Taiwan Cooperative Bank, Ltd. Financial Statements for the Years Ended December 31, 2008 and 2007 and Independent Auditors Report

Transcription

1 Taiwan Cooperative Bank, Ltd. Financial Statements for the Years Ended December 31, 2008 and 2007 and Independent Auditors Report

2 INDEPENDENT AUDITORS REPORT The Board of Directors and the Stockholders Taiwan Cooperative Bank, Ltd. We have audited the accompanying balance sheets of Taiwan Cooperative Bank, Ltd. as of December 31, 2008 and 2007, and the related statements of income, changes in stockholders equity and cash flows for the years then ended. These financial statements are the responsibility of the Bank 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 Audit of Financial Statements of Financial Institutions 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 provide a reasonable basis for our opinion. In our opinion, based on our audits, the financial statements referred to above present fairly, in all material respects, the financial position of Taiwan Cooperative Bank, Ltd. as of December 31, 2008 and 2007, 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 Public Banks, Guidelines Governing the Preparation of Financial Reports by Futures Commission Merchants, requirements of the Business Accounting Law and Guidelines Governing Business Accounting relevant to financial accounting standards, and accounting principles generally accepted in the Republic of China. As stated in Note 3 to the financial statements, under an explanation issued by the Accounting Research and Development Foundation of the Republic of China, Taiwan Cooperative Bank, Ltd. should recognize bonus to employees and remuneration to directors and supervisors as compensation expenses effective January 1, These bonus and remuneration were previously recorded as appropriations from earnings. As stated in Notes 3 and 32 to the financial statements, Taiwan Cooperative Bank, Ltd. reclassified its financial assets in accordance with the newly amended Statement of Financial Accounting Standards No Financial Instruments: Recognition and Measurement

3 We have also audited the consolidated financial statements of Taiwan Cooperative Bank, Ltd. and its subsidiaries as of and for the years ended December 31, 2008 and 2007, on which we have issued a modified unqualified opinion and an unqualified opinion thereon, respectively, in our report dated March 2, 2009 (not presented herewith). March 2, 2009 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 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-language auditors report and financial statements shall prevail

4 TAIWAN COOPERATIVE BANK, LTD. BALANCE SHEETS DECEMBER 31, 2008 AND 2007 (In Thousands of New Taiwan Dollars, Except Par Value) Percentage Increase (Decrease) Percentage Increase (Decrease) ASSETS Amount Amount % LIABILITIES AND STOCKHOLDERS EQUITY Amount Amount % CASH AND CASH EQUIVALENTS (Notes 4 and 28) $ 40,592,528 $ 32,500, DUE TO THE CENTRAL BANK AND OTHER BANKS (Notes 16 and 28) $ 202,656,838 $ 254,816,364 (20 ) DUE FROM THE CENTRAL BANK AND CALL LOANS TO OTHER FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS BANKS (Notes 5, 28 and 29) 383,763, ,359,794 (10 ) (Notes 2, 6 and 20) 4,525,836 2,650, FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS SECURITIES SOLD UNDER REPURCHASE AGREEMENTS (Notes 2, 6, 9, (Notes 2, 3, 6 and 32) 31,259,237 41,748,515 (25 ) 12 and 17) 55,961,852 43,247, RECEIVABLES, NET (Notes 2, 7 and 28) 20,385,892 27,872,714 (27 ) PAYABLES (Note 18) 45,943,097 39,115, DISCOUNTS AND LOANS, NET (Notes 2, 8 and 28) 1,832,644,545 1,729,746,205 6 DEPOSITS AND REMITTANCES (Notes 19 and 28) 1,983,480,938 1,885,247,837 5 AVAILABLE-FOR-SALE FINANCIAL ASSETS (Notes 2, 3, 9 and 32) 64,785,297 60,247,280 8 BANK DEBENTURES (Note 20) 77,771,000 84,321,000 (8 ) HELD-TO-MATURITY FINANCIAL ASSETS (Notes 2 and 10) 8,171,079 7,527,062 9 ACCRUED PENSION COST (Notes 2 and 23) 1,763,570 1,645,063 7 EQUITY INVESTMENTS UNDER THE EQUITY METHOD (Notes 2 and 11) 5,628,867 5,776,283 (3 ) OTHER FINANCIAL LIABILITIES (Notes 21 and 28) 4,554,131 4,608,630 (1 ) OTHER FINANCIAL ASSETS, NET (Notes 2 and 12) 56,149,881 47,387, OTHER LIABILITIES (Notes 2, 13, 22, 25 and 28) 3,272,227 3,454,168 (5 ) PROPERTIES (Notes 2 and 13) Total liabilities 2,379,929,489 2,319,105,918 3 Land (including revaluation increments) 22,481,984 22,211,380 1 Buildings 13,098,990 13,017,330 1 STOCKHOLDERS' EQUITY Machinery and equipment 5,208,396 4,768,094 9 Capital Transportation equipment 687, ,891 - Common stock - NT$10.00 par value; authorized 6,000,000 Other equipment 1,299,766 1,280,397 2 thousand shares; issued and outstanding 5,485,500 thousand Leasehold improvements 641, , shares in 2008 and 4,770,000 thousand shares in ,855,000 47,700, ,417,461 42,531,005 2 Capital surplus - additional paid-in capital from share Less: Accumulated depreciation 9,428,473 8,689,285 9 issuance in excess of par value 32,207,944 32,207,944 - Less: Accumulated impairment 1,114 86,215 (99 ) Retained earnings 33,987,874 33,755,505 1 Legal reserve 8,993,862 6,071, Construction in progress 24,476 42,545 (42 ) Unappropriated earnings 7,592,988 12,660,965 (40 ) Prepayment for land and buildings - 54,664 (100 ) Total retained earnings 16,586,850 18,732,715 (11 ) Prepayment for equipment 18,118 13, Other equity Unrealized revaluation increments 4,420,439 4,419,580 - Properties, net 34,030,468 33,866,474 - Cumulative translation adjustments 162, ,568 (41 ) Unrealized gain (loss) on financial instruments 867,133 (896,081 ) 197 INTANGIBLE ASSETS (Notes 2, 3 and 14) 3,624,616 3,434,078 6 Treasury stock - 100,000 thousand shares (1,898,154 ) - - Total other equity 3,552,398 3,798,067 (6 ) OTHER ASSETS, NET (Notes 2, 15, 25 and 30) Nonoperating assets, net 3,834,123 3,961,244 (3 ) Total stockholders' equity 107,202, ,438,726 5 Refundable deposits 994,879 1,094,801 (9 ) Collaterals assumed, net 741, ,947 (25 ) CONTINGENCIES AND COMMITMENTS (Notes 2 and 30) Operating deposits and settlement funds 96,832 96,806 - Deferred income tax assets, net - 694,462 (100 ) Others 428, , Other assets, net 6,096,156 7,078,466 (14 ) TOTAL $ 2,487,131,681 $ 2,421,544,644 3 TOTAL $ 2,487,131,681 $ 2,421,544,644 3 The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated March 2, 2009) - 3 -

