAS 133
will have a significant effect on the financial position
of the Company or its results of operations.
The A m e rican Institute of Certified Publ i c
Accountants issued Statement of Position 97-3,
“Accounting by Insurance and Other Enterp rises
for Insurance-Related A s s e s s m e n t s ” (“SOP 97-3”)
in December 1997, Statement of Position 98-1,
“Accounting for the Costs of Computer Softwa re
D eveloped or Obtained for Internal Use” (“SOP
98-1”) in March 1998 and Statement of Position
98-5 “ R e p o rting on the Costs of Start-Up A c t iv i t i e s ”
(“SOP 98-5”) in A p ril 1998, all of which are effective
for the Company ’s 1999 financial statements. S O P
97-3 provides guidance for determining when an
insurance company or other enterp rises should re c-
ognize a liability for guaranty-fund assessments and
guidance for measuring the liability. SOP 98-1
re q u i res certain computer softwa re and related costs
for internal use to be capitalized and amort i z e d .S O P
98-5 re q u i res costs of start-up activities and organi-
zation costs to be expensed as incurre d .The adop-
tion of SOP 97-3 and SOP 98-1 is not expected to
h ave a significant effect on the financial position of
the Company or its results of operations. The initial
application of SOP 98-5 in the first quarter of 1999
will result in a charge of approximately $10 million
b e f o re income taxes re p resenting the write-off of
existing start-up and organization costs which will
be re p o rted as a cumu l a t ive effect of a change in
accounting pri n c i p l e .