Health Net 2004 Annual Report Download - page 102

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The shares issued pursuant to the agreements are subject to restrictions on transfers, voting rights and certain other conditions. Upon
issuance of the restricted shares pursuant to the agreements, an unamortized compensation expense equivalent to the market value of
the shares on the date of grant was charged to stockholders’ equity as unearned compensation. This unearned compensation will be
amortized over the respective restricted periods. Compensation expense recorded for these restricted shares was $1.9 million, $2.1
million and $0.5 million during the years ended December 31, 2004, 2003 and 2002, respectively.
We become entitled to an income tax deduction in an amount equal to the taxable income reported by the holders of the
restricted shares when the restrictions are released and the shares are issued. Restricted shares are forfeited if the employees terminate
prior to the lapsing of restrictions. We record forfeitures of restricted stock, if any, as treasury share repurchases and any
compensation cost previously recognized is reversed in the period of forfeiture.
Comprehensive Income
Comprehensive income includes all changes in stockholders’ equity (except those arising from transactions with stockholders)
and includes net income, net unrealized appreciation (depreciation), after tax, on investments available for sale and changes in
minimum pension liabilities (see Note 9). Reclassification adjustments for net (losses) gains realized, net of tax, in net income were
$(4.7) million, $3.2 million and $3.0 million for the years ended December 31, 2004, 2003 and 2002, respectively.
Taxes Based on Premiums
We provide services in certain states which require premium taxes to be paid by us based on membership or billed premiums.
These taxes are paid in lieu of or in addition to state income taxes and totaled $34.8 million in 2004, $31.8 million in 2003 and $24.2
million in 2002. These amounts are recorded in general and administrative expenses on our consolidated statements of operations.
Income Taxes
We record deferred tax assets and liabilities based on differences between the book and tax bases of assets and liabilities (see
Note 10). The deferred tax assets and liabilities are calculated by applying enacted tax rates and laws to taxable years in which such
differences are expected to reverse. We establish a valuation allowance in accordance with the provisions of SFAS No. 109,
“Accounting for Income Taxes.” We continually review the adequacy of the valuation allowance and recognize the benefits from our
deferred tax assets only when an analysis of both positive and negative factors indicate that it is more likely than not that the benefits
will be realized. In addition, we maintain a reserve for the estimated amount of potential assessments by taxing authorities upon their
examination, in accordance with SFAS No. 5, “Accounting for Contingencies.” The reserve is comprised of amounts for potential
specific issues arising in periods subject to examination. These amounts are released from the reserve upon closure of such
examinations and new amounts are added for specific issues for new tax years.
Recently Issued Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R). SFAS 123R revises
SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to
Employees”. This statement requires a public entity to measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an
employee is required to provide
F-16