AdvAntAgeous
for everyone
AdvAntAgeous
for me
2013
financial review
DesjarDins
financial security
AdvAntAgeous
for PeoPLe
And BusInesses
Desjardins Financial Security meets the changing financial security needs of individuals and
businesses by offering a wide range of life and health insurance and retirement savings products
and services. Our employees and partners are committed to ensuring the satisfaction of all
Desjardins clients and caisse members. It is this spirit of cooperation that enables us to offer our
clients the products and services they need. That’s the Desjardins Financial Security advantage.
summary 1 2013 financial review desjardins financial security
Summary
DesjarDins Financial security ProFile
...3
Message FroM ManageMent
...4
Key achieveMents in 2013
...6
consoliDateD Financial stateMents
...9
Five-year suMMary
...68
corPorate inForMation
...69
note
this financial review reports mainly the financial results of desjardins financial security life assurance company (desjardins financial security or the company) for the year ended december 31, 2013. in the event of a discrepancy between the french and english texts, the french text will prevail.
version en Français
une version en français de cette revue financière peut être consultée sur le site internet de la compagnie ou commandée par écrit, par téléphone, par courriel ou par télécopie.
conseils en communication desjardins sécurité financière 200, rue des commandeurs lévis (Québec) G6v 6r2 téléphone : 418 838-7800, poste 7797 1 877 828-7800, poste 7797 courriel : [email protected] télécopieur : 418 833-5985 1 877 833-5985 site internet : desjardinsassurancevie.com
more than five million canadians rely on desjardins financial security every day to protect their financial security. desjardins financial security’s life and health insurance and retirement savings products and services are designed to meet the respective needs of both individuals and businesses.
In numbers
• 3,923 employees
• 9,083 representatives and brokers
• $36.7B in assets under management and administration
Our dIstrIbutIOn netwOrks
• desjardins caisses, with 246 financial security advisors dedicated exclusively to caisse clients and members
• desjardins financial security sales offices
• sfl and sfl investments financial centres (in Quebec)
• desjardins financial security independent network and desjardins financial security investments financial centres (in canada outside Quebec)
• Group plan representatives, actuarial consulting firms, brokers, and managing general agents (mGas) across canada
• desjardins business centres
• direct sales, both online and through our direct distribution centre
Our subsIdIarIes
• desjardins financial security investments inc. is a mutual fund investment and insurance brokerage firm. the firm provides access to the products of 18 canadian insurance manufacturers and over 100 manufacturers of mutual funds to affiliated representatives, financial security advisors and financial planners in our financial centres, as well as group savings plan representatives. • sigma assistel inc., a pioneer in canadian telephone assistance services, offers
the most diversified range of services in this area of activity, including travel, roadside (Desjardins Roadside Assistance), convalescence, legal identity-theft and identity-restauration assistance. sigma also offers employee assistance programs (eaP).
Our lOcatIOns
• Head office in lévis
• Offices in cities across canada, including vancouver, calgary, winnipeg, toronto, Ottawa, montreal, Quebec city, Halifax, and st. john’s
DeSjarDinS
Financial Security
1 the market data cited in this review is based on the most recent information published in reports by the Office of the superintendent of financial institutions and the autorité des marchés financiers, most
of which dates from december 31, 2012.
mOre than 100 years Of experIence
the result of mergers involving some 20 portfolios and
companies, including desjardins-laurentian life assurance
and the Imperial life assurance company of canada,
desjardins financial security boasts more than a century of
experience.
sOlId fOundatIOns
desjardins financial security is the life and health insurer of desjardins Group, the largest financial cooperative group in canada, which
employs more than 45,000 people and manages $212b in overall assets.
Our Industry rankInG
• 1st in Quebec
• 4th in canada
in terms of written premiums
1meSSage From
management
2013: an outStanDing year!
Monique F. leroux, c.m., fcPa, fca
Denis Berthiaume, fcia, fsa
we started 2013 with a new strategic plan and three new strategic priorities: service, growth and efficiency.
looking at the strength of our year-end results, it’s clear that our focus on these priorities and our related
business decisions have paid off. it’s also clear that our products and services truly speak to the needs of our
5 million clients across canada. Once again this past year, desjardins financial security has proved itself by
ranking among the top life and health insurers and financial services providers in the country.
Growth and financial strength were the hallmarks of desjardins financial security’s 2013 results, which
played a major role in the performance of desjardins Group as a whole. the company posted net income of
$382.0 million as at december 31, 2013, compared to $210.6 million in 2012. this 81.4% jump in profits
is primarily due to favourable market conditions throughout the year, positive claims experience and the
revision of certain actuarial assumptions. the return on shareholder equity was 21.9% versus 10.1% the
previous year.
satIsfIed clIents frOm cOast tO cOast
desjardins financial security remains the leading life and health insurer in Quebec and has climbed to
fourth place in canada. Our strong position proves that we are able to meet the diverse needs of our diverse
clientele across the country.
the key to our success is our people. Our dedicated teams are always working hard and looking for ways
to better meet our clients’ ever-changing needs. Our 2013 accomplishments in the area of life and health
insurance speak for themselves. there are the assistance services we offer free of charge to desjardins
members:
travel assistance and identity theft assistance. there are our insurance hybrids, which pair life
insurance with critical illness or long-term care advances—an industry first! we’ve introduced prescription
drug cost management strategies to boost the sustainability of our group insurance plans, and we’ve also
launched destinago.com, a website that offers travel insurance tips and advice.
the savings sector also had a great year. stand-out performers include our Guarantee advantage investment
product, which gives clients a wide range of return options. and then there’s our new sri (socially responsible
investment) retirement savings solution, which combines the meritas sri fund platform and desjardins
Global asset management funds for an ideal investment for small and mid-sized businesses.
stayInG On cOurse fOr Our clIents
customer satisfaction is the driving force behind our 2013–2016 strategic plan, and we firmly believe
that by staying focused on this priority, we will achieve our goals. By taking a client-centred approach to
everything we do, we will show our clients the advantage of doing business with desjardins.
we will also stay focused on our canada-wide accelerated growth plan. the success of this plan will depend
on the strength of our teams and the expansion of our distribution networks. we will also look for even
better and more efficient ways to run our existing networks and remaining alert to possible acquisitions
and partnerships. Our hard work in this area has already paid off: in 2013, we announced our planned
acquisition of the canadian operations of state farm. By the time the deal has gone through in january
2015, more than 500 agencies will have been added to our distribution network.
we can look back at our solid 2013 results as an achievement, but we can also see them as a challenge to
surpass ourselves in 2014, for our clients and for desjardins Group as a whole.
thanks tO Our teams, Our partners and all Of Our clIents!
we would like to thank our 13,000 employees, representatives and partners who made customer satisfaction
a priority in 2013. we are also grateful for the loyal support and valuable contributions of the officers of
desjardins Group and the members of our Board of directors.
last but not least, a sincere thank you to all our clients, including desjardins caisse members, for choosing
us. we will do our best to continue living up to your expectations in 2014!
