1934 Act Registration No. 1-14700

 

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 6-K

 

 

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16 OF

THE SECURITIES EXCHANGE ACT OF 1934

For the month of November 2018

 

 

Taiwan Semiconductor Manufacturing Company Ltd.

(Translation of Registrant’s Name Into English)

 

 

No. 8, Li-Hsin Rd. 6,

Hsinchu Science Park,

Taiwan

(Address of Principal Executive Offices)

 

 

(Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.)

Form 20-F  ☒            Form 40-F  ☐

(Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.)

Yes  ☐            No  ☒

(If “Yes” is marked, indicated below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82:             .)

 

 

 

---

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

				Taiwan Semiconductor Manufacturing Company Ltd.
Date: November 16, 2018				By		/s/ Lora Ho
						Lora Ho
						Senior Vice President & Chief Financial Officer

---

		Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries
		Consolidated Financial Statements for the Nine Months Ended September 30, 2018 and 2017 and Independent Auditors’ Review Report

---

INDEPENDENT AUDITORS’ REVIEW REPORT

The Board of Directors and Shareholders

Taiwan Semiconductor Manufacturing Company Limited

Introduction

We have reviewed the accompanying consolidated balance sheets of Taiwan Semiconductor Manufacturing Company Limited and its subsidiaries (collectively, the “Company”) as of September 30, 2018 and 2017, the related consolidated statements of comprehensive income for the three months ended September 30, 2018 and 2017 and for the nine months ended September 30, 2018 and 2017, the consolidated statements of changes in equity and cash flows for the nine months then ended, and the related notes to the consolidated financial statements, including a summary of significant accounting policies (collectively referred to as the “consolidated financial statements”). Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with the Regulations Governing the Preparation of Financial Reports by Securities Issuers and International Accounting Standard 34 “Interim Financial Reporting” endorsed and issued into effect by the Financial Supervisory Commission of the Republic of China. Our responsibility is to express a conclusion on the consolidated financial statements based on our reviews.

Scope of Review

We conducted our reviews in accordance with Statement of Auditing Standards No. 65 “Review of Financial Information Performed by the Independent Auditor of the Entity”. A review of consolidated financial statements consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our reviews, nothing has come to our attention that caused us to believe that the accompanying consolidated financial statements do not present fairly, in all material respects the consolidated financial position of the Company as of September 30, 2018 and 2017, its consolidated financial performance for the three months ended September 30, 2018 and 2017, and its consolidated financial performance and its consolidated cash flows for the nine months ended September 30, 2018 and 2017 in accordance with the Regulations Governing the Preparation of Financial Reports by Securities Issuers and International Accounting Standard 34 “Interim Financial Reporting” endorsed and issued into effect by the Financial Supervisory Commission of the Republic of China.

 

- 1 -

---

The engagement partners on the reviews resulting in this independent auditors’ review report are Mei Yen Chiang and Yu Feng Huang.

 

Deloitte & Touche

Taipei, Taiwan

Republic of China

November 13, 2018

Notice to Readers

The accompanying consolidated financial statements are intended only to present the consolidated 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 review such consolidated financial statements are those generally applied in the Republic of China.

For the convenience of readers, the independent auditors’ review report and the accompanying consolidated 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’ review report and consolidated financial statements shall prevail.

 

- 2 -

---

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(In Thousands of New Taiwan Dollars)

 

 

