Prudential 2007 Annual Report Download - page 109

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
amounts of these instruments approximate fair value. Securities repurchase and resale agreements are collateralized by cash, U.S.
government and government agency securities. Securities loaned are collateralized principally by cash and U.S. government securities. For
securities repurchase agreements and securities loaned transactions used to earn spread income, the cash received is typically invested in
cash equivalents, short-term investments or fixed maturities.
Securities repurchase and resale agreements that satisfy certain criteria are treated as collateralized financing arrangements. These
agreements are carried at the amounts at which the securities will be subsequently resold or reacquired, as specified in the respective
agreements. For securities purchased under agreements to resell, the Company’s policy is to take possession or control of the securities and to
value the securities daily. Securities to be resold are the same, or substantially the same, as the securities received. For securities sold under
agreements to repurchase, the market value of the securities to be repurchased is monitored, and additional collateral is obtained where
appropriate, to protect against credit exposure. Securities to be repurchased are the same, or substantially the same, as those sold. Income and
expenses related to these transactions executed within the insurance companies and broker-dealer subsidiaries used to earn spread income are
reported as “Net investment income;” however, for transactions used to borrow funds, the associated borrowing cost is reported as interest
expense (included in “General and administrative expenses”). Income and expenses related to these transactions executed within the
Company’s commercial mortgage and derivative dealer operations are reported in “Asset management fees and other income.”
Securities loaned transactions are treated as financing arrangements and are recorded at the amount of cash received. The Company
obtains collateral in an amount equal to 102% and 105% of the fair value of the domestic and foreign securities, respectively. The
Company monitors the market value of the securities loaned on a daily basis with additional collateral obtained as necessary. Substantially
all of the Company’s securities loaned transactions are with large brokerage firms. Income and expenses associated with securities loaned
transactions used to earn spread income are reported as “Net investment income;” however, for securities loaned transactions used for
funding purposes the associated rebate is reported as interest expense (included in “General and administrative expenses”).
Other long-term investments consist of the Company’s investments in joint ventures and limited partnerships, other than operating
joint ventures, as well as wholly-owned investment real estate and other investments. Joint venture and partnership interests are generally
accounted for using the equity method of accounting. In certain instances in which the Company’s partnership interest is so minor
(generally less than 3%) that it exercises virtually no influence over operating and financial policies, the Company applies the cost method
of accounting. The Company’s income from investments in joint ventures and partnerships accounted for using the equity method or the
cost method, other than the Company’s investment in operating joint ventures, is included in “Net investment income.” The Company
consolidates joint ventures and limited partnerships in certain other instances where it is deemed to exercise control, or is considered the
primary beneficiary of a variable interest entity. Certain of these consolidated joint ventures and limited partnerships relate to investment
structures in which the Company’s asset management business invests with other co-investors in an investment fund referred to as a feeder
fund. In these structures, the invested capital of several feeder funds is pooled together and used to purchase ownership interests in another
fund, referred to as a master fund. The master fund utilizes this invested capital, and in certain cases other debt financing, to purchase
various classes of assets on behalf of its investors. Specialized industry accounting for investment companies calls for the feeder fund to
reflect its investment in the master fund as a single net asset equal to its proportionate share of the net assets of the master fund, regardless
of its level of interest in the master fund. In cases where the Company consolidates the feeder fund, it retains the feeder fund’s net asset
presentation and reports the consolidated feeder fund’s proportionate share of the net assets of the master fund in “Other long-term
investments,” with any unaffiliated investors’ minority interest in the feeder fund reported in “Other liabilities.” The Company’s net
income from consolidated joint ventures and limited partnerships, including these consolidated feeder funds, is included in the respective
revenue and expense line items depending on the activity of the consolidated entity.
The Company’s wholly-owned investment real estate consists of real estate which the Company has the intent to hold for the
production of income as well as real estate held for sale. Real estate which the Company has the intent to hold for the production of income
is carried at depreciated cost less any writedowns to fair value for impairment losses and is reviewed for impairment whenever events or
circumstances indicate that the carrying value may not be recoverable. Real estate held for sale is carried at the lower of depreciated cost or
fair value less estimated selling costs and is not further depreciated once classified as such. An impairment loss is recognized when the
carrying value of the investment real estate exceeds the estimated undiscounted future cash flows (excluding interest charges) from the
investment. At that time, the carrying value of the investment real estate is written down to fair value. Decreases in the carrying value of
investment real estate held for the production of income due to other-than-temporary impairments are recorded in “Realized investment
gains (losses), net.” Depreciation on real estate held for the production of income is computed using the straight-line method over the
estimated lives of the properties, and is included in “Net investment income.” In the period a real estate investment is deemed held for sale
and meets all of the discontinued operation criteria, the Company reports all related net investment income and any resulting investment
gains and losses as discontinued operations for all periods presented.
Short-term investments consist of highly liquid debt instruments with a maturity of greater than three months and less than twelve
months when purchased, other than those debt instruments meeting this definition that are included in “Trading account assets supporting
insurance liabilities, at fair value.” These investments are generally carried at fair value.
Realized investment gains (losses) are computed using the specific identification method with the exception of some of the
Company’s International portfolios, where the average cost method is used. Realized investment gains and losses are generated from
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