YUANTA SECURITIES CO., LTD.

Transcription

1 YUANTA SECURITIES CO., LTD. NON-CONSOLIDATED 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.

2 REPORT OF INDEPENDENT ACCOUNTANTS PWCR To the Board of Directors and Stockholders of Yuanta Securities Co., Ltd. We have audited the accompanying non-consolidated balance sheets of YUANTA SECURITIES CO., LTD. as of December 31, 2011 and 2010, and the related non-consolidated statements of income, of 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 conducted our audits in accordance with the Rules Governing the Examination of Financial Statements by Certified Public Accountants and auditing standards generally accepted in the Republic of China. Those 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 provide a reasonable basis for our opinion. In our opinion, the non-consolidated financial statements referred to above present fairly, in all material respects, the financial position of YUANTA SECURITIES CO., LTD. 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 Rules Governing the Preparation of Financial Statements by Securities Firms, Rules Governing the Preparation of Financial Statements by Futures Commission Merchants, and generally accepted accounting principles in the Republic of China. ~1~

3 As described in Note 5 to the non-consolidated financial statements, Yuanta Securities Co., Ltd. entered into an agreement relating to the transfer of the right of claim on margin loans and short sales of securities and on borrowing of securities with Yuanta Securities Finance Co., Ltd. amounting to NT $34,186,074 thousand. The effective date of the transfer was set on October 18, We have also audited the consolidated financial statements of the Company and its subsidiaries as of and for the years ended December 31, 2011 and Our reports on these consolidated financial statements expressed unqualified and modified unqualified opinions, respectively. PricewaterhouseCoopers, Taiwan March 22, 2012 Taipei, Taiwan Republic of China The accompanying non-consolidated financial statements are not intended to present the financial position and results of operations and cash flows in accordance with accounting principles generally accepted in countries and jurisdictions other than the Republic of China. The standards, procedures and practices in the Republic of China governing the audit of such financial statements may differ from those generally accepted in countries and jurisdictions other than the Republic of China. Accordingly, the accompanying non-consolidated financial statements and report of independent accountants are not intended for use by those who are not informed about the accounting principles or auditing standards generally accepted in the Republic of China, and their applications in practice. As the financial statements are the reponsibility of the management, PricewaterhouseCoopers cannot accept any liability for the use of, or reliance on, the English translation or for any errors or misunderstandings that may derive from the translation. ~2~

4 YUANTA SECURITIES CO., LTD NON-CONSOLIDATED BALANCE SHEETS DECEMBER 31 (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS) ASSETS Notes AMOUNT % AMOUNT % Current Assets Cash and cash equivalents 4(1) and 5 $ 14,227, $ 5,577,842 5 Financial assets at fair value through profit or loss - current 4(2), 5, 6 and 10 34,458, ,999, Receivables from margin loans 4(6) 31,085, ,115, Refinancing margin 6, Refinancing deposits receivable 5 17,162-50,448 - Bonds purchased under resale agreements 4(5), 5 and ,081,058 2 Receivables from refinance guaranty 13,046-40,320 - Receivables from security lending 385, ,699 - Security lending deposits 5 2,381, ,675,314 1 Notes receivable 3(1) 6,522-6,481 - Accounts receivable 3(1) and 5 1,905, ,510,513 1 Prepayments 28,897-38,233 - Other receivables 66, ,618 - Other receivables - related parties 5 57,925-59,300 - Restricted assets - current 5 and 6 226,953-1,531,452 1 Deferred income tax assets - current 4(25) 12, Available-for-sale financial assets - current 4(3) and 6 1,427, ,587,671 2 Held-to-maturity financial assets - current 4(4) and ,991 - Non-current assets held for sale ,737-86,308, ,162, Funds And Investments Long-term investments accounted for under the equity 4(7)(8) method 21,335, ,835, Available-for-sale financial assets - noncurrent 4(3) and 6 2,128, ,130,972 2 Held-to-maturity financial assets - noncurrent 4(4) and 6 1,927, ,989 - Financial assets at fair value through profit or loss - 4(2) and 6 noncurrent ,917-25,391, ,883, Fixed Assets 4(8) and 6 Land 2,741, ,793,400 2 Buildings 2,094, ,167,786 2 Equipment 1,205, ,054,507 1 Prepayments for equipment 96, ,920 - Leasehold improvements 274, ,525 - Leased assets 110,182-91,581 - Less: accumulated impairment ( 24,814 ) - ( 24,814 ) - Less: accumulated depreciation ( 1,177,345 ) ( 1 ) ( 1,122,033 ) ( 1 ) 5,319, ,425,872 4 Intangible Assets Other intangibles 4(8) 67, ,795 - Other Assets Business security deposits 5 and 6 440, ,000 1 Exchange clearing deposits 868, ,268 1 Deposits-out 6 128, ,413 - Rental assets 4(8), 5, 6 and 7 3,325, ,432,411 3 Idle assets 4(8) and 6 125, ,376 - Deferred income tax assets - noncurrent 4(25) 102, ,024 - Other assets - others 113, ,152-5,103, ,729,644 5 Securities brokerage debit accounts - net 4(27) 471, ,966 - Total Assets $ 122,662, $ 126,411, (Continued) ~3~