5 TAIWAN COOPERATIVE BANK, LTD. STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2008 AND 2007 (In Thousands of New Taiwan Dollars, Except Per Share Amounts) Percentage Increase (Decrease) Amount Amount % INTEREST REVENUE (Notes 2, 28 and 32) $ 71,779,904 $ 66,367,211 8 INTEREST EXPENSE (Notes 2, 28 and 32) (44,423,797 ) (42,017,527 ) 6 NET INTEREST 27,356,107 24,349, NET REVENUE AND GAIN (LOSS) OTHER THAN INTEREST Service fee income, net (Notes 2, 28 and 32) 3,467,406 3,332,734 4 Loss on financial assets and liabilities at fair value through profit or loss (Notes 2 and 32) (4,689,947 ) (148,847 ) 3,051 Realized gain on available-for-sale financial assets (Notes 2 and 32) 156, ,864 (77 ) Realized loss on held-to-maturity financial assets (Note 2) (140,354 ) - - Income (loss) from equity investments under the equity method (Notes 2 and 11) (96,152 ) 341,711 (128 ) Foreign exchange gain, net (Note 2) 5,314, , Impairment loss on assets (Notes 2, 12 and 15) (686,006 ) (439,680 ) 56 Gain on financial assets carried at cost (Note 2) 411, ,887 (33 ) Gain on disposal of properties and nonoperating assets (Note 2) 298,495 1,120,181 (73 ) Recovery of bad debts written off and overdue accounts 2,537,842 3,599,636 (29 ) Other noninterest gain, net (Notes 2 and 28) 338, ,023 (38 ) Total net revenue and gain (loss) other than interest 6,912,973 10,214,607 (32 ) TOTAL NET REVENUE 34,269,080 34,564,291 (1 ) ALLOWANCE FOR BAD-DEBT EXPENSES (Notes 2 and 8) (6,248,668 ) (4,678,962 ) 34 OPERATING EXPENSES Personnel (Notes 2, 3 and 24) (12,338,982 ) (11,842,537 ) 4 Depreciation and amortization (Notes 2 and 24) (1,105,344 ) (1,103,517 ) - General and administrative (5,068,211 ) (4,997,861 ) 1 Total operating expenses (18,512,537 ) (17,943,915 ) 3 (Continued) - 4 -

6 TAIWAN COOPERATIVE BANK, LTD. STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2008 AND 2007 (In Thousands of New Taiwan Dollars, Except Per Share Amounts) Percentage Increase (Decrease) Amount Amount % INCOME BEFORE INCOME TAX $ 9,507,875 $ 11,941,414 (20 ) INCOME TAX EXPENSE (Notes 2 and 25) (1,977,097 ) (2,201,041 ) (10 ) NET INCOME $ 7,530,778 $ 9,740,373 (23 ) Before Income After Income Before Income After Income Tax Tax Tax Tax EARNINGS PER SHARE (Note 27) Basic earnings per share $ 1.74 $ 1.38 $ 2.18 $ 1.78 Diluted earnings per share $ 1.73 $ 1.37 $ 2.18 $ 1.78 The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated March 2, 2009) (Concluded) - 5 -

