Humana 2009 Annual Report Download - page 89

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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. We classify interest and penalties
associated with uncertain tax positions in our provision for income taxes.
Derivative Financial Instruments
At times, we may 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, terminated in 2008, are more fully described in Note 12.
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 options 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 13.
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-
average number of unrestricted common shares outstanding plus the dilutive effect of outstanding employee
stock options and restricted shares using the treasury stock method.
Fair Value
Assets and liabilities measured at fair value are categorized into a fair value hierarchy based on whether the
inputs to valuation techniques are observable or unobservable. Observable inputs reflect market data obtained
from independent sources, while unobservable inputs reflect our own assumptions about the assumptions market
participants would use. The fair value hierarchy includes three levels of inputs that may be used to measure fair
value as described below.
Level 1—Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities
include debt and equity securities that are traded in an active exchange market.
Level 2—Observable inputs other than Level 1 prices such as quoted prices in active markets for similar
assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or
other inputs that are observable or can be corroborated by observable market data for substantially the full
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