		September 30, 2018 (Reviewed)								December 31, 2017 (Audited)								September 30, 2017 (Reviewed)
		Amount				%				Amount				%				Amount				%
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Note 6)		$	488,732,121				25			$	553,391,696				28			$	408,077,695				22
Financial assets at fair value through profit or loss (Note 7)			4,057,240				—				569,751				—				1,125,668				—
Financial assets at fair value through other comprehensive income (Note 8)			99,214,066				5				—				—				—				—
Available-for-sale financial assets (Note 9)			—				—				93,374,153				5				84,953,011				5
Held-to-maturity financial assets (Note 10)			—				—				1,988,385				—				7,521,216				—
Financial assets at amortized cost (Note 11)			11,891,845				1				—				—				—				—
Hedging derivative financial assets (Note 13)			—				—				34,394				—				98,879				—
Hedging financial assets (Note 13)			124,242				—				—				—				—				—
Notes and accounts receivable, net (Note 14)			127,782,905				7				121,133,248				6				117,649,258				7
Receivables from related parties (Note 34)			1,757,073				—				1,184,124				—				1,076,438				—
Other receivables from related parties (Note 34)			64,385				—				171,058				—				165,929				—
Inventories (Note 15 and 38)			105,336,576				5				73,880,747				4				73,893,879				4
Other financial assets (Note 35)			15,178,774				1				7,253,114				—				5,209,635				—
Other current assets (Note 19)			5,084,478				—				4,222,440				—				5,090,170				—
Total current assets			859,223,705				44				857,203,110				43				704,861,778				38
NONCURRENT ASSETS
Financial assets at fair value through other comprehensive income (Note 8)			5,701,354				—				—				—				—				—
Held-to-maturity financial assets (Note 10)			—				—				18,833,329				1				18,899,177				1
Financial assets at amortized cost (Note 11)			7,470,742				—				—				—				—				—
Financial assets carried at cost (Note 12)			—				—				4,874,257				—				4,986,046				—
Investments accounted for using equity method (Note 16)			16,630,670				1				17,861,488				1				17,018,500				1
Property, plant and equipment (Note 17)			1,048,516,835				53				1,062,542,322				53				1,065,756,867				58
Intangible assets (Note 18)			13,989,184				1				14,175,140				1				14,841,399				1
Deferred income tax assets (Note 4)			14,697,325				1				12,105,463				1				11,237,149				1
Refundable deposits			1,968,751				—				1,283,414				—				1,241,028				—
Other noncurrent assets (Note 19)			1,690,222				—				2,983,120				—				2,582,438				—
Total noncurrent assets			1,110,665,083				56				1,134,658,533				57				1,136,562,604				62
TOTAL		$	1,969,888,788				100			$	1,991,861,643				100			$	1,841,424,382				100
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Short-term loans (Notes 20 and 32)		$	73,974,625				4			$	63,766,850				3			$	54,430,200				3
Financial liabilities at fair value through profit or loss (Note 7)			240,620				—				26,709				—				251,212				—
Hedging derivative financial liabilities (Note 13)			—				—				15,562				—				7,545				—
Hedging financial liabilities (Note 13)			3,750				—				—				—				—				—
Accounts payable			28,733,773				1				28,412,807				1				27,545,477				1
Payables to related parties (Note 34)			1,571,303				—				1,656,356				—				1,442,029				—
Salary and bonus payable			11,937,583				1				14,254,871				1				12,304,052				1
Accrued profit sharing bonus to employees and compensation to directors and supervisors (Notes 24 and 31)			17,789,768				1				23,419,135				1				17,067,133				1
Payables to contractors and equipment suppliers			58,590,057				3				55,723,774				3				47,975,461				3
Income tax payable (Note 4)			39,157,673				2				33,479,311				2				20,663,395				1
Provisions (Note 21)			—				—				13,961,787				1				14,123,509				1
Long-term liabilities - current portion (Note 22)			34,900,000				2				58,401,122				3				59,071,057				3
Accrued expenses and other current liabilities (Notes 23, 25, 32 and 34)			54,731,050				3				65,588,396				3				43,641,234				2
Total current liabilities			321,630,202				17				358,706,680				18				298,522,304				16
NONCURRENT LIABILITIES
Bonds payable (Notes 22 and 32)			56,900,000				3				91,800,000				5				91,800,000				5
Long-term bank loans			—				—				—				—				14,520				—
Deferred income tax liabilities (Note 4)			254,887				—				302,205				—				120,360				—
Net defined benefit liability (Note 4)			8,788,142				—				8,850,704				1				8,574,626				—
Guarantee deposits (Notes 23 and 32)			4,445,580				—				7,586,790				—				9,243,250				1
Others			2,039,976				—				1,855,621				—				1,736,633				—
Total noncurrent liabilities			72,428,585				3				110,395,320				6				111,489,389				6
Total liabilities			394,058,787				20				469,102,000				24				410,011,693				22
EQUITY ATTRIBUTABLE TO SHAREHOLDERS OF THE PARENT
Capital stock (Note 24)			259,303,805				13				259,303,805				13				259,303,805				14
Capital surplus (Note 24)			56,311,659				3				56,309,536				3				56,281,271				3
Retained earnings (Note 24)
Appropriated as legal capital reserve			276,033,811				14				241,722,663				12				241,722,663				13
Appropriated as special capital reserve			26,907,527				1				—				—				—				—
Unappropriated earnings			974,796,321				50				991,639,347				49				892,598,197				49
			1,277,737,659				65				1,233,362,010				61				1,134,320,860				62
Others (Note 24)			(18,181,209	)			(1	)			(26,917,818	)			(1	)			(19,189,089	)			(1	)
Equity attributable to shareholders of the parent			1,575,171,914				80				1,522,057,533				76				1,430,716,847				78
NON - CONTROLLING INTERESTS			658,087				—				702,110				—				695,842				—
Total equity			1,575,830,001				80				1,522,759,643				76				1,431,412,689				78
TOTAL		$	1,969,888,788				100			$	1,991,861,643				100			$	1,841,424,382				100

