Prudential 2005 Annual Report Download - page 89

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Share-Based Compensation Awards with Non-Substantive Vesting Conditions
The Company issues employee share-based compensation awards, under a plan authorized by the Board of Directors, that are
subject to specific vesting conditions; generally the awards vest ratably over a three-year period, “the nominal vesting period,” or at
the date the employee retires (as defined by the plan), if earlier. For awards that specify an employee vests in the award upon
retirement, the Company accounts for the awards using the nominal vesting period approach. Under this approach, the Company
records compensation expense over the nominal vesting period. If the employee retires before the end of the nominal vesting period,
any remaining unrecognized compensation expense is recorded at the date of retirement.
With the Company’s adoption of SFAS No. 123(R), the Company will revise its approach to apply the non-substantive vesting
period approach to all new share-based compensation awards. Under this approach, compensation cost will be recognized
immediately for awards granted to retirement-eligible employees, or over the period from the grant date to the date retirement
eligibility is achieved, if that is expected to occur during the nominal vesting period. The Company will continue to apply the
nominal vesting period approach for any new awards granted prior to the Company’s adoption of SFAS No. 123(R), and for the
remaining portion of then unvested outstanding awards.
If the Company had accounted for all share-based compensation awards granted after January 1, 2003 under the
non-substantive vesting period approach, net income of the Financial Services Businesses for the years ended December 31, 2005,
2004 and 2003 would have been reduced by $10 million, $4 million and $9 million, respectively, or $0.02, $0.01 and $0.02 per
share of Common Stock, respectively, on both a basic and diluted basis.
Investments
Fixed maturities are comprised of bonds, notes and redeemable preferred stock. Fixed maturities classified as “available for
sale” are carried at fair value. Fixed maturities that the Company has both the positive intent and ability to hold to maturity are
carried at amortized cost and classified as “held to maturity.” The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Interest income, as well as amortization and accretion is included in “Net
investment income.” The amortized cost of fixed maturities is written down to fair value when a decline in value is considered to be
other than temporary. See the discussion below on realized investment gains and losses for a description of the accounting for
impairments. Unrealized gains and losses on fixed maturities classified as “available for sale,” net of tax and the effect on deferred
policy acquisition costs, valuation of business acquired, future policy benefits and policyholders’ dividends that would result from
the realization of unrealized gains and losses, are included in “Accumulated other comprehensive income (loss).”
“Trading account assets supporting insurance liabilities, at fair value” include assets that support certain products included in
the retirement business the Company acquired from CIGNA, as well as certain products included in the International Insurance
segment, which are experience rated, meaning that the investment results associated with these products will ultimately accrue to
contractholders. Realized and unrealized gains and losses for these investments are reported in “Asset management fees and other
income.” Investment income for these investments is reported in “Net investment income.”
“Other trading account assets, at fair value” consist primarily of investments and certain derivatives used by the Company
either in its capacity as a broker-dealer or for asset and liability management activities. These instruments are carried at fair value.
Realized and unrealized gains and losses on other trading account assets are reported in “Asset management fees and other
income.”
“Equity securities, available for sale” are comprised of common and non-redeemable preferred stock and are carried at fair
value. The associated unrealized gains and losses, net of tax and the effect on deferred policy acquisition costs, valuation of
business acquired, future policy benefits and policyholders’ dividends that would result from the realization of unrealized gains and
losses, are included in “Accumulated other comprehensive income (loss).” The cost of equity securities is written down to fair value
when a decline in value is considered to be other than temporary. See the discussion below on realized investment gains and losses
for a description of the accounting for impairments.
Commercial loans originated and held within the Company’s insurance operations are carried at unpaid principal balances, net
of unamortized premiums or discounts and an allowance for losses. Commercial loans originated and held within the Company’s
commercial mortgage operations for sale are reported at the lower of cost or fair market value, while other mortgage loan
investments are carried at amortized cost, net of unamortized deferred loan origination fees and expenses. Commercial loans
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