5 YUANTA SECURITIES CO., LTD NON-CONSOLIDATED BALANCE SHEETS (CONTINUED) DECEMBER 31 (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS) LIABILITIES AND STOCKHOLDERS' EQUITY Notes AMOUNT % AMOUNT % Current Liabilities Short-term loans 4(10) $ 1,685 - $ 6,955,570 6 Commercial paper payable 4(11) - - 9,797,902 8 Bonds sold under repurchase agreements 4(12), 5 and 6 24,175, ,320, Financial liabilities at fair value through profit or loss - 4(13) and 10 current 3,908, ,271,444 4 Guarantee deposit received from short sales 5 4,789, ,562,551 4 Deposit payable for short sales 5 5,640, ,423,593 4 Guarantee deposit received from security lending 4(14) 10,999, ,900,902 6 Accounts payable 417, ,368 1 Advance collections 4,905-6,664 - Collections for third parties 184, ,702 - Other payables 4(15)(25) 3,523, ,614,681 5 Other payables - related parties 4(15)(25) and 5 1,147, ,363,544 1 Deferred income tax liabilities - current 4(25) - - 5,334-54,792, ,989, Other Liabilities Reserve for default 4(16) ,000 - Reserve for trading loss 4(17) ,000 - Deposits-in 57,616-57,929 - Accrued pension liability - noncurrent 4(18) 922, ,038 1 Reserve for bad debts 214, ,743 - Receipts of underwriting share capital under 6 custody - - 1,311,330 1 Other Liabilities - others 2, ,196, ,866,040 2 Total Liabilities 55,989, ,855, Stockholders' Equity Common stock 4(19) 46,953, ,953, Capital Reserve 4(20) Paid-in capital in excess of par 169,725-38,699 - Long-term investment ,531 - Capital surplus from business combination 1,230, ,230,544 1 Employee stock options 4,768-12,950 - Expired stock options Retained Earnings Legal reserve 4(21) 2,445, ,943,153 2 Special reserve 4(22) 5,256, ,886,306 3 Unappropriated earnings 4(23) 11,458, ,019,939 4 Other Stockholders Equity Adjustment Cumulative translation adjustments ( 645,087 ) - 116,972 - Unrealized gain or loss on financial instruments 4(3) and 10(1) ( 199,753 ) - 255,653 - Total Stockholders' Equity 66,673, ,555, TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 122,662, $ 126,411, The accompanying notes are an integral part of these financial statements. See report of independent accountants dated March 22, ~4~

6 YUANTA SECURITIES CO., LTD STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31 (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS, EXCEPT EARNINGS PER SHARE AMOUNTS) Notes AMOUNT % AMOUNT % Revenues Securities brokerage fees 5 $ 6,942, $ 8,202, Service fees for security lending Borrowed stock revenue 447, ,447 - Underwriting fees 539, ,111 4 Trust business revenue 3, Gain on sales of trading securities 4(2) and 5 178, ,686, Stock custodial income 193, ,898 1 Interest income 5 2,908, ,575 6 Dividend income 305, ,904 2 Gain on short covering and trading securities - RS financing covering 216, Gain on short covering and trading securities - RS valuation 39, Gain on warrants issuance 10 2,299, ,711 3 Commission income - futures 5 198, ,222 1 Gain on trading of financial instruments - 10 futures 2,350, ,147,557 7 Gain on trading of financial instruments - 10 OTC 264, Other operating income 4(28) and 5 77,818-1,124,004 7 Non-operating income 4(29) and 5 8,795, ,462, ,760, ,433, Expenses Handling charges - brokerage ( 389,165 ) ( 2 ) ( 457,240 ) ( 3 ) Handling charges - dealing ( 55,486 ) - ( 34,388 ) - Service charges - refinancing ( 1,082 ) - ( 599 ) - Service charges - underwriting ( 15,814 ) - ( 15,349 ) - Trust business expense ( 128 ) Loss on sales of trading securities 4(2) and 5 ( 1,663,926 ) ( 6 ) ( 1,448 ) - Interest expense 5 ( 129,084 ) ( 1 ) ( 59,755 ) - Loss on short covering and trading 4(2) securities - valuation ( 848,530 ) ( 3 ) ( 96,282 ) ( 1 ) Loss on short covering and trading securities - RS financing covering - - ( 7,566 ) - Loss on short covering and trading securities - RS valuation - - ( 2,195 ) - Loss from security borrowing ( 3,709 ) - ( 4,428 ) - Warrant issuance expense ( 80,490 ) - ( 78,267 ) - Service charges - exchange clearing ( 16,770 ) - ( 10,942 ) - Loss on trading of financial instruments - 10 futures ( 1,997,721 ) ( 8 ) ( 1,074,309 ) ( 7 ) Loss on trading of financial instruments - 10 OTC - - ( 152,536 ) ( 1 ) Operating expenses 4(30) and 5 ( 7,957,893 ) ( 31 ) ( 8,350,531 ) ( 51 ) Other operating expenses ( 2,781 ) - ( 127,866 ) ( 1 ) Non-operating expenses ( 535,855 ) ( 2 ) ( 382,495 ) ( 2 ) ( 13,698,434 ) ( 53 ) ( 10,856,196 ) ( 66 ) Income before income tax 12,062, ,577, Income tax expense 4(25) ( 604,231 ) ( 3 ) ( 557,395 ) ( 3 ) Net income $ 11,458, $ 5,019, Before Tax After Tax Before Tax After Tax Basic earnings per share (in dollars) 4(26) Net income $ 2.57 $ 2.44 $ 1.19 $ 1.07 The accompanying notes are an integral part of these financial statements. See report of independent accountants dated March 22, ~5~

