LCY CHEMICAL CORP. and Subsidiaries. Consolidated Financial Statements for the Years Ended December 31, 2017 and 2016 and Independent Auditors Report

Transcription

1 LCY CHEMICAL CORP. and Subsidiaries Consolidated Financial Statements for the Years Ended December 31, 2017 and 2016 and Independent Auditors Report

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3 Key audit matters for the consolidated financial statements for the year ended December 31, 2017 are stated as follows: Impairment Assessment of Property, Plant and Equipment As described in Note 5, the carrying value of property, plant and equipment, as of December 31, 2017, was $12,581,991 thousand, representing 27% of the total assets which is material to the consolidated financial statements as a whole. Refer to Note 14 to the consolidated financial statements for the details of the information. In accordance with IAS 36 - Impairment of Assets, the management assesses periodically whether there is any indication that property, plant and equipment may be impaired. If an indication of impairment exists, management considers the usage of the asset and industry condition to determine the recoverable amount of the cash-generating unit to which the asset belongs based on judgments. Since the assessment of indication of impairment and determination of the recoverable amounts of an asset are subject to management s judgments and assumptions, the impairment assessment is deemed to be a key audit matter. Management analyzed the industry trend and market condition and evaluated the Group s operating performance and financial condition, and concluded that no indication of impairment exists. We reviewed the impairment evaluation report prepared by the management, and assessed the underlying information the management used when assessing for the indication of impairment to evaluate the appropriateness of impairment assessment performed by the management. Assessment of Compensation for Gas Explosion Event As described in Note 31, a gas explosion occurred in Kaohsiung on July 31, 2014, which resulted in several civil litigations that are currently pending. The management assesses contingent liabilities regarding claims for civil damage due to the gas explosion event in accordance with IAS 37 - Provisions, Contingent Liabilities and Contingent Assets to estimate the probability and amount of outflow of resources embodying economic benefits. Provisions shall be recognized whenever an outflow of resources embodying economic benefits is probable and estimable. Since the assessment of the probability and amount of damage claims requires management s judgments and estimates, the assessment of the pending damage claims for gas explosion event is deemed to be a key audit matter. Our key audit procedures performed in respect of the assessment thereof included the followings: 1. We obtained pending litigation information of the gas explosion event from management and inquired of management s current assessment of and actions on the litigations. 2. We also inquired from external legal counsels whether it is probable that a civil damage may be incurred and whether the amount of such loss can be estimated. 3. We evaluated the reasonableness of aforementioned assessment performed by the management. Others We have audited and expressed an unqualified opinion on the separate financial statements of LCY CHEMICAL CORP. as of and for the years ended December 31, 2017 and

4 Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with the Regulations Governing the Preparation of Financial Reports by Securities Issuers and IFRS, IAS, IFRIC and SIC endorsed and issued into effect by the FSC of the Republic of China 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. In preparing the consolidated financial statements, management is responsible for assessing the Group s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance, including supervisor, are responsible for overseeing the Group s financial reporting process. Auditors Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the auditing standards generally accepted in the Republic of China will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with the auditing standards generally accepted in the Republic of China, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: 1. Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. 2. Obtain an understanding of internal control relevant to the audit 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 Group s internal control. 3. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. 4. Conclude on the appropriateness of management s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors report. However, future events or conditions may cause the Group to cease to continue as a going concern

5 5. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. 6. Obtain sufficient and appropriate audit evidence regarding the financial information of entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision, and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with statements that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements for the year ended December 31, 2017 and are therefore the key audit matters. We describe these matters in our auditors report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. The engagement partners on the audit resulting in this independent auditors report are Wen-Chi Kuo and Yi-Wen Wang. Deloitte & Touche Taipei, Taiwan Republic of China March 19, 2018 Notice to Readers The accompanying financial statements are intended only to present the consolidated financial position, consolidated financial performance and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to audit such consolidated financial statements are those generally applied in the Republic of China. For the convenience of readers, the independent auditors report and the accompanying consolidated financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language independent auditors report and consolidated financial statements shall prevail

