Health Net 2014 Annual Report Download - page 128

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
F-18
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, 2014 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.
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 Note 3 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 for goodwill fair value measurement information.
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.
The carrying amount of goodwill by reporting unit is as follows:
Western
Region
Operations Total
(Dollars in millions)
Balance as of December 31, 2012................................................ $ 565.9 $ 565.9
Balance as of December 31, 2013................................................ 565.9 565.9
Goodwill allocated to sale of business (see Note 3) .................... (7.0)(7.0)
Balance as of December 31, 2014................................................ $ 558.9 $ 558.9