Prudential 2011 Annual Report Download - page 163

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS (continued)
In May 2011, the FASB issued updated guidance regarding the fair value measurements and disclosure requirements. The updated
guidance clarifies existing guidance related to the application of fair value measurement methods and requires expanded disclosures. This
new guidance is effective for the first interim or annual reporting period beginning after December 15, 2011 and should be applied
prospectively. The Company expects this guidance to have an impact on its financial statement disclosures but limited, if any, impact on
the Company’s consolidated financial position or results of operations.
In April 2011, the FASB issued updated guidance regarding the assessment of effective control for repurchase agreements. This new
guidance is effective for the first interim or annual reporting period beginning on or after December 15, 2011 and should be applied
prospectively to transactions or modifications of existing transactions that occur on or after the effective date. The Company’s adoption of
this guidance effective January 1, 2012 is not expected to have a material effect on the Company’s consolidated financial position, results
of operations, and financial statement disclosures.
In October 2010, the FASB issued authoritative guidance to address diversity in practice regarding the interpretation of which costs
relating to the acquisition of new or renewal insurance contracts qualify for deferral. Under the amended guidance, acquisition costs are to
include only those costs that are directly related to the acquisition or renewal of insurance contracts by applying a model similar to the
accounting for loan origination costs. An entity may defer incremental direct costs of contract acquisition with independent third parties or
employees that are essential to the contract transaction, as well as the portion of employee compensation, including payroll fringe benefits,
and other costs directly related to underwriting, policy issuance and processing, medical inspection, and contract selling for successfully
negotiated contracts. This amended guidance is effective for fiscal years, and interim periods within those years, beginning after
December 15, 2011 and permits, but does not require, retrospective application. The Company will adopt this guidance effective January 1,
2012, and will apply the retrospective method of adoption. Accordingly upon adoption, “Deferred policy acquisition costs” will be reduced
and policy reserves for certain limited payment contracts within “Future policy benefits” will be increased with a corresponding reduction,
net of taxes, to “Retained earnings” (and “Total equity”), as a result of acquisition costs previously deferred that are not eligible for deferral
under the amended guidance. The Company estimates if the amended guidance were adopted as of December 31, 2011, retrospective
adoption would reduce “Deferred policy acquisition costs” by approximately $3.8 billion to $4.6 billion, increase “Future policy benefits”
by approximately $0.2 billion to $0.3 billion, and reduce “Total equity” by approximately $2.7 billion to $3.1 billion. Subsequent to the
adoption of the guidance, the lower level of costs qualifying for deferral may be only partially offset by a lower level of amortization of
“Deferred policy acquisition costs”, and, as such, may initially result in lower earnings in future periods, primarily within the International
Insurance and Individual Annuities segments. The impact to the International Insurance segment largely reflects lower deferrals of
allocated costs of its proprietary distribution system, while the impact to the Individual Annuities segment mainly reflects lower deferrals
of its wholesaler costs. While the adoption of this amended guidance changes the timing of when certain costs are reflected in the
Company’s results of operations, it has no effect on the total acquisition costs to be recognized over time and will have no impact on the
Company’s cash flows.
3. ACQUISITIONS AND DISPOSITIONS
Acquisition of AIG Star Life Insurance Co., Ltd., AIG Edison Life Insurance Company and Related Entities from AIG
On February 1, 2011, Prudential Financial completed the acquisition from American International Group, Inc. (“AIG”) of AIG Star
Life Insurance Co., Ltd. (“Star”), AIG Edison Life Insurance Company (“Edison”), AIG Financial Assurance Japan K.K., and AIG Edison
Service Co., Ltd. (collectively, the “Star and Edison Businesses”) pursuant to the stock purchase agreement dated September 30, 2010
between Prudential Financial and AIG. The total purchase price was $4,709 million, comprised of $4,213 million in cash and $496 million
in assumed third party debt, substantially all of which is expected to be repaid, over time, with excess capital of the acquired entities. The
acquisition of these businesses included the purchase by the Company of all of the shares of these entities, which became indirect wholly-
owned subsidiaries of the Company. All acquired entities are Japanese corporations and their businesses are in Japan.
The Star and Edison Businesses primarily distribute individual life insurance, fixed annuities and certain accident and health products
with fixed benefits through captive agents, independent agents, and banks. The addition of these operations to the Company’s existing
businesses increases its scale in the Japanese insurance market and provides complementary distribution opportunities.
Prudential Financial made a Section 338(g) election under the Internal Revenue Code with respect to the acquisition resulting in the
acquired entities being treated for U.S. tax purposes as newly-incorporated companies. Under such election, the U.S. tax basis of the assets
acquired and liabilities assumed of the Star and Edison Businesses were adjusted as of February 1, 2011 to reflect the consequences of the
Section 338(g) election.
Although the acquisition of the Star and Edison Businesses included the acquisition of multiple entities, the Company views this as a
single acquisition and reports it as such in the following disclosures.
Prudential Financial, Inc. 2011 Annual Report 161