Health Net 2005 Annual Report Download - page 73

Goodwill
We test goodwill for impairment annually based on the estimated fair value of our Health Plan Services
reportable segment. We test for impairment on a more frequent basis in cases where events and changes in
circumstances would indicate that we might not recover the carrying value of goodwill. Our measurement of fair
value is 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 using
different methodologies. The income approach is 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 are
estimated for each year of a defined multi-year period until the growth pattern becomes stable. The expected
interim cash flows expected after the growth pattern becomes stable are calculated using an appropriate
capitalization technique and then discounted. The market approach uses a market valuation methodology which
includes the selection of companies engaged in a line (or lines) of business similar to ours to be valued and an
analysis of our comparative operating results and future prospects in relation to those of the guideline companies
selected. The market price multiples are selected and applied to us based on our relative performance, future
prospects and risk profiles in comparison to those of the guideline companies. Methodologies for selecting
guideline companies include the exchange methodology and the acquisition methodology. The exchange
methodology is based upon transactions of minority-interests in publicly traded companies engaged in a line (or
lines) of business similar to ours. The public companies selected are defined as guideline companies. The
acquisition methodology involved analyzing the transaction involving similar companies that have been bought
and sold in the public marketplace. There are numerous assumptions and estimates underlying the determination
of the estimated fair value of our reporting units, including certain assumptions and estimates related to future
earnings based on current and future plans and initiatives. If these planned initiatives do not accomplish their
targeted objectives, the assumptions and estimates underlying the goodwill impairment tests could be adversely
affected and have a material effect upon our financial condition, results of operations or liquidity.
Recoverability of Long-Lived Assets and Investments
We periodically assess the recoverability of our long-lived assets including property and equipment and
other long-term assets and investments where events and changes in circumstances would indicate that we might
not recover the carrying value as follows:
Long-lived Assets Held and Used
We test long-lived assets or asset groups for recoverability when events or changes in circumstances
indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include,
but are not limited to: significant decreases in the market price of the asset, significant adverse changes in the
business climate or legal factors, current period cash flow or operating losses combined with a history of losses
or a forecast of continuing losses associated with the use of the asset and current expectation that the asset will
more likely than not be sold or disposed of significantly before the end of its estimated useful life.
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 Held For Sale
Long-lived assets are classified as held for sale when certain criteria are met, which include: management
commitment to a plan to sell the assets, the availability of the assets for immediate sale in their present condition,
whether an active program to locate buyers and other actions to sell the assets have been initiated, whether the
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