Wintek Corporation. Financial Statements for the Years Ended December 31, 2011 and 2010 and Independent Auditors Report

Transcription

1 Wintek Corporation Financial Statements for the Years Ended December 31, 2011 and 2010 and Independent Auditors Report

2 INDEPENDENT AUDITORS REPORT The Board of Directors and the Shareholders Wintek Corporation We have audited the accompanying balance sheets of Wintek Corporation as of December 31, 2011 and 2010, and the related statements of income, changes in shareholders equity and cash flows for the years then ended. These financial statements are the responsibility of the Corporation s management. Our responsibility is to express an opinion on these financial statements based on our audits. However, we did not audit the financial statements as of and for the years ended December 31, 2011 and 2010 of Wintek ElectroOptics Corporation, Wintek (Central Europe) GmbH and Wintek Technology (India) Private Limited, and as of and for the year ended December 31, 2011 of Wintek Vietnam Co., Ltd., the investments in which were accounted for by the equity method. These four investees financial statements were audited by other auditors whose reports have been furnished to us and our opinion, insofar as it relates to the amounts included for these investees as well as the investees information disclosed in Note 27 to the financial statements, is based solely on the reports of the other auditors. The carrying values of these investments were NT$4,715,851 thousand and NT$760,084 thousand as of December 31, 2011 and 2010, respectively, or 6% and 1%, respectively, of the Corporation s total assets as of those dates. On these investments, there were a loss at 18% (NT$358,629 thousand) of net loss before income tax and a gain at 1% (NT$19,290 thousand) of net income before income tax in 2011 and 2010, respectively. We conducted our audits in accordance with the Rules Governing the Audit of Financial Statements by Certified Public Accountants and auditing standards generally accepted in the Republic of China. Those rules and standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of the other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Wintek Corporation 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 Guidelines Governing the Preparation of Financial Reports by Securities Issuers, the requirements of the Business Accounting Law and the Guidelines Governing Business Accounting relevant to financial accounting standards, and accounting principles generally accepted in the Republic of China. 1

3 We have also audited the consolidated financial statements of Wintek Corporation and subsidiaries as of and for the years ended December 31, 2011 and 2010 and have issued a modified unqualified opinion report thereon (not presented herewith) dated February 23, February 23, 2012 Notice to Readers The accompanying financial statements are intended only to present the financial position, results of operations 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 financial statements are those generally accepted and applied in the Republic of China. For the convenience of readers, the independent 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. 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 version auditors report and financial statements shall prevail. 2

4 WINTEK CORPORATION BALANCE SHEETS DECEMBER 31, 2011 AND 2010 (In Thousands of New Taiwan Dollars, Except Par Value) ASSETS Amount % Amount % LIABILITIES AND SHAREHOLDERS EQUITY Amount % Amount % CURRENT ASSETS CURRENT LIABILITIES Cash and cash equivalents (Notes 2 and 4) $ 2,915,473 4 $ 1,651,967 3 Shortterm bank loans (Note 14) $ 5,612,686 7 $ 3,373,031 6 Financial assets at fair value through profit or loss current Shortterm bills payable (Note 15) 248,583 (Notes 2 and 5) 56, ,752 Financial liabilities at fair value through profit or loss Availableforsale financial assets current (Notes 2 and 6) 106, ,824 current (Notes 2 and 5) 23, ,586 Notes receivable (Notes 2 and 3) Notes payable Third parties Third parties 13,551 7,040 Accounts receivable (Notes 2 and 3) Accounts payable Third parties (Note 7) 15,150, ,638, Third parties 12,028, ,946, Related parties (Note 23) 91, ,295 1 Related parties (Note 23) 5,854, ,047,975 7 Other receivables (Notes 7 and 23) 3,459, ,927, Income tax payable (Notes 2 and 19) 20, ,480 1 Other financial assets current (Note 2) 74,193 61,790 Accrued expenses (Note 23) 2,248, ,835,795 3 Inventories (Notes 2, 8 and 24) 9,557, ,266, Payables for the acquisition of equipment (Note 23) 906, ,136 Deferred income tax assets current (Notes 2 and 19) 397, ,720 1 Current portion of longterm bank loans (Notes 16 and 24) 3,249, ,945,952 3 Restricted assets current (Note 4) 5,413 Other current liabilities (Note 23) 1,441, ,722,955 3 Other current assets (Notes 2 and 23) 596, ,557 1 Total current liabilities 31,649, ,341, Total current assets 32,407, ,059, LONGTERM BANK LOANS, NET OF CURRENT PORTION (Notes 16 and 24) 8,989, ,551, INVESTMENTS (Note 2) Financial assets carried at cost noncurrent (Note 9) 170, ,519 1 OTHER LIABILITIES Investments accounted for by the equity method (Note 10) 23,770, ,030, Deferred intercompany gain (Notes 2 and 23) 117,527 1,602 Others 620 Total investments 23,940, ,335, Total other liabilities 118,147 1,602 PROPERTY, PLANT AND EQUIPMENT (Notes 2, 11, 23 and 24) Cost Total liabilities 40,756, ,894, Land 2,770, ,365,861 4 Buildings 6,763, ,268, SHAREHOLDERS EQUITY Machinery and equipment 22,915, ,406, Capital stock, NT$10.00 par value Transportation equipment 19,927 31,272 Authorized 1,800,000 thousand shares in 2011; 1,500,000 Furniture and fixtures 64,601 73,443 thousand shares in 2010 Leasehold improvements 14,396 2,380 Issued and outstanding 1,647,778 thousand shares in 2011; Miscellaneous equipment 3,032, ,129, ,296,950 thousand shares in ,477, ,969, Total cost 35,580, ,277, Capital surplus Less: Accumulated depreciation (19,021,755) (25) (16,474,698) (27) Additional paidin capital from share issuance in excess of par 17,658, ,711, Less: Accumulated impairment (38,273) (38,273) Treasury stock transactions 172, ,402 Construction in progress 341, ,405 Longterm investments 3,262 3,090 Prepayments for equipment 2,632, ,904 1 Merger 48,478 48,478 Employee stock options 3,264 6,614 Property, plant and equipment, net 19,495, ,306, Others Retained earnings OTHER ASSETS Legal reserve 1,576, ,403,641 2 Refundable deposits 51,086 72,619 Unappropriated earnings (accumulated deficit) (1,904,878) (2) 1,725,640 3 Deferred charges (Notes 2, 12 and 23) 34,507 55,685 Cumulative translation adjustments 1,670, ,648 1 Deferred income tax assets noncurrent (Notes 2 and 19) 459, ,955 1 Unrealized gain on financial instruments 30, ,055 Others (Notes 2, 13 and 17) 102,382 89,877 Total shareholders equity 35,735, ,495, Total other assets 647, ,136 1 TOTAL $ 76,491, $ 61,390, TOTAL $ 76,491, $ 61,390, The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated February 23, 2012) 3

