ASUSTEK COMPUTER INC. Financial Statements and. Report of independent accountants. December 31, 2011 and 2010

Transcription

1 ASUSTEK COMPUTER INC. Financial Statements and Report of independent accountants December 31, 2011 and For the convenience of readers and for information purpose only, the auditors report and the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. In the event of any discrepancy between the English version and the original Chinese version or any differences in the interpretation of the two versions, the Chinese-language auditors report and financial statements shall prevail. ~1~

2 Independent Auditors Report To the Board of Directors and Shareholders of ASUSTEK COMPUTER INC.: We have audited the accompanying balance sheets of ASUSTEK COMPUTER INC. as of December 31, 2011 and 2010, the related statements of income, of changes in stockholders equity and of cash flows for the years then ended. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of certain investee companies accounted for under the equity method. These long-term equity investments amounted to $22,868,192,000 and $22,605,982,000 as of December 31, 2011 and 2010, respectively, the investments with credit balances amounted to $793,962,000 and $757,225,000 as of December 31, 2011 and 2010, respectively, and the related investment (loss) income amounted to ($9,735,000) and $2,763,939,000 for the years then ended, respectively. The financial statements of these investee companies were audited by other auditors whose reports thereon have been furnished to us and our opinion expressed herein, insofar as it relates to the amounts included in the financial statements and information disclosed relative to these investee companies, is based solely on the reports of other auditors. We conducted our audits in accordance with the Regulations Governing Auditing and Attestation of Financial Statements by Certified Public Accountants and generally accepted auditing standards in the Republic of China. Those rules and standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the financial statements referred to in the first paragraph present fairly, in all material respects, the financial position of ASUSTEK COMPUTER INC. as of December 31, 2011 and 2010, and the results of its operations and its cash flows for the years then ended, in conformity with the Regulations Governing the Preparation of Financial Reports by Securities Issuers and generally accepted accounting principles in the Republic of China. ~2~

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4 ASUSTEK COMPUTER INC. BALANCE SHEETS DECEMBER 31, 2011 AND 2010 (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS) DECEMBER 31, 2011 DECEMBER 31, 2010 ASSETS Notes AMOUNT % AMOUNT % Current Assets Cash and cash equivalents 4(1) $ 16,608,239 9 $ 25,414, Financial assets at fair value through profit or loss - current 4(2) 9,737, ,137,398 5 Available-for-sale financial assets - current 4(3) 274, ,793 - Financial assets carried at cost - current 4(4) Accounts receivable 4(5) 2,669, ,083,914 6 Accounts receivable - related parties 5 52,847, ,845, Other receivables 5 8,251, ,176,324 1 Inventories 4(6) 20,149, ,580,297 9 Prepayments 7 1,364, ,673,156 4 Deferred income tax assets - current 4(17) 907, ,014,641 1 Other current assets - others 21,466-16, ,832, ,079, Funds and Investments Available-for-sale financial assets - non-current 4(3) 7,068, ,346,516 4 Financial assets carried at cost - non-current 4(4) 107, ,520 - Long-term equity investments accounted for under the equity method 4(7) 58,384, ,223, ,560, ,970, Property, Plant and Equipment 4(8) and 5 Cost Land 981, ,191 1 Buildings 2,312, ,312,517 1 Instruments and equipment 379, ,298 - Other equipment 943, ,796, ,616, ,532,133 3 Less: Accumulated depreciation and impairment ( 948,816 ) ( 1 ) ( 1,355,422 ) ( 1 ) Prepayments for equipment 270,053-92,392-3,937, ,269,103 2 Intangible Asset Computer software 123,425-89,987 - Other Assets Leased assets 4(9) 95,988-97,372 - Refundable deposits 6 161, ,972 - Deferred expenses 25,717-56,001 - Other assets - others 4(10) - - 8, , ,959 - TOTAL ASSETS $ 182,737, $ 167,730, LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Financial liabilities at fair value through profit or loss - current 4(2)(11) $ 32,695 - $ 105,895 - Notes and accounts payable 37,098, ,291, Notes and accounts payable - related parties 5 9,068, ,435,702 6 Income tax payable 4(17) 1,612, ,316,542 1 Accrued expenses 4(15) and 5 13,244, ,448,180 6 Receipts in advance 5 573, ,550 - Current portion of bonds payable 4(11) - - 2,412,309 1 Other currents liabilities 5 59,295-60,951-61,689, ,719, Other Liabilities Deferred credits 4(7) and 5 3,279, ,051,225 1 Deferred income tax liabilities- non-current 4(17) 2,808, ,903,869 1 Other Liabilities - Others 11,978-11,886-6,099, ,966,980 2 Total liabilities 67,789, ,686, Stockholders' Equity Capital 4(13) Common stock 7,527, ,270,166 4 Additional paid-in capital 4(14) Common stock share premium 4,284, ,205,880 2 Others 377, ,244 - Retained earnings 4(15)(17) Legal reserve 21,806, ,158, Undistributed earnings 77,293, ,802, Other adjustments to stockholders' equity Cumulative translation adjustments 715,457 1 ( 1,066,766 ) ( 1 ) Net loss not recognized as pension cost Unrealized gain on financial instruments 4(3)(7) 1,514, ,197,335 1 Unrealized revaluation increment 73, Unrealized gain on cash flow hedges 4(7) 1,354, ,655 - Total stockholders' equity 114,948, ,043, TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 182,737, $ 167,730, The accompanying notes are an integral part of these financial statements. See report of independent accountants dated March 23, ~4~

