Bank SinoPac Financial Statements for the Years Ended 2013 and and Independent Auditors Report
INDEPENDENT AUDITORS REPORT The Board of Directors and Stockholders Bank SinoPac We have audited the accompanying balance sheets of Bank SinoPac as of 2013, and January 1,, and the related statements of comprehensive income, changes in equity and cash flows for the years ended 2013 and. These financial statements are the responsibility of the Bank s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the Rules Governing the Audit of Financial Statements of Financial Institutions by Certified Public Accountants and auditing standards generally accepted in the Republic of China. Those rules and standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bank SinoPac as of 2013, and January 1,, and its financial performance and its cash flows for the years ended 2013 and, in conformity with Criteria Governing the Preparation of Financial Reports by Public Banks, Criteria Governing the Preparation of Financial Reports by Securities Firms and the guidelines issued by the authority. February 27, 2014 Notice to Readers The accompanying financial statements are intended only to present the financial position, financial performance and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to audit such financial statements are those generally applied in the Republic of China. For the convenience of readers, the independent auditors report and the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language independent auditors report and financial statements shall prevail. - 1 -
BANK SINOPAC BALANCE SHEETS (In Thousands of New Taiwan Dollars) 2013 January 1, ASSETS Amount % Amount % Amount % CASH AND CASH EQUIVALENTS (Notes 6 and 41) $ 23,545,074 2 $ 18,633,817 2 $ 17,789,825 2 DUE FROM THE CENTRAL BANK AND CALL LOANS TO OTHER BANKS (Note 7) 58,955,096 4 85,616,140 7 73,672,240 6 FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (Notes 4, 8, 41 and 42) 25,370,342 2 27,010,687 2 32,788,680 3 DERIVATIVE FINANCIAL ASSETS FOR HEDGING (Notes 4 and 10) - - 15,616-41,323 - SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL (Notes 4, 11 and 41) - - 236,006-3,080,168 - RECEIVABLES, NET (Notes 4, 5, 12 and 41) 118,432,710 9 61,702,122 5 51,039,007 4 CURRENT TAX ASSETS (Notes 4, 29 and 41) 1,271,286-1,168,527-1,177,570 - DISCOUNT AND LOANS, NET (Notes 4, 5, 13, 41 and 42) 781,918,923 59 750,309,439 60 712,005,897 60 AVAILABLE-FOR-SALE FINANCIAL ASSETS (Notes 4, 9, 14 and 42) 56,309,091 4 51,061,892 4 32,704,993 3 HELD-TO-MATURITY FINANCIAL ASSETS, NET (Notes 4, 14 and 42) 211,578,290 16 217,319,165 18 229,879,924 20 EQUITY INVESTMENTS - EQUITY METHOD, NET (Notes 4 and 15) 15,516,534 1 5,417,496-4,564,911 - OTHER FINANCIAL ASSETS, NET (Notes 4, 16 and 41) 19,924,558 2 8,312,429 1 8,329,171 1 PROPERTY AND EQUIPMENT, NET (Notes 4, 17 and 41) 10,742,005 1 10,894,873 1 11,247,131 1 INTANGIBLE ASSETS, NET (Notes 4 and 18) 1,490,433-1,564,818-951,678 - DEFERRED TAX ASSETS (Notes 4, 5 and 29) 1,649,751-1,789,067-2,306,592 - OTHER ASSETS, NET (Notes 4, 19 and 41) 1,103,212-1,624,434-1,060,030 - TOTAL $ 1,327,807,305 100 $ 1,242,676,528 100 $ 1,182,639,140 100 LIABILITIES AND EQUITY DEPOSITS FROM THE CENTRAL BANK AND BANKS (Note 20) $ 87,282,453 7 $ 69,989,084 6 $ 66,166,811 5 FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS (Notes 4, 8 and 41 ) 11,831,968 1 8,671,057 1 7,309,754 1 DERIVATIVE FINANCIAL LIABILITIES FOR HEDGING (Notes 4 and 10) 3,789-22,576-54,319 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (Notes 4, 9, 21 and 41) 451,771-1,201,450-7,071,871 1 PAYABLES (Notes 22, 27, 30 and 41) 16,631,252 1 21,376,897 2 19,088,655 2 CURRENT TAX LIABILITIES (Notes 4, 29 and 41) 724,735-271,459-17,989 - DEPOSITS AND REMITTANCES (Notes 23 and 41) 1,065,373,051 80 1,008,785,799 81 963,100,250 81 BANK DEBENTURES (Notes 4 and 24) 45,087,336 3 43,001,812 4 37,027,843 3 OTHER FINANCIAL LIABILITIES (Note 25) 6,721,787 1 5,684,826-7,565,838 1 PROVISIONS (Notes 4, 5, 26 and 27) 2,754,549-2,738,274-2,767,122 - DEFERRED TAX LIABILITIES (Notes 4, 5 and 29) 827,807-826,270-819,136 - OTHER LIABILITIES (Notes 28 and 41) 2,564,895-1,856,217-1,987,378 - Total liabilities 1,240,255,393 93 1,164,425,721 94 1,112,976,966 94 EQUITY Share capital Ordinary shares 59,616,160 5 53,862,022 4 52,574,469 4 Capital surplus Additional paid-in capital in excess of par 2,335,205-2,335,205-1,884,561 - Capital surplus from business combination 8,076,524 1 8,076,524 1 8,076,524 1 Others 1,733-1,733-1,733 - Total capital surplus 10,413,462 1 10,413,462 1 9,962,818 1 Retained earnings Legal reserve 7,616,601-5,150,542-4,411,447 1 Special reserve 367,188-367,188-367,188 - Unappropriated earnings 9,665,834 1 8,326,111 1 2,451,634 - Total retained earnings 17,649,623 1 13,843,841 1 7,230,269 1 Other equity (127,333) - 131,482 - (105,382) - Total equity 87,551,912 7 78,250,807 6 69,662,174 6 TOTAL $ 1,327,807,305 100 $ 1,242,676,528 100 $ 1,182,639,140 100 The accompanying notes are an integral part of the financial statements. - 2 -
