Prudential 2003 Annual Report Download - page 111

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 for the year ended December 31, 2001 also include $340 million of demutualization consideration paid to
former Canadian branch policyholders pertaining to certain policies that Prudential Insurance transferred to London
Life Insurance Company in 1996.
New Accounting Pronouncements
In December 2003, the Financial Accounting Standards Board (“FASB”) revised Interpretation (“FIN”) No. 46,
“Consolidation of Variable Interest Entities”, which was originally issued in January 2003. FIN No. 46 addresses
whether certain types of entities, referred to as variable interest entities (“VIEs”), should be consolidated in a
company’s financial statements. A VIE is an entity that either (1) has equity investors that lack certain essential
characteristics of a controlling financial interest (including the ability to control the entity, the obligation to absorb the
entity’s expected losses and the right to receive the entity’s expected residual returns) or (2) lacks sufficient equity to
finance its own activities without financial support provided by other entities, which in turn would be expected to
absorb at least some of the expected losses of the VIE. An entity should consolidate a VIE if it stands to absorb a
majority of the VIE’s expected losses or to receive a majority of the VIE’s expected residual returns. The Company
adopted FIN No. 46 for relationships with VIEs that began on or after February 1, 2003, and on December 31, 2003,
adopted the revised guidance for all relationships with VIEs that are special purpose entities (“SPEs”). The Company
will implement the revised guidance to relationships with potential VIEs that are not SPEs as of March 31, 2004. The
transition to the revised guidance for SPEs as of December 31, 2003, resulted in the deconsolidation of certain
previously consolidated SPEs, with no material effect to the Company’s consolidated financial position, results of
operations or cash flows. The Company does not believe the transition to the revised guidance on March 31, 2004, will
have a material effect on the Company’s consolidated financial position or results of operations.
In July 2003, the Accounting Standards Executive Committee (“AcSEC”) of the American Institute of Certified
Public Accountants (“AICPA”) issued Statement of Position (“SOP”) 03-01, “Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts.” AcSEC has developed the
SOP to address the evolution of product designs since the issuance of Statement of Financial Accounting Standards
(“SFAS”) No. 60, “Accounting and Reporting by Insurance Enterprises,” and SFAS No. 97, “Accounting and
Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the
Sale of Investments” and the need for interpretive guidance to be developed in three areas: separate account
presentation and valuation; the accounting recognition given sales inducements (bonus interest, bonus credits,
persistency bonuses); and the classification and valuation of certain long-duration contract liabilities.
The most significant accounting implications of the SOP are as follows: (1) reporting and measuring assets and
liabilities of separate account products as general account assets and liabilities when specified criteria are not met; (2)
reporting and measuring seed money in separate accounts as general account assets based on the insurer’s
proportionate beneficial interest in the separate account’s underlying assets; (3) capitalizing sales inducements that
meet specified criteria and amortizing such amounts over the life of the contracts using the same methodology as used
for amortizing deferred acquisition costs, but immediately expensing those sales inducements accrued or credited if
such criteria are not met; (4) recognizing contractholder liabilities for: (a) modified guaranteed (market value adjusted)
annuities at accreted balances that do not include the then current market value surrender adjustment, (b) two-tier
Prudential Financial 2003 Annual Report 109
PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)