Prudential 2012 Annual Report Download - page 124

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS (continued)
Short-Term and Long-Term Debt
Liabilities for short-term and long-term debt are primarily carried at an amount equal to unpaid principal balance, net of unamortized
discount or premium. Original-issue discount or premium and debt-issue costs are recognized as a component of interest expense over the
period the debt is expected to be outstanding, using the interest method of amortization. Short-term debt is debt coming due in the next
twelve months, including that portion of debt otherwise classified as long-term. The short-term debt caption may exclude short-term debt
items the Company intends to refinance on a long-term basis in the near term. See Note 14 for additional information regarding short-term
and long-term debt.
Income Taxes
The Company and its eligible domestic subsidiaries file a consolidated federal income tax return that includes both life insurance
companies and non-life insurance companies. Subsidiaries operating outside the U.S. are taxed, and income tax expense is recorded, based
on applicable foreign statutes. See Note 19 for a discussion of certain non-U.S. jurisdictions for which the Company assumes repatriation
of earnings to the U.S.
Deferred income taxes are recognized, based on enacted rates, when assets and liabilities have different values for financial statement
and tax reporting purposes. A valuation allowance is recorded to reduce a deferred tax asset to the amount expected to be realized.
The Company’s liability for income taxes includes the liability for unrecognized tax benefits, interest and penalties which relate to tax
years still subject to review by the Internal Revenue Service (“IRS”) or other taxing jurisdictions. Audit periods remain open for review
until the statute of limitations has passed. Generally, for tax years which produce net operating losses, capital losses or tax credit
carryforwards (“tax attributes”), the statute of limitations does not close, to the extent of these tax attributes, until the expiration of the
statute of limitations for the tax year in which they are fully utilized. The completion of review or the expiration of the statute of limitations
for a given audit period could result in an adjustment to the liability for income taxes. The Company classifies all interest and penalties
related to tax uncertainties as income tax expense. See Note 19 for additional information regarding income taxes.
Adoption of New Accounting Pronouncements
In December 2012, the Company adopted retrospectively a change in method of applying an accounting principle for the Company’s
pension plans. The change in accounting method relates to the calculation of market related value of pension plan assets, used to determine
net periodic pension cost. The impact of this change in accounting method on net income for the year ended December 31, 2012 was an
increase of $96 million ($0.21 diluted earnings per share of Common stock). In addition, this change resulted in a cumulative increase of
$144 million in retained earnings previously reported for December 31, 2009, with a corresponding decrease in AOCI. For additional
information on the change in accounting method for the Company’s pension plans, see Note 18.
Effective January 1, 2012, the Company adopted, retrospectively, new 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. Prior period financial information presented in these financial statements has been
adjusted to reflect the retrospective adoption of the amended guidance. Retained earnings and AOCI previously reported for December 31,
2009 were reduced $2,358 million and $90 million, respectively, as a result of this retrospective adoption. The lower level of costs now
qualifying for deferral will be only partially offset by a lower level of amortization of “Deferred policy acquisition costs”, and, as such, will
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. 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 adopted this guidance effective January 1, 2012 and applied the retrospective method of adoption. 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 has no impact on the Company’s cash flows.
The following tables present amounts as previously reported for the periods indicated, the effect on those amounts of the change due
to the retrospective adoption of the amended guidance related to the deferral of acquisition costs as described above, as well as the effect of
retrospective application of a change in accounting principle for the Company’s pension plans as also discussed above.
122 Prudential Financial, Inc. 2012 Annual Report