Prudential 2005 Annual Report Download - page 88

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Earnings Per Share
As discussed in Note 1, the Company has outstanding two separate classes of common stock. Basic earnings per share is
computed by dividing available income attributable to each of the two groups of common shareholders by the respective weighted
average number of common shares outstanding for the period. Diluted earnings per share includes the effect of all dilutive potential
common shares that were outstanding during the period.
Share-Based Compensation
Effective January 1, 2003, the Company changed its accounting for employee stock options to adopt the fair value recognition
provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as
amended, prospectively for all new stock options granted to employees on or after January 1, 2003. Prior to January 1, 2003, the
Company accounted for employee stock options using the intrinsic value method of Accounting Principles Board (“APB”) Opinion
No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Under this method, the Company did not
recognize any stock-based compensation expense for employee stock options as all options granted had an exercise price equal to
the market value of the underlying Common Stock on the date of grant. If the Company had accounted for all employee stock
options granted prior to January 1, 2003 under the fair value based accounting method of SFAS No. 123 for the years ended
December 31, 2005, 2004 and 2003, net income and earnings per share would have been as follows:
Year ended
December 31, 2005
Year ended
December 31, 2004
Year ended
December 31, 2003
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(in millions, except per share amounts)
Net income, as reported .......................................... $3,219 $ 321 $1,674 $ 582 $1,025 $ 239
Add: Total employee stock option compensation expense included in
reported net income, net of tax ................................... 28 1 19 — 10 —
Deduct: Total employee stock option compensation expense determined
under the fair value based method for all awards, net of tax ............ 38 1 45 1 45 1
Pro forma net income ............................................ $3,209 $ 321 $1,648 $ 581 $ 990 $ 238
Earnings per share:
Basic—as reported .......................................... $ 6.45 $119.50 $ 3.38 $249.00 $ 1.99 $89.50
Basic—pro forma ........................................... $ 6.43 $119.50 $ 3.33 $249.00 $ 1.93 $89.50
Diluted—as reported ......................................... $ 6.34 $119.50 $ 3.31 $249.00 $ 1.98 $89.50
Diluted—pro forma .......................................... $ 6.32 $119.50 $ 3.26 $249.00 $ 1.91 $89.50
The fair value of each option issued prior to January 1, 2003 for purposes of the pro forma information presented above was
estimated on the date of grant using a Black-Scholes option-pricing model. For options issued on or after January 1, 2003, the fair
value of each option was estimated on the date of grant using a binomial option-pricing model.
The Company accounts for non-employee stock options using the fair value method in accordance with Emerging Issues Task
Force Issue (“EITF”) No. 96-18 “Accounting for Equity Instruments That Are Issued to Other Than Employees” and related
interpretations in accounting for its non-employee stock options.
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R), “Share-Based Payment,”
which replaces SFAS No. 123. SFAS No. 123(R) requires all entities to apply the fair value based measurement method in
accounting for share-based payment transactions with employees except for equity instruments held by employee share ownership
plans. Under this method, compensation costs of awards to employees, such as stock options, are measured at fair value and
expensed over the period during which an employee is required to provide service in exchange for the award (the vesting period).
The Company had previously adopted the fair value recognition provisions of the original SFAS No. 123, prospectively for all new
stock options issued to employees on or after January 1, 2003. The Company adopted SFAS No. 123(R) on January 1, 2006. On
that date, there were no unvested stock options issued prior to January 1, 2003, and therefore the adoption will have no effect to the
Company’s consolidated financial position and results of operations.
Prudential Financial 2005 Annual Report86