Prudential 2012 Annual Report Download - page 117

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS (continued)
Securities loaned transactions are treated as financing arrangements and are recorded at the amount of cash received. 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 the securities loaned on a daily basis with additional collateral obtained as necessary. Substantially
all of the Company’s securities loaned transactions are with large brokerage firms. Income and expenses associated with securities loaned
transactions used to earn spread income are reported as “Net investment income;” however, for securities loaned transactions used for
funding purposes the associated rebate is reported as interest expense (included in “General and administrative expenses”).
“Other long-term investments” consist of the Company’s investments in joint ventures and limited partnerships, other than operating
joint ventures, as well as wholly-owned investment real estate and other investments. Joint venture and partnership interests are either
accounted for using the equity method of accounting or under the cost method when the Company’s partnership interest is so minor
(generally less than 3%) that it exercises virtually no influence over operating and financial policies. The Company’s income from
investments in joint ventures and partnerships accounted for using the equity method or the cost method, other than the Company’s
investment in operating joint ventures, is included in “Net investment income.” The carrying value of these investments is written down, or
impaired, to fair value when a decline in value is considered to be other-than-temporary. In applying the equity method or the cost method
(including assessment for other-than-temporary impairment), the Company uses financial information provided by the investee, generally
on a one to three month lag. The Company consolidates joint ventures and limited partnerships in certain other instances where it is deemed
to exercise control, or is considered the primary beneficiary of a variable interest entity. See Note 5 for additional information about
variable interest entities.
The Company’s wholly-owned investment real estate consists of real estate which the Company has the intent to hold for the
production of income as well as real estate held for sale. Real estate which the Company has the intent to hold for the production of income
is carried at depreciated cost less any writedowns to fair value for impairment losses and is reviewed for impairment whenever events or
circumstances indicate that the carrying value may not be recoverable. Real estate held for sale is carried at the lower of depreciated cost or
fair value less estimated selling costs and is not further depreciated once classified as such. An impairment loss is recognized when the
carrying value of the investment real estate exceeds the estimated undiscounted future cash flows (excluding interest charges) from the
investment. At that time, the carrying value of the investment real estate is written down to fair value. Decreases in the carrying value of
investment real estate held for the production of income due to other-than-temporary impairments are recorded in “Realized investment
gains (losses), net.” Depreciation on real estate held for the production of income is computed using the straight-line method over the
estimated lives of the properties, and is included in “Net investment income.” In the period a real estate investment is deemed held for sale
and meets all of the discontinued operation criteria, the Company reports all related net investment income and any resulting investment
gains and losses as discontinued operations for all periods presented.
“Short-term investments” primarily consist of highly liquid debt instruments with a maturity of twelve months or less and greater than
three months when purchased, other than those debt instruments meeting this definition that are included in “Trading account assets
supporting insurance liabilities, at fair value.” These investments are generally carried at fair value and include certain money market
investments, short-term debt securities issued by government sponsored entities and other highly liquid debt instruments. Short-term
investments held in the Company’s former broker-dealer operations were marked-to-market through “Income from discontinued
operations, net of taxes.”
Realized investment gains (losses) are computed using the specific identification method with the exception of some of the
Company’s International Insurance businesses’ portfolios, where the average cost method is used. Realized investment gains and losses are
generated from numerous sources, including the sale of fixed maturity securities, equity securities, investments in joint ventures and limited
partnerships and other types of investments, as well as adjustments to the cost basis of investments for net other-than-temporary
impairments recognized in earnings. Realized investment gains and losses are also generated from prepayment premiums received on
private fixed maturity securities, allowance for losses on commercial mortgage and other loans, fair value changes on commercial mortgage
loans carried at fair value, and fair value changes on embedded derivatives and free-standing derivatives that do not qualify for hedge
accounting treatment, except those derivatives used in the Company’s capacity as a broker or dealer.
The Company’s available-for-sale and held-to-maturity securities with unrealized losses are reviewed quarterly to identify other-than-
temporary impairments in value. In evaluating whether a decline in value is other-than-temporary, the Company considers several factors
including, but not limited to the following: (1) the extent and the duration of the decline; (2) the reasons for the decline in value (credit
event, currency or interest-rate related, including general credit spread widening); and (3) the financial condition of and near-term prospects
of the issuer. With regard to available-for-sale equity securities, the Company also considers the ability and intent to hold the investment
for a period of time to allow for a recovery of value. When it is determined that a decline in value of an equity security is other-than-
temporary, the carrying value of the equity security is reduced to its fair value, with a corresponding charge to earnings.
An other-than-temporary impairment is recognized in earnings for a debt security in an unrealized loss position when the Company
either (a) has the intent to sell the debt security or (b) more likely than not will be required to sell the debt security before its anticipated
recovery. For all debt securities in unrealized loss positions that do not meet either of these two criteria, the Company analyzes its ability to
recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. The
net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate
implicit in the debt security prior to impairment. The Company may use the estimated fair value of collateral as a proxy for the net present
value if it believes that the security is dependent on the liquidation of collateral for recovery of its investment. If the net present value is
Prudential Financial, Inc. 2012 Annual Report 115