BANK SINOPAC STATEMENTS OF COMPREHENSIVE INCOME (In Thousands of New Taiwan Dollars, Except Per Share Amounts) Percentage For the Years Ended December 31 Increase 2013 (Decrease) Amount % Amount % % INTEREST REVENUE $ 23,789,473 95 $ 22,402,755 106 6 LESS: INTEREST EXPENSE 9,994,514 40 9,243,020 44 8 NET INTEREST (Notes 4, 31 and 41) 13,794,959 55 13,159,735 62 5 NET REVENUES OTHER THAN INTEREST (Note 4) Commission and fee revenues, net (Notes 32 and 41) 4,218,483 17 3,476,744 16 21 Gains on financial assets and liabilities at fair value through profit or loss (Notes 33 and 41) 4,102,807 16 2,688,638 13 53 Realized gains on available-for-sale financial assets (Note 34) 11,097-6,989-59 Foreign exchange gains, net 1,398,512 5 291,611 1 380 Impairment losses on assets (Notes 5 and 35) (70,298) - (258,288) (1) (73) Share of profit of subsidiaries (Note 15) 1,191,298 5 1,609,106 8 (26) Other noninterest net revenues (Notes 36 and 41) 446,652 2 145,699 1 207 Total net revenues other than interest 11,298,551 45 7,960,499 38 42 TOTAL NET REVENUES 25,093,510 100 21,120,234 100 19 ALLOWANCE FOR DOUBTFUL ACCOUNTS AND GUARANTEES 2,092,031 9 394,862 2 430 OPERATING EXPENSES Employee benefits (Notes 4, 5 and 37) 7,408,553 30 7,014,394 33 6 Depreciation and amortization (Notes 4 and 38) 613,942 2 517,616 2 19 Others (Notes 39 and 41) 4,287,610 17 3,776,083 18 14 Total operating expenses 12,310,105 49 11,308,093 53 9 (Continued) - 3 -
BANK SINOPAC STATEMENTS OF COMPREHENSIVE INCOME (In Thousands of New Taiwan Dollars, Except Per Share Amounts) Percentage For the Years Ended December 31 Increase 2013 (Decrease) Amount % Amount % % INCOME BEFORE INCOME TAX $ 10,691,374 42 $ 9,417,279 45 14 INCOME TAX EXPENSE (Notes 4, 5 and 29) 1,088,465 4 1,069,213 5 2 NET INCOME 9,602,909 38 8,348,066 40 15 OTHER COMPREHENSIVE INCOME Unrealized valuation (losses) gains on available-for-sale financial assets (188,305) (1) 221,203 1 (185) Cash flow hedges 18,787-28,636 - (34) Actuarial loss arising from defined benefit plans (51,794) - (11,973) - 333 Share of other comprehensive income of subsidiaries (103,739) - (9,768) - 962 Income tax relating to the components of other comprehensive income (Notes 4, 5 and 28) 23,247 - (1,172) - 2,084 Other comprehensive income for the period, net of income tax (301,804) (1) 226,926 1 (233) TOTAL COMPREHENSIVE INCOME FOR THE YEAR $ 9,301,105 37 $ 8,574,992 41 8 EARNINGS PER SHARE (Note 40) Basic $ 1.61 $ 1.42 The accompanying notes are an integral part of the financial statements. (Concluded) - 4 -
BANK SINOPAC STATEMENTS OF CHANGES IN EQUITY (In Thousands of New Taiwan Dollars) Other Equity Exchange Unrealized Differences on Gain (Loss) on Translating Available- Share Capital (Note 30) Retained Earnings (Note 30) Foreign for- sale Cash Shares in Capital Surplus Unappropriated Operations Financial Assets Flow Hedges Thousand Amount (Note 30) Legal Reserve Special Reserve Earning Total (Notes 4 and 30) (Notes 4 and 30) (Notes 4 and 30) Total Total Equity BALANCE AT JANUARY 1, 5,257,447 $ 52,574,469 $ 9,962,818 $ 4,411,447 $ 367,188 $ 2,451,634 $ 7,230,269 $ (215,972) $ 153,096 $ (42,506) $ (105,382) $ 69,662,174 Appropriation of 2011 earnings Legal reserve - - - 739,095 - (739,095) - - - - - - Cash dividends - - - - - (1,724,556) (1,724,556) - - - - (1,724,556) Net profit for the year ended - - - - - 8,348,066 8,348,066 - - - - 8,348,066 Other comprehensive income for the year ended - - - - - (9,938) (9,938) 4,356 208,740 23,768 236,864 226,926 Total comprehensive income for the year ended - - - - - 8,338,128 8,338,128 4,356 208,740 23,768 236,864 8,574,992 Capital raising 128,755 1,287,553 450,644 - - - - - - - - 1,738,197 BALANCE AT DECEMBER 31, 5,386,202 53,862,022 10,413,462 5,150,542 367,188 8,326,111 13,843,841 (211,616) 361,836 (18,738) 131,482 78,250,807 Appropriation of earnings Legal reserve - - - 2,466,059 - (2,466,059) - - - - - - Stock dividends 575,414 5,754,138 - - - (5,754,138) (5,754,138) - - - - - Net profit for the year ended 2013 - - - - - 9,602,909 9,602,909 - - - - 9,602,909 Other comprehensive income for the year ended 2013 - - - - - (42,989) (42,989) (1,159) (273,249) 15,593 (258,815) (301,804) Total comprehensive income for the year ended 2013 - - - - - 9,559,920 9,559,920 (1,159) (273,249) 15,593 (258,815) 9,301,105 BALANCE AT DECEMBER 31, 2013 5,961,616 $ 59,616,160 $ 10,413,462 $ 7,616,601 $ 367,188 $ 9,665,834 $ 17,649,623 $ (212,775) $ 88,587 $ (3,145) $ (127,333) $ 87,551,912 The accompanying notes are an integral part of the financial statements. - 5 -
BANK SINOPAC STATEMENTS OF CASH FLOWS (In Thousands of New Taiwan Dollars) For the Years Ended December 31 2013 CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax $ 10,691,374 $ 9,417,279 Adjustments for: Depreciation expenses 444,787 442,798 Amortization expenses 169,155 74,818 Allowance for doubtful accounts 3,114,376 1,171,062 Interest expenses 9,994,514 9,243,020 Interest revenues (23,789,473) (22,402,755) Dividend revenues (57,210) (51,839) Net change in provisions for losses on guarantees (11,378) 80,502 Net change in other provisions 6,904 3,895 Share of profit of subsidiaries (1,191,298) (1,609,106) (Gains from) losses on disposal of property and equipment (195,140) 4,799 Gains from disposal of investments (10,641) (6,912) Impairment losses on financial assets 74,957 257,828 (Reversal gains) impairment losses on non-financial assets (4,659) 460 Losses on (gains from) disposal of collaterals assumed 1,272 (4,540) Changes in operating assets and liabilities Decrease (increase) in due from the central banks and call loans to other banks 8,576,363 (9,642,578) Decrease in financial assets at fair value through profit or loss 1,640,345 5,777,993 Increase in receivables (57,065,955) (10,701,007) Increase in discounts and loans (34,611,036) (39,226,726) Increase in deposits from the central bank and banks 17,293,369 3,822,273 Increase in financial liabilities at fair value through profit or loss 3,160,911 1,361,303 (Decrease) increase in payables (4,449,026) 2,394,890 Increase in deposits and remittances 56,587,252 45,685,549 Decrease in provision for employee benefits (31,468) (124,903) Net cash used in operations (9,661,705) (4,031,897) Interest received 23,798,939 22,217,844 Dividend received 876,044 637,285 Interest paid (10,080,944) (9,201,217) Income tax paid (79,623) (52,099) Net cash generated from operating activities 4,852,711 9,569,916 CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of available-for-sale financial assets (445,637,932) (440,781,876) Proceeds from disposal of available-for-sale financial assets 429,956,762 422,524,062 Acquisition of held-to-maturity financial assets (1,830,097,021) (1,780,758,486) Proceeds from redemption of held-to-maturity financial assets 1,845,995,029 1,793,320,178 Proceeds from capital reduction of financial assets measured at cost 12,500 2,815 Acquisition of equity investments (9,714,624) - Acquisition of property and equipment (434,670) (628,807) (Continued) - 6 -
