CHINATRUST FINANCIAL HOLDING COMPANY, LTD. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2006 and 2005 AND INDEPENDENT AUDITORS REPORT

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1 CHINATRUST FINANCIAL HOLDING COMPANY, LTD. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2006 and 2005 AND INDEPENDENT AUDITORS REPORT ADDRESS: No. 3 Sung-Shou Road, Taipei, Taiwan, R.O.C. TELEPHONE NUMBER:

2 CONSOLIDATED FINANCIAL STATEMENTS TABLE OF CONTENTS Contents Page. Cover Page 1. Table of Contents 2. Independent Auditors Report 3. Consolidated Balance Sheets 4. Consolidated Statements of Income 5 Consolidated Statements of Change in Stockholders Equity 6. Consolidated Statements of Cash Flows 7. Notes to Consolidated Financial Statements 1. Basis of Presentation 8~12 2. Summary of Significant Accounting Policies 12~23 3. Reasons for and Effects of Accounting Changes 23~24 4. Summary of Major Accounts 24~87 5. Related Party Transactions 88~93 6. Pledged Assets Significant Commitments and Contingencies 95~96 8. Significant Catastrophic Losses Significant Subsequent Events Other

3 The Board of Directors Chinatrust Financial Holding Company, Ltd.: Independent Auditors Report We have audited the accompanying consolidated balance sheets of Chinatrust Financial Holding Company, Ltd. and subsidiaries as of June 30, 2006 and 2005, and the related consolidated statements of income, changes in stockholders equity and cash flows for the six months then ended. These consolidated financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the Republic of China. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Chinatrust Financial Holding Company, Ltd. and subsidiaries as of June 30, 2006 and 2005, and the consolidated results of their operations and cash flows for the six months then ended, in conformity with generally accepted accounting principles in the Republic of China. As stated in Note 3, effective January 1, 2006, Chinatrust Financial Holding Company, Ltd. and its subsidiaries adopted the Republic of China Statements of Financial Accounting Standards (SFAS) No. 34 Financial Instruments: Recognition and Measurement and SFAS No. 36 Financial Instruments: Disclosure and Presentation, and Amended SFAS No. 1 Conceptual Framework for Financial Accounting and Preparation of Financial Statements and Amended SFAS No. 5 Long-Term Investments under Equity Method. In accordance with SFAS No. 34, the financial assets and liabilities at the beginning of 2006 were revalued based on either fair value or net amortized cost. The adoption of SFAS No. 34 also resulted in the revaluation differences, which were accounted for as cumulative effect of change in accounting principle and adjustments to shareholders equity amounted to $53,869 thousand and $605,750 thousand, respectively. Furthermore, effective January 1, 2006, the Company and its subsidiaries adopted the Amended SFAS No. 1 and 5, under which goodwill from merger and the difference between investment cost and net equity of the investee previously recognized as asset, which are not plausible to analyze the underlying causes are no longer amortized. This accounting change increased net income before tax by $661,832 thousand and $9,141 thousand, respectively for the six months then ended. In addition, as of January 1, 2006, the moving-average method originally adopted in determining the cost of bonds investment has been substituted by the First In First Out (FIFO) method, the resulted cumulative effect of change in accounting principle amounted to $4,604 thousand

4 Taipei, Taiwan, ROC August 25, 2006 Notice to Readers The accompanying financial statements are intended only to present the financial position, results of operations and cash flows in accordance with the 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

5 CONSOLIDATED BALANCE SHEETS June 30, 2006 AND 2005 (Expressed in Thousands of New Taiwan Dollars) June 30, Change in ASSETS Amount Amount % Cash and cash equivalents (Notes 2 and 4(a)) $ 54,445,638 $ 38,669, Due from Central Bank and call loans to banks (Note 4(b)) 139,412,445 94,165, Financial assets measured at fair value through profit or loss net (Notes 2, 3, 4(c) and 7) 105,100,672 75,727, Available-for-sale financial assets net (Notes 2, 3, 4(d), 6 and 7) 135,567, ,877, Receivables net (Notes 2, 4(e) and 6) 136,740, ,356,374 (14) Loans net (Notes 2, 4(f) and 5) 886,592, ,176,376 2 Held-to-maturity financial assets (Notes 2, 3, 4(g), (h), 6 and 7) 161,442, ,450, Investments under equity method (Notes 2, 3, 4(i)) 3,161,826 2,580, Premises and equipment net (Notes 2, 4(j) and 6) 37,594,159 34,855,381 8 Intangible assets (Notes 2, 3, 4(k)) 4,528,164 5,188,727 (13) Other financial assets net (Notes 2, 3, 4(l) and 6) 36,098,168 28,753, Other assets net (Notes 2, 4(m) and (u)) 11,927,215 10,081, TOTAL ASSETS $ 1,712,611,721 $ 1,564,881,799 9 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits from Central Bank and other banks $ 40,566,890 $ 51,685,539 (22) Deposits and remittances (Notes 4(n)) 1,194,900,477 1,120,527,759 7 Financial liabilities measured at fair value through profit or loss (Notes 2, 3 and 4(o)) 38,885,327 8,040, Securities sold under repurchase agreements (Notes 2 and 7) 113,320, ,073,558 (4) Payables (Notes 2 and 4(p)) 44,217,030 46,693,512 (5) Due to Central Bank and other banks (Note 4(q)) 19,634,761 12,538, Corporate bonds and financial debentures (Notes 2 and 4(r)) 110,259,657 90,536, Other financial liabilities (Notes 2, 3 and 4(s)) 5,290,857 1,288, Other liabilities (Notes 2 and 4(t)) 8,008,255 6,927, Total liabilities 1,575,083,888 1,456,311,716 8 Stockholders' equity Parent Company Common stock (Note 4(w)) 70,907,489 59,127, Preferred stock (Note 4(w)) 10,000,000 2,500, Stock dividend to be distributed (Note 4(w)) 8,785,467 11,776,108 (25) Capital surplus (Note 4(w)) 46,921,027 24,437, Retained earnings (Note 4(w)) Legal reserve 4,476,467 2,899, Special reserve 1,872,832 1,508, (Accumulated deficits) Undistributed earnings (1,669,610) 9,874,053 (117) Other adjustments to stockholders' equity: Cumulative translation adjustments (Note 2) (1,777,580) (2,221,276) (20) Unrealized losses on financial instruments (Notes 2, 3 and 4(d)) (1,778,254) (1,044,007) 70 Treasury stock (Notes 2 and 4(x)) (273,326) (342,582) (20) Subtotal Stockholders' Equity for Parent Company 137,464, ,515, Minority interest 63,321 54, Total Stockholders' Equity 137,527, ,570, Commitments and contingencies (Notes 2 and 7) TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,712,611,721 $ 1,564,881,799 9 The accompanying notes are an integral part of the financial statements

