Prudential 2002 Annual Report Download - page 29
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Please find page 29 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.a reserve for losses in connection with an unresolved legal matter. The initial reserve reflects management’s best
estimate of the probable cost of ultimate resolution of the matter and is revised accordingly as facts and
circumstances change and, ultimately, when the matter is brought to closure.
Other Significant Estimates
In addition to the items discussed above, the application of GAAP requires management to make other
estimates and assumptions. For example, accounting for pension and other postretirement and postemployment
benefits requires estimates of future returns on plan assets, expected increases in compensation levels and trends
in health care costs. See “—Corporate and Other Operations” for a discussion of our pension assumptions and
related returns. Another example is the recognition of deferred tax assets, which depends on management’s
assumption that future earnings will be sufficient to realize the deferred benefit. This is discussed in Note 18 to
the Consolidated Financial Statements.
Accounting Policies Adopted
Accounting for Stock Options
Employee stock options issued during 2001 and 2002 are accounted for using the intrinsic value method
prescribed by Accounting Principles Board Opinion (“APB”) No. 25, “Accounting to Stock Issued to
Employees,” and related interpretations, an allowable alternative method under Statement of Financial
Accounting Standards (“SFAS”) No.123, “Accounting for Stock-Based Compensation.” Under APB No. 25, we
did not recognize any stock-based compensation expense for employee stock options as all employee stock
options had an exercise price equal to the market value of our Common Stock at the date of grant. After
consideration, we have concluded that our employee stock options represent compensation costs and including
such costs in our results of operations is a preferable method of accounting. Effective January 1, 2003, we
changed our accounting for employee stock options to adopt the fair value recognition provisions of SFAS No.
123, as amended, prospectively for all new awards granted to employees on or after January 1, 2003.
Under these provisions, the fair value of all employee stock options awarded on or after January 1, 2003, will
be included in the determination of net income, but not options awarded prior thereto. Accordingly, the amount
we will include in the determination of net income will be less than that which would have been recognized if the
fair value method had been applied to all awards since inception of the employee stock option plan. The fair value
of employee stock options is determined using a Black-Scholes option pricing model that utilizes the following
assumptions: dividend yield, expected volatility, risk-free interest rate, and expected life of the option. If we had
accounted for all employee stock options under the fair value based accounting method, net income for the year
ended December 31, 2002 would have been reduced by $30 million and basic and diluted earnings per share for
Common Stock would have reduced by $.05. For the period December 18, 2001 through December 31, 2001, net
income and basic and diluted earnings per share of Common Stock would have been reduced by $1 million and
$.01, respectively.
Discontinued Operations
During 2002, we announced the discontinuance of our web-based business for the workplace distribution of
voluntary benefits, our European retail transaction-oriented stockbrokerage and related activities and our Tokyo-
based retail brokerage business. The discontinuance of these businesses was accounted for under SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets.” Under SFAS No. 144, in the period in which
such components qualify for discontinued operations treatment, the results of operations for each component for
all periods presented are reclassified to “Income (loss) from discontinued operations,” a separate line in the
statements of operations. In addition, where necessary, we reduced the carrying value of each component to
estimated fair value through a charge to earnings that is also included in “Income (loss) from discontinued
operations.”
Goodwill
As of December 31, 2002, we completed our annual impairment testing of goodwill in accordance with
SFAS No. 142, “Goodwill and Other Intangible Assets.” Impairment testing requires us to compare the fair value
of each reporting unit to its carrying amount, including goodwill, and record an impairment charge if the carrying
amount of a reporting unit exceeds its estimated fair value. As a result of the December 31, 2002 annual
impairment test, we determined that the goodwill related to our Property and Casualty Insurance segment was
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