The accompanying notes are an integral part of the consolidated financial statements.

 

- 3 -

---

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands of New Taiwan Dollars, Except Earnings Per Share)

(Reviewed, Not Audited)

 

 

		For the Three Months Ended September 30																For the Nine Months Ended September 30
		2018								2017								2018								2017
		Amount				%				Amount				%				Amount				%				Amount				%
NET REVENUE (Notes 25, 34 and 40)		$	260,347,882				100			$	252,107,345				100			$	741,703,364				100			$	699,876,957				100
COST OF REVENUE (Notes 15, 31, 34 and 38)			136,967,039				53				126,230,664				50				381,759,723				51				343,761,367				49
GROSS PROFIT BEFORE REALIZED (UNREALIZED) GROSS PROFIT ON SALES TO ASSOCIATES			123,380,843				47				125,876,681				50				359,943,641				49				356,115,590				51
REALIZED (UNREALIZED) GROSS PROFIT ON SALES TO ASSOCIATES			(14,203	)			—				3,467				—				(188,528	)			—				(37,152	)			—
GROSS PROFIT			123,366,640				47				125,880,148				50				359,755,113				49				356,078,438				51
OPERATING EXPENSES (Notes 31 and 34)
Research and development			21,886,199				8				21,045,439				8				62,206,346				8				59,515,288				8
General and administrative			4,656,730				2				5,003,679				2				14,579,032				2				15,178,441				2
Marketing			1,585,523				—				1,487,598				1				4,511,592				1				4,366,284				1
Total operating expenses			28,128,452				10				27,536,716				11				81,296,970				11				79,060,013				11
OTHER OPERATING INCOME AND EXPENSES, NET (Note 31)			6,993				—				(286,999	)			—				(1,957,870	)			(1	)			(354,201	)			—
INCOME FROM OPERATIONS (Note 40)			95,245,181				37				98,056,433				39				276,500,273				37				276,664,224				40
NON-OPERATING INCOME AND EXPENSES
Share of profits of associates			997,827				—				751,618				—				1,946,111				—				2,036,879				—
Other income (Note 26)			3,817,473				1				2,128,556				1				10,701,950				2				6,859,745				1
Foreign exchange gain (loss), net (Note 39)			444,202				—				(462,310	)			—				2,097,838				—				(914,048	)			—
Finance costs (Note 27)			(739,068	)			—				(843,214	)			—				(2,175,318	)			—				(2,499,791	)			—
Other gains and losses, net (Note 28)			(868,673	)			—				887,081				—				(2,642,683	)			—				2,311,121				—
Total non-operating income and expenses			3,651,761				1				2,461,731				1				9,927,898				2				7,793,906				1
INCOME BEFORE INCOME TAX			98,896,942				38				100,518,164				40				286,428,171				39				284,458,130				41
INCOME TAX EXPENSE (Notes 4 and 29)			9,798,870				4				10,568,936				4				35,249,150				5				40,617,342				6
NET INCOME			89,098,072				34				89,949,228				36				251,179,021				34				243,840,788				35
OTHER COMPREHENSIVE INCOME (LOSS) (Notes 24 and 29)
Items that will not be reclassified subsequently to profit or loss:
Unrealized loss on investments in equity instruments at fair value through other comprehensive income			(418,111	)			—				—				—				(1,306,987	)			—				—				—
Gain on hedging instruments			8,544				—				—				—				23,887				—				—				—
Share of other comprehensive loss of associates			(9,719	)			—				—				—				(4,106	)			—				—				—
Income tax benefit related to items that will not be reclassified subsequently			30,458				—				—				—				66,843				—				—				—
			(388,828	)			—				—				—				(1,220,363	)			—				—				—
Items that may be reclassified subsequently to profit or loss:
Exchange differences arising on translation of foreign operations			(3,457,786	)			(1	)			(882,654	)			(1	)			10,375,886				1				(20,772,474	)			(3	)
Changes in fair value of available-for-sale financial assets			—				—				(43,684	)			—				—				—				(108,757	)			—
Cash flow hedges			—				—				19,522				—				—				—				38,519				—
Unrealized loss on investments in debt instruments at fair value through other comprehensive income			(30,572	)			—				—				—				(1,040,342	)			—				—				—
Share of other comprehensive income (loss) of associates			(3,820	)			—				1,710				—				73,283				—				(56,920	)			—
Income tax benefit related to items that may be reclassified subsequently			—				—				1,192				—				—				—				53,633				—
			(3,492,178	)			(1	)			(903,914	)			(1	)			9,408,827				1				(20,845,999	)			(3	)
Other comprehensive income (loss) for the period, net of income tax			(3,881,006	)			(1	)			(903,914	)			(1	)			8,188,464				1				(20,845,999	)			(3	)
TOTAL COMPREHENSIVE INCOME FOR THE PERIOD		$	85,217,066				33			$	89,045,314				35			$	259,367,485				35			$	222,994,789				32
NET INCOME ATTRIBUTABLE TO:
Shareholders of the parent		$	89,071,628				34			$	89,925,437				36			$	251,146,789				34			$	243,825,354				35
Non-controlling interests			26,444				—				23,791				—				32,232				—				15,434				—
		$	89,098,072				34			$	89,949,228				36			$	251,179,021				34			$	243,840,788				35
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO:
Shareholders of the parent		$	85,190,350				33			$	89,029,620				35			$	259,332,283				35			$	222,984,427				32
Non-controlling interests			26,716				—				15,694				—				35,202				—				10,362				—
		$	85,217,066				33			$	89,045,314				35			$	259,367,485				35			$	222,994,789				32