6 LCY CHEMICAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2017 AND 2016 (In Thousands of New Taiwan Dollars) ASSETS Amount % Amount % CURRENT ASSETS Cash and cash equivalents (Note 6) $ 14,702, $ 11,130, Financial assets at fair value through profit or loss (Note 7) 282, ,999 2 Available-for-sale financial assets (Note 8) 1,397, ,210,021 3 Notes receivable 1,144, ,597 2 Notes receivable - related parties (Note 29) 18,604-19,637 - Trade receivables (Notes 10 and 30) 2,767, ,719,939 7 Trade receivables - related parties (Note 29) 6,348-31,578 - Other receivables 326, ,463 2 Other receivables - related parties (Note 29) 1,061-1,254 - Current tax assets 14,264-4,163 - Inventories (Notes 11 and 30) 5,628, ,746, Prepayments (Note 29) 469, ,161 1 Non-current assets held for sale (Note 12) ,317 1 Other financial assets (Notes 15 and 30) 2,666, ,442,520 3 Other current assets 306, ,251 1 Total current assets 29,732, ,965, NON-CURRENT ASSETS Available-for-sale financial assets (Note 8) 192,311-78,985 - Financial assets measured at cost (Note 9) 3,150, ,264,055 8 Property, plant and equipment (Notes 5, 14 and 30) 12,581, ,203, Other intangible assets 62,349-59,088 - Deferred tax assets (Note 22) 313, ,517 1 Other financial assets (Notes 15 and 30) 280, ,641 - Long-term prepayments for lease 289, ,493 1 Other non-current assets (Notes 15, 26 and 29) 656, ,152,876 3 Total non-current assets 17,527, ,515, TOTAL $ 47,260, $ 41,481, LIABILITIES AND EQUITY CURRENT LIABILITIES Short-term borrowings (Note 16) $ 3,272,043 7 $ 2,752,902 7 Short-term bills payable (Note 16) 996, Financial liabilities at fair value through profit or loss (Note 7) 133,290-53,495 - Notes payable (Note 17) 6,436-4,713 - Trade payables (Note 17) 2,610, ,524,757 6 Trade payables - related parties (Note 29) 73,272-55,403 - Other payables (Note 18) 2,071, ,809,168 4 Other payables - related parties (Note 29) 26, Current tax liabilities 406, ,896 - Receipts in advance 406, ,921 1 Current portion of long-term borrowings (Note 16) 616, ,297,145 3 Other current liabilities 5,593-6,905 - Total current liabilities 10,626, ,865, NON-CURRENT LIABILITIES Long-term borrowings (Note 16) 4,264, ,412,570 3 Deferred tax liabilities (Note 22) 4,676, ,413, Guarantee deposits received 2,559-4,311 - Total non-current liabilities 8,944, ,830, Total liabilities 19,570, ,696, EQUITY ATTRIBUTABLE TO OWNERS OF THE CORPORATION (Note 20) Share capital Ordinary shares 8,554, ,560, Share capital to be cancelled (1,050) Total share capital 8,553, ,560, Capital surplus 9,646, ,236, Retained earnings Legal reserve 2,812, ,415,335 6 Special reserve 1,561, ,561,927 4 Unappropriated earnings 5,234, ,607, Total retained earnings 9,608, ,585, Other equity (716,471) (1) 305,512 1 Total equity attributable to owners of the Corporation 27,091, ,686, NON-CONTROLLING INTERESTS (Note 20) 598, ,959 - Total equity 27,689, ,785, TOTAL $ 47,260, $ 41,481, The accompanying notes are an integral part of the consolidated financial statements

7 LCY CHEMICAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (In Thousands of New Taiwan Dollars, Except Earnings Per Share) Amount % Amount % OPERATING REVENUE Sales (Note 29) $ 45,069, $ 39,853, Rental revenue (Note 29) 214, ,767 1 Other operating revenue 36, Total operating revenue 45,320, ,080, OPERATING COSTS Cost of goods sold (Notes 11, 21 and 29) 37,988, ,028, Rental cost 97, ,886 - Other operating cost 1, Total operating costs 38,088, ,129, GROSS PROFIT 7,231, ,950, OPERATING EXPENSES (Notes 21 and 29) Selling and marketing expenses 1,899, ,728,509 4 General and administrative expenses 842, ,097 2 Research and development expenses 418, ,603 1 Total operating expenses 3,159, ,826,209 7 PROFIT FROM OPERATIONS 4,072, ,124, NON-OPERATING INCOME AND EXPENSES Other income (Notes 21 and 29) 1,038, ,251 2 Other gains and losses (Notes 21 and 29) (346,232) (1) (81,206) - Finance costs (Note 21) (145,556) - (91,814) - Total non-operating income and expenses 546, ,231 2 PROFIT BEFORE INCOME TAX 4,618, ,646, INCOME TAX EXPENSE (Note 22) 946, ,765 2 NET PROFIT FOR THE YEAR 3,672, ,993, (Continued) - 6 -