5 WINTEK CORPORATION STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2011 AND 2010 (In Thousands of New Taiwan Dollars, Except Earnings [Loss] Per Share) Amount % Amount % GROSS SALES $ 93,298, $ 63,261, SALES RETURNS 655, ,476 1 SALES ALLOWANCES 98, ,301 NET SALES (Notes 2 and 23) 92,545, ,339, COST OF GOODS SOLD (Notes 8, 20 and 23) 91,020, ,761, GROSS PROFIT 1,525, ,577,824 6 REALIZED (UNREALIZED) GROSS INTERCOMPANY GAIN (Notes 2 and 23) (4,812) 14,563 REALIZED GROSS PROFIT 1,520, ,592,387 6 OPERATING EXPENSES (Notes 20 and 23) Selling 514, ,826 1 General and administrative 644, ,279 1 Research and development 1,325, ,440 2 Total operating expenses 2,484, ,109,545 4 OPERATING INCOME (LOSS) (964,488) (1) 1,482,842 2 NONOPERATING INCOME AND GAINS Interest income (Notes 5 and 23) 42,626 9,966 Investment income recognized under equity method, net (Notes 2 and 10) 1,037,505 2 Dividend income (Note 2) 13,902 9,015 Valuation gain on financial instruments, net (Notes 2 and 5) 320,616 1 Royalty income (Notes 2 and 23) 9,574 53,894 Government subsidy income (Note 2) 10,055 28,054 Others (Note 23) 157, ,666 Total nonoperating income and gains 233,934 1,649,716 3 (Continued) 4

6 WINTEK CORPORATION STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2011 AND 2010 (In Thousands of New Taiwan Dollars, Except Earnings [Loss] Per Share) Amount % Amount % NONOPERATING EXPENSES AND LOSSES Interest expense, net of amount capitalized (Notes 2, 5, 7 and 11) $ 379,972 $ 359,654 1 Investment loss recognized under the equity method, net (Notes 2 and 10) 571,678 1 Loss on disposal of assets (Notes 2, 11 and 23) 10,353 12,590 Foreign exchange loss, net (Note 2) 55, ,952 1 Impairment loss on assets (Notes 2, 9 and 13) 159,327 4,944 Valuation loss on financial instruments, net (Notes 2 and 5) 38,528 Others (Note 20) 20,897 24,928 Total nonoperating expenses and losses 1,235, ,068 2 INCOME (LOSS) BEFORE INCOME TAX (1,966,487) (2) 2,164,490 3 INCOME TAX EXPENSE (BENEFIT) (Notes 2 and 19) (61,609) 105,770 NET INCOME (LOSS) $ (1,904,878) (2) $ 2,058,720 3 Before Income Tax After Before Income Income Tax Tax After Income Tax EARNINGS (LOSS) PER SHARE (NT$; Note 21) Basic $ (1.20) $ (1.16) $ 1.59 $ 1.51 Diluted $ (1.20) $ (1.16) $ 1.57 $ 1.49 The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated February 23, 2012) (Concluded) 5

