TONG YANG INDUSTRY CO., LTD. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2017 AND 2016 WITH

Transcription

1 CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2017 AND 2016 WITH REPORT OF INDEPENDENT AUDITORS The reader is advised that these financial statements have been prepared originally in Chinese. In the event of a conflict between these financial statements and the original Chinese version or difference in interpretation between the two versions, the Chinese language financial statements shall prevail. 1

2 Independent Auditors Report To TONG YANG INDUSTRY CO., LTD. Opinion We have audited the accompanying consolidated balance sheets of TONG YANG INDUSTRY CO., LTD. (the Company ) and its subsidiaries as of, and the related consolidated statements of comprehensive income, changes in equity and cash flows for the years ended, and notes to the consolidated financial statements, including the summary of significant accounting policies (together the consolidated financial statements ). In our opinion, based on our audits and the reports of other auditors (please refer to the Other Matter Making Reference to the Audits of Component Auditors section of our report), the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of, and their consolidated financial performance and cash flows for the years ended, in conformity with the requirements of the Regulations Governing the Preparation of Financial Reports by Securities Issuers and International Financial Reporting Standards, International Accounting Standards, Interpretations developed by the International Financial Reporting Interpretations Committee or the former Standing Interpretations Committee as endorsed by Financial Supervisory Commission of the Republic of China. Basis for Opinion We conducted our audits in accordance with the Regulations Governing Auditing and Attestation of Financial Statements by Certified Public Accountants and auditing standards generally accepted in the Republic of China. Our responsibilities under those standards are further described in the Auditors Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Company and its subsidiaries in accordance with the Norm of Professional Ethics for Certified Public Accountant of the Republic of China (the Norm ), and we have fulfilled our other ethical responsibilities in accordance with the Norm. Based on our audits and the reports of other auditors, we believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of 2017 consolidated financial statements. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Estimated Impairment of Accounts Receivable As of 31 December 2017, the balance of accounts receivable and allowance for uncollectible accounts amounted to NT$4,738,993 thousand and NT$69,096 thousand, respectively. Net accounts receivable constituted a material amount of 13% of total consolidated assets. Evaluation of whether the allowance for bad debt reflected the credit risk of accounts receivable, the appropriateness of the accounting policy applied and the establishment of aging accounts receivable time period based on historical experience for the basis of group assessment, required management s significant judgment. Thus, we determined this a key audit matter. 2

3 Our audit procedures included, but not limited to, evaluating the appropriateness of management s provisioning policy of allowance of uncollectible accounts and the impairment of accounts receivable which includes testing the following controls: 1. Analyze the ratio of uncollectible accounts losses to total accounts receivable. 2. Sample test the accuracy of aging accounts receivable time period. 3. Recalculate the impairment of accounts receivable. 4. Verify that the provision of allowance of uncollectible accounts is based on accounting policies. 5. Perform tests on subsequent collection of receivables. We also assessed the adequacy of disclosures of accounts receivable. Please refer to Notes 5 and 6.6 to the Company s consolidated financial statements. Valuation for slow-moving inventories As of 31 December 2017, the Company s net inventories amounted to NT$2,953,030 thousand, and constitutes 8% of total consolidated asset. Considering the significant amount of inventories and that the identification of slow-moving inventories as well as the assessment of the amount of inventory write-downs required significant management judgment, we determined this as a key audit matter. Our audit procedures included, but not limited to, evaluating the appropriateness of management s provisioning policy of allowance of obsolescence loss, including sample testing the accuracy of inventory aging time period; performing and evaluating the changes in value of the slow-moving inventories reserve ratio and inventory aging, to ensure that the valuation for slow-moving inventories followed accounting policies. We also assessed the adequacy of disclosures of inventories. Please refer to Notes 5 and 6.7 to the Company s consolidated financial statements. Other Matter Making Reference to the Audits of a Component Auditors We did not audit the financial statements of certain consolidated subsidiaries, which statements reflect total assets of NT$897,020 thousand and NT$965,823 thousand, constituting 2.38% and 2.65% of consolidated total assets as of 31 December, 2017 and 2016, respectively, and total operating revenues of NT$987,791 thousand and NT$1,149,970 thousand, constituting 4.04% and 4.76% of consolidated operating revenues for the years ended, respectively. We did not audit the financial statements of certain associates and joint ventures accounted for under the equity method. Those financial statements were audited by other auditors, whose reports thereon have been furnished to us, and our opinions expressed herein are based solely on the audit reports of the other auditors. Those associates and joint ventures under equity method amounted to NT$314,125 thousand and NT$366,710 thousand, representing 0.83% and 1.01% of consolidated total assets as of 31 December 2017 and 2016, respectively. The related shares of profits from the associates and joint ventures under the equity method amounted to NT$83,600 thousand and NT$44,718 thousand, representing 2.78% and 1.45% of the consolidated net income before tax for the years ended, respectively, and the related shares of other comprehensive income from the associates and joint ventures under the equity method amounted to NT$(20,978) thousand and NT$(8,111) thousand, representing (26.80)% and 1.39% of the consolidated other comprehensive income for the years ended, respectively. 3