BANK SINOPAC STATEMENTS OF CASH FLOWS (In Thousands of New Taiwan Dollars) For the Years Ended December 31 2013 Proceeds from disposal of property and equipment $ 287,061 $ 111 Proceeds from disposal of collaterals assumed 15,466 35,794 Increase in other financial assets (11,629,074) (221,811) Increase in other assets (146,458) (987,681) Net cash used in investing activities (21,392,961) (7,495,701) CASH FLOWS FROM FINANCING ACTIVITIES Bank debentures issued 3,497,948 5,996,840 Repayment of bank debentures on maturity (1,400,000) - Decrease in securities sold under agreements to repurchase (749,679) (5,870,421) Increase (decrease) in other financial liabilities 1,036,961 (1,881,012) Increase (decrease) in other liabilities 708,678 (131,161) Cash dividends - (1,724,556) Capital raising - 1,738,197 Net cash generated from (used in) financing activities 3,093,908 (1,872,113) EFFECTS OF EXCHANGE RATE CHANGES ON THE BALANCE OF CASH HELD IN FOREIGN CURRENCIES 36,912 99,050 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (13,409,430) 301,152 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 64,434,931 64,133,779 CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $ 51,025,501 $ 64,434,931 Reconciliation of the amounts in the statement of cash flows with the equivalent items reports in the balance sheets as of 2013 and : December 31 2013 Cash and cash equivalents in balance sheets $ 23,545,074 $ 18,633,817 Due from the Central Bank and call loans to other banks reclassified as cash and cash equivalents under IAS 7 Statement of Cash Flows 27,480,427 45,565,108 Securities purchased under agreement to resell reclassified as cash and cash equivalents under IAS 7 Statement of Cash Flows - 236,006 Cash and cash equivalents in statements of cash flows $ 51,025,501 $ 64,434,931 The accompanying notes are an integral part of the financial statements. (Concluded) - 7 -
BANK SINOPAC NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND (In Thousands of New Taiwan Dollars, Unless Otherwise Stated) 1. ORGANIZATION August 8, 1991 January 28, 1992 May 9, 2002 December 26, 2005 May 8, 2006 November 13, 2006 June 1, 2009 Bank SinoPac (the Bank ) obtained government approval to incorporate. The Bank started operations. The Bank swap shares with SinoPac Securities Corporation and SinoPac Securities Co., Ltd. (the SPS ) to establish SinoPac Financial Holdings Company Limited (the SPH ), a financial holding company, resulting in the Bank becoming an unlisted wholly owned subsidiary of SPH, the ultimate parent company of SPH. SPH finished the merger with International Bank of Taipei Co., Ltd. (IBT), through a 100% share swap. The boards of directors of IBT resolved to transfer credit card business and related assets and liabilities to SinoPac Card Services Co., Ltd. ( SinoPac Card ). The transaction has been approved by the authorities on June 22, 2006 and the assets have been transferred at the book value of $5,171,080 on August 4, 2006. The preliminary effective date of the share swap and merger. The Bank acquired the assets and liabilities of IBT through a share swap at ratio of 1.175 shares of the Bank to swap for 1 share of IBT. The Bank s cash merger with SinoPac Card took effect, with this merger amounting to $3,873,675. Under this merger, the Bank was the surviving entity. The Bank s ultimate parent and controller is SinoPac Holdings which holds 100% ordinary shares of the Bank. The functional currency of the Bank is New Taiwan dollars. The financial statements are presented in New Taiwan dollars. 2. APPROVAL OF FINANCIAL STATEMENTS The financial statements were approved by the board of directors on February 27, 2014. - 8 -
3. APPLICATION OF NEW, AMENDED AND REVISED STANDARDS AND INTERPRETATIONS a. New, amended and revised standards and interpretations (the New IFRSs ) in issue but not yet effective The Bank has not applied the following International Financial Reporting Standards (IFRS), International Accounting Standards (IAS), Interpretations of IFRS (IFRIC), and Interpretations of IAS (SIC) issued by the IASB. As of the date that the financial statements were authorized for issue, the Financial Supervisory Commission (the FSC ) has not announced the effective dates for the following new, amended and revised standards and interpretations (the New IFRSs ). On January 28, 2014, the Financial Supervisory Commission (FSC) announced the framework for the adoption of updated IFRSs version in the ROC. Under this framework, starting January 1, 2015, the previous version of IFRSs endorsed by the FSC (the 2010 IFRSs version) currently applied by companies with shares listed on the Taiwan Stock Exchange or traded on the Taiwan GreTai Securities Market, Emerging Stock Market or financial institutions governed by FSC will be replaced by the updated IFRSs without IFRS 9 (the 2013 IFRSs version). However, as of the date that the financial