5 ASUSTEK COMPUTER INC. STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010 (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS, EXCEPT EARNINGS PER SHARE DATA) FOR THE YEARS ENDED DECEMBER 31, Items Notes AMOUNT % AMOUNT % Operating revenues 5 Sales revenue $ 327,013, $ 299,768, Sales returns and allowances ( 9,343,564 ) ( 3 ) ( 3,016,885 ) ( 1 ) Net sales revenues 317,669, ,751, Operating costs 4(6)(12) (15)(19) and 5 Cost of goods sold ( 296,351,674 ) ( 93 ) ( 279,426,109 ) ( 94 ) Gross profit 21,318, ,325,020 6 Change in unrealized inter-company 5 ( 1,191,149 ) ( 1 ) ( 89,344 ) - profits Net gross profit 20,126, ,235,676 6 Operating expenses 4(12)(15) (19)and 5 Selling ( 2,549,132 ) ( 1 ) ( 1,968,285 ) ( 1 ) General and administrative ( 1,930,165 ) ( 1 ) ( 1,780,233 ) ( 1 ) Research and development ( 4,924,199 ) ( 1 ) ( 3,823,712 ) ( 1 ) Total operating expenses ( 9,403,496 ) ( 3 ) ( 7,572,230 ) ( 3 ) Operating income 10,723, ,663,446 3 Non-operating income and gains Interest income 160,270-91,168 - Investment income accounted for 4(7) 7,274, ,541,113 3 under the equity method Dividends 292, ,950 - Foreign currency exchange gain, net 1,645, Gain on valuation of financial assets, 4(2) 163, ,044 1 net Others 225, ,272 - Total non-operating income and 9,761, ,904,547 4 gains Non-operating expenses and losses Interest expense 4(11) ( 47,099 ) - ( 81,045 ) - Foreign currency exchange loss, net - - ( 400,516 ) - Loss on valuation of financial 4(2)(11) ( 522,198 ) - ( 44,971 ) - liabilities, net Others ( 120,243 ) - ( 132,591 ) - Total non-operating expenses and ( 689,540 ) - ( 659,123 ) - losses Income before income tax 19,795, ,908,870 7 Income tax expense 4(17) ( 3,217,306 ) ( 1 ) ( 2,420,513 ) ( 1 ) Net income $ 16,578,159 5 $ 16,488,357 6 Before Tax After Tax Before Tax After Tax Earnings per share (In dollars) 4(18) Basic earnings per share $ $ $ 7.25 $ 6.32 Diluted earnings per share $ $ $ 7.11 $ 6.19 The accompanying notes are an integral part of these financial statements. See report of independent accountants dated March 23, ~5~

6 ASUSTEK COMPUTER INC. STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010 (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS) Common stock Additional paid-in capital Legal reserve Retained Earnings Undistributed earnings Cumulative translation adjustments Other Adjustments to Stockholders Equity Unrealized gain on financial instruments Net loss not recognized as pension cost Unrealized revaluation increment Unrealized gain on cash flow hedges Treasury Stock Total 2010 $ 42,467,775 $ 18,910,213 $ $ 1,490,885 ($ 3,202 ) $ 2,159,201 $ $ 306,361 $ - $ Appropriations of 2009 earnings (Note 4(15)) Legal reserve - - 1,247,907 ( 1,247,907 ) Cash dividends ( 8,918,232 ) ( 8,918,232 ) Balance at January 1, 2010 $ 30,237,586 77,615, ,183,977 Effect of adjustments to spin off and capital reduction ( 36,097,609 ) ( 25,798,854 ) - ( 6,983,398 ) ( 99,230 ) 2,402 ( 1,221,037 ) ( 70,197,726 ) Effect of changes in ownership percentage of investee companies' net stockholders' equity - 102, ( 364,194 ) - ( 105,706 ) - ( 366,362 ) Effect of disposal of long-term investments accounted for under the equity method - ( 24,075 ) - - ( 1,342 ) 32 ( 16,379 ) ( 41,764 ) Dividends on shares held in trust paid to employees - 31, ,287 Foreign currency translation adjustments ( 2,457,079 ) ( 2,457,079 ) Effect of changes in valuation of available-for-sale financial assets , ,744 Purchase of treasury stock ( 2,321,248 ) ( 2,321,248 ) Transfer of treasury stock ( 399 ) ,105 2,706 Retirement of treasury stock ( 100,000 ) ( 66,579 ) - ( 2,151,564 ) ,318,143 - Net income for ,488, ,488,357 Balance at December 31, 2010 $ 6,270,166 $ 4,482,124 $ 20,158,120 $ 74,802,015 ( $ 1,066,766 ) $ 11 $ 1,197,335 $ - $ 200,655 $ - $ 106,043, $ $ $ $ $ $ $ $ $ Appropriations of 2010 earnings (Note4(15)) Legal reserve - - 1,648,835 ( 1,648,835 ) Dividends transferred to common stock 1,357, ( 1,357,437 ) Cash dividends ( 8,638,233 ) ( 8,638,233 ) Balance at January 1, ,270,166 4,482,124 20,158,120 74,802,015 ( $ 1,066,766 ) $ 11 1,197, , ,043,660 Effect of changes in ownership percentage of investee companies' net stockholders' equity - 102, ( 204,819 ) 73,526 1,153,815-1,125,283 Effect of disposal of long-term investments accounted for under the equity method - ( 1,227 ) ( 1,204 ) Dividends on shares held in trust paid to employees - 130, ,595 Dividends on shares held in trust transferred for increasing in long-term equity investments accounted for under the equity method - 15, ,491 Foreign currency translation adjustments ,782, ,782,200 Effect of changes in valuation of available-for-sale financial assets , ,721 Purchase of treasury stock ( 2,609,422 ) ( 2,609,422 ) Retirement of treasury stock ( 100,000 ) ( 67,078 ) - ( 2,442,344 ) ,609,422 - Net income for ,578, ,578,159 Balance at December 31, 2011 $ 7,527,603 $ 4,662,555 $ 21,806,955 $ 77,293,325 $ 715,457 $ 122 $ 1,514,237 $ 73,526 $ 1,354,470 $ - $ 114,948,250 The accompanying notes are an integral part of these financial statements. See report of independent accountants dated March 23, ~6~

