Prudential 2006 Annual Report Download - page 101

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Previous Adoption of Fair Value Recognition Provisions
As noted above, effective January 1, 2003, the Company changed its accounting for employee stock options to adopt the fair
value recognition provisions of SFAS No. 123, 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 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 measurement method of SFAS
No. 123, net income and earnings per share for the year ended December 31, 2006 would have been unchanged, since, as of
January 1, 2006, there were no unvested employee stock options issued prior to January 1, 2003. Net income and earnings per share
for the years ended December 31, 2005 and 2004, would have been as follows:
Year Ended
December 31, 2005
Year Ended
December 31, 2004
Financial
Services
Businesses
Closed
Block
Business
Financial
Services
Businesses
Closed
Block
Business
(in millions, except per share amounts)
Net income, as reported ................................................................ $3,219 $ 321 $1,674 $ 582
Add: Total employee stock option compensation expense included in reported net income, net of
taxes ............................................................................. 28 1 19 —
Deduct: Total employee stock option compensation expense determined under the fair value based
method for all awards, net of taxes ..................................................... 38 1 45 1
Pro forma net income .................................................................. $3,209 $ 321 $1,648 $ 581
Earnings per share:
Basic—as reported ................................................................ $ 6.45 $119.50 $ 3.38 $249.00
Basic—pro forma ................................................................. $ 6.43 $119.50 $ 3.33 $249.00
Diluted—as reported .............................................................. $ 6.34 $119.50 $ 3.31 $249.00
Diluted—pro forma ............................................................... $ 6.32 $119.50 $ 3.26 $249.00
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 (“EITF”) Issue No. 96-18 “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services” and related interpretations in accounting for its non-employee stock options.
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.
As discussed under “Excess Tax Benefits” above, the Company adopted SFAS No. 123(R) using the modified prospective
application transition method and has elected to calculate the “pool” of excess tax benefits in additional paid-in capital using the
short-cut method. The Company has further elected to reflect in assumed proceeds, under the application of the treasury stock
method, the entire amount of excess tax benefits that would be recognized in additional paid-in capital upon exercise or release of
the award.
PRUDENTIAL FINANCIAL, INC. 2006 ANNUAL REPORT
99