4 Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with the requirements of the Regulations Governing the Preparation of Financial Reports by Securities Issuers and International Financial Reporting Standards, International Accounting Standards, Interpretations developed by the International Financial Reporting Interpretations Committee or the former Standing Interpretations Committee as endorsed by Financial Supervisory Commission of the Republic of China and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the ability to continue as a going concern of the Company and its subsidiaries, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company and its subsidiaries or to cease operations, or has no realistic alternative but to do so. Those charged with governance, including audit committee or supervisors, are responsible for overseeing the financial reporting process of the Company and its subsidiaries. Auditor s Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with auditing standards generally accepted in the Republic of China will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with auditing standards generally accepted in the Republic of China, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: 1. Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. 2. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal control of the Company and its subsidiaries. 3. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. 4

5 4. Conclude on the appropriateness of management s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the ability to continue as a going concern of the Company and its subsidiaries. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause the Company and its subsidiaries to cease to continue as a going concern. 5. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the accompanying notes, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. 6. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company and its subsidiaries to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of 2017 consolidated financial statements and are therefore the key audit matters. We describe these matters in our auditor s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. We have audited and expressed an unqualified opinion on the parent company only financial statements of the Company as of and for the years ended. Hu, Tzu-Ren Huang, Shih-Chieh Ernst & Young, Taiwan 23 March,

6 CONSOLIDATED BALANCE SHEETS (Expressed in Thousands of New Taiwan Dollars) ASSETS Notes 31 Dec Dec Current assets Cash and cash equivalents Ⅳ/Ⅵ.1 $1,236,257 $1,504,666 Debt instrument investments for which no active market exists-current Ⅳ/Ⅵ.4 81,008 89,952 Notes receivable-net Ⅳ/Ⅵ.5 239, ,992 Accounts receivable-net Ⅳ/Ⅵ.6 4,480,787 4,577,780 Accounts receivable-related parties-net Ⅳ/Ⅵ.6/Ⅶ 189,110 60,565 Other receivables Ⅳ 117, ,757 Inventories-net Ⅳ/Ⅵ.7 2,953,030 2,708,489 Other current assets Ⅳ 566, ,185 Total current assets 9,864,022 10,042,386 Non-current assets Available-for-sale financial assets-noncurrent Ⅳ/Ⅵ.2 324, ,311 Financial assets measured at cost-noncurrent Ⅳ/Ⅵ.3-2,236 Bond investments for which no active market exists-noncurrent Ⅳ/Ⅵ.4 19,274 18,098 Investments accounted for under the equity method Ⅳ/Ⅵ.8 3,768,241 3,558,774 Property, plant and equipment Ⅳ/Ⅵ.9 19,758,993 18,679,840 Intangible assets Ⅳ/Ⅵ ,113,235 1,014,450 Deferred tax assets Ⅳ/Ⅵ , ,542 Prepayment for equipments 2,108,032 2,290,644 Long-term prepaid rents 289, ,822 Other assets-others 209, ,383 Total non-current assets 27,809,866 26,423,100 Total assets $37,673,888 $36,465,486 (The accompanying notes are an integral part of the consolidated financial statements.) 6

7 CONSOLIDATED BALANCE SHEETS (Expressed in Thousands of New Taiwan Dollars) LIABILITIES AND SHAREHOLDERS' EQUITY Notes 31 Dec Dec.2016 Current liabilities Short-term loans Ⅳ/Ⅵ.12 $2,015,689 $1,810,712 Short-term notes and bills payable Ⅳ/Ⅵ ,930 Notes payable ,688 Accounts payable 3,249,451 2,949,163 Accounts Payable-related parties Ⅶ 162, ,697 Other payables 1,270,780 1,223,120 Balance payable-machinery and equipment 414, ,357 Current tax liabilities Ⅳ/Ⅵ , ,882 Reserves-current Ⅳ/Ⅵ.17 45,246 45,356 Current portion of bond payable Ⅳ/Ⅵ ,000 Current portion of long-term liabilities Ⅳ/Ⅵ , ,058 Other current liabilities 274, ,218 Total current liabilities 8,238,435 9,010,181 Non-current liabilities Bonds payable Ⅳ/Ⅵ.14 1,200,000 1,200,000 Long-term loans Ⅳ/Ⅵ.15 5,718,964 4,899,852 Deferred tax liabilities Ⅳ/Ⅵ , ,013 Net defined benefit liabilities Ⅳ/Ⅵ , ,500 Other liabilities-others 22,353 20,789 Total non-current liabilities 8,099,485 7,303,154 Total liabilities 16,337,920 16,313,335 Equity attributable to the parent company Capital Ⅳ/Ⅵ.18 Common stock 5,914,771 5,914,771 Capital surplus Ⅳ/Ⅵ.18 4,149,257 4,149,257 Retained earnings Ⅳ/Ⅵ.18 Legal reserve 1,871,315 1,629,768 Special reserve 135,542 - Unappropriated earnings 8,367,931 7,645,334 Other equity Ⅳ/Ⅵ.18 (57,722) (135,542) Non-controlling interests Ⅳ/Ⅵ , ,563 Total equity 21,335,968 20,152,151 Total liabilities and equity $37,673,888 $36,465,486 (The accompanying notes are an integral part of the consolidated financial statements.) 7