Monique F. leroux, c.m., fcPa, fca chair of the Board, President and ceO desjardins Group
ceO, desjardins financial security
Denis Berthiaume, fcia, fsa President and chief Operating Officer desjardins financial security
messaGe frOm manaGement 5 2013 financial review desjardins financial security 4 2013 financial review desjardins financial security
our Key
acHieVementS
in 2013
GrOup Insurance
grouP anD Business insurance
• we started advising all our group insurance plan policyholders to limit drug reimbursements to the cost of the least expensive generic equivalent. this is an effective drug cost management strategy for both employees and employers, and it also helps ensure that group insurance plans remain sustainable. • we were the first insurer to sign an agreement with express scripts canada
for our insureds outside of Quebec. this agreement includes pharmacy benefit management and home delivery services for maintenance prescription medications.
• we added a section to the desjardins insurance website (desjardinslifeinsurance.com) that gives plan members tips about using drug insurance responsibly.
creDitor anD Direct insurance
• all individual desjardins members enjoy free access to Identity Theft Assistance and Travel Assistance (which also includes a three-day discount on Travel Insurance). these services are available as a preventive measure, in case of emergency, or to meet a specific need. Both services are available via a free mobile app, and we also have a team available by phone 24 hours a day, 7 days a week, to offer expert advice, coordination services and useful information.
• life and critical illness insurance coverages were added to Accord D Business
financing.
• we relaxed the Loan Insurance enrolment requirements for amounts between $250,000 and $350,000, and extended the validity of the insurability report from 6 to 12 months. these new rules simplify the enrolment process for both desjardins members and caisses.
• after the tragedy in lac-mégantic, we sent a team of claims and assistance experts to support grieving members, to help them through the benefit claims process and to provide answers to estate settlement questions.
• net IncOme Of $382.0 mIllIOn
• return On sharehOlder eQuIty
Of 21.9%
• In-fOrce Insurance up 3.9%
• $3.3 bIllIOn In net Insurance
premIums, an Increase Of 8.1%
• GrOup retIrement savInGs sales
up 145.3%, clearInG the bIllIOn
dOllar mark and endInG the year
at $1.04 bIllIOn
• IndIvIdual savInGs brOkeraGe
sales up 3.2%
• tOtal credIt wIth lOan Insurance
cOveraGe up 4.2%
• 6.8% Increase In assets under
manaGement and admInIstratIOn
tO $36.7 bIllIOn
• sIGnIfIcant GrOwth Of the
cOmpany’s capItalIzatIOn
• excellent fInancIal stabIlIty
IndIvIdual Insurance
inDiviDual insurance
• we introduced insurance hybrids that pair life insurance with critical illness or long-term care advances—an industry first.
• Product pricing adjustments were made to take into consideration the financial environment and the competition.
assurFinance For inDiviDuals
• we introduced the position of “advisor liaison” in the caisses to improve the quality of service we provide our members and clients.
• the Vision insurance contract was revised and the documentation rewritten in simpler, more accessible language
dIrect Insurance
• we launched destinago.com, an engaging new website that provides travel insurance tips and useful information to travellers of all kinds, from foodies to adventurers to dreamers.
savInGs
grouP retireMent savings
• four new investment solutions were added to the desjardins insurance line with the launch of desjardins Global asset management (dGam) funds. • we created a turnkey solution for small and mid-sized businesses interested
in socially responsible investing by combining the meritas sri fund platform with dGam funds. the solution is offered nationwide through Qtrade financial Group, in which desjardins Group acquired an interest in 2013.
• Pension plan participants can now use yourwaymobile.ca to securely monitor transactions, assets and returns from their smart phones.
• we established a partnership with Bâtirente, a retirement system created in 1987 by the csn (a Quebec trade union federation) that encompasses 354 groups and more than 22,000 plan participants.
• visits to our secure site for pension plan participants went up by 60%, and online transactions jumped by 23.9%
inDiviDual savings
• Our market-lined term investment product Guarantee Advantage now includes a new basket of securities in its Global Diversified category, comprising 20 international companies for solid industry and geographic diversification. • clients can choose a 3- or 5-year term for their Guarantee Advantage investment,
plus a range of short-term investment options.
• Business processes were harmonized for mGi, desjardins financial security investments (dfsi) and sfl investments. this was the last step in the process of integrating mGi financial, making it possible for advisors across the network to distribute desjardins products.
• desjardins funds were integrated to diversify the range of products available from networks outside of Quebec: desjardins financial security investments (dfsi) and desjardins financial security independent network (dfsin).
Other accOmplIshments
• we launched a multi-platform travel insurance application available for download on smartphones and tablets. travellers can turn to the app for help before they leave or while they’re away—from anywhere they go. it offers tips to help plan a worry-free vacation and deal with the unexpected should anything happen, and includes a medical assistance feature that travellers can personalize with their own medical information. this project was a joint effort between Group and Business insurance and direct Travel Insurance.
• efforts got underway on our planned acquisition of the canadian life and health insurance and mutual fund operations of state farm. • we announced our investment in the construction of canada’s
largest solar park. the Grand renewable solar Project will be located in Haldimand county, Ontario, and will generate an unprecedented 100 megawatts annually—enough to power 17,000 homes.
• Ongoing construction projects continue to revitalize the cité desjardins de la coopération in lévis and the complexe desjardins in montréal. • a desjardins financial security independent network (dfsin) financial
centre was opened in westminster, Ontario.
• results were published from a national study on work-life balance among employed caregivers, sponsored by desjardins insurance. the study shows that employed caregivers, particularly those from the so-called sandwich generation, are having a hard time balancing work and caregiving responsibilities, which is having a negative impact on their health. desjardins insurance will use the findings of the study, led by professors linda duxbury from carleton university and christopher Higgins from the university of western Ontario, to design services to meet the needs of caregivers.
• the third edition of ‘’forum 360°‘’ conference in toronto and montréal, which addressed mental health issues in young workers, a population that is showing signs of burnout earlier and earlier in their careers. • dalbar1 gave top marks to our group pension plan statement in several
categories: look and feel, level of detail, quality of personalized messaging, and sources for up-to-date account information.