7 WINTEK CORPORATION STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2011 AND 2010 (In Thousands of New Taiwan Dollars, Except Amount Per Share) Retained Earnings (Note 18) Unappropriated Cumulative Unrealized Capital Stock (Note 18) Earnings Translation Gain on Financial Total Issued and Capital Surplus (Accumulated Adjustments Instruments Shareholder s Authorized Outstanding (Notes 2 and 18) Legal Reserve Deficit) (Note 2) (Notes 2 and 18) Equity BALANCE, JANUARY 1, 2010 $ 15,000,000 $ 11,320,411 $ 9,327,858 $ 1,403,641 $ (333,080) $ 1,273,615 $ 135,908 $ 23,128,353 Exercise of employee stock options 149, , ,913 Recognition of an equitymethod investee's remuneration to employees due to the investee's newly granted employee stock options 1,749 1,749 Issuance of capital stock for GDRs May 3, ,500,000 2,257,859 3,757,859 Decrease in the Corporation's equity in the net assets of a subsidiary due to the subscription for the subsidiary's newly issued shares at a percentage different from the Corporation's current equity in the subsidiary Net income in the year ended December 31, ,058,720 2,058,720 Translation adjustments on investments in shares of stock (956,967) (956,967) Unrealized gain on availableforsale financial instruments 2,147 2,147 BALANCE, DECEMBER 31, ,000,000 12,969,498 11,942,314 1,403,641 1,725, , ,055 28,495,796 Increase in authorized capital stock 3,000,000 Issuance of capital stock for GDRs January 19, ,000,000 7,416,934 9,416,934 Recognition of an equitymethod investee's remuneration to employees due to the investee's newly granted employee stock options (3,350) (3,350) Issuance of common stock from capital surplus 1,496,950 (1,496,950) Exercise of employee stock options 11,336 26,964 38,300 Decrease in the Corporation's equity in the net assets of a subsidiary due to the subscription for the subsidiary's newly issued shares at a percentage different from the Corporation's current equity in the subsidiary Appropriations of 2010 earnings Legal reserve 172,564 (172,564) Cash dividends NT$1.037 per share (1,553,076) (1,553,076) Net loss in the year ended December 31, 2011 (1,904,878) (1,904,878) Translation adjustments on investments in shares of stock 1,353,805 1,353,805 Unrealized loss on availableforsale financial instruments (108,041) (108,041) BALANCE, DECEMBER 31, 2011 $ 18,000,000 $ 16,477,784 $ 17,886,084 $ 1,576,205 $ (1,904,878) $ 1,670,453 $ 30,014 $ 35,735,662 The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated February 23, 2012) 6

8 WINTEK CORPORATION STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2011 AND 2010 (In Thousands of New Taiwan Dollars) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (1,904,878) $ 2,058,720 Adjustments to reconcile net income (loss) to net cash provided by operating activities Deferred income taxes (62,049) (55,402) Depreciation 4,609,789 4,400,623 Allowance for loss on inventories 1,253, ,088 Investment loss (gain) recognized under the equity method, net 571,678 (1,037,505) Impairment loss on assets 159,327 4,944 Unrealized (realized) deferred intercompany gain 115,925 (1,602) Cash dividends received from equity method investees 52,354 13,089 Amortization 43,124 82,184 Valuation loss (gain) on financial instruments, net 38,528 (320,616) Loss on disposal of assets, net 10,353 12,590 Unrealized (realized) gross intercompany gain 4,812 (14,563) Allowance for doubtful accounts 537 Gain on sale of investments (715) Others 620 Net changes in operating assets and liabilities Financial instruments held for trading (98,578) 292,774 Notes receivable 76 1,230 Accounts receivable (4,228,646) (6,064,483) Other receivables 3,469,233 (6,534,799) Other financial assets current (12,403) (15,207) Inventories (2,544,892) (3,776,594) Other current assets (105,047) (116,068) Notes payable 6,511 6,823 Accounts payable 4,888,354 8,216,002 Income tax payable (149,705) 142,792 Accrued expenses 413, ,928 Other current liabilities (281,115) 1,295,999 Net cash provided by operating activities 6,249,317 25,947 CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of investments accounted for by equity method (9,019,264) (1,967,730) Acquisition of property, plant and equipment (6,103,713) (967,354) Proceeds from disposal of availableforsale financial assets 310,718 Acquisition of availableforsale financial assets (310,003) Decrease in refundable deposits 21,533 11,129 Increase in deferred charges (21,527) (31,038) (Continued) 7

9 WINTEK CORPORATION STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2011 AND 2010 (In Thousands of New Taiwan Dollars) Increase in other assets $ (12,505) $ (12,677) Proceeds from disposal of assets 11,554 84,051 Decrease in restricted assets 5, ,360 Net cash used in investing activities (15,117,794) (2,499,259) CASH FLOWS FROM FINANCING ACTIVITIES Issuance of capital stock for GDRs 9,416,934 3,757,859 Repayment of longterm bank loans (3,945,952) (10,049,453) Proceeds from longterm bank loans 3,687,800 9,012,300 Net increase (decrease) in shortterm bank loans 2,239,655 (1,603,302) Cash dividends (1,553,076) Net increase (decrease) in shortterm bills payable 248,583 (199,866) Exercise of employee stock options 38, ,913 Increase (decrease) in guarantee deposits received (261) 5 Net cash provided by financing activities 10,131,983 1,421,456 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,263,506 (1,051,856) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,651,967 2,703,823 CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,915,473 $ 1,651,967 SUPPLEMENTARY CASH FLOW INFORMATION Interest paid, net of amount capitalized $ 381,294 $ 354,580 Income tax paid $ 152,231 $ 17,614 NONCASH INVESTING AND FINANCING ACTIVITIES Current portion of longterm bank loans $ 3,249,940 $ 1,945,952 INVESTING ACTIVITIES AFFECTING BOTH CASH AND NONCASH ITEMS Acquisition of property, plant and equipment $ 6,845,838 $ 891,190 Decrease (increase) in payable for equipment (742,125) 76,164 Cash paid for acquisition of property, plant and equipment $ 6,103,713 $ 967,354 The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated February 23, 2012) (Concluded) 8