statements were authorized for issue, the FSC has not endorsed the following new, amended and revised standards and interpretations issued by the IASB (the New IFRSs ) included in the 2013 IFRSs version. Furthermore, the FSC has not announced the effective date for the following New IFRSs that are not included in the 2013 IFRSs version. The New IFRSs Included in the 2013 IFRSs Version Not Yet Endorsed by the FSC Effective Date Announced by IASB (Note 1) Improvements to IFRSs (2009) - amendment to IAS 39 January 1, 2009 and January 1, 2010, as appropriate Amendment to IAS 39 Embedded Derivatives Effective for annual periods ending on or after June 30, 2009 Improvements to IFRSs (2010) July 1, 2010 and January 1, 2011, as appropriate Annual Improvements to IFRSs 2009-2011 Cycle January 1, 2013 Amendment to IFRS 1 Limited Exemption from Comparative IFRS 7 July 1, 2010 Disclosures for First-time Adopters Amendment to IFRS 1 Severe Hyperinflation and Removal of Fixed July 1, 2011 Dates for First-time Adopters Amendment to IFRS 1 Government Loans January 1, 2013 Amendment to IFRS 7 Disclosure - Offsetting Financial Assets and January 1, 2013 Financial Liabilities Amendment to IFRS 7 Disclosure - Transfer of Financial Assets July 1, 2011 IFRS 10 Consolidated Financial Statements January 1, 2013 IFRS 11 Joint Arrangements January 1, 2013 IFRS 12 Disclosure of Interests in Other Entities January 1, 2013 Amendments to IFRS 10, IFRS 11 and IFRS 12 Consolidated January 1, 2013 Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance Amendments to IFRS 10 and IFRS 12 and IAS 27 Investment January 1, 2014 Entities IFRS 13 Fair Value Measurement January 1, 2013 Amendment to IAS 1 Presentation of Other Comprehensive Income July 1, Amendment to IAS 12 Deferred Tax: Recovery of Underlying January 1, Assets IAS 19 (Revised 2011) Employee Benefits January 1, 2013 IAS 27 (Revised 2011) Separate Financial Statements January 1, 2013 (Continued) - 9 -
The New IFRSs Included in the 2013 IFRSs Version Not Yet Endorsed by the FSC Effective Date Announced by IASB (Note 1) IAS 28 (Revised 2011) Investments in Associates and Joint January 1, 2013 Ventures Amendment to IAS 32 Offsetting Financial Assets and Financial January 1, 2014 Liabilities IFRIC 20 Stripping Costs in Production Phase of a Surface Mine January 1, 2013 (Concluded) The New IFRSs Not Included in the 2013 IFRSs Version Effective Date Announced by IASB (Note 1) Annual Improvements to IFRSs 2010- Cycle July 1, 2014 (Note 2) Annual Improvements to IFRSs 2011-2013 Cycle July 1, 2014 IFRS 9 Financial Instruments Effective date not determined Amendments to IFRS 9 and IFRS 7 Mandatory Effective Date of Effective date not determined IFRS 9 and Transition Disclosures IFRS 14 Regulatory Deferral Account January 1, 2016 Amendment to IAS 19 Defined Benefit Plans: Employee July 1, 2014 Contributions Amendment to IAS 36 Impairment of Assets: Recoverable Amount January 1, 2014 Disclosures for Non-financial Assets Amendment to IAS 39 Novation of Derivatives and Continuation of January 1, 2014 Hedge Accounting IFRIC 21 Levies January 1, 2014 Note 1: Unless stated otherwise, the above New IFRSs are effective for annual periods beginning on or after the respective effective dates. Note 2: The amendment to IFRS 2 applies to share-based payment transactions for which the grant date is on or after July 1, 2014; the amendment to IFRS 3 applies to business combinations for which the acquisition date is on or after July 1, 2014; the amendment to IFRS 13 is effective immediately; the remaining amendments are effective for annual periods beginning on or after July 1, 2014. b. Significant impending changes in accounting policy resulted from New IFRSs in issue but not yet effective Except for the following, the initial application of the above New IFRSs has not had any material impact on the Bank s accounting policies: 1) IFRS 9 Financial Instruments Recognition and measurement of financial assets With regards to financial assets, all recognized financial assets that are within the scope of IAS 39 Financial Instruments: Recognition and Measurement are subsequently measured at amortized cost or fair value. Specifically, financial assets that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortized cost at the end of subsequent accounting periods. All other financial assets are measured at their fair values at the end of reporting period. However, the Bank may make an irrevocable election to present subsequent changes in the fair value of an equity investment (that is not held for trading) in other comprehensive income, with only dividend income generally recognized in profit or loss. - 10 -
Recognition and measurement of financial liabilities As for financial liabilities, the main changes in the classification and measurement relate to the subsequent measurement of financial liabilities designated as at fair value through profit or loss. The amount of change in the fair value of such financial liability attributable to changes in the credit risk of that liability is presented in other comprehensive income and the remaining amount of change in the fair value of that liability is presented in profit or loss, unless the recognition of the effects of changes in the liability's credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability's credit risk are not subsequently reclassified to profit or loss. If the above accounting treatment would create or enlarge an accounting mismatch in profit or loss, the Bank presents all gains or losses on that liability in profit or loss. Hedge accounting The main changes in hedge accounting amended the application requirements for hedge accounting to better reflect the entity s risk management activities. Compared with IAS 39, the main changes include: (1) enhancing types of transactions eligible for hedge accounting, specifically broadening the risk eligible for hedge accounting of non-financial items; (2) changing the way hedging derivative instruments are accounted for to reduce profit or loss volatility; and (3) replacing retrospective effectiveness assessment with the principle of economic relationship between the hedging instrument and the hedged item. Effective date The mandatory effective date of IFRS 9, which was previously set at January 1, 2015, was removed and will be reconsidered once the standard is complete with a new impairment model and finalization of any limited amendments to classification and measurement. 