Sun Life 2010 Annual Report Download - page 88

in our Consolidated Statements of Operations. Dividends received on both held-for-trading and available-for-sale stocks are recorded
as Other net investment income (loss) in our Consolidated Statements of Operations.
All equity instruments in an unrealized loss position are reviewed quarterly to determine if objective evidence of impairment exists.
Objective evidence of impairment for an investment in an equity instrument includes, but is not limited to, the financial condition and
near-term prospects of the issuer, including information about significant changes with adverse effects that have taken place in the
technological, market, economic or legal environment in which the issuer operates that may indicate that the carrying amount will not
be recovered, and a significant or prolonged decline in the fair value of an equity instrument below its cost. If, as a result of this review,
the security is determined to be other-than-temporarily impaired, it is written down to its fair value. When this occurs, the loss
accumulated in OCI is reclassified to Net gains (losses) on available-for-sale assets in our Consolidated Statements of Operations.
Derivative financial instruments
Derivative financial instruments are required to be classified as held-for-trading unless designated as a hedge for accounting purposes.
We are required to identify derivatives embedded in other contracts unless the host contract is an insurance policy issued by us.
Embedded derivatives identified are bifurcated from the host contract if the host contract is not already measured at fair value, with
changes in fair value recorded to income (such as held-for-trading assets), if the economic characteristics and risks of the embedded
derivative are not closely related to the economic characteristics and risks of the host contract and if a separate instrument with the
same terms as the embedded derivative would meet the definition of a derivative. We chose a transition date of January 1, 2003 for
embedded derivatives and, therefore, are only required to account separately for those embedded derivatives in hybrid instruments
issued, acquired or substantially modified after that date.
All derivatives, including derivatives designated as hedges for accounting purposes and embedded derivatives, are recorded in our
Consolidated Balance Sheets at fair value. Derivatives with a positive fair value are recorded as Derivative assets while derivatives
with a negative fair value are recorded as Derivative liabilities. The accounting for the changes in fair value of derivatives depends on
whether or not they are designated as hedges for accounting purposes.
Derivatives not designated as accounting hedges (“derivative investments”) and embedded derivatives
Derivative investments and embedded derivatives are recorded in our Consolidated Balance Sheets at fair value with interest income
earned and paid and changes in fair value recorded to Income (loss) from derivative investments in our Consolidated Statements of
Operations.
Derivatives designated as hedges for accounting purposes
Hedge accounting is applied to certain derivatives to reduce income statement volatility, in accordance with risk management objectives. All
derivatives designated as hedges for accounting purposes are documented at inception and hedge effectiveness is assessed on a quarterly
basis. The accounting for the change in fair value of these derivatives depends on the hedge designation for accounting purposes.
Fair value hedges
Certain interest rate swaps, cross currency swaps and equity forwards are designated as hedges of the interest rate, foreign currency
or equity exposures associated with available-for-sale assets. Changes in fair value of the derivatives are recorded to Other net
investment income (loss) in our Consolidated Statements of Operations. The change in fair value of these available-for-sale assets
related to the effective portion of the hedged risk is recorded in Other net investment income (loss) to offset the change in fair value on
the hedging derivatives. As a result, ineffectiveness, if any, is recognized in Other net investment income (loss). Interest income earned
and paid on the available-for-sale assets and swaps in the fair value hedging relationships are also recorded to Other net investment
income (loss).
Cash flow hedges
Certain equity forwards are designated as cash flow hedges of the anticipated payments of awards under certain stock-based
compensation plans. The difference between the forward price and the spot price of these forwards is excluded from the assessment of
hedge effectiveness and is recorded in Other net investment income (loss) in our Consolidated Statements of Operations. Changes in
fair value based on spot price changes are recorded to OCI, with the remaining changes in fair value recorded to Other net investment
income (loss). A portion of the amount included in accumulated OCI related to these forwards is reclassified to Operating expenses in
our Consolidated Statements of Operations as the liability is accrued for the stock-based compensation awards over the vesting period.
All amounts recorded to or from OCI are net of related taxes.
Net investment hedges
We use currency swaps and/or forwards to reduce foreign exchange fluctuations associated with certain foreign currency investment
financing activities. Changes in fair value of these swaps and forwards, along with interest earned and paid on the swaps, are recorded
to the Unrealized foreign currency gains (losses), in OCI, offsetting the respective exchange gains or losses arising from the underlying
investments. All amounts recorded to or from OCI are net of related taxes. If the hedging relationship is terminated, amounts deferred
in accumulated OCI continue to be deferred until there is a reduction in our net investment in the hedged foreign operation resulting
from a capital transaction, dilution or sale of all or part of the foreign operation.
84 Sun Life Financial Inc. Annual Report 2010 Notes to the Consolidated Financial Statements