Prudential 2015 Annual Report Download - page 122

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
Amounts received as payment for interest-sensitive or variable group and individual life contracts, deferred fixed or variable annuities,
structured settlements and other contracts without life contingencies, and participating group annuities are reported as deposits to
“Policyholders’ account balances” and/or “Separate account liabilities.” Revenues from these contracts are reflected in “Policy charges and
fee income” consisting primarily of fees assessed during the period against the policyholders’ account balances for mortality and other
benefit charges, policy administration charges and surrender charges. In addition to fees, the Company earns investment income from the
investment of deposits in the Company’s general account portfolio. Fees assessed that represent compensation to the Company for services
to be provided in future periods and certain other fees are generally deferred and amortized into revenue over the life of the related
contracts in proportion to estimated gross profits. Benefits and expenses for these products include claims in excess of related account
balances, expenses of contract administration, interest credited to policyholders’ account balances and amortization of DAC, DSI and
VOBA.
For group life, other than universal and variable group life contracts, and disability insurance, premiums are generally recognized over
the period to which the premiums relate in proportion to the amount of insurance protection provided. Claim and claim adjustment
expenses are recognized when incurred.
Premiums, benefits and expenses are stated net of reinsurance ceded to other companies, except for amounts associated with certain
modified coinsurance contracts which are reflected in the Company’s financial statements based on the application of the deposit method of
accounting.
Asset Management and Service Fees
“Asset management and service fees” principally include asset management fees and securities commission revenues, which are
recognized in the period in which the services are performed.
In 2013, the Company adopted retrospectively a discretionary change in accounting principle for recognition of performance-based
incentive fee revenue. In certain asset management fee arrangements, the Company is entitled to receive performance-based incentive fees
when the return on assets under management exceeds certain benchmark returns or other performance targets. The Company may be
required to return all, or part, of such performance-based incentive fee depending on future performance of these assets relative to
performance benchmarks. Under the newly adopted accounting principle, the Company records performance-based incentive fee revenue
when the contractual terms of the asset management fee arrangement have been satisfied such that the performance fee is no longer subject
to clawback or contingency. Under this principle the Company records a deferred performance-based incentive fee liability to the extent it
receives cash related to the performance-based incentive fee prior to meeting the revenue recognition criteria delineated above.
Under the prior accounting principle, the Company accrued performance-based incentive fee revenue quarterly based on measuring
fund performance to date versus the performance benchmark stated in the investment management agreement, as if the contracts containing
the fee arrangements were terminated as of the applicable balance sheet date. Certain performance-based incentive fees were also subject to
future adjustment based on cumulative fund performance in relation to these specified benchmarks.
The new method is recognized as preferable in authoritative accounting literature. In addition, the Company believes that the new
method improves the quality of earnings by eliminating the potential that revenue will be recognized in one quarter and reversed in a future
quarter. Finally, the Company believes that the new accounting principle provides a more meaningful comparison to competitors.
Other Income
“Other income” includes realized and unrealized gains or losses from investments classified as “trading” such as “Trading account
assets supporting insurance liabilities” and “Other trading account assets,” short-term investments that are marked-to-market through other
income, and from consolidated entities that follow specialized investment company fair value accounting.
“Other income” also includes a gain of $0.1 billion and losses of $3.0 billion and $4.1 billion for the years ended December 31, 2015,
2014 and 2013, respectively, primarily related to the remeasurement of foreign currency denominated assets and liabilities, as discussed in
more detail under “Foreign Currency” below.
Foreign Currency
Assets, liabilities and results of foreign operations are recorded based on the functional currency of each foreign operation. The
determination of the functional currency is based on economic facts and circumstances pertaining to each foreign operation. With the
exception of our Japanese operations, where multiple functional currencies exist, the local currencies of our foreign operations are typically
their functional currencies. See Note 22 for additional information.
Assets and liabilities of foreign operations and subsidiaries reported in currencies other than U.S. dollars are translated at the exchange
rate in effect at the end of the period. Revenues, benefits and other expenses are translated at the average rate prevailing during the period.
The effects of translating the statements of operations and financial position of non-U.S. entities with functional currencies other than the
U.S. dollar are included, net of related qualifying hedge gains and losses and income taxes, in AOCI. Gains and losses resulting from the
remeasurement of foreign currency transactions are reported in either AOCI or current earnings in “Other income” depending on the nature
of the related foreign currency denominated asset or liability.
120 Prudential Financial, Inc. 2015 Annual Report