7 YUANTA SECURITIES CO., LTD STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010 (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS) Retained earnings Common stock Capital reserves Legal reserve Special reserve Unappropriated earnings Cumulative translation adjustments Unrealized gain or loss on financial instruments Year 2010 Balance at January 1, 2010 $ 43,679,388 $ 1,354,235 $ 1,457,034 $ 3,148,727 $ 4,861,193 $ 694,370 $ 365,124 $ 55,560,071 Appropriation of prior year's earnings Legal reserve ,119 - ( 486,119 ) Reversal of special reserve ( 234,660 ) 234, Special reserve ,239 ( 972,239 ) Cash dividends ( 363,750 ) - - ( 363,750 ) Stock dividends 3,273, ( 3,273,745 ) Net income for ,019, ,019,939 Adjustment to capital reserve due to non-proportional investment in investee s increase in capital ( 577,398 ) - ( 577,398 ) Cumulative translation adjustment derived from long-term foreign investments - 3, ,598 Unrealized gain or loss on financial instruments ( 109,471 ) ( 109,471 ) Treasury stocks of parent company reissued to employees - 22, ,891 Balance at December 31, 2010 $ 46,953,133 $ 1,380,724 $ 1,943,153 $ 3,886,306 $ 5,019,939 $ 116,972 $ 255,653 $ 59,555,880 Year 2011 Balance at January 1, 2011 $ 46,953,133 $ 1,380,724 $ 1,943,153 $ 3,886,306 $ 5,019,939 $ 116,972 $ 255,653 $ 59,555,880 Appropriation of prior year s earnings Legal reserve ,994 - ( 501,994 ) Special reserve ,003,988 ( 1,003,988 ) Cash dividends ( 3,513,957 ) - - ( 3,513,957 ) Net income for ,458, ,458,178 Reversal of reserve for default and reserve for trading loss , ,000 Adjustment to capital reserve due to non-proportional investment in investee s increase in capital ( 762,059 ) - ( 762,059 ) Cumulative translation adjustment derived from long-term foreign investments - ( 98,531 ) ( 98,531 ) Unrealized gain or loss on financial instruments ( 455,406 ) ( 455,406 ) Treasury stocks of parent company reissued to employees - 123, ,621 Balance at December 31, 2011 $ 46,953,133 $ 1,405,814 $ 2,445,147 $ 5,256,294 $ 11,458,178 ($ 645,087 ) ($ 199,753 ) $ 66,673,726 Total The accompanying notes are an integral part of these financial statements. See report of independent accountants dated March 22, ~6~

8 YUANTA SECURITIES CO., LTD STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31 (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 11,458,178 $ 5,019,939 Adjustments to reconcile net income to net cash provided by operating activities : Loss on valuation of trading securities 848,530 96,282 Loss on valuation of open-end mutual fund, beneficiary certificates and money market instruments 11, ,725 Provision for trading loss - 66,136 (Gain) Loss on short covering and trading securities - valuation ( 39,584 ) 2,195 Write off of bad debts and allowance for uncollectible accounts ( 184 ) ( 370 ) Reversal of reserve for bad debts - 1,278 Investment income accounted for under the equity method ( 7,775,261 ) ( 537,390 ) Dividends received from long-term equity investments accounted for under the equity method 303,138 4,255 Gain on disposal of investment in bonds without active markets - noncurrent - ( 11,400 ) Loss on valuation of financial assets at fair value through profit or loss Loss (gain) on investments 26,433 ( 203,739 ) (Gain) loss on disposal of fixed assets ( 257,972 ) 765 Impairment loss on non- financial assets (including other intangibles) 101,001 84,875 Depreciation (including rental and idle assets) 414, ,379 Amortization 60,441 62,185 Compensation cost of employee stock options 60,907 13,992 Changes in assets and liabilities Financial assets at fair value through profit or loss -current ( 5,345,350 ) ( 1,049,219 ) Refinancing deposits ( 6,536 ) - Receivables from margin loans 20,029,513 ( 3,152,482 ) Refinancing deposits receivable 33,286 ( 50,448 ) Bonds purchased under resale agreements 2,081,058 ( 1,137,877 ) Receivables from refinance guaranty 27,274 ( 27,527 ) Receivables from security lending ( 132,436 ) ( 181,987 ) Security lending deposits ( 706,675 ) ( 524,476 ) Accounts and notes receivable ( 395,108 ) 449,848 Prepayments 9,750 42,766 Other receivables 268,366 ( 7,086 ) Deferred income tax assets 15,982 ( 50,597 ) Available-for-sale financial assets - current ( 75,582 ) 315,715 Financial liabilities at fair value through profit or loss - current 51,917 - Securities brokerage debit and credit account - net ( 389,469 ) 275,866 Bonds sold under repurchase agreements 8,855, ,209 Financial liabilities at fair value through profit or loss - current ( 1,323,560 ) 2,501,557 Guarantee deposit received from short sales 226,804 ( 70,977 ) Deposit payable for short sales 216,763 ( 83,152 ) Guarantee deposit received from security lending 3,098,354 2,460,802 Accounts payable ( 83,979 ) 220,141 Advance collections ( 1,759 ) ( 60,227 ) Collections for third parties ( 81,440 ) ( 48,202 ) Other payables ( 3,402,661 ) ( 712,189 ) Other financial liabilities - current - ( 179,220 ) Accrued pension liability - noncurrent 40,133 49,653 Underwriting share capital collected on behalf of others ( 1,311,330 ) 1,311,330 Other liabilities - other 2,640 - Net cash provided by operating activities 26,913,428 5,519,033 (Continued) ~7~

