Prudential 2001 Annual Report Download - page 111

Prudential Financial, Inc.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
In June 2001, the FASB issued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other
Intangible Assets.” SFAS No. 141 requires that the Company account for all business combinations in the scope of
the statement using the purchase method. SFAS No. 142 requires that an intangible asset acquired either
individually or with a group of other assets shall initially be recognized and measured based on fair value. An
intangible asset with a finite life is amortized over its useful life to the reporting entity; an intangible asset with an
indefinite useful life, including goodwill, is not amortized. All indefinite lived intangible assets shall be tested for
impairment in accordance with the statement. SFAS No. 142 is effective for fiscal years beginning after December
15, 2001; however, goodwill and intangible assets acquired after June 30, 2001 are subject immediately to the
nonamortization and amortization provisions of this statement. The Company has ceased the amortization of
goodwill as of January 1, 2002 and believes that the effect of implementing the impairment provisions of this
statement will not be material to its results of operations and financial position. Goodwill amounted to $335 million
at December 31, 2001 and amortization amounted to $21 million for the year then ended. Goodwill is included in
“Other assets.”
In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets.” SFAS No. 144 eliminated the requirement that discontinued operations be measured at net realizable value
or that entities include losses that have not yet occurred. SFAS No. 144 eliminated the exception to consolidation for
a subsidiary for which control is likely to be temporary. SFAS No. 144 requires that long-lived assets that are to be
disposed of by sale be measured at the lower of book value or fair value less cost to sell. An impairment for assets
that are not to be disposed of is recognized only if the carrying amounts of long-lived assets are not recoverable and
exceed their fair values. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all
components of an entity with operations and cash flows that (1) can be distinguished from the rest of the entity and
(2) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No. 144 is effective
for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, its provisions are
to be applied prospectively. At the date of adoption of this standard, the impact on results of operations of the
Company is not material.
Reclassifications
Certain amounts in prior years have been reclassified to conform to the current year presentation.
3. Discontinued Operations
In December 1998, the Company entered into a definitive agreement to sell its healthcare business to Aetna, Inc.
(“Aetna”). The sale was completed on August 6, 1999. The healthcare business is reported as discontinued
operations in the accompanying consolidated financial statements. As of December 31, 1998, the measurement date,
the Company recorded a loss on disposal of $223 million, net of taxes, which included estimated operating losses of
the healthcare business subsequent to December 31, 1998 through the date of the sale, the estimated cost of retained
liabilities associated with litigation, as well as estimates of other costs in connection with the disposition of the
business. These included facilities closure and systems termination costs, severance and termination benefits, the
impact of modifications to pension and benefit plans, payments to Aetna related to the Administrative Services Only
business and payments in connection with a medical loss ratio agreement (the “MLR Agreement”). The MLR
Agreement provided for payments to Aetna in the event that the medical loss ratios (i.e., incurred medical expense
divided by earned premiums) of the sold businesses were less favorable than levels specified in the MLR Agreement
for the years 1999 and 2000.
The Company retained all liabilities associated with litigation that existed at August 6, 1999 or commenced within
two years of that date with respect to claims that were incurred prior to August 6, 1999. The loss on disposal
includes management’s best estimate of the cost of the ultimate resolution of such litigation as well as the cost of
resolving certain matters pertaining to contractual and regulatory requirements. It is possible that additional
adjustments to this estimate may be necessary which might be material to future results of operations of a particular
quarterly or annual period.
The loss on disposal was increased in 1999 by $400 million, net of taxes, primarily as a result of higher than
anticipated healthcare operating losses prior to the August 6, 1999 closing date and an increase in the Company’s
estimated obligation under the MLR Agreement. Actual pretax losses of $370 million during that period exceeded
the original estimate of $160 million. In 2000, upon the completion of the period covered by the MLR Agreement
Prudential Financial 2001 Annual Report 109