8 LCY CHEMICAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (In Thousands of New Taiwan Dollars, Except Earnings Per Share) Amount % Amount % OTHER COMPREHENSIVE INCOME Items that may be reclassified subsequently to profit and loss Exchange differences on translating foreign operations $ (1,431,762) (3) $ (671,547) (1) Unrealized gain or loss on available-for-sale financial assets 129,148 - (1,036) - Income tax relating to components of other comprehensive income (Note 22) 243, ,162 - Other comprehensive income (loss) for the year, net of income tax (1,059,214) (2) (558,421) (1) TOTAL COMPREHENSIVE INCOME FOR THE YEAR $ 2,613,449 6 $ 3,435,439 9 NET PROFIT ATTRIBUTABLE TO: Owners of the Corporation $ 3,581,943 8 $ 3,968, Non-controlling interests 90,720-25,653 - $ 3,672,663 8 $ 3,993, TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO: Owners of the Corporation $ 2,522,726 6 $ 3,409,783 9 Non-controlling interests 90,723-25,656 - $ 2,613,449 6 $ 3,435,439 9 EARNINGS PER SHARE (Note 23) Basic $ 4.20 $ 4.65 Diluted $ 4.19 $ 4.64 The accompanying notes are an integral part of the consolidated financial statements. (Concluded) - 7 -

9 LCY CHEMICAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (In Thousands of New Taiwan Dollars) Equity Attributable to Owners of the Corporation Other Equity Exchange Unrealized Differences on Gain (Loss) on Share Capital Retained Earnings Translating Available-for- Unearned Non- Shares (In Ordinary Share Capital Capital Unappropriated Foreign sale Financial Employee controlling Thousand) Shares to Be Cancelled Surplus Legal Reserve Special Reserve Earnings Total Operations Assets Compensation Total Total Interests Total Equity BALANCE AT JANUARY 1, ,959 $ 8,529,594 $ - $ 9,171,710 $ 2,202,110 $ 1,561,927 $ 2,132,252 $ 5,896,289 $ 876,272 $ 45,464 $ - $ 921,736 $ 24,519,329 $ 73,303 $ 24,592,632 Appropriation of 2015 earnings Legal reserve ,225 - (213,225) Cash dividends (1,279,439) (1,279,439) (1,279,439) - (1,279,439) Employee restricted shares issued 3,050 30,500-64, (94,811 ) (94,811 ) Compensation cost of employee restricted shares ,011 37,011 37,011-37,011 Net profit in ,968,207 3,968, ,968,207 25,653 3,993,860 Other comprehensive income (loss) in 2016, net of income tax (557,385) (1,039) - (558,424) (558,424) 3 (558,421) Total comprehensive income (loss) in ,968,207 3,968,207 (557,385 ) (1,039 ) - (558,424 ) 3,409,783 25,656 3,435,439 BALANCE AT DECEMBER 31, ,009 8,560,094-9,236,021 2,415,335 1,561,927 4,607,795 8,585, ,887 44,425 (57,800 ) 305,512 26,686,684 98,959 26,785,643 Appropriation of 2016 earnings Legal reserve ,821 - (396,821) Cash dividends (2,558,878) (2,558,878) (2,558,878) - (2,558,878) Other changes in capital surplus Overdue unpaid dividends reclassified to capital surplus , ,459-7,459 Actual disposals of interests in subsidiaries (Note 25) , (30) (3) - (33) 417, , ,636 Cancelation of employee restricted shares (577 ) (5,770 ) (1,050 ) 6, Compensation cost of employee restricted shares (20,986) ,267 37,267 16,281-16,281 Net profit in ,581,943 3,581, ,581,943 90,720 3,672,663 Other comprehensive income (loss) in 2017, net of income tax (1,188,361) 129,144 - (1,059,217) (1,059,217) 3 (1,059,214) Total comprehensive income (loss) in ,581,943 3,581,943 (1,188,361 ) 129,144 - (1,059,217 ) 2,522,726 90,723 2,613,449 BALANCE AT DECEMBER 31, ,432 $ 8,554,324 $ (1,050 ) $ 9,646,562 $ 2,812,156 $ 1,561,927 $ 5,234,039 $ 9,608,122 $ (869,504 ) $ 173,566 $ (20,533 ) $ (716,471 ) $ 27,091,487 $ 598,103 $ 27,689,590 The accompanying notes are an integral part of the consolidated financial statements

