Health Net 2013 Annual Report Download - page 121

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
F-17
Property and Equipment
Property and equipment are stated at historical cost less accumulated depreciation. Depreciation is computed
using the straight-line method over the lesser of estimated useful lives of the various classes of assets or the remaining
lease term, in the case of leasehold improvements. The useful life for buildings and improvements is estimated at 35 to
40 years, and the useful lives for furniture, equipment and software range from 3 to 10 years (see Note 5).
We capitalize certain consulting costs, payroll and payroll-related costs for employees associated with computer
software developed for internal use. We amortize such costs primarily over a five-year period. Expenditures for
maintenance and repairs are expensed as incurred. Major improvements, which increase the estimated useful life of an
asset, are capitalized. Upon the sale or retirement of assets, the recorded cost and the related accumulated depreciation
are removed from the accounts, and any gain or loss on disposal is reflected in operations.
Wee periodically assess long-lived assets or asset groups including property and equipment for recoverability
when events or changes in circumstances indicate that their carrying amount may not be recoverable. 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 are classified as held for sale and included as part of current assets when certain criteria are met. We
measure long-lived assets to be disposed of by sale at the lower of carrying amount or fair value less cost to sell. Fair
value is determined using quoted market prices or the anticipated cash flows discounted at a rate commensurate with
the risk involved. During the years ended December 31, 2013, 2012 and 2011, we recorded $1.2 million, $0.5 million
and $4.3 million respectively, in impairment charges to general and administrative expenses primarily for internally
developed software.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets arise primarily as a result of various business acquisitions and consist of
identifiable intangible assets acquired and the excess of the cost of the acquisitions over the tangible and intangible
assets acquired and liabilities assumed (goodwill). Identifiable intangible assets primarily consist of the value of
provider networks and customer relationships, which are all subject to amortization.
We perform our annual impairment test on our recorded goodwill as of June 30 or more frequently if events or
changes in circumstances indicate that we might not recover the carrying value of these assets for each of our reporting
units. We performed our annual impairment test on our goodwill and other intangible assets as of June 30, 2013 for our
Western Region Operations reporting unit and also re-evaluated the useful lives of our other intangible assets. No
impairment was identified. 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 to the related carrying values and concluded
that the carrying value of the Western Region Operations was not impaired. As a result, the second step was not
performed. We also determined that the estimated useful lives of our other intangible assets properly reflected the
current estimated useful lives.
Due to the many variables inherent in the estimation of a business’s fair value and the relative size of recorded
goodwill, changes in assumptions may have a material effect on the results of our impairment test. The discounted cash
flows and market participant valuations (and the resulting fair value estimates of the Western Region Operations
reporting unit) are sensitive to changes in assumptions including, among others, certain valuation and market
assumptions, the Company’s ability to adequately incorporate into its premium rates the future costs of premium-based
assessments imposed by the ACA, and assumptions related to the achievement of certain administrative cost reductions
and the profitable implementation of California's Coordinated Care Initiative, which includes the dual eligibles
demonstration. Changes to any of these assumptions could cause the fair value of our Western Region Operations
reporting unit to be below its carrying value. The ratio of the fair value of our Western Region Operations reporting unit
to its carrying value was approximately 149% and 115% as of June 30, 2013 and 2012, respectively.
On April 1, 2012, we completed the sale of our Medicare PDP business. See Note 3 for additional information
regarding the sale of our Medicare PDP business. Our Medicare PDP business was previously reported as part of our