7 ASUSTEK COMPUTER INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010 (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS) FOR THE YEARS ENDED DECEMBER 31, Cash flows from operating activities Net income $ 16,578,159 $ 16,488,357 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, amortization and impairment 1,509,094 1,284,844 Cash dividends received from long-term investee companies accounted for under the equity method 1,303,736 4,018,073 Investment income accounted for under the equity method ( 7,274,803 ) ( 8,541,113 ) Changes in assets and liabilities Financial assets at fair value through profit or loss - current ( 1,599,905 ) 5,098,429 Notes and accounts receivable (including related parties) ( 4,587,375 ) ( 3,839,449 ) Other receivables (including related parties) ( 6,680,610 ) 3,873,937 Inventories ( 4,569,209 ) ( 492,802 ) Prepayments and other current assets 5,359,651 ( 1,925,006 ) Financial liabilities at fair value through profit or loss - current ( 73,200 ) ( 28,546 ) Notes and accounts payable (including related parties) 3,047,839 5,800,854 Income tax payable 295,693 ( 1,160,711 ) Accrued expense, receipts in advance and other current liabilities 3,663,165 ( 354,680 ) Deferred credits 1,191,149 89,344 Deferred income tax assets and liabilities 888, ,365 Others 96,672 ( 123,226 ) Net cash provided by operating activities 9,148,282 21,018,670 Cash flows from investing activities Increase in financial assets carried at cost ( 56,000 ) - Proceeds from disposal of available-for-sale financial assets 60, ,354 Increase in long-term equity investments accounted for under the equity method ( 3,185,945 ) ( 610,098 ) Proceeds from disposal of long-term investments accounted for under the equity method 83, ,577 Proceeds from capital reduction of long-term equity investments accounted for under the equity method - 1,061,951 Acquisition of property, plant and equipment ( 1,074,166 ) ( 1,098,447 ) Increase in deferred expense and intangible assets ( 91,469 ) ( 63,697 ) Decrease in other assets - others 8,614 20,617 Others 6,804 ( 50,499 ) Net cash (used in) provided by investing activities ( 4,247,970 ) 570,758 Cash flows from financing activities Redemption of bonds payable ( 2,459,400 ) ( 1,346,450 ) Redemption of treasury stock ( 2,609,422 ) ( 2,321,248 ) Payment of cash dividends ( 8,638,233 ) ( 8,918,232 ) Others 92 9,302 Net cash (used in) financing activities ( 13,706,963 ) ( 12,576,628 ) (Decrease) increase in cash and cash equivalents ( 8,806,651 ) 9,012,800 Cash and cash equivalents at beginning of the year 25,414,890 16,402,090 Cash and cash equivalents at end of the year $ 16,608,239 $ 25,414,890 Supplemental disclosures of cash flow information Cash paid during the year for interest $ 8 $ 5 Cash paid during the year for income tax $ 2,336,873 $ 2,750,859 Investing and financing activities that result in non-cash flows: Bonds payable - payable in one year $ - $ 2,412,309 Dividends transferred to common stock $ 1,357,437 $ - The accompanying notes are an integral part of these financial statements. See report of independent accountants dated March 23, ~7~

8 ASUSTEK COMPUTER INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2011 AND 2010 (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS, EXCEPT AS OTHERWISE INDICATED) 1. HISTORY AND ORGANIZATION (1) ASUSTEK COMPUTER INC. (ASUS or the Company) was established on April 2, The Company s common shares are listed on the Taiwan Stock Exchange (TSE) on November 14, Its main activities are to produce, design and sell notebook PCs, main boards, software, add-on cards, optics, wired and wireless communication equipment and telecom-restricted radio frequency devices. (2) The Company resolved to spin-off its OEM businesses on January 1, Pursuant to the Company s resolution, the Company transferred its computer and non-computer OEM businesses to its spun-off subsidiaries, PEGA and UNIHAN, respectively. On June 1, 2010, however, the Company transferred further its OEM assets and business (the Company s long-term equity investment in PEGA) to the Company s another investee, PII. PII issued new shares to the Company and its shareholders as consideration. (3) The Company s headcount totaled 4,061 and 3,612 employees as of December 31, 2011 and 2010, respectively. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements are prepared in accordance with the Regulations Governing the Preparation of Financial Reports by Securities Issuers and generally accepted accounting principles in the Republic of China. The Company s significant accounting policies are as follows: (1) Foreign currency transactions and translation of financial statements in foreign currencies A. Transactions involving non-derivative financial instruments denominated in foreign currencies are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occurred. Translation gain or loss arising from the settlement of assets and liabilities denominated in foreign currencies are included in profit or loss in the year of actual settlement. B. Monetary assets and liabilities denominated in foreign currencies are remeasured at the balance sheet date using the exchange rates in effect on that date, with related exchange gain and loss included in the statement of income. C. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value through stockholders equity are remeasured at the exchange rate prevailing at the balance sheet date, with related exchange gain or loss recorded as cumulative translation adjustment in stockholders equity. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value through profit or loss are remeasured at the exchange rate prevailing at the balance sheet date, with related exchange gain or loss recorded in the statement of income. Non-monetary assets and liabilities denominated in foreign currencies that are measured at cost are remeasured at the historical exchange rate. ~8~