9 CASH FLOWS FROM INVESTING ACTIVITIES YUANTA SECURITIES CO., LTD STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31 (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS) Increase in claim on margin loans and short sales of securities and on borrowing The accompanying notes are an integral part of these financial statements. See report of independent accountants dated March 22, ~8~ of securities $ - ( $ 34,186,074 ) Decrease (increase) in restricted assets 1,304,499 ( 1,286,303 ) Acquisition of fixed assets ( 392,380 ) ( 496,443 ) Proceeds from disposal of fixed assets 392,285 15,630 Decrease in business security deposits 400,000 - Decrease (increase) in exchange clearing deposits 40,833 ( 38,799 ) Decrease in deposits-out 29, ,224 Proceeds from sale of available-for-sale financial assets - current 500,000 10,671 Proceeds from disposal of available-for-sale financial assets - noncurrent - 46,096 Proceeds from sale of available-for-sale financial assets - noncurrent - 13,965 Return of principal at maturity of available-for-sale financial assets securitizationcurrent 399,736 - Return of share capital due to capital reduction in investee company that was recognized as "available - for - sale financial assets - non - current" - 30,915 Acquisition of long-term investments accounted for under the equity method - ( 775,016 ) Proceeds from maturity of held-to-maturity financial assets-current 400,000 - Acquisition of held-to-maturity financial assets - non-current ( 1,071,880 ) ( 256,969 ) Net cash provided by (used in) investing activities 2,002,631 ( 36,817,103 ) CASH FLOWS FROM FINANCING ACTIVITIES (Decrease) increase in short-term loans ( 6,953,885 ) 6,905,773 (Decrease) increase in commercial paper payable ( 9,797,902 ) 9,797,902 (Decrease) increase in deposits-in ( 313 ) 911 Cash dividends paid ( 3,513,957 ) ( 363,750 ) Net cash (used in) provided by financing activities ( 20,266,057 ) 16,340,836 Net increase (decrease) in cash and cash equivalents 8,650,002 ( 14,957,234 ) Cash and cash equivalents at beginning of year 5,577,842 20,535,076 Cash and cash equivalents at end of year $ 14,227,844 $ 5,577,842 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest $ 480,354 $ 144,310 Cash paid for income tax $ 3,347,692 $ 1,509,246

10 YUANTA SECURITIES CO., LTD 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) Yuanta Securities Co., Ltd. ( the Company ) was incorporated as a company limited by shares under the provisions of the Company Law of the Republic of China (R.O.C.) and commenced commercial operations in The Company is mainly engaged in the underwriting, dealing, brokerage and financing of marketable securities, futures, warrants and derivative financial instruments. As of December 31, 2011, the Company had approximately 4,400 employees. 2) In accordance with the resolution adopted during the first stockholders special meeting on December 10, 2001, the Company decided to jointly establish Yuanta Financial Holding Co., Ltd. with Yuanta Securities Finance Co., Ltd. by way of shares conversion based on the Financial Holding Company Act. The shares conversion base date was set on February 4, ) In accordance with the resolution adopted by the Board of Directors on April 10, 2007, the Company decided to merge with Yuanta Core Pacific Securities Co., Ltd, as approved by the Commerce Services, Ministry of Economic Affairs, R.O.C., on October 23, The merger date was set on September 23, ) On October 10, 2011, the Board of Directors at their meeting resolved to merge with Polaris Securities Co., Ltd. and set April 1, 2012 as the tentative merger date. The Company has obtained the approval to change its name to Yuanta Polaris Securities Co., Ltd from the Ministry of Economic Affairs, R.O.C. effective February 1, ) As of December 31, 2011, the Company had 141 branches. 6) The Company s parent company is Yuanta Financial Holding Co., Ltd. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying financial statements are prepared in accordance with the Rules Governing the Preparation of Financial Statements by Securities Firms, Rules Governing the Preparation of Financial Statements by Futures Commission Merchants, and generally accepted accounting principles in the Republic of China. The Company s significant accounting policies are described below: ~9~

