Prudential 2003 Annual Report Download - page 158

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
16. INCOME TAXES (continued)
The Company previously had not provided U.S. income taxes on unremitted foreign earnings of its non-U.S.
operations because such earnings had been considered to be permanently reinvested in such operations. During 2003,
the Company determined that earnings from companies in high tax jurisdictions will be repatriated to the U.S.
Accordingly, earnings from its Japanese insurance operations are no longer considered permanently reinvested. U.S.
income tax expense associated with the assumed repatriation of such earnings in the amount of $112 million have been
recognized. The Company has undistributed earnings of foreign subsidiaries, other than its Japanese insurance
operations, of $674 million and $353 million at December 31, 2003 and 2002, respectively, for which deferred taxes
have not been provided. Such earnings are considered permanently invested in the foreign subsidiaries. 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 1996. The Service has begun its examination of 1997 through 2001. Management believes
sufficient provisions have been made for potential adjustments.
17. 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 18 for
a discussion of derivative instruments.
Fixed Maturities
Estimated fair values for fixed maturities, other than private placement securities, are based on quoted market
prices or prices obtained from independent pricing services. Estimated fair values for private placement fixed
maturities are determined primarily by 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 estimated 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 U.S. insurance policy loans is calculated using a discounted cash flow model based
upon current U.S. Treasury rates and historical loan repayment patterns, while Japanese insurance policy loans use the
risk-free proxy based on the Yen Libor.
Mortgage Securitization Inventory
The estimated fair value of the mortgage securitization inventory is based upon various factors, including the
terms of the loans, the intended exit strategy for the loans based upon either a securitization pricing model or
commitments from investors, prevailing interest rates, and credit risk.
Growing and Protecting Your Wealth156