Health Net 2014 Annual Report Download - page 101

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Therefore, we recognize revenue related to administrative services on a straight-line basis over the option period,
when the fees become fixed and determinable.
The T-3 contract includes various performance-based incentives and penalties. For each of the incentives or
penalties, we adjust revenue accordingly based on the amount that we have earned or incurred at each interim date and
are legally entitled to in the event of a contract termination.
Revenues and expenses associated with the T-3 contract are reported as part of government contracts revenues
and government contracts expenses, respectively, in the consolidated statements of operations and included in our
Government Contracts reportable segment.
Amounts receivable under government contracts are comprised primarily of contractually defined billings,
accrued contract incentives under the terms of the contract and amounts related to change orders for services not
originally specified in the contract. Pursuant to our T-3 contract, the government has the right to unilaterally modify the
contract in certain respects by issuing change orders directing us to implement terms or services that were not originally
included in the contract. Following receipt of a change order, we have a contractual right to negotiate an equitable
adjustment to the contract terms to account for the impact of the change order. We start to perform under such change
orders and begin to incur associated costs after we receive the government's unilateral modification, but before we have
negotiated the final scope and/or value of the change order. In these situations, costs are expensed as incurred, and we
estimate and record revenue when we have met all applicable revenue recognition criteria. These criteria include the
requirements that change order amounts are determinable, that we have performed under the change orders, and that
collectability of amounts payable to us is reasonably assured.
Reserves For Contingent Liabilities
In the course of our operations, we are involved on a routine basis in various disputes with members, health care
providers, and other entities or individuals, as well as audits or investigations by government agencies and elected
officials that relate to our services and/or business practices that expose us to potential losses.
We recognize an estimated loss, which may represent damages, assessment of regulatory fines or penalties,
settlement costs, future legal expenses or a combination of the foregoing, as appropriate, from such loss contingencies
when it is both probable that a loss will be incurred and the amount of the loss can be reasonably estimated. Our loss
estimates are based in part on an analysis of potential results, the stage of the proceedings, consultation with outside
counsel and any other relevant information available.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets arise primarily as a result of various business acquisitions. Goodwill consists
of the excess of the cost of acquisitions over the tangible and intangible assets acquired and liabilities assumed. Other
intangible assets consist of identifiable intangible assets acquired and the value of provider networks and customer
relationships, which are all subject to amortization.
On November 2, 2014, we signed a definitive master services agreement with Cognizant to provide certain
services to us. In connection with this agreement, we have agreed to sell certain software assets and related intellectual
property ("software system assets") we own to Cognizant. The transaction, including the related asset sale, is subject to
the receipt of required regulatory approvals. See "—Cognizant Transaction" and Note 3 to our consolidated financial
statements for additional information regarding our agreements with Cognizant. Because the sale of these software
system assets meets the definition of a sale of a business under GAAP, as of September 30, 2014, we re-allocated $7
million of goodwill based on relative fair values of the Western Region Operations reporting unit with and without the
impact of the business to be sold. Our measurement of fair values is based on a combination of the discounted total
consideration expected to be received in connection with the services and asset sale agreements, income approach based
on a discounted cash flow methodology, and replacement cost methodology. After the reallocation of goodwill, we
performed a two-step impairment test to determine the existence of any impairment and the amount of the impairment.
In the first step, we compared the fair values to the related carrying value and concluded that the carrying value of the
business to be sold was impaired; however, we determined that the carrying value of the Western Region Operations
reporting unit was not impaired. In the second step, we measured the impairment amount by comparing the implied
value of the allocated 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 business to be sold was zero, which resulted in an
impairment charge for the total carrying value of the allocated goodwill of $7 million. See Note 7 to our consolidated
financial statements for additional goodwill fair value measurement information.