Prudential 2001 Annual Report Download - page 141

Prudential Financial, Inc.
Notes to Consolidated Financial Statements
17. Income Taxes (continued)
Management believes that based on its historical pattern of taxable income, the Company will produce sufficient
income in the future to realize its deferred tax asset after valuation allowance. A valuation allowance has been
recorded primarily related to tax benefits associated with foreign operations and state and local deferred tax assets.
Adjustments to the valuation allowance will be made if there is a change in management’s assessment of the amount
of the deferred tax asset that is realizable. At December 31, 2001 and 2000, respectively, the Company had federal
net operating loss carryforwards of $109 million and $848 million, which expire between 2009 and 2018. At
December 31, 2001 and 2000, respectively, the Company had state operating loss carryforwards for tax purposes
approximating $2,647 million and $509 million, which expire between 2005 and 2021. At December 31, 2001 and
2000, respectively, the Company had foreign operating loss carryforwards for tax purposes approximating $597
million and $86 million, which expire between 2003 and 2006.
Deferred taxes are not provided on the undistributed earnings of foreign subsidiaries (considered to be permanent
investments), which at December 31, 2001 were $1,749 million. Determining the tax liability that would arise if
these earnings were remitted is not practicable.
The Internal Revenue Service (the “Service”) has completed all examinations of the consolidated federal income tax
returns through 1992. The Service has examined the years 1993 through 1995. Discussions are being held with the
Service with respect to proposed adjustments. Management, however, believes there are adequate defenses against,
or sufficient reserves to provide for such adjustments. The Service has completed its examination of 1996 and has
begun its examination of 1997 through 2000.
18. Fair Value of Financial Instruments
The estimated fair values presented below have been determined by using available market information and by
applying valuation methodologies. Considerable judgment is applied in interpreting data to develop the estimates of
fair value. Estimated fair values may not be realized in a current market exchange. The use of different market
assumptions and/or estimation methodologies could have a material effect on the estimated fair values. The methods
and assumptions discussed below were used in calculating the estimated fair values of the instruments. See Note 19
for a discussion of derivative instruments.
Fixed Maturities and Equity Securities
Estimated fair values for fixed maturities and equity securities, other than private placement securities, are based on
quoted market prices or estimates from independent pricing services. Generally, fair values for private placement
fixed maturities are estimated using a discounted cash flow model which considers the current market spreads
between the U.S. Treasury yield curve and corporate bond yield curve, adjusted for the type of issue, its current
credit quality and its remaining average life. The fair value of certain non-performing private placement fixed
maturities is based on amounts estimated by management.
Commercial Loans
The estimated fair value of commercial loans is primarily based upon the present value of the expected future cash
flows discounted at the appropriate U.S. Treasury rate or Japanese Government Bond rate for yen based loans,
adjusted for the current market spread for similar quality loans.
Policy Loans
The estimated fair value of policy loans is calculated using a discounted cash flow model based upon current U.S.
Treasury rates and historical loan repayment patterns.
Mortgage Securitization Inventory
The estimated fair value of the mortgage securitization inventory is primarily based upon the intended exit strategy
for the mortgage loans, including securitization and whole loan sales. For loans expected to be securitized, the value
is estimated using a pricing model that, among other factors, considers current investor yield requirements for
subordination and yield.
Prudential Financial 2001 Annual Report 139