2) IFRS 13 Fair Value Measurement IFRS 13 establishes a single source of guidance for fair value measurements. It defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements. The disclosure requirements in IFRS 13 are more extensive than those required in the current standards. For example, quantitative and qualitative disclosures based on the three-level fair value hierarchy currently required for financial instruments only will be extended by IFRS 13 to cover all assets and liabilities within its scope. 3) Revision to IAS 19 Employee Benefits Revision in 2011 To the extent that the benefits are already vested immediately following the changes to a defined benefit plan, an entity shall recognize past service cost immediately. An entity shall recognize past service cost as an expense on a straight-line basis over the average period until the benefits become vested. Amendment in 2013 Past service cost is recognized as an expense wholly when it occurs. - 11 -
4) Amendment to IAS 36 Recoverable Amount Disclosures for Non-financial Assets In issuing IFRS 13 Fair Value Measurement, the IASB made consequential amendment to the disclosure requirements in IAS 36 Impairment of Assets, introducing a requirement to disclose in every reporting period the recoverable amount of an asset or each cash-generating unit. The amendment clarifies that such disclosure of recoverable amounts is required only when an impairment loss has been recognized or reversed during the period. Furthermore, the Bank is required to disclose the discount rate used in measurements of the recoverable amount based on fair value less costs of disposal measured using a present value technique. c. Significant impending changes in accounting policy resulted from the amendments to the Regulations Governing the Preparation of Financial Reports by Securities Issuers in issue but not yet effective The Bank is in the process of estimating the impact of the initial application of the Standards, Amendments and Interpretations on its financial position and results of operations. Disclosures will be provided until a detailed review of the impact has been completed. 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICY The financial statements for the year ended 2013 is its first IFRS financial statements prepared in accordance with the Regulations Governing the Preparation of Financial Reports by Public Banks and Criteria Governing the Preparation of Financial Reports by Securities Firms. Statement of Compliance The financial statements have been prepared in accordance with Criteria Governing the Preparation of Financial Reports by Public Banks, Criteria Governing the Preparation of Financial Reports by Securities Firms, and the guidelines issued by the authority (the Regulations ). Basis of Preparation The financial statements have been prepared on the historical cost basis except for certain properties and financial instruments that are measured at revalued amounts or fair values, as explained in the accounting policies below. Historical cost is generally based on the fair value of the consideration given in exchange for assets. When preparing its financial statements, the Bank used equity method to account for its investment in subsidiaries. In order for the amounts of the net profit for the year, other comprehensive income for the year and total equity in the financial statements to be the same with the amounts attributable to the owner of the Bank in its consolidated financial statements, adjustments arising from the differences in accounting treatment between basis and consolidated basis were made to equity investment - equity method, share of profit or loss of subsidiaries and share of other comprehensive income of subsidiaries and related equity items, as appropriate, in the financial statements. Since the operating cycle in the banking industry cannot be reasonably identified, the accounts included in the financial statements were not classified as current or noncurrent. Nevertheless, accounts were properly categorized in accordance with the nature of each account and sequenced by their liquidity. Please refer to Note 45 for the maturity analysis of assets and liabilities. The significant accounting policies are set out as below. Principles for Preparing Financial Statements The accompanying financial statements include the accounts of the Head Office, OBU, all branches and the representative office. All interoffice transactions and balances have been eliminated. - 12 -
