TAIWAN SEMICONDUCTOR CO., LTD. AND SUBSIDIARIES

Transcription

1 TAIWAN SEMICONDUCTOR CO., LTD. AND SUBSIDIARIES Consolidated Financial Statements 2013 and (With Independent Auditors Report Thereon) The accompanying financial statements are not intended only to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to review such financial statements are those generally accepted and applied in the Republic of China. The auditors report and the accompanying financial statements are the English translation of the Chinese version prepared and used in the Republic of China. If there is any conflict between, or any difference in the interpretation of, the English and Chinese language auditors report and financial statements, the Chinese version shall prevail.

2 Independent Auditors Review Report The Board of Directors TAIWAN SEMICONDUCTOR CO., LTD.: We have audited the accompanying consolidated balance sheets of TAIWAN SEMICONDUCTOR CO., LTD. and subsidiaries as of 2013 and and January 1,, the related consolidated statements of income, the related consolidated statements of changes in stockholders equity and the cash flows from January 1 to 2013 and. These consolidated financial statements are the responsibility of the Group s management. Our responsibility is to issue an opinion on these Consolidated Financial Statements based on our audits. Our audits were made in accordance with the Regulations Governing Auditing and Certification of Financial Statements by Certified Public Accountants and the Generally Accepted Auditing Standard, in order to assure reasonably that the Consolidated Financial Statements is free from material misstatement. An audit consists of analyzing the procedures applied to the financial data and disclosed items, assessing the accounting rules and significant accounting estimates prepared by the management, and evaluating the overall expression of the Consolidated Financial Statements. We believe the audit work will provide a reasonable basis for our opinion. Regarding to our opinion, the first stage of the Consolidated Financial Statements, which is prepared accordingly to the Regulation Governing the Preparation of Financial Reports by Securities Issuers, The International Financial Reporting endorsed by FSC, The International Accounting Standards, IFRIC Interpretation and SIC Interpretation, is sufficient to present the Taiwan Semiconductor Co., LTD. and its subsidiaries consolidated financial status as of 2013 and and January 1, and the consolidated financial performance and cash flows as of January 1 to 2013 and. KPMG CPA: Mei, Yuan-Chen Chou, Pao-Lian Taipei, Taiwan, R.O.C March 26, 2014 The accompanying financial statements are not intended only to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to review such financial statements are those generally accepted and applied in the Republic of China. The auditors report and the accompanying financial statements are the English translation of the Chinese version prepared and used in the Republic of China. If there is any conflict between, or any difference in the interpretation of, the English and Chinese language auditors report and financial statements, the Chinese version shall prevail.

3 TAIWAN SEMICONDUCTOR CO., LTD. AND SUBSIDIARIES Consolidated Balance Sheets 2013 and and January 1, (Expressed in thousand of New Taiwan dollars) 2013 January 1, Assets Amount % Amount % Amount % Current assets: Cash and cash equivalents (note 6(a)) $ 2,249, ,928, ,721, Financial assets measured at fair value through profit or loss current (note 6(b)) ,084-1,808 - Available-for-sale financial assets current (note 6(b)) ,070 1 Notes receivable, net (note 6(c)) 17,676-29,277-47,375 1 Accounts receivable, net (note 6(c)) 1,483, ,235, ,290, Other receivables 124, , ,309 1 Current tax assets 2,052-3, Inventories (note 6(d)) 1,125, ,190, ,426, Prepaid expenses 239, , , ,242, ,702, ,808, Non-current assets: Financial assets carried at cost non-current (note 6(b)) - - 1,568-10,882 - Property, Plant and Equipment (note 6(e)) 3,034, ,274, ,601, Intangible asset (note 6(f)) 16,024-18,088-8,524 - Deferred tax assets (note 6(k)) 36,847-42, ,873 1 Other financial assets-non current 17,437-16,542-16,420 - Other non-current assets 41,822-43,350-39,085-3,147, ,396, ,743, Total assets $ 8,389, ,099, ,551, January 1, Liabilities and Stockholders Equity Amount % Amount % Amount % Current liabilities: Short-term borrowings (note 6(g)) $ 418, , ,873 7 Financial liabilities meaured at fair value through profit or loss current (note 6(b)) Notes payable 12,348-22,065-41,175 - Accounts payable 952, , , Other payables 433, , ,982 5 Current tax liabilities 120, , ,261 1 Product warranty obligations (note 6(i)) 2,710-2,491-2,259 - Long-term borrowings due within one year (note 6(g)) 16, , ,100 1 Capital lease liabilities current (note 6(h)) 17,513-16,606-13,431 - Other current liabilities 16,800-20,089-11,521-1,990, ,845, ,145, Non-current liabilities: Long-term borrowings (note 6(g)) 94, , ,400 5 Employee benefits (note 6(j)) 35,252-46, ,636 1 Deferred tax liabilities (note 6(k)) 107, , ,444 1 Capital lease liabilities non-current (note 6(h)) 321, , , , , , Total liabilities 2,548, ,685, ,112, Stockholders equity attributable to parent (note 6(l)): Common stock 2,442, ,439, ,439, Capital surplus 963, , , Retained earnings: Legal reserve 357, , ,084 4 Special reserve 302, Unappropriated earnings 1,029, ,082, ,203, ,689, ,423, ,505, Other stockholders equity 41,256 - (70.983) (1) - - Treasury stock (151,065) (2) (23,310) - (23,310) - Total Stockholders equity attributable to parent 4,986, ,720, ,870, Non-controlling interests 855, , ,405 7 Total stockholders equity 5,841, ,413, ,439, Total liabilities and stockholders equity $ 8,389, ,099, ,551, See accompanying notes to consolidated financial statements.

