Humana 2003 Annual Report Download - page 40

In accordance with the adoption of an accounting standard on January 1, 2002, as discussed in Note 2 to the
consolidated financial statements, goodwill is no longer amortized but must be tested at least annually for
impairment at a level of reporting referred to as the reporting unit and more frequently if adverse events or
changes in circumstances indicate that the asset may be impaired. A reporting unit is one level below our
Commercial and Government segments. The Commercial segment’s two reporting units consist of fully and self-
insured medical and specialty. The Government segment’s three reporting units consist of Medicare+Choice,
TRICARE and Medicaid. Goodwill was assigned to the reporting unit that was expected to benefit from a
specific acquisition. If goodwill was expected to benefit multiple reporting units, we allocated goodwill in
connection with our transitional impairment test as of January 1, 2002 based upon the reporting units’ relative
fair value. This process resulted in the allocation of $633.2 million of goodwill to the Commercial segment and
$143.7 million of goodwill to the Government segment.
Our strategy, long-range business plan, and annual planning process supports our goodwill impairment tests.
These tests are based primarily on an evaluation of future discounted cash flows under several scenarios. We
used a range of discount rates that correspond to our weighted-average cost of capital. Key assumptions including
changes in membership, premium yields, medical cost trends and certain government contract extensions are
consistent with those utilized in our long-range business plan and annual planning process. If these assumptions
differ from actual, the estimates underlying our goodwill impairment tests could be adversely affected.
Long-lived assets consist of property and equipment and other intangible assets. These assets are
depreciated or amortized over their estimated useful life, and are subject to impairment reviews. We periodically
review long-lived assets whenever adverse events or changes in circumstances indicate the carrying value of the
asset may not be recoverable. In assessing recoverability, we must make assumptions regarding estimated future
cash flows and other factors to determine if an impairment loss may exist, and, if so, estimate fair value. We also
must estimate and make assumptions regarding the useful life we assign to our long-lived assets. If these
estimates or their related assumptions change in the future, we may be required to record impairment losses or
change the useful life, including accelerating depreciation for these assets. We recognized losses due to
impairment and accelerated depreciation from changes in estimated useful life of $30.8 million in 2003,
$2.4 million in 2002 and none in 2001. See Note 4 to the consolidated financial statements.
Recently Issued Accounting Pronouncements
On December 17, 2003, the Staff of the Securities and Exchange Commission (“SEC” or the “Staff”) issued
Staff Accounting Bulletin No. 104, Revenue Recognition, or SAB 104, which supercedes Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements, or SAB 101.SAB 104’s primary purpose is to
rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements,
superceded as a result of the issuance of EITF 00-21, “Accounting for Revenue Arrangements with Multiple
Deliverables.” Additionally, SAB 104 rescinds the SEC’s Revenue Recognition in Financial Statements
Frequently Asked Questions and Answers, or the FAQ, issued with SAB 101 that had been codified in SEC Topic
13, Revenue Recognition. Selected portions of the FAQ have been incorporated into SAB 104. While the wording
of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101
remain largely unchanged by the issuance of SAB 104. The provisions of SAB 104 do not have an impact on our
current revenue recognition policies.
In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46,
Consolidation of Variable Interest Entities, an Interpretation of ARB 51,orFIN 46. The primary objectives of
FIN 46 are to provide guidance on the identification of entities for which control is achieved through means other
than through voting rights (variable interest entities, or VIEs) and how to determine when and which business
enterprise should consolidate the VIE (the primary beneficiary). In December 2003, the FASB issued FIN 46-R,
Consolidation of Variable Interest Entities—an interpretation of ARB 51 (revised December 2003), which
replaces FIN 46. FIN 46-R incorporates certain modifications to FIN 46 adopted by the FASB subsequent to the
issuance of FIN 46, including modifications to the scope of FIN 46. Additionally, FIN 46-R incorporates much of
the guidance previously issued in the form of FASB Staff Positions.
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