 

(Continued)

 

- 4 -

---

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands of New Taiwan Dollars, Except Earnings Per Share)

(Reviewed, Not Audited)

 

 

		For the Three Months Ended September 30								For the Nine Months Ended September 30
		2018				2017				2018				2017
		Income Attributable to Shareholders of the Parent				Income Attributable to Shareholders of the Parent				Income Attributable to Shareholders of the Parent				Income Attributable to Shareholders of the Parent
EARNINGS PER SHARE (NT$, Note 30)
Basic earnings per share		$	3.44			$	3.47			$	9.69			$	9.40
Diluted earnings per share		$	3.44			$	3.47			$	9.69			$	9.40

The accompanying notes are an integral part of the consolidated financial statements.

 

(Concluded)

 

- 5 -

---

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In Thousands of New Taiwan Dollars, Except Dividends Per Share)

(Reviewed, Not Audited)

 

 

		Equity Attributable to Shareholders of the Parent
																														Others
		Capital Stock - Common Stock												Retained Earnings																Foreign				Unrealized				Unrealized Gain (Loss) on Financial Assets at Fair Value Through				Cash								Unearned
		Shares (In Thousands)				Amount				Capital Surplus				Legal Capital Reserve				Special Capital Reserve				Unappropriated Earnings				Total				Currency Translation Reserve				Gain (Loss) from Available-for-sale Financial Assets				Other Comprehensive Income				Flow Hedges Reserve				Gain (Loss) on Hedging Instruments				Stock-Based Employee Compensation				Total				Total				Non-controlling Interests				Total Equity
BALANCE, JANUARY 1, 2018			25,930,380			$	259,303,805			$	56,309,536			$	241,722,663			$	—			$	991,639,347			$	1,233,362,010			$	(26,697,680	)		$	(214,074	)		$	—			$	4,226			$	—			$	(10,290	)		$	(26,917,818	)		$	1,522,057,533			$	702,110			$	1,522,759,643
Effect of retrospective application			—				—				—				—				—				1,556,319				1,556,319				—				214,074				(524,915	)			(4,226	)			4,226				—				(310,841	)			1,245,478				342				1,245,820
ADJUSTED BALANCE, JANUARY 1, 2018			25,930,380				259,303,805				56,309,536				241,722,663				—				993,195,666				1,234,918,329				(26,697,680	)			—				(524,915	)			—				4,226				(10,290	)			(27,228,659	)			1,523,303,011				702,452				1,524,005,463
Appropriations of prior year’s earnings
Legal capital reserve			—				—				—				34,311,148				—				(34,311,148	)			—				—				—				—				—				—				—				—				—				—				—
Special capital reserve			—				—				—				—				26,907,527				(26,907,527	)			—				—				—				—				—				—				—				—				—				—				—
Cash dividends to shareholders - NT$8 per share			—				—				—				—				—				(207,443,044	)			(207,443,044	)			—				—				—				—				—				—				—				(207,443,044	)			—				(207,443,044	)
Total			—				—				—				34,311,148				26,907,527				(268,661,719	)			(207,443,044	)			—				—				—				—				—				—				—				(207,443,044	)			—				(207,443,044	)
Net income for the nine months ended September 30, 2018			—				—				—				—				—				251,146,789				251,146,789				—				—				—				—				—				—				—				251,146,789				32,232				251,179,021
Other comprehensive income (loss) for the nine months ended September 30, 2018, net of income tax			—				—				—				—				—				—				—				10,448,911				—				(2,287,670	)			—				24,253				—				8,185,494				8,185,494				2,970				8,188,464
