Prudential 2005 Annual Report Download - page 146

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
17. INCOME TAXES (continued)
recoverability of these tax benefits as of the same date caused the Company to record a valuation allowance in a substantially
equivalent amount, resulting in no material change in net deferred tax assets as of that date.
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 and German investment management subsidiaries are no longer considered permanently reinvested. The U.S.
income tax benefit of $14 million associated with the assumed repatriation of 2005 earnings has been recognized. During 2005, the
Company determined that historical earnings of its Canadian operations are no longer considered permanently reinvested and will
be available for repatriation to the U.S. The U.S. income tax expense of $69 million associated with the repatriation of the Canadian
operations’ earnings has been recognized. The Company has undistributed earnings of foreign subsidiaries, other than its Japanese
insurance operations, German investment management subsidiaries and Canadian operations, of $1,018 million and $862 million at
December 31, 2005 and 2004, 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.
On October 22, 2004, the American Jobs Creation Act (“the AJCA”) was signed into law. The AJCA includes a deduction of
85% of certain foreign earnings that are repatriated, as defined in the AJCA. During 2005, the Company evaluated the effects of the
repatriation provision and repatriated earnings of approximately $160 million from foreign operations under the AJCA, for which
the Company recorded income tax expense of $9 million.
On January 26, 2006, the Internal Revenue Service (“IRS”) officially closed the audit of the Company’s consolidated federal
income tax returns for the 1997 to 2001 periods. As a result of certain favorable resolutions, the Company’s consolidated statement
of operations for the year ended December 31, 2005 includes an income tax benefit of $720 million, reflecting a reduction in the
Company’s liability for income taxes. The Company’s consolidated federal income tax returns for the 2002 and 2003 periods are
currently under examination.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The 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. These 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 fair values. The methods and assumptions discussed below were used in calculating the fair values of the
instruments. See Note 19 for a discussion of derivative instruments.
Fixed Maturities
The fair values of public fixed maturity securities are based on quoted market prices or estimates from independent pricing
services. However, for investments in private placement fixed maturity securities, this information is not available. For these private
fixed maturities, the fair value is determined typically by using a discounted cash flow model, which relies upon the average of
spread surveys collected from private market intermediaries who are active in both primary and secondary transactions and takes
into account, among other things, the credit quality of the issuer and the reduced liquidity associated with private placements.
Historically, changes in estimated future cash flows or the assessment of an issuer’s credit quality have been the more significant
factors in determining fair values.
Commercial Loans
The fair value of commercial loans, other than those held by the Company’s commercial mortgage operations, 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.
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