United Healthcare 2005 Annual Report Download - page 60

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To determine compensation expense related to our stock-based compensation plans under the fair value method,
the fair value of each option grant is estimated on the date of grant using an option-pricing model. For purposes
of estimating the fair value of our employee stock option grants, we utilized a binomial model. The principal
assumptions we used in applying the option pricing models were as follows:
2005 2004 2003
Risk-Free Interest Rate ..................................................... 4.3% 3.3% 2.6%
Expected Volatility ........................................................ 23.5% 28.5% 30.9%
Expected Dividend Yield ................................................... 0.1% 0.1% 0.1%
Expected Life in Years ..................................................... 4.1 4.2 4.1
Information regarding the effect on net earnings and net earnings per common share had we applied the fair value
expense recognition provisions of FAS 123 is included in Note 2.
In December 2004, the Financial Accounting Standards Board (FASB) issued FAS 123R, which amended
FAS 123 and 95. FAS 123R requires all companies to measure compensation expense for all share-based
payments (including employee stock options) at fair value and recognize the expense over the related service
period. Additionally, excess tax benefits, as defined in FAS 123R, are recognized as an addition to paid-in-capital
and are reclassified from operating cash flows to financing cash flows in the Consolidated Statements of Cash
Flows. We adopted this standard as of January 1, 2006, and the adoption did not result in any change to the pro
forma compensation amounts historically disclosed under FAS 123.
10. Income Taxes
The components of the provision for income taxes are as follows:
Year Ended December 31, (in millions) 2005 2004 2003
Current Provision
Federal .......................................................... $1,638 $1,223 $ 932
State and Local .................................................... 106 78 46
Total Current Provision ......................................... 1,744 1,301 978
Deferred Provision ..................................................... 88 85 37
Total Provision for Income Taxes ................................. $1,832 $1,386 $1,015
The reconciliation of the tax provision at the U.S. Federal Statutory Rate to the provision for income taxes is as
follows:
Year Ended December 31, (in millions) 2005 2004 2003
Tax Provision at the U.S. Federal Statutory Rate ............................. $1,796 $1,391 $ 994
State Income Taxes, net of federal benefit ................................... 77 54 29
Tax-Exempt Investment Income .......................................... (40) (33) (30)
Other,net ............................................................ (1) (26) 22
Provision for Income Taxes .......................................... $1,832 $1,386 $1,015
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