4 TAIWAN SEMICONDUCTOR CO., LTD. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income January 1 to 2013 and (Expressed in thousand of New Taiwan dollars, except for earnings per common share) See accompanying notes to consolidated financial statements Amount % Amount % Sales revenue 7,169, ,301, Less: Sales returns and allowances 87, ,216 2 Net sales revenue (Note 6(d)) 7,082, ,192, Cost of goods sold 5,010, ,723, Gross profit 2,072, ,469, Operating expenses: Selling 609, ,403 8 Administrative 307, ,661 4 Research and development 140, , ,056, , Operating income 1,015, ,159 9 Non-operating income and expenses: Finance expense (32,019) - (43,498) (1) Interest revenue 16,984-15,726 - Other income 19,713-18,317 - Gains (Loss) on disposal of investments (3,219) - Foreign exchange gains (Loss) 54,688 1 (25,588) - Loss on disposal of property, plant and equipment (127,548) (2) (2,799) - Gains on financial assets (liabilities) measured at fair value through profit or loss 1, Impairment loss (2,182) - (3,572) - Miscellaneous disbursements (3,162) - (4,809) - (72,019) (1) (49,144) (1) Income before income tax 943, ,015 8 Income tax expense (Note 6(k)) 276, ,224 3 Consolidated net income 666, ,791 5 Other comprehensive income: Exchange differences on translation of foreign subsidiaries, before income tax 127,756 2 (80,025) (1) Less: Income tax relating to components of other comprehensive income 3,812 - (2,232) - Other comprehensive income, net of tax 123,944 2 (77,793) (1) Comprehensive income $ 790, ,998 4 Net income attributable to: Owners of the parent $ 387, ,350 2 Non-controlling interests 278, ,441 3 $ 666, ,791 5 Comprehensive income attributable to: Owners of the parent $ 449, ,367 1 Non-controlling interests 290, ,631 3 $ 790, ,998 4 Basic earnings per common share (Note 6(n)) $ Diluted earnings per common share (Note 6(n)) $

5 TAIWAN SEMICONDUCTOR CO., LTD. AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders Equity January 1 to 2013 and (Expressed in thousand of New Taiwan dollars) Common stock Capital surplus Stockholders equity attributable to Owners of the parent Other stockholders Retained earnings equity Legal reserve Special reserve Unappropriated earnings Accumulated translation adjustment Treasury stock Total equity attributable to Owners of the parent Non-controlling interests Total stockholders equity Balance as of January 1, $ 2,439, , ,084-1,203,205 - (23,310) 4,870, ,405 5,439,405 Appropriation of earnings: Provision of legal reserve ,071 - (39,071) Cash dividends (242,997) - - (242,997) - (242,997) Net income , , , ,791 Other comprehensive income (70,983) - (70,983) (6,810) (77,793) Total comprehensive income ,350 (70,983) - 90, , ,998 Share-based payment-employee stock options - 2, ,631-2,631 Changes in non-controlling interests (57,534) (57,534) Balance as of January 1, ,439, , ,155-1,082,487 (70,983) (23,310) 4,720, ,502 5,413,503 First-time application of IFRs for provision of special reserve ,150 (302,150) Appropriation of earnings: Provision of legal reserve ,594 - (16,594) Cash dividends (121,498) - - (121,498) - (121,498) Net income , , , ,320 Other comprehensive income , ,239 11, ,944 Total comprehensive income , , , , ,264 Share-based payment-employee stock options - 4, ,301-4,301 Employee stock options-exercised 2, ,808-3,808 Subsidiaries purchase treasury stock (127,755) (127,755) - (127,755) Changes the number of affiliates using equity method - 7, ,349-7,349 Changes in non-controlling interests (128,949) (128,949) Balance as of 2013 $ 2,442, , , ,150 1,029,812 41,256 (151,065) 4,986, ,011 5,841,023 See accompanying notes to consolidated financial statements.