9 D. Long-term investments in foreign investees, which are accounted for under the equity method, are stated on the basis of stockholders equity in the foreign-currency financial statements of investees. Translation gain or loss from long-term investments is recognized as cumulative translation adjustment in stockholders equity. (2) Classification of current and non-current assets and liabilities A. Assets that meet one of the following criteria are classified as current assets; otherwise, they are classified as non-current assets: (A) Assets arising from operating activities that are expected to be realized or consumed, or are intended to be sold within the normal operating cycle; (B) Assets held mainly for trading purposes; (C) Assets that are expected to be realized within twelve months from the balance sheet date; (D) Cash and cash equivalents, excluding restricted cash and cash equivalents and those that are to be exchanged or used to pay off liabilities more than twelve months after the balance sheet date. B. Liabilities that meet one of the following criteria are classified as current liabilities; otherwise, they are classified as non-current liabilities: (A) Liabilities arising from operating activities that are expected to be paid off within the normal operating cycle; (B) Liabilities arising mainly from trading activities; (C) Liabilities that are to be paid off within twelve months from the balance sheet date; (D) Liabilities for which the repayment date cannot be extended unconditionally to more than twelve months after the balance sheet date. (3) Financial instruments A. In accordance with SFAS No. 34, Accounting for Financial Instruments and the Regulations Governing the Preparation of Financial Reports by Securities Issuers, financial assets are classified as financial assets at fair value through profit or loss, financial assets carried at cost, or available-for-sale financial assets, as appropriate. Financial liabilities are classified either as financial liabilities at fair value through profit or loss, or as financial liabilities at cost. B. The Company accounts for purchases and sales of financial assets on the trade date, or the date when the Company commits to purchase or sell the asset. At initial recognition, financial assets are recognized at fair value plus, in the case of investments that are not reported at fair value through profit or loss, directly attributable transaction costs. (A) Financial assets measured at fair value through profit or loss These financial assets are subsequently measured at fair value with changes in fair value recognized in profit or loss. Stocks of listed companies, convertible bonds and closed-end funds are measured at closing prices at the balance sheet date. Open-end funds are measured at the unit price of the net assets at the balance sheet date. ~9~

10 (B) Available-for-sale financial assets Available-for-sale financial assets are those non-derivative financial assets that are designated as available for sale or not classified as financial assets at fair value through profit or loss, held-to-maturity financial assets, or loans and receivables. These assets are then measured at fair value. The difference adjustments arising from change in fair value, excluding impairment loss and exchange gain or loss from the translation of monetary financial assets denominated in foreign currencies which are recognized in current profit or loss, are recognized in a separate component of stockholders equity until such investment is reclassified or disposed of, upon which the cumulative separate component of stockholders equity is transferred to current profit or loss. (C) Financial assets carried at cost Equity investments without reliable market prices, including emerging and other unlisted stocks, are measured at cost. If objective evidence of impairment exists, the Company recognizes impairment loss, which is not reversed in subsequent periods. C. Subsequent to initial recognition, the Company measures all financial liabilities at amortized cost except for financial liabilities at fair value through profit or loss, which are measured at fair value. (4) Notes and accounts receivable and other receivables A. Notes and accounts receivable are claims resulting from the sale of goods or services. Other receivables are those arising from transactions other than the sale of goods or services. Before December 31, 2010, allowance for doubtful accounts is provided according to the evaluation of the collectibility of notes and accounts receivable and other receivables, taking into account the bad debts incurred in prior years and the aging analysis of the receivables. B. Effective January 1, 2011, notes and accounts receivable and other receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for accumulated impairment. A provision for impairment is established when there is objective evidence that the receivables are impaired. The amount of the provision is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. When the fair value of the asset subsequently increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss shall be reversed to the extent of the loss previously recognized in profit or loss. Such recovery of impairment loss shall not make the asset s carrying amount more than its amortized cost where no accumulated impairment loss was recognized. Subsequent recoveries of amounts previously written off are recognized in profit. (5) Inventories The costs of inventories consist of those necessary expenditures incurred in bringing each item of inventory to its usable condition and location. Cost is calculated on a weighted-average basis. Inventories are valued at the lower of cost or net realizable value. Net realizable value by item is determined based on the estimated selling price in the ordinary course of business, less estimated costs of completion and costs to sell. ~10~