11 1) 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. 2) Cash equivalents Cash and cash equivalents include cash on hand and in banks and other short-term highly liquid investments which are readily convertible to known amount of cash and subject to insignificant risk of changes in value resulting from fluctuations in interest rates. 3) Financial assets and financial liabilities at fair value through profit or loss A. Equity securities and beneficiary certificates are accounted for using trade date accounting while debt securities are accounted for using settlement date accounting at fair value. Option transactions are recognized based on fair value on the date of trading. Derivative non-option transactions are recognized at a fair value of zero on the date of trading. B. These financial instruments are subsequently remeasured and stated at fair value, and the gain or loss is recognized in profit or loss. The fair value of listed stocks, OTC stocks and closed-end mutual funds is based on closing prices at the balance sheet date. The fair value of open-end mutual funds is based on the net asset value at the balance sheet date. C. Financial assets and liabilities designated at fair value through profit or loss are those that meet one of the following requirements: (A) the product is a mixed product; (B) the designation can significantly eliminate the inconsistency in measurement or recognition; or (C) the position is mutually managed in accordance with the risk management or investment strategies of the Company and is designated for the purpose of fair value evaluation. 4) Receivables from security lending A. For managing the security lending business, the amount of lending to customers is recognized as receivables from security lending- customers giving securities purchased as pledges or receivables from security lending- customers giving their holding securities as pledges at the second business day following the transaction date. Allowance for doubtful accounts is provided according to the evaluation of the collectibility of receivables from security lending at the end of period, and recognized as allowance for doubtful accounts- receivables from ~10~

12 security lending- customers giving securities purchased as pledges or allowance for doubtful accounts- receivables from security lending- customers giving their holding securities as pledges. B. The interest on receivables from security lending would start to accrue from the second business day following the transaction date, and are recognized as interest revenue. The service charges on security lending are recognized as service charges revenue. 5) Available-for-sale financial assets A. Equity securities and beneficiary certificates are accounted for using trade date accounting while debt securities are accounted for using settlement date accounting at fair value. B. Available-for-sale financial assets, except for delisted stocks, are remeasured and stated at fair value or fundamental value derived from model evaluation, and the gain or loss is recognized in equity. The fair value of listed stocks, OTC stocks, closed-end mutual funds and beneficiary certificates is determined based on the closing prices at the balance sheet date. The fair value of open-end mutual funds is based on the net asset value at the balance sheet date. Unlisted and emerging stocks are stated at cost. C. If there is any objective evidence that the financial asset is impaired, a loss is recognized. Subsequent recovery of fair value is recognized in equity. Recovery of fair value of debt instruments is recognized in current operations. 6) Held-to-maturity financial assets A. Held-to-maturity financial assets are accounted for using settlement date accounting, and are stated initially at its fair value plus transaction costs that are directly attributable to the acquisition of the financial asset. B. These financial assets are carried at amortized cost. C. If there is any objective evidence that the financial asset is impaired, a loss is recognized. Subsequent recovery of fair value is recognized in equity. Recovery of fair value of debt instruments is recognized in current operations. 7) Notes, accounts and other receivables, margin receivables A. Notes and accounts receivable are claims resulting from the sale of goods or services. Receivables arising from transactions other than the sale of goods or services are classified as other receivables. Notes, accounts and other receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. B. Marginal receivables arise when securities firms offer margin loans to customers. ~11~

13 C. The Company assesses at each balance sheet date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. If such evidence exists, a provision for impairment of financial asset is recognized. The amount of impairment loss is determined based on 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 result to the asset s carrying amount greater than its amortized cost where no impairment loss was recognized. Subsequent recoveries of amounts previously written off are recognized in profit or loss. 8) Provision for bad debts The Company provided allowance for doubtful accounts for the extra gain from the reduction of business tax rate from July 1, 1999 till June 30, 2003 in accordance with the Tai-Tsai-Cheng Letter (2) No of the former Securities and Futures Commission, Ministry of Finance, R.O.C., dated September 29, 1999; however, when the amount of total receivables was insufficient to offset allowance for doubtful accounts, the difference was recognized as Provision for bad debts. Effective July 1, 2003, this rule was no longer applicable. 9) Bonds sold under repurchase agreements and bonds purchased under resale agreements Bonds sold with repurchase or purchased with resale agreements are stated at cost. The variance between the contracted price and the cost is amortized over the period of the transactions. 10) Futures transaction The security deposits made by the dealer department when undertaking futures transaction are recognized as financial assets at fair value through profit or loss- current- futures transaction security deposits-own funds. The futures transaction security deposits-own funds are adjusted based on the difference between the futures index at the closing-out date and the futures index at balance sheet date; options premium paid by the dealer department upon purchase of options for trading is recognized as purchase of options futures ; options premium received by the dealing department upon sale of options is recognized as liability on sale of options futures. Realized futures transaction income (loss) is recognized at the closing-out date. The unclosing-out position is evaluated at end of period, and the unrealized futures transaction income (loss) is recognized as derivative instruments income (loss) - futures- futures contract income (loss). ~12~