7 TAIWAN COOPERATIVE BANK, LTD. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2008 AND 2007 (In Thousands of New Taiwan Dollars) Other Equity Unrealized Issued and Outstanding Capital Stock Revaluation Cumulative Unrealized Gain (Note 26) Retained Earnings (Notes 2 and 26) Increments Translation (Loss) on Financial Total Shares Capital Surplus Unappropriated (Notes 2, 13, 15 Adjustments Instruments Treasury Stock Stockholders (in Thousands) Common Stock (Notes 2 and 26) Legal Reserve Earnings and 26) (Note 2) (Note 2) (Notes 2 and 26) Equity BALANCE, JANUARY 1, ,500,000 $ 45,000,000 $ 34,907,944 $ 3,319,187 $ 9,401,193 $ 4,024,155 $ 177,176 $ 902,595 $ - $ 97,732,250 Appropriation of the 2006 earnings Legal reserve ,752,563 (2,752,563 ) Cash dividends (3,150,000 ) (3,150,000 ) Remuneration to directors and supervisors (64,226 ) (64,226 ) Bonus to employees (513,812 ) (513,812 ) Balance after appropriation 4,500,000 45,000,000 34,907,944 6,071,750 2,920,592 4,024, , ,595-94,004,212 Capital surplus transferred to capital stock in August ,000 2,700,000 (2,700,000 ) Net income in ,740, ,740,373 Change in unrealized revaluation increments , ,425 Change in cumulative translation adjustments , ,392 Change in unrealized loss on financial instruments (1,798,676 ) - (1,798,676 ) BALANCE, DECEMBER 31, ,770,000 47,700,000 32,207,944 6,071,750 12,660,965 4,419, ,568 (896,081 ) - 102,438,726 Appropriation of the 2007 earnings Legal reserve ,922,112 (2,922,112 ) Cash dividends (1,908,000 ) (1,908,000 ) Stock dividends 715,500 7,155, (7,155,000 ) Remuneration to directors and supervisors (68,182 ) (68,182 ) Bonus to employees (545,461 ) (545,461 ) Balance after appropriation 5,485,500 54,855,000 32,207,944 8,993,862 62,210 4,419, ,568 (896,081 ) - 99,917,083 Net income in ,530, ,530,778 Change in unrealized revaluation increments Change in cumulative translation adjustments (111,588 ) - - (111,588 ) Change in unrealized gain on financial instruments ,763,214-1,763,214 Acquisition of treasury stock - 100,000 thousand shares (1,898,154 ) (1,898,154 ) BALANCE, DECEMBER 31, ,485,500 $ 54,855,000 $ 32,207,944 $ 8,993,862 $ 7,592,988 $ 4,420,439 $ 162,980 $ 867,133 $ (1,898,154 ) $ 107,202,192 The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated March 2, 2009) - 6 -

8 TAIWAN COOPERATIVE BANK, LTD. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2008 AND 2007 (In Thousands of New Taiwan Dollars) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 7,530,778 $ 9,740,373 Loss (gain) on valuation of financial instruments (824,507 ) 339,077 Gain on the sale of available-for-sale financial assets (156,358 ) (578,873 ) Loss (income) from equity investments under the equity method, net of cash dividends received 136,363 (199,182 ) Impairment loss on assets 686, ,680 Depreciation and amortization 1,105,344 1,103,517 Gain on disposal of properties, nonoperating assets and collaterals assumed, net (382,485 ) (1,190,465 ) Allowance for bad-debt expenses 6,248,668 4,678,962 Other provisions 27,274 9,059 Amortization of premium or discount on bonds 645, ,296 Provision for pension costs 118, ,910 Deferred income tax 1,021,161 1,333,830 Loss on the sale of held-to-maturity financial assets 140,354 - Gain on the sale of financial assets carried at cost (173,599 ) (273,380 ) Others 29,668 (15,526 ) Net changes in operating assets and liabilities Held-for-trading financial assets 10,809,207 7,444,082 Receivables 1,036, ,617 Other assets (183,491 ) 11,381 Held-for-trading financial liabilities (930,668 ) (2,492,428 ) Payables 6,812,759 (9,164,188 ) Other liabilities (279,268 ) (143,196 ) Net cash provided by operating activities 33,417,178 12,371,546 CASH FLOWS FROM INVESTING ACTIVITIES Decrease (increase) in due from the Central Bank and call loans to other banks 40,596,679 (43,086,326 ) Acquisition of financial assets designated at fair value through profit or loss (182,581 ) (1,470,751 ) Proceeds of the sale of financial assets designated at fair value through profit or loss 2,148,775 1,148,257 Increase in discounts and loans (111,839,726 ) (30,562,426 ) Acquisition of available-for-sale financial assets (79,841,482 ) (75,893,498 ) Proceeds of the sale of available-for-sale financial assets 77,612,595 75,722,340 Acquisition of held-to-maturity financial assets (6,051,969 ) (4,365,905 ) Proceeds of the sale of and return of principal on held-to-maturity financial assets 5,526,187 - Acquisition of debt instruments with no active market (19,043,506 ) (15,184,077 ) Proceeds of the sale of and return of principal on debt instruments with no active market 9,148,657 8,361,762 Proceeds of the sale of financial assets carried at cost 385, ,484 Increase in other financial assets (365,033 ) (439,175 ) (Continued) - 7 -

9 TAIWAN COOPERATIVE BANK, LTD. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2008 AND 2007 (In Thousands of New Taiwan Dollars) Acquisition of properties, intangible assets and nonoperating assets $ (1,518,547 ) $ (1,339,393 ) Proceeds of the sale of properties, nonoperating assets and collaterals assumed 952,515 1,984,626 Decrease (increase) in other assets (157,590 ) 58,946 Proceeds of the sale of nonperforming loans 9,364,024 8,645,318 Net cash used in investing activities (73,265,318 ) (76,083,818 ) CASH FLOWS FROM FINANCING ACTIVITIES Decrease in due to the Central Bank and other banks (52,159,526 ) (13,307,939 ) Increase (decrease) in securities sold under repurchase agreements 12,714,692 (13,910,411 ) Increase in deposits and remittances 98,233,101 61,874,798 Repayment of bank debentures (16,540,000 ) - Issuance of bank debentures 10,000,000 20,170,000 Bonus to employees and remuneration to directors and supervisors (613,643 ) (576,979 ) Decrease in other financial liabilities (54,499 ) (333,545 ) Cash dividends (1,903,204 ) (3,135,216 ) Acquisition of treasury stock (1,898,154 ) - Decrease in other liabilities (41,992 ) (4,335 ) Net cash provided by financing activities 47,736,775 50,776,373 EFFECTS OF EXCHANGE RATE CHANGES 203,383 (564,228 ) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,092,018 (13,500,127 ) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 32,500,510 46,000,637 CASH AND CASH EQUIVALENTS, END OF YEAR $ 40,592,528 $ 32,500,510 SUPPLEMENTAL CASH FLOW INFORMATION Interest paid $ 44,750,799 $ 40,898,578 Income tax paid $ 1,354,397 $ 725,022 PART-CASH INVESTING ACTIVITIES Sale of nonperforming loans - current year $ 3,103,990 $ 10,929,032 Receivables from the sale of nonperforming loans (2,483,192 ) (8,743,226 ) Proceeds of the sale of nonperforming loans - previous year 8,743,226 6,459,512 Proceeds of the sale of nonperforming loans $ 9,364,024 $ 8,645,318 NON-CASH INVESTING ACTIVITIES Acquisition of Taiwan Cooperative Bills Finance Corporation by using the Bank's creditor's rights converted to stockholder's rights (Note 11), resulting in a decrease in receivables and an increase in equity-method investments $ - $ 529,516 The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated March 2, 2009) (Concluded) - 8 -

