Humana 2006 Annual Report Download - page 83

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We believe our medical and other expenses payable are adequate to cover future claims payments required.
However, such estimates are based on knowledge of current events and anticipated future events. Therefore, the
actual liability could differ materially from the amounts provided.
Book Overdraft
Under our cash management system, checks issued but not yet presented to banks frequently result in
overdraft balances for accounting purposes and are classified as a current liability in the consolidated balance
sheets. Changes in book overdrafts from period to period are reported in the consolidated statement of cash flows
as a financing activity.
Income Taxes
We recognize an asset or liability for the deferred tax consequences of temporary differences between the
tax bases of assets or liabilities and their reported amounts in the consolidated financial statements. These
temporary differences will result in taxable or deductible amounts in future years when the reported amounts of
the assets or liabilities are recovered or settled. We also recognize the future tax benefits such as net operating
and capital loss carryforwards as deferred tax assets. A valuation allowance is provided against these deferred tax
assets if it is more likely than not that some portion or all of the deferred tax assets will not be realized. Future
years’ tax expense may be increased or decreased by adjustments to the valuation allowance or to the estimated
accrual for income taxes.
We record reserves for contingent tax benefits when it is not probable that the tax return position taken with
respect to a particular transaction will be sustained. The contingency is not considered resolved until (1) the tax
audit statute of limitations has expired, (2) a settlement is reached with the appropriate level of taxing authorities,
or (3) the law changes such that there is objective evidence that it is probable that the uncertain tax position will
be sustained.
Derivative Financial Instruments
We use interest rate swap agreements to manage our exposure to interest rate risk. The differential between
fixed and variable rates to be paid or received is accrued and recognized over the life of the agreements as
adjustments to interest expense in the consolidated statements of income. Our interest rate swap agreements
convert the fixed interest rates on our senior notes to a variable rate and are accounted for as fair value hedges.
Our interest rate swap agreements are more fully described in Note 10.
Stock-Based Compensation
We recognize stock-based compensation expense, as determined on the date of grant at fair value, over the
period during which an employee is required to provide service in exchange for the award (usually the vesting
period). We estimate expected forfeitures and recognize compensation expense only for those awards which are
expected to vest. We estimate the grant-date fair value of stock awards using the Black-Scholes option-pricing
model. In addition, we report certain tax effects of stock-based compensation as a financing activity rather than
an operating activity in the consolidated statement of cash flows. Additional detail regarding our stock-based
compensation plans is included in Note 11.
Earnings Per Common Share
We compute basic earnings per common share on the basis of the weighted average number of unrestricted
common shares outstanding. Diluted earnings per common share is computed on the basis of the weighted
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