• the ceB2 retirement services leadership council used our group
retirement savings case study to show how new types of communication are being used in social media—by customer demand—to enhance the user experience and respond to their changing needs.
• a total of $50,000 was awarded to three charitable organizations as part of the ‘’if you could choose campaign‘’. more than 150,000 votes were cast throughout the campaign, which was a tie-in with the new cancer coverage added to loan insurance.
• we won 15 awards at the insurance and financial communication association (ifca) annual awards competition—a record for desjardins financial security. the competition recognizes excellence in marketing, public relations and communications in the insurance and financial services industry.
1 a leading u.s. market research firm founded in 1976, with offices in toronto since 1994, dalbar is
committed to raising the standards of excellence in the financial services industry.
2 ceB is a grouping of 32 of the biggest pension plan providers in north america.
Our key acHievements in 2013 7 2013 financial review desjardins financial security 6 2013 financial review desjardins financial security
table oF contentS
resPonsiBility For Financial rePorting
...10
inDePenDent auDitor’s rePort
...11
aPPointeD actuary’s rePort
...12
consoliDateD Financial stateMents
consolidated statement of net income ...13
consolidated statement of comprehensive income ...14
consolidated Balance sheet ...15
consolidated statement of changes in equity ...16
consolidated statement of cash flows ...17
notes to the consoliDateD Financial stateMents
note 1 – General information ...18
note 2 – significant accounting policies ...18
note 3 – future accounting changes ...28
note 4 – changes in accounting policies ...29
note 5 – investments ...31
note 6 – interests in other entities ...35
note 7 – derivative financial instruments and hedging activities ...36
note 8 – fair value of financial instruments ...37
note 9 – Offsetting of financial assets and liabilities ...40
note 10 – reinsurance assets ...42
note 11 – fixed assets ...42
note 12 – Others assets ...43
note 13 – segregated funds ...43
note 14 – insurance contract liabilities ...46
note 15 – investment contract liabilities ...49
note 16 – Other liabilities ...50
note 17 – defined benefit plan net liabilities...51
note 18 – long-term debt ...55
note 19 – share capital and liabilities for preferred shares ...56
note 20 – accumulated other comprehensive income...56
note 21 – income taxes...57
note 22 – capital management ...58
note 23 – financial instrument risk management ...59
note 24 – commitments, guarantees and contingencies...63
note 25 – leases ...64
note 26 – related party transactions ...65
note 27 – Operating expenses ...67
note 28 – subsequent event...67
reSponSibility For
Financial reporting
the consolidated financial statements of desjardins financial security life assurance company (the company) and the information contained in its financial review were prepared by the company’s management. these consolidated financial statements were prepared in accordance with the international financial reporting standards described in the accompanying notes and contain amounts that are based on management’s best judgment within reasonable limits of materiality.
to discharge their responsibility for the reliability and integrity of the financial data, management has established systems to ensure strict control over accounting records, operations, and the various systems used.
the company’s Board of directors approves the information contained in the financial review and, as part of its responsibilities, oversees management’s preparation of the financial statements and maintenance of appropriate internal control systems. the Board of directors exercises this responsibility primarily through its audit and risk management committee, the members of which are neither members of management nor employees of the company. the audit and risk management committee meets regularly with management, the appointed actuary, the internal auditor and the independent auditor. the independent auditor’s representatives may, if they deem it necessary, request meetings with the audit and risk management committee. the Board of directors, through its investment committee and audit and risk management committee, approves the company’s investment policies and monitors the activities governed by these policies. the Board of directors also oversees the company’s transactions with related parties and with persons related to its directors and officers through its ethics committee, to which all major transactions of this nature must be submitted for approval.
in accordance with sound corporate governance practices, the company has a governance policy. the Board of directors has mandated the executive committee to oversee governance. this committee is responsible for evaluating the implementation of the mechanisms required to ensure efficient and effective governance.
the appointed actuary, who is appointed by the Board of directors, is responsible for performing a yearly valuation of the company’s policyholder liabilities in accordance with the standards of the canadian institute of actuaries and the requirements of the act respecting insurance (Quebec) and for reporting thereon to the company’s policyholders and shareholder. to this end, the appointed actuary may ask to meet with the audit and risk management committee as well as the Board of directors. to perform this valuation, the appointed actuary makes assumptions as to future interest, mortality, morbidity and lapse rates, claims experience, inflation, reinsurance recoveries, expenses and other contingencies, by taking into consideration the circumstances of the company. in the appointed actuary’s report, the scope of the valuation is defined and an opinion is issued. each year, the appointed actuary is required to perform an analysis of the company’s financial position and prepare a report for the Board of directors. this analysis tests the company’s capital adequacy for a five-year period, under adverse economic and business conditions.
the independent auditor, deloitte s.e.n.c.r.l., who is appointed by the shareholder, is responsible for auditing the company’s consolidated financial statements and has full and unrestricted access to the audit and risk management committee’s meetings, as well as to any information required in order to express an audit opinion on these financial statements.
the Autorité des marchés financiers (amf) is empowered to audit the company’s compliance with the act respecting insurance (Quebec), which aims primarily to protect policyholder interests and ensure companies maintain a sound financial position.
Denis Berthiaume François Drouin
President and chief Operating Officer senior vice-President, finance lévis, february 14, 2014
indePendent auditOr’s rePOrt 11 2013 financial review desjardins financial security
inDepenDent
auDitor’S report
to the Policyholders and shareholder of desjardins financial security life assurance company
we have audited the accompanying consolidated financial statements of desjardins financial security life assurance company, which compose the consolidated Balance sheets as at december 31, 2013 and 2012 and january 1, 2012, and the consolidated statements of net income, comprehensive income, changes in equity and cash flows for the years ended december 31, 2013 and 2012, as well as a summary of the significant accounting policies and other explanatory information.
manaGement’s respOnsIbIlIty fOr the cOnsOlIdated fInancIal statements
management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with international financial reporting standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
audItOr’s respOnsIbIlIty
Our responsibility is to express an opinion on the consolidated financial statements based on our audits. we have conducted our audits in accordance with canadian generally accepted auditing standards. those standards require that we comply with ethical requirements conduct and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatements.
an audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. the selected procedures depends on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements could contain material misstatements, whether due to fraud or error. in making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. an audit also includes evaluating the appropriateness of evaluating the accounting policies used and the reasonableness of the accounting estimates made by management, as well as the overall presentation of the consolidated financial statements.
we believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
OpInIOn
in our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of desjardins financial security life assurance company as at december 31, 2013 and 2012 and as at january 1, 2012, and its financial performance and its cash flows for the years ended december 31, 2013 and 2012, in accordance with international financial reporting standards.
