Humana 2007 Annual Report Download - page 82

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Future policy benefits payable
Future policy benefits payable include liabilities for long-duration insurance policies including life
insurance, annuities and health policies sold to individuals for which some of the premium received in the earlier
years is intended to pay anticipated benefits to be incurred in future years. These reserves are recognized on a net
level premium method based on interest, mortality, morbidity, withdrawal and maintenance expense assumptions
from published actuarial tables, modified based upon actual experience. Changes in estimates of these reserves
are recognized as an adjustment to benefit expenses in the period the changes occur.
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 tax benefits when it is more likely than not that the tax return position taken with respect to a
particular transaction will be sustained. A liability, if recorded, is not considered resolved until the statute of
limitations for the relevant taxing authority to examine and challenge the tax position has expired, or the tax
position is ultimately settled through examination, negotiation, or litigation.
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, straight-
line 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.
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