Total comprehensive income (loss) for the nine months ended September 30, 2018			—				—				—				—				—				251,146,789				251,146,789				10,448,911				—				(2,287,670	)			—				24,253				—				8,185,494				259,332,283				35,202				259,367,485
Disposal of investments in equity instruments at fair value through other comprehensive income			—				—				—				—				—				(884,415	)			(884,415	)			—				—				884,415				—				—				—				884,415				—				—				—
Basis adjustment for loss on hedging instruments			—				—				—				—				—				—				—				—				—				—				—				(26,936	)			—				(26,936	)			(26,936	)			—				(26,936	)
Adjustments to share of changes in equities of associates			—				—				(288	)			—				—				—				—				—				—				—				—				—				4,477				4,477				4,189				—				4,189
From share of changes in equities of subsidiaries			—				—				2,371				—				—				—				—				—				—				—				—				—				—				—				2,371				(2,371	)			—
Donation from shareholders			—				—				40				—				—				—				—				—				—				—				—				—				—				—				40				6				46
Decrease in non-controlling interests			—				—				—				—				—				—				—				—				—				—				—				—				—				—				—				(77,202	)			(77,202	)
BALANCE, SEPTEMBER 30, 2018			25,930,380			$	259,303,805			$	56,311,659			$	276,033,811			$	26,907,527			$	974,796,321			$	1,277,737,659			$	(16,248,769	)		$	—			$	(1,928,170	)		$	—			$	1,543			$	(5,813	)		$	(18,181,209	)		$	1,575,171,914			$	658,087			$	1,575,830,001
BALANCE, JANUARY 1, 2017			25,930,380			$	259,303,805			$	56,272,304			$	208,297,945			$	—			$	863,710,224			$	1,072,008,169			$	1,661,237			$	2,641			$	—			$	105			$	—			$	—			$	1,663,983			$	1,389,248,261			$	802,865			$	1,390,051,126
Appropriations of prior year’s earnings
Legal capital reserve			—				—				—				33,424,718				—				(33,424,718	)			—				—				—				—				—				—				—				—				—				—				—
Cash dividends to shareholders - NT$7 per share			—				—				—				—				—				(181,512,663	)			(181,512,663	)			—				—				—				—				—				—				—				(181,512,663	)			—				(181,512,663	)
Total			—				—				—				33,424,718				—				(214,937,381	)			(181,512,663	)			—				—				—				—				—				—				—				(181,512,663	)			—				(181,512,663	)
Net income for the nine months ended September 30, 2017			—				—				—				—				—				243,825,354				243,825,354				—				—				—				—				—				—				—				243,825,354				15,434				243,840,788
Other comprehensive income (loss) for the nine months ended September 30, 2017, net of income tax			—				—				—				—				—				—				—				(20,831,019	)			(43,804	)			—				33,896				—				—				(20,840,927	)			(20,840,927	)			(5,072	)			(20,845,999	)
Total comprehensive income (loss) for the nine months ended September 30, 2017			—				—				—				—				—				243,825,354				243,825,354				(20,831,019	)			(43,804	)			—				33,896				—				—				(20,840,927	)			222,984,427				10,362				222,994,789
Adjustments to share of changes in equities of associates			—				—				6,206				—				—				—				—				—				—				—				—				—				(12,145	)			(12,145	)			(5,939	)			—				(5,939	)
From share of changes in equities of subsidiaries			—				—				2,761				—				—				—				—				—				—				—				—				—				—				—				2,761				(2,761	)			—
Decrease in non-controlling interests			—				—				—				—				—				—				—				—				—				—				—				—				—				—				—				(114,624	)			(114,624	)
BALANCE, SEPTEMBER 30, 2017			25,930,380			$	259,303,805			$	56,281,271			$	241,722,663			$	—			$	892,598,197			$	1,134,320,860			$	(19,169,782	)		$	(41,163	)		$	—			$	34,001			$	—			$	(12,145	)		$	(19,189,089	)		$	1,430,716,847			$	695,842			$	1,431,412,689