6 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (Expressed in Thousands of New Taiwan Dollars) Capital stock Retained earnings Undistributed retained earnings (Accumulated deficits) Other adjustments to stockholders' equity Common stock Preferred stock Stock dividend to be distributed Capital surplus Legal reserve Special reserve adjustments Unrealized losses on financial instruments Treasury stock common stock Minority interest Total Beginning Balance January 1, 2005 $ 57,798,995 $ 2,500,000 $ - $ 28,774,389 $ 1,429,334 $ 141,362 $ 14,874,762 $ (2,040,140) $ (943,028) $ (1,663,306) $ 53,051 $ 100,925,419 Appropriation and distribution of 2004 earnings Legal reserve ,470,066 - (1,470,066) Special reserve ,367,296 (1,367,296) Employee bonuses (5,713) (5,713) Remuneration to directors and supervisors (457,016) (457,016) Cash dividends common stock (5,888,054) (5,888,054) Stock dividends common stock - - 4,710, (4,710,443) Dividend paid for preferred stock (612,000) (612,000) Capitalization of capital surplus - - 7,065,665 (7,065,665) Convertible Bonds transfer into common stocks 1,328, ,728, ,056,922 Recognition of capital surplus of subsidiaries Recognition of cumulative translation adjustment of subsidiaries (217,707) (217,707) Recognition of unrealized losses on long-term equity investments of subsidiaries (100,979) - - (100,979) Recognition of undistributed retained earnings of subsidiaries (319,839) (319,839) Recognition of treasury stock of subsidiaries ,320,724-1,320,724 Effect of hedging against fluctuations in exchange rates of foreign investments , ,571 Change in minority interest ,451 1,451 Net income for the six months ended June 30, ,829, ,829,718 Ending Balance June 30, 2005 $ 59,127,863 $ 2,500,000 $ 11,776,108 $ 24,437,364 $ 2,899,400 $ 1,508,658 $ 9,874,053 $ (2,221,276) $ (1,044,007) $ (342,582) $ 54,502 $ 108,570,083 Beginning Balance January 1, 2006 $ 70,907,489 $ 10,000,000 $ - $ 46,921,027 $ 2,899,400 $ 1,508,658 $ 16,134,840 $ (1,397,698) $ (1,103,120) $ (273,326) $ 57,829 $ 145,655,099 Appropriation and distribution of 2005 earnings Legal reserve ,577,067 - (1,577,067) Special reserve ,174 (364,174) Employee bonuses cash (119,442) (119,442) Employee bonuses stock , (287,747) Remuneration to directors and supervisors (542,919) (542,919) Cash dividends common stock (3,540,717) (3,540,717) Stock dividends common stock - - 8,497, (8,497,720) Dividend paid for preferred stock (620,630) (620,630) Recognition of unrealized losses on available-for-sale financial assets (158,282) - - (158,282) Recognition of unrealized losses on cash flow hedges (367,047) - - (367,047) Recognition of cumulative translation adjustment of subsidiaries (399,178) (399,178) Recognition of unrealized losses on available-for-sale financial assets of subsidiaries (25,032) - - (25,032) Recognition of unrealized losses on cash flow hedges of subsidiaries (124,773) - - (124,773) Effect of hedging against fluctuations in exchange rates of foreign investments , ,296 Change in minority interest ,492 5,492 Net loss for the six months ended June 30, (2,254,034) (2,254,034) Ending Balance June 30, 2006 $ 70,907,489 $ 10,000,000 $ 8,785,467 $ 46,921,027 $ 4,476,467 $ 1,872,832 $ (1,669,610) $ (1,777,580) $ (1,778,254) $ (273,326) $ 63,321 $ 137,527,833 Cumulative translation The accompanying notes are an integral part of the financial statements