14 11) Investments accounted for under the equity method A. Long-term equity investments in which the Company holds more than 20% of the investee company s voting shares or has the ability to exercise significant influence on the investee s operational decisions are accounted for under the equity method. The excess of the initial investment cost over the acquired net asset value of the investee attributable to goodwill is no longer amortized, effective January 1, Retrospective adjustment of the amount of goodwill amortized in previous year(s) is not required. The excess of acquired net asset value of investee over the initial investment cost is allocated proportionately and applied as a reduction to the book values of identifiable non-current assets, and any remaining amount of such excess after this allocation is credited to extraordinary gains. However, negative goodwill prior to December 31, 2005 is continuously amortized. B. If an investee company issues new shares and original shareholders do not purchase or acquire new shares proportionately, then the investment percentage, and therefore the equity in net assets for the investment that an investor company has invested, will be changed. Such difference shall be used to adjust the additional paid-in capital and the long-term investments accounts. If the adjustment stated above is to debit the additional paid-in capital account and the book balance of additional paid-in capital from long-term investments is insufficient to be offset, then the difference shall be debited to the retained earnings account. C. Exchange differences arising from the translation of the financial statements of overseas investee companies accounted for under the equity method are recorded as cumulative translation adjustments under stockholders equity. 12) Fixed assets / Idle assets / Rental assets A. Fixed assets are stated at cost. Interests incurred on the loans used to bring the asset to the condition and location for its intended use are capitalized. Depreciation is provided using the straight-line method based on the estimated economic useful lives of the assets plus one year as residual value, except for leasehold improvements which are amortized based on useful lives or the terms of the contract. The estimated useful lives of major fixed assets range from 3 to 8 years, except for buildings which are 27 to 55 years. B. Major renewals and improvements are capitalized and depreciated accordingly. Maintenance and repairs are expensed as incurred. C. When an asset is sold or retired, the cost and accumulated depreciation are removed from the respective accounts and the resulting gain or loss is included in current operations. D. The rental payments on capital lease should be capitalized as leased assets and a lease ~13~

15 liability should be recognized. All capital leased property should be depreciated. If the lease contract contains a bargain purchase option or allows the transfer of ownership at the end of the term, then the depreciation should be determined based on the leased property s useful economic life. Otherwise, the lease term is used. If the Company sells its property to others and immediately leases it back, the gain or loss resulting from the sale of leased property should be deferred using the unearned gain or loss on sales-leaseback account. The amortization of the unearned gain or loss on sales-leaseback depends on the nature of the lease. If the fair value of the leased property is smaller than its book value on disposal, then the Company should recognize the difference between the fair value and the book value as a loss in the current period. E. Fixed assets not used for operations are reclassified as idle assets or rental assets and are stated at the lower of net realizable value or book value. Any loss is charged to non-operating expense. 13) Intangible assets Business rights are stated at cost and amortized over 10 years based on the straight-line method. 14) Available-for-sale financial assets noncurrent These are included in other non-current financial assets unless management intends to dispose of the investment within 12 months of the balance sheet date. In the latter case, they are included in current assets ( other financial assets ). These financial assets are measured at the lower of book or fair value and depreciation is no longer recognized. 15) Impairment of non-financial assets The Company recognizes impairment loss when there is indication that the recoverable amount of an asset is less than its carrying amount. The recoverable amount is the higher of the fair value less costs to sell and value in use. When the impairment no longer exists, the impairment loss recognized in prior years shall be recovered. The recoverable amount of goodwill, intangible assets with indefinite useful lives and intangible assets which have not yet been available for use shall be evaluated periodically. Impairment loss is recognized whenever there is indication that the recoverable amount of these assets is less than their respective carrying amount. Impairment loss of goodwill recognized in prior years is not recoverable in the following years. 16) Financial institution asset securitization A. According to the Statute for Financial Asset Securitization and the Trust Law, in using special purpose trusts, the Company transfers bonds held as well as related rights and obligations to trustees as the basis for the issuance of beneficiary certificates, and ~14~

16 accordingly receives funds raised thereon. Under the transaction structure, the transaction is deemed as a sale since the Company loses control over the transferred assets. Conversely, the transfer of subordinated bonds is not treated as a sale and instead as a long-term investment since those bonds are held for the purpose of assuming the risk for all beneficiary certificates. B. Due to the lack of market quotes for subordinated bonds or seller-side beneficiary certificates, the Company adopts the expected reset interest rates and residual cash flow discount rate as the basis for estimating fair market values of seller-side beneficiary certificates. These are then evaluated based on the present value of expected future cash flow amount at the balance sheet date with the resulting gain or loss recognized as current year s profit or loss. Subordinated bonds are amortized by the discount method. At the maturity of subordinated bonds, the distributed amount is charged against their cost and recognized as investment income/loss. The distributed interest for seller-side beneficiary certificates is charged against the book value of available-for-sale financial assets- non-current. 17) Pension plan 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 gains or losses on plan assets. Under the defined contribution pension plan, net periodic pension costs are recognized as incurred. 18) Share-based payment employee compensation plan In accordance with the Regulations Governing the Transfer of the Company s Reacquired Shares to Employees as prescribed by the Company s parent company - Yuanta Financial Holding Co., Ltd., all regular employees of the Company are entitled to parent company stock options. For treasury stocks of parent company reissued to employees as compensation, compensation cost is recognized using the fair value method, in accordance with EITF , Accounting for Transfer of Enterprise s Treasury Stocks to Employees, dated October 12, 2007, as prescribed by the R.O.C. Accounting Research and Development Foundation. The cost of the services received during the vesting period is measured based on the option pricing model at the grant date, and is amortized as payroll expenses during that period. 19) Employees bonuses and directors and supervisors remuneration Effective January 1, 2008, pursuant to EITF of the Accounting Research and Development Foundation, R.O.C., dated March 16, 2007, Accounting for Employees Bonuses and Directors and Supervisors Remuneration, the costs of employees bonuses and directors ~15~