6 TAIWAN SEMICONDUCTOR CO., LTD. AND SUBSIDIARIES Consolidated Statements of Cash Flows 2013 and (Expressed in thousand of New Taiwan dollars) 2013 Cash flows from operating activities: Income before income tax $ 943, ,015 Adjustments: Adjustments for the non-cash effects of items of incomes and expenses: Depreciation expense 367, ,782 Amortization expense 19,945 14,112 Bad debt expense 447 (755) Net gain on financial assets or liabilities at fair value through profit or loss (1,041) (298) Interest expense 29,563 35,707 Interest income (16,984) (15,726) Share-based payments 4,301 2,631 Loss on disposal of property, plant and equipment 127,548 2,799 Disposal loss (gain) on financial assets (466) 3,219 Impairment loss on non-financial assets 2,182 3,572 Others 460 (275) Allowance for sales returns and discounts 10,641 7,346 Total adjustments for the non-cash effects of items of incomes and expenses 543, ,114 Net change in operating assets and liabilities: Net change in operating assets: Decrease (increase) in financial assets measured at fair value through profit or loss 20,560 (17,773) Decrease in notes receivable 11,601 18,098 Decrease (increase) in accounts receivable (261,900) 45,278 Decrease (increase) in other receivable (23,901) 684 Decrease in inventories 65, ,481 Increase in prepayments (58,887) (98,781) Increase in other financial assets (895) (122) Total net change in operating assets (248,129) 182,865 Net change in operating liabilities: Decrease in notes payable (9,717) (19,110) Increase (decrease) in accounts payable 90,395 (21,491) Increase (decrease) in other payable 66,891 (97,847) Increase (decrease) in other current liabilities (3,070) 8,738 Decrease in provisions non-current (11,125) (2,259) Total net change in operating liabilities 133,374 (125,969) Total net change in operating assets and liabilities (114,755) 56,896 Total adjustments 428, ,010 Cash inflows from operating activities 1,371,881 1,017,025 Interest received 16,745 15,661 Income taxes paid (204,212) (122,761) Net cash provided by operating activities 1,184, ,925 Cash flows from investing activities: Disposal of available-for-sale financial asset - 48,070 Disposal of financial assets carried at cost 765 5,933 Acquisition of property, plant and equipment (199,855) (76,132) Disposal of property, plant and equipment 20,628 32,052 Acquisition of intangible assets (3,567) (15,983) Decrease in other non-current assets (12,496) (11,801) Net cash used in investing activities (194,525) (17,861) Cash flows from financing activities: Increase (Decrease) in short-term loans 96,607 (263,450) Repayments in long-term loans (422,554) (50,246) Decrease in capital lease liabilities (24,921) (21,831) Payments of Cash dividends (121,498) (242,997) Employee stock option-exercised 3,808 - Purchase of treasury stock (127,755) - Interest paid (13,110) (18,897) Change in non-controlling interests (128,949) (57,534) Net cash used in financing activities (738,372) (654,955) Effect of exchange rate changes 69,864 (30,123) Net increase in cash and cash equivalents 321, ,986 Cash and cash equivalents, beginning of period 1,928,064 1,721,078 Cash and cash equivalents, end of period $ 2,249,445 1,928,064 See accompanying notes to consolidated financial statements.

7 and 2011 (Amounts expressed in thousand of New Taiwan dollars, unless otherwise specified) 1. Organization and Principal Activities TAIWAN SEMICONDUCTOR CO., LTD. (the Company) was incorporated in January 1979 under the Company Act of the Republic of China. Its major business activities are the manufacture and sale of rectifiers and bar code printers. The Company s common stock has been officially listed and traded on the GreTai Securities Market starting from February In order to improve operating efficiency and industry competitiveness from specialization, the Company restructured its business and organization. The Company separated its bar code printer business unit from itself and transferred it to establish TSC Auto ID Technology Co., Ltd. (TSC Auto ID). The board of directors meeting approved August 1, 2007, as the date of record of the split. The spun-off bar code printer business unit s business value was $150,000, comprising related assets amounting to $357,957 and liabilities amounting to $207,957. TSC Auto ID categorically assumed all assets and liabilities and related rights and obligations after the date of record of the split. TSC Auto ID issued common stock of $150,000, with par value of 10 NT dollars, to the Company as acquisition cost. The Company and the subsidiaries consolidated in the preparation of the interim consolidated financial statements are referred to as the Group. The Group primarily is involved in the manufacture and sale of Rectifier and Bar Code. 2. Approval date and procedures of the interim consolidated financial statements These consolidated financial statements were authorized for issuance by the board of directors on March 26, New standards and interpretations not yet adopted (a) New standards and interpretations endorsed by the Financial Supervisory Commissions R.O.C. ( FSC ) but not yet in effect. The International Accounting Standards Board ( IASB ) issued the International Financial Reporting Standard 9 Financial instruments ( IFRS 9 ), which takes effect as of January 1, (In December 2011, the IASB postponed the effective date of IFRS 9 to January 1, 2015; however, in November 2013, the IASB cancelled the announcement mentioned above to allow the preparer of financial statements to have sufficient time to convert to the new standard.) This standard had been approved by the FSC; however, the effective date has not been announced. In accordance with FSC rules early adoption is not permitted, and companies shall follow the guidance in the 2009 version of the International Accounting Standard 39 Financial instruments ( IAS 39 ). Upon the adoption of this new standard, is it expected there will be significant impacts on the classification and measurement of financial instruments in the parent-company-only financial statements.