The accompanying notes are an integral part of the consolidated financial statements.

 

- 6 -

---

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of New Taiwan Dollars)

(Reviewed, Not Audited)

 

 

		Nine Months Ended September 30
		2018				2017
CASH FLOWS FROM OPERATING ACTIVITIES
Income before income tax		$	286,428,171			$	284,458,130
Adjustments for:
Depreciation expense			213,318,950				186,131,944
Amortization expense			3,197,428				3,197,293
Reversal of expected credit losses on investments in debt instruments			(2,279	)			—
Finance costs			2,175,318				2,499,791
Share of profits of associates			(1,946,111	)			(2,036,879	)
Interest income			(10,543,592	)			(6,714,157	)
Loss on disposal or retirement of property, plant and equipment, net			789,005				251,319
Gain on disposal of intangible assets, net			(436	)			—
Impairment loss on property, plant and equipment			488,336				—
Impairment loss on intangible assets			—				13,520
Impairment loss on financial assets			—				15,941
Loss on financial instruments at fair value through profit or loss, net			244,799				—
Loss on disposal of investments in debt instruments at fair value through other comprehensive income, net			774,784				—
Gain on disposal of available-for-sale financial assets, net			—				(266,986	)
Gain on disposal of financial assets carried at cost, net			—				(12,809	)
Unrealized gross profit on sales to associates			188,528				37,152
Loss (gain) on foreign exchange, net			1,863,969				(6,624,087	)
Dividend income			(158,358	)			(145,588	)
Loss arising from fair value hedges, net			2,494				32,058
Changes in operating assets and liabilities:
Financial instruments at fair value through profit or loss			639,804				5,260,911
Notes and accounts receivable, net			(10,902,779	)			5,990,086
Receivables from related parties			(572,949	)			(106,879	)
Other receivables from related parties			106,673				(19,141	)
Inventories			(31,475,575	)			(25,211,646	)
Other financial assets			(5,641,723	)			604,831
Other current assets			(247,466	)			(1,639,813	)
Other noncurrent assets			139,107				(890,881	)
Accounts payable			341,340				1,452,987
Payables to related parties			(85,053	)			179,855
Salary and bonus payable			(2,317,288	)			(1,377,765	)
Accrued profit sharing bonus to employees and compensation to directors and supervisors			(5,629,367	)			(5,826,873	)
Accrued expenses and other current liabilities			(24,443,396	)			9,167,145
Provisions			—				(3,899,652	)
Net defined benefit liability			(62,562	)			23,218
Cash generated from operations			416,669,772				444,543,025
Income taxes paid			(32,088,012	)			(63,351,167	)
Net cash generated by operating activities			384,581,760				381,191,858

(Continued)

 

- 7 -

---

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of New Taiwan Dollars)

(Reviewed, Not Audited)

 

 

