Health Net 2003 Annual Report Download - page 83

During the years ended December 31, 2003 and 2002, we recorded impairment charges of $2.6 million for real estate
we own and $35.8 million for certain information technology-related assets, respectively (see Note 14).
We periodically assess long-lived assets or asset groups including property and equipment for recoverability when
events or changes in circumstances indicate that their carrying amount may not be recoverable. If we identify an indicator
of impairment, we assess recoverability by comparing the carrying amount of the asset to the sum of the undiscounted
cash flows expected to result from the use and the eventual disposal of the asset. An impairment loss is recognized when
the carrying amount is not recoverable and is measured as the excess of carrying value over fair value. Long-lived assets
are classified as held for sale when certain criteria are met. We measure long-lived assets to be disposed of by sale at the
lower of carrying amount or fair value less cost to sell. Fair value is determined using quoted market prices or the
anticipated cash flows discounted at a rate commensurate with the risk involved.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets arise primarily as a result of various business acquisitions and consist of
identifiable 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 and non-compete agreements.
Effective January 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets” which, among other
things, eliminates amortization of goodwill and other intangibles with indefinite lives. Intangible assets, including
goodwill, that are not subject to amortization will be tested for impairment annually or more frequently if events or
changes in circumstances indicate that we might not recover the carrying value of these assets. The impairment test
follows a two-step approach. The first step determines if the goodwill is potentially impaired; the second step measures
the amount of the impairment loss, if necessary. Under the first step, goodwill is considered potentially impaired if the
value of the reporting unit is less than the reporting unit’s carrying amount, including goodwill. Under the second step, the
impairment loss is then measured as the excess of recorded goodwill over the fair value of goodwill, as calculated. The
fair value of goodwill is calculated by allocating the fair value of the reporting unit to all the assets and liabilities of the
reporting unit as if the reporting unit was purchased in a business combination and the purchase price was the fair value of
the reporting unit.
We identified the following six reporting units with goodwill within our businesses: Health Plans, Government
Contracts, Behavioral Health, Dental & Vision, Subacute and Employer Services Group. In accordance with the transition
requirements of SFAS No. 142, we completed an evaluation of goodwill at each of our reporting units upon adoption of
this Standard. We also re-assessed the useful lives of our other intangible assets and determined that they properly reflect
the estimated useful lives of these assets. As a result of these impairment tests, we identified goodwill impairment at our
behavioral health subsidiary and at our employer services group subsidiary in the amounts of $3.5 million and $5.4
million, respectively. Accordingly, we recorded an impairment charge to goodwill of $8.9 million, net of tax benefit of
$0, which was reflected as a cumulative effect of a change in accounting principle in the consolidated statement of
operations during the first quarter ended March 31, 2002. As part of our annual goodwill impairment test, we completed
an evaluation of goodwill with the assistance of the same independent third-party professional services firm at each of our
reporting units as of June 30, 2003 and 2002. We perform our annual goodwill impairment test as of June 30 in each year.
No further goodwill impairments have been identified in any of our reporting units.
Our measurement of fair value was based on utilization of both the income and market approaches to fair value
determination. As a part of assessing impairments of goodwill and other intangible assets, we perform fair value
measurements. This includes using an independent third-party professional services firm. The income approach was based
on a discounted cash flow methodology. The discounted cash flow methodology is based upon converting expected cash
flows to present value. Annual cash flows were estimated for each year of a defined multi-year period until the growth
pattern becomes stable. The interim cash flows expected after the growth pattern becomes stable were calculated using an
appropriate capitalization technique and then discounted. The market approach used a market valuation methodology
which included the selection of companies engaged in a line (or lines) of business similar to the Company to be valued
and an analysis of the comparative operating results and future prospects of the Company in relation to the guideline
companies selected. The market price multiples are selected and applied to the Company based on the relative
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