10 LCY CHEMICAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (In Thousands of New Taiwan Dollars) CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax $ 4,618,768 $ 4,646,625 Adjustments for: Depreciation expenses 1,165,197 1,245,307 Amortization expenses 23,358 21,236 Impairment loss recognized on trade receivables Net loss (gain) on fair value changes of financial assets and liabilities through profit or loss 357,261 (8,419) Finance costs 145,556 91,814 Interest income (162,874) (81,304) Dividend income (791,550) (537,684) Compensation cost of share-based payment 16,281 37,011 Loss on disposal of property, plant and equipment 4,356 7,689 Gain on disposal of non-current assets held for sale (63,110) - Gain on disposal of investments (28,665) (1,108) Impairment loss recognized on property, plant and equipment 130,496 - Reversal of impairment loss recognized on property, plant and equipment (7,879) - Write-down (reversal of write-down) of inventories 23,867 (19) Net loss on unrealized foreign currency exchange 172,068 57,826 Other non-cash items (45,946) (13,351) Changes in operating assets and liabilities Financial assets held for trading (3,902) 9,613 Notes receivable (205,807) (478,999) Notes receivable - related parties 1,033 (16,852) Trade receivables (124,481) (543,348) Trade receivables - related parties 25,230 (13,879) Other receivables 59,439 (63,693) Other receivables - related parties Inventories (988,158) 75,580 Prepayments (20,695) (188,015) Other current assets (47,174) (5,441) Other financial assets (61,729) 2,181,401 Financial liabilities held for trading (195,630) (47,793) Notes payable 1,723 (980) Trade payables 130, ,407 Trade payables - related parties 18,621 38,948 Other payables 208, ,031 Other payables - related parties 1,359 (27) Receipts in advance 150, ,163 Other current liabilities (1,312) 5,527 Cash generated from operations 4,505,434 7,633,789 Interest paid (134,592) (89,686) Income tax paid (169,536) (648,501) Net cash generated from operating activities 4,201,306 6,895,602 (Continued)

11 LCY CHEMICAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (In Thousands of New Taiwan Dollars) CASH FLOWS FROM INVESTING ACTIVITIES Decrease in financial asset designated as at fair value through profit or loss upon initial recognition $ 236,021 $ 75,570 Purchase of available-for-sale financial assets (3,448,508) (2,947,658) Proceeds from sale of available-for-sale financial assets 3,693,832 1,673,423 Proceeds from capital reduction of available-for-sale financial assets 17,431 4,684 Purchase of financial assets measured at cost (215,348) (292,531) Proceeds from sale of financial assets measured at cost 35, Proceeds from capital reduction of financial assets carried at cost 145, ,265 Increase in prepayments for investment (71,683) (600) Decrease in prepayments for investment Proceeds from disposal of non-current assets held for sale 518,427 - Payments for property, plant and equipment (2,112,750) (1,306,767) Proceeds from disposal of property, plant and equipment 5,127 2,721 Decrease (increase) in refundable deposits 16,643 (31,830) Payments for intangible assets (17,433) (5,168) Decrease (increase) in other financial assets (1,288,107) 281,280 Interest received 152,131 82,103 Dividend received 791, ,684 Net cash used in investing activities (1,540,784) (1,817,246) CASH FLOWS FROM FINANCING ACTIVITIES Increase in short-term borrowings 579,774 1,229,396 Proceeds from short-term bills payable 993,801 - Proceeds from long-term borrowings 3,899,319 1,378,294 Repayments of long-term borrowings (1,701,696) (2,074,683) Increase (decrease) guarantee deposits received (1,752) 2,954 Partial disposal of interests in subsidiaries without loss of control 825,636 - Cash dividends paid (2,558,878) (1,279,439) Net cash generated from (used in) financing activities 2,036,204 (743,478) EFFECTS OF EXCHANGE RATE CHANGES ON THE BALANCE OF CASH AND CASH EQUIVALENTS HELD IN FOREIGN CURRENCIES (1,125,627) (214,083) NET INCREASE IN CASH AND CASH EQUIVALENTS 3,571,099 4,120,795 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 11,130,927 7,010,132 CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $ 14,702,026 $ 11,130,927 The accompanying notes are an integral part of the consolidated financial statements. (Concluded)

