Prudential 2011 Annual Report Download - page 150

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS (continued)
The Company accounts for non-employee stock options using the fair value method in accordance with authoritative guidance and
related interpretations on accounting for equity instruments that are issued to other than employees for acquiring, or in conjunction with
selling, goods or services.
Earnings Per Share
As discussed in Note 1, 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 includes the effect of all dilutive potential common shares that were
outstanding during the period.
As discussed under “Share-Based Payments” above, the Company accounts for excess tax benefits in additional paid-in capital as a
single “pool” available to all share-based compensation awards. The Company reflects in assumed proceeds, based on application of the
treasury stock method, the excess tax benefits that would be recognized in additional paid-in capital upon exercise or release of the award.
Investments and Investment-Related Liabilities
The Company’s principal investments are fixed maturities; equity securities; commercial mortgage and other loans; policy loans; other
long-term investments, including joint ventures (other than operating joint ventures), limited partnerships, and real estate; and short-term
investments. Investments and investment-related liabilities also include securities repurchase and resale agreements and securities lending
transactions. The accounting policies related to each are as follows:
Fixed maturities are comprised of bonds, notes and redeemable preferred stock. Fixed maturities classified as “available-for-sale” are
carried at fair value. See Note 20 for additional information regarding the determination of fair value. Fixed maturities that the Company
has both the positive intent and ability to hold to maturity are carried at amortized cost and classified as “held-to-maturity.” The amortized
cost of fixed maturities is adjusted for amortization of premiums and accretion of discounts to maturity. Interest income, as well as the
related amortization of premium and accretion of discount, is included in “Net investment income” under the effective yield method. For
mortgage-backed and asset-backed securities, the effective yield is based on estimated cash flows, including prepayment assumptions based
on data from widely accepted third-party data sources or internal estimates. In addition to prepayment assumptions, cash flow estimates
vary based on assumptions regarding the underlying collateral, including default rates and changes in value. These assumptions can
significantly impact income recognition and the amount of other-than-temporary impairments recognized in earnings and other
comprehensive income. For high credit quality mortgage-backed and asset-backed securities (those rated AA or above), cash flows are
provided quarterly, and the amortized cost and effective yield of the security are adjusted as necessary to reflect historical prepayment
experience and changes in estimated future prepayments. The adjustments to amortized cost are recorded as a charge or credit to net
investment income in accordance with the retrospective method. For asset-backed and mortgage-backed securities rated below AA, the
effective yield is adjusted prospectively for any changes in estimated cash flows. See the discussion below on realized investment gains and
losses for a description of the accounting for impairments. Unrealized gains and losses on fixed maturities classified as “available-for-sale,”
net of tax, and the effect on deferred policy acquisition costs, value of business acquired, deferred sales inducements, 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).”
“Trading account assets supporting insurance liabilities, at fair value” includes invested assets that support certain products included in
the Retirement segment, as well as certain products included in the International Insurance segment, which are experience rated, meaning
that the investment results associated with these products are expected to ultimately accrue to contractholders. Realized and unrealized
gains and losses for these investments are reported in “Asset management fees and other income.” Interest and dividend income from these
investments is reported in “Net investment income.”
“Other trading account assets, at fair value” consist primarily of fixed maturities, equity securities, including certain perpetual
preferred stock, and certain derivatives, including those used by the Company in its capacity as a broker-dealer and derivative hedging
positions used in a non-broker-dealer capacity primarily to hedge the risks related to certain products. These instruments are carried at fair
value. Realized and unrealized gains and losses on these investments and on derivatives used by the Company in its capacity as a broker-
dealer are reported in “Asset management fees and other income” and, for those related to the Company’s global commodities group, in
“Income from discontinued operations, net of taxes.” Interest and dividend income from these investments is reported in “Net investment
income” and, for those related to the Company’s global commodities group, in “Income from discontinued operations, net of taxes.”
Equity securities available-for-sale are comprised of common stock, mutual fund shares, non-redeemable preferred stock, and certain
perpetual preferred stock, and are carried at fair value. The associated unrealized gains and losses, net of tax, and the effect on deferred
policy acquisition costs, value of business acquired, deferred sales inducements, 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 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 impairments. Dividends from these investments are
recognized in “Net investment income” when declared.
148 Prudential Financial, Inc. 2011 Annual Report