11 (6) Long-term equity investments accounted for under the equity method A. Long-term investments are accounted for under the equity method when the percentage of ownership held by the Company and its subsidiaries exceeds 20% or if the Company and its subsidiaries own less than 20% of the investee s capital but have significant influence on the investee s operations. If an investee company accounted for under the equity method issues new shares and the Company does not purchase new shares proportionately, then the investment percentage, and therefore the equity in net assets of the investee, will be changed. The effect of such change is adjusted against the additional paid-in capital resulting from long-term equity investments or retained earnings. B. The difference between the cost of the investment and the amount of underlying equity in net assets of an investee attributed to depreciable, depletable, or amortizable assets is amortized over the estimated remaining economic years. The difference attributed to the carrying amount in excess of or lower than the fair value of assets is written off entirely when the difference disappear. The cost of investment in excess of the fair value of identifiable net assets is recognized as goodwill and is no longer amortized. The difference attributed to the fair value of identifiable net assets in excess of the cost of investment causes a proportional decrease in the carrying amount of non-current assets. When the carrying amount of non-current assets is reduced to zero, the remaining difference is recorded as extraordinary gain. C. When the equity of long-term equity investments under the equity method including unrealized gain on financial instruments, foreign currency translation adjustments, net loss not recognized as pension cost, and unrealized losses on cash flow hedges is changed, the changes in percentage of ownership are reflected in those related accounts and long-term equity investments under the equity method. D. Unrealized inter-company profit or loss resulting from transactions between the Company and investees accounted for under the equity method are accounted in unrealized gain on inter-affiliate accounts and deferred until realized. E. The investees over which the Company has control are accounted for under the equity method. The Company prepares consolidated financial statements on a quarterly basis. (7) Property, plant and equipment, leased assets and idle assets A. Property, plant and equipment are stated at cost. Cost associated with significant additions, improvements, and replacements to property, plant and equipment are capitalized. Expenditures for regular repairs and maintenance are charged against operating income. B. Property, plant and equipment leased to other parties under operating leases are classified as leased assets. The related depreciation is provided under the straight-line method based on the assets estimated useful lives and accounted for as a reduction of rental income. Property, plant and equipment not currently used in operations are transferred to idle assets. The cost, accumulated depreciation, and accumulated impairment of the original assets not currently used in operations are all transferred to idle assets, and depreciated. C. Depreciation is provided under the straight-line method over the estimated useful lives of the assets. Salvage value of the fully depreciated assets that are still in use is depreciated over the re-estimated useful lives. The estimated useful lives of buildings are 3~50 years, machinery and equipment are 3~8 years and other equipment are 1~15 years. ~11~

12 (8) Intangible assets and deferred expenses Intangible assets represent computer software, which are amortized using the straight-line method over 3 years. Deferred expenses represent office decorations, which are amortized using the straight-line method over 2~5 years. (9) Impairment of non-financial assets A. The Company assesses all applicable assets subject to SFAS No. 35 for indication of impairment at the balance sheet date. If any indication of impairment exists, the Company then compares the carrying amount with the recoverable amount of the assets or the cash-generating unit ( CGU ) and writes down the carrying amount to the recoverable amount. If the recoverable amount of an asset other than goodwill has increased as a result of the increase in its estimated service potential, the Company reverses the impairment loss to the extent that the carrying amount after the reversal would not exceed the amount (net of amortization or depreciation) that would otherwise result had no impairment loss been recognized in prior periods. B. The Company assesses the goodwill and intangible assets that have indefinite lives or that are not yet available for use periodically on an annual basis and recognizes an impairment loss on the carrying value in excess of the recoverable amount. The loss is first recorded against the goodwill allocated to the CGU, with any remaining loss allocated to other assets on a pro rata basis proportionate to their carrying amounts. The write-down of goodwill cannot be reversed in subsequent periods under any circumstances. (10) Convertible bonds payable Bonds issued after January 1, 2006 are accounted for in accordance with SFAS No. 36 and Interpretations (95) 290, (97) 331 and (98) 046 by the Accounting Research and Development Foundation (ARDF) as follows: A. The issuance costs are allocated to the related liability and equity components in proportion of the initially recognized amounts. B. Convertible bonds bearing a clause on conversion price adjustment based on stock market price do not include the equity component. For the liability components, the fair value of the conversion right and call/put option is determined first, and then the book value of main debt component is determined based on the net amount of the issuance price after deducting the fair value of the call/put option and conversion right with a clause on price adjustment. C. Convertible bonds are subsequently measured at amortized cost. Derivatives with call/put options and conversion rights with a clause on price adjustment are recognized as financial liabilities at fair value through profit or loss and are subsequently measured at fair value. Movements in the fair value of the derivatives are recognized as gain/(loss) on valuation of financial liabilities. D. If the bondholder exercises the right to convert the bonds ahead of the maturity date of the bond, the book value of the liability component is adjusted to the value on the conversion date, which serves as the basis for the recording of the issuance of common stock so that no conversion gain and loss is recognized thereon. ~12~