8 2 (b) New standards and interpretations not yet endorsed by the FSC A summary of the new standards and amendments issued by the IASB that may have an impact to the financial statements not yet endorsed by the FSC: Issue date New standards and amendments Description Effective date per IASB IFRS 10 Consolidated Financial Statements IFRS 11 Joint Arrangements IFRS 12 Disclosure of Interests in Other Entities Amended IAS 27 Separate Financial Statements Amended IAS 28 Investments in Associates and Joint Ventures IFRS 13 Fair Value Measurement On May 12, 2011, the IASB issued a series of standards and amendments related to consolidation, joint arrangements, and investments. The new standards provide a single model for determining whether an entity has control over an investee (including special purpose entities). However, the original guidance and method apply to the consolidation process. In addition, joint arrangements are separated into joint operations (formerly known as jointly controlled assets and jointly controlled operations), and joint venture (formerly known as jointly controlled entities), and removal of the proportionate consolidation method. On June 28,, amendments were issued clarifying the guidance over the transition period. Replaces fair value measurement guidance in other standards, and consolidates the financial and nonfinancial items as a single guidance. Adoption of the new standard will have an impact on the measurement of certain assets and liabilities. In addition, this amendment might increase the disclosure of fair value

9 3 Issue date New standards and amendments Description Effective date per IASB Amended IAS 1 Presentation of Financial Statements Amended IAS 19 Employee Benefits Items presented in other comprehensive income shall be based on whether they are potentially reclassifiable to profit or loss subsequently. Eliminates the corridor method and eliminates the option to recognize changes in the net defined benefit liability (asset) in profit or loss; in addition, requires the immediate recognition of past service cost. Adoption of the amendment will change the presentation and the measurement of accrued pension liabilities and actuarial gains (losses) on defined benefit plan Significant accounting policies The significant accounting policies presented in the consolidated financial statements are summarized as follows. The significant accounting policies have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently to the IFRS statement of financial position approved by FSC on January 1,. (a) Statement of Compliance The auditors report and the accompanying consolidated financial statements are the English translation of the Chinese version prepared and used in the Republic of China. If there is any conflict between, or any difference in the interpretation of, the English and Chinese language auditors report and financial statements, the Chinese version shall prevail. These consolidated financial statements have been prepared in accordance with the Regulations Governing the Preparation of Financial Reports by Enterprises Engaging in Insurance (hereinafter referred to the Regulations). These are the Company s first IFRS consolidated financial statements and by the first IFRS (endorsed by the FSC) annual financial statements, and IFRS 1 First-time Adoption of International Financial Reporting Standards has been applied. An explanation of how the transition to IFRS has affected the reported financial position, financial performance, and cash flows of the Group is provided in note 15.

10 4 (b) Basis of measurement i) The consolidated financial statements have been prepared on a historical cost basis except for the following material items in the statement of financial position: 1) Financial instruments measured at fair value through profit or loss is measured at fair value; 2) Available-for-sale financial assets are measured at fair value; 3) Liabilities for cash-settled share-based payment arrangements are measured at fair value; 4) Inventories are measured at the lower of cost and net realizable value; 5) The defined benefit asset is recognized as plan assets, plus unrecognized past service cost, less the present value of the defined benefit obligation. ii) Functional and presentation currency The functional currency of each entity is determined based on the primary economic environment in which the entities operate. The Company s consolidated financial statements are presented in New Taiwan Dollar, which is the Company s functional currency. All financial information presented in New Taiwan Dollar has been rounded to the nearest thousand. (c) Basis of Consolidation i) The consolidated financial statements comprise the Company and its subsidiaries (Group). The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Losses applicable to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes the non-controlling interests to have a deficit balance. Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions are eliminated in preparing the consolidated financial statements. 1) Changes in ownership interest Changes in the Group s ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions.