Foreign Currencies In preparing the financial statements of the Bank, transactions in currencies other than the Bank s functional currency (foreign currencies) are recognized at the rates of exchange prevailing at the dates of the transactions. Functional currency is the currency of the primary economic environment in which the entity operates. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items measured at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences arising from settlement or translation are recognized in profit or loss. Exchange differences arising on the retranslation of non-monetary assets (such as equity instruments) or liabilities measured at fair value are included in profit or loss for the period at the rates prevailing at the end of reporting period except for exchange differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognized directly in other comprehensive income, in which case, the exchange differences are also recognized directly in other comprehensive income. For the purposes of presenting the financial statements, the assets and liabilities of the Bank s foreign operations are translated into New Taiwan dollars using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising are recognized in other comprehensive income. Investments Accounted for Using Equity Method The Bank uses equity method of accounting on investment of subsidiaries. The subsidiaries are the entities controlled by the Bank. Under the equity method, the investment is initially recognized at cost and the carrying amount is increased or decreased to recognize the Bank 's share of the profit or loss and other comprehensive income of the subsidiary after the date of acquisition. Besides, the Bank also recognizes the Bank s share of the change in other equity of the subsidiary. When the Bank s share of losses of a subsidiary equals or exceeds its interest in that subsidiary (which includes any carrying amount of the investment in subsidiary accounted for by the equity method and long-term interests that, in substance, form part of the Bank s net investment in the subsidiary), the Bank continues recognizing its share of further losses. The acquisition cost in excess of the acquisition-date fair value of the identifiable net assets acquired is recognized as goodwill. Goodwill is not amortized. Profits and losses from downstream transactions with a subsidiary are eliminated in full. Profits and losses from upstream with a subsidiary and side stream transactions between subsidiaries are recognized in the financial statements only to the extent of interests in the subsidiary that are not related to the Bank. Financial Instruments Financial assets and financial liabilities are recognized when the Bank becomes a party to the contractual provisions of the instruments. - 13 -
Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss. Financial assets All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis. a. Measurement category Financial assets are classified into the following specified categories: Financial assets at fair value through profit or loss, held-to-maturity investments, available-for-sale financial assets and loans and receivables. 1) Financial assets at fair value through profit or loss Financial assets are classified as at fair value through profit or loss when the financial asset is either held for trading or it is designated as at fair value through profit or loss. A Financial asset is classified as designated as at fair value through profit or loss if: a) Such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; b) The financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Bank s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or c) A contract contains one or more embedded derivatives, the entire hybrid (combined) contract can be designated as a whole. Financial assets at fair value through profit or loss are stated at fair value. The net gain or loss which incorporates any dividend or interest earned on the financial asset recognized in profit or loss. 2) Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated as available-for-sale or are not classified as loans and receivables, held-to-maturity investments or financial assets at fair value through profit or loss. Fair value is determined in the manner described in Note 44. Available-for-sale financial assets are measured at fair value. Changes in the carrying amount of available-for-sale monetary financial assets relating to changes in foreign currency exchange rates, interest income calculated using the effective interest method and dividends on available-for-sale equity investments are recognized in profit or loss. Other changes in the carrying amount of available-for-sale financial assets are recognized in other comprehensive income. When the investment is disposed of or is determined to be impaired, the cumulative gain or loss that previously accumulated in the investments revaluation reserve is reclassified to profit or loss. - 14 -
The effective interest method is a method of calculating the amortized cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or, where appropriate, a shorter period, to the net carrying amount on initial recognition. Dividends on available-for-sale equity instruments are recognized in profit or loss when the Bank s rights to receive the dividends are established. Available-for-sale equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity investments are measured at cost less any identified impairment loss at the end of each reporting period and are recognized in a separate line item as financial assets carried at cost. If, in a subsequent period, the fair value of the financial assets cannot be reliably measured, the financial assets are remeasured at fair value. The difference between carrying amount and fair value is recognized in other comprehensive income on financial assets and recognized in profit or loss when impairment loss is identified. 