Prudential 2003 Annual Report Download - page 108

Download and view the complete annual report

Please find page 108 of the 2003 Prudential annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 180

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152
  • 153
  • 154
  • 155
  • 156
  • 157
  • 158
  • 159
  • 160
  • 161
  • 162
  • 163
  • 164
  • 165
  • 166
  • 167
  • 168
  • 169
  • 170
  • 171
  • 172
  • 173
  • 174
  • 175
  • 176
  • 177
  • 178
  • 179
  • 180

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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, as well as earnings from our
investment in Wachovia Securities. Realized and unrealized gains from trading activities of the Company’s securities
and investment management businesses are also included in “Commissions and other income.”
Derivative Financial Instruments
The Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as
amended, on January 1, 2001. Except as noted below, the adoption of this statement did not have a material impact on
the results of operations of the Company. In 2003, the Company adopted SFAS No. 149, “Amendment of Statement
133, Accounting for Derivative Instruments and Hedging Activities.” The adoption of this statement did not have a
material impact on the results of operations of the Company, other than as discussed below.
Upon its adoption of SFAS No. 133, the Company reclassified “held to maturity” securities with a fair market
value of approximately $12,085 million to “available for sale” as permitted by the new standard. This reclassification
resulted in unrealized investment gains of $94 million, net of tax, which were recorded as a component of
“Accumulated other comprehensive income (loss)” at the time of the transfer in 2001.
Upon its adoption of SFAS No. 149, the Company recharacterized certain contracts to acquire “to be announced”
securities from “Fixed maturities—available for sale” to derivatives within “Other long-term investments”. The impact
of adoption of this standard included a reduction of approximately $3.2 billion of available for sale securities, as of
December 31, 2003, with the related offsets recorded in “Other assets” and “Other liabilities.” In addition, an asset
related to these contracts of approximately $12 million was reported in “Other long-term investments,” as of December
31, 2003, with a related gain reported in “Realized investment gains (losses), net” for the year ended December 31,
2003.
Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates,
financial indices, or the values 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. Derivative positions are carried at estimated fair value, generally by obtaining quoted market prices or
through the use of pricing models. Values can be affected by changes in interest rates, foreign exchange rates, financial
indices, values of securities or commodities, credit spreads, market volatility and liquidity. Values can also be affected
by changes in estimates and assumptions used in pricing models.
Derivatives are used to manage the characteristics of the Company’s asset/liability mix, manage the interest rate
and currency characteristics of invested assets and to mitigate the risk of a diminution, upon translation to U.S. dollars,
of expected non-U.S. earnings resulting from unfavorable changes in currency exchange rates. They are also used in a
derivative dealer capacity in the Company’s securities operations to meet the needs of clients by structuring
transactions that allow clients to manage their exposure to interest rates, foreign exchange rates, indices or prices of
securities and commodities and similarly in a dealer capacity through the operation of hedge portfolios in a limited-
Growing and Protecting Your Wealth106