10 WINTEK CORPORATION NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2011 AND 2010 (In Thousands of New Taiwan Dollars, Except Amounts Per Share and Unless Stated Otherwise) 1. ORGANIZATION AND OPERATIONS Wintek Corporation (the Corporation ) was incorporated on April 26, It manufactures and sells liquid crystal displays (LCDs), liquid crystal modules (LCMs) and touch panels. The Corporation s shares have been listed on the Taiwan Stock Exchange (TSE) since December 19, The Corporation had 5,005 and 4,196 employees as of December 31, 2011 and 2010, respectively. 2. SIGNIFICANT ACCOUNTING POLICIES The financial statements have been prepared in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, Business Accounting Law, Guidelines Governing Business Accounting, and accounting principles generally accepted in the Republic of China (ROC). Significant accounting policies are summarized as follows: Foreign Currencies Nonderivative foreigncurrency transactions are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occur. Exchange differences arising from the settlement of foreigncurrency assets and liabilities are recognized in profit or loss. At the balance sheet date, foreigncurrency monetary assets and liabilities are revalued using prevailing exchange rates, and the exchange differences are recognized in profit or loss. At the balance sheet date, foreigncurrency nonmonetary assets (such as equity instruments) and liabilities that are measured at fair value are revalued using prevailing exchange rates, with the exchange differences treated as follows: a. Recognized in shareholders equity if the changes in fair value are recognized in shareholders equity; b. Recognized in profit and loss if the changes in fair value are recognized in profit or loss. Foreigncurrency nonmonetary assets and liabilities that are carried at cost continue to be stated at exchange rates at trade dates. If the functional currency of an equitymethod investee is a foreign currency, translation adjustments will result from the translation of the investee s financial statements into the reporting currency of the Corporation. Such adjustments are accumulated and reported as a separate component of shareholders equity. Accounting Estimates Under the above guidelines, law and principles, certain estimates and assumptions have been used for the allowance for doubtful accounts, allowance for loss on inventory, depreciation of property, plant and equipment, impairment loss on assets, amortization of deferred charges, income tax, pension cost, bonuses to employees, directors and supervisors, etc. Actual results may differ from these estimates. 9

11 For readers convenience, the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the ROC. If inconsistencies arise between the English version and the Chinese version or if differences arise in the interpretations between the two versions, the Chinese version of the financial statements shall prevail. Current and Noncurrent Assets and Liabilities Current assets include cash, cash equivalents and those assets held primarily for trading purposes or to be realized, sold or consumed within one year from the balance sheet date. All other assets such as property, plant and equipment are classified as noncurrent. Current liabilities are obligations incurred for trading purposes or to be settled within one year from the balance sheet date. All other liabilities are classified as noncurrent. Cash Equivalents Cash equivalents, consisting of commercial paper, are highly liquid financial instruments with maturities of three months or less when acquired and with carrying amounts that approximate their fair values. Financial Assets/Liabilities at Fair Value through Profit or Loss Financial instruments classified as financial assets or financial liabilities at fair value through profit or loss (FVTPL) include financial assets or financial liabilities held for trading and those designated as at FVTPL on initial recognition. The Corporation recognizes a financial asset or a financial liability on its balance sheet when the Corporation becomes a party to the contractual provisions of the financial instrument. A financial asset is derecognized when the Corporation loses control of its contractual rights over the financial asset. A financial liability is derecognized when the obligation specified in the relevant contract is discharged, cancelled or expired. Financial instruments at FVTPL are initially measured at fair value plus transaction costs. At each balance sheet date, financial assets or financial liabilities at FVTPL are remeasured at fair value, with changes in fair value recognized directly in profit or loss in the year in which they arise. Cash dividends received subsequently (including those received in the year of investment) are recognized as income for the year. On the derecognition of a financial asset or a financial liability, the difference between its carrying amount and the sum of the consideration received and receivable or consideration paid and payable is recognized as profit or loss. A derivative that does not meet the criteria for hedge accounting is classified as a financial asset or a financial liability held for trading. If the fair value of the derivative is positive, the derivative is recognized as a financial asset; otherwise, the derivative is recognized as a financial liability. All regular way purchases or sales of financial assets are recognized and derecognized on a settlement date basis. The fair value of financial assets and financial liabilities without quoted prices in an active market are determined using valuation techniques. Availableforsale Financial Assets Availableforsale financial assets are initially measured at fair value plus transaction costs that are directly attributable to the acquisition. At each balance sheet date subsequent to initial recognition, availableforsale financial assets are remeasured at fair value, with changes in fair value recognized in equity until the financial assets are disposed of, at which time, the cumulative profit or loss previously recognized in equity is included in profit or loss for the year. All regular way purchases or sales of financial assets are recognized and derecognized on a settlement date basis. The recognition, derecognition of availableforsale financial assets are the same with those of financial assets at FVTPL. 10

