Prudential 2007 Annual Report Download - page 107

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
records compensation expense over the nominal vesting period. If the employee retires before the end of the nominal vesting period, any
remaining unrecognized compensation cost is recognized at the date of retirement.
Upon the adoption of SFAS No. 123(R), the Company revised its approach to the recognition of compensation costs for awards
granted to retirement-eligible employees and awards that vest when an employee becomes retirement-eligible to apply the non-substantive
vesting period approach to all new share-based compensation awards granted after January 1, 2006. Under this approach, all compensation
cost is recognized on the date of grant for awards issued 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.
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, 2007 and 2006 would have
been increased by $9 million and $12 million, or $0.02 and $0.02 per share of Common Stock, respectively, on both a basic and diluted
basis. Net income of the Financial Services Businesses for the year ended December 31, 2005 would have been decreased by $10 million,
or $0.02 per share of Common Stock, on both a basic and diluted basis.
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 years ended December 31, 2007 and 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 year ended December 31, 2005, would
have been as follows:
Year Ended
December 31, 2005
Financial
Services
Businesses
Closed
Block
Business
(in millions, except
per share amounts)
Net income, as reported ..................................................................................... $3,219 $ 321
Add: Total employee stock option compensation expense included in reported net income, net of taxes ...................... 28 1
Deduct: Total employee stock option compensation expense determined under the fair value based method for all awards, net of
taxes .................................................................................................. 38 1
Pro forma net income ....................................................................................... $3,209 $ 321
Earnings per share:
Basic—as reported ..................................................................................... $ 6.45 $119.50
Basic—pro forma ...................................................................................... $ 6.43 $119.50
Diluted—as reported ................................................................................... $ 6.34 $119.50
Diluted—pro forma .................................................................................... $ 6.32 $119.50
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.
Prudential Financial 2007 Annual Report 105