Humana 2012 Annual Report Download - page 107

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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. 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. We were not party to
any interest-rate swap agreements in 2012, 2011, or 2010.
Stock-Based Compensation
We generally recognize stock-based compensation expense, as determined on the date of grant at fair value,
on a straight-line basis over the period during which an employee is required to provide service in exchange for
the award (the vesting period). However, for awards granted to retirement eligible employees, the compensation
expense is recognized on a straight-line basis over the shorter of the requisite service period or the period from
the date of grant to an employee’s eligible retirement date. 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 12.
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, or units, using the treasury stock method.
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