8 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended (Expressed in Thousands of New Taiwan Dollars, Except for Earnings Per Share) ~ ~ ITEMS NOTE Sales revenues Ⅳ/Ⅵ.19/Ⅶ $24,452,883 $24,181,282 Cost of goods sold Ⅳ/Ⅵ.20/Ⅶ (18,527,509) (18,077,865) Gross profit 5,925,374 6,103,417 Realized sales profit Gross profit-net 5,925,511 6,104,076 Operating expenses Ⅳ/Ⅵ.20 Sales and marketing expenses (1,738,853) (1,700,237) General and administrative expenses (1,080,249) (1,005,357) Research and development expenses (607,135) (601,440) Subtotal (3,426,237) (3,307,034) Operating income 2,499,274 2,797,042 Non-operating income and expenses Other revenue Ⅳ/Ⅵ , ,120 Other gain and loss Ⅳ/Ⅵ.21 (237,744) (222,718) Financial costs Ⅳ/Ⅵ.21 (126,412) (131,686) Share of profit or loss of associates for using the equity methed 639, ,457 Subtotal 505, ,173 Income from continuing operations before income tax 3,005,127 3,076,215 Income tax expense Ⅳ/Ⅵ.23 (609,646) (597,751) Net income $2,395,481 $2,478,464 Other comprehensive income Not to be reclassified to profit or loss in subsequent periods Ⅳ/Ⅵ.22 Remeasurements of the defined benefit plan 13,926 (48,384) Income tax relating to those items not to be reclassified to profit or loss (2,434) 8,319 To be reclassified to profit or loss in subsequent periods Exchange differences resulting from translating the financial statements of foreign operations (57,348) (351,300) Unrealized gains (losses) from available-for-sale financial assets 173, Share of other comprehensive income of associates accounted for using the equity method (68,516) (288,100) Income tax relating to those items to be reclassified to profit or loss 19,523 96,280 Total other comprehensive income, net of tax 78,289 (583,167) Total comprehensive income $2,473,770 $1,895,297 Net income attributable to: Stockholders of the parent $2,341,351 $2,415,469 Non-controlling interests $54,130 $62,995 Comprehensive income attributable to: Stockholder of the parent $2,431,438 $1,907,008 Non-controlling interests $42,332 $(11,711) Earnings per share (NTD) Earnings per share-basic Ⅳ/Ⅵ.24 $3.96 $4.08 Earnings per share-diluted Ⅳ/Ⅵ.24 $3.96 $4.08 (The accompanying notes are an integral part of the consolidated financial statements.) 8

9 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY For the year ended (Expressed in Thousands of New Taiwan Dollars) ITEMS Common Stock Capital Surplus Legal Reserve Special Reserve Unappropriated Earnings Balance as of 1 January 2016 $5,914,771 $4,149,257 $1,460,211 $- $6,265,878 $259,617 $74,913 $18,124,647 $1,005,249 $19,129,896 Appropriation and distribution of 2015 retained earnings Equity attributable to the parent company Retained Earnings Exchange differences resulting from translating the financial statements of a foreign operations Other equitity Unrealized Gain or Loss on Available-for- Sale Financial Assets Legal reserve ,557 - (169,557) Cash dividend (828,067) - - (828,067) - (828,067) Net income in ,415, ,415,469 62,995 2,478,464 Other comprehensive income, net of tax in (38,389) (470,087) 15 (508,461) (74,706) (583,167) Total comprehensive income ,377,080 (470,087) 15 1,907,008 (11,711) 1,895,297 Total Noncontrolling interests Total Equity Non-controlling interests (44,975) (44,975) Balance as of 31 December 2016 $5,914,771 $4,149,257 $1,629,768 $- $7,645,334 $(210,470) $74,928 $19,203,588 $948,563 $20,152,151 Balance as of 1 January 2017 $5,914,771 $4,149,257 $1,629,768 $- $7,645,334 $(210,470) $74,928 $19,203,588 $948,563 $20,152,151 Appropriation and distribution of 2016 retained earnings Legal reserve ,547 - (241,547) Special Reserve ,542 (135,542) Cash dividend (1,253,932) - - (1,253,932) - (1,253,932) Net income in ,341, ,341,351 54,130 2,395,481 Other comprehensive income, net of tax in ,267 (95,318) 173,138 90,087 (11,798) 78,289 Total comprehensive income ,353,618 (95,318) 173,138 2,431,438 42,332 2,473,770 Non-controlling interests (36,021) (36,021) Balance as of 31 December 2017 $5,914,771 $4,149,257 $1,871,315 $135,542 $8,367,931 $(305,788) $248,066 $20,381,094 $954,874 $21,335,968 (The accompanying notes are an integral part of the consolidated financial statements.) 9