10 TAIWAN COOPERATIVE BANK, LTD. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2008 AND 2007 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise) 1. ORGANIZATION AND OPERATIONS Taiwan Cooperative Bank, Ltd. (the Bank ) was officially established on October 5, 1946 to regulate the supply of and demand for funds for cooperative organizations by accepting their surplus funds as deposits and extending working funds to them. On February 10, 2006, the Bank changed its Chinese name upon approval by the Ministry of Economic Affairs. However, the Bank s English name remains unchanged. The Bank became a legal entity in 1985 in accordance with the Banking Law. At the start of 2001, the Bank was converted into a corporate entity engaged in (a) all commercial banking operations allowed under the Banking Law; (b) international banking operations; (c) overseas branch operations as authorized by the respective foreign governments; (d) futures trading assistance; and (e) other operations as authorized by the central authority-in-charge. The Bank merged with the Farmers Bank of China (FBC) on May 1, 2006, with the Bank as the survivor entity. The Bank has its Head Office in Taipei. It had a Business, International Banking, Finance, Security and Trust Departments as well as 299 domestic branches, 10 securities brokerage branches, an offshore banking unit (OBU), 4 overseas branches and 1 representative offices as of December 31, The operations of the Bank s Trust Department are (1) planning, managing and operating the trust business and (2) custodianship of nondiscretionary trust fund in domestic and overseas securities and mutual funds. These operations are regulated under the Banking Law and Trust Law of the Republic of China (ROC). As of December 31, 2008 and 2007, the Bank had 8,892 and 8,792 employees, respectively. The Bank s shares have been listed on the Taiwan Stock Exchange since November 17, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The Bank s financial statements have been prepared in conformity with the Guidelines Governing the Preparation of Financial Reports by Public Banks, Guidelines Governing the Preparation of Financial Reports by Futures Commission Merchants, Business Accounting Law and Guidelines Governing Business Accounting, and accounting principles generally accepted in the ROC. In preparing financial statements in conformity with these guidelines, law and principles, the Bank is required to make certain estimates and assumptions that could affect amounts of the allowance for credit losses, reserve for losses on guarantees, depreciation, amortization, pension, assets impairment, the valuation of financial instruments, bonus to employees, remuneration to directors and supervisors, income tax, accrued litigation loss, etc. Actual results may differ from these estimates. Also, since the operating cycle in the banking industry cannot be reasonably identified, accounts included in the Bank s financial statements are not classified as current or noncurrent. Nevertheless, these accounts are properly categorized according to the nature of each account and are sequenced by their liquidity. The maturity analysis of the Bank s assets and liabilities is shown in Note 32. The accompanying financial statements include the accounts of the Head Office, all domestic and overseas operating departments, branches and representative offices. All interoffice account balances and transactions have been eliminated

11 For the convenience of readers, the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the ROC. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language financial statements shall prevail. The Bank s significant accounting policies are summarized as follows: Regular Way Purchase or Sale of a Financial Asset The Bank uses settlement date accounting when recording transactions, except those on beneficiary certificates, for which trade date accounting is used. The Bank recognizes gain or loss on the sale of financial assets on the settlement date. The changes in fair values between the trade date and the settlement date for purchase of financial assets are recognized by the following methods: a) financial assets at fair value through profit or loss - credited or charged to current income; b) available-for-sale financial assets - credited or charged to stockholders equity. Basis of Fair Value Fair values are determined as follows: (a) short-term bills - at reference prices published by Reuters; (b) listed securities and GreTai Securities Market (GTSM) securities - at closing prices as of the balance sheet date; (c) beneficiary certificates (open-end funds) - at net asset values as of the balance sheet date; (d) bonds-domestic - at period-end reference prices published by the GTSM; (e) securities that are not listed or not traded in the GTSM but have quoted market prices or trading records - at quoted market prices or trading prices; and (f) financial instruments with no active markets - at fair value estimates based on valuation techniques. Financial Instruments at Fair Value Through Profit or Loss Financial instruments at fair value through profit or loss are financial assets or liabilities that are designated on initial recognition as those to be measured at fair values, with fair value changes in profit or loss or financial assets or liabilities classified as held for trading. These instruments are required to be recognized at fair value and to be measured at fair value through profit or loss on the balance sheet date. Financial instruments used in derivative transactions that do not qualify for hedge accounting are classified as financial assets or liabilities held for trading. If the fair value of a derivative is a positive number, the derivative is carried as an asset, and if the fair value is a negative number, the derivative is carried as a liability. Applying the fair value option eliminates accounting measurement mismatch for items that naturally offset each other or eliminates the burden of separating embedded derivatives that are not considered to be closely related to the host contract pertaining to a hybrid instrument. The Bank does not adopt hedge accounting in 2008 and 2007, respectively. If the hedged items are not designated as financial assets or liabilities at fair value through profit or loss (FVTPL), accounting measurement mismatches on these items will occur as a result of differences in measurement attributes. Thus, the Bank designated debt instruments and bank debentures issued as financial assets and liabilities at FVTPL. Moreover, the Bank designated hybrid instruments as financial assets and liabilities at FVTPL because embedded derivatives are not separated from the host contract in a hybrid instrument. Securities Purchased/Sold Under Resale/Repurchase Agreements Securities purchased under resell agreements and securities sold under repurchase agreements are generally treated as collateralized financing transactions. Interest earned on resell agreements or interest incurred on repurchase agreements is recognized as interest revenue or interest expense over the life of each agreement