3) Held-to-maturity investments Held-to-maturity investments are investments with specific ratings that the Bank has the positive intent and ability to hold to maturity such as corporate bonds and governments bonds. Subsequent to initial recognition, held-to-maturity investments are measured at amortized cost using the effective interest method less any impairment. 4) Loans and receivables Loans and receivables are measured at amortized cost using the effective interest method, less any impairment. Interest income is recognized by applying the effective interest rate, except for short-term receivables when the effect of discounting is immaterial. b. Impairment of financial assets Financial assets, other than those at fair value through profit or loss, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected. In determining the allowance for credit losses and provision for losses on guarantees, the Bank assesses the collectability of discounts and loans, receivables, and other financial assets, as well as guarantees and acceptances as of the balance sheet date. Loans and receivables are assessed for impairment at the end of each reporting period and considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the foregoing discounts and loans, receivables, and other financial assets, the estimated future cash flows of the asset have been affected. Objective evidence of impairment could include: Significant financial difficulty of the debtor; The foregoing discounts and loans, receivables, and other financial assets becoming overdue; or Probability that the debtor will enter into bankruptcy or undergo financial reorganization. Discounts and loans, receivables, and other financial assets that are assessed as not impaired individually are further assessed for impairment on a collective basis. Objective evidence of - 15 -
impairment for a portfolio of discounts and loans, receivables, and other financial assets could include the Bank s past experience of collecting payments and an increase in the number of delayed payments, as well as observable changes in national or local economic conditions that correlate with defaults on loans and receivables. The amount of the impairment loss recognized is the difference between the asset carrying amount and the present value of estimated future cash flows, after taking into account the related collaterals and guarantees, discounted at the original effective interest rates. The carrying amount of the discounts and loans, receivables, and other financial assets is reduced through the use of an allowance account. Under the Regulations Governing the Procedures for Banking Institutions to Evaluate Assets and Deal with Nonperforming/Nonaccrual Loans (the NPL Regulations ), the Bank evaluates credit losses on the basis of the estimated collectability. In accordance with the NPL Regulations, credit assets are classified as normal assets, assets that require special mentioned, assets with substandard, assets with doubtful collectability, and assets on which there is loss. Based on the above NPL Regulations, the minimum allowance for credit losses and provision for losses on guarantees for the assets that require special mentioned, assets that are substandard, assets with doubtful collectability, and assets on which there is loss were 2%, 10%, 50% and 100%, respectively of outstanding. Effective January 1, 2011, however, under an amendment to the NPL Regulations, the minimum provisions for possible losses should be the sum of (a) 0.5% of the outstanding balance of normal on-and off-balance sheet credit assets (excluding assets that represent claims against an ROC government agency) and (b) 0.5% of the foregoing provisions for unsound credit assets. The minimum loan loss provision and reserves against liability on guarantees of normal credit assets should be allocated sufficiently within three years of the execution of the amendment. In addition, under Financial Supervisory Commission (FSC) guidelines No. 10010006830 there should be a provision at more than 1% of sum of a minimum allowance for credit losses and the provision for losses on guarantees. For available-for-sale equity investments, a significant or prolonged decline in the fair value of the security below its cost is considered to be objective evidence of impairment. When an available-for-sale financial asset is considered to be impaired, cumulative gains or losses previously recognized in other comprehensive income are reclassified to profit or loss in the period. In respect of available-for-sale equity securities, impairment loss previously recognized in profit or loss are not reversed through profit or loss. Any increase in fair value subsequent to an impairment loss is recognized in other comprehensive income and accumulated under the heading of investments revaluation reserve. In respect of available-for-sale debt securities, impairment loss are subsequently reversed through profit or loss if an increase in the fair value of the investment can be objectively related to an event occurring after the recognition of the impairment loss. For financial assets that are carried at cost, the amount of the impairment loss is measured as the difference between the asset s 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 will not be reversed in subsequent periods. The carrying amount of the financial asset is reduced through the use of an allowance account or accumulated impairment account. When those financial assets are considered uncollectible, they are written off against the allowance account and accumulated impairment account. Subsequent recoveries of amounts previously written off are debited against the bad debt expense or credited against the allowance account in according with Criteria Governing the Preparation of Financial Reports by Public Banks. - 16 -