12 LCY CHEMICAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise) 1. GENERAL LCY CHEMICAL CORP. (the Corporation), incorporated in November 6, 1965, mainly manufactures and sells polypropylene resin (PP), methanol, solvents and thermoplastic elastomer (TPE). The Corporation s shares have been listed on the Taiwan Stock Exchange since December 17, These consolidated financial statements of the Corporation and its subsidiaries (collectively referred to as the Group) are presented in the Corporation s functional currency, New Taiwan dollars. 2. APPROVAL OF FINANCIAL STATEMENTS The consolidated financial statements were approved by the Corporation s board of directors and authorized for issue on March 19, APPLICATION OF NEW AND REVISED STANDARDS, AMENDMENTS AND INTERPRETATIONS a. Initial application of the amendments to the Regulations Governing the Preparation of Financial Reports by Securities Issuers and the International Financial Reporting Standards (IFRS), International Accounting Standards (IAS), Interpretations of IFRS (IFRIC), and Interpretations of IAS (SIC) (collectively, the IFRSs ) endorsed and issued into effect by the FSC Except for the following, the initial application of the amendments to the Regulations Governing the Preparation of Financial Reports by Securities Issuers and the IFRSs endorsed and issued into effect by the FSC did not have any material impact on the Group s accounting policies: 1) Amendments to the Regulations Governing the Preparation of Financial Reports by Securities Issuers The amendments include additions of several accounting items and requirements for disclosures of impairment of non-financial assets as a consequence of the IFRSs endorsed and issued into effect by the FSC. In addition, as a result of the post implementation review of IFRSs in Taiwan, the amendments also include an emphasis on certain recognition and measurement considerations and add requirements for disclosures of related party transactions and goodwill. The amendments stipulate that other companies or institutions of which the chairman of the board of directors or president serves as the chairman of the board of directors or the president of the Corporation or its subsidiaries, or is the spouse or second immediate family of the chairman of the board of directors or president of the Corporation or its subsidiaries, are deemed to have a substantive related party relationship, unless it can be demonstrated that no control, joint control, or significant influence exists. Furthermore, the amendments require the disclosure of the names of the related parties and the relationships with whom the Group has significant transactions. If the transaction amount or balance with a specific related party is 10% or more of the Group s respective total transaction amount or balance, such transactions should be separately disclosed by the name of each related party

13 The retrospective application of the amendments on January 1, 2017, enhanced the disclosure of related party transactions. Refer to Note 28 for the related disclosures. 2) Amendments to IAS 36 Impairment of Assets The amendment Disclosures for Non-financial Assets clarifies that the recoverable amount of an asset or a cash-generating unit is disclosed only when an impairment loss on the asset has been recognized or reversed during the period. Furthermore, if the recoverable amount of an item of property, plant and equipment for which impairment loss has been recognized is the fair value less costs of disposal, the Group is required to disclose the fair value hierarchy. If the fair value measurements are categorized within Level 2 or Level 3, the valuation technique and key assumptions used to measure the fair value are disclosed. The discount rate used is disclosed if such fair value less costs of disposal is measured by using the present value technique. The amendment has been applied retrospectively on January 1, Refer to Note 14 for the related disclosures. b. The Regulations Governing the Preparation of Financial Reports by Securities Issuers and the IFRSs endorsed by the FSC for application starting from 2018 New IFRSs Effective Date Announced by IASB (Note 1) Annual Improvements to IFRSs Cycle Note 2 Amendments to IFRS 2 Classification and Measurement of January 1, 2018 Share-based Payment Transactions Amendments to IFRS 4 Applying IFRS 9 Financial Instruments with January 1, 2018 IFRS 4 Insurance Contracts IFRS 9 Financial Instruments January 1, 2018 Amendments to IFRS 9 and IFRS 7 Mandatory Effective Date of January 1, 2018 IFRS 9 and Transition Disclosures IFRS 15 Revenue from Contracts with Customers January 1, 2018 Amendments to IFRS 15 Clarifications to IFRS 15 Revenue from January 1, 2018 Contracts with Customers Amendment to IAS 7 Disclosure Initiative January 1, 2017 Amendments to IAS 12 Recognition of Deferred Tax Assets for January 1, 2017 Unrealized Losses Amendments to IAS 40 Transfers of Investment Property January 1, 2018 IFRIC 22 Foreign Currency Transactions and Advance January 1, 2018 Consideration Note 1: Unless stated otherwise, the above New IFRSs are effective for annual periods beginning on or after their respective effective dates. Note 2: The amendment to IFRS 12 is retrospectively applied for annual periods beginning on or after January 1, 2017; the amendments to IAS 28 are retrospectively applied for annual periods beginning on or after January 1,

