Prudential 2007 Annual Report Download - page 108

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Investments
Fixed maturities are comprised of bonds, notes and redeemable preferred stock. Fixed maturities classified as “available for sale” are
carried at fair value. Fixed maturities that the Company has both the positive intent and ability to hold to maturity are carried at amortized
cost and classified as “held to maturity.” The amortized cost of debt securities is adjusted for amortization of premiums and accretion of
discounts to maturity. Interest income, as well as the related amortization of premium and accretion of discount is included in “Net
investment income.” The amortized cost of fixed maturities is written down to fair value when a decline in value is considered to be other-
than-temporary. See the discussion below on realized investment gains and losses for a description of the accounting for impairments.
Unrealized gains and losses on fixed maturities classified as “available for sale,” net of tax and the effect on deferred policy acquisition
costs, valuation of business acquired, future policy benefits and policyholders’ dividends that would result from the realization of
unrealized gains and losses, are included in “Accumulated other comprehensive income (loss).”
“Trading account assets supporting insurance liabilities, at fair value” includes invested assets that support certain products included in
the Retirement segment, as well as certain products included in the International Insurance segment, which are experience rated, meaning
that the investment results associated with these products will ultimately accrue to contractholders. Realized and unrealized gains and
losses for these investments are reported in “Asset management fees and other income.” Interest and dividend income from these
investments is reported in “Net investment income.”
“Other trading account assets, at fair value” consist primarily of investments and certain derivatives used by the Company either in its
capacity as a broker-dealer or for asset and liability management activities. These instruments are carried at fair value. Realized and
unrealized gains and losses on other trading account assets are reported in “Asset management fees and other income.” Interest and
dividend income from these investments is reported in “Net investment income.”
Equity securities are comprised of common stock and non-redeemable preferred stock and are carried at fair value. The associated
unrealized gains and losses, net of tax and the effect on deferred policy acquisition costs, valuation of business acquired, future policy
benefits and policyholders’ dividends that would result from the realization of unrealized gains and losses, are included in “Accumulated
other comprehensive income (loss).” The cost of equity securities is written down to fair value when a decline in value is considered to be
other-than-temporary. See the discussion below on realized investment gains and losses for a description of the accounting for impairments.
Dividend income from these investments is reported in “Net investment income.”
Commercial loans originated and held for investment within the Company’s insurance operations are carried at unpaid principal
balances, net of an allowance for losses. Commercial loans originated and held for sale within the Company’s commercial mortgage
operations are reported at the lower of cost or fair market value, while other mortgage loan investments are carried at amortized cost, net of
unamortized deferred loan origination fees and expenses. Commercial loans acquired, including those related to the acquisition of a
business, are recorded at fair value when purchased, reflecting any premiums or discounts to unpaid principal balances. Interest income, as
well as prepayment fees and the amortization of the related premiums or discounts, is included in “Net investment income.” The allowance
for losses includes a loan specific reserve for non-performing loans and a portfolio reserve for probable incurred but not specifically
identified losses. Non-performing loans include those loans for which it is probable that amounts due according to the contractual terms of
the loan agreement will not all be collected. These loans are measured at the present value of expected future cash flows discounted at the
loan’s effective interest rate, or at the fair value of the collateral if the loan is collateral dependent. Interest received on non-performing
loans, including loans that were previously modified in a troubled debt restructuring, is either applied against the principal or reported as
net investment income, based on the Company’s assessment as to the collectibility of the principal. The Company discontinues accruing
interest on non-performing loans after the loans are 90 days delinquent as to principal or interest, or earlier when the Company has doubts
about collectibility. When a loan is deemed non-performing, any accrued but uncollectible interest is charged to interest income in the
period the loan is deemed non-performing. Generally, a loan is restored to accrual status only after all delinquent interest and principal are
brought current and, in the case of loans where the payment of interest has been interrupted for a substantial period, a regular payment
performance has been established. The portfolio reserve for incurred but not specifically identified losses considers the Company’s past
loan loss experience, the current credit composition of the portfolio, historical credit migration, property type diversification, default and
loss severity statistics and other relevant factors. The gains and losses from the sale of loans, which are recognized when the Company
relinquishes control over the loans, as well as changes in the allowance for loan losses, are reported in “Realized investment gains (losses),
net.”
Policy loans are carried at unpaid principal balances.
Securities repurchase and resale agreements and securities loaned transactions are used to earn spread income, to borrow funds, or to
facilitate trading activity. Securities repurchase and resale agreements are generally short-term in nature, and therefore, the carrying
106 Prudential Financial 2007 Annual Report