Health Net 1999 Annual Report Download - page 36

34 FOUNDATION HEALTH SYSTEMS, IN C.
Cash and Cash Equivalents
Cash equivalents include all highly liquid investments with
a maturity of three months or less when purchased.
The Company and its consolidated subsidiaries are
required to set aside certain funds for restricted purposes
pursuant to regulatory requirements. As of December 31,
1999 and 1998, cash and cash equivalent balances of $52.9
million and $65.5 million, respectively, are restricted and
included in other noncurrent assets.
Investments
Investments classified as available for sale are reported at fair
value based on quoted market prices, with unrealized gains
and losses excluded from earnings and reported as other
comprehensive income, net of income tax effects.The cost
of investments sold is determined in accordance with the
specific identification method and realized gains and losses
are included in investment income.
Certain debt investments are held by trustees or agen-
cies pursuant to state regulatory requirements.These invest-
ments totaled $31.8 million in 1999 and $61.8 million in
1998, and are included in other noncurrent assets (see
Note 11). Market values approximate carrying value at
December 31, 1999 and 1998.
Government Contracts
Amounts receivable or payable under government contracts
are based on three TR ICAR E contracts in five regions
which include both amounts billed ($5.1 million and $75.0
million of net receivables at December 31, 1999 and 1998,
respectively) and estimates for amounts to be received
under cost and performance incentive provisions, price
adjustments and change orders for services not originally
specified in the contracts. Such estimates are determined
based on information available as well as historical perfor-
mance and collection of which could extend for periods
beyond a year. Differences, which may be material, between
the amounts estimated and final amounts collected are
recorded in the period when determined.
Additionally, the reserves for claims and other settle-
ments includes approximately $189.7 million and $162.4
million relating to health care services provided under these
contracts as of December 31, 1999 and 1998, respectively.
Property and Equipment
Property and equipment are stated at historical cost less
accumulated depreciation. Depreciation is computed using
the straight-line method over the lesser of estimated useful
lives of the various classes of assets or the lease term.The
useful life for buildings and improvements is estimated at 40
years, and the useful lives for furniture, equipment and soft-
ware range from three to eight years (see Note 5).
Expenditures for maintenance and repairs are expensed
as incurred. Major improvements which increase the esti-
mated useful life of an asset are capitalized. Upon the sale
or retirement of assets, the recorded cost and the related
accumulated depreciation are removed from the accounts,
and any gain or loss on disposal is reflected in operations.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets arise primarily as a
result of various business acquisitions and consist of identifi-
able intangible assets acquired and the excess of the cost of
the acquisitions over the tangible and intangible assets
acquired and liabilities assumed (goodwill). Identifiable
intangible assets consist of the value of employer group
contracts, provider networks, non-compete agreements and
debt issuance costs. Goodwill and other intangible assets are
amortized using the straight-line method over the estimated
lives of the related assets listed below. In accordance with
Accounting Principles Board (“APB”) Opinion No. 17, the
Company periodically evaluates these estimated lives to
determine if events and circumstances warrant revised peri-
ods of amortization.The Company further evaluates the
carrying value of its goodwill and other intangible assets
based on estimated fair value or undiscounted operating
cash flows whenever significant events or changes occur
which might impair recovery of recorded costs. Fully amor-
tized goodwill and other intangible assets and the related
accumulated amortization are removed from the accounts.
Impairment is measured in accordance with Statement
of Financial Accounting Standards (“SFAS”) No. 121
“Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed O f” and is based on
whether the asset will be held and used or held for disposal.
An impairment loss on assets to be held and used is mea-
sured as the amount by which the carrying amount exceeds
the fair value of the asset. Fair value of assets held for dis-
posal would additionally be reduced by costs to sell the
asset. For the purposes of analyzing impairment, assets,
including goodwill, are grouped at the lowest level for
which there are identifiable independent cash flows, which
is generally at the operating subsidiary level. Estimates of
fair value are determined using various techniques depend-
ing on the event that indicated potential impairment (see
Note 15). Impairment charges for goodwill in 1999 and
1998 amounted to $4.7 million and $30.0 million, respec-
tively (see Note 15).
Effective January 1, 1999, the Company adopted
Statement of Position 98-5 “R eporting on the Costs of
Start-up Activities” and changed its method of accounting
for start-up and organization costs.The change involved
expensing these costs as incurred, rather than the Com-
pany’s previous accounting principle of capitalizing and
subsequently amortizing such costs.
The change in accounting principle resulted in the
write-off of the costs capitalized as of January 1, 1999.The
cumulative effect of the write-off was $5.4 million (net of
tax benefit of $3.7 million) and has been expensed and
reflected in the consolidated statement of operations for the
year ended December 31, 1999.