12 Overdue Loans Loans and other credits (including accrued interest) that are overdue for at least six months are classified as overdue loans in accordance with the guideline issued by the Ministry of Finance (MOF). Overdue loans (except other credits) are classified as discounts and loans, and the remaining are classified as other financial assets. Allowance for Credit Losses and Reserve for Losses on Guarantees In determining the allowance for credit losses and reserve for losses on guarantees, the Bank evaluates the losses on particular loans and overall credit portfolio, considering the balances of bills, discounts, loans, receivables, and overdue loans as well as guarantees as of the balance sheet date. Under The Regulations Governing the Procedures for Banking Institutions to Evaluate Assets and Deal with Nonperforming/Non-accrual Loans (the Regulations ) issued by the MOF, the Bank evaluates credit losses on the basis of its borrowers /clients financial condition, delinquency record on payment of the interest and principal, and collaterals provided to estimate level of collectibility. The Regulations amended the classification of loan assets, such that loan assets are classified as special mention, substandard, with highly doubtful collectibility and deemed uncollectible, and the minimum allowance for credit losses and provision for losses on guarantees for these classifications are 2%, 10%, 50% and 100% of outstanding credits, respectively. Under the MOF guidelines, write-offs of specific loans are offset against the recorded allowance for loan losses, as approved by the Board of Directors. Available-for-sale Financial Assets Available-for-sale financial assets are initially recognized at fair value plus transaction costs that are directly attributable to the asset acquisition. Any difference between the initial carrying amount of a debt security and its amount on maturity is amortized using the effective interest method. However, the straight-line method is used for amortization if there was a minor difference between the amortizations using the effective interest method and the straight-line method. When assets are subsequently measured at fair value, the changes in fair value are excluded from earnings and reported as a separate component of stockholders equity. The accumulated gains or losses are recognized as earnings when the financial asset is de-recognized from the balance sheet. Cash dividends received within a year of asset acquisition are recognized as a reduction of the original investment cost and are subsequently recognized as investment income up on the stockholders resolution. Stock dividends received are recorded as an increase in the number of shares held and do not affect investment income. The cost per share is recalculated on the basis of the new number of shares held. Held-to-maturity Financial Assets Held-to-maturity financial assets are carried at amortized cost using the effective interest method. However, the straight-line method is used for amortization if there was a minor difference between the amortizations using the effective interest method and the straight-line method. These financial assets are initially recognized at fair value plus transaction costs that are directly attributable to the asset acquisition. Gains or losses are recognized at the time of de-recognition, impairment or amortization

13 Equity Investments under the Equity Method Investments in shares of companies in which the Bank exercises significant influence on their operating and financial policy decisions are accounted for by the equity method. Under the equity method, the investments are carried at cost on the acquisition date and subsequently adjusted for the Bank s proportionate share in the net income or loss of the investees. The proportionate share in the net income or loss is recognized as current income or loss, and any cash dividends received are reflected as a reduction of the carrying values of the investments. If net income on an investment becomes negative, the maximum investment loss the Bank is allowed to recognize will be limited to the extent that the original carrying amount of the investment plus any advances given to the investee are equal to zero, unless the Bank decides to support the investee or there are adequate evidences suggesting the loss is temporary and the investee will become profitable again in the near future. Stock dividends received are recognized only as increases in the number of shares held and not as income. Cost of equity investments sold is determined by the weighted-average method. Other Financial Assets Financial assets carried at cost are those investments in equity instruments (including unlisted stocks and emerging stocks) with no quoted market prices in an active market and with fair values that cannot be reliably measured are measured at their original cost. The accounting treatment of dividends is similar to that for available-for-sale financial assets. Debt instruments with no active market are those with no quoted market prices in an active market and with predetermined amounts. The accounting treatment for these debt instruments is similar to that for held-to-maturity financial assets, except for the absence of restriction on the timing of the disposal of held-to-maturity financial assets. Properties and Nonoperating Assets Properties and nonoperating assets are stated at cost, or cost plus revaluation increments and less accumulated depreciation and accumulated impairment. Major renewals, additions and improvements are capitalized; while costs of repairs and maintenance are expensed as incurred. Depreciation of properties and nonoperating assets is computed on the straight-line basis over useful lives estimated as follows: buildings, 10 to 50 years; machinery and equipment, 3 to 7 years; transportation equipment, 3 to 10 years; other equipment, 2 to 10 years; and leasehold improvements, 5 to 10 years. Assets still being used after they have reached their full depreciation value are depreciated over newly estimated service lives. Upon retirement or disposal of properties and nonoperating assets, their cost (including revaluation increments), related accumulated depreciation, accumulated impairment and any unrealized revaluation increments of an item of property and nonoperating asset are removed from the accounts. Any resulting gain or loss is credited or charged to current income. Intangible Assets Goodwill is stated at cost less accumulated impairment. Computer software is recorded at acquisition cost and amortized by the straight-line method over five years

