Sun Life 2012 Annual Report Download - page 83

government, other foreign government and corporate debt securities, certain asset-backed securities, OTC derivatives, and certain
segregated and mutual fund units held for account of segregated fund holders.
Level 3: Fair value is based on valuation techniques that require one or more significant inputs that are not based on observable
market inputs. These unobservable inputs reflect our expectations about the assumptions market participants would use in pricing the
asset or liability. The types of financial instruments classified as Level 3 generally include certain asset-backed securities, certain other
invested assets, and investment contract liabilities.
As pricing inputs become more or less observable, assets are transferred between levels in the hierarchy. For a financial instrument
that transfers into level 3 during the reporting period, the entire change in fair value for the period is included in the level 3 reconciliation
schedule in Note 5 to our 2012 Consolidated Financial Statements. For transfers out of level 3 during the reporting period, the change
in fair value for the period is excluded from the level 3 reconciliation schedule in Note 5 to our 2012 Consolidated Financial Statements.
Transfers into level 3 occur when the inputs used to price the financial instrument lack observable market data and as a result, no
longer meet the level 1 or 2 criteria at the reporting date. During the current reporting period, transfers into level 3 were primarily related
to a significant reduction in the trading activity of certain types of securities, which resulted in a change to the pricing source. Transfers
out of level 3 occur when the pricing inputs become more transparent and satisfy the level 1 or 2 criteria at the reporting date. During
the current reporting period, transfers out of level 3 were primarily related to observable market data being available at the reporting
date, thus removing the requirement to rely on inputs that lack observability. If a financial instrument is transferred into and out of level
3 during the same period, it is not included in the level 3 reconciliation schedule in Note 5 to our 2012 Consolidated Financial
Statements. Total gains and losses in earnings and OCI are calculated assuming transfers into or out of level 3 occur at the beginning
of the period.
Transfers into and out of level 3 for financial assets were $373 million and $366 million, respectively, for the year ended December 31,
2012. The total amount of the net realized/unrealized gains/(losses) related to financial instruments transferred out of level 3 during the
period, which were excluded from the level 3 reconciliation, was $33 million.
Additional information on the fair value measurement of investments can be found in Note 5 of our 2012 Consolidated Financial
Statements.
Impairment
All financial assets are assessed for impairment at each reporting date. Financial assets are impaired and impairment losses are
incurred if, and only if, there is objective evidence of impairment as a result of one or more loss events that have an impact that can be
reliably estimated, on the estimated future cash flows of the asset. Objective evidence of impairment for debt securities generally
includes significant financial difficulty of the issuer, including actual or anticipated bankruptcy or defaults and delinquency in payments
of interest or principal. All equity instruments in an unrealized loss position are reviewed to determine if objective evidence of
impairment exists. Objective evidence of impairment for an investment in an equity instrument or other invested asset 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 or other invested asset below its cost. Objective evidence of impairment for mortgages and loans involves an assessment of
the borrower’s ability to meet current and future contractual interest and principal payments.
Additional information on the impairment of financial assets can be found in Notes 1 and 6 of our 2012 Consolidated Financial
Statements.
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the net identifiable tangible and intangible assets of
the acquired businesses. It is carried at original cost less any impairment subsequently incurred. Goodwill is assessed for impairment
annually or more frequently if events or circumstances occur that may result in the recoverable amount of a CGU falling below its
carrying value. A CGU is the smallest identifiable group of assets that generates cash inflows that are independent of cash inflows from
other groups of assets. The goodwill balances are allocated to either individual or groups of CGUs that are expected to benefit from the
synergies of the business combination. Goodwill impairment is quantified by comparing a CGU’s carrying values to their recoverable
amount, which is the higher of fair value less cost to sell and value in use. Impairment losses are recognized immediately and may not
be reversed in future periods.
At the end of 2011, we took an impairment charge in our Canadian Individual Wealth CGU. Although no further impairment charge is
required in 2012, the excess of fair value over carrying value for this CGU remains small as a result of low interest rates, market
volatility affecting the cost of hedging and uncertainty regarding future capital requirements for segregated funds. The goodwill
associated with this CGU was $160 million at December 31, 2012.
We had a carrying value of $3.9 billion in goodwill as at December 31, 2012. Additional information on goodwill can be found in Note 10
of our 2012 Consolidated Financial Statements.
Intangible Assets
Intangible assets consist of finite-life and indefinite-life intangible assets. Finite-life intangible assets are amortized on a straight-line
basis over varying periods of up to 40 years, and are charged through operating expenses. The useful lives of finite-life intangible
assets are reviewed annually, and the amortization is adjusted as necessary. Indefinite-life intangibles are not amortized, and are
assessed for impairment annually or more frequently if events or changes in circumstances indicate that the asset may be impaired.
Impairment is assessed by comparing the carrying values of the indefinite-life intangible assets to their recoverable amounts. If the
carrying values of the indefinite-life intangibles exceed their recoverable amounts, these assets are considered impaired, and a charge
for impairment is recognized in our Consolidated Statements of Operations. The fair value of intangible assets is determined using
various valuation models, which require management to make certain judgments and assumptions that could affect the fair value
estimates and result in impairment write-downs. In accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations, we have written down $6 million of intangibles and have recorded this charge in Discontinued Operations in 2012.
Management’s Discussion and Analysis Sun Life Financial Inc. Annual Report 2012 81