17 and supervisors remuneration are accounted for as expenses and liabilities, provided that such a recognition is required under legal or constructive obligation and those amounts can be estimated reasonably. However, if the accrued amounts for employees bonuses and directors and supervisors remuneration are significantly different from the actual distributed amounts resolved by the stockholders at their stockholders meeting subsequently, the significant differences shall be recognized as gain or loss in the following year. In accordance with the Gin-Guan-Zheng (6) Letter No of the Financial Supervisory Commission, dated March 30, 2007, the Company calculates the number of shares of employees stock bonus based on the net asset value per share on its latest financial statements which were audited by independent auditors. 20) Revenues and expenses Revenues and expenses are recorded as follows: A. Gains (losses) on sale of securities, securities brokerage fees, and commissions on brokerage and trading are recognized on the transaction date. B. Interest revenues or interest expenses on margin loans and short sales of securities and bonds purchased under resale agreements, bonds sold under repurchase agreements are recognized respectively over the loan period, short selling period and trading period on an accrual basis. C. Underwriting fees and related service charges: application fees are recognized when collected; underwriting fees revenue and service charges expenditures are recognized when the contract is completed. D. Stock custodian income is recognized monthly based on the terms of the contract. E. Commission income Futures is recognized on the transaction date. The Company assists in futures transactions and fees collection. F. Gain (losses) on future contracts: The margin of futures transactions is recognized as cost. Costs and expenses are recognized as incurred. G. Options transaction income (loss): The premium of options transaction is recognized as cost. The options are evaluated monthly based on the market value. Options transaction income (loss) arising from settlement is recognized in current period s profit or loss. 21) Income tax A. Provision for income tax includes deferred income tax resulting from temporary differences, investment tax credits and loss carryforward. Valuation allowance on deferred tax assets is provided to the extent that it is more likely than not that the tax benefit will not be realized. Over or under provision of prior years income tax liabilities is included in current year s income tax. When a change in the tax laws is enacted, the deferred tax liability or asset ~16~

18 should be 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, should be recognized as an adjustment to income tax expense (benefit) for income from continuing operations in the current period. B. An additional 10% tax is levied on the unappropriated retained earnings and is recorded as income tax expense in the year the stockholders resolve to retain the earnings. C. In accordance with Article 49 of the Financial Holding Company Act and Income Tax Act, the Company elects its parent company, Yuanta Financial Holding Co., Ltd., as the taxpayer to file the consolidated profit-seeking enterprise income tax returns. In addition to the consolidated income tax returns, the Company has to compute its income tax on an individual filing basis pursuant to the ROC SFAS No. 22, Accounting for Income Tax, and records the tax receipts and tax payments arising from the consolidated income tax returns in current period s deferred income tax assets (liabilities), income tax payable (refundable) and other receivables (payables)- affiliates in the Company s financial statements. 22) Foreign currency transactions A. Transactions denominated in foreign currencies are translated into functional currency at the spot exchange rates prevailing at the transaction dates. B. Receivables, other monetary assets and liabilities denominated in foreign currencies are translated at the spot exchange rates prevailing at the balance sheet date. Exchange gains or losses are recognized in profit or loss. C. When a gain or loss on a non-monetary item is recognized directly in equity, any exchange component of that gain or loss shall be recognized directly in equity. Conversely, when a gain or loss on a non-monetary item is recognized in profit or loss, any exchange component of that gain or loss shall be recognized in profit or loss. 23) 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; and d) Cash and cash equivalents, excluding restricted cash and cash equivalents and those that ~17~

19 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; and d) Liabilities for which the repayment date cannot be extended unconditionally to more than twelve months after the balance sheet date. 24) Operating segments A. Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker is responsible for allocating resources and assessing performance of the operating segments. B. In accordance with R.O.C. SFAS No. 41, Operating Segments, segment information is disclosed in the consolidated financial statements of the Company. 3. CHANGES IN ACCOUNTING PRINCIPLES 1) Accounts, notes and other receivables Effective January 1, 2011, the Company adopted the amendments to R.O.C. SFAS No. 34, Financial Instruments: Recognition and Measurement. A provision for impairment (bad debts) of notes, accounts and other receivables is recognized when there is objective evidence that the receivables are impaired. This change of accounting principle had no significant effect on net income for the year ended December 31, ) Operating segments Effective January 1, 2011, the Company adopted the newly issued R.O.C. SFAS No. 41, Operating Segments to replace the original R.O.C. SFAS No. 20, Segment Reporting. In accordance with such standard, the Company restated the segment information for 2010 upon the first adoption of R.O.C. SFAS No. 41. This change of accounting principle had no significant effect on net income and earnings per share for the years ended December 31, 2011 and ) Reserve for default and reserve for trading loss The Company had reclassified reserve for default and reserve for trading loss provided as at December 31, 2010, together with related deferred income tax assets, to special reserve in January, 2011 in accordance with the Gin-Gwen-Zheng-Quan Letter No As a ~18~

