Health Net 2006 Annual Report Download - page 113

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
any interest and penalties related to taxes that are included in the financial statements, and open statutes of
limitations for examination by major tax jurisdictions. FIN 48 is effective for annual periods beginning after
December 15, 2006 and the cumulative effect of adopting FIN 48 will be recorded as a change in accounting
principle in the financial statements for the three months ended March 31, 2007. We anticipate the impact to be
an immaterial reduction to the beginning balance of retained earnings.
In 2006, the FASB issued SFAS No. 157. SFAS No. 157 provides guidance for using fair value to measure
assets and liabilities. The standard expands required disclosures about the extent to which companies measure
assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value
measurements on earnings. SFAS No. 157 applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value. SFAS No. 157 does not expand the use of fair value in any new
circumstances. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. We do not expect the impact to be material to
our consolidated financial statements.
In 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an
amendment of FASB Statements No. 133 and 140” (SFAS No. 155). SFAS No. 155 establishes a requirement to
evaluate if certain financial instruments are freestanding derivatives or hybrid financial instruments that contain
an embedded derivative requiring bifurcation. SFAS No. 155 is effective for all financial instruments acquired,
issued, or subject to a remeasurement (new basis) event occurring after the beginning of an entity’s first fiscal
year that begins after September 15, 2006. On October 25, 2006, the FASB voted to exempt certain mortgage-
backed securities from the provisions of SFAS No. 155 and issued FAS 133 Implementation Issue
B40-Embedded Derivatives which exempted most mortgage-backed securities from the provisions of SFAS
No. 155. We will adopt the provisions of SFAS No. 155 and FAS 133 Implementation Issue B40, beginning with
financial instruments acquired in the first quarter of 2007, and we do not expect it to have a material impact to
our consolidated financial statements at the time of adoption.
In 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB No. 108) which addresses quantifying the
financial statement effects of misstatements, specifically, how the effects of prior year uncorrected errors must be
considered in quantifying misstatements in the current year financial statements. SAB No. 108 is effective for
fiscal years ending after November 15, 2006. The adoption of the provisions of SAB No. 108 had no impact on
our consolidated financial statements as of December 31, 2006.
Note 3—Sales and Acquisition
Sale of Pennsylvania Subsidiaries
On July 31, 2006, we completed the sale of the subsidiary that formerly held our Pennsylvania health plan
and certain of its affiliates (Pennsylvania Subsidiaries). We recognized an estimated $32 million tax benefit and a
$0.4 million pretax loss related to this sale in the year ended December 31, 2006. See Note 10 for further
information regarding our tax accounting policies related to sales of subsidiaries.
The Pennsylvania Subsidiaries were historically reported as part of our Health Plan Services reportable
segment. The revenues and expenses of the Pennsylvania Subsidiaries were negligible for the years ended
December 31, 2006, 2005 and 2004.
Acquisition of Universal Care Business
On March 31, 2006, we completed the acquisition of certain health plan businesses of Universal Care, Inc.
(Universal Care), a California-based health care company, and paid $74.0 million, including transaction-related
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