Sun Life 2010 Annual Report Download - page 87

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Bonds are tested for impairment on a quarterly basis. Objective evidence of impairment includes financial difficulty of the issuer,
bankruptcy, and default or ongoing delinquency in payment of interest or principal. Since held-for-trading bonds are recorded at fair
value with changes in fair value recorded to income, any reduction in value of the asset due to impairment is already reflected in
investment income. Impairment of held-for-trading bonds may impact the change in actuarial liabilities due to the impact of impairment
on future cash flows. When there is objective evidence that an available-for-sale bond is impaired and the decline in value is
considered other than temporary, the loss accumulated in OCI is reclassified to Net gains (losses) on available-for-sale assets in our
Consolidated Statements of Operations. If the fair value of an available-for-sale bond recovers after an impairment loss is recognized
and the recovery can be objectively related to an event occurring after the impairment loss was recognized in net income, the
impairment loss is reversed with the amount of the reversal recognized in net income. Subsequently, available-for-sale bonds continue
to be recorded at fair value with changes in fair value recorded to OCI. Interest is recognized on previously impaired available-for-sale
bonds in accordance with the effective interest rate method.
Mortgages and corporate loans
Mortgages and corporate loans are accounted for at amortized cost using the effective interest method. Purchases and sales of
mortgages and corporate loans are recognized or derecognized in our Consolidated Balance Sheets on their trade dates, which are the
dates that we commit to purchase or sell the asset. Transaction costs on mortgages and corporate loans are capitalized on initial
recognition and are recognized in income using the effective interest method.
Realized gains and losses on the sale of mortgages and corporate loans and interest income earned are recorded in Other net
investment income (loss) in our Consolidated Statements of Operations.
Mortgages and corporate loans are individually evaluated for impairment in establishing the allowance for credit losses. However, the
full extent of impairment present in the portfolio of mortgages and corporate loans cannot be identified solely by reference to individual
loans. When the credit quality of groups of loans to borrowers operating in particular sectors has deteriorated, additional impairment
that cannot be identified on a loan-by-loan basis is estimated collectively for the group on a sectoral basis.
Mortgages and corporate loans are classified as impaired when there is no longer reasonable assurance of the timely collection of the
full amount of principal and interest or when the troubled debt is restructured. When an asset is classified as impaired, allowances for
credit losses are established to adjust the carrying value of the asset to its net recoverable amount. The allowance for credit losses is
estimated using the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the
collateral, if the loan is collateral dependent.
Interest income is recognized on impaired mortgages and corporate loans when the collection of contractually specified future cash
flows is probable, in which case cash receipts are recorded in accordance with the effective interest rate method. Interest income is not
recognized on impaired mortgages and corporate loans and these mortgages and corporate loans are placed on nonaccrual status
when the collection of contractually specified future cash flows is not probable, in which case cash receipts are applied, firstly against
the carrying value of the loan, then against the provision, and then to income. The accrual of interest resumes when the collection of
contractually specified future cash flows becomes probable based on certain facts and circumstances.
Changes in allowances for losses, and write-offs of specific mortgages and corporate loans net of recoveries, are charged against
Other net investment income (loss) in our Consolidated Statements of Operations. Once the conditions causing impairment improve
and future payments are reasonably assured, allowances are reduced and the mortgages and corporate loans are no longer classified
as impaired unless the troubled debt was restructured, in which case it remains classified as impaired.
If the conditions causing impairment do not improve and future payments remain unassured, we typically derecognize the asset
through disposition or foreclosure. Uncollectible collateral-dependent loans are written off through allowances for losses at the time of
disposition or foreclosure.
Stocks – held-for-trading and available-for-sale
Stocks are designated as held-for-trading or available-for-sale and are generally carried at fair value. Stocks that do not have a quoted
market price in an active market and that are designated as available-for-sale are carried at cost. Generally, stocks supporting our
actuarial liabilities are designated as held-for-trading. Changes in fair value of held-for-trading stocks are recorded to Change in fair
value of held-for-trading assets in our Consolidated Statements of Operations. The majority of held-for-trading equities are held to
support products where investment returns are passed through to policyholders, hence equity market movements are largely offset by
changes in actuarial liabilities. Stocks not supporting our actuarial liabilities are generally designated as available-for-sale. Changes in
fair value of available-for-sale stocks are recorded to Unrealized gains and (losses) on available-for-sale assets within OCI in our
Consolidated Statements of Comprehensive Income.
Purchases and sales of stocks are recognized or derecognized in our Consolidated Balance Sheets on their trade dates, which are the
dates that we commit to purchase or sell the stock.
Realized gains and losses on the sale of available-for-sale stocks are reclassified from accumulated OCI and recorded as Net gains
(losses) on available-for-sale assets in our Consolidated Statements of Operations. Since held-for-trading stocks are measured at fair
value, realized gains and losses are included along with unrealized gains and losses in Change in fair value of held-for-trading assets
Notes to the Consolidated Financial Statements Sun Life Financial Inc. Annual Report 2010 83