Quebec city, canada february 14, 2014
1 cPa auditor, ca, public accountancy permit no. a117569 10 2013 financial review desjardins financial security
appointeD actuary’S report
to the Policyholders, shareholder and directors of Desjardins Financial security life assurance company
i have made valuations of the policy liabilities and reinsurance recoverables of Desjardins Financial security life assurance company for its consolidated Balance sheet as at december 31, 2013 and 2012, and their change in the consolidated statement of net income for the years ended december 31, 2013 and 2012, in accordance with accepted actuarial practice, including selection of appropriate valuation assumptions and methods.
in my opinion, the amount of the company’s policy liabilities, net of reinsurance recoverables, makes an appropriate provision for all policyholder obligations and the consolidated financial statements fairly present the results of these valuations.
camil lévesque
fellow, canadian institute of actuaries lévis, february 14, 2014
cOnsOlidated statement Of net incOme 13 2013 financial review desjardins financial security
conSoliDateD Statement oF net income
for the years ended december 31(in millions of canadian dollars)
notes 2013 restated (note 4) 2012 revenue insurance premiums $ 3,509.1 $ 3,265.9 annuity premiums 306.3 266.3 ceded premiums (152.1) (161.7) net premiums 3,663.3 3,370.5
net investment income 5d (400.0) 785.7
Other revenue 272.4 254.8
3,535.7 4,411.0
expenses
expenses attributable to policyholders
Benefits 2,727.1 2,516.0
ceded benefits (124.6) (79.6)
change in actuarial liabilities 14e (905.7) 577.6
change in ceded actuarial liabilities 14e 113.2 (10.3)
dividends and experience refunds 135.3 110.0
interest on benefits and deposits 9.4 10.3
1,954.7 3,124.0 commissions 271.9 270.3 Operating expenses 27 741.6 684.6 Premium taxes 79.5 79.2 3,047.7 4,158.1 operating income 488.0 252.9 income taxes 21 106.0 42.3 net income $ 382.0 $ 210.6
allocation oF net incoMe
attributable to non-controlling interests $ 1.1 $ 3.7
attributable to participating policyholders (1.9) 49.5
attributable to the shareholder 382.8 157.4
net income $ 382.0 $ 210.6
the accompanying notes are an integral part of the consolidated financial statements. 12 2013 financial review desjardins financial security
conSoliDateD Statement
oF compreHenSiVe income
for the years ended december 31(in millions of canadian dollars)
2013
restated (note 4)
2012
net income $ 382.0 $ 210.6
other comprehensive income
item that will not be reclassified to the consolidated statement of net income
revaluation of defined benefit plan net liabilities 30.6 (20.2)
income taxes (8.2) 5.5
22.4 (14.7)
items that will be reclassified to the consolidated statement of net income
unrealized gains on assets available for sale 10.7 43.7
income taxes 21.9 (2.4)
32.6 41.3
reclassification of net gains on assets available for sale included in net income (29.7) (21.8)
income taxes 2.9 5.0
(26.8) (16.8)
total other comprehensive income 28.2 9.8
comprehensive income $ 410.2 $ 220.4
allocation oF coMPrehensive incoMe
attributable to non-controlling interests $ 1.1 $ 3.7
attributable to participating policyholders 2.7 48.6
attributable to the shareholder 406.4 168.1
comprehensive income $ 410.2 $ 220.4
cOnsOlidated Balance sHeet 15 2013 financial review desjardins financial security
conSoliDateD balance SHeet
(in millions of canadian dollars)notes 2013
restated (note 4)
2012
December 31 december 31 january 1
assets
investments 5
cash and money market securities $ 374.1 $ 323.4 $ 497.2
Bonds 10,411.1 10,699.6 10,258.6
mortgage and business loans 2,942.8 2,922.5 2,959.9
shares 1,643.0 1,233.0 1,089.1
Policy loans 108.5 107.1 109.0
investment property 1,407.8 1,386.3 1,428.5
investments accounted for using the equity method 269.2 248.7 1.1 securities borrowed or purchased under reverse repurchase agreements 538.3 384.3 435.2
derivative financial instruments 7 79.0 215.2 212.7
Other loans and investments 144.8 284.1 484.5
17,918.6 17,804.2 17,475.8
Other assets 12 652.8 585.5 569.6
reinsurance assets 10 596.1 715.9 712.7
deferred tax assets 21 4.9 4.7 3.5
fixed assets 11 108.7 111.9 79.4
segregated fund net assets 13 7,260.2 6,075.1 5,361.5
total assets $ 26,541.3 $ 25,297.3 $ 24,202.5
liaBilities
insurance contract liabilities
actuarial liabilities 14 $ 13,117.0 $ 14,023.2 $ 13,446.1
Provisions for benefits, dividends and experience refunds 370.0 322.4 330.5
Policyholder deposits 475.6 464.8 489.5
investment contract liabilities 15 45.7 48.5 49.4
14,008.3 14,858.9 14,315.5
commitments related to securities lent or sold under repurchase agreements 924.4 735.3 1,064.4
derivative financial instruments 7 155.8 62.6 87.2
Other liabilities 16 836.8 594.9 701.3
deferred tax liabilities 21 193.4 154.7 114.9
defined benefit plan net liabilities 17 179.7 241.8 241.6
long-term debt 18 23.0 24.0 36.9
Preferred shares liabilities 19 700.0 700.0 475.0
segregated fund net liabilities 13 7,260.2 6,075.1 5,361.5
total liabilities $ 24,281.6 $ 23,447.3 $ 22,398.3
equity
Policyholders’ interest $ 289.5 $ 286.8 $ 238.0
shareholder’s interest 1,955.0 1,548.6 1,554.3
Policyholders’ and shareholder’s interest 2,244.5 1,835.4 1,792.3
non-controlling interests 15.2 14.6 11.9
total equity $ 2,259.7 $ 1,850.0 $ 1,804.2
total liabilities and equity $ 26,541.3 $ 25,297.3 $ 24,202.5
the accompanying notes are an integral part of the consolidated financial statements.