10 ITEMS TONG YANG INDUSTRY CO., LTD. AND SUBSIDIARIES ~ CONSOLIDATED STATEMENTS OF CASH FLOWS For the year ended (Expressed in Thousands of New Taiwan Dollars) ~ Cash flows from operating activities: Cash flows from investing activities: Net income before tax $3,005,127 $3,076,215 Acquisition of bond investments with no active market - (68,796) Adjustments for The profit or loss items which did not affect cash flows: Disposal of bond investments with no active market 7,768 - Depreciation 2,709,086 2,698,035 Proceeds of the capital reduction on financial assets carried at cost 5,000 - Amortization 269, ,137 Capital reduction to return monies for using the equity method 9,657 62,218 Interest expense 126, ,686 Acquisition of property, plant and equipment (4,314,394) (3,366,260) Interest revenue (8,014) (12,138) Proceeds from disposal of property, plant and equipment 169,013 91,407 Share of profit of associates for using the equity method (639,980) (461,457) (Increase) in intangible assets (335,701) (202,880) (Gain) on disposal of property, plant and equipment (11,438) (23,161) (Increase) in prepayment for equipments - (754,575) Realized sales profit (137) (659) Decrease in prepayment for equipments 182,612 - Gain on the capital reduction of financial assets carried at cost (2,764) - Net cash used in investing activities (4,276,045) (4,238,886) Changes in operating assets and liabilities: Notes receivable-net (5,697) (79,268) Accounts receivable-net 96,993 56,630 CashIncrease in short-term borrowings 204, ,626 Accounts receivable-related parties-net (128,545) (27,573) Increase in short-term notes and bills payable - 300,000 Other receivable 21,388 53,009 (Decrease) in short-term notes and bills payable (300,000) - Inventories (158,575) (73,123) Reimburse corporate bond (500,000) (2,000,000) Other current assets 161, ,998 Borrow in long-term borrowings 2,169,404 2,448,049 Long-term prepaid rents (10,771) 38,722 Reimburse long-term borrowings (1,503,939) (1,704,398) Other non-current assets (15,425) (22,443) Dividend paid (1,253,932) (828,067) Notes payable (54,942) (3,053) Interest paid (134,360) (142,301) Accounts payable 300, ,479 Change in non-controlling interests (36,021) (44,975) Accounts payable-related parties (62,167) (17,323) Net cash used in financing activities (1,353,871) (1,854,066) Other payables 55,678 (180,690) Effect of exchange rate changes on cash and cash equivalents 17,941 (22,156) Reserves-current (110) 5,318 Net (decrease) increase in cash and cash equivalents (268,409) (548,536) Other current liabilities (40,480) 89,822 Cash and cash equivalents at beginning of period 1,504,666 2,053,202 Net defined benefit liabilities (77,817) (296,272) Cash and cash equivalents at end of period $1,236,257 $1,504,666 Other non-current liabilities 1, Cash generated from operations 5,531,100 5,651,791 Interest received 8,044 12,138 Dividend received 348, ,656 Income tax paid (543,854) (306,013) Net cash provided by operating activities 5,343,566 5,566,572 ITEMS ~ ~ (The accompanying notes are an integral part of the consolidated financial statements.) 10

