Prudential 2007 Annual Report Download - page 117

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
beginning after December 15, 2006. The Company adopted FSP SFAS 13-2 on January 1, 2007 and the adoption resulted in a net after-tax
reduction to retained earnings of $84 million, as of January 1, 2007.
In June 2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes,” an Interpretation of FASB Statement
No. 109. See Note 17 for details regarding the adoption of this pronouncement.
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets.” This statement requires that
servicing assets or liabilities be initially measured at fair value, with subsequent changes in value reported based on either a fair value or
amortized cost approach for each class of servicing assets or liabilities. Under previous guidance, such servicing assets or liabilities were
initially measured at historical cost and the amortized cost method was required for subsequent reporting. The Company adopted this
guidance effective January 1, 2007, and elected to continue reporting subsequent changes in value using the amortized cost approach.
Adoption of this guidance had no material effect on the Company’s consolidated financial position or results of operations.
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Instruments.” This statement eliminates an
exception from the requirement to bifurcate an embedded derivative feature from beneficial interests in securitized financial assets. The
Company has used this exception for investments the Company has made in securitized financial assets in the normal course of operations,
and thus has not previously had to consider whether such investments contain an embedded derivative. The new requirement to identify
embedded derivatives in beneficial interests will be applied on a prospective basis only to beneficial interests acquired, issued, or subject to
certain remeasurement conditions after the adoption of the guidance. This statement also provides an election, on an instrument by instrument
basis, to measure at fair value an entire hybrid financial instrument that contains an embedded derivative requiring bifurcation, rather than
measuring only the embedded derivative on a fair value basis. If the fair value election is chosen, changes in unrealized gains and losses are
reflected in the Consolidated Statements of Operations. The Company adopted this guidance effective January 1, 2007. 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 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 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,
including deferred policy acquisition costs, valuation of business acquired and deferred sales inducements, 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 was effective for internal
replacements occurring in fiscal years beginning after December 15, 2006. The Company adopted SOP 05-1 on January 1, 2007, which
resulted in a net after-tax reduction to retained earnings of $20 million.
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 was 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.
Reclassifications
Certain amounts in prior years have been reclassified to conform to the current year presentation.
Prudential Financial 2007 Annual Report 115