On behalf of the Board of directors,
yvon vinet serge hamelin
chair of the Board of directors chair of the audit and risk management committee
conSoliDateD Statement
oF cHangeS in equity
for the year ended december 31 (in millions of canadian dollars)
retained earnings accumulated other comprehensive income (note 20) Participating policyholders’ and shareholder’s interest share capital (note 19) Partici-pating policy-holders share-holder Partici-pating policy-holders share-holder Partici-pating policy-holders share-holder non-controlling interest Balance as at january 1, 2012 (note 4) $ 307.0 $ 221.0 $ 1,130.1 $ 20.2 $ 145.4 $ 241.2 $ 1,582.5 $ 11.9
impacts of accounting policy changes
(note 4) (3.2) (28.2) — — (3.2) (28.2) —
restated balance as at january 1, 2012 $ 307.0 $ 217.8 $ 1,101.9 $ 20.2 $ 145.4 $ 238.0 $ 1,554.3 $ 11.9
restated 2012 net income (note 4) 49.5 157.4 49.5 157.4 3.7
Other comprehensive income (note 4) (1.4) (13.3) 0.5 24.0 (0.9) 10.7 — related party transactions adjustment
(note 26) 0.2 1.2 0.2 1.2 —
dividends — (175.0) — (175.0) —
net distributions (1.0)
restated balance as at December 31, 2012 $ 307.0 $ 266.1 $ 1,072.2 $ 20.7 $ 169.4 $ 286.8 $ 1,548.6 $ 14.6
net income for 2013 (1.9) 382.8 (1.9) 382.8 1.1
Other comprehensive income 2.6 19.8 2.0 3.8 4.6 23.6 —
net distributions (0.5)
Balance as at December 31, 2013 $ 307.0 $ 266.8 $ 1,474.8 $ 22.7 $ 173.2 $ 289.5 $ 1,955.0 $ 15.2
cOnsOlidated statement Of casH flOws 17 2013 financial review desjardins financial security
conSoliDateD Statement oF caSH FlowS
for the years ended december 31(in millions of canadian dollars)
2013
restated (note 4)
2012
oPerating activities
Operating income $ 488.0 $ 252.9
income taxes received (paid) 3.9 (53.8)
items not affecting cash
change in net actuarial liabilities (792.5) 567.3
Gains, losses and amortization recognized in investment income 779.9 (89.4)
change in fair value of investment property (44.2) (39.2)
amortization and other 16.3 13.6
451.4 651.4 change in operating assets and liabilities
assets and liabilities held for trading and assets designated as at fair value through profit or loss (185.1) (500.9)
Other 80.2 (69.1)
cash flows from operating activities 346.5 81.4
investing activities
sales, maturities and repayments
shares and bonds available for sale 873.5 798.1
investment property and property held for administrative purposes and fixed assets 50.4 0.7 Purchases
shares and bonds available for sale (1,363.9) (808.9)
investment property and property held for administrative purposes and fixed assets (53.8) (126.1) net change in money market securities maturing in more than three months 7.0 66.9 net change in mortgage loans, policy loans and business loans (55.9) 39.7
net change in other loans 143.1 202.1
distribution received from a joint venture (note 6) 14.7 —
investments in an associate (17.5) —
acquisition of an interest in a joint venture — (71.0)
Other (4.4) (3.4)
cash flows from investing activities (406.8) 98.1
Financing activities
issuance of class e shares (note 19) — 225.0
dividends paid to common shareholder — (175.0)
net change in commitments related to securities lending transactions and securities sold short 151.7 (296.9)
decrease in long-term debt (1.1) (11.4)
capital injection into pension plan (note 17) (32.0) (27.2)
Other (0.6) (0.9)
cash flows from financing activities 118.0 (286.4)
increase (decrease) in cash and cash equivalents 57.7 (106.9)
cash and cash equivalents at beginning 225.6 332.5
cash and cash equivalents at end $ 283.3 $ 225.6
composition of cash and cash equivalents
cash $ 78.1 $ 40.0 money market securities maturing in less than three months 205.2 185.6
$ 283.3 $ 225.6
Other cash flow information
interest paid during the year $ 29.9 $ 25.8
interest received during the year $ 453.2 $ 450.7
dividends received during the year $ 41.7 $ 35.9
the accompanying notes are an integral part of the consolidated financial statements. 16 2013 financial review desjardins financial security
noteS to tHe conSoliDateD
Financial StatementS
(tabular amounts are in millions of canadian dollars)
note 1
General InfOrmatIOn
desjardins financial security life assurance company (the company) is incorporated under the act respecting insurance (Quebec) and is governed by the Business corporations act (Quebec). the company’s head office is located at 200 rue des commandeurs, lévis, (Quebec), G6v 6r2, canada.
the parent company, desjardins financial corporation inc., is under the ultimate control of the desjardins caisses, through the fédération des caisses desjardins du Québec (the federation).
the company designs, markets and distributes individual and group insurance and savings products.
On february 14, 2014, the company’s Board of directors adopted and approved these consolidated financial statements for the year ended december 31, 2013.
note 2
sIGnIfIcant accOuntInG pOlIcIes
statement of compliance
the company’s consolidated financial statements were prepared in accordance with international financial reporting standards (ifrs) published by the international accounting standards Board (iasB) as at december 31, 2013. this framework includes ias and ifrs accounting standards and interpretations by the standing interpretations committee and the international financial reporting interpretations committee, issued by the iasB as at december 31, 2013, and applicable as of 2013.
certain figures from the previous year have been reclassified to conform to the presentation of the consolidated financial statements for the current year. these reclassifications will have no impact on the company’s profit or loss or total assets and liabilities.
significant judgments, estimates and assumptions
in accordance with ifrs, the preparation of consolidated financial statements requires management to make judgments, estimates and assumptions that are described in the following significant accounting policies with respect to the fair value measurement of financial instruments and investment property, as well as their classification, derecognition of financial assets and liabilities, provision for non-performing investments, objective evidence of impairment of available-for-sale securities, measurement and classification of insurance and investment contract liabilities, provisions, carrying amount of goodwill, impairment of non-financial assets, income taxes, employee benefits, assessment of relationships with other entities for the purpose of consolidation and contingencies. actual results may differ from these estimates and assumptions.
scope of consolidation
these consolidated financial statements include the financial statements of the company and its subsidiaries.
an entity is considered to be a subsidiary when it is controlled by the company. the company controls an investee if and only if all of the following criteria are met: • it has power over the investee;
• it is exposed, or has rights to variable returns from its involvement with the investee; and • it has the ability to use its power over the investee to affect its returns from the investee.
management must exercise a significant amount of judgment when assessing these various elements and all of the related facts and circumstances as a whole in order to determine whether control exists, more specifically in the case of structured entities. a structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements. a structured entity often has some or all of the following features or attributes: restricted activities, a narrow and well-defined objective, insufficient equity to permit the structured entity to finance its activities without subordinated financial support and financing in the form of multiple contractually linked instruments to investors.