14 Asset Impairment a. Available-for-sale financial assets If an available-for-sale financial asset is determined to be impaired, a loss is recognized. If the impairment loss on equity securities decreases, this loss is reversed to the extent of the decrease and recorded as an adjustment to stockholders equity; for debt securities, this loss is recognized as earnings. b. Held-to-maturity financial assets and debt instruments with no active market If a held-to-maturity financial asset or debt instrument with no active market is determined to be impaired, a loss is recognized. If the impairment loss decreases, the previously recognized impairment loss is reversed. However, the reversal should not result in the carrying amount of financial assets exceeding the amortized cost that would have been determined had no impairment loss been recognized. c. Financial assets carried at cost If there is objective evidence that a financial asset carried at cost is impaired, an impairment loss is recognized. However, impairment loss reversal is prohibited. d. Equity investments under the equity method If there is objective evidence that an equity-method investment is impaired, an impairment loss is recognized. The Bank tests equity investments on which the Bank has significant influence but over which the Bank has no control on the basis of the individual carrying amounts of the investments. e. Properties, intangible assets, and other assets The Bank tests assets (mainly properties, nonoperating assets, goodwill and computer software) and cash-generating units (CGUs) for impairment on each balance sheet date. If impairment is determined, the Bank estimates the recoverable amounts of assets or CGUs. An impairment loss should be recognized whenever the recoverable amount of the assets or the CGU is below the carrying amount. If asset impairment loss (excluding goodwill) is reversed, the increase in the carrying amount resulting from reversal is credited to current income. However, loss reversal should not be more than the carrying amount (net of depreciation or amortization) had the impairment loss not been recognized. For the unrealized revaluation increments recognized upon revaluation required by law, the impairment loss is recognized as a reduction of the reported revaluation increments. If the impairment loss exceeds the reported revaluation increments, the excess is recognized as current loss. If this impairment loss is reversed, this reversal is recognized as current income to the extent of the loss previously recognized, and any reversal exceeding the amount of previously recognized loss is reported as unrealized revaluation increments. Goodwill is tested for impairment annually, or more frequently if events indicate goodwill impairment. An impairment loss is recorded if the book value exceeds the value in use. No recording of a subsequent recovery of fair value of goodwill is allowed. Collaterals Assumed Collaterals assumed are recorded at cost and revalued at the lower of cost or net fair value as of the balance sheet date. If cost exceeds net fair value, an impairment loss is recognized. If the impairment loss is reversed, this reversal is recognized as current income. If collaterals assumed are not disposed within the statutory period, relevant regulations require that the Bank should either apply for the extension of the disposal period or increase their provision for possible losses

15 Pension Costs The Bank has two pension plans: Defined benefit and defined contribution. Under the defined benefit plan, pension cost is determined actuarially. Under the defined contribution plan, the Bank s pension fund contributions are recognized as current expenses throughout the employees service periods. Trading Loss Reserve Reserve for losses on the sale of bonds is computed at 10% of the net gain on the sale of bonds until the balance of the reserve reaches $200,000 thousand. This reserve should be used only to offset actual losses on the sale of the bonds. Under the Regulations Governing Futures Commission Merchants, the futures commission merchant engaging in proprietary futures trading should set aside 10% of each month s realized net profit as trading loss reserve, i.e., this reserve should not be used for purposes other than covering trading losses in excess of trading profits. When the accumulated trading loss reserve reaches the legally required level of working capital, no additional trading loss reserve is required to be set aside. Treasury Stock Issued shares reacquired as treasury stock are carried at cost and presented as a deduction to arrive at stockholders equity. When the treasury shares are reissued to the employees, the difference between the reissue price and acquisition cost will be credited or debited to capital surplus - treasury stock. If this capital surplus is not enough for debiting purposes, the shortfall is charged to unappropriated retained earnings. Interest Revenue and Service Fees Interest revenue on loans and financial instruments are recorded on the accrual basis. Interest revenue on loans and other credits extended by the Bank that are classified as overdue loans is recognized only upon collection. Unpaid interest on rescheduled loans is recorded as deferred revenue (part of other liabilities), and paid interest is recognized as interest revenue. Service fees are recorded as income upon receipt or upon substantial completion of the earnings process based on the nature of the transaction. Income Tax Inter-period and intra-period income tax allocations are used, by which tax effects of loss carryforwards, unused investment tax credits, deductible temporary differences and debits of stockholders equity adjustments are recognized as deferred income tax assets, and those of taxable temporary differences and credits of stockholders equity adjustments are recognized as deferred income tax liabilities. A valuation allowance is provided for deferred income tax assets that are not certain to be realized. Tax credits for expenditures for personnel training and stock investments are recognized in the current period. Any adjustments of prior years tax liabilities are included in the current year s income tax expense. Income tax on interest in short-term negotiable investments or special-purpose trust beneficiary securities, which is levied separately, is included in the current year s income tax expense

