Health Net 2009 Annual Report Download - page 85

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 income approach is based on the
discounted cash flow methodology. The discounted cash flow methodology is based on converting expected cash
flows to their present value. Annual cash flows are estimated 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 are
calculated using an appropriate capitalization technique and then discounted. There are numerous assumptions
and estimates underlying the determination of the estimated fair values, including assumptions and estimates
related to future earnings and membership levels based on current and future plans and initiatives, long-term
strategies and our annual planning and forecasting processes, as well as the expected weighted average cost of
capital used in the discount process. If the 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.
In connection with the goodwill allocation and related impairment testing, our fair value estimates
contemplated the consideration expected to be received in connection with the Northeast Sale, including the cash
proceeds, contingent consideration for membership renewal, the receivable for the remaining adjusted tangible
net equity and the other deliverables which are part of the Stock Purchase Agreement (see Note 3 to our
consolidated financial statements).
After the reallocation of the goodwill, we performed a two-step impairment test to determine the existence
of impairment and the amount of the impairment. In the first step, we compared the fair values of our reporting
units to the related carrying values and concluded that the carrying value of the Acquired Companies was
impaired; however, we determined that the carrying value of the Northeast retained business and the West
Operations were not impaired. In the second step we measured the amount of the impairment by comparing the
implied value of the Acquired Companies’ goodwill to the carrying amount of such goodwill. Based on the
results of our Step 2 test, we concluded that the implied value of the goodwill allocated to the Acquired
Companies was zero, which resulted in an impairment charge for the total carrying value of the allocated
goodwill of $137 million. We updated our goodwill impairment assessment test performed as of September 30,
2009 to December 11, 2009 and no additional impairment was indicated.
After impairing the goodwill, we compared the Acquired Companies’ adjusted carrying value to its
estimated fair value less cost to sell. The carrying value of the assets and liabilities held for sale exceeded the fair
value less cost to sell by approximately $6 million. As of September 30, 2009, the assets and liabilities held for
sale included $46.2 million in other intangible assets and we reduced the carrying value of these intangibles by
the $6 million. Additionally, upon classifying the Acquired Companies’ assets and liabilities as held for sale we
ceased recording amortization expense related to these intangible assets.
On December 11, 2009, we completed the Northeast Sale (See Note 3 to the consolidated financial
statements for information regarding the Northeast Sale).
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
83