Humana 2013 Annual Report Download - page 112

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Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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.
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 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
term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that
are traded less frequently than exchange-traded instruments as well as debt securities whose value is
determined using a pricing model with inputs that are observable in the market or can be derived principally
from or corroborated by observable market data.
Level 3 – Unobservable inputs that are supported by little or no market activity and are significant to the fair
value of the assets or liabilities. Level 3 includes assets and liabilities whose value is determined using
pricing models, discounted cash flow methodologies, or similar techniques reflecting our own assumptions
about the assumptions market participants would use as well as those requiring significant management
judgment.
Fair value of actively traded debt securities are based on quoted market prices. Fair value of other debt
securities are based on quoted market prices of identical or similar securities or based on observable inputs like
interest rates generally using a market valuation approach, or, less frequently, an income valuation approach and
are generally classified as Level 2. We obtain at least one quoted price for each security from a third party
pricing service. These prices are generally derived from recently reported trades for identical or similar
securities, including adjustments through the reporting date based upon observable market information. When
quoted prices are not available, the third party pricing service may use quoted market prices of comparable
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