11 (Expressed in Thousands of New Taiwan Dollars Unless Otherwise Stated) I. HISTORY AND ORGANIZATION 1. TONG YANG INDUSTRY CO., LTD. (the Company ) was incorporated under the laws of the Republic of China (the ROC ) on 30 October The Company s principal activities consist of the manufacture and sale of parts, components and models for automobile and motorcycle. The Company became a listed company on Taiwan Stock Exchange on 12 December The Company merged with TAIWAN KAI YIH INDUSTRIAL CO., LTD. (TKY) on 1 September 2010 and was the surviving company. The Company merged with KAI MING INDUSTRIAL CO., LTD. (KM) on 1 October 2011 and was the surviving company. II. DATE AND PROCEDURES OF AUTHORIZATION OF FINANCIAL STATEMENTS FOR ISSUE The consolidated financial statements of the Company and subsidiaries (hereinafter referred to as the Company ) for the year ended were authorized for issue in accordance with a resolution of the Board of directors on 23 March III. NEWLY ISSUED OR REVISED STANDARDS AND INTERPRETATIONS 1. Changes in accounting policies resulting from applying for the first time certain standards and amendments The Group applied for the first time International Financial Reporting Standards, International Accounting Standards, and Interpretations issued, revised or amended which are recognized by Financial Supervisory Commission ( FSC ) and become effective for annual periods beginning on or after 1 January The nature and the impact of each new standard and amendment that has no material effect on the Group. IAS 36 Impairment of Assets (Amendment) This amendments relate to the amendments issued in May 2011 and require entities to disclose the recoverable amount of an asset (including goodwill) or a cash-generating unit when an impairment loss has been recognized or reversed during the period. The amendments also require detailed disclosure of how the fair value less costs of disposal has been measured when an impairment loss has been recognized or reversed, including valuation techniques used, level of fair value hierarchy of assets and key assumptions used in measurement. 11

12 2. Standards or interpretations issued, revised or amended, which are endorsed by FSC, but not yet adopted by the Group at the date of issuance of the Group s financial statements are listed below. (1) IFRS 15 Revenue from Contracts with Customers The core principle of the new Standard is for companies to recognize revenue to depict the transfer of promised goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. An entity recognizes revenue in accordance with that core principle by applying the following steps: Step 1: Identify the contract(s) with a customer Step 2: Identify the performance obligations in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations in the contract Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation The new Standard includes a cohesive set of disclosure requirements that would result in an entity providing users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts with customers. The Standard is effective for annual periods beginning on or after 1 January (2) IFRS 9 Financial Instruments The IASB has issued the final version of IFRS 9, which combines classification and measurement, the expected credit loss impairment model and hedge accounting. The standard will replace IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9 Financial Instruments (which include standards issued on classification and measurement of financial assets and liabilities and hedge accounting). Classification and measurement: Financial assets are measured at amortized cost, fair value through profit or loss, or fair value through other comprehensive income, based on both the entity s business model for managing the financial assets and the financial asset s contractual cash flow characteristics. Financial liabilities are measured at amortized cost or fair value through profit or loss. Furthermore there is requirement that own credit risk adjustments are not recognized in profit or loss. 12

13 Impairment: Expected credit loss model is used to evaluate impairment. Entities are required to recognize either 12-month or lifetime expected credit losses, depending on whether there has been a significant increase in credit risk since initial recognition. Hedge accounting: Hedge accounting is more closely aligned with risk management activities and hedge effectiveness is measured based on the hedge ratio. The new standard is effective for annual periods beginning on or after 1 January Consequential amendments on the related disclosures also become effective for annual periods beginning on or after 1 January (3) IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures Sale or Contribution of Assets between an Investor and its Associate or Joint Ventures The amendments address the inconsistency between the requirements in IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures, in dealing with the loss of control of a subsidiary that is contributed to an associate or a joint venture. IAS 28 restricts gains and losses arising from contributions of non-monetary assets to an associate or a joint venture to the extent of the interest attributable to the other equity holders in the associate or joint ventures. IFRS 10 requires full profit or loss recognition on the loss of control of the subsidiary. IAS 28 was amended so that the gain or loss resulting from the sale or contribution of assets that constitute a business as defined in IFRS 3 between an investor and its associate or joint venture is recognized in full. IFRS 10 was also amended so that the gains or loss resulting from the sale or contribution of a subsidiary that does not constitute a business as defined in IFRS 3 between an investor and its associate or joint venture is recognized only to the extent of the unrelated investors interests in the associate or joint venture. The effective date of the amendments has been postponed indefinitely, but early adoption is allowed. (4) IAS 12 Income Taxes Recognition of Deferred Tax Assets for Unrealized Losses The amendments clarify how to account for deferred tax assets for unrealized losses. The amendments are effective for annual periods beginning on or after 1 January

