Humana 2003 Annual Report Download - page 74

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Long-Lived Assets
Property and equipment is recorded at cost. Gains and losses on sales or disposals of property and
equipment are included in administrative expense. Certain costs related to the development or purchase of
internal-use software are capitalized in accordance with AICPA Statement of Position 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use. Depreciation is computed using the
straight-line method over estimated useful lives ranging from 3 to 10 years for equipment, 3 to 7 years for
computer software, and 20 to 40 years for buildings.
We periodically review long-lived assets, including property and equipment and other intangible assets, for
impairment whenever adverse events or changes in circumstances indicate the carrying value of the asset may not
be recoverable. Losses are recognized for a long-lived asset to be held and used in our operations when the
undiscounted future cash flows expected to result from the use of the asset are less than its carrying value. We
recognize an impairment loss based on the excess of the carrying value over the fair value of the asset. A long-
lived asset held for sale is reported at the lower of the carrying amount or fair value less costs to sell.
Depreciation expense is not recognized on assets held for sale. Losses are recognized for a long-lived asset to be
abandoned when the asset ceases to be used. In addition, we periodically review the estimated lives of all long-
lived assets for reasonableness. See Note 4 for a discussion related to our 2003 impairment.
Goodwill and Other Intangible Assets
Goodwill represents the unamortized excess of cost over the fair value of the net tangible and other
intangible assets acquired. Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets,orStatement 142, requires goodwill to no longer be amortized to earnings, but instead to 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 health
insurance and specialty products. 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.
We ceased amortizing goodwill upon adopting Statement 142 on January 1, 2002. Statement 142 requires a
two-step process to review goodwill for impairment. The first step is a screen for potential impairment, and the
second step measures the amount of impairment, if any. Impairment tests are performed, at a minimum, in the
fourth quarter of each year supported by our long-range business plan and annual planning process. Impairment
tests completed for 2002 and 2003 did not result in an impairment loss.
Medical and Other Expenses Payable and Medical Cost Recognition
Medical costs include claim payments, capitation payments, allocations of certain centralized expenses and
various other costs incurred to provide health insurance coverage to members, as well as estimates of future
payments to hospitals and others for medical care provided prior to the balance sheet date. Capitation payments
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