Prudential 2001 Annual Report Download - page 106

Prudential Financial, Inc.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
instances where the Company cannot exercise control because the minority owners have substantive participating
rights in the operating and capital decisions of the entity. The consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Intercompany balances and transactions have been eliminated. Effective on the date of demutualization and
corporate reorganization, the historical consolidated financial statements of Prudential Insurance became the
historical consolidated financial statements of Prudential Financial.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, in particular deferred policy acquisition costs,
investment allowances, future policy benefits, disclosure of contingent liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period. Actual results could differ from
those estimates.
Earnings Per Share
As discussed in Note 1 under “Demutualization and Initial Public Offering,” the Company has outstanding two
separate classes of common stock. Basic earnings per share are computed by dividing available income attributable
to each of the two groups of common shareholders for the period subsequent to the demutualization by the
respective weighted average number of common shares outstanding for the period. Diluted earnings per share reflect
the potential dilution that could occur if securities or other contracts to issue common stock were exercised.
Investments
Fixed maturities classified as “available for sale” are carried at estimated fair value. Fixed maturities that the
Company has both the positive intent and ability to hold to maturity are stated at amortized cost and classified as
“held to maturity.” See Note 19 for a discussion of the Company’s reclassificiation of “held to maturity” securities
to “available for sale” in connection with the implementation of new accounting standards for derivatives. The
amortized cost of fixed maturities is written down to estimated fair value when a decline in value is considered to be
other than temporary. See the discussion below on realized investment gains and losses for a description of the
accounting for impairment adjustments. Unrealized gains and losses on fixed maturities “available for sale,” net of
income tax and the effect on deferred policy acquisition costs and future policy benefits that would result from the
realization of unrealized gains and losses, are included in a separate component of equity, “Accumulated other
comprehensive income (loss).”
Trading account assets and securities sold but not yet purchased are carried at estimated fair value. Realized and
unrealized gains and losses on trading account assets and securities sold but not yet purchased are included in
“Commissions and other income.”
Equity securities, available for sale, are comprised of common and non-redeemable preferred stock and are carried
at estimated fair value. The associated unrealized gains and losses, net of income tax and the effect on deferred
policy acquisition costs and future policy benefits that would result from the realization of unrealized gains and
losses, are included in “Accumulated other comprehensive income (loss).” See the discussion below on realized
investment gains and losses for a description of the accounting for impairment adjustments.
Commercial loans are stated primarily at unpaid principal balances, net of unamortized discounts and an allowance
for losses. In connection with the acquisition of Gibraltar Life (see Note 5), commercial loans were acquired at a
discount to par and are carried at amortized cost. Accretion of the discount over the remaining lives of the loans is
included in “Net investment income.” The allowance for losses includes a loan specific reserve for impaired loans
and a portfolio reserve for incurred but not specifically identified losses. Impaired loans include those loans for
which it is probable that amounts due according to the contractual terms of the loan agreement will not all be
collected. Impaired loans are measured at the present value of expected future cash flows discounted at the loan’s
effective interest rate, or at the fair value of the collateral if the loan is collateral dependent. Interest received on
impaired loans, including loans that were previously modified in a troubled debt restructuring, is either applied
against the principal or reported as revenue, according to management’s judgment as to the collectibility of
principal. Management discontinues accruing interest on impaired loans after the loans are 90 days delinquent as to
principal or interest, or earlier when management has serious doubts about collectibility. When a loan is recognized
as impaired, any accrued but uncollectible interest is reversed against interest income of the current period.
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