14 (5) Disclosure Initiative Amendment to IAS 7 Statement of Cash Flows The amendments relate to changes in liabilities arising from financing activities and to require a reconciliation of the carrying amount of liabilities at the beginning and end of the period. The amendments are effective for annual periods beginning on or after 1 January (6) IFRS 15 Revenue from Contracts with Customers Clarifications to IFRS 15 The amendments clarify how to identify a performance obligation in a contract, determine whether an entity is a principal or an agent, and determine whether the revenue from granting a license should be recognized at a point in time or over time. The amendments are effective for annual periods beginning on or after 1 January (7) IFRS 2 Shared-Based Payment Amendments to IFRS 2 The amendments contain (1) clarifying that vesting conditions (service and non-market performance conditions), upon which satisfaction of a cash-settled share-based payment transaction is conditional, are not taken into account when estimating the fair value of the cash-settled share-based payment at the measurement date. Instead, these are taken into account by adjusting the number of awards included in the measurement of the liability arising from the transaction, (2) clarifying if tax laws or regulations require the employer to withhold a certain amount in order to meet the employee s tax obligation associated with the share-based payment, such transactions will be classified in their entirety as equity-settled share-based payment transactions if they would have been so classified in the absence of the net share settlement feature, and (3) clarifying that if the terms and conditions of a cash-settled share-based payment transaction are modified, with the result that it becomes an equity-settled share-based payment transaction, the transaction is accounted for as an equity-settled transaction from the date of the modification. The equity-settled share-based payment transaction is measured by reference to the fair value of the equity instruments granted at the modification date and is recognized in equity, on the modification date, to the extent to which goods or services have been received. The liability for the cash-settled share-based payment transaction as at the modification date is derecognized on that date. Any difference between the carrying amount of the liability derecognized and the amount recognized in equity on the modification date is recognized immediately in profit or loss. The amendments are effective for annual periods beginning on or after 1 January

15 (8) Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts Amendments to IFRS 4 The amendments help to resolve issues arising from the different effective dates for IFRS 9 Financial Instruments (1 January 2018) and the new insurance contracts standard about to be issued by the IASB (still to be decided, but not before 1 January 2020). The amendments allow entities issuing insurance contracts within the scope of IFRS 4 to mitigate certain effects of applying IFRS 9 Financial Instruments before the IASB s new insurance contracts standard becomes effective. The amendments introduce two approaches: an overlay approach and a temporary exemption. The overlay approach allows an entity applying IFRS 9 to remove from profit or loss the effects of some of the accounting mismatches that may occur from applying IFRS 9 before the new insurance contracts standard is applied. The temporary exemption enables eligible entities to defer the implementation date of IFRS 9 until 2021 (these entities that defer the application of IFRS 9 will continue to apply IAS 39). (9) Transfers of Investment Property Amendments to IAS 40 The amendments relate to the transfers of investment property. The amendments clarify that a change in use occurs when the property meets, or ceases to meet, the definition of investment property and there is evidence of the change in use, the entity should transfer property into and out of investment property accordingly. A mere change in management s intentions for the use of a property does not provide evidence of a change in use. The amendments are effective for annual periods beginning on or after 1 January (10) Improvements to International Financial Reporting Standards ( cycle): IFRS 1 First-time Adoption of International Financial Reporting Standards The amendments revise and amend transition requirements relating to certain standards and delete short-term exemptions under Appendix E for first-time adopter. The amendments are effective for annual periods beginning on or after 1 January IFRS 12 Disclosure of Interests in Other Entities The amendments clarify that the disclosure requirements in IFRS 12, other than those in paragraphs B10 B16, apply to an entity s interests that are classified as held for sale or discontinued operations. The amendments are effective for annual periods beginning on or after 1 January

16 IAS 28 Investments in Associates and Joint Ventures The amendments clarify that when an investment in an associate or a joint venture is held by, or is held indirectly through, an entity that is a venture capital organisation, or a mutual fund, unit trust and other qualifying entities including investment-linked insurance funds, the entity may elect to measure that investment at fair value through profit or loss in accordance with IFRS 9 Financial Instruments on an investment-by-investment basis. Besides, if an entity that is not itself an investment entity has an interest in an associate or joint venture that is an investment entity, the entity may, when applying the equity method, elect to retain the fair value measurement applied by that investment entity associate or joint venture to the investment entity associate's or joint venture's interests in subsidiaries on an investment-by-investment basis. The amendments are effective for annual periods beginning on or after 1 January (11) IFRIC 22 Foreign Currency Transactions and Advance Consideration The interpretation clarifies that when applying paragraphs 21 and 22 of IAS 21 The Effects of Changes in Foreign Exchange Rates, in determining the spot exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non-monetary liability relating to advance consideration, the date of the transaction is the date on which an entity initially recognizes the non-monetary asset or non-monetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, then the entity must determine a date of the transactions for each payment or receipt of advance consideration. The interpretation is effective for annual periods beginning on or after 1 January The abovementioned standards and interpretations issued by IASB and endorsed by FSC so that they are applicable for annual periods beginning on or after 1 January Apart from the potential impact of the standards and interpretations listed under (1), (2), (5), and (6) which is described below, all other standards and interpretations have no material impact on the Group: 16

