Prudential 2005 Annual Report Download - page 21

changes in any of the other assumptions described above that could ultimately accompany any changes in our assumed long-term rate of
return.
For the year ended December 31, 2005
Increase/(decrease) in
Net Periodic Pension Cost
Increase/(decrease) in
Net Periodic Other
Postretirement Cost
(in millions)
Increase in expected rate of return by 100 basis points ..................................... $(93) $(10)
Decrease in expected rate of return by 100 basis points .................................... $93 $10
We determine our discount rate, used to value the pension and postretirement benefit obligations, based upon rates commensurate with
current yields on high quality corporate bonds. See Note 16 to our Consolidated Financial Statements for information regarding the
methodology we employ to determine our discount rate. Our assumed discount rate for 2005 was 5.75% for our pension plans and 5.50%
for our other postretirement benefit plans. Given the amount of pensions and postretirement obligation as of September 30, 2004, the
beginning of the measurement year, if we had assumed a discount rate for both our pension and other postretirement benefit plans that was
100 basis points higher or 100 basis points lower than the rates we assumed, the change in our net periodic costs would have been as shown
in the table below. The information provided in the table below considers only changes in our assumed discount rate without consideration
of possible changes in any of the other assumptions described above that could ultimately accompany any changes in our assumed discount
rate.
For the year ended December 31, 2005
Increase/(decrease) in
Net Periodic Pension Cost
Increase/(decrease) in
Net Periodic Other
Postretirement Cost
(in millions)
Increase in discount rate by 100 basis points ............................................ $(19) $(9)
Decrease in discount rate by 100 basis points ............................................ $72 $8
For a discussion of our expected rate of return on plan assets and discount rate for our qualified pension plan in 2006 see “—Results of
Operations for Financial Services Businesses by Segment—Corporate and Other.”
In addition to the effect of changes in our assumptions, the net periodic cost or benefit from our pension and other postretirement
benefit plans may change due to factors such as actual experience being different from our assumptions, special benefits to terminated
employees, or changes in benefits provided under the plans.
Taxes on Income
Our effective tax rate is based on income, non-taxable and non-deductible items, statutory tax rates and tax planning opportunities
available in the various jurisdictions in which we operate. Inherent in determining our annual tax rate are judgments regarding business
plans, planning opportunities and expectations about future outcomes.
Tax regulations require items to be included in the tax return at different times from the items reflected in the financial statements. As
a result, the effective tax rate reflected in the financial statements is different than the actual rate applied on the tax return. Some of these
differences are permanent such as expenses that are not deductible in our tax return, and some differences are temporary, reversing over
time, such as valuation of insurance reserves. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally
represent items that can be used as a tax deduction or credit in future years for which we have already recorded the tax benefit in our
income statement. Deferred tax liabilities generally represent tax expense recognized in our financial statements for which payment has
been deferred, or expenditures for which we have already taken a deduction in our tax return but have not yet recognized in our financial
statements. The application of GAAP requires us to evaluate the recoverability of our deferred tax assets and establish a valuation
allowance if necessary to reduce our deferred tax asset to an amount that is more likely than not to be realized. Realization of certain
deferred tax assets is dependent upon generating sufficient taxable income in the appropriate jurisdiction prior to the expiration of the
carry-forward periods. Although realization is not assured, management believes it is more likely than not the deferred tax assets, net of
valuation allowances, will be realized.
Our accounting represents management’s best estimate of future events that can be appropriately reflected in the accounting estimates.
Certain changes or future events, such as changes in tax legislation, geographic mix of earnings and completion of tax audits could have an
impact on our estimates and effective tax rate.
An increase or decrease in our effective tax rate by one percent of income from continuing operations before income taxes,
extraordinary gain on acquisition and cumulative effect of accounting change, would have resulted in a decline or increase in consolidated
income from continuing operations before extraordinary gain on acquisition and cumulative effect of accounting change in 2005 of $45
million.
The amount of income taxes paid by the Company is subject to ongoing audits in various jurisdictions. We reserve for our best
estimate of potential payments/settlements to be made to the Internal Revenue Service and other taxing jurisdictions for audits ongoing or
not yet commenced. On January 26, 2006, the Internal Revenue Service, or IRS, officially closed the audit of our consolidated federal
income tax returns for the 1997 to 2001 periods. As a result of certain favorable resolutions, our consolidated statement of operations for
the year ended December 31, 2005 includes an income tax benefit of $720 million, reflecting a reduction in our liability for income taxes.
The Company’s consolidated federal income tax returns for the 2002 and 2003 periods are currently under examination.
Prudential Financial 2005 Annual Report 19