		Nine Months Ended September 30
		2018				2017
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of:
Financial instruments at fair value through profit or loss - debt instruments		$	(306,309	)		$	—
Financial assets at fair value through other comprehensive income			(72,383,276	)			—
Available-for-sale financial assets			—				(66,661,656	)
Held-to-maturity financial assets			—				(1,695,771	)
Financial assets carried at cost			—				(1,190,157	)
Property, plant and equipment			(201,476,971	)			(269,408,108	)
Intangible assets			(2,940,549	)			(3,677,303	)
Proceeds from disposal or redemption of:
Financial instruments at fair value through profit or loss - debt instruments			286,248				—
Financial assets at fair value through other comprehensive income			63,929,332				—
Available-for-sale financial assets			—				45,952,054
Held-to-maturity financial assets			—				12,510,000
Financial assets at amortized cost			2,032,442				—
Financial assets carried at cost			—				58,237
Property, plant and equipment			135,507				253,267
Intangible assets			492				—
Proceeds from return of capital of investments in equity instruments at fair value through other comprehensive income			127,878				—
Proceeds from return of capital of financial assets carried at cost			—				14,828
Derecognition of hedging derivative financial instruments			—				(35,790	)
Derecognition of hedging financial instruments			199,730				—
Interest received			10,612,192				6,776,756
Proceeds from government grants - property, plant and equipment			—				436,587
Other dividends received			158,358				145,588
Dividends received from investments accounted for using equity method			3,262,910				4,245,772
Refundable deposits paid			(2,227,335	)			(1,084,028	)
Refundable deposits refunded			1,581,399				247,027
Net cash used in investing activities			(197,007,952	)			(273,112,697	)

 

(Continued)

 

- 8 -

---

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of New Taiwan Dollars)

(Reviewed, Not Audited)

 

 

		Nine Months Ended September 30
		2018				2017
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term loans		$	9,626,705			$	(290,110	)
Repayment of bonds			(58,024,900	)			(38,100,000	)
Repayment of long-term bank loans			—				(7,260	)
Interest paid			(2,796,082	)			(2,907,017	)
Guarantee deposits received			1,253,537				4,400,240
Guarantee deposits refunded			(1,947,272	)			(6,810,329	)
Cash dividends			(207,443,044	)			(181,512,663	)
Donation from shareholders			46				—
Decrease in non-controlling interests			(77,202	)			(114,624	)
Net cash used in financing activities			(259,408,212	)			(225,341,763	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS			7,174,829				(15,913,536	)
NET DECREASE IN CASH AND CASH EQUIVALENTS			(64,659,575	)			(133,176,138	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			553,391,696				541,253,833
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	488,732,121			$	408,077,695

 

The accompanying notes are an integral part of the consolidated financial statements.		(Concluded)

 

- 9 -

---

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 and 2017

(Amounts in Thousands of New Taiwan Dollars, Unless Specified Otherwise)

(Reviewed, Not Audited)

 

 

1.

GENERAL

Taiwan Semiconductor Manufacturing Company Limited (TSMC), a Republic of China (R.O.C.) corporation, was incorporated on February 21, 1987. TSMC is a dedicated foundry in the semiconductor industry which engages mainly in the manufacturing, selling, packaging, testing and computer-aided design of integrated circuits and other semiconductor devices and the manufacturing of masks.

On September 5, 1994, TSMC’s shares were listed on the Taiwan Stock Exchange (TWSE). On October 8, 1997, TSMC listed some of its shares of stock on the New York Stock Exchange (NYSE) in the form of American Depositary Shares (ADSs).

The address of its registered office and principal place of business is No. 8, Li-Hsin Rd. 6, Hsinchu Science Park, Taiwan. The principal operating activities of TSMC’s subsidiaries are described in Note 4.

 

2.	THE AUTHORIZATION OF FINANCIAL STATEMENTS

The accompanying consolidated financial statements were reported to the Board of Directors and issued on November 13, 2018.

 

3.	APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS

 

a.

Initial application of the amendments to the Regulations Governing the Preparation of Financial Reports by Securities Issuers and the International Financial Reporting Standards (IFRS), International Accounting Standards (IAS), IFRIC Interpretations (IFRIC), and SIC Interpretations (SIC) (collectively, “IFRSs”) endorsed and issued into effect by the Financial Supervisory Commission (FSC)

Except for the following, the initial application of the amendments to the Regulations Governing the Preparation of Financial Reports by Securities Issuers and the IFRSs endorsed and issued into effect by the FSC did not have a significant effect on TSMC and its subsidiaries’ (collectively as the “Company”) accounting policies:

 

1)

IFRS 9 “Financial Instruments” and related amendment

IFRS 9 supersedes IAS 39 “Financial Instruments: Recognition and Measurement”, with consequential amendments to IFRS 7 “Financial Instruments: Disclosures” and other standards. IFRS 9 sets out the requirements for classification, measurement and impairment of financial assets and hedge accounting. Please refer to Note 4 for information relating to the relevant accounting policies.

