Q4 - Power Corporation of Canada

POWER CORPORATION OF CANADANOTE 2 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)Investments are deemed to be impaired when there is no longer reasonable assurance of timely collection of thefull amount of the principal and interest due. The fair value of an investment is not a definitive indicator ofimpairment, as it may be significantly influenced by other factors, including the remaining term to maturity andliquidity of the asset. However, market price must be taken into consideration when evaluating impairment.For impaired mortgages and other loans, and bonds classified as loans and receivables, provisions are establishedor impairments recorded to adjust the carrying value to the net realizable amount. Wherever possible the fairvalue of collateral underlying the loans or observable market price is used to establish net realizable value. Forimpaired available‐for‐sale bonds, recorded at fair value, the accumulated loss recorded in the investmentrevaluation reserves is reclassified to net investment income. Impairments on available‐for‐sale debt instrumentsare reversed if there is objective evidence that a permanent recovery has occurred. All gains and losses on bondsclassified or designated as fair value through profit or loss are already recorded in earnings, therefore, areduction due to impairment of these assets will be recorded in earnings. As well, when determined to beimpaired, contractual interest is no longer accrued and previous interest accruals are reversed.Fair value movement on the assets supporting insurance contract liabilities is a major factor in the movement ofinsurance contract liabilities. Changes in the fair value of bonds designated or classified as fair value throughprofit or loss that support insurance contract liabilities are largely offset by corresponding changes in the fairvalue of liabilities except when the bond has been deemed impaired.TRANSACTION COSTSTransaction costs are expensed as incurred for financial instruments classified or designated as fair valuethrough profit or loss. Transaction costs for financial assets classified as available for sale or loans andreceivables are added to the value of the instrument at acquisition and taken into net earnings using the effectiveinterest method. Transaction costs for financial liabilities classified as other than fair value through profit or lossare deducted from the value of the instrument issued and taken into net earnings using the effective interestmethod.INVESTMENTS IN JOINTLY CONTROLLED CORPORATIONS AND ASSOCIATESJointly controlled corporations are all entities in which unanimous consent is required over the entity’smanagement and operating and financial policy. Associates are all entities in which the Corporation exercisessignificant influence over the entity’s management and operating and financial policy, without exercising control.Investments in jointly controlled corporations and associates is accounted for using the equity method. The sharein net earnings of the jointly controlled corporations and associates is recognized in the statement of earnings,the share in other comprehensive income of the jointly controlled corporations and associates is recognized inthe statement of other comprehensive income and the change in equity is recognized in the statement of changesin equity.LOANS TO POLICYHOLDERSLoans to policyholders are shown at their unpaid principal balance and are fully secured by the cash surrendervalues of the policies. The carrying value of loans to policyholders approximates fair value.REINSURANCE CONTRACTSLifeco, in the normal course of business, is both a user and a provider of reinsurance in order to limit thepotential for losses arising from certain exposures. Assumed reinsurance refers to the acceptance of certaininsurance risks by Lifeco underwritten by another company. Ceded reinsurance refers to the transfer ofinsurance risk, along with the respective premiums, to one or more reinsurers who will share the risks.A 40POWER CORPORATION OF CANADA