13 E. If the bondholder is eligible to exercise the put option within one year, the bonds payable are reclassified as current liability. When the put option expires, those bonds payable are reclassified as long-term liability if the liability meets the definition of long-term liability. (11) Pension A. Under the defined benefit pension plan, net periodic pension costs are recognized in accordance with the actuarial calculations. Net periodic pension costs include service cost, interest cost, expected return on plan assets, and amortization of unrecognized net transition obligation and gain or loss on plan assets. Unrecognized net transition obligation is amortized on a straight-line basis over the employees remaining service period. B. Under the defined contribution pension plan, net periodic pension costs are recognized as incurred. (12) Income tax A. Income tax is calculated on the basis of accounting income. The differences between the tax bases and the book values of assets and liabilities are recorded as deferred tax using the enacted tax rates for the periods in which the deferred tax is expected to be reversed. The tax effects from taxable temporary differences are recognized as deferred tax liabilities, while the deductible temporary differences and investment tax credits are accounted for as deferred tax assets, which are assessed for an allowance for deferred tax assets based on future realization. B. Deferred income tax assets or liabilities are classified as current or non-current based on the classification of items that resulted in the deferred item or based on the timing of the expected reversal, for certain transactions not directly related to an asset or liability. When a change in the tax laws is enacted, the deferred tax liability or asset is recomputed accordingly in the period of change. The difference between the new amount and the original amount, that is, the effect of changes in the deferred tax liability or asset, is recognized as an adjustment to current income tax expense (benefit). C. Over or under provision of prior years income tax liabilities is included in current year s income tax. D. The 10% additional income tax on unappropriated earnings is recorded as current income tax expense in the year when the shareholders resolve not to distribute the earnings. E. Current income tax is the higher of current income tax payable or the Alternative Minimum Tax ( AMT ) calculated by applying the Income Basic Tax Act ( IBTA ). The Company has taken into consideration the impact of the AMT in the determination of its current income tax expense and its future impact when estimating the realizable value of the deferred tax assets. (13) Treasury stock A. When the Company acquires its outstanding shares as treasury stock, the acquisition cost should be debited to the treasury stock account (a contra account under stockholders equity). B. When the Company s treasury stock is retired, the treasury stock account should be credited, and the capital surplus-premium on stock account and capital stock account should be debited proportionately according to the share ratio. An excess of the carrying value of treasury stock over the sum of its par value and premium on stock should first be offset against capital surplus from the same class of treasury stock transactions, and the remainder, if any, debited to ~13~

14 retained earnings. An excess of the sum of the par value and premium on stock of treasury stock over its carrying value should be credited to additional paid-in capital from the same class of treasury stock transactions. C. The cost of treasury stock is accounted for on a weighted-average basis. (14) Employees bonuses and directors and supervisors remuneration and share-based payment Pursuant to Interpretation (96) 052 issued by the ARDF, the costs of employees bonuses and directors and supervisors remuneration are accounted for as expenses and liabilities, provided that such recognition is required under legal or constructive obligation and the amounts can be estimated reasonably. However, if the accrued amounts for employees bonuses and directors and supervisors remuneration are significantly different from the distributed amounts resolved by the Board of Directors, then the differences shall be adjusted in current year s gain or loss (the year of recognition) and, if the accrued amounts for employees bonus and directors and supervisors remuneration are significantly different from the actual distributed amounts resolved by the stockholders at their annual stockholders meeting subsequently, the differences shall be recognized as gain or loss in the following year treated as accounting estimate difference. In addition, according to Interpretation (97) 127 issued by the ARDF, the Company calculates the number of shares of employees stock bonus based on the closing price of the Company s common stock at the previous day of the stockholders meeting held in the year following the financial reporting year, and after taking into account the effects of ex-rights and ex-dividends. The Company adopts SFAS No. 39 to account for the transfer of equity instruments from shareholders to the Group s employees. (15) Earnings per share A. Earnings per share of common stock is computed based on the weighted-average number of common shares outstanding during the period. Earnings per share for the prior period is retroactively adjusted to reflect the effects of new shares issued from the capitalization of additional paid-in capital or retained earnings. B. The convertible bonds and employee stock bonuses which have not yet been approved in the stockholders meeting are potential common shares. Only basic earnings per share is disclosed if there is no dilutive effect. Otherwise, both basic and diluted earnings per share are disclosed. For the purpose of calculating diluted earnings per share, the potential common shares are deemed to have been converted into common stock at the beginning of the period, and the effect on net income of the additional common shares outstanding is considered accordingly. (16) Revenues, costs and expenses The Company recognizes revenue when the earning process has been significantly completed, which means the revenue has been realized or is readily realizable and earned. Cost is recognized when the related revenue is accrued; expenses are recognized as current expenses when incurred. ~14~

15 (17) Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements and the amounts of revenues and expenses during the reporting period. Actual results could differ from those assumptions and estimates. (18) Spin-off transaction The Company resolved to spin off its OEM assets and businesses. The Company adopted Interpretations (91) 128, (92) 106 and (92) 107 issued by the ARDF to account for its spin-off transactions. Since the transferee company continues the transferor company s economic activities, the Company did not record any gain or loss from the said spin-off transaction but has adjusted the net assets and long-term equity investment related additional paid-in capital and other equity account against retained earnings or other components. (19) Operating segments In accordance with SFAS No. 41, Segment reporting, operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. 3. CHANGES IN ACCOUNTING PRINCIPLES (1) Notes and accounts receivable and other receivables Effective January 1, 2011, the Company adopted the amended SFAS No. 34, Accounting for Financial Instruments. Under this standard, a provision for impairment (bad debt) of accounts and notes receivable and other receivables is established when there is objective evidence that they are impaired. This change in accounting principle had no significant effect on the net income for the year ended December 31, (2) Operating segments Effective January 1, 2011, the Company adopted the SFAS No. 41, Segment Reporting, replacing the original SFAS No. 20, Disclosure of Segment Financial Information. In accordance with such standard, the Company restated the segment information for 2010 upon the first adoption of SFAS No. 41. This change in accounting principle had no significant effect on the net income and earnings per share for the years ended December 31, 2011 and DETAILS OF SIGNIFICANT ACCOUNTS (1) Cash and cash equivalents 2011/12/ /12/31 Petty cash and cash on hand $ 250 $ 264 Checking and demand deposits 5,677 4,632 Time deposits 16,602,312 25,409,994 $ 16,608,239 $ 25,414,890 ~15~