7 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (Expressed in Thousands of New Taiwan Dollars) For the six months ended June 30, Cash flows from operating activities: Consolidated net (loss) income $ (2,254,034) $ 9,829,718 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Cumulative effect of changes in accounting principles (58,473) - Minority interest income 4,335 2,217 Depreciation and amortization 1,332,086 1,996,279 Investment income accounted for under equity method over cash dividends received 39,206 64,243 Unrealized gains on valuation of financial instruments (567,129) (884,779) Gains on disposal of investment under equity method - (30,804) (Gains) losses on disposal of financial assets carried at cost (8,000) 422,141 Gains on stock conversion of financial assets carried at cost (8,259) - Accretion of discounts, net of amortization of premium on investments in held-to-maturity financial assets 114, ,700 Losses (gains) on dispositions of premises, equipment and foreclosed propertie 198,129 (34,751) Losses on scrapping of premises and equipment 48,435 67,646 Provision for bad debts expenses 25,641,313 5,938,262 Reversal of miscellaneous reserve (86,424) (152,015) Reversal of unrealized losses on foreclosed properties (20,925) (1,189) Redemption premium accrued on convertible bonds payable and foreign exchange losses 141,444 83,161 Other 1,386 6,861 Net changes in: Decrease (increase) in receivables 26,466,377 (2,157,701) Increase in financial assets measured at fair value through profit or loss (2,947,602) (6,415,908) (Increase) decrease in other financial assets (3,160,715) 183,674 Increase in other financial liabilities 3,673,409 40,705 (Decrease) increase in payables (10,301,811) 482,238 Increase in financial liabilities measured at fair value through profit or loss 30,890,707 1,044,467 Net cash provided by operating activities 69,138,305 10,736,165 Cash flows from investing activities: Decrease (increase) in loans 9,076,347 (74,914,169) Increase in deposits from Central Bank and other banks (excluding cash equivalents) (3,034,133) (16,171,983) (Purchases) dispositions of available-for-sale financial assets (81,112,028) 55,287,377 Purchase of held-to-maturity financial assets (34,535,370) (25,597,062) Proceeds from maturities and paydowns of investments in held-to-maturity financial assets 2,405,070 4,595,927 Purchase of financial assets carried at cost (281,112) (1,555,946) Purchase of investment under equity method (1,000,000) (650,000) Proceeds from stock conversion of financial assets carried at cost 80,307 - Proceeds from disposition of premises, equipments and foreclosed properties 286, ,538 Proceeds from disposition of investment under equity method - 932,030 Proceeds from disposition of financial assets carried at cost 53,151 49,309 Purchase of premises and equipments (4,220,741) (922,765) Increase in other assets (2,713,547) (1,052,385) Decrease in other financial assets 4,062,817 1,651,427 Increase of receivables (2,224,103) (15,448,987) Net cash used in investing activities (113,157,008) (72,911,689) Cash flows from financing activities: Decrease in deposit from Central Bank and other banks (24,221,129) (21,214,150) (Decrease) increase in deposits and remittances (21,347,397) 100,992,034 Increase in payables 270,630 6,498,003 Increase (decrease) in due to Central Bank and other banks 10,617,907 (2,345,539) Increase in securities sold under repurchase agreements 8,549,118 5,718,095 Increase in corporate bonds and financial debentures 1,523,692 32,879,563 (Decrease) increase in other liabilities (2,726,092) 669,414 Remuneration to directors and supervisors - (457,016) Employee bonuses (4,826) (10,401) Disposal of treasury stock to employee - 1,000,885 Net cash (used in) provided by financing activities (27,338,097) 123,730,888 Effect of exchange rate changes (1,761) (71,912) Net (decrease) increase in cash and cash equivalents (71,358,561) 61,483,452 Cash and cash equivalents, at the beginning of the period 178,517,017 81,559,159 Cash and cash equivalents, at the end of the period $ 107,158,456 $ 143,042,611 Cash and cash equivalents: Cash $ 54,445,638 $ 38,669,214 Call loans to banks 34,935,082 9,150,509 Due from Central Bank 11,545,674 11,771,020 Financial instruments (cash equivalents) 6,232,062 83,451,868 $ 107,158,456 $ 143,042,611 Supplemental disclosures of cash flows information: Cash Paid during the period for: Interest $ 12,471,457 $ 6,675,824 Income tax $ 1,087,866 $ 2,208,005 Investing and financing activities not affecting cash flows: Convertible Bonds convert into common stocks $ - $ 4,056,922 Employee bonuses cash $ 120,815 $ 1,200 Employee bonuses stock $ 287,747 $ - Remuneration to directors and supervisors $ 542,919 $ - Cash dividends common stock $ 3,540,717 $ 5,888,054 Stock dividends common stock $ 8,497,720 $ 4,710,443 Dividend paid for preferred stock $ 620,630 $ 612,000 The accompanying notes are an integral part of the financial statements