16 According to the Income Tax Law, income taxes (10%) on undistributed earnings generated annually since 1998 are recorded as expenses in the year when the stockholders resolve to retain the earnings. Foreign-currency Transactions The Bank records foreign-currency transactions (except derivative transactions) in the respective currencies in which these are denominated. Every month-end, foreign-currency income and expenses are translated into New Taiwan dollars at the exchange rates announced by the Central Bank of the Republic of China (CBC). On the balance sheet date, monetary financial assets and liabilities are translated into New Taiwan dollars at the CBC closing rates, and exchange differences are recognized in the income statement. Unrealized exchange differences on nonmonetary financial assets (investments in equity instruments) are a component of the change in their entire fair value. For nonmonetary financial assets and liabilities classified as financial instruments measured at fair value through profit or loss, unrealized exchange differences are recognized in the income statement. For nonmonetary financial instruments that are classified as available-for-sale, unrealized exchange differences are recorded directly under stockholders equity until the asset is sold or becomes impaired. Nonmonetary financial instruments that are classified as carried at cost are recognized at the exchange rates on the transaction dates. The Bank translates overseas branches and the equity-method investees financial statements at the following rates: Assets and liabilities - the CBC closing exchange rates on the balance sheet date; and income and expenses - the average exchange rate in the year. Translation differences net of income tax are recorded as cumulative translation adjustments under stockholders equity and will be recognized as gain or loss if overseas branches and equity-method investments are sold or liquidated. Contingencies A loss is recognized when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. If loss is possible but cannot be reasonably estimated, information on the circumstances that might give rise to the possible loss is disclosed in the notes to the financial statements. Reclassification Certain accounts for 2007 had been reclassified to be consistent with the 2008 financial statement presentation. 3. ACCOUNTING CHANGES Effective January 1, 2008, under an explanation issued by the Accounting Research and Development Foundation of the ROC, the Bank should recognize bonus to employees and remuneration to directors and supervisors as compensation expenses. These bonus and remuneration were previously recorded as appropriations from earnings. This accounting change decreased the Bank s net income in the year ended December 31, 2008 by $391,021 thousand and basic earnings per share after income tax by NT$0.07. Under the newly amended Statement of Financial Accounting Standards ( Statement or SFAS) No Financial Instruments: Recognition and Measurement, the Bank reclassified a part of the held-for-trading financial assets into available-for-sale financial assets. Related information is shown in Note 32. Effective January 1, 2007, the Bank adopted the newly released ROC SFAS No Intangible Assets and related revisions of previously released Statements. The Bank s management believes this change had no significant effect on the financial statements

17 4. CASH AND CASH EQUIVALENTS Cash on hand $ 21,821,074 $ 21,523,928 Notes and checks in clearing 17,583,970 8,389,336 Due from banks 1,187,484 2,587,246 $ 40,592,528 $ 32,500, DUE FROM THE CENTRAL BANK AND CALL LOANS TO OTHER BANKS Deposit reserve - account A $ 22,350,891 $ 12,001,428 Deposit reserve - account B 50,994,290 48,721,366 Reserves for deposits - community financial institutions 35,914,162 35,790,446 Reserves for deposits - foreign-currency deposits 140,506 4,280,900 Deposits in the Central Bank 49,700,000 49,700,000 Negotiable certificates of deposit in the Central Bank 186,105, ,945,000 Due from the Central Bank - others 3,357,342 3,228,867 Call loans to banks 35,200,924 40,691,787 $ 383,763,115 $ 424,359,794 The deposit reserves are determined monthly at prescribed rates based on the average balances of customers New Taiwan dollar deposits. The deposit reserve is subject to withdrawal restrictions, but deposit reserve - account A and foreign-currency deposit reserves may be withdrawn anytime and are noninterest earning. 6. FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS Held-for-trading financial assets Commercial paper $ 17,214,263 $ 11,011,430 Beneficiary securities under securitization 1,313,221 2,495,659 Government bonds 195,650 12,324,111 Corporate bonds 193,115 33,998 Listed stocks - domestic 126,947 2,592,763 Beneficiary certificates - 1,190,132 Bank acceptances - 3,133 Currency swap contracts 2,743, ,445 Forward contracts 804, ,094 Non-deliverable forward contracts 142,484 8,848 Interest rate swap contracts 97,579 22,098 Futures exchange margins 33,219 - Foreign-currency margin contracts 20, ,675 Currency option contracts - buy 5,400 14,073 Commodity option contracts - buy 1,467 - Cross-currency swap contracts - 77,609 22,891,231 30,774,068 (Continued)

18 Financial assets designated at fair value through profit or loss Government bonds $ 3,839,958 $ 5,007,906 Bank debentures 3,777,965 5,019,831 Corporate bonds 750, ,910 Structured deposits - 19,800 8,368,006 10,974,447 Held-for-trading financial liabilities $ 31,259,237 $ 41,748,515 Currency swap contracts $ 1,313,850 $ 393,720 Interest rate swap contracts 543, ,582 Cross-currency swap contracts 393,177 1,536 Forward contracts 259,840 29,144 Non-deliverable forward contracts 134,072 3,932 Currency option contracts - sell 5,400 14,008 Foreign-currency margin contracts 1, Commodity option contracts - sell 1,579-2,653, ,441 Financial liabilities designated at fair value through profit or loss Bank debentures (Note 20) 1,872,674 1,764,713 $ 4,525,836 $ 2,650,154 (Concluded) As of December 31, 2008 and 2007, some securities, with face values of $12,069,300 thousand and $11,865,753 thousand, respectively, had been sold under repurchase agreements. The Bank enters into derivative transactions mainly to accommodate customers needs and to manage its exposure to adverse changes in exchange rates and interest rates. The Bank s strategy for hedging against risk is to avoid most of the market price risk or cash flow risk. In addition, the Bank does futures trading. The Bank uses index futures and option contracts for trading purposes, specifically to diversify investments, aggressively develop various services and increase working capital efficiency. As of December 31, 2008 and 2007, the contract (notional) amounts of derivative transactions were as follows: Forward contracts $ 25,467,154 $ 22,396,038 Non-deliverable forward contracts 5,861,856 1,220,241 Currency swap contracts 182,373, ,464,814 Foreign-currency margin contracts 105,243 4,094,398 Currency option contracts - buy 537,059 6,912,619 Currency option contracts - sell 537,059 6,912,619 Commodity option contracts - buy 3,151 - Commodity option contracts - sell 3,151 - Interest rate swap contracts 10,742,231 11,380,680 Cross-currency swap contracts 820,103 1,478,

