Prudential 2002 Annual Report Download - page 94
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Please find page 94 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)
Trading account assets, and securities sold but not yet purchased, consist primarily of investments and
derivatives used by the Company either in its capacity as a broker-dealer, its operation of hedge portfolios or its
use of derivatives for asset and liability management activities. These instruments are carried at estimated fair
value. Realized and unrealized gains and losses on trading account assets and securities sold but not yet purchased
are included in “Commissions and other income.”
Equity securities, available for sale, are comprised of common and non-redeemable preferred stock and are
carried at estimated fair value. The associated unrealized gains and losses, 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 “Accumulated other comprehensive income (loss).” The
cost of equity securities 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.
Commercial loans are stated primarily at unpaid principal balances, net of unamortized discounts and an
allowance for losses. In connection with the acquisition of Gibraltar Life (see Note 5), commercial loans were
acquired at a discount to par and are carried at amortized cost. Accretion of the discount over the remaining lives
of the loans is included in “Net investment income.” The allowance for losses includes a loan specific reserve for
non-performing loans and a portfolio reserve for incurred but not specifically identified losses. Non-performing
loans include those loans for which it is probable that amounts due according to the contractual terms of the loan
agreement will not all be collected. These loans are measured at the present value of expected future cash flows
discounted at the loan’s effective interest rate, or at the fair value of the collateral if the loan is collateral
dependent. Interest received on non-performing loans, including loans that were previously modified in a troubled
debt restructuring, is either applied against the principal or reported as revenue, according to management’s
judgment as to the collectibility of principal. Management discontinues accruing interest on non-performing loans
after the loans are 90 days delinquent as to principal or interest, or earlier when management has serious doubts
about collectibility. When a loan is recognized as non-performing, any accrued but uncollectible interest is
reversed against interest income of the current period. Generally, a loan is restored to accrual status only after all
delinquent interest and principal are brought current and, in the case of loans where the payment of interest has
been interrupted for a substantial period, a regular payment performance has been established. The portfolio
reserve for incurred but not specifically identified losses considers the Company’s past loan loss experience, the
current credit composition of the portfolio, historical credit migration, property type diversification, default and
loss severity statistics and other relevant factors.
Policy loans are carried at unpaid principal balances.
Securities purchased under agreements to resell and securities sold under agreements to repurchase are
treated as collateralized financing arrangements and are carried at the amounts at which the securities will be
subsequently resold or reacquired, including accrued interest, as specified in the respective agreements. The
Company’s policy is to take possession or control of securities purchased under agreements to resell and to value
the securities daily. Assets to be repurchased are the same, or substantially the same, as the assets transferred. The
market value of securities to be repurchased or resold is monitored, and additional collateral is obtained, where
appropriate, to protect against credit exposure.
Securities borrowed and securities loaned are treated as financing arrangements and are recorded at the
amount of cash advanced or received. With respect to securities loaned, the Company obtains collateral in an
amount equal to 102% and 105% of the fair value of the domestic and foreign securities, respectively. The
Company monitors the market value of securities borrowed and loaned on a daily basis with additional collateral
obtained as necessary. Substantially all of the Company’s securities borrowed transactions are with brokers and
dealers, commercial banks and institutional clients. Substantially all of the Company’s securities loaned
transactions are with large brokerage firms.
Prudential Financial 2002 Annual Report 93