8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2006 AND 2005 (New Taiwan Dollars in Thousands, Unless Otherwise stated) 1. Basis of Presentation Chinatrust Financial Holding Company, Ltd. (the "Company") was established on May 17, 2002 through a stock conversion (conversion ratio: one to one) with Chinatrust Commercial Bank Co., Ltd. On the same date, following the approval from the Securities & Futures Bureau (the "SFB") under the Ministry of Finance (the "MOF") the shares of the Company started to be traded publicly, while shares of Chinatrust Commercial Bank Co., Ltd. were de-listed. The Company conducts business in the following areas: (a) The Company has been approved to invest in the following businesses: (i) (ii) Banking. Bills financing. (iii) Credit cards. (iv) Trusts. (v) Insurance. (vi) Securities. (vii) Futures. (viii) Venture capital. (ix) Investments in overseas financial institutions as approved by the MOF. (x) Other related financing as approved by the MOF. (xi) Other related investments. (b) (c) (d) Management of above businesses. Investments in businesses other than the ones listed in item (a) as approved by the MOF. Other related businesses as approved by the MOF. As of June 30, 2006, the Company had 22 employees. As of June 30, 2006, the Company and its consolidated subsidiaries had 9,503 employees

9 Details of subsidiaries within the consolidated entity are shown below: Name of Investor Company The Company Name of Subsidiary Chinatrust Commercial Bank Co., Ltd. Chinatrust Securities Corp., Ltd. Chinatrust Insurance Brokers Corp., Ltd. Chinatrust Venture Capital Corp., Ltd. Chinatrust Asset Management Co., Ltd. Chinatrust Bills Finance Corp. Primary Business Primarily engages in the commercial banking and financing business Primarily engages in the securities and futures business Primarily engages in the property insurance and life insurance brokerage Primarily engages in the venture capital business Primarily engages in the asset management business Primarily engages in proprietary trading, brokerage, underwriting, certification, guarantee and endorsement of shortterm bills Shareholding Percentage June 30, June 30, Description % % As of June 30, 2006, the issued capital of the Company s subsidiary, Chinatrust Commercial Bank Co., Ltd. amounted to $53,532,181; representing 5,353,218 thousand common shares with par value of $10 TWD per share % 99.66% As of June 30, 2006, the issued capital of the Company s subsidiary, Chinatrust Securities Corp., Ltd. amounted to $5,000,000; representing 500,000 thousand common shares with par value of $10 TWD per share % % As of June 30, 2006, the issued capital of the Company s subsidiary, Chinatrust Insurance Brokers Corp., Ltd. amounted to $1,396,795; representing 139,679 thousand common shares with par value of $10 TWD per share % % As of June 30, 2006, the issued capital of the Company s subsidiary, Chinatrust Venture Capital Corp., Ltd. amounted to $2,000,000; representing 200,000 thousand common shares with par value of $10 TWD per share % % As of June 30, 2006, the issued capital of the Company s subsidiary, Chinatrust Asset Management Co., Ltd. amounted to $20,000,000; representing 2,000,000 thousand common shares with par value of $10 TWD per share % % As of June 30, 2006, the issued capital of the Company s subsidiary, Chinatrust Bills Finance Corp. amounted to $4,080,000; representing 408,000 thousand common shares with par value of $10 TWD per share

10 Name of Investor Company Chinatrust Commercial Bank Co., Ltd. Name of Subsidiary Chinatrust (Philippines) Commercial Bank Corporation Primary Business Primarily engages in commercial banking and financing business Shareholding Percentage June 30, June 30, Description 99.41% 99.41% As of June 30, 2006, the issued capital of Chinatrust (Philippines) Commercial Bank Corporation, a subsidiary of Chinatrust Commercial Bank Co., Ltd. amounted to 2,156,250 thousand Philippine pesos, representing 215,625 thousand common shares with par value of 10 Philippines pesos per share. PT Bank Chinatrust Indonesia CTC Bank of Canada Primarily engages in commercial banking and financing business Primarily engages in commercial banking and financing business 99.00% 99.00% As of June 30, 2006, the issued capital of PT Bank Chinatrust Indonesia, a subsidiary of Chinatrust Commercial Bank Co., Ltd. amounted to Rupiah 150,000,000 thousand, representing 1,500 common shares with par value of Rupiah 100,000 thousand per share % % As of June 30, 2006, the issued capital of CTC Bank of Canada, a subsidiary of Chinatrust Commercial Bank Co., Ltd. amounted to CAD15,000 thousand, representing 1,500 thousand common shares with par value of CAD10 (in dollars) per share. Chinatrust Capital Corp. (original named China Trust Holdings Corp.) Primarily engages in securities investment business % % As of June 30, 2006, the issued capital of Chinatrust Capital Corp. (Original named China Trust Holdings Corp.) amounted to USD1,336 (in dollars), representing 1,336 common shares with par value of USD1 (in dollars) per share. Chinatrust Capital Corp. Chinatrust Bank (U.S.A.) Primarily engages in commercial banking and financing business % % As of June 30, 2006, the issued capital of this US bank amounted to USD500 thousand for preferred stock and USD100 thousand for common stock