16 (2) Financial assets (liabilities) at fair value through profit or loss The financial instruments held by the Company are as follows: Items 2011/12/ /12/31 Current: Financial assets at fair value through profit or loss: Open-end funds $ 9,623,062 $ 8,022,694 Convertible bonds 92, ,700 Forward exchange contracts 21,391 - Currency options contracts - 3,004 $ 9,737,303 $ 8,137,398 Financial liabilities at fair value through profit or loss: Call/put options and conversion $ - $ 104,525 right - convertible bonds Forward exchange contracts 32,695 - Currency options contracts - 1,370 $ 32,695 $ 105,895 A. For the years ended December 31, 2011 and 2010, the Company recognized net financial assets gain on valuation of $163,466 and $466,044, respectively, and net financial liabilities loss on valuation of $522,198 and $44,971, respectively. B. The trading items and contract information of derivatives are as follows: Contract Amount Contract Amount (Nominal principal) (Nominal principal) Items (in thousands) Contract Period (in thousands) Contract Period Derivative financial assets Forward exchange contracts USD 80, ~ Currency options contracts - - USD 10, ~ Derivative financial liabilities 2011/12/ /12/31 Forward exchange contracts USD 278, ~ Currency options contracts - - USD 30, ~ The main purpose of the Company s trading derivatives was to hedge foreign currency risk from operating activities. As of December 31, 2011 and 2010, the Company did not meet the criteria for hedge accounting, so the Company recognized them at fair value. C. For convertible bonds information, please refer to Note 4(11), Bonds payable. ~16~

17 (3) Available-for-sale financial assets A. For available-for-sale financial assets, the amount of gain recognized directly in equity was $521,721 and $639,744 for the years ended December 31, 2011 and 2010, respectively. B. After evaluating and comparing the carrying value of available-for-sale financial assets and the recoverable amount, the Company recognized impairment loss amounting to $12,000 and $0 for the years ended December 31, 2011 and 2010, respectively. (4) Financial assets carried at cost Items 2011/12/ /12/31 Current: Listed and OTC stocks AZURE $ 191,541 $ - EDISON - 100,625 Others 83,251 36,168 $ 274,792 $ 136,793 Non-Current: Listed and OTC stocks ADVANTECH $ 7,015,732 $ 6,278,997 Others 52,607 67,519 $ 7,068,339 $ 6,346,516 Items 2011/12/ /12/31 Current: Unlisted and non-otc stocks Others $ 372 $ 372 Non-current: Unlisted and non-otc stocks AZURE $ - $ 202,660 AMTRUST CAPITAL I 100, ,000 Others 56, , , ,661 Less: provision for impairment ( 48,422) ( 37,141) $ 107,579 $ 400,520 A. The above investments were measured at cost since there are no public quotes in active markets and their fair value cannot be measured reliably. B. The Company and its subsidiaries lost significant influence on AZURE on June 1, 2010, the spin-off date, and accordingly discontinued applying the equity method. C. After evaluating and comparing the carrying value of financial assets carried at cost and the recoverable amount, the Company recognized impairment loss amounting to $11,281 and $0 for the years ended December 31, 2011 and 2010, respectively. ~17~

18 (5) Accounts receivable (6) Inventories Except for cost of goods sold, the inventories recognized as decrease in operating costs amounted to $712,105 and $492,549, of which $714,747 and $496,780 were net realizable value recovery of inventories because some inventories with allowance for decline in value had been sold during the years ended December 31, 2011 and 2010, respectively. (7) Long-term equity investments 2011/12/ /12/31 Accounts receivable $ 2,700,985 $ 9,191,918 Less: allowance for doubtful accounts ( 31,227) ( 108,004) (provision for impairment) $ 2,669,758 $ 9,083, /12/ /12/31 Raw materials $ 5,378,508 $ 5,602,157 Work in process 1,169, ,566 Finished goods 636, ,639 Merchandise inventories 13,957,561 10,249,608 Inventories in transit 183,848 80,601 21,326,033 17,471,571 Less: allowance for decline in value of inventories ( 1,176,527) ( 1,891,274) $ 20,149,506 $ 15,580,297 A. Details of long-term equity investments accounted for under the equity method are as follows: 2011/12/ /12/31 Percentage Percentage Carrying of Carrying of Investee company amount ownership amount ownership PEGA $ 22,374, $ 22,165, AIL 19,415, ,839, ASKEY 9,584, ,845, AAEON 2,607, , HCVC 1,069, ,208, HMI 717, , AHL 670, , ASUTC 484, , Others 1,459,545 1,099,493 $ 58,384,558 $ 46,223,721 ~18~

