Health Net 2002 Annual Report Download - page 64

62 | HEALTH NET, INC.
Fair Value of Financial Instruments
The estimated fair value amounts of cash equivalents,
investments available for sale, trade accounts and notes
receivable and notes payable approximate their carrying
amounts in the financial statements and have been deter-
mined by us 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 estimated based on the quoted market
prices for the same or similar issues or on the current rates
offered to us for debt with the same remaining maturities.
The carrying value of long-term notes receivable, non-
marketable securities and revolving credit facilities approx-
imate the fair value of such financial instruments. The
carrying values of the senior notes payable were $398.8
million and $398.7 million and the fair values were $458
million and $415 million as of December 31, 2002 and
2001, respectively. Considerable judgment is required to
develop estimates of fair value. Accordingly, the estimates
are not necessarily indicative of the amounts we could
have realized in a current market exchange. The use of
different market assumptions and/or estimation method-
ologies may have a material effect on the estimated fair
value amounts.
In June 1998, the FASB issued, then subsequently
amended, SFAS No. 133 “Accounting for Derivative
Instruments and Hedging Activities” (SFAS No. 133).
SFAS No. 133, as amended by SFAS No. 138, “Accounting
for Certain Derivative Instruments and Certain Hedging
Activities,” is effective for all fiscal years beginning after
June 15, 2000. SFAS No. 133 establishes accounting and
reporting standards requiring that all derivatives be
recorded in the balance sheet as either an asset or liability
measured at fair value and that changes in fair value be
recognized currently in earnings, unless specific hedge
accounting criteria are met. We adopted SFAS No. 133, as
amended, effective January 1, 2001. The adoption of SFAS
No. 133 had no effect on our consolidated financial posi-
tion or results of operations.
Stock-Based Compensation
In December 2002, the FASB issued SFAS No. 148,
“Accounting for Stock-Based Compensation – Transition
and Disclosure” (SFAS No. 148). SFAS No. 148 amended
SFAS No. 123, “Accounting for Stock-Based
Compensation” (SFAS No. 123), to provide alternative
methods of transition to SFAS No. 123’s fair value method
of accounting for stock-based employee compensation.
SFAS No. 148 also amends the disclosure provisions of
SFAS No. 123 and APB Opinion No. 28, “Interim
Financial Reporting,” to require disclosure in the summary
of significant accounting policies of the effects of an
entity’s accounting policy with respect to stock-based
employee compensation on reported net income and
earnings per share in annual and interim financial state-
ments. While SFAS No. 148 does not amend SFAS No.
123 to require companies to account for employee stock
options using the fair value method, the disclosure provi-
sions of SFAS No. 148 are applicable to all companies
with stock-based employee compensation, regardless of
whether they account for that compensation using the fair
value method of SFAS No. 123 or the intrinsic value
method of Opinion 25.
SFAS No. 123 encourages, but does not require,
companies to record compensation cost for stock-based
employee compensation plans at fair value. As permitted
under SFAS No. 123, we have elected to continue
accounting for stock-based compensation under the
intrinsic value method prescribed in APB 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 our stock over the exer-
cise price of the option. We apply APB Opinion No. 25
and related Interpretations in accounting for our plans (see
Note 7). Accordingly, no compensation cost has been
recognized for our stock option or employee stock
purchase plans. Had compensation cost for our plans been
determined based on the fair value at the grant dates of
options and employee purchase rights consistent with the
method of SFAS No. 123, our net income and earnings per