11 Name of Investor Company Chinatrust Asset Management Co., Ltd. Name of Subsidiary CT Opportunity Investment Company Primary Business Primarily engages in securities investment business Shareholding Percentage June 30, June 30, Description % % As of June 30, 2006, the issued capital of CT Opportunity Investment Company amounted to USD36,301(in dollars), representing 36,301common shares with par value of USD1 (in dollars) per share. Chung Shin-1 Asset Management Co., Ltd. Tuo Yu Asset Management Servicing Co., Ltd. Primarily engages in the asset management business Primarily engages in the asset management business % % As of June 30, 2006, the issued capital of Chung Shin-1 Asset Management Co., Ltd. amounted to $1,300,000, representing 130,000 thousand common shares with par value of $10 TWD per share % % As of June 30, 2006, the issued capital of Tuo Yu Asset Management Servicing Co., Ltd. amounted to $5,000, representing 500 thousand common shares with par value of $10 TWD per share. Chinatrust Securities Corp., Ltd. CTCB (Mauritius) Holding Company Ltd. Primarily engages in securities investment business % % As of June 30, 2006, the issued capital of CTCB (Mauritius) Holding Company Ltd. amounted to USD11,113 thousand, representing 11,113 thousand common shares with par value of USD1 (in dollars) per share. CTCB (Mauritius) Holding Company Ltd. Chinatrust Securities (Hong Kong) Limited Primarily engages in securities business % % As of June 30, 2006, the issued capital of Chinatrust Securities (Hong Kong) Limited to HKD 86,679 thousand, representing 86,679 thousand common shares with par value of HKD 1 (in dollars) per share

12 The majority-owned investees of the Company have been consolidated except for those shown below: Name of Investee Company Primary business Ownership Chinatrust Forex Corp. Foreign exchange All shares were held by brokerage the Chinatrust Commercial Bank Co., Ltd. and Chinatrust (Philippines) Commercial Bank Corporation Reason for not consolidating The company went into liquidation. Taipei Arena Co., Ltd. Entertainment services 50.00% Chinatrust Securities Investment Consultancy Corp., Ltd. Securities investment and consultancy services 99.40% The total assets and operating revenue of this investee company are insignificant. GCB Finance (HK) Limited Corporate loans % Chinatrust Security Co., Ltd. Protection, Fire and Life Safety Services % 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company s financial statements were prepared in accordance with generally accepted accounting principles of the Republic of China. The significant accounting policies and bases of measurement adopted in preparing these financial statements are as follows: (a) Cash and Cash Equivalents The statements of cash flows are compiled based upon cash and cash equivalents. Cash comprise of cash in vault, savings accounts, checking accounts and unrestricted time deposits or negotiable certificates of deposits, which may be terminated any time without impairing its principal. Cash equivalents consist of short-term and highly liquid investments that are readily convertible to known amounts of cash and will mature on short notice so that the interest rate fluctuations have little effect on their values. Cash equivalents include short term bills with maturities within three months from investment date

13 (b) Securities Under Repurchase/Resell Agreements Securities sold/purchased with a commitment to repurchase/resell them at predetermined price are treated as financing transactions. The difference between the cost and repurchase/ resell price is treated as interest expense/revenue and recognized over the term of the agreement. On selling/purchasing date, these agreements are recognized as the securities sold under repurchase agreement or securities purchased under resell agreement. (c) Financial Instruments Financial instruments held by the Company and its subsidiaries are recorded on trading date, except for debt securities, which are recorded on the settlement date. The financial instruments are initially recognized at fair value plus transaction costs, except for financial instruments held for trading purpose, which are initially recognized at fair value. Upon disposition, the cost of equity securities is determined by moving-average method and debts securities are determined by First-in-First-Out (FIFO) Method. Subsequent to their initial recognition, the financial instruments held or issued by the Company and its subsidiaries are classified according to the purpose of holding or issuing as follows: 1. Financial assets and liabilities carried at fair value through profit or loss: Financial assets and liabilities are classified as held for trading if they have been acquired principally for the purpose of selling or repurchasing in the near term. The derivative financial instruments held by the Company and its subsidiaries, except for those designated as hedging instruments, are classified under these accounts. At each balance sheet date the fair value is remeasured and the resulting gain or loss from such remeasurement is recognized in profit and loss. 2. Available-for-sale financial assets: At each balance sheet date the fair value is remeasured and the resulting gain or loss from such remeasurement is recognized directly in equity. Interest on debt instrument classified as available-for-sale is accrued; relevant premium/discount is amortized by using effective interest rate method. If there is objective evidence that an available-for-sale financial asset is impaired, the carrying amount of the asset is reduced and impairment loss is recognized. Impairment loss recognized in profit and loss for an investment in equity instrument classified as available-for-sale shall not be reversed through profit and loss. If in a subsequent period, the amount of the impairment loss of the available-for-sale debt securities decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previous recognized impairment loss is reversed through the profit and loss. A gain or loss on available-for-sale financial assets is recognized directly in equity, except for impairment losses and foreign exchange gains or losses raising from monetary financial assets, until the financial assets are derecognized, at which time the cumulative gain or loss previously recognized in equity is charged to profit and loss

