Prudential 2006 Annual Report Download - page 111

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
basis only to beneficial interests acquired, issued, or subject to certain remeasurement conditions after the adoption of the guidance.
The Company expects to adopt this guidance effective January 1, 2007. The Company’s adoption of this guidance is not expected to
have a material effect on the Company’s consolidated financial position or results of operations.
In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment
and its Application to Certain Investments.” This FSP provides impairment models for determining whether to record impairment
losses associated with investments in certain equity and debt securities, primarily by referencing existing accounting guidance. It
also requires income to be accrued on a level-yield basis following an impairment of debt securities, where reasonable estimates of
the timing and amount of future cash flows can be made. The Company adopted this guidance effective January 1, 2006, and it did
not have a material effect on the Company’s consolidated financial position or results of operations.
In September 2005, the Accounting Standards Executive Committee (“AcSEC”) of the American Institute of Certified Public
Accountants (“AICPA”) issued SOP 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection
With Modifications or Exchanges of Insurance Contracts.” SOP 05-1 provides guidance on accounting by insurance enterprises for
deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in
SFAS No. 97. SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights, or coverages that
occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of
a feature or coverage within a contract, and is effective for internal replacements occurring in fiscal years beginning after
December 15, 2006. The Company expects to adopt SOP 05-1 on January 1, 2007. The Company’s adoption of this guidance will
not have a material effect on the Company’s consolidated financial position or results of operations.
In June 2005, the EITF of the FASB reached a consensus on Issue No. 04-5, “Investor’s Accounting for an Investment in a
Limited Partnership When the Investor Is the Sole General Partner and the Limited Partners Have Certain Rights.” This Issue first
presumes that general partners in a limited partnership control that partnership and should therefore consolidate that partnership, and
then provides that the general partners may overcome the presumption of control if the limited partners have: (1) the substantive
ability to dissolve or liquidate the limited partnership, or otherwise to remove the general partners without cause or (2) the ability to
participate effectively in significant decisions that would be expected to be made in the ordinary course of the limited partnership’s
business. This guidance became effective for new or amended arrangements after June 29, 2005, and became effective January 1,
2006 for all arrangements existing as of June 29, 2005 that remain unmodified. The Company’s adoption of this guidance did not
have a material effect on the Company’s consolidated financial position or results of operations.
In June 2005, the FASB issued Statement No. 133 Implementation Issue No. B39, “Embedded Derivatives: Application of
Paragraph 13(b) to Call Options That are Exercisable Only by the Debtor.” Implementation Issue No. B39 indicates that debt
instruments where the right to accelerate the settlement of debt can be exercised only by the debtor do not meet the criteria of
Paragraph 13(b) of Statement No. 133, and therefore should not individually lead to such options being considered embedded
derivatives. Such options must still be evaluated under paragraph 13(a) of Statement No. 133. This implementation guidance is
effective for the first fiscal quarter beginning after December 15, 2005. The Company’s adoption of this guidance effective
January 1, 2006 did not have a material effect on the Company’s consolidated financial position or results of operations as the
guidance is consistent with the Company’s existing accounting policy.
In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,” which replaces SFAS No. 123 as discussed
under “Share-Based Payments” above.
In May 2004, the FASB issued FSP 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003.” See Note 16 for details regarding the adoption of this pronouncement.
In December 2003, the FASB issued FIN No. 46(R), “Consolidation of Variable Interest Entities,” which revised the original
FIN No. 46 guidance issued in January 2003. FIN No. 46(R) addresses whether certain types of entities, referred to as variable
interest entities (“VIEs”), should be consolidated in a company’s financial statements. A VIE is an entity that either (1) has equity
investors that lack certain essential characteristics of a controlling financial interest (including the ability to control the entity, the
obligation to absorb the entity’s expected losses and the right to receive the entity’s expected residual returns) or (2) lacks sufficient
equity to finance its own activities without financial support provided by other entities, which in turn would be expected to absorb
at least some of the expected losses of the VIE. An entity should consolidate a VIE if, as the primary beneficiary, it stands to absorb
a majority of the VIE’s expected losses or to receive a majority of the VIE’s expected residual returns. On December 31, 2003, the
Company adopted FIN No. 46(R) for all special purpose entities (“SPEs”) and for relationships with all VIEs that began on or after
February 1, 2003. On March 31, 2004, the Company implemented FIN No. 46(R) for relationships with potential VIEs that are not
SPEs. The transition to FIN No. 46(R) did not have a material effect on the Company’s consolidated financial position or results of
operations.
PRUDENTIAL FINANCIAL, INC. 2006 ANNUAL REPORT
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