Prudential 2007 Annual Report Download - page 106

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Consolidated Financial Statements include the accounts of Prudential Financial, entities over which the Company exercises
control, including majority-owned subsidiaries and minority-owned entities such as limited partnerships in which the Company is the
general partner, and variable interest entities in which the Company is considered the primary beneficiary. See Note 4 for more information
on the Company’s consolidated variable interest entities. The Consolidated Financial Statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (“U.S. GAAP”). Intercompany balances and transactions have
been eliminated.
The Company’s Gibraltar Life Insurance Company, Ltd. (“Gibraltar Life”) operations use a November 30 fiscal year end for purposes
of inclusion in the Company’s Consolidated Financial Statements. Therefore, the Consolidated Financial Statements as of December 31,
2007, and 2006, include Gibraltar Life’s assets and liabilities as of November 30, 2007 and 2006, respectively, and for the years ended
December 31, 2007, 2006 and 2005, include Gibraltar Life’s results of operations for the twelve months ended November 30, 2007, 2006
and 2005, respectively.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The most significant estimates include those used in determining deferred policy acquisition costs, goodwill, valuation of business
acquired, valuation of investments including derivatives, future policy benefits including guarantees, pension and other postretirement
benefits, provision for income taxes, reserves for contingent liabilities and reserves for losses in connection with unresolved legal matters.
Share-Based Payments
The Company adopted SFAS No. 123(R), “Share-Based Payment” on January 1, 2006, using the modified prospective application
transition method prescribed by this standard. This standard requires that the cost resulting from all share-based payments be recognized in
the financial statements and 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. As described more fully below, the
Company had previously adopted the fair value recognition provisions of 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. Upon adoption of SFAS No. 123(R),
there were no unvested stock options issued prior to January 1, 2003, and, therefore, the adoption of SFAS No. 123(R) had no impact to the
Company’s consolidated financial condition or results of operations with respect to the unvested employee options. For a discussion of the
prospective recognition of compensation cost under the non-substantive vesting period approach, see “Share-Based Compensation Awards
with Non-substantive Vesting Conditions” below.
Excess Tax Benefits
Upon adoption of SFAS No. 123(R), the Company was required to determine the portion of additional paid-in capital that was
generated from the realization of excess tax benefits prior to the adoption of SFAS No. 123(R) available to offset deferred tax assets that
may need to be written off in future periods had the Company adopted the fair value recognition provisions of SFAS No. 123 beginning in
2001. The Company has elected to calculate this “pool” of additional paid-in capital using the short-cut method as permitted by Financial
Accounting Standards Board (“FASB”) Staff Position (“FSP”) FAS123(R)-3, “Transition Election to Accounting for the Tax Effects of
Share-Based Payment Awards.” Under the short-cut method, this “pool” of additional paid-in capital was calculated as the sum of all net
increases of additional paid-in capital recognized in the Company’s financial statements related to tax benefits from share-based payment
transactions subsequent to the adoption of SFAS No. 123 but prior to the adoption of SFAS No. 123(R) less the cumulative incremental
pre-tax compensation costs that would have been recognized if SFAS No. 123 had been used to account for share-based payment
transactions, tax effected at the statutory tax rate as of the adoption of SFAS No. 123(R). Subsequent to the date of adoption, the
Company’s policy is to account for this additional paid-in capital as a single “pool” available to all share-based compensation awards.
In accordance with SFAS No. 123(R), the Company does not recognize excess tax benefits in additional paid-in capital until the
benefits result in a reduction in taxes payable. The Company has elected the “tax-law ordering methodology” and has adopted a convention
that considers excess tax benefits to be the last portion of a net operating loss carryforward to be utilized.
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 granted prior to January 1, 2006 that specify an employee vests in the award
upon retirement, the Company accounts for those awards using the nominal vesting period approach. Under this approach, the Company
104 Prudential Financial 2007 Annual Report