14 IFRS 9 Financial Instruments and related amendments Classification, measurement and impairment of financial assets With regard to financial assets, all recognized financial assets that are within the scope of IAS 39 Financial Instruments: Recognition and Measurement are subsequently measured at amortized cost or fair value. Under IFRS 9, the requirement for the classification of financial assets is stated below. For the Group s debt instruments that have contractual cash flows that are solely payments of principal and interest on the principal amount outstanding, their classification and measurement are as follows: 1) For debt instruments, if they are held within a business model whose objective is to collect contractual cash flows, the financial assets are measured at amortized cost and are assessed for impairment continuously with any impairment loss recognized in profit or loss. Interest revenue is recognized in profit or loss by using the effective interest method; 2) For debt instruments, if they are held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, the financial assets are measured at fair value through other comprehensive income (FVTOCI) and are assessed for impairment. Interest revenue is recognized in profit or loss by using the effective interest method, and other gains or losses are recognized in other comprehensive income, except for impairment gains or losses and foreign exchange gains and losses. When the debt instruments are derecognized or reclassified, the cumulative gain or loss previously recognized in other comprehensive income is reclassified from equity to profit or loss. Except for the above measurements, all other financial assets are measured at fair value through profit or loss. However, the Group may make an irrevocable election to present subsequent changes in the fair value of an equity investment (that is not held for trading) in other comprehensive income, with only dividend income generally recognized in profit or loss. No subsequent impairment assessment is required, and the cumulative gain or loss previously recognized in other comprehensive income cannot be reclassified from equity to profit or loss. The Group analyzed the facts and circumstances of its financial assets that exist at December 31, 2017 and performed the assessment of the impact of IFRS 9 on the classification and measurement of financial assets. Under IFRS 9: 1) Listed shares classified as held for trading or available-for-sale will be designated as at fair value through other comprehensive income and the fair value gains or losses accumulated in other equity will be transferred directly to retained earnings instead of being reclassified to profit or loss on disposal. Besides this, unlisted shares measured at cost will be measured at fair value instead; 2) Mutual funds and venture funds classified as available-for-sale will be classified as at fair value through profit or loss because the contractual cash flows are not solely payments of principal and interest on the principal outstanding and they are not equity instruments. Besides this, venture funds measured at cost will be measured at fair value instead; and 3) Trade receivables classified as loans and receivables and measured at amortized cost will be classified as measured at amortized cost under IFRS 9 because, on initial recognition, the contractual cash flows are solely payments of principal and these investments are held within a business model whose objective is to collect contractual cash flows, or will be classified as at fair value through other comprehensive income under IFRS 9 because, on initial recognition, the contractual cash flows that are solely payments of principal and these investments are held within a business model whose objective is achieved both by collecting contractual cash flows and selling financial assets

15 4) Debt investments classified as other financial assets and measured at amortized cost will be classified as measured at amortized cost under IFRS 9 because, on initial recognition, the contractual cash flows are solely payments of principal and interest on the principal outstanding and these investments are held within a business model whose objective is to collect contractual cash flows, or will be classified as at fair value through profit or loss because, on initial recognition, the contractual cash flows are not solely payments of principal and interest on the principal outstanding. IFRS 9 requires impairment loss on financial assets to be recognized by using the Expected Credit Losses Model. A loss allowance is required for financial assets measured at amortized cost, investments in debt instruments measured at FVTOCI, lease receivables, contract assets arising from IFRS 15 Revenue from Contracts with Customers, certain written loan commitments and financial guarantee contracts. A loss allowance for 12-month expected credit losses is required for a financial asset if its credit risk has not increased significantly since initial recognition. A loss allowance for full-lifetime expected credit losses is required for a financial asset if its credit risk has increased significantly since initial recognition and is not low. However, a loss allowance for full-lifetime expected credit losses is required for trade receivables that do not constitute a financing transaction. For purchased or originated credit-impaired financial assets, the Group takes into account the expected credit losses on initial recognition in calculating the credit-adjusted effective interest rate. Subsequently, any changes in expected losses are recognized as a loss allowance with a corresponding gain or loss recognized in profit or loss. The Group has performed a preliminary assessment that it will apply the simplified approach to recognize full-lifetime expected credit losses for trade receivables. In relation to debt instrument investments, the Group will assess whether there has been a significant increase in credit risk to determine whether to recognize 12-month or full-lifetime expected credit losses. In general, the Group anticipates that the application of the expected credit losses model of IFRS 9 will result in an earlier recognition of credit losses for financial assets. The Group will elect not to restate prior reporting periods when applying the requirements for the classification, measurement and impairment of financial assets under IFRS 9, and will recognize the cumulative effect of the initial application at the date of initial application and will provide the disclosures related to the classification and the adjustment information upon initial application of IFRS 9. The anticipated impact on assets, liabilities and equity of retrospective application of the requirements for the classification, measurement and impairment of financial assets as of January 1, 2018 is set out below: Carrying Amount as of December 31, 2017 Adjustments Arising from Initial Application Adjusted Carrying Amount as of January 1, 2018 Impact on assets, liabilities and equity Financial assets at fair value through profit or loss $ 282,374 $ 2,993,092 $ 3,275,466 Available-for-sale financial assets - current 1,397,437 (1,397,437) - Financial assets measured at amortized cost - current - 2,391,282 2,391,282 Other financial assets - current 2,666,827 (2,666,827) - Available-for-sale financial assets - non-current 192,311 (192,311) - (Continued)