11 5 ii) List of subsidiaries in the consolidated financial statements Name of Investor Name of subsidiary Principal activity 2013 Shareholding January 1, The Company Ever Energetic Int'l Ltd. Holding company and general % % % (Ever Energetic) import and export business The Company Ever Winner Int'l Co., Ltd. Holding company and general % % % (Ever Winner) import and export business The Company Skyrise Int'l Ltd. (Skyrise) Holding company and general % % % import and export business The Company Taiwan Semiconductor General import and export business % % % Europe GmbH (TSCE) The Company Taiwan Semiconductor Trading of rectifiers % % % Japan Ltd. (TSCJ) The Company Taiwan Semiconductor Holding company and trading 25.22% 25.22% 25.22% (H.K.) Co., Ltd. (TSCH) rectifiers The Company TSC Auto ID Technology Manufacture and sale of 37.10% 37.48% 37.94% Co., Ltd. (TSC Auto ID) bar code printers Ever Energetic Taiwan Semiconductor (H.K.) Co., Ltd. (TSCH) Holding company and trading of rectifiers 36.96% 36.96% 36.96% Ever Energetic TSC America, Inc. (TSCA) Trading of rectifiers 75.00% 75.00% 75.00% Ever Winner Taiwan Semiconductor (H.K.) Co., Ltd. (TSCH) Trading of rectifiers 37.82% 37.82% 37.82% Ever Winner TSC America, Inc. (TSCA) Trading of rectifiers 25.00% 25.00% 25.00% Ever Winner Shanghai Great Trading of rectifiers % % % Technology Trading Co., Ltd. (TSCC) TSCH TAIWANSEMI Trading of rectifiers -% % % (Shenzhen) Co., Ltd. (TSCZ) TSCH Yangxin Everwell Electronic Co., Ltd. (Yangxin Everwell) Manufacture and sale of rectifiers % % % TSCH TSC Auto ID TSC Auto ID TSC Auto ID TSCAE TSCAE TSC HK Tianjin Everwell Technology Co., Ltd. (Tianjin Everwell) TSC Auto ID Technology EMEA GmbH (TSCAE) TSC Auto ID (H.K.) Ltd. (TSC HK) TSC Auto Technology America Inc. (TSCAA) TSC Auto ID Technology ME, Ltd. FZE (TSCAD) TSC Auto ID Technology Spain, S.L. (TSCAS) Tianjin TSC Auto ID Technology Co., Ltd. (TTSC) iii) Subsidiaries impairment Manufacture and sale of wafer Bar code printers and other parts trading Holding company and general import and export business Bar code printers and other parts trading Bar code printers and other parts trading Bar code printers and other parts trading Manufacture and sale of bar code printers and other parts % % % % % % % % % % % % % % % % % % % % % TSCZ close down its business during the year 2013 with the liquidation date set at July 17, The liquidation process has already been completed.

12 6 iv) Unlisted subsidiaries in the consolidated financial statement: None. (d) Foreign currency i) Foreign currency transaction Transactions in foreign currencies are translated to the respective functional currencies of Group s entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the year adjusted for the effective interest and payments during the year, and the amortized cost in foreign currency translated at the exchange rate at the end of the year. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Non-monetary items in a foreign currency that are measured based on historical cost are translated using the exchange rate at the date of translation. Foreign currency differences arising on retranslation are recognized in profit or loss, except for difference in available-for-sale equity investment which are recognized in other comprehensive income arising on the retranslation. ii) Foreign operations The assets and liabilities of foreign operations are translated to the Group s functional currency at exchange rates at the reporting date. The income and expenses of foreign operations are translated to the Group s functional currency at average rate. Foreign currency differences are recognized in other comprehensive income, and presented in the foreign currency translation reserve (translation reserve) in equity. (e) Classification of current and non-current assets and liabilities An entity shall classify an asset as current when: i) It expects to realize the asset, or intends to sell or consume it, in its normal operating cycle; ii) It holds the asset primarily for the purpose of trading; iii) It expects to realize the asset within twelve months after the reporting period; or iv) The asset is cash and cash equivalent unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period. An entity shall classify all other assets as non-current.

