Humana 2014 Annual Report Download - page 101

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
93
liability had been sold at their stated aggregate fair value and the proceeds reinvested at current yields. We include the
impact of this adjustment, if any, net of applicable deferred taxes, with the change in unrealized investment gain (loss)
in accumulated other comprehensive income in stockholders’ equity. As discussed above, beginning in 2014, health
policies sold to individuals that conform to the Health Care Reform Law are accounted for under a short-duration model
under which policy reserves are not established because premiums received in the current year are intended to pay
anticipated benefits in that year.
Book Overdraft
Under our cash management system, checks issued but not yet presented to banks that would result in negative
bank balances when presented 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
On October 29, 2012, we acquired a noncontrolling equity interest in MCCI Holdings, LLC, or MCCI, a privately
held Medical Services Organization, or MSO, headquartered in Miami, Florida that coordinates medical care for
Medicare Advantage and Medicaid beneficiaries primarily in Florida and Texas. Our agreement with MCCI includes
a put option that would allow the controlling interest holder to put their interest to us after a specified date as well as
a call option that would allow us to purchase the controlling interest after a specified date. Accordingly, we recorded,
at fair value, a liability and an asset associated with the put and call, respectively. Changes in the fair value of the
liability and asset during the years ended December 31, 2014, 2013, and 2012 were not material to our results of
operations, financial condition, or cash flows.
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 2014, 2013, or 2012.
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 13.