Prudential 2002 Annual Report Download - page 93
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Please find page 93 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
Basis of Presentation
The consolidated financial statements include the accounts of Prudential Financial, its majority-owned
subsidiaries and those partnerships and joint ventures in which the Company has a majority financial interest,
except in those instances where the Company cannot exercise control because the minority owners have
substantive participating rights in the operating and capital decisions of the entity. The consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of
America (“GAAP”). Intercompany balances and transactions have been eliminated. Effective on the date of
demutualization and corporate reorganization, the historical consolidated financial statements of Prudential
Insurance became the historical consolidated financial statements of Prudential Financial.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, in particular deferred policy acquisition
costs, investments, future policy benefits, disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the period. Actual results could differ from those
estimates.
Earnings Per Share
As discussed in Note 1 under “Demutualization and Initial Public Offering,” the Company has outstanding
two separate classes of common stock. Basic earnings per share is computed by dividing available income
attributable to each of the two groups of common shareholders by the respective weighted average number of
common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised.
Stock Options
During 2002 and 2001, the Company accounted for employee stock options using the intrinsic value method
of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related
interpretations. Under this method, the Company did not recognize any stock-based compensation expense for
employee stock options as all options granted had an exercise price equal to the market value of the underlying
Common Stock on the date of grant. Effective January 1, 2003, the Company changed its accounting for
employee stock options to adopt the fair value recognition provisions of Statement of Financial Accounting
Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended, prospectively for all
new awards granted to employees on or after January 1, 2003. The Company accounts for non-employee stock
options using the fair value method. See Note 16 for pro forma net income and earnings per share, as well as
additional information pertaining to stock options.
Investments
Fixed maturities classified as “available for sale” are carried at estimated fair value. Fixed maturities that the
Company has both the positive intent and ability to hold to maturity are stated at amortized cost and classified as
“held to maturity.” The amortized cost of all fixed maturities is written down to estimated fair value when a
decline in value is considered to be other than temporary. See the discussion below on realized investment gains
and losses for a description of the accounting for impairment adjustments. Unrealized gains and losses on fixed
maturities “available for sale,” net of income tax and the effect on deferred policy acquisition costs, future policy
benefits and policyholders’ dividends that would result from the realization of unrealized gains and losses, are
included in a separate component of equity, “Accumulated other comprehensive income (loss).”
Growing and Protecting Your Wealth92