13 7 An entity shall classify a liability as current when: i) It expects to settle the liability in its normal operating cycle; ii) It holds the liability primarily for the purpose of trading; iii) The liability is due to be settled within twelve months after the reporting period. iv) The asset is cash and cash equivalent (as defined in IAS 7) unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period. An entity shall classify all other liabilities as non-current. (f) Cash and cash equivalents Cash and cash equivalents include cash on hand, due from banks, demand deposits and highly liquid investments that are readily convertible into known amount of cash and which are subject to insignificant risk of change in value. A time deposit is qualified as a cash equivalent when it has a maturity of one year or less from the date of acquisition that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Also, it s held for the purpose of short-term cash commitments rather than for investment or other purposes. Bank overdrafts that are repayable on demand and form an integral part of the Group's cash management are included as a component of cash and cash equivalents for the purpose of the consolidated statement of cash flows. (g) Financial Instruments Financial assets and financial liabilities are initially recognized when the Group becomes a party to the contractual provisions of the instruments. i) Financial assets The Group classifies financial assets into the following categories: financial assets at fair value through profit or loss, receivables and available-for-sale financial assets.

14 8 1) Financial assets at fair value through profit or loss Financial assets (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 Group, except for those designated as effective hedging derivative instruments, are classified into this category. This type of financial asset is measured at fair value at the time of initial recognition, and attributable transaction costs are recognized in profit or loss as incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein, which take into account any dividend and interest income, are recognized in profit or loss. A regular way purchase or sale of financial assets shall be recognized and derecognized, as applicable, using trade-date accounting. 2) Receivables Receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables comprise trade receivables, other receivables. Such assets are recognized initially at fair value, plus, any directly attributable transaction costs. Subsequent to initial recognition, receivables are measured at amortized cost using the effective interest method, less any impairment losses other than insignificant interest on short-term receivables. A regular way purchase or sale of financial assets shall be recognized and derecognized, as applicable, using trade-date accounting 3) Impairment of financial assets The financial assets which are not measured at fair value through profit or loss shall be assessed for impairment at each reporting date. A financial asset is impaired if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset that can be estimated reliably. Objective evidence that financial assets are impaired includes default or delinquency by a debtor, restructuring of an amount due to the Group on terms that the Group would not consider otherwise, indications that a debtor or issuer will enter bankruptcy, adverse changes in the payment status of borrowers or issuers, economic conditions that correlate with defaults, or the disappearance of an active market for a security. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is accounted for as objective evidence of impairment.

15 9 All individually significant receivables are assessed for specific impairment. Receivables that are not individually significant are collectively assessed for impairment by grouping together assets with similar risk characteristics. In assessing collective impairment, the Group uses historical trends of the probability of default, the timing of recoveries, and the amount of loss incurred, adjusted for management s judgment as to whether current economic and credit conditions are such that the actual losses are likely to be greater or lesser than those suggested by historical trends. An impairment loss in respect of a financial asset measured at cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss is not reversible in subsequent periods. An impairment loss in respect of a financial asset is deducted from the carrying amount, except for trade receivables, for which an impairment loss is reflected in an allowance account against the receivables. When it is determined a receivable is uncollectible, it is written off from the allowance account. Any subsequent recovery of receivable written off is recorded in the allowance account. Changes in the amount of the allowance account are recognized in profit or loss. ii) Financial liabilities and equity instrument 1) Financial liabilities measured at fair value through profit or loss This type of financial liabilities is classified as held-for-trading financial liabilities or the financial liabilities designated as fair value through profit or loss. These liabilities are recognized initially at fair value with transaction costs taken directly to income statement, and are subsequently re-measured at fair value. Gains and losses from changes in the fair value of such liabilities (including interest expenses) are reported in the account of profit or loss of financial assets and liabilities meaured at fair value through profit or loss in the comprehensive income statement. 2) Other financial liabilities Financial liabilities not classified as held-for-trading or designated as at fair value through profit or loss, which comprise loans and borrowings, and trade and other payables, are measured at fair value plus any directly attributable transaction cost at the time of initial recognition. Subsequent to initial recognition, they are measured at amortized cost calculated using the effective interest method.

16 10 (h) Inventories 3) Offsetting of financial assets and liabilities The Group presents financial assets and liabilities on a net basis when the Group has the legally enforceable right to offset and intends to settle such financial assets and liabilities on a net basis or to realize the assets and settle the liabilities simultaneously. The cost of inventories includes all necessary costs of purchase, costs of conversion, and other costs in bringing the inventories to a salable and useable location and condition. The fixed production overhead is allocated to the finished goods and work in progress based on the normal capacity of production facilities. Variable production overheads are allocated to each unit of production on the basis of the actual use of the production facilities. At each period-end, inventories are measured at the lower of cost or net realizable value. The cost of inventories is based on the weighted-average-cost formula. Net realizable value is calculated based on the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses at the end of the period. (i) Property, plant and equipment i) Recognition and measurement Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributed to the acquisition of the asset. Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately, unless the useful life and the depreciation method of a significant part of an item of property, plant and equipment are the same as the useful life and depreciation method of another significant part of that same item. The gain or loss arising from the derecognition of an item of property, plant and equipment shall be determined as the difference between the net disposal proceeds, if any, and the carrying amount of the item, and it shall be recognized as other gains and losses. ii) Subsequent cost Subsequent expenditure is capitalized only when it is probable that the future economic benefits associated with the expenditure will flow to the Company. The carrying amount of those parts that are replaced is derecognized. Ongoing repairs and maintenance are expensed as incurred.

