Prudential 2005 Annual Report Download - page 92

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
unamortized deferred acquisition costs is reflected in “General and administrative expenses” in the period such estimated gross
margins are revised. Policy acquisition costs related to interest-sensitive and variable life products and fixed and variable annuity
products are deferred and amortized over the expected life of the contracts (periods ranging from 7 to 30 years) in proportion to
gross profits arising principally from investment results, mortality and expense margins, and surrender charges based on historical
and anticipated future experience, which is updated periodically. The effect of changes to estimated gross profits on unamortized
deferred acquisition costs is reflected in “General and administrative expenses” in the period such estimated gross profits are
revised. DAC related to non-participating traditional individual life insurance is amortized over the expected life of the contracts in
proportion to gross premiums.
The Company has offered programs under which policyholders, for a selected product or group of products, can exchange an
existing policy or contract issued by the Company for another form of policy or contract. These transactions are known as internal
replacements. If policyholders surrender traditional life insurance policies in exchange for life insurance policies that do not have
fixed and guaranteed terms, the Company immediately charges to expense an estimate of the remaining unamortized DAC on the
surrendered policies. For other internal replacement transactions, the unamortized DAC on the surrendered policies is immediately
charged to expense if the terms of the new policies are not substantially similar to those of the former policies. If the new policies
have terms that are substantially similar to those of the earlier policies, the DAC is retained with respect to the new policies and
amortized over the expected life of the new policies.
For group annuity defined contribution contracts and group corporate- and trust-owned life insurance contracts, acquisition
expenses are deferred and amortized over the expected life of the contracts in proportion to gross profits. For group and individual
long-term care contracts, acquisition expenses are deferred and amortized over the expected life of the contracts in proportion to
gross premiums. For funding agreement notes contracts, acquisition expenses are deferred and amortized over the expected life of
the contracts using a method that approximates the interest method. For other group life and disability insurance, group and certain
individual annuities, and guaranteed investment contracts, acquisition costs are expensed as incurred.
Separate Account Assets and Liabilities
Separate account assets and liabilities are reported at fair value and represent segregated funds that are invested for certain
policyholders, pension funds and other customers. The assets consist of equity securities, fixed maturities, real estate related
investments, real estate mortgage loans and short-term investments. The assets of each account are legally segregated and are
generally not subject to claims that arise out of any other business of the Company. Investment risks associated with market value
changes are borne by the customers, except to the extent of minimum guarantees made by the Company with respect to certain
accounts. See Note 8 for additional information regarding separate account arrangements with contractual guarantees. The
investment income and gains or losses for separate accounts generally accrue to the policyholders and are not included in the
Consolidated Statements of Operations. Mortality, policy administration and surrender charges assessed against the accounts are
included in “Policy charges and fee income.” Asset management fees charged to the accounts are included in “Asset management
fees and other income.”
Other Assets and Other Liabilities
Other assets consist primarily of prepaid benefit costs, certain restricted assets, broker-dealer related receivables, trade
receivables, valuation of business acquired (described below), goodwill and other intangible assets, the Company’s investment in
operating joint ventures, which includes the Company’s investment in Wachovia Securities Financial Holdings, LLC (“Wachovia
Securities”), property and equipment, and receivables resulting from sales of securities that had not yet settled at the balance sheet
date. Property and equipment are carried at cost less accumulated depreciation. Depreciation is determined using the straight-line
method over the estimated useful lives of the related assets, which generally range from 3 to 40 years. Other liabilities consist
primarily of trade payables, broker-dealer related payables, employee benefit liabilities, demutualization consideration not yet paid
to policyholders and payables resulting from purchases of securities that had not yet settled at the balance sheet date.
As a result of certain acquisitions and the application of purchase accounting, the Company reports a financial asset
representing the valuation of business acquired (“VOBA”). VOBA represents the present value of future profits embedded in the
acquired business. The Company has established a VOBA asset primarily for its acquired traditional life, deferred annuity, defined
contribution and defined benefit businesses. VOBA is determined by estimating the net present value of future cash flows from the
contracts in force at the date of acquisition. For acquired traditional insurance contracts, future positive cash flows generally include
net valuation premiums while future negative cash flows include policyholders’ benefits and certain maintenance expenses. For
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