19 Contract Amount or Premium Paid Transaction Outstanding Positions (Received) Fair Value Items Type Long/Short Volume (Note 1) (Note 2) December 31, 2008 Futures contracts TAIEX Futures Short 45 $(40,947) $(40,932) Note 1: Contract amount on the transaction date. Note 2: Closing price published by the Taiwan Futures Exchange on December 31, RECEIVABLES, NET Accrued interest $ 7,946,166 $ 8,287,064 Acceptances 3,298,033 4,097,438 Credit cards 2,562,035 2,784,250 Receivable from the sale of nonperforming loans 2,483,192 8,743,226 Factored accounts receivable without recourse 1,777,453 1,434,713 Credits receivable 609, ,701 Refundable deposits receivable in leasehold agreements 496, ,893 Tax refundable 491, ,592 Accounts receivable 442, ,524 Others 932, ,619 21,038,812 28,702,020 Less: Allowance for credit losses 652, ,306 $ 20,385,892 $ 27,872,714 Credits receivable due to the merger with the Farmers Bank of China on May 1, 2006 were recognized at fair value of credits written off by the Farmers Bank of China in the past. The fair values were evaluated by PricewaterhouseCoopers Financial Advisory Service Co., Ltd

20 To speed up the disposal of nonperforming loans (NPLs) and strengthen the Bank s financial structure, the Bank sold - through public bidding - NPLs (including a portion of credits written off) and related credits amounting to (a) $15,819,616 thousand on December 2, 2008 to Fubon Asset Management Co., Ltd. and (b) $39,645,824 thousand on December 10, 2007 to Co-operative Assets Management Co., Ltd.. Contract terms were as follows: Date of NPL Sale December 2, 2008 December 10, 2007 a. Contract signing date December 5, 2008 December 13, 2007 b. Cutoff date September 15, 2008 August 31, 2007 c. Settlement date By March 11, 2009 By April 11, 2008 d. Put-back provision If a buyer identifies any defective asset, the Bank should repurchase the asset between the settlement date and the end of the 12th month from the settlement date. If a buyer identifies any defective asset, the Bank should repurchase the asset between the settlement date and the end of the 15th month from the settlement date. The outstanding receivables on the foregoing transactions amounted to $2,483,192 thousand (Fubon Asset Management Co, Ltd.) and $8,743,226 thousand (Co-operative Assets Management Co., Ltd.) as of December 31, 2008 and 2007, respectively. 8. DISCOUNTS AND LOANS, NET Bills discounted $ 1,669,462 $ 1,775,063 Overdraft Unsecured 836,189 2,254,495 Secured 2,010,990 1,203,408 Import and export negotiations 690,490 1,252,678 Short-term loans Unsecured 262,209, ,192,244 Accounts receivable financing 74,827 - Secured 90,161,311 75,064,313 Receivable from securities financing 546,447 1,284,019 Medium-term loans Unsecured 358,478, ,331,617 Secured 269,990, ,121,529 Long-term loans Unsecured 99,769, ,143,353 Secured 737,460, ,746,978 Overdue loans 24,940,140 26,321,325 1,848,838,243 1,745,691,022 Less: Allowance for credit losses 16,193,698 15,944,817 $ 1,832,644,545 $ 1,729,746,205 Accrual of interest on the above overdue loans had stopped. Thus, the unrecognized interest revenue was $933,235 thousand in 2008 and $1,115,108 thousand in 2007 based on the average loan interest rates for those years. In 2008 and 2007, the Bank had written off credits only after completing the required legal procedures

21 The details and changes in allowance for credit losses of discounts and loans are summarized below: 2008 Specific Risk General Risk Total Balance, January 1 $ 5,726,296 $ 10,218,521 $ 15,944,817 Provisions (reversal) 7,225,852 (1,153,645 ) 6,072,207 Write-offs (5,831,092 ) - (5,831,092 ) Effects of exchange rate changes - 7,766 7,766 Balance, December 31 $ 7,121,056 $ 9,072,642 $ 16,193, Specific Risk General Risk Total Balance, January 1 $ 6,783,839 $ 13,928,459 $ 20,712,298 Provisions (reversal) 8,197,480 (3,709,337 ) 4,488,143 Write-offs (9,255,023 ) - (9,255,023 ) Effects of exchange rate changes - (601 ) (601 ) Balance, December 31 $ 5,726,296 $ 10,218,521 $ 15,944,817 The details of the allowance for bad-debt expenses in 2008 and 2007 were as follows: Provision for possible losses on discounts and loans $ 6,072,207 $ 4,488,143 Reversal of provision for possible losses on receivables (55,425 ) (85,706 ) Provision for possible losses on overdue receivables 230, ,529 Provision (reversal of provision) for reserve for guarantees 1,561 (8,004 ) $ 6,248,668 $ 4,678, AVAILABLE-FOR-SALE FINANCIAL ASSETS Government bonds $ 57,565,569 $ 53,898,624 Bank debentures 5,235,285 5,917,014 Listed stocks - domestic 1,261, ,905 Beneficiary certificates 486,892 - Corporate bonds 235, ,737 $ 64,785,297 $ 60,247,280 As of December 31, 2008 and 2007, available-for-sale financial assets with face values of $34,488,700 thousand and $26,224,600 thousand, respectively, had been sold under repurchase agreements