Sun Life 2012 Annual Report Download - page 96

insurance contract liabilities generally offset changes in the fair value of debt securities classified as FVTPL, except for changes that
are due to impairment. The majority of equity securities and other invested assets classified as FVTPL are held to support products
where investment returns are passed through to policyholders and therefore, changes in the fair value of those assets are significantly
offset by changes in insurance contract liabilities.
Available-for-Sale Financial Assets
Financial assets classified as AFS are recorded at fair value in our Consolidated Statements of Financial Position and transaction costs
are capitalized on initial recognition. Transaction costs for debt securities are recognized in income using the effective interest method,
while transaction costs for equity securities and other invested assets are recognized in income when the asset is derecognized.
Changes in fair value are recorded to unrealized gains and losses in OCI. For foreign currency translation, exchange differences
calculated on the amortized cost of AFS debt securities are recognized in income and other changes in carrying amount are recognized
in OCI. The exchange differences from the translation of AFS equity securities and other invested assets are recognized in OCI.
Interest income earned and dividends received are recorded in Interest and other investment income in our Consolidated Statements of
Operations. Net impairment losses and realized gains and losses on the sale of assets classified as AFS are reclassified from
accumulated OCI to Net gains (losses) on available-for-sale assets in the Consolidated Statements of Operations.
Loans and Receivables
Loans and receivables are carried at amortized cost using the effective interest method. Transaction costs for mortgages and 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 loans, interest income earned, and fee income, are recorded in Interest and other investment income in our
Consolidated Statements of Operations.
ii) Derecognition
A financial asset is derecognized when the contractual rights to its cash flows expire, or we have transferred our economic rights to the
asset and substantially all risks and rewards. In instances where substantially all risks and rewards have not been transferred or
retained, the assets are derecognized if the asset is not controlled through rights to sell or pledge the asset.
iii) Impairment
Financial assets are assessed for impairment on a quarterly basis. Financial assets are impaired and impairment losses are incurred if
there is objective evidence of impairment as a result of one or more loss events and that event has an impact on the estimated future
cash flows that can be reliably estimated. Objective evidence of impairment generally includes significant financial difficulty of the
issuer, including actual or anticipated bankruptcy or defaults and delinquency in payments of interest or principal or disappearance of
an active market for that financial asset. Objective evidence of impairment for an investment in an equity instrument or other invested
asset also 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.
Financial Assets at Fair Value Through Profit or Loss
Since financial assets classified as FVTPL are carried at fair value with changes in fair value recorded to income, any reduction in
value of the assets due to impairment is already reflected in investment income. However, the impairment of assets classified as
FVTPL generally impacts the change in insurance contract liabilities due to the impact of asset impairment on future cash flows.
Available-for-Sale Financial Assets
When there is objective evidence that a financial asset classified as AFS is impaired, the loss in accumulated OCI is reclassified to Net
gains (losses) on available-for-sale assets in our Consolidated Statements of Operations. Following impairment loss recognition, a debt
security continues to be carried at fair value with changes in fair value recorded in OCI, and it is assessed quarterly for further
impairment loss or reversal. Subsequent losses on an impaired equity security or other invested asset, including losses relating to
foreign currency changes, are reclassified from OCI to income in subsequent reporting periods until the asset is derecognized. Once an
impairment loss on a debt security classified as AFS is recorded to income, any reversal of impairment loss through income occurs
only when the recovery in fair value is objectively related to an event occurring after the impairment was recognized. Impairment losses
on an equity security or other invested asset classified as AFS are not reversed through income.
Loans and Receivables
If an impairment loss on an individual mortgage or loan has been incurred, the amount of the loss is measured as the difference
between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the asset’s original
effective interest rate. For collateralized financial assets, the present value of the estimated future cash flows reflects the cash flows
that may result from foreclosure less costs to sell,whether or not foreclosure is probable. If no evidence of impairment exists for an
individually assessed mortgage or loan, it is included in a group of loans with similar credit risk characteristics and collectively
assessed for impairment.
When an impairment loss has been incurred, the carrying amount of the asset is reduced through the use of an allowance account, and
the amount of the loss is recognized in income. If the impairment loss subsequently decreases and the decrease can be related
objectively to an event occurring after the initial impairment charge was recognized, the previous impairment charge is reversed by
adjusting the allowance account and the reversal is recognized in income. Interest income is recognized on impaired mortgages and
loans using the effective interest rate method and it is based on the estimated future cash flows used to measure the impairment loss.
Changes in the allowance account, other than write-offs net of recoveries, are charged against Interest and other investment income in
our Consolidated Statements of Operations. Write offs, net of recoveries, are deducted from the allowance account when there is no
realistic prospect of recovery, which is typically not before derecognition of the asset through foreclosure or sale.
94 Sun Life Financial Inc. Annual Report 2012 Notes to Consolidated Financial Statements