Prudential 2001 Annual Report Download - page 107

Prudential Financial, Inc.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
Generally, a loan is restored to accrual status only after all delinquent interest and principal are brought current and,
in the case of loans where the payment of interest has been interrupted for a substantial period, a regular payment
performance has been established. The portfolio reserve for incurred but not specifically identified losses considers
the Company’s past loan loss experience, the current credit composition of the portfolio, historical credit migration,
property type diversification, default and loss severity statistics and other relevant factors.
Policy loans are carried at unpaid principal balances.
Securities purchased under agreements to resell and securities sold under agreements to repurchase are treated as
collateralized financing arrangements and are carried at the amounts at which the securities will be subsequently
resold or reacquired, including accrued interest, as specified in the respective agreements. The Company’s policy is
to take possession or control of securities purchased under agreements to resell and to value the securities daily.
Assets to be repurchased are the same, or substantially the same, as the assets transferred. The market value of
securities to be repurchased or resold is monitored, and additional collateral is obtained, where appropriate, to
protect against credit exposure.
Securities borrowed and securities loaned are treated as financing arrangements and are recorded at the amount of cash
advanced or received. With respect to securities loaned, the Company obtains collateral in an amount equal to 102%
and 105% of the fair value of the domestic and foreign securities, respectively. The Company monitors the market
value of securities borrowed and loaned on a daily basis with additional collateral obtained as necessary. Substantially
all of the Company’s securities borrowed transactions are with brokers and dealers, commercial banks and institutional
clients. Substantially all of the Company’s securities loaned transactions are with large brokerage firms.
Securities repurchase and resale agreements and securities borrowed and loaned transactions are used to generate
net investment income and facilitate trading activity. These instruments are short-term in nature (usually 30 days or
less) and are collateralized principally by U.S. Government and mortgage-backed securities. The carrying amounts
of these instruments approximate fair value because of the relatively short period of time between the origination of
the instruments and their expected realization.
Other long-term investments primarily represent the Company’s investments in joint ventures and limited
partnerships in which the Company does not exercise control. Other long-term investments also include investments
in the Company’s own separate accounts, which are carried at estimated fair value, investment real estate and
derivatives held for purposes other than trading. See Note 19 for a discussion of accounting policies for derivative
instruments. Joint venture and partnership interests are generally accounted for using the equity method of
accounting, reduced for other than temporary declines in value, except in instances in which the Company’s interest
is so minor that it exercises virtually no influence over operating and financial policies. In such instances, the
Company applies the cost method of accounting. The Company’s net income from investments in joint ventures and
partnerships is generally included in “Net investment income.” However, for certain real estate joint ventures,
Prudential’s interest is liquidated by means of one or more transactions that result in the sale of the underlying
invested assets to third parties and the ultimate distribution of the proceeds to Prudential and other joint venture
partners in exchange for and settlement of the respective joint venture interests. These transactions are accounted for
as disposals of Prudential’s joint venture interests and the resulting gains and losses are included in “Realized
investment gains (losses), net.”
Real estate held for disposal is carried at the lower of depreciated cost or fair value less estimated selling costs and
is not further depreciated once classified as such. Real estate which the Company has the intent to hold for the
production of income is carried at depreciated cost less any write-downs to fair value for impairment losses and is
reviewed for impairment whenever events or circumstances indicate that the carrying value may not be recoverable.
An impairment loss is recognized when the review indicates that the carrying value of the investment real estate
exceeds the estimated undiscounted future cash flows (excluding interest charges) from the investment. At that time,
the carrying value of the investment real estate is written down to fair value. Depreciation on real estate held for the
production of income is computed using the straight-line method over the estimated lives of the properties, and is
included in “Net investment income.”
Short-term investments consist of highly liquid debt instruments with a maturity of greater than three months and less
than twelve months when purchased. These investments are carried at amortized cost, which approximates fair value.
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