19 B. The investment income recognized under the equity method amounted to $7,274,803 and $8,541,113 for the years ended December 31, 2011 and 2010, respectively which were determined based on the investees audited financial statements. As of December 31, 2011 and 2010, the related long-term equity investments (deferred credits) amounted to $58,384,558 ($793,962) and $46,223,721 ($757,225), respectively. C. The effect of changes in unrealized gain (loss) on financial assets (including unrealized gain on cash flow hedge) resulting from long-term equity investments were $948,996 and ($469,900) for the years ended December 31, 2011 and 2010, respectively. D. The Company received cash dividends amounting to $1,303,736 and $4,018,073 for the years ended December 31, 2011 and 2010, respectively, accounted for as a deduction from long-term equity investments. E. The change of long-term equity investments accounted for under the equity method are as follows: (A) On June 1, 2010, the Company transferred the OEM assets and business (the Company s long-term equity investment in PEGA) to PII. PII then issued new shares to the Company and its shareholders as consideration. The Company then obtained 25% ownership of the consolidated PEGA and PII (PII is the dissolved company). The long-term investment decreased by $70,197,726 after this transaction. (B) (C) AHL decreased its capital and the Company received a return of capital amounting to $1,061,951 for the year ended December 31, SYT had a cash capital increase on January 10, 2010, and the Company invested $2,500,400. After the capital increase, the Company held 45,120,000 shares of SYT, representing 47% ownership. (D) As approved by the authorities and in compliance with the related regulations, SYT had obtained 86,220,000 shares of AAEON, and the merger record date was set on June 1, After the merger, SYT was the surviving company, and SYT has been approved by the authorities on July 4, 2011 to change its name to AAEON. (8) Property, plant and equipment 2011/12/31 Accumulated depreciation Initial cost and impairment Book value Land $ 981,191 $ - $ 981,191 Buildings 2,312,270 ( 390,140) 1,922,130 Instruments and equipment 379,407 ( 203,084) 176,323 Other equipment 943,706 ( 355,592) 588,114 Prepayments for equipment 270, ,053 $ 4,886,627 ($ 948,816) $ 3,937,811 ~19~

20 After evaluating and comparing the carrying value of property, plant and equipment and its recoverable amount, the Company recognized impairment loss amounting to $335,171 and $0 for the years ended December 31, 2011 and 2010, respectively. (9) Leased assets (10) Idle assets 2010/12/31 Accumulated depreciation Initial cost and impairment Book value Land $ 981,191 $ - $ 981,191 Buildings 2,312,517 ( 343,308) 1,969,209 Instruments and equipment 442,298 ( 246,961) 195,337 Other equipment 1,796,127 ( 765,153) 1,030,974 Prepayments for equipment 92,392-92,392 $ 5,624,525 ($ 1,355,422) $ 4,269,103 Initial cost 2011/12/ /12/31 Land $ 38,233 $ 38,233 Buildings 70,678 80, , ,964 Less: accumulated depreciation - buildings ( 12,923) ( 21,592) $ 95,988 $ 97, /12/ /12/31 Other equipment $ 963,354 $ 1,338,232 Less: accumulated depreciation ( 571,287) ( 1,028,773) Less: accumulated impairment ( 392,067) ( 309,459) $ - $ - After evaluating and comparing the carrying value of idle assets and their recoverable amount, the Company recognized impairment loss amounting to $82,608 and $7,842 for the years ended December 31, 2011 and 2010, respectively. ~20~

21 (11) Bonds payable The details of domestic unsecured convertible bonds are as follows: 2011/12/ /12/31 Aggregate principal amount $ 12,000,000 $ 12,000,000 Accumulated converted amount ( 7,000) ( 7,000) Accumulated redeemed amount ( 11,993,000) ( 9,533,600) Discount on bonds payable - ( 47,091) - 2,412,309 Less: convertible bonds payable- - ( 2,412,309) Less: redeemable within one year Total $ - $ /12/ /12/31 Debt-component embedded derivative: -conversion rights $ - $ 104,525 A. The Company issued the redeemable domestic unsecured convertible bonds on November 7, The main issuance terms are as follows: (A) Total amount of the convertible bonds at issuance: $12,000,000 (B) Nominal rate: 0% 2011/1/1~12/ /1/1~12/31 Gain on valuation of financial liabilitiescall/put option and conversion rights $ 104,525 $ 151,382 Interest expense $ 47,091 $ 81,039 (C) Duration of issuance: 5 years (from November 7, 2006 to November 7, 2011) (D) Conversion period: Each bondholder has the right to convert all or from time to time any portion of its convertible bonds into common shares during the conversion period (up to 31 days after the original issue date to 10 days before the maturity date). (E) Conversion price and adjustment: The conversion price is $105.4 (in dollars) per common share initially. The conversion price will be adjusted upon the occurrence of an increase in the number of common shares. On July 14, 2011, the Company adjusted further the conversion price to $269.2 (in dollars), considering the effect of capitalization from retained earnings. (F) Call option: The Company could redeem the convertible bonds at par value at any time during the period from December 8, 2006 to September 28, 2011, under the following conditions: the closing price of the common shares on each of 30 consecutive trading days reaches or exceeds 50% of the conversion price, or the outstanding balance of the bonds is less than 10% of the original issuance. (G) Put option: Each bondholder has the right to put the convertible bonds at par value after the 3rd and 4th year. ~21~