16 Carrying Amount as of December 31, 2017 Adjustments Arising from Initial Application Adjusted Carrying Amount as of January 1, 2018 Financial assets at fair value through other comprehensive income - non-current $ - $ 4,722,065 $ 4,722,065 Other financial assets - non-current 280,247 (280,247) - Financial assets measured at amortized cost - non-current - 280, ,247 Financial assets measured at cost - non-current 3,150,784 (3,150,784) - Trade receivables - non-related parties 2,767,101 13,130 2,780,231 Total effect on assets $ 10,737,081 $ 2,712,210 $ 13,449,291 Deferred tax liabilities $ 4,676,927 $ 26,257 $ 4,703,184 Total effect on liabilities $ 4,676,927 $ 26,257 $ 4,703,184 Retained earnings $ 9,608,122 $ 164,846 $ 9,772,968 Other equity (716,471) 2,519,291 1,802,820 Non-controlling interests 598,103 1, ,919 Total effect on equity $ 9,489,754 $ 2,685,953 $ 12,175,707 (Concluded) Except for the above impact, as of the date the consolidated financial statements were authorized for issue, the Group has assessed that the application of other standards and interpretations would not have material impact on the Group s financial position and financial performance. c. New IFRSs in issue but not yet endorsed and issued into effect by the FSC New IFRSs Effective Date Announced by IASB (Note 1) Annual Improvements to IFRSs Cycle January 1, 2019 Amendments to IFRS 9 Prepayment Features with Negative January 1, 2019 (Note 2) Compensation Amendments to IFRS 10 and IAS 28 Sale or Contribution of Assets To be determined by IASB between an Investor and its Associate or Joint Venture IFRS 16 Leases January 1, 2019 (Note 3) IFRS 17 Insurance Contracts January 1, 2021 Amendments to IAS 19 Plan Amendment, Curtailment or January 1, 2019 (Note 4) Settlement Amendments to IAS 28 Long-term Interests in Associates and Joint January 1, 2019 Ventures IFRIC 23 Uncertainty Over Income Tax Treatments January 1, 2019 Note 1: Unless stated otherwise, the above New IFRSs are effective for annual periods beginning on or after their respective effective dates. Note 2: The FSC permits the election for early adoption of the amendments starting from

17 Note 3: On December 19, 2017, the FSC announced that IFRS 16 will take effect starting from January 1, Note 4: The Group shall apply these amendments to plan amendments, curtailments or settlements occurring on or after January 1, IFRS 16 Leases IFRS 16 sets out the accounting standards for leases that will supersede IAS 17 and a number of related interpretations. Under IFRS 16, if the Group is a lessee, it shall recognize right-of-use assets and lease liabilities for all leases on the consolidated balance sheets except for low-value and short-term leases. The Group may elect to apply the accounting method similar to the accounting for operating leases under IAS 17 to low-value and short-term leases. On the consolidated statements of comprehensive income, the Group should present the depreciation expense charged on right-of-use assets separately from the interest expense accrued on lease liabilities; interest is computed by using the effective interest method. On the consolidated statements of cash flows, cash payments for the principal portion of lease liabilities are classified within financing activities; cash payments for the interest portion are classified within operating activities. The application of IFRS 16 is not expected to have a material impact on the accounting of the Group as lessor. When IFRS 16 becomes effective, the Group may elect to apply this standard either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of the initial application of this standard recognized at the date of initial application. Except for the above impact, as of the date the consolidated financial statements were authorized for issue, the Group is continuously assessing the possible impact that the application of other standards and interpretations will have on the Group s financial position and financial performance, and will disclose the relevant impact when the assessment is completed. 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Statement of Compliance The consolidated financial statements have been prepared in accordance with the Regulations Governing the Preparation of Financial Reports by Securities Issuers and IFRSs as endorsed by the FSC. Basis of Preparation The consolidated financial statements have been prepared on the historical cost basis except for financial instruments which are measured at fair value. Historical cost is generally based on the fair value of the consideration given in exchange for assets. The fair value measurements are grouped into Levels 1 to 3 based on the degree to which the fair value measurement inputs are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows: a. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; b. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

