Prudential 2001 Annual Report Download - page 110

Prudential Financial, Inc.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
Premiums, benefits and expenses are stated net of reinsurance ceded to other companies. Estimated reinsurance
recoverables and the cost of reinsurance are recognized over the life of the reinsured policies using assumptions
consistent with those used to account for the underlying policies.
Foreign Currency Translation Adjustments
Assets and liabilities of foreign operations and subsidiaries reported in 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 financial position of non-U.S. entities
with functional currencies other than the U.S. dollar are included, net of related hedge gains and losses and income
taxes, in “Accumulated other comprehensive income (loss).”
Commissions and Other Income
Commissions and other income principally includes securities and commodities commission revenues and asset
management fees which are recognized in the period in which the services are performed. Realized and unrealized
gains from trading activities of the Company’s securities business are also included in “Commissions and other
income.”
Derivative Financial Instruments
Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial
indices, or the value of securities or commodities. Derivative financial instruments used by the Company include
swaps, futures, forwards and option contracts and may be exchange-traded or contracted in the over-the-counter
market. See Note 19 for a discussion of the Company’s use of derivative financial instruments and the related
accounting and reporting treatment of such instruments.
Income Taxes
The Company and its domestic subsidiaries file a consolidated federal income tax return. The Internal Revenue
Code (the “Code”) limits the amount of non-life insurance losses that may offset life insurance company taxable
income. The Code also imposes an “equity tax” on mutual life insurance companies which, in effect, imputes an
additional tax to the Company based on a formula that calculates the difference between stock and mutual life
insurance companies’ earnings. Effective for the year ended December 31, 2001, the Company, as a stock company,
is no longer subject to the equity tax. The provision for income taxes includes an estimate for changes in the total
equity tax to be paid for prior years. Subsidiaries operating outside the United States are taxed under applicable
foreign statutes.
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
that amount that is expected to be realized.
Demutualization Costs and Expenses
Demutualization costs and expenses include the cost of engaging external accounting, actuarial, investment banking,
legal and other consultants to advise the Company, the New Jersey Department of Banking and Insurance and the
New York State Insurance Department in the demutualization process and related matters as well as the cost of
printing and postage for communications with policyholders and other administrative costs. Demutualization costs
and expenses also include $340 million of demutualization consideration payable to former Canadian branch
policyholders pertaining to certain policies that Prudential Insurance transferred to London Life Insurance Company
in 1996 in connection with the sale of most of its Canadian branch operations. Under the Plan of Reorganization,
these policyholders are required to receive demutualization compensation in the form of cash. All demutualization
costs and expenses have been recorded in the periods prior to demutualization.
New Accounting Pronouncements
In September 2000, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial
Accounting Standards (“SFAS”) No. 140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities—a replacement of FASB Statement No. 125.” The Company has adopted the
provisions of SFAS No. 140 relating to transfers and extinguishments of liabilities which are effective for periods
occurring after March 31, 2001. The adoption did not have a material effect on the results of operations of the
Company.
Growing and Protecting Your Wealth108