Health Net 2014 Annual Report Download - page 102

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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, 2014 for our
Western Region Operations reporting unit, and 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 re-evaluated the useful lives of our other intangible
assets and determined that the current estimated useful lives were properly reflected.
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. 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 224% and 149% as of September 30, 2014 and June 30, 2013, respectively.
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 or a forecast of continuing losses
associated with the use of the asset and current expectation that the asset will more likely than not be sold or disposed
of significantly before the end of its estimated useful life.
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.
In connection with the Cognizant Transaction, we classified certain software systems assets as held-for-sale. As
of December 31, 2014, we had classified software systems assets with a total net book value of $130.2 million as assets
held for sale. We assessed the recoverability of these assets held for sale and as a result, we recorded $80.2 million in
asset impairments during the year ended December 31, 2014. See Note 3 for more information regarding assets held for
sale and the Cognizant Transaction. In addition, we recorded an asset impairment of $1.3 million during the year ended
December 31, 2014 for internally developed software.
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
the Income Taxes Topic of the Financial Accounting Standards Board ("FASB") codification. 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 all of the positions as
filed. Accordingly, we maintain a liability for the estimated amount of contingent tax challenges by taxing authorities
upon examination. We 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. Any difference between the amounts of tax
benefits reported on tax returns and tax benefits reported in the financial statements is recorded as a liability for