nOtes tO tHe cOnsOlidated financial statements 19 2013 financial review desjardins financial security
subsidiaries are included in the consolidated financial statements from the date control commences until the date control ceases.
the financial statements of all of the company’s entities were prepared for the same reference period using similar accounting policies. in addition, all intercompany balances, income and expenses, as well as gains and losses on internal transactions have been completely eliminated in the consolidation.
a) non-controlling interests
non-controlling interests represent the share in profit or loss as well as net assets not held by the company. they are presented separately in the consolidated statement of net income, the consolidated statement of comprehensive income, and under equity in the consolidated Balance sheet. they include the non-controlling interests in laurentian-weloga, a limited partnership.
b) associates
an associate is an entity over which the company has significant influence, but not control or joint control. the company’s investments in associates are accounted for using the equity method. with this method, investments are initially recorded at cost. the carrying amount is subsequently adjusted (up or down) to reflect the company’s share of the equity and profit or loss of the associate after acquisition. the company has investments in cc&l Haldimand solar co-investment limited Partnership.
c) joint arrangements
a joint arrangement is an arrangement over which the company exercises joint control with one or more other parties. joint control exists only when decisions about the company’s relevant activities require the unanimous consent of the parties sharing control.
joint arrangements are classified into two types based on the rights and obligations of the parties to the arrangement:
• a joint operation is a joint arrangement whereby the parties have rights to the assets, and obligations for the liabilities, relating to the arrangement. each party must recognize their assets, liabilities, income and expenses, including its share of any assets held or any liabilities incurred jointly and its share of the revenue from the sale of the output by the joint operation and any expenses incurred jointly.
• a joint venture is a joint arrangement whereby the parties have rights to the net assets of the arrangement. this type of joint arrangement is recognized using the equity method.
the company’s only significant joint arrangement is an interest in the rPads joint venture.
Financial instruments
financial instruments are initially measured at fair value. subsequent measurement depends on their classification.
financial assets are classified according to the company’s intention and capacity to hold the invested assets and are measured using the following methods:
i) assets held for trading and those designated under the fair value option through profit or loss are measured at fair value and changes in fair value are recorded in the consolidated statement of net income.
ii) assets classified as available for sale are measured at fair value. Gains and losses arising from changes in fair value are recognized in “Other comprehensive income” until the asset is derecognized, except for impairment losses and foreign exchange gains and losses on money market securities, which are presented in the consolidated statement of net income.
iii) loans and receivables, which include cash, mortgage and business loans, policy loans, securities borrowed or purchased under reverse repurchase agreements, immigrant investor loans, premiums receivable, amounts receivable and accrued net investment income, are measured at cost and after amortization, if applicable, using the effective interest method.
securities classified as available for sale are monitored on a regular basis throughout the period to determine whether there is any objective evidence that they are impaired. factors considered include, but are not limited to, a significant or prolonged decline in fair value, significant financial difficulties of the issuer, a breach of contract, the increasing probability that the issuer will enter bankruptcy or a restructuring and the disappearance of an active market for the asset concerned. management also uses its judgment to determine when to recognize an impairment loss.
the company assesses each bond to determine whether there is any objective evidence of impairment indicating a credit risk with regard to the amounts due by the issuer. However, the impairment loss represents the cumulative loss measured as the difference between the carrying amount and the current fair value, less any loss previously recognized. future interest income is calculated on the carrying amount reduced by applying the interest rate used to discount future cash flows in order to measure the impairment loss. when, during a subsequent period, the fair value of a bond increases and that increase can be objectively related to a credit event occurring after the impairment loss was recognized in the consolidated statement of net income, the impairment loss is reversed in the consolidated statement of net income.
note 2
sIGnIfIcant accOuntInG pOlIcIes (cOntInued)
for equity securities, the objective evidence of impairment also includes a significant or prolonged decline in the fair value as compared to its cost. the terms “significant” and ”prolonged” generally mean a decline of 20% or more and a period of more than 12 months, respectively. when there is evidence of impairment, the cumulative loss, namely the difference between the acquisition cost and the current fair value, less any loss previously recognized, is removed from “Other comprehensive income” and recognized in the consolidated statement of net income. equity security impairment losses recognized in the consolidated statement of net income are not reversed and increases in fair value occurring subsequent to impairment are recorded directly under ”Other comprehensive income”. any impairment loss on securities previously impaired is directly recognized in the consolidated statement of net income.
financial liabilities are measured at amortized cost using the effective interest method and include all liabilities not held for trading. with regard to liabilities held for trading (derivative financial instruments and securities sold short), changes in the fair value are recorded in the consolidated statement of net income.
the main financial asset classes designated as at fair value through profit or loss include:
i) financial assets matched to actuarial liabilities that would otherwise be classified as available for sale, in order to substantially reduce the accounting mismatch that would result from this classification. the impact of fluctuations in the fair value of these investments is largely offset by corresponding changes in actuarial liabilities. ii) financial assets that are managed according to an investment strategy and whose performance is measured using the fair value method.
transaction costs for securities held for trading and designated as at fair value through profit or loss are expensed as soon as they are incurred. transaction costs for securities classified as available for sale or as loans and receivables are capitalized and amortized over the expected life of the financial instrument using the effective interest method.
the regular-way purchase or sale of financial assets is recognized using the trade date accounting method.
a) offsetting of financial assets and liabilities
financial assets and liabilities are presented on a net basis when there is a legally enforceable right to set off the recognized amounts and the company intends to settle on a net basis or to realize the asset and settle the liability simultaneously.
b) Derecognition of financial assets and liabilities
a financial asset is derecognized from the consolidated Balance sheet when the contractual rights to the cash flows from the asset expire, when the contractual rights to receive the cash flows from the asset are retained, but the company has an obligation to pay these cash flows to a third party or when the contractual rights to receive the cash flows from the asset are transferred and substantially all the risks and rewards of ownership of the asset have also been transferred.
when the company has retained substantially all the risks and rewards of ownership of a transferred financial asset, the transferred financial asset is not derecognized in the consolidated Balance sheet and a financial liability is recognized, if applicable.
when the company neither transfers nor retains substantially all the risks and rewards of ownership of a financial asset, it derecognizes the financial asset in which it does not have control and records an asset or a liability that represents the rights and obligations created or retained in the asset transfer. if control of the financial asset is retained, the company continues to recognize the asset in the consolidated Balance sheet to the extent of its continuing involvement in said asset. when a financial asset is derecognized in its entirety, a gain or a loss of an amount equal to the difference between the carrying amount of the asset and the value of the consideration received is recognized in the consolidated statement of net income.