12 Fair values of financial assets and financial liabilities at the balance sheet date are determined as follows: publicly traded stocks at closing prices; and openend mutual funds at net asset values. Cash dividends are recognized on the exdividend date, except for dividends distributed from the preacquisition profit, which are treated as a reduction of investment cost. Stock dividends are not recognized as investment income but are recorded as an increase in the number of shares. The total number of shares subsequent to the increase is used for the recalculation of cost per share. An impairment loss is recognized when there is objective evidence that the financial asset is impaired. Any subsequent decrease in impairment loss for an equity instrument classified as availableforsale is recognized directly in equity. Financial Assets Carried at Cost Investments in equity instruments with no quoted prices in an active market and with fair values that cannot be reliably measured, such as nonpublicly traded stocks and stocks traded in the Emerging Stock Market, are measured at their original cost. The accounting treatment for dividends on financial assets carried at cost is the same with that for dividends on availableforsale financial assets. An impairment loss is recognized when there is objective evidence that the asset is impaired. A reversal of this impairment loss is disallowed. Impairment of Accounts Receivable An allowance for doubtful accounts is provided on the basis of a review of the collectibility of accounts receivable. The Corporation assesses the probability of collections of accounts receivable by aging analysis of the outstanding receivables and assessing the economic environment. As discussed in Note 3 to the financial statements, on January 1, 2011, the Corporation adopted the thirdtime revised Statement of Financial Accounting Standards (SFAS) No. 34 Financial Instruments: Recognition and Measurement. One of the main revisions is that the impairment of receivables originated by the Corporation should be covered by SFAS No. 34. Accounts receivable are assessed for impairment at the end of each reporting period and considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the accounts receivable, the estimated future cash flows of the asset have been affected. Objective evidence of impairment could include: Significant financial difficulty of the debtor; Accounts receivable becoming overdue; or It becoming probable that the debtor will enter bankruptcy or financial reorganization. Accounts receivable that are assessed not to be impaired individually are further assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of accounts receivable could include the Corporation s past experience of collecting payments and an increase in the number of delayed payments, as well as observable changes in national or local economic conditions that correlate with defaults on receivables. The amount of the impairment loss recognized is the difference between the asset carrying amount and the present value of estimated future cash flows. The carrying amount of the accounts receivable is reduced through the use of an allowance account. When accounts receivable are considered uncollectible, they are written off against the allowance account. Recoveries of amounts previously written off are credited to the allowance account. Changes in the carrying amount of the allowance account are recognized as bad debt in profit or loss. 11

13 Impairment of Assets If the recoverable amount of an asset (mainly property, plant and equipment, deferred charges, idle assets and investments accounted for by the equity method) is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is charged to earnings unless the asset is carried at a revalued amount, in which case the impairment loss is first treated as a deduction to the unrealized revaluation increment and any remaining loss is charged to earnings. If an impairment loss subsequently reverses, the carrying amount of the asset is increased accordingly, but the increased carrying amount may not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss is recognized in earnings, unless the asset is carried at a revalued amount, in which case the reversal of the impairment loss is first recognized as gain to the extent that an impairment loss on the same revalued asset was previously charged to earnings. Any excess amount is treated as an increase in the unrealized revaluation increment. For the purpose of impairment testing, goodwill is allocated to each of the relevant cashgenerating units ( CGUs ) that are expected to benefit from the synergies of the acquisition. A CGU to which goodwill has been allocated is tested for impairment annually or whenever there is an indication that the CGU may be impaired. If the recoverable amount of the CGU becomes less than its carrying amount, the impairment is allocated to first reduce the carrying amount of the goodwill allocated to the CGU and then to the other assets of the CGU pro rata on the basis of the carrying amount of each asset in the CGU. A reversal of an impairment loss on goodwill is disallowed. For longterm equity investments on which the Corporation has significant influence but over which it has no control, the carrying amount (including goodwill) of each investment is compared with its own recoverable amount for the purpose of impairment testing. Inventories Inventories consist of raw materials, supplies, workinprocess and finished goods. Inventories are stated at the lower of cost or net realizable value. Inventory writedowns are made item 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 standard cost and adjusted to approximate weightedaverage cost on the balance sheet date. Investments Accounted for by the Equity Method Investments in which the Corporation holds 20% of the investees voting shares or exercises significant influence on the investees operating and financial policy decisions are accounted for by the equity method. The acquisition cost is allocated to the assets acquired and liabilities assumed on the basis of their fair values at the date of acquisition, and the acquisition cost in excess of the fair value of the identifiable net assets acquired is recognized as goodwill. Goodwill is not being amortized. The fair value of the net identifiable assets acquired in excess of the acquisition cost is used to reduce the fair value of each of the noncurrent assets acquired in proportion to the respective fair values of the noncurrent assets, with any excess recognized as an extraordinary gain. When the Corporation subscribes for its investee s newly issued shares at a percentage different from its percentage of ownership in the investee, the Corporation records the change in its equity in the investee s net assets as an adjustment to investments, with a corresponding amount credited or charged to capital surplus. When the adjustment should be debited to capital surplus, but the capital surplus arising from longterm investments is insufficient, the shortage is debited to retained earnings. 12