14 3. Held-to-maturity financial assets: The amortized cost, interest income and interest expense of held-to-maturity financial assets are determined by using the effective interest rate method. If there is objective evidence that a held-to-maturity financial asset is impaired, the carrying amount of the asset is reduced and impairment loss is recognized. If in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previous recognized impairment loss is reversed through the profit and loss. The carrying value after the reversal should not exceed the recoverable amount or the depreciated or amortized balance of the assets assuming no impairment loss was recognized. 4. Financial assets carried at cost: Equity instruments with no quoted market price and whose fair value cannot be reliably measured are stated at cost. If there is objective evidence that financial assets carried at cost is impaired, the carrying amount of the assets is reduced and impairment loss is recognized. However, the impairment losses may not be reversed subsequently. Long-term fund investments for subsidiaries in the asset management business are carried at acquisition costs. Considering the uncertainties arising from the collectibility of non-performing loans, based on prudence principal, investment gains and losses are recognized using the cost recovery method. If the impairment in the value of investment is other than temporary and the recovery of the carrying amount is deemed unlikely, loss on investment is recognized currently. 5. Debt investments without active market: The amortized cost, interest income and interest expense of debt investments without active market are determined by using the effective interest rate method. If in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previous recognized impairment loss is reversed through the profit and loss. The carrying value after the reversal should not exceed the recoverable amount or the depreciated or amortized balance of the assets assuming no impairment loss was recognized. Commencing from January 1, 2006, the fair value of financial assets held by the Company and its subsidiaries is determined as follows: Fair value of listed or OTC securities are determined based on the market closing price on balance sheet date, fair value for open-end fund investment is the net worth on balance sheet date and fair value for debt securities is determined based on the closing price on balance sheet date shown on Gre Tai Securities Market or the pricing model used by the Company or its subsidiaries. Fair value of derivative financial instruments is determined by the market value on balance sheet date or the pricing model adopted by the Company or its subsidiaries

15 Prior to December 31, 2005, the investments held by the Company and its subsidiaries are classified into bills or securities purchased or long-term investment based on the intention of the investments. These investments are booked at cost of acquisition and valued at the lower of total cost or market. The market values of listed or OTC securities are determined by the average closing prices of the last month of the accounting period and the open-end funds investments is by the unit net worth on balance sheet date. The unrealized loss of long-term investment from the decline in market value below cost is charged against stockholders equity, and the unrealized loss of bills and securities purchased from the decline in market value below cost is recognized through profit and loss in the current period. (d) Hedge accounting When the fair value hedge, cash flow hedge and hedge of net investment in foreign operations are qualify for all the conditions of applying hedge accounting, the effected profit or loss are recognized by offsetting the changes in the fair values of hedging instrument and hedged items. The related accounting treatments are shown as follows: (1) Fair value hedge: Changes in the fair value of derivatives that are designated and qualify as fair value hedging instruments against the exposure to changes in fair value of a recognized asset or liability or an unrecognized firm commitment, are recognized through profit and loss in the current period. (2) Cash flow hedge: Where a derivative financial instrument is designated as a hedge of the variability in cash flow of a recognized asset or liability or a highly probable forecast transaction, the effective portion of any gain or loss on remeasurement of the derivative financial instrument to fair value is recognized directly in equity. When the hedged transaction actually affecting the profit and loss, the gain or loss previously recognized in equity should be recognized through current profit and loss. Any gain or loss from the change in fair value relating to an ineffective portion of the hedge transaction is recognized immediately through profit and loss. (3) Hedges of net investment in foreign operation: The effective portion of any gain or loss on the hedging instrument relating to the hedge against foreign currency fluctuation in foreign operation is recognized directly in equity until the disposal of the foreign operation, at which time the cumulative gain or loss recognized directly in equity is recognized in profit and loss. (e) Financial assets securitization Under the Regulations for Financial Assets Securitization, the Company s banking subsidiary, with the assistance of a trustee securitized its financial assets for the purposes of offering asset-backed securities in the form of related beneficiary certificates through a special-purpose trust. Because the banking subsidiary surrendered its rights and control on these securitized financial assets, such financial assets are no longer recognized on its accounts, and the gain or loss from securitization is recognized thereon, except for the retained interests in the form of subordinated seller certificates necessary for credit enhancement, which are classified as held-to-maturity financial assets because those certificates do not have quoted market prices

16 The gain or loss from securitization of the financial assets is determined based on the difference between the proceeds from securitization and carrying value of the securitized financial assets. The cost of each class of asset-backed securities which is determined based on the previous carrying value of the securitized financial assets, is allocated in proportion to the fair value of each class of the asset backed securities and the retained interests on the date of transfer. Because the securitized financial assets do not have a quoted market price, the fair value of each class of the asset-backed securities and the retained interests are evaluated based on the present value of future cash flows considering the expected credit loss rate, prepayment rate, and discount rate on the financial assets. The cash receipts of subordinated seller certificates from the trustee are accounted for using the cost recovery method. On the balance sheet date, the fair value of these certificates is evaluated based on the present value of expected future cash flows, and the resulting losses (if any) are recognized as current losses. (f) Accounts Receivable For the Company s banking subsidiaries, consumer loans to credit card holders are reflected by the amounts reported by merchants, excluding unearned interest. Interest thereon is recognized on accrual basis using the interest method. Credit card loan or accrued interest that is over 150 days past due is reclassified to a nonaccrual account. Interest collected thereafter is included in earnings only to the extent of cash actually received. The Company s banking subsidiaries engage in factoring and management of accounts receivable. The interest and transaction fees from factoring and management of such accounts are treated as current income. An allowance for credit losses is provided by reviewing the balance of accounts at period-end. Unpaid accounts receivables purchased from companies that sell receivables are accounted for under payables. (g) Loans Loans are carried at principal amounts outstanding, net of unearned income and amounts charged-off. Interest is accrued using the interest method. Interest accrual is suspended under either of the following conditions: (1) collection of principal or interest accrued is considered highly unlikely; or (2) principal or interest accrued is 180 days past due. Interest collected thereafter is included in earnings only to the extent of cash actually received