management must use its judgment to determine whether the contractual rights to the cash flows have expired, or have been transferred or retained with an obligation to pay these cash flows to a third party. with respect to the substantial transfer of all the risks and rewards, management considers the company’s exposure before and after the transfer with the variation in the amount and timing of the realization of net cash flows from the transferred assets. management must also make judgments to establish whether it has control and assess the retained interests.
a financial asset is derecognized when the related obligation is discharged, cancelled or expires. the difference between the carrying amount of the transferred financial liability and the consideration paid is recognized in the consolidated statement of net income.
investments
a) cash and money market securities
“cash and money market securities” consist of deposit accounts in financial institutions and investments in money market securities. cash is classified as loans and receivables, whereas money market securities are recognized at fair value.
b) Bonds
Bonds are recorded at fair value in the consolidated Balance sheet.
the fair value of bonds is the prevailing market price, when available. in the absence of an active market, the company establishes fair value using valuation techniques. these techniques include using information available from orderly transactions between market participants, using the current fair value of another relatively identical financial instrument and analyzing discounted cash flows.
for bonds classified as available for sale, interest income and amortization of premiums and discounts on acquisition are calculated using the effective interest method and recognized in the consolidated statement of net income.
nOtes tO tHe cOnsOlidated financial statements 21 2013 financial review desjardins financial security nOtes tO tHe cOnsOlidated financial statements 20 2013 financial review desjardins financial security
c) Mortgage and business loans
mortgage and business loans are recorded at amortized cost, less provisions for non-performing investments. Premiums or discounts on acquisition are amortized using the effective interest method.
the fair value of these loans (presented in note 5) is estimated using discounted cash flows at the market interest rates currently charged for similar new loans on december 31 and applied to expected maturity amounts.
the company’s policy is to recognize these loans as non-performing investments when, in its opinion, there is reasonable doubt as to the collectibility of a portion of the principal or interest, or where interest on a loan is contractually past due for 90 days or more unless, in the company’s opinion, there is no doubt as to the collectibility of the principal and interest and recovery procedures have not commenced. all investments are classified as non-performing when payment is 180 days in arrears. with regard to these loans, the provision for non-performing investments is based on the present value of estimated future cash flows, discounted at the effective interest rate of the loan and on the current market price of the loan. the interest recognized after the initial 90-day period is reversed and specific provisions are set up, if necessary, for the previously recognized accrued interest and to cover the risk of capital losses.
d) shares
shares are recorded at fair value, which is based on the bid price when available. in the absence of such a price, fair value is determined using valuation techniques that are based on data not directly observable in the market. dividends are recognized in the consolidated statement of net income as soon as the company’s right to receive payment has been determined.
e) Policy loans
Policy loans, which are classified as loans and receivables, are presented at their unpaid balance and are fully secured by the cash surrender value of the policies on which the loans were made.
f) investment property
investment property includes buildings or land held to earn rental income or to grow the company’s capital.
investment property is initially recognized at cost, including transaction costs. it is subsequently recognized at fair value. changes in fair value are recognized under “net investment income” in the consolidated statement of net income.
the fair value of investment property is determined by independent real estate appraisers with recognized and relevant professional qualification and who use a range of appraisal techniques, including net operating income capitalization and cash flow discounting. these techniques, which are based on market inputs, involve estimating capitalization rates and adjusted net operating income, in the case of the net operating income capitalization method, and estimating discount rates and future cash flows for investment property, in the case of the cash flow discounting method.
investment property is derecognized upon transfer or when permanently withdrawn from use and no future economic benefits are expected. Gains or losses on the disposal or sale are recognized under “net investment income” in the consolidated statement of net income in the period in which they are realized.
transfers to and from the “investment property” category are made only when there is a change in use. upon a transfer from the “investment property” category to the “Buildings” category of fixed assets, the deemed cost of the building is the fair value as at the date of the change in use. if a building held and occupied by the company becomes an investment property, it is recorded using the accounting policies applicable to investment property.
g) other loans and investments
Other loans and investments include immigrant investor loans classified as loans and receivables and investments in the company’s segregated funds classified as available for sale. the fair value of immigrant investor loans presented in note 8 is estimated by discounting expected cash flows at the market interest rates currently charged for similar new loans on the closing date.
h) securities lending
securities borrowed or purchased under a reverse repurchase agreement
securities borrowed for a securities or cash consideration or purchased under reverse repurchase agreements are not recognized in the consolidated Balance sheet, as substantially all the risks and rewards of ownership of these securities have not been transferred.
reverse repurchase agreements are accounted for as collateralized lending transactions. the consideration paid for the securities acquired, including accrued interest, is recognized in the consolidated Balance sheet under “securities borrowed or purchased under reverse repurchase agreements”.
when the consideration for the borrowed securities is paid in cash, the cash pledged as collateral is derecognized from “cash and money market securities” in the consolidated Balance sheet and an asset representing the right to receive the securities is recognized under “securities borrowed or purchased under reverse repurchase agreements”.
when consideration for the borrowed securities is paid in securities, the securities pledged are not derecognized, as substantially all the risks and rewards of ownership of these securities have not been transferred.
note 2
sIGnIfIcant accOuntInG pOlIcIes (cOntInued)
investments (continued)
h) securities lending (continued)
the fair value of securities borrowed for a securities or cash consideration or purchased under reverse repurchase agreements is presented in the notes as financial assets held as collateral. in addition, when the securities received can subsequently be resold or re-pledged as collateral, the fair value of securities borrowed or purchased under reverse repurchase agreements is presented in note 24, as financial assets held as collateral that can be sold or re-pledged.
securities lent or sold under repurchase agreements
securities lent or sold under repurchase agreements are not derecognized in the consolidated Balance sheet, as substantially all the risks and rewards of ownership of these securities have not been transferred.
repurchase agreements are accounted for as collateralized borrowing transactions. the consideration received for the securities sold, including accrued interest, is therefore recognized under “cash and money market securities” in the consolidated Balance sheet and a liability representing the obligation to return the securities is recognized under “commitments related to securities lent or sold under repurchase agreements”. the difference between the price received and the repurchase price is recognized as interest expense.
when the consideration received for the securities lent is paid in cash, the cash received as collateral is recognized under “cash and money market securities” in the consolidated Balance sheet and a liability representing the obligation to return the securities is recognized under “commitments related to securities lent or sold under repurchase agreements”. these transactions are treated as collateralized financings since the party that pays the consideration takes possession of the securities pledged as collateral for the financing.
