Prudential 2012 Annual Report Download - page 120

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS (continued)
Other Assets and Other Liabilities
Other assets consist primarily of prepaid pension benefit costs, certain restricted assets, trade receivables, value of business acquired,
goodwill and other intangible assets, deferred sales inducements, the Company’s investments in operating joint ventures, which include the
Company’s indirect investment in China Pacific Insurance (Group) Co., Ltd. (“China Pacific Group”), property and equipment, reinsurance
recoverables, and receivables resulting from sales of securities that had not yet settled at the balance sheet date. Other liabilities consist
primarily of trade payables, pension and other employee benefit liabilities, derivative liabilities, reinsurance payables, and payables
resulting from purchases of securities that had not yet settled at the balance sheet date.
Property and equipment are carried at cost less accumulated depreciation. Depreciation is determined using the straight-line method
over the estimated useful lives of the related assets, which generally range from 3 to 40 years.
As a result of certain acquisitions, the Company recognizes an asset for goodwill representing the excess of cost over the net fair value
of the assets acquired and liabilities assumed. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. A
reporting unit is an operating segment or a unit one level below the operating segment, if discrete financial information is prepared and
regularly reviewed by management at that level. Once goodwill has been assigned to reporting units, it no longer retains its association with
a particular acquisition, and all of the activities within a reporting unit, whether acquired or organically grown, are available to support the
value of the goodwill.
The Company tests goodwill for impairment annually as of December 31 and more frequently if an event occurs or circumstances
change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The fundamental goodwill
impairment analysis is a two-step test that is performed at the reporting unit level. The first step, used to identify potential impairment,
involves comparing each reporting unit’s fair value to its carrying value including goodwill. If the fair value of a reporting unit exceeds its
carrying value, the applicable goodwill is considered not to be impaired. If the carrying value exceeds fair value, there is an indication of a
potential impairment and the second step of the test is performed to measure the amount of impairment.
The second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated
impairment. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business
combination, which is the excess of the fair value of the reporting unit, as determined in the first step, over the aggregate fair values of the
individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied
fair value of goodwill in the “pro forma” business combination accounting as described above exceeds the goodwill assigned to the reporting
unit, there is no impairment. If the goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge
is recorded in “General and administrative expenses” for the excess. An impairment loss recognized cannot exceed the amount of goodwill
assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not
permitted. Management is required to make significant estimates in determining the fair value of a reporting unit including, but not limited
to: projected earnings, comparative market multiples, and the risk rate at which future net cash flows are discounted.
In accordance with accounting guidance, the Company may first perform a qualitative goodwill assessment to determine whether
events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying
amount. Factors such as macroeconomic conditions; industry and market considerations; cost factors and other are used to assess the
validity of goodwill. If, after assessing the totality of events or circumstances, the Company determines it is not more likely than not that
the fair value of a reporting unit is less than its carrying amount, then performing the two-step goodwill impairment test, as described
above, is not necessary. If, however, the Company concludes otherwise, then the Company must perform the first step of the two-step
impairment test by comparing the reporting unit’s fair value with its carrying value including goodwill. If the carrying value exceeds fair
value, then the Company must perform the second step of the goodwill impairment test to measure the impairment loss, if any.
See Note 9 for additional information regarding goodwill.
The Company offers various types of sales inducements to policyholders related to fixed and variable deferred annuity contracts. The
Company defers sales inducements and amortizes them over the anticipated life of the policy using the same methodology and assumptions
used to amortize DAC. Sales inducements balances are subject to recoverability testing at the end of each reporting period to ensure that
the balance does not exceed the present value of anticipated gross profits. The Company records amortization of deferred sales inducements
in “Interest credited to policyholders’ account balances.” See Note 11 for additional information regarding sales inducements.
The majority of the Company’s reinsurance recoverables and payables are receivables and corresponding payables associated with the
reinsurance arrangements used to effect the Company’s acquisition of the retirement businesses of CIGNA. The remaining amounts relate to
other reinsurance arrangements entered into by the Company. For each of its reinsurance contracts, the Company determines if the contract
provides indemnification against loss or liability relating to insurance risk in accordance with applicable accounting standards. The Company
reviews all contractual features, particularly those that may limit the amount of insurance risk to which the reinsurer is subject or features that
delay the timely reimbursement of claims. See Note 13 for additional information about the Company’s reinsurance arrangements.
Identifiable intangible assets are recorded net of accumulated amortization. The Company tests identifiable intangible assets for
impairment on an annual basis as of December 31 of each year or whenever events or circumstances suggest that the carrying value of an
identifiable intangible asset may exceed the sum of the undiscounted cash flows expected to result from its use and eventual disposition. If
this condition exists and the carrying value of an identifiable intangible asset exceeds its fair value, the excess is recognized as an
118 Prudential Financial, Inc. 2012 Annual Report