Prudential 2003 Annual Report Download - page 102

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PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Prudential Financial, its majority-owned
subsidiaries and those partnerships and joint ventures in which the Company has a majority financial interest, except in
those 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,
value of business acquired, investments, 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 is computed by dividing available income attributable to
each of the two groups of common shareholders by the respective weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised.
Stock Options
Effective January 1, 2003, the Company changed its accounting for employee stock options to adopt the fair value
recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-
Based Compensation,” as amended, prospectively for all new awards granted to employees on or after January 1, 2003.
During 2002 and 2001, the Company accounted for employee stock options using the intrinsic value method of
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations.
Under this method, the Company did not recognize any stock-based compensation expense for employee stock options
as all options granted had an exercise price equal to the market value of the underlying Common Stock on the date of
grant. The Company accounts for non-employee stock options using the fair value method. See Note 14 for pro forma
net income and earnings per share, as well as additional information pertaining to stock options.
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.” The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts
to maturity. Such amortization and accretion is included in “Net investment income.” The amortized cost of fixed
maturities is written down to estimated fair value when a decline in value is considered to be an other than temporary
impairment. See the discussion below on realized investment gains and losses for a description of the accounting for
impairments. Unrealized gains and losses on fixed maturities “available for sale,” net of income tax and the effect on
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