17 11 iii) Depreciation (j) Lease The depreciable amount of an asset is determined after deducting its residual amount, and it shall be allocated on a systematic basis over its useful life. Items of property, plant and equipment with the same useful life may be grouped in determining the depreciation charge. The remainder of the items may be depreciated separately. The depreciation charge for each period shall be recognized in profit or loss. The depreciable amount of a leased asset is allocated to each accounting period during the period of expected use on a systematic basis consistent with the depreciation policy the lessee adopts for depreciable assets that are owned. If there is reasonably certainty that the lessee will obtain ownership by the end of the lease term, the period of expected use is the useful life of the asset; otherwise, the asset is depreciated over the shorter of the lease term and its useful life. Land has an unlimited useful life and therefore is not depreciated. The estimated useful lives for the current and comparative years of significant items of property, plant and equipment are as follows: 1) Buildings and improvements: 3~55 years. 2) Machinery and equipment: 2~15 years. 3) Transportation equipment: 3~6 years. 4) Office equipment and others: 3~15 years. Depreciation methods, useful lives, and residual values are reviewed at each reporting date. If expectations differ from the previous estimates, the change(s) is accounted for as a change in an accounting estimate. Leases which the Group assumes substantially all of the risks and rewards of ownership are classified as finance leases. On initial recognition, the lease asset is measured at an amount equal to the lower of its fair value or the present of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to the asset. Other leases are operating leases and are not recognized in the Group s statement of financial position.

18 12 Payments made under operating lease (excluding insurance and maintenance expenses) are recognized in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognized as an integral part of the total lease expense, over the term of the lease. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. (k) Intangible assets Other intangible assets that are acquired by the Group are measured at cost less accumulated amortization and any accumulated impairment losses. Subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. The amortizable amount is the cost of an asset, or other amount substituted for cost, less its residual value. Amortization is recognized in profit or loss on a straight-line basis over the estimated useful lives (6 years) of intangible assets from the date that they are available for use. The residual value, amortization period, and amortization method for an intangible asset with a finite useful life shall be reviewed at least annually at each fiscal year-end. Any change shall be accounted for as changes in accounting estimates. (l) Deferred expense The cost of the purchased computer software will be deferred and amortized accordingly over the estimated useful life based on its future economic benefits. (m) Impairment Non-derivative financial assets The Group assess at each balance sheet date whether there is any indication that an asset (individual asset or cash-generating unit) may have been impaired. If any such indication exists, the Group estimates the recoverable amount of the asset. The Group recognizes impairment loss for an asset whose carrying value is higher than the recoverable amount. The Group reverses impairment losses recognized in prior periods for assets if there is any indication that the impairment loss recognized no longer exists or has decreased. 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. (n) Product warranty obligations A provision for warranties is recognized when the underlying products or services are sold. The provision is based on historical warranty data and a weighting of all possible outcomes against their associated probabilities.

19 13 (o) Treasury stock The outstanding shares of the Company purchased back by it should be recorded as treasury stock at the purchasing cost before such shares are disposed of or retired. If treasury stock is disposed of afterward, the difference is recorded as capital surplus when the disposal price is higher than the carrying amount; when the situation is reversed, the difference is recorded as a reduction of capital surplus generated from treasury stock transactions, and any insufficiency is applied to retained earnings. The carrying amount of the treasury stock is calculated by using the weighted-average method, and determined individually by each repurchasing reason. When retiring treasury stock, common stock and capital surplus derived from paid-in capital in excess of par value should be eliminated proportionally. If the carrying amount of retired treasury stock is higher than the eliminated amount of common stock and capital surplus, then the difference is recorded as a reduction of capital surplus derived from treasury stock, with any insufficiency applied to retained earnings; when the situation is reversed, the difference is recorded as capital surplus. (p) Revenue recognition Revenue is recognized when titles to the products and the risks and rewards of ownership are transferred to the customers. Related costs and expenses matching the revenues are recognized as incurred. Allowances for estimated sales returns and discounts are provided in the period the related revenue is recognized based on historical experience Employees bonuses and directors and supervisors remuneration (q) Employee benefits i) Defined contribution plans Obligations for contributions to defined contribution pension plans are recognized as an employee benefit expense in profit or loss in the periods during which services are rendered by employees.

