Health Net 2007 Annual Report Download - page 114

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Income Taxes
We record deferred tax assets and liabilities based on differences between the book and tax bases of assets
and liabilities. 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 Statement of Financial Accounting Standards No. 109, “Accounting for
Income Taxes” (SFAS No. 109). 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.
We file tax returns in many tax jurisdictions. Often, application of tax rules within the various jurisdictions
is subject to differing interpretation. Despite our belief that our tax return positions are fully supportable, we
believe that it is probable certain positions will be challenged by taxing authorities, and we may not prevail on
the positions as filed. Accordingly, we maintain a liability for the estimated amount of contingent tax challenges
by taxing authorities upon examination, in accordance with Financial Accounting Standards Board Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), which we adopted as of January 1, 2007. Prior
to 2007, we maintained a liability pursuant to SFAS No. 5, “Accounting for Contingencies.” FIN 48 clarifies the
accounting for uncertain taxes recognized in a company’s financial statements in accordance with SFAS No. 109,
“Accounting for Income Taxes.” The interpretation requires us to analyze the amount at which each tax position
meets a “more likely than not” standard for sustainability upon examination by taxing authorities. Only tax
benefit amounts meeting or exceeding this standard will be reflected in tax provision expense and deferred tax
asset balances. The interpretation also requires that any differences between the amounts of tax benefits reported
on tax returns and tax benefits reported in the financial statements be recorded in a liability for unrecognized tax
benefits. The liability for unrecognized tax benefits is reported separately from deferred tax assets and liabilities
and classified as current or noncurrent based upon the expected period of payment. See Note 10 to the
consolidated financial statements for additional disclosures related to FIN 48 policies and the impact of adoption.
Recently Issued Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 141(R), Business
Combinations. This statement replaces SFAS No. 141, Business Combinations. While retaining the fundamental
requirements in SFAS No. 141 that the acquisition method of accounting be used for all business combinations,
SFAS No. 141 (R) establishes principles and requirements for how the acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree. The standard also provides requirements for recognition and measurement of the goodwill acquired in
the business combination or gain from a bargain purchase and establishes disclosure requirements to enable users
of the financial statements to evaluate the nature and financial effects of the business combination. SFAS
No. 141(R) is effective for business combinations for which the acquisition date is in the fiscal year beginning on
or after December 15, 2008.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements- an amendment of ARB No. 51. SFAS No. 160 establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported
as equity in the consolidated financials statements. Under the new standard, noncontrolling interests no longer
will be classified within a mezzanine section of the balance sheet but will be reported as a part of equity. The
standard also changes a way the consolidated income statement is presented. It requires consolidated net income
to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest.
SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after
December 15, 2008.
F-18