14 Unrealized Intercompany Gains All gains on product or other sales to subsidiaries are wholly deferred or, in the case of other equitymethod investees that are not majority owned, are deferred only to the extent of the Corporation s equity interest, with the deferred profit reported as deferred intercompany gains. The gains or losses on sales between subsidiaries are deferred at the percentage of equity interest in the subsidiary that incurred the gain or loss. In addition, the Corporation recognizes its proportionate share in net income from product and other sales of its subsidiaries and other equitymethod investees in the year they are realized through the subsequent sale of the related items to unrelated third parties. Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Major additions and improvements to property, plant and equipment are capitalized, while costs of repairs and maintenance are expensed currently. Borrowing costs directly attributable to the acquisition or construction of property, plant and equipment are capitalized as part of the cost of those assets. Depreciation expense is provided on a straightline basis over useful lives estimated as follows: buildings 10 to 30 years; machinery and equipment 3 to 10 years; transportation equipment 3 to 5 years; furniture and fixtures 3 to 5 years; leasehold improvements 2 to 3 years; and miscellaneous equipment 3 to 10 years. Property, plant and equipment still in use beyond their original estimated useful lives are further depreciated over their newly estimated service lives. Upon retirement or disposal of property, plant and equipment, the related cost, accumulated depreciation and accumulated impairment are removed from the accounts. Any resulting gain or loss is recorded as nonoperating gain or loss in the current year. Intangible Assets Expenditures for research activities are recognized as expenses when incurred. An internally generated intangible asset arising from development activities is capitalized and then amortized on a straightline basis if the recognition criteria for intangible assets have been met; otherwise, the development expenditure is recognized as an expense when incurred. Deferred Charges Deferred charges, which pertain to technical assistance royalty, molding equipment, the enterprise resource planning (ERP) system, supplies and manufacturing information system, are amortized using the straightline basis over 2 to 20 years. Idle Assets Idle assets are classified as other assets and stated at the lower of net fair value or carrying value. The related cost, accumulated depreciation and accumulated impairment are written off, and any cost in excess of net realizable value is recognized as loss. The remaining value is depreciated using the straightline basis. Pension Costs Pension cost under a defined benefit plan is determined by actuarial valuations. Contributions made under a defined contribution plan are recognized as pension cost during the period in which employees render services. Curtailment or settlement gains or losses on the defined benefit plan are recognized as part of the net periodic pension cost for the year. 13

15 Income Tax The Corporation applies the interyear allocation method to its income tax, whereby deferred income tax assets and liabilities are recognized for the tax effects of temporary differences, unused loss carryforwards and unused tax credits. Valuation allowances are provided to the extent, if any, that it is more likely than not that deferred income tax assets will not be realized. A deferred tax asset or liability is classified as current or noncurrent in accordance with the classification of its related asset or liability. However, if a deferred income tax asset or liability does not relate to an asset or liability in the financial statements, then it is classified as either current or noncurrent based on the expected length of time before it is realized or settled. The Corporation can control the timing of the reversal of a temporary difference arising from the difference between the book value and the tax basis of a longterm equity investment in a foreign subsidiary and if the temporary difference is not expected to reverse in the foreseeable future and will, in effect, exist indefinitely, then a deferred tax liability or asset is not recognized. The tax credits for purchases of eligible equipment and technology, research and development expenditures and personnel training expenditures are recognized in the current period. Adjustments of prior years tax liabilities are added to or deducted from the current year s income tax provision. Income tax (10%) on unappropriated earnings is recorded as expense in the year the shareholders resolve to retain the earnings. Stockbased Compensation Employee stock options granted on or after January 1, 2008 are accounted for under SFAS No. 39 Accounting for Sharebased Payment. Under the statement, the value of the stock options granted, which is equal to the best available estimate of the number of stock options expected to vest multiplied by the grantdate fair value, is expensed on a straightline basis over the vesting year, with a corresponding adjustment to capital surplus employee stock options. The estimate is revised if subsequent information indicates that the number of stock options expected to vest differs from previous estimates. Employee stock options granted between January 1, 2004 and December 31, 2007 were accounted for under the interpretations issued by the Accounting Research and Development Foundation (ARDF). The Corporation adopted the intrinsic value method, under which compensation cost was recognized on a straightline basis over the vesting period. Revenue Recognition Revenue is recognized when the Corporation has transferred to the buyer the significant risks and rewards of ownership of the goods, primarily upon shipment, because the earnings process has been completed and the economic benefits associated with the transaction have been realized or are realizable. The Corporation does not recognize sales revenue on materials delivered to subcontractors because this delivery does not involve a transfer of risks and rewards of materials ownership. Revenue is measured at the fair value of the consideration received or receivable and represents amounts agreed between the Corporation and the customers for goods sold in the normal course of business, net of sales discounts and volume rebates. For trade receivables due within one year from the balance sheet date, as the nominal value of the consideration to be received approximates its fair value and transactions are frequent, fair value of the consideration is not determined by discounting all future receipts using an imputed rate of interest. 14

16 Royalties are recognized when: a. It is probable that the economic benefits of a transaction will flow to the Corporation; and b. The revenue can be measured reliably. Royalties are recognized on an accrual basis in accordance with the substance of the contract. If a contract meets the recognition criteria for sales of goods and the following conditions, royalties are recognized at the time of sale: a. The amount of the royalties is fixed or the royalties are nonrefundable; b. The contract is noncancelable; c. The contract permits the licensee to exploit the assigned rights freely; and d. The licensor has no remaining obligations to perform. Government Subsidy Government subsidies that are realized should be recognized as income for the period and should be presented as government subsidy income or other income. Government subsidies that are not yet realized should be presented as deferred income. Deferred income should be recognized as government subsidy income or other income only when the Corporation has met the related conditions and has fulfilled its obligations. Reclassifications Certain accounts in the financial statements as of and for the year ended December 31, 2010 have been reclassified to conform to the presentation of the financial statements as of and for the year ended December 31, EFFECTS OF CHANGES IN ACCOUNTING PRINCIPLES Financial Instruments On January 1, 2011, the Corporation adopted the newly revised SFAS No. 34 Financial Instruments: Recognition and Measurement. The main revisions include (1) finance lease receivables are now covered by SFAS No. 34; (2) the scope of the applicability of SFAS No. 34 to insurance contracts is amended; (3) loans and receivables originated by the Corporation are now covered by SFAS No. 34; (4) additional guidelines on impairment testing of financial assets carried at amortized cost when a debtor has financial difficulties and the terms of obligations have been modified; and (5) accounting treatment by a debtor for modifications in the terms of obligations. This accounting change had no significant impact on the financial statements for the year ended December 31, Operating Segments On January 1, 2011, the Corporation adopted the newly issued SFAS No. 41 Operating Segments. The requirements of the statement are based on the information about the components of the Corporation that management uses to make decisions about operating matters. SFAS No. 41 requires identification of operating segments on the basis of internal reports that are regularly reviewed by the Corporation's chief operating decision maker in order to allocate resources to the segments and assess their performance. This statement supersedes SFAS No. 20 Segment Reporting. For this accounting change, the Corporation restated the segment information in the consolidated financial statements as of and for the year ended December 31, 2010 to conform to the disclosures as of and for the year ended December 31,