17 (1) IFRS 15 Revenue from Contracts with Customers (including Amendments to IFRS 15 Clarifications to IFRS 15 Revenue from Contracts with Customers ) The Group elected to recognize the cumulative effect of initially applying IFRS 15 at the date of initial application (1 January 2018). The Group also elected to apply this standard retrospectively only to contracts that are not completed contracts at the date of initial application. The Group s principal activities consist of the sale of goods and rendering of services. The impacts arising from the adoption of IFRS 15 on the Group are summarized as follows: A. Revenue from sale of goods is currently recognized when goods have been delivered to the buyer. Starting from the date of initial application, in accordance with the requirements of IFRS 15, the Group shall recognize revenue when (or as) the Group satisfies a performance obligation by transferring a promised good to a customer. IFRS 15 has no impact on the Group s revenue recognition from sale of goods. However, for some contracts, if the Group has the right to transfer the goods to customers but does not has a right to an amount of consideration that is unconditional, these contacts should be presented as contract assets. It is different from the accounting treatment of recognizing trade receivables before the date of initial application. The amount reclassified from other current liabilities to contracts liabilities of the Group as at the date of initial application was NT194,098 thousand. B. In accordance with the requirements of IFRS 15, more extensive disclosure would have to be made. (2) IFRS 9 Financial Instruments The Group elects not to restate prior periods in accordance with the requirements of IFRS 9 at the date of initial application (1 January 2018). The adoption of IFRS 9 has the following impacts on the Group: 17

18 A. Classification and measurement of financial assets Available-for-sale financial assets equity instrument investments measured at cost The assessment of the cash flow characteristics will be based on the facts and circumstances that exited as at the date of initial application.as these equity instrument investments are not held-for-trading, the Group elected to designate them as financial assets measured at fair value through other comprehensive income. The stocks of unlisted companies are currently measured at fair value.as at the date of initial application, except for the reclassification to financial assets measured at fair value through other comprehensive income and other equity accounts, no other difference will incur. Available-for-sale financial assets de-recognition of equity investments measured at faire value Upon de-recognition of equity investments currently classified as available-for-sale measured at fair value, the accumulated gains or losses previously recognized in other comprehensive income was recycled to profit or loss from equity. However under the requirements of IFRS 9, subsequent fair value movement of the aforementioned equity investments is recognized in other comprehensive income and cannot be recycled to profit or loss. Upon de-recognition, the accumulated amounts in other equity is reclassified to retained earnings (reclassification to profit or loss is not allowed). Impairment of financial assets This is applicable to financial assets not measured at fair value through profit or loss. In accordance with the requirements of IFRS 9, a loss allowance for debt instruments is measured using the expected credit loss model, whereas trade receivables or contract assets that result from transactions that are within the scope of IFS 15 is measured using the simplified approach (provision matrix); and no assessment of impairment on equity instrument is required. The aforementioned requirements on impairment is different from the current incurred loss model and have no material impact on the Group. B. Investment Accounted For Under the Equity Method The Group has applied the provisions of IFRS 9 to adjust the investments accounted for under the equity method and retained the retained earnings were NT2,779 thousand. 18

19 C. Others Consequential amendments on the related disclosures in IFRS 7 were also made as a result of the application of IFRS 9, which include the disclosure requirements related to the initial application of IFRS 9. Therefore more extensive disclosure would have to be made. (3) Disclosure Initiative Amendment to IAS 7 Statement of Cash Flows Additional disclosure of a reconciliation of the carrying amount of liabilities arising from financing activities at the beginning and end of the period would be required. 3. Standards or interpretations issued, revised or amended, by IASB but not yet endorsed by FSC at the date of issuance of the Group s financial statements are listed below. (1) IFRS 16 Leases The new standard requires lessees to account for all leases under a single on-balance sheet model (subject to certain exemptions). Lessor accounting still uses the dual classification approach: operating lease and finance lease. The Standard is effective for annual periods beginning on or after 1 January (2) IFRIC 23 Uncertainty Over Income Tax Treatments The Interpretation clarifies application of recognition and measurement requirements in IAS 12 Income Taxes when there is uncertainty over income tax treatments. The Interpretation is effective for annual periods beginning on or after 1 January (3) IFRS 17 Insurance Contracts IFRS 17 provides a comprehensive model for insurance contracts, covering all relevant accounting aspects (including recognition, measurement, presentation and disclosure requirements). The core of IFRS 17 is the General (building block) Model, under this model, on initial recognition, an entity shall measure a group of insurance contracts at the total of the fulfilment cash flows and the contractual service margin. The fulfilment cash flows comprise of the following: a. estimates of future cash flows; b. Discount rate: an adjustment to reflect the time value of money and the financial risks related to the future cash flows, to the extent that the financial risks are not included in the estimates of the future cash flows; and c. a risk adjustment for non-financial risk. 19

