Prudential 2011 Annual Report Download - page 28

An increase or decrease in our effective tax rate by one percent of income (loss) from continuing operations before income taxes and
equity in earnings of operating joint ventures, would have resulted in an increase or decrease in our consolidated income from continuing
operations before equity in earnings of operating joint ventures in 2011 of $51 million.
U.S. GAAP prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial
statements uncertain tax positions that a company has taken or expects to take on tax returns. The application of this guidance is a two-step
process, the first step being recognition. We determine whether it is more likely than not, based on the technical merits, that the tax position
will be sustained upon examination. If a tax position does not meet the more likely than not recognition threshold, the benefit of that
position is not recognized in the financial statements. The second step is measurement. We measure the tax position as the largest amount
of benefit that is greater than 50 percent likely of being realized upon ultimate resolution with a taxing authority that has full knowledge of
all relevant information. This measurement considers the amounts and probabilities of the outcomes that could be realized upon ultimate
settlement using the facts, circumstances, and information available at the reporting date.
Our liability for income taxes includes the liability for unrecognized tax benefits and interest that relate to tax years still subject to
review by the IRS or other taxing authorities. The completion of review or the expiration of the Federal statute of limitations for a given
audit period could result in an adjustment to our liability for income taxes. The Federal statute of limitations for the 2002 tax year expired
on April 30, 2009. The Federal statute of limitations for the 2003 tax year expired on July 31, 2009. The Federal statute of limitations for
the 2004 through 2007 tax years will expire in June 2012, unless extended. Tax years 2008 through 2010 are still open for IRS
examination. See Note 19 to the Consolidated Financial Statements for a discussion of the impact in 2009 and 2011 of changes to our total
unrecognized tax benefits. We do not anticipate any significant changes within the next 12 months to our total unrecognized tax benefits
related to tax years for which the statute of limitations has not expired.
The Company’s affiliates in Japan and Korea file separate tax returns and are subject to audits by the local taxing authority. The
general statute of limitations for Japan and Korea are five years from when the return is filed.
Reserves for Contingencies
A contingency is an existing condition that involves a degree of uncertainty that will ultimately be resolved upon the occurrence of
future events. Under U.S. GAAP, reserves for contingencies are required to be established when the future event is probable and its impact
can be reasonably estimated, such as 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.
Adoption of New Accounting Pronouncements
See Note 2 to our Consolidated Financial Statements for a discussion of recently adopted accounting pronouncements.
Future Adoption of New Accounting Pronouncements
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. The Company adopted this guidance effective
January 1, 2012, and will apply the retrospective method of adoption. We estimate that if the new guidance were adopted as of
December 31, 2011, retrospective adoption would reduce deferred policy acquisition costs by approximately $3.6 billion to $4.4 billion for
the Financial Services Businesses and by approximately $0.2 billion for the Closed Block Business, increase policy reserves for certain
limited pay contracts by approximately $0.2 billion to $0.3 billion for the Financial Services Businesses, and reduce total equity by
approximately $2.6 billion to $3.0 billion for the Financial Services Businesses and approximately $0.1 billion for the Closed Block
Business. 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.
See Note 2 to our Consolidated Financial Statements for a complete discussion of newly issued accounting pronouncements, including
further discussion of the new authoritative guidance addressing which costs relating to the acquisition of new or renewal insurance
contracts qualify for deferral.
26 Prudential Financial, Inc. 2011 Annual Report