Sun Life 2012 Annual Report Download - page 97

Collateral
Cash received (pledged) as collateral is recognized (derecognized) in our Consolidated Statements of Financial Position with
corresponding amounts recognized in Other liabilities (Other assets), respectively. All other types of assets received (pledged) as
collateral are not recognized (derecognized) in our Consolidated Statements of Financial Position.
Derivative Financial Instruments
All derivative financial instruments are recorded at fair value in our Consolidated Statements of Financial Position. 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 a derivative instrument depends on whether or not it is designated as a hedging
instrument for accounting purposes. Changes in fair value of derivatives that are not designated as hedging instruments for accounting
purposes, which are defined as derivative investments, and embedded derivatives that are bifurcated are recorded in Change in fair
value through profit or loss assets and liabilities in our Consolidated Statements of Operations. Income earned or paid on these
derivatives is recorded in Interest and other investment income in our Consolidated Statements of Operations. Hedge accounting is
applied to certain derivatives to reduce income statement volatility. When certain qualification criteria are met, hedge accounting
recognizes the offsetting effects of hedging instruments and hedged items in income or defers the effective portion of changes in fair
value of hedging instruments in OCI until there is a recognition event, such as the occurrence of a forecasted transaction or the
disposal of a net investment in a foreign subsidiary. All hedging relationships are documented at inception and hedge effectiveness is
assessed on a quarterly basis.
Fair Value Hedges
Certain interest rate swaps and foreign currency forwards are designated as fair value hedges of the interest rate or foreign exchange
rate risks associated with AFS assets. Changes in fair value of the derivatives are recorded in Interest and other investment income in
our Consolidated Statements of Operations. The change in fair value of the AFS assets related to the hedged risk is reclassified from
OCI to income. As a result, ineffectiveness, if any, is recognized in income to the extent that changes in fair value of the derivatives and
AFS assets do not offset. Interest income earned and paid on the AFS assets and swaps in the fair value hedging relationships are
recorded in Interest and other investment income in the Consolidated Statements of Operations.
Cash Flow Hedges
Certain equity forwards are designated as cash flow hedges of the anticipated payments of awards under certain share-based payment
plans. Changes in fair value of these forwards based on spot price changes are recorded to OCI, with the spot-to-forward differential
and any ineffectiveness recognized in Interest and other investment income in the Consolidated Statements of Operations. A portion of
the amount included in OCI related to these forwards is reclassified to income as a component of operating expenses as the liabilities
are accrued for the share-based payment awards over the vesting periods. All amounts recorded to or from OCI are net of related
taxes.
Net Investment Hedges
Certain swaps and foreign currency denominated liabilities are designated as net investment hedges to reduce foreign exchange
fluctuations associated with certain net investments in funding of foreign subsidiaries. Changes in fair value of these instruments are
recorded to foreign exchange gains and losses in OCI, offsetting the respective foreign currency translation gains or losses arising from
the underlying net investments in foreign subsidiaries. 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 disposal or partial disposal of
our net investment in the hedged foreign subsidiary. Interest earned and paid on the swaps is recorded in Interest and other investment
income in the Consolidated Statements of Operations.
Embedded Derivatives
An embedded derivative is a component of a host contract that modifies the cash flows of the host in a manner similar to a derivative,
according to a specified interest rate, financial instrument price, foreign exchange rate underlying index or other variable. We are
required to separate embedded derivatives from the host contract, if an embedded derivative has economic and risk characteristics that
are not closely related to the host contract, meets the definition of a derivative, and the combined contract is not measured at fair value
with changes recognized in income. If an embedded derivative is separated from the host contract, it will be accounted for as a
derivative. For further details on embedded derivatives in insurance contracts, see the Insurance Contract Liabilities accounting policy
in this Note.
Investment Properties
Investment properties are real estate held to earn rental income or for capital appreciation. Properties held to earn rental income or for
capital appreciation that have an insignificant portion that is owner-occupied are classified as investment properties. Properties that do
not meet these criteria are classified as property and equipment. Expenditures related to ongoing maintenance of properties incurred
subsequent to acquisition are expensed. Investment properties are initially recognized at transaction price including transaction costs in
our Consolidated Statements of Financial Position. These properties are subsequently measured at fair value with changes in value
recorded to Change in fair value through profit or loss assets and liabilities in our Consolidated Statements of Operations. Fair value is
supported by market evidence, as assessed by qualified appraisers. All assets are appraised annually and reviewed quarterly for
material changes. External appraisals are obtained at least once every three years. In all cases, the valuation methodology used is a
recognized or accepted approach in accordance with the valuation standards of the Appraisal Institutes of Canada or the United States.
Other Invested Assets – Non-Financial Assets
Other invested assets also include non-financial assets such as investments in associates and joint ventures, which are accounted for
using the equity method. Investments in associates and joint ventures are initially recorded at cost. Subsequent adjustments to the
investment are made for our share of net income or loss and our share of OCI. Our share of net income is recorded in Interest and
other investment income in our Consolidated Statements of Operations and our share of OCI is recorded in our Consolidated
Statements of Comprehensive Income (Loss). Impairment losses on equity method investments are recognized when events or
changes in circumstances indicate that they are impaired. The impairment loss recognized is the difference between the carrying
amount and the recoverable amount.
Notes to Consolidated Financial Statements Sun Life Financial Inc. Annual Report 2012 95