when the consideration received for the securities lent is paid in securities, the securities held as collateral are not recognized, as substantially all the risks and rewards of ownership of these securities have not been transferred.
the carrying amount of securities lent or sold under repurchase agreements is presented in note 24, as financial assets pledged as collateral. when the consideration received for the securities lent is paid in securities and these securities can be re-pledged as collateral or resold, the fair value of the securities received is presented in note 24, as financial assets held as collateral.
i) Derivative financial instruments
derivative financial instruments are financial contracts whose value depends on assets, interest rates, foreign exchange rates and other financial indexes. the vast majority of derivative financial instruments are negotiated by mutual agreement between the company and the counterparty and include interest rate, credit risk, and foreign exchange contracts, stock index and currency future contracts and total return swaps. the types of contracts used are defined in note 7.
derivative financial instruments are initially measured at fair value. Gains and impairment losses are recognized in the consolidated statement of income.
the fair value of derivative financial instruments is calculated using pricing models that incorporate current market prices and the contractual prices of the underlying instruments, the time value of money, the credit risk and the yield curves. the fair value of derivative financial instruments is presented without taking into account the impact of master netting agreements. it requires management to use estimates.
j) hedging activities
the company holds derivative financial instruments for hedge accounting purposes. to qualify for this type of accounting, the hedging relationship must be designated and documented at inception and then throughout the life of the contract. the documentation must describe the company’s specific risk management strategy, the assets, liabilities or cash flows being hedged and the method of assessing the effectiveness of the hedge. consequently, the effectiveness of each hedging relationship must be assessed, regularly and on an individual basis, to determine with reasonable assurance whether the relationship is effective and will continue to be effective. the derivative financial instrument must be highly effective to offset changes in the fair value or cash flows attributable to the risk being hedged.
Hedging instruments that meet the strict hedge accounting conditions are recognized as follows:
fair value hedging
the company uses hedge accounting as a hedge against changes in the fair value of certain assets available for sale. changes in the fair value of the hedging derivative financial instrument and changes associated with the hedged risk are recognized in “net investment income”. changes in the fair value associated with the risk not being hedged are recognized in “Other comprehensive income”.
the designation of a hedging relationship is discontinued in the following circumstances: the hedged item or hedging instrument is sold, matures or is cancelled the hedging is no longer effective or the company terminates the hedge designation. when a hedging relationship is discontinued, hedge accounting ceases to be applied prospectively.
embedded derivatives
an embedded derivative is a component of a host contract that modifies a portion of the cash flows of the host in a manner similar to a stand-alone derivative, according to a specified interest rate, financial instrument price, foreign exchange rate, underlying index or other variable. embedded derivatives must be separated from the host contract and recognized at fair value if their economic characteristics and risks are not clearly and closely related to those of the host contract, if the terms of the embedded derivative are the same as those of a stand-alone derivative and if the host contract itself is not designated at fair value in the consolidated statement of net income. embedded derivatives that meet the definition of insurance contracts are measured and recognized as insurance contracts, including variable capital life and individual life insurance products, guaranteed minimum credit rates and segregated fund minimum guarantees.
nOtes tO tHe cOnsOlidated financial statements 23 2013 financial review desjardins financial security nOtes tO tHe cOnsOlidated financial statements 22 2013 financial review desjardins financial security
Financial guarantees
a financial guarantee is a contract or an indemnification agreement that contingently requires the company to make payments to the guaranteed party following a loss resulting from the default by a specified third party to make a payment upon maturity in accordance with the original or modified provisions of the borrowing instrument. financial guarantees are initially recognized in the consolidated financial statements as a liability, which represents the fair value of the obligation undertaken in issuing the guarantee. after initial recognition, the guarantee is measured at the higher of the following amounts:
i) the amount initially recorded less, when appropriate, cumulative amortization of costs recognized in net profit or loss; or ii) the best estimate of the expenditure required to settle any financial obligation arising from the guarantee.
if a financial guarantee meets the definition of derivative, it is measured at fair value at each reporting date and recorded as a liability under “derivative financial instruments”. Guarantees presented as derivative financial instruments are a type of credit derivative which are over-the-counter (Otc) contracts designed to transfer the credit risk in an underlying financial instrument from one counterparty to another. the carrying amount of guarantees does not reflect the maximum potential amount of future payments under guarantees. therefore, the company continues to consider these guarantees as off-balance sheet credit instruments.
Fixed assets
fixed assets consist of land and buildings occupied by the owner, computer equipment, furniture, fixtures and other, and leasehold improvements. these assets are recognized at cost, less any accumulated depreciation and impairment losses and are depreciated over their expected useful life using the straight-line method.
the depreciation expense for fixed assets is recognized under “Operating expenses” in the consolidated statement of net income. fixed assets are depreciated based on the following useful lives:
Depreciation periods
land non-depreciable
Buildings 5 to 80 years
computer equipment 2 to 5 years furniture, fixtures and other 2 to 20 years leasehold improvements expected term of the lease
the depreciable amount of an item of fixed assets is determined after deducting its residual value less costs to sell. the useful life of an item of fixed assets is generally equal to its expected useful life. when a fixed asset item is made up of several significant parts with different useful lives or providing economic benefits according to different patterns, each part is recognized separately and is depreciated over its own depreciation period.
fixed assets are derecognized on disposal or when permanently withdrawn from use and no future financial benefits are expected. Gains or losses on the disposal or sale of fixed assets are recognized under “Operating expenses” in the consolidated statement of net income in the period in which they are realized.
fixed assets are tested for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. assessing whether such events or circumstances exist is up to management’s judgment.
intangible assets
intangible assets include computer software acquired or developed by the company and the distribution networks and are initially recognized at cost. subsequent to initial recognition, they are measured at cost less any accumulated amortization and, if applicable, any impairment losses. software is amortized on a straight-line basis over periods ranging from three to five years. Other intangible assets are amortized on a straight-line basis over periods ranging from 20 to 40 years.
Gains or losses resulting from the derecognition of an intangible asset correspond to the difference between the net proceeds of disposal and the net carrying amount of the asset. they are recognized under “Operating expenses” in the consolidated statement of net income upon derecognition of the asset.
goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed in a business combination accounted for using the acquisition method. On the date of acquisition, each item of goodwill is allocated to one or more cash-generating units (cGu or group of cGus) that are expected to benefit from this combination. the group of cGus must not be larger than a business segment. a cGu is the smallest identifiable group of assets that generates cash inflows that are independent from the cash inflows from other groups of assets. the allocation of goodwill to one or more cGus depends on management’s judgment. subsequent to initial measurement, goodwill is measured at cost less any impairment loss.