c. Derecognition of financial assets The Bank derecognizes a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another party. On derecognition of a financial asset in its entirety, the difference between the asset s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognized in other comprehensive income and accumulated in equity is recognized in profit or loss. Financial liabilities and equity instruments Debt and equity instruments issued by the Bank are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument. Equity and debt instruments are recognized at the proceeds received, net of direct issue costs. a. Measurement and recognition Except the following situation, all the financial liabilities are measured at amortized cost using the effective interest method (see above for the definition of effective interest method): Financial liabilities at fair value through profit or loss Financial liabilities are classified as at fair value through profit or loss when the financial liability is either held for trading or it is designated as at fair value through profit or loss. A financial liability is classified as designated as at fair value through profit or loss if: 1) Such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; 2) The financial liability forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Bank s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or 3) The contract contains one or more embedded derivatives, so that the entire hybrid (combined) contract can be designated at fair value through profit or loss. Financial liabilities at fair value through profit or loss are stated at fair value. The net gain or loss recognized in profit or loss incorporates any dividends paid on the financial liability. Fair value is determined in the manner described in Note 44. b. Derecognition of financial liabilities The difference between the carrying amount of the financial liability derecognized and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognized in profit or loss. Financial Guarantee Contracts Financial guarantee contracts issued by the Bank is initially recognized at their fair values and, if not designated as at fair value through profit or loss, are subsequently measured at amortized cost. - 17 -
If obligation of a financial guarantee contract will most likely to be paid, it will be measured at the higher of the best estimate or the amortized amount of the obligation under the contract. Derivative Financial Instruments and Hedge Accounting Derivatives are initially recognized at fair value at the date the derivative contracts are entered into and are subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is recognized in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship. When the fair value of derivative financial instruments is positive, the derivative is recognized as a financial asset; when the fair value of derivative financial instruments is negative, the derivative is recognized as a financial liability. Derivatives embedded in non-derivative host contracts are treated as separate derivatives when they meet the definition of a derivative, their risks and characteristics are not closely related to those of the host contracts and the contracts are not measured at fair value through profit or loss. The Bank designates certain hedging instruments as either fair value hedges or cash flow hedges. a. Fair value hedges Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognized in profit or loss immediately, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The change in the fair value of the hedging instrument and the change in the hedged item attributable to the hedged risk are recognized in profit or loss in the line item relating to the hedged item. Hedge accounting is discontinued prospectively when the Bank revokes the designated hedging relationship, or when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer meets the criteria for hedge accounting. b. Cash flow hedges The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in profit or loss. The associated gains or losses that were recognized in other comprehensive income are reclassified from equity to profit or loss as a reclassification adjustment in the line item relating to the hedged item in the same period when the hedged item affects profit or loss. If a hedge of a forecast transaction subsequently results in the recognition of a non-financial asset or a non-financial liability, the associated gains and losses that were recognized in other comprehensive income are removed from equity and are included in the initial cost of the non-financial asset or non-financial liability. Hedge accounting is discontinued prospectively when the Bank revokes the designated hedging relationship, or when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer meets the criteria for hedge accounting. The cumulative gain or loss on the hedging instrument that has been previously recognized in other comprehensive income from the period when the hedge was effective remains separately in equity until the forecast transaction occurs. When a forecast transaction is no longer expected to occur, the gain or loss accumulated in equity is recognized immediately in profit or loss. Repurchase and Reverse Repurchase Transactions Securities purchased under agreements to resell (reverse repurchase) agreements and securities sold under agreements to repurchase are generally treated as collateralized financing transactions. Interest earned on - 18 -