Prudential 2002 Annual Report Download - page 100
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Please find page 100 of the 2002 Prudential annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Under certain circumstances, the change in fair value of an unhedged item is either not recorded or recorded
instead in “Accumulated other comprehensive income (loss).” When such items are hedged and the hedge
qualifies as a fair value hedge, the change in fair value of both the hedged item and the derivative are reported on
a net basis in “Realized investment gains (losses), net.” Periodic settlements associated with such derivatives are
recorded in the same income statement line as the related settlements of the hedged items.
When a derivative is designated as a cash flow hedge and is determined to be highly effective, changes in its
fair value are recorded in “Accumulated other comprehensive income (loss)” until earnings are affected by the
variability of cash flows (e.g., when periodic settlements on a variable-rate asset or liability are recorded in
earnings). At that time, the related portion of deferred gains or losses on the derivative instrument is reclassified
and reported in the income statement line item associated with the hedged item.
When a derivative is designated as a foreign currency hedge and is determined to be highly effective,
changes in its fair value are recorded in either current period earnings or “Accumulated other comprehensive
income (loss),” depending on whether the hedge transaction is a fair value hedge (e.g., a hedge of a firm
commitment that is to be settled in a foreign currency) or a cash flow hedge (e.g., a foreign currency denominated
forecasted transaction). When a derivative is used as a hedge of a net investment in a foreign operation, its change
in fair value, to the extent effective as a hedge, is recorded in the cumulative translation adjustment account
within “Accumulated other comprehensive income (loss).”
If a derivative does not qualify for hedge accounting, all changes in its fair value, including net receipts and
payments, are included in “Realized investment gains (losses), net” without considering changes in the fair value
of the economically associated assets or liabilities.
The Company occasionally is a party to a financial instrument that contains a derivative instrument that is
“embedded” in the financial instrument. At inception, the Company assesses whether the economic characteristics
of the embedded derivative are clearly and closely related to the economic characteristics of the remaining
component of the financial instrument (i.e., the host contract) and whether a separate instrument with the same
terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined
that (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the
economic characteristics of the host contract, and (2) a separate instrument with the same terms would qualify as a
derivative instrument, the embedded derivative is separated from the host contract, carried at fair value, and
changes in its fair value are included in “Realized investment gains (losses), net.”
The Company discontinues hedge accounting prospectively when (1) it is determined that the derivative is no
longer highly effective in offsetting changes in the fair value or cash flows of a hedged item (including firm
commitments or forecasted transactions); (2) the derivative expires or is sold, terminated, or exercised; or (3) the
derivative is no longer designated as a hedge instrument, because (a) it is unlikely that a forecasted transaction
will occur; (b) because a hedged firm commitment no longer meets the definition of a firm commitment; or (c)
management determines that designation of the derivative as a hedge instrument is no longer appropriate. When
hedge accounting is discontinued, any hedged asset or liability, which otherwise would not be carried at fair
value, will no longer be adjusted for changes in fair value.
Income Taxes
The Company and its domestic subsidiaries file a consolidated federal income tax return that includes both
life insurance companies and non-life insurance companies. In addition to taxes on operations, the Internal
Revenue Code imposes an “equity tax” on mutual life insurance companies. Subsequent to the demutualization,
the Company is no longer subject to the equity tax. Subsidiaries operating outside the United States are taxed, and
income tax expense is recorded, based on applicable foreign statutes.
Prudential Financial 2002 Annual Report 99