20 result of this change, total assets decreased by $34,000, total liabilities decreased by $400,000 and stockholders equity increased by $366,000 as of January 31, DETAILS OF SIGNIFICANT ACCOUNTS 1) CASH AND CASH EQUIVALENTS December 31, Petty cash $ 4,667 $ 5,167 Demand deposits 160, ,055 Time deposits 8,187,936 5,008,601 Foreign currency deposits 3,290, ,067 11,643,608 5,347,890 Cash equivalents - commercial paper (expiring within three months) 2,584, ,952 $ 14,227,844 $ 5,577,842 ~19~

21 2) FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS A. Details of financial assets at fair value through profit or loss are as follows: December 31, Current items: Financial assets held for trading: Open-end mutual funds beneficiary certificates and money market instruments Open-end mutual funds beneficiary certificates $ 220,070 $ 600,120 Adjustment of open-end mutual funds beneficiary certificates ( 4,418) 7, , ,153 Trading securities - dealer Government bonds 8,653,938 3,388,976 Corporate bonds 15,150,668 9,696,326 Listed (TSE and OTC) stocks 445,724 1,541,894 Convertible corporate bonds 6,430,231 5,111,432 Emerging stocks 397, ,018 Foreign securities 36, ,300 Exchange traded funds - 73,181 Others - 44,800 31,114,321 21,078,927 Adjustment of trading securities - dealer ( 303,709) 216,524 30,810,612 21,295,451 Trading securities - underwriter Listed (TSE and OTC) stocks 63,363 $ - Convertible corporate bonds 18,300 6,400 Others - 124,500 81, ,900 Adjustment of trading securities - underwriter ( 3,046) 2,752 78, ,652 Trading securities - hedging Listed (TSE and OTC) stocks 1,426,977 6,098,583 Convertible corporate bonds 487, ,741 Exchange traded funds 30,122 66,170 Warrants 103,031 65,684 Taiwan Depositary Receipts 7,388 23,199 Foreign securities - 13,170 2,055,512 6,390,547 Adjustment of trading securities - hedging ( 76,176) 233,282 1,979,336 6,623,829 Derivatives Bought options 9,117 1,382 Futures guarantee deposits receivable 1,002, ,723 Derivative financial instrument assets - OTC 363, ,684 1,374,593 1,339,789 Total $ 34,458,810 $ 29,999,874 Noncurrent items: Financial assets at fair value through profit or loss Government $ bonds - $ 49,990 Adjustment of financial assets designated as at fair value through profit or loss - 1,927 Total $ - $ 51,917 ~20~

22 B. Changes in financial assets at fair value through profit or loss are as follows: December 31, 2011 Gain/(loss) on disposal Gain/(loss) on valuation Open-end mutual funds beneficiary certificates ($ 26,433) ($ 11,451) Trading securities - dealer 99,792 ( 533,274) Trading securities - underwriter 78,957 ( 5,798) Trading securities - hedging ( 1,663,926) ( 309,458) Total ($ 1,511,610) ($ 859,981) Gain/(loss) on disposal For the year ended Gain/(loss) on valuation Open-end mutual funds beneficiary certificates $ 203,739 ($ 147,725) Trading securities - dealer 1,537,545 ( 191,051) Trading securities - underwriter 149,046 ( 31,699) Trading securities - hedging ( 1,448) 126,468 Total $ 1,888,882 ($ 244,007) For derivatives, please refer to Note 10(5). For the year ended December 31, 2010 ~21~

23 3) AVAILABLE-FOR-SALE FINANCIAL ASSETS A. Current: Bonds Items December 31, Government bonds $ - $ 499,965 Adjustment of financial assets designated at fair value through profit or loss Sub-total - 500,108 Trading securities-dealer Listed (TSE and OTC) stocks 1,257,349 1,251,025 Adjustment of financial assets designated as at fair value through profit or loss ( 155,089) 102,214 Sub-total 1,102,260 1,353,239 Trading securities - underwriter Listed (TSE and OTC) stocks 229,146 - Adjustment of financial assets designated as at fair value through profit or loss ( 4,399) - Sub-total 224,747 - Lending securities Listed (TSE and OTC) stocks 140, ,219 Adjustment of financial assets designated as at fair value through profit or loss ( 40,397) 39,623 Sub-total 100, ,842 Others Subordinated beneficiary securities - 398,699 Seller beneficiary securities (Note) - 6,163 Adjustment of financial assets designated as at fair value through profit or loss - ( 5,380) Sub-total - 399,482 Total $ 1,427,067 $ 2,587,671 Information on related gain for the years ended December 31, 2011 and 2010 is as follows: For the years ended December 31 Realized disposal gain : Listed (TSE and OTC) stocks $ 266,856 $ 628,067 Note: For details, please refer to Note 4(9) F. and G.. ~22~