Prudential 2012 Annual Report Download - page 26

For a discussion of our expected rate of return on plan assets and discount rate for our qualified pension plan in 2012, see “—Results
of Operations for Financial Services Businesses by Segment—Corporate and Other.”
For purposes of calculating pension income from our own qualified pension plan for the year ended December 31, 2013, we will
decrease the discount rate to 4.05% from 4.85% in 2012. The expected rate of return on plan assets will decrease to 6.25% in 2013 from
6.75% in 2012, and the assumed rate of increase in compensation will remain unchanged at 4.5%.
In addition to the effect of changes in our assumptions, the net periodic cost or benefit from our pension and other postretirement
benefit plans may change due to factors such as actual experience being different from our assumptions, special benefits to terminated
employees, or changes in benefits provided under the plans.
At December 31, 2012, the sensitivity of our pension and postretirement obligations to a 100 basis point change in discount rate was
as follows:
December 31, 2012
Increase/(Decrease) in
Pension Benefits Obligation
Increase/(Decrease) in
Accumulated Postretirement
Benefits Obligation
Increase in discount rate by 100 basis points .................................... (12)% (9)%
Decrease in discount rate by 100 basis points .................................... 14% 10%
Taxes on Income
Our effective tax rate is based on income, non-taxable and non-deductible items, statutory tax rates and tax planning opportunities
available in the various jurisdictions in which we operate. Inherent in determining our annual tax rate are judgments regarding business
plans, planning opportunities and expectations about future outcomes. The Company provides for U.S. income taxes on unremitted foreign
earnings of its operations in Japan and certain operations in India, Germany and Taiwan. In addition, beginning in 2012, the Company
provides for U.S. income taxes on a portion of the current year foreign earnings for its insurance operations in Korea.
Items required by tax regulations to be included in the tax return may differ from the items reflected in the financial statements. As a
result, the effective tax rate reflected in the financial statements may be different than the actual rate applied on the tax return. Some of
these differences are permanent such as expenses that are not deductible in our tax return, and some differences are temporary, reversing
over time, such as valuation of insurance reserves. Temporary differences create deferred tax assets and liabilities. Deferred tax assets
generally represent items that can be used as a tax deduction or credit in future years for which we have already recorded the tax benefit in
our income statement. Deferred tax liabilities generally represent tax expense recognized in our financial statements for which payment has
been deferred, or expenditures for which we have already taken a deduction in our tax return but have not yet been recognized in our
financial statements.
The application of U.S. GAAP requires us to evaluate the recoverability of our deferred tax assets and establish a valuation allowance
if necessary to reduce our deferred tax assets to an amount that is more likely than not to be realized. Considerable judgment is required in
determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance. In evaluating the need for a
valuation allowance we consider many factors, including: (1) the nature of the deferred tax assets and liabilities; (2) whether they are
ordinary or capital; (3) in which tax jurisdictions they were generated and the timing of their reversal; (4) taxable income in prior carryback
years as well as projected taxable earnings exclusive of reversing temporary differences and carryforwards; (5) the length of time that
carryovers can be utilized in the various taxing jurisdictions; (6) any unique tax rules that would impact the utilization of the deferred tax
assets; and (7) any tax planning strategies that we would employ to avoid a tax benefit from expiring unused. Although realization is not
assured, management believes it is more likely than not that the deferred tax assets, net of valuation allowances, will be realized.
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 2012 of $7 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.
The Company’s liability for income taxes includes the liability for unrecognized tax benefits and interest that relate to tax years still
subject to review by the Internal Revenue Service (“IRS”) or other taxing authorities. See Note 19 to the Consolidated Financial Statements
for a discussion of the impact in 2010, 2011 and 2012 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.
24 Prudential Financial, Inc. 2012 Annual Report