Sun Life 2010 Annual Report Download - page 37

In reporting periods after the Transition Date, the change in investment income on these invested assets and property and equipment
will consist of rental income, depreciation expense, mark to market gains or losses and realized gains or losses. This change in income
will be substantially offset by the change in insurance contract liabilities where the assets support those liabilities.
4. Remeasurement of Insurance Contracts (Mandatory)
Canadian GAAP IFRS
Insurance contracts are determined in accordance with accepted
actuarial practice and any requirements of OSFI. The valuation of
these contract liabilities is consistent with the Canadian Asset
Liability Method (“CALM”).
Under IFRS, contract classification determines the accounting
and measurement basis. Our existing life, health and annuity
policies will be classified as either insurance contracts,
investment contracts or service contracts under IFRS. The
majority of our general fund contracts will retain their
classification as insurance contracts under IFRS (representing
more than 90% of the Canadian GAAP insurance liabilities).
The CALM method of valuation of insurance contracts satisfies
the IFRS 4 requirements until the adoption of a
comprehensive new standard on insurance contracts, which is
expected to be applicable no earlier than 2013.
Under Canadian accepted actuarial practice, the value of the insurance contract liabilities is determined by reference to the carrying
value of the assets supporting those liabilities. As a result, for assets supporting insurance contracts, the impact to equity from asset
measurement differences between Canadian GAAP and IFRS, as noted in 3 above, is significantly offset by the associated adjustment
to insurance contract liabilities.
5. Consolidation of Special Purpose Entities (Mandatory)
Canadian GAAP IFRS
Consolidation of an entity is based on one of two models, the
variable interests model and the voting interests model. Under
the variable interests model, entities are evaluated as variable
interest entities based on their equity investment at risk. If an
entity is not within the scope of the variable interests model, then
it is analyzed using the voting interests model, being the
continuing power to govern the financial and operating policies
of an entity.
Consolidation under IFRS is based on control which is defined
as the power to govern the financial and operating policies of
an entity so as to obtain benefits from its activities. A special
purpose entity (“SPE”) is an entity created to accomplish a
narrow and well-defined objective. The determination of
control includes an analysis of the risks and rewards
associated with an SPE.
IFRS requires the consolidation of certain securitized off-balance sheet structures, which were not consolidated under Canadian
GAAP. These include collateralized mortgage obligations, collateralized debt obligations and synthetic collateralized debt obligations,
which have been recorded as assets on the balance sheet, with an offsetting liability. The retained interest in these special purpose
entities was recorded at fair value under Canadian GAAP whereas certain consolidated balances under IFRS are measured at
amortized cost, resulting in an adjustment to equity.
Reported Net Income
The key impacts on our net income under IFRS is set out below. These items do not represent a complete list of all changes that will
occur as a result of our transition to IFRS. These items have been identified, analyzed and represent our estimate of the impacts to our
net income based on current policy choices. These estimates and current policy choices may be subject to change until the issuance of
our 2011 Annual Consolidated Financial Statements.
Share-based Compensation
Canadian GAAP IFRS
Share-based payment awards issued by MFS that are based on
their own shares are accounted for as equity-settled share-based
payments. Compensation expense is determined based on the
fair value of the awards at the date of grant. Employees are only
able to request the repurchase of their shares by MFS after a
specified holding period, the length of which was sufficient for the
awards to be accounted for as equity settled share-based
payment awards.
Share-based payment awards issued by MFS that are based
on their own shares are required to be accounted for as cash
settled share-based payment awards under IFRS 2, Share-
based Payments. The vested and unvested awards, as well as
the shares that have been issued under these plans, are
recognized as liabilities because employees have the right to
request the repurchase of their shares by MFS. The liabilities
are measured at fair value at each reporting period until they
are vested, exercised and repurchased by MFS.
The current Canadian GAAP basis provides a comparable compensation expense between reporting periods because the expense is
fixed at the date a grant is made. The expense under IFRS will vary with the change in fair value, if any, of the share-based awards and
underlying shares, thereby increasing net income volatility. The movement in fair value of both the underlying shares and the share-
based payment awards at MFS are influenced by a number of factors including the number of share-based awards outstanding, the
financial performance of MFS and changes in option values of MFS shares as determined by a Black-Scholes option-pricing model.
Based on the number of awards granted, exercised and vested, as well as an appreciation of MFS shares of 4% per quarter, the
additional compensation expense that would be recorded under IFRS would be approximately $20 – $25 million per quarter.
Management’s Discussion and Analysis Sun Life Financial Inc. Annual Report 2010 33