20 14 ii) Defined benefit plans A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Group s net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value. Any unrecognized past service costs and the fair value of any plan assets are deducted. The discount rate is the yield at the reporting date (market yields of highquality corporate bonds or government bonds) on bonds that have maturity dates approximating the terms of the Company s obligations and that are denominated in the same currency in which the benefits are expected to be paid. The calculation is performed annually by a qualified actuary using the projected unit credit method. When the calculation results in a benefit to the Group, the recognized asset is limited to the total of any unrecognized past service costs and the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. In order to calculate the present value of economic benefits, consideration is given to any minimum funding requirements that apply to any plan in the Group. An economic benefit is available to the Company if it is realizable during the life of the plan, or on settlement of the plan liabilities. When the benefits of a plan are improved, the portion of the increased benefit relating to past service by employees is recognized in profit or loss on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognized immediately in profit or loss. If the defined benefit plan or the fair value of the plan asset exceeds 10% of the actuarial gains and losses arising subsequently from defined benefit plans, it should be recognized in other comprehensive income and amortized accordingly in profit or loss based on the estimated average service years. The Group recognizes gains or losses on the curtailment or settlement of a defined benefit plan when the curtailment or settlement occurs. The gain or loss on curtailment comprises any resulting change in the fair value of plan assets, any change in the present value of the defined benefit obligation, and any related actuarial gains or losses and past service cost that had not previously been recognized. iii) Short-term employee benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided.

21 15 A liability is recognized for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably. (r) Share-based payments The grant-date fair value of share-based payment awards granted to employees is recognized as employee expenses, with a corresponding increase in equity, over the period that the employees become unconditionally entitled to the awards. The amount recognized as an expense is adjusted to reflect the number of awards whose related service and non-market performance conditions are expected to be met, such that the amount ultimately recognized as an expense is based on the number of awards that meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grant-date fair value of the share-based payment is measured to reflect such conditions, and there is no true-up for differences between expected and actual outcomes. (s) Income Taxes Income tax expenses include both current taxes and deferred taxes. Except for expenses related to business combinations or recognized directly in equity or other comprehensive income, all current and deferred taxes shall be recognized in profit or loss. Current taxes include tax payables and tax deduction receivables on taxable gains (losses) for the year calculated using the statutory tax rate on the reporting date or the actual legislative tax rate, as well as tax adjustments related to prior years. Deferred taxes arise due to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective tax bases. Deferred taxes shall not be recognized for the below exceptions: i) Assets and liabilities that are initially recognized but are not related to the business combination and have no effect on net income or taxable gains (losses) during the transaction. ii) Temporary differences arising from equity investments in subsidiaries or joint ventures where there is a high probability that such temporary differences will not reverse. iii) Initial recognition of goodwill. Deferred tax assets and liabilities shall be measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates that have been enacted or substantively enacted by the end of the reporting period.

22 16 Deferred tax assets and liabilities may be offset against each other if the following criteria are met: i) The entity has the legal right to settle tax assets and liabilities on a net basis; and ii) the taxing of deferred tax assets and liabilities fulfill one of the below scenarios: 1) levied by the same taxing authority; or 2) levied by different taxing authorities, but where each such authority intends to settle tax assets and liabilities (where such amounts are significant) on a net basis every year of the period of expected asset realization or debt liquidation, or where the timing of asset realization and debt liquidation is matched. A deferred tax asset should be recognized for the carry-forward of unused tax losses, unused tax credits, and deductible temporary differences to the extent that it is probable that future taxable profit will be available against which the unused tax losses, unused tax credits, and deductible temporary differences can be utilized. Such unused tax losses, unused tax credits, and deductible temporary differences shall also be re-evaluated every year on the financial reporting date, and adjusted based on the probability that future taxable profit will be available against which the unused tax losses, unused tax credits, and deductible temporary differences can be utilized. (t) Employees bonuses and directors and supervisors remuneration Employees bonuses and directors and supervisors remuneration appropriated by the Company and its domestic subsidiaries are accounted in accordance with the Company s articles of incorporation and are recorded as either operating costs or operating expenses. Any differences between the amount approved in the shareholders meeting and recognized in the financial statements are accounted for as changes in accounting estimates and recognized as profit or loss. (u) Earnings per share The Group discloses the Company s basic and diluted earnings per share attributable to ordinary equity holders of the Company. The calculation of basic earnings per share is based on the profit attributable to the ordinary shareholders of the Company divided by the weighted-average number of ordinary shares outstanding. The calculation of diluted earnings per share is based on the profit attributable to ordinary shareholders of the Company, divided by the weighted-average number of ordinary shares outstanding after adjustment for the effects of all dilutive potential ordinary shares.