17 (h) Allowance for Credit Losses For the Company s banking subsidiary, allowance for credit losses is a significant estimate regularly evaluated by management for adequacy and is provided through a charge to provision for credit losses. In accordance with the Regulation Governing the Procedures for Banking Institutions to Evaluate Assets and Deal with Non-performing and Non-accrual Loans issued by MOF and Regulations Governing Institution Engaging in Credit Card Business, the management evaluates the quality of the overall portfolio, which comprises of loans, receivable-non-accrual accounts, outstanding guarantee, and a review of specific delinquent claims. The risk of overall claims is reviewed based on past experiences. For the Company s banking subsidiaries, non-accrual loans and accounts receivable non-accrual account deemed as uncollectible are written off upon approval of the Board of Directors. (i) Investments Under Equity Method Investees in which the Company and its subsidiaries directly or indirectly, hold more than 20% of the outstanding stock with voting power, or hold less than 20% of outstanding stock with voting power but has significant influence over the investees are accounted for under the equity method. Upon disposition, gain or loss on disposal of long-term equity investment is calculated based on the difference between selling price and book value. The remaining capital surplus arising from long-term equity investment is adjusted to profit and loss based on the percentage of sales. Commencing from the year 2005, the Company prepares consolidated financial statements that include the accounts of its majority-owned affiliates in accordance with amended SFAS No. 7 Consolidated Financial Statements. Commencing from January 1, 2006, the Company adopted the amended SFAS No. 5 Long-term Investments under Equity Method. In accordance with this amended standard, when the investment cost exceeds the net equity worth of the investee acquired, the excess is recorded as goodwill. Prior to December 31, 2005, the differences between original investment and net equity of the investee previously recognized, which is not plausible to analyze the underlying causes are amortized equally over twenty years, since January 1, 2006 these differences are no longer amortizable. (j) Premises, Equipment, and Depreciation Premises and equipment are stated at cost or cost plus incremental value from revaluation. The incremental value of land is adjusted using the Government Announced Price. Major additions, improvements, and replacements are capitalized, while maintenance and repairs are charged to current earnings. Interests incurred in the acquisition of premises until they are ready for their intended use are capitalized as part of the acquisition costs

18 Pursuant to the regulations set forth by the Paraguay government, the local branch in Paraguay (dissolved in 2005) revalues its assets monthly based on the government announced revaluation ratio, effective from the second year of the branch s operation. Depreciation is computed using the straight-line method over the government prescribed useful lives. Premises and equipment still in use after their original estimated useful lives may be depreciated continuously over their estimated remaining useful lives and residual value. Useful lives of major premises and equipment are as follows: Buildings and premises Transportation equipment Miscellaneous equipment 10 to 56 years 3 to 6 years 3 to 10 years Superficies right is recognized and capitalized at acquisition cost and amortized over the term of the contract. During the period of construction on the surface, the amortization expenses are capitalized as the cost of the building construction. (k) Amortization Capitalized software expenses are amortized over a period of 5 to 10 years. (l) Intangible Assets Prior to January 1, 2006, goodwill resulting from the merger by the Company s banking subsidiary is amortized over 5 years using the straight-line method. In accordance with the amended SAFS No.1 Conceptual Framework for Financial Accounting and Preparation of Financial Statements, the goodwill previously recognized is no longer amortized commencing from January 1, Goodwill relating to cash-generating units is tested for impairment in a fixed period each year. An impairment loss is recognized when the recoverable amount is less than the carrying amount. Impairment losses can not be reversed once an impairment loss has been recognized. If the result of the evaluation of future economic benefits of goodwill indicated a significant impairment, the unamortized portion of goodwill is reduced based on the amount of impairment loss and the reduction is recognized as non-operating expenses

19 The differences between original investment and net equity of the investee, which is not plausible to analyze the underlying causes, upon consolidation these differences are reflected as intangible assets and amortized equally over twenty years. In accordance with the amended SFAS No.5, these intangible assets are no longer amortized commencing from January 1, (m) Bank owned Life Insurance cash surrender value The Company s banking sub-subsidiary, Chinatrust Bank (USA) purchased a singlepremium life insurance (the BOLI), under which, the executive officers and directors are the insured, while the Bank is the owner and beneficiary thereof. The receipt of the cash surrender value when the life insurance was terminated prior to maturity date, was reflected under other assets. (n) Assets Impairment Commencing from the first quarter of year 2005, the Company and its subsidiaries adopted SFAS No. 35 Impairment of Assets. In accordance with SFAS 35, unless inapplicable, the recoverable amount (individual assets or cash generating units other than goodwill) of an asset is estimated and compared with the carrying amount whenever there is an indication that the asset may be impaired. An impairment loss is recognized when the recoverable amount is less than the carrying amount (higher of fair market value and value in use). For assets other than goodwill, reversal of impairment loss is recognized when the recoverable amount of the asset has increased from its prior period estimation, the carrying value after the reversal should not exceed the recoverable amount or the depreciated or amortized balance of the assets assuming no impairment loss was recognized in prior periods. (o) Foreclosed Properties Foreclosed properties received are stated at estimated net realizable value, and the difference from the nominal value of the original claim is reflected as a credit loss. On the balance sheet date, if the foreclosed properties are still unsold, their net realizable values are reassessed. If there is sufficient evidence indicating that market value is lower than book value, the difference is recognized as a current loss. Gain or loss on disposal of foreclosed properties is accounted for under a recovery of doubtful accounts. (p) Convertible Bonds (1) The convertible bonds issued prior to December 31, 2005 are accounted for as follows: a) Due to the inseparability of the conversion option and debt elements, convertible bonds are stated at the total issue price on issuance date. b) The direct and necessary costs of issuing convertible bonds are recognized as deferred expenses and amortized using the straight-line method over the term of the bonds or over the period from issuance date to expiry date of the put option, whichever is shorter. If repayment occurs prior to maturity, the remaining unamortized deferred expenses are recognized as current expenses in proportion of earlier redemption