20 The carrying amount of a group of insurance contracts at the end of each reporting period shall be the sum of the liability for remaining coverage and the liability for incurred claims. Other than the General Model, the standard also provides a specific adaptation for contracts with direct participation features (the Variable Fee Approach) and a simplified approach (Premium Allocation Approach) mainly for short-duration contracts. IFRS 17 is effective for annual periods beginning on or after 1 January (4) IAS 28 Investment in Associates and Joint Ventures Amendments to IAS 28 The amendments clarify that an entity applies IFRS 9 to long-term interests in an associate or joint venture that form part of the net investment in the associate or joint venture before it applies IAS 28, and in applying IFRS 9, does not take account of any adjustments that arise from applying IAS 28. The amendment is effective for annual reporting periods beginning on or after 1 January (5) Prepayment Features with Negative Compensation (Amendments to IFRS 9) The amendment allows financial assets with prepayment features that permit or require a party to a contract either to pay or receive reasonable compensation for the early termination of the contract, to be measured at amortised cost or at fair value through other comprehensive income. The amendment is effective for annual reporting periods beginning on or after 1 January (6) Improvements to International Financial Reporting Standards ( cycle): IFRS 3 Business Combinations The amendments clarify that an entity that has joint control of a joint operation shall remeasure its previously held interest in a joint operation when it obtains control of the business. The amendments are effective for annual periods beginning on or after 1 January IFRS 11 Joint Arrangements The amendments clarify that an entity that participates in, but does not have joint control of, a joint operation does not remeasure its previously held interest in a joint operation when it obtains joint control of the business. The amendments are effective for annual periods beginning on or after 1 January

21 IAS 12 Income Taxes The amendments clarify that an entity shall recognize the income tax consequences of dividends in profit or loss, other comprehensive income or equity according to where the entity originally recognized those past transactions or events. The amendments are effective for annual periods beginning on or after 1 January IAS 23 Borrowing Costs The amendments clarify that an entity should treats as part of general borrowings any borrowing made specifically to obtain an asset when the asset is ready for its intended use or sale. The amendments are effective for annual periods beginning on or after 1 January (7) Plan Amendment, Curtailment or Settlement (Amendments to IAS 19) The amendments clarify that when a change in a defined benefit plan is made (such as amendment, curtailment or settlement, etc.), the entity should use the updated assumptions to remeasure its net defined benefit liability or asset. The amendments are effective for annual periods beginning on or after 1 January The abovementioned standards and interpretations issued by IASB have not yet endorsed by FSC at the date when the Group s financial statements were authorized for issue, the local effective dates are to be determined by FSC. As the Group is still currently determining the potential impact of the standards and interpretations listed under (1), (2), (4) and (6), it is not practicable to estimate their impact on the Group at this point in time. All other standards and interpretations have no material impact on the Group. IV. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. Statement of Compliance The consolidated financial statements of the Group for the year ended 31 December 2017 and 2016 have been prepared in accordance with the Regulations Governing the Preparation of Financial Reports by Securities Issuers ( the Regulations ) and IAS 34 Interim Financial Reporting as endorsed and became effective by the FSC. 21

22 2. Basis of preparation The consolidated financial statements have been prepared on a historical cost basis, except for financial instruments that have been measured at fair value. The consolidated financial statements are expressed in thousands of New Taiwan Dollars ( NT$ ) unless otherwise stated. 3. Basis of consolidation Preparation principle of consolidated financial statement Control is achieved when the Company is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Company controls an investee if and only if the Company has: a. power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee); b. exposure, or rights, to variable returns from its involvement with the investee; and c. the ability to use its power over the investee to affect its returns. When the Company has less than a majority of the voting or similar rights of an investee, the Company considers all relevant facts and circumstances in assessing whether it has power over an investee, including: a. the contractual arrangement with the other vote holders of the investee; b. rights arising from other contractual arrangement; c. the Company s voting rights and potential voting rights. The Company re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Subsidiaries are fully consolidated from the acquisition date, being the date on which the Company obtains control, and continue to be consolidated until the date that such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using uniform accounting policies. All intra-group balances, income and expenses, unrealized gains and losses and dividends resulting from intra-group transactions are eliminated in full. A change in the ownership interest of a subsidiary, without a change of control, is accounted for as an equity transaction. Total comprehensive income of the subsidiaries is attributed to the owners of the parent and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. 22