17 4. CASH AND CASH EQUIVALENTS December 31 Cash in banks $ 2,687,776 $ 567,355 Time deposits 205,158 1,087,390 Cash equivalents Commercial paper interest 0.68% 19,951 Cash on hand and petty cash 2,588 2,635 2,915,473 1,657,380 Less: Restricted cash current (5,413) $ 2,915,473 $ 1,651, FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS CURRENT Financial assets held for trading December 31 Forward exchange contracts Domestic banks $ 582 $ 93,943 Foreign banks 6, ,752 Swap contracts Domestic banks 1,540 Crosscurrency swap contracts Domestic banks 16,076 Foreign banks 38,771 54,847 Financial liabilities held for trading $ 56,969 $ 100,752 Crosscurrency swap contracts Domestic banks $ $ 49,492 Foreign banks 51, ,430 Forward exchange contracts Domestic banks 1,042 2,333 Swap contracts Domestic banks 1,823 Interest rate swap contracts Domestic banks 20,888 23,823 $ 23,753 $ 127,586 16

18 The Corporation entered into forward exchange contracts, swap contracts, crosscurrency swap contracts and interest rate swap transactions for the years ended December 31, 2011 and 2010 to hedge against its exposures to adverse exchange rate and interest rate fluctuations of its foreigncurrency assets or liabilities. The financial risk management objective of the Corporation is to minimize risks due to changes in fair values or cash flows. a. Forward exchange contracts Outstanding forward exchange contracts as of December 31, 2011 and 2010 were as follows: December 31, 2011 Contract Amount Currency Maturity (In Thousands) Sell/buy US$/JPY January 4, 2012 US$4,000/JPY311,840 Sell/buy US$/NT$ January 4, 2012 to January 13, 2012 US$18,000/NT$543,576 December 31, 2010 Sell/buy US$/JPY January 4, 2011 to March 1, 2011 US$34,000/JPY2,814,821 Sell/buy US$/NT$ January 4, 2011 to February 25, 2011 US$99,100/NT$2,991,497 Sell/buy INR/US$ January 10, 2011 to January 31, 2011 INR452,450/US$10,000 The contracts resulted in net a gains of $18,406 thousand and $401,829 thousand for the years ended December 31, 2011 and 2010, respectively. b. Swap contract Outstanding swap contract as of December 31, 2011 was as follows: December 31, 2011 Contract Amount Currency Maturity (In Thousands) Sell/Buy US$/NT$ January 12, 2012 to February 7, 2012 US$79,900/NT$2,418,513 The contract resulted in a net loss of $216,144 thousand for the year ended December 31, c. Crosscurrency swap contracts Outstanding crosscurrency swap contracts as of December 31, 2011 and 2010 were as follows: Contract Amount (In Thousands) Maturity Date Interest Rates for Payment (Receivables) Interest Rates for Receivables December 31, 2011 US$16,500/NT$483,450 January 30, 2012 USD Libor 1M+0.26% US$10,000/NT$294,000 March 9, % USD Libor 1M+0.50% US$10,000/NT$290,000 May 23, % USD Libor 3M+0.65% US$6,000/NT$176,400 February 21, % USD Libor 3M+1.20% US$6,000/NT$176,358 February 22, % USD Libor 3M+1.15% US$10,000/NT$295,800 March 22, 2012 (1.00%) USD Libor 3M+1.00% (Continued) 17

19 Contract Amount (In Thousands) Maturity Date Interest Rates for Payment (Receivables) Interest Rates for Receivables December 31, 2010 US$15,600/NT$498,810 January 28, % USD Libor 1 M US$10,000/NT$319,000 March 9, % USD Libor 1 M+0.20% US$10,000/NT$308,000 January 13, % USD Libor 3 M+0.4% US$4,740/NT$149,784 March 22, % US$3,000/NT$95,814 September 9, % 1%+USD Libor 3M US$5,000/NT$160,155 September 3, % 1%+USD Libor 3M (Concluded) The contracts resulted in net gains of $164,332 thousand and net losses of $103,425 thousand for the years ended December 31, 2011 and 2010, respectively. d. Interest rate swap contracts The Corporation entered into interest rate swap contracts with bank to hedge against adverse fluctuations of the floating interest rates for its longterm bank loans. The contracts resulted in net losses of $17,918 thousand and $10,417 thousand for the years ended December 31, 2011 and 2010, respectively. Outstanding interest rate swap contracts as of December 31, 2011 and 2010 are summarized as follows: Principal Amount (In Thousands) Maturity Date Interest Rates for Payments Interest Rates for Receivables December 31, 2011 NT$571,429 (Note) December 15, 2012 Daily range accrual, 2.35% + (3*TWD 90D 90day commercial paper CP)*N/M N is the number of days which TWD 5Y CMS TWD 1Y CMS 0 in that calculation period US$10,000 July 20, % (Yearly, ACT/360) LI USD 3M+0bP (Quarterly, ACT/360) December 31, 2010 NT$1,142,857 (Note) December 15, 2012 Daily range accrual, 2.35% + (3*TWD 90D 90day commercial paper CP)*N/M N is the number of days which TWD 5Y CMS TWD 1Y CMS 0 in that calculation period US$10,000 July 20, % (Yearly, ACT /360) LI USD 3M+0bP (Quarterly, ACT/360) Note: The principal amounts of the interest rate swap contracts decrease gradually as bank loans are repaid. 6. AVAILABLEFOR SALE FINANCIAL ASSETS CURRENT These assets comprised publicly listed stocks. 18