20 c) The redemption premium of puttable convertible bonds, which represents the difference between the specified put price and par value, is amortized using the interest method and is recognized as the liability and interest expense over the period from the issuance date of the bonds to the expiry date of the put option. d) When bondholders exercise their conversion rights, the unamortized issue costs, redemption premium, and par value of the convertible bonds are converted into the common stock entitlement certificates or the capital stock at par value, while the excess amount is recorded as capital surplus. (2) In the case of convertible bonds issued after January 1, 2006, if the economic relationship of the embedded conversion, redemption or puttable right are not closely related to the host contract (the bond), the embedded derivative is separated from the host contract. (q) Retirement Plan The Company s domestic subsidiaries maintain and fund a retirement plan covering all regular employees. Payments of pension benefits are calculated based on the employee s average monthly salary for the last six months prior to approved retirement and base point (b.p.) entitlement. The b.p earned by each employee is based on 2 b.p. for the first 15 years of service and 1 b.p. from the 16 th year and thereafter. Under the retirement plan, the pension benefits obligation is fully compensated by the Company s domestic subsidiaries. The Labor Pension Act of R.O.C. ( the Act ), which takes effect from July 1, 2005; adopts a defined contribution pension plan. In accordance with the Act, employees of the Company s domestic subsidiaries (who were hired before July 1, 2005) may elect to be subject to either the Act and maintain their seniority before the enforcement of the Act, or the pension mechanism of the Labor Standards Law. Employees who are hired by the Company s domestic subsidiaries after July 1, 2005, are required to be covered by the pension plan as defined by the Act. For employees subject to this Act, the Company s domestic subsidiaries are required to make monthly cash contributions to the employees individual pension accounts at the rate of not less than 6% of the employees monthly wages and deposit the contribution in a personal retirement benefit account of the Council of Labor Affairs. The employee retirement plan maintained by the Company s domestic subsidiaries has been amended in conformity with the Act. Under SFAS No. 18 Accounting for Pensions, an actuarial valuation of a pension asset or liability is performed on the balance sheet date, and a minimum pension liability is recorded in the financial statements based on difference between the accumulated benefit obligation and the fair value of plan assets. Net periodic pension cost recognized in accordance with SFAS No. 18 includes the current service cost, net transition asset or obligation, prior service cost and unrecognized gain (loss) on a pension plan which is amortized on straight-line basis over the expected average remaining service period of 15 years of the employees in accordance with the rules set by the SFB. The Company s domestic subsidiaries contribute monthly no less than 2% of gross salary to the employee pension fund which is deposited into a designated depository account with the Central Trust of China

21 Pursuant to the Act, the Company s domestic subsidiaries also contribute cash at the rate of 6% of gross salary of each employee to the Council of Labor Affairs. This contribution is recognized as pension expense for the current period when the contribution is actually made. The pension cost contribution for the employees of foreign subsidiaries are based on the regulations of the countries where those subsidiaries are domiciled. (r) Guarantee and Loss Reserves For subsidiaries engaged in banking, bills and securities business, guarantee and loss reserves are provided in accordance with the regulations of the regulatory agencies concerned and are accounted as expense in the current period. (s) Foreign Currency Translation The non-derivative foreign currency transactions of the Company and its subsidiaries are recorded at the rate of exchange prevailing on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the rate of exchange ruling at the balance sheet date. Any resulting exchange differences are included in the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated into the functional currency using the rate of exchange at the date of the initial transaction. Non-monetary assets and liabilities measured at fair value in a foreign currency are translated into the functional currency using the rate of exchange ruling at the balance sheet date. Any exchange differences resulting from fair value variation through profit and loss are included in the income statement, and exchange differences resulting from fair value variation through equity are accounted for under equity adjustments. Foreign investments under equity investment of the Company and its subsidiaries are booked at functional currency, the currency translation of financial statements is determined as follows: Foreign currency denominated assets and liabilities of overseas subsidiaries are translated at the spot rate on the balance sheet date; the components of their stockholders equity are translated at the historical rate. Dividends are translated at the exchange rate on the date of declaration. Income statement accounts are translated at the weighted-average rate of the year, with difference reflected as cumulative translation adjustments to stockholders equity. (t) Commitments and Contingencies If the losses from commitments and contingencies are deemed probable and the amount can be reasonably estimated, such losses are recorded currently; otherwise, only the nature of commitments and contingencies are disclosed in the notes to financial statements. (u) Income Taxes The Company adopts SFAS No. 22 Income Taxes for the purposes of making inter- and intra-period income tax allocation, as well as for calculating the current income tax expense (benefit). Accordingly, the income tax effects from taxable temporary differences are recognized as deferred tax liability, while those deductible temporary differences, prior years loss carry forward benefits, and investment tax credits are accounted for as deferred tax assets but subject to management s judgment as to whether the realization is more likely than not