18 c. Level 3 inputs are unobservable inputs for the asset or liability. Classification of Current and Non-current Assets and Liabilities Current assets include: a. Assets held primarily for the purpose of trading; b. Assets expected to be realized within twelve months after the reporting period; and c. Cash and cash equivalents unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period. Current liabilities include: a. Liabilities held primarily for the purpose of trading; b. Liabilities due to be settled within twelve months after the reporting period, even if an agreement to refinance, or to reschedule payments, on a long-term basis is completed after the reporting period and before the consolidated financial statements are authorized for issue; and c. Liabilities for which the Group does not have an unconditional right to defer settlement for at least twelve months after the reporting period. Terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification. Assets and liabilities that are not classified as current are classified as non-current. Basis of Consolidation Principles for preparing consolidated financial statements The consolidated financial statements incorporate the financial statements of the Corporation and the entities controlled by the Corporation (i.e. its subsidiaries, including special purpose entities). Income and expenses of subsidiaries disposed of during the period are included in the consolidated statement of profit or loss and other comprehensive income up to the effective date of disposal, as appropriate. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by the Corporation. All intra-group transactions, balances, income and expenses are eliminated in full upon consolidation. Attribution of total comprehensive income to non-controlling interests Total comprehensive income of subsidiaries is attributed to the owners of the Corporation and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. Changes in the Group s ownership interests in existing subsidiaries Changes in the Group s ownership interests in subsidiaries that do not result in the Group losing control over the subsidiaries are accounted for as equity transactions. The carrying amounts of the Group s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity and attributed to the owners of the Corporation

19 When the Group loses control of a subsidiary, a gain or loss is recognized in profit or loss and is calculated as the difference between (i) the aggregate of the fair value of the consideration received and any investment retained in the former subsidiary at its fair value at the date when control is lost and (ii) the assets (including any goodwill) and liabilities and any non-controlling interests of the former subsidiary at their carrying amounts at the date when control is lost. The Group accounts for all amounts recognized in other comprehensive income in relation to that subsidiary on the same basis as would be required if the Group had directly disposed of the related assets or liabilities. See Note 13 for the detailed information of subsidiaries (including the percentage of ownership and main business). Foreign Currencies In preparing the financial statements of each individual group entity, transactions in currencies other than the entity s functional currency (foreign currencies) are recognized at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Exchange differences on monetary items arising from settlement or translation are recognized in profit or loss in the period. Non-monetary items measured at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Exchange differences arising on the retranslation of non-monetary items are included in profit or loss for the period except for exchange differences arising from the retranslation of non-monetary items in respect of which gains and losses are recognized directly in other comprehensive income, in which case, the exchange differences are also recognized directly in other comprehensive income. Non-monetary items that are measured at historical cost in a foreign currency are not retranslated. For the purposes of presenting consolidated financial statements, the assets and liabilities of the Group s foreign operations (including of the subsidiaries, associates or branches operations in other countries or currencies used different with the Corporation) are translated into New Taiwan dollars using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for the period. Exchange differences arising are recognized in other comprehensive income (attributed to the owners of the Corporation and non-controlling interests as appropriate). In relation to a partial disposal of a subsidiary that does not result in the Corporation losing control over the subsidiary, the proportionate share of accumulated exchange differences is re-attributed to non-controlling interests of the subsidiary and is not recognized in profit or loss. Cash Equivalents Cash equivalents are time deposits with original maturities less than three months, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. Inventories Inventories consist of raw materials, supplies, finished goods and work-in-process and are stated at the lower of cost or net realizable value. Inventory write-downs are made by item, except where it may be appropriate to group similar or related items. Net realizable value is the estimated selling price of inventories less all estimated costs of completion and costs necessary to make the sale. Inventories are recorded at weighted-average cost on the balance sheet date

20 Property, Plant and Equipment Property, plant and equipment are stated at cost, less accumulated depreciation and accumulated impairment loss. Properties in the course of construction for production, supply or administrative purposes are carried at cost, less any recognized impairment loss. Cost includes professional fees and borrowing costs eligible for capitalization. Such properties are depreciated and classified to the appropriate categories of property, plant and equipment when completed and ready for intended use. Freehold land is not depreciated. Depreciation is recognized using the straight-line method. Each significant part is depreciated separately. The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis. On derecognition of an item of property, plant and equipment, the difference between the sales proceeds and the carrying amount of the asset is recognized in profit or loss. Intangible Assets Intangible assets acquired separately Intangible assets with finite useful lives that are acquired separately are initially measured at cost and subsequently measured at cost less accumulated amortization and accumulated impairment loss. Amortization is recognized on a straight-line basis. The estimated useful life, residual value, and amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis. Intangible assets with indefinite useful lives that are acquired separately are measured at cost less accumulated impairment loss. Derecognition of intangible assets On derecognition of an intangible asset, the difference between the net disposal proceeds and the carrying amount of the asset is recognized in profit or loss. Impairment of Tangible and Intangible Assets At the end of each reporting period, the Group reviews the carrying amounts of its tangible and intangible assets, to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. When it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Corporate assets are allocated to the individual cash-generating units on a reasonable and consistent basis of allocation/corporate assets are allocated to the smallest group of cash-generating units on a reasonable and consistent allocation basis. Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell and value in use. If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, the carrying amount of the asset or cash-generating unit is reduced to its recoverable amount