20 7. ACCOUNTS RECEIVABLE December 31 Accounts receivable third parties $ 15,167,453 $ 10,653,521 Less: Allowance for doubtful accounts (16,557) (14,806) The movements of the allowance of doubtful accounts are summarized as follows: $ 15,150,896 $ 10,638,715 Year Ended December 31 Beginning balance $ 14,806 $ 14,806 Allowance for doubtful accounts 537 Reclassification 1,214 Ending balance $ 16,557 $ 14,806 Factored notes and accounts receivable for the years ended December 31, 2011 and 2010 were as follows: Counterparties Receivables Sold (US$ in Thousands) Amounts Collected (US$ in Thousands) Advances Received at Yearend (US$ in Thousands) Interest Rates on Advances Received (%) Credit Line (US$ in Thousands) Year ended December 31, 2011 Land Bank $ 73,464 $ 65,975 $ 6, $ 11,500 Shanghai Commercial & Savings Bank 27,195 23,287 3, ,000 Ta Chong Bank 47,180 40,668 5, ,000 Yuanta Commercial Bank 76,658 68,843 7, ,000 China Development Industrial Bank 53,569 46,405 6, ,000 Taichung Commercial Bank 77,159 66,739 9, ,000 Taipei Fubon Bank 77,159 66,739 9, ,000 Industrial Bank of Taiwan 38,329 34,422 3, ,000 Taiwan Business Bank 73,464 65,975 6, ,500 Bank of Taiwan 244, ,037 35, ,000 E.SUN Commercial Bank 77,159 66,739 9, ,000 Mega International Commercial Bank 27,195 23,287 3, ,000 Bank of Panhsin 19,165 17,211 1, ,000 DBS Bank 44,717 40,159 4, ,000 Bank of Kaohsiung 39,150 34,591 4, ,000 Cathay United Bank 25,553 22,948 2, ,000 First Commercial Bank 78,801 67,078 10, ,000 Hua Nan Commercial Bank 51,106 45,895 4, ,000 Far Eastern International Bank 44,717 40,159 4, ,000 Taishin Bank 22,494 14, ,000 $ 1,218,346 $ 1,056,368 $ 138,326 (Continued) 19

21 Counterparties Receivables Sold (US$ in Thousands) Amounts Collected (US$ in Thousands) Advances Received at Yearend (US$ in Thousands) Interest Rates on Advances Received (%) Credit Line (US$ in Thousands) Year ended December 31, 2010 Land Bank $ 11,512 $ 10,350 $ 10, $ 10,500 Shanghai Commercial & Savings Bank 4,004 3,600 3, ,000 Ta Chong Bank 7,007 6,300 6, ,000 Yuanta Bank 12,012 10,800 10, ,000 China Development Industrial Bank 8,008 7,200 7, ,000 Taichung Bank 11,512 10,350 10, ,500 Taipei Fubon Bank 11,512 10,350 10, ,500 Industrial Bank of Taiwan 6,006 5,400 5, ,000 Taiwan Business Bank 11,512 10,350 10, ,500 Bank of Taiwan 35,036 31,500 31, ,000 E.SUN Commercial Bank 11,512 10,350 10, ,500 Mega International Commercial Bank 4,004 3,600 3, ,000 Bank of Panhsin 3,003 2,700 2, ,000 DBS Bank 7,007 6,300 6, ,000 Bank of Kaohsiung 6,006 5,400 5, ,000 Cathay United Bank 4,004 3,600 3, ,000 First Commercial Bank 11,512 10,350 10, ,500 Hun Nan Bank 8,008 7,200 7, ,000 Far Eastern International Bank 7,007 6,300 6, ,000 $ 180,184 $ 162,000 $ 162,000 (Concluded) Note 1: Under the factoring agreements, the Corporation, irrevocably and without recourse, transferred accounts receivable to underwriting banks. Any risks of default on the factored accounts receivable by customers having financial difficulties are borne by respective banks. The Corporation is not responsible for the collection of factored receivables or for any legal proceedings and costs of recovering these receivables. Note 2: As of December 31, 2011 and 2010, total outstanding receivables resulting from the above transactions, net of advances received, were classified under other receivables. Note 3: For the years ended December 31, 2011 and 2010, underwriting banks fees of $69,158 thousand and $6,632 thousand, respectively, were classified under bank expense and interest expense. 8. INVENTORIES December 31 Finished goods $ 2,228,727 $ 1,267,005 Work in process 4,495,054 3,814,816 Raw materials and supplies 2,834,160 3,184,647 $ 9,557,941 $ 8,266,468 As of December 31, 2011 and 2010, the allowances for inventory devaluation were $2,174,295 thousand and $1,360,815 thousand, respectively. 20