Classification, measurement and impairment of financial assets and financial liabilities

The Company elects not to restate prior reporting period when applying the requirements for the classification, measurement and impairment of financial assets and financial liabilities under IFRS 9 with the cumulative effect of the initial application recognized at the date of initial application.

 

- 10 -

---

The impact on measurement categories, carrying amount and related reconciliation for each class of the Company’s financial assets and financial liabilities when retrospectively applying IFRS 9 on January 1, 2018 is detailed below:

 

 

 

 

- 11 -

---

(1)

Cash and cash equivalents, notes and accounts receivable (including related parties), other receivables and refundable deposits that were classified as loans and receivables under IAS 39 are now classified at amortized cost with assessment of future 12-month or lifetime expected credit loss under IFRS 9. As a result of retrospective application, the adjustments would result in a decrease in loss allowance for accounts receivable of NT$244,773 thousand and an increase in retained earnings of NT$244,773 thousand on January 1, 2018.

 

(2)

As equity investments that were previously classified as available-for-sale financial assets under IAS 39 are not held for trading, the Company elected to designate all of these investments as at FVTOCI under IFRS 9. As a result, the related other equity-unrealized gain or loss on available-for-sale financial assets of NT$228,304 thousand is reclassified to increase other equity-unrealized gain or loss on financial assets at FVTOCI.

As equity investments previously measured at cost under IAS 39 are remeasured at fair value under IFRS 9, the adjustments would result in an increase in financial assets at FVTOCI of NT$967,127 thousand, an increase in other equity-unrealized gain or loss on financial assets at FVTOCI of NT$968,670 thousand and a decrease in non-controlling interests of NT$1,543 thousand on January 1, 2018.

For those equity investments previously classified as available-for-sale financial assets (including measured at cost financial assets) under IAS 39, the impairment losses that the Company had recognized have been accumulated in retained earnings. Since these investments were designated as at FVTOCI under IFRS 9 and no impairment assessment is required, the adjustments would result in a decrease in other equity-unrealized gain or loss on financial assets at FVTOCI of NT$1,294,528 thousand and an increase in retained earnings of NT$1,294,528 thousand on January 1, 2018.

 

(3)

Debt investments were previously classified as available-for-sale financial assets under IAS 39. Under IFRS 9, except for debt instruments of NT$779,489 thousand whose contractual cash flows are not solely payments of principal and interest on the principal outstanding and therefore are classified as at FVTPL with the related other equity-unrealized gain or loss on available-for-sale financial assets of NT$10,085 thousand being consequently reclassified to decrease retained earnings, the remaining debt investments are classified as at FVTOCI with assessment of future 12-month expected credit loss because these investments are held within a business model whose objective is both to collect the contractual cash flows and sell the financial assets. The related other equity-unrealized gain or loss on available-for-sale financial assets of NT$434,403 thousand is reclassified to decrease other equity-unrealized gain or loss on financial assets at FVTOCI. As a result of retrospective application of future 12-month expected credit loss, the adjustments would result in an increase in other equity-unrealized gain or loss on financial assets at FVTOCI of NT$30,658 thousand and a decrease in retained earnings of NT$30,658 thousand on January 1, 2018.

 

(4)

Debt investments previously classified as held-to-maturity financial assets and measured at amortized cost under IAS 39 are classified as measured at amortized cost with assessment of future 12-month expected credit loss under IFRS 9 because the contractual cash flows are solely payments of principal and interest on the principal outstanding and these investments are held within a business model whose objective is to collect the contractual cash flows. As a result of retrospective application of future 12-month expected credit loss, the adjustments would result in an increase in loss allowance of NT$8,252 thousand and a decrease in retained earnings of NT$8,252 thousand on January 1, 2018.

 

- 12 -

---

(5)

With the retrospective adoption of IFRS 9 by associates accounted for using equity method, the corresponding adjustments made by the Company would result in an increase in investments accounted for using equity method of NT$8,258 thousand, a decrease in other equity- unrealized gain or loss on financial assets at FVTOCI of NT$23,616 thousand, a decrease in other equity- unrealized gain or loss on available-for-sale financial assets of NT$2,110 thousand and an increase in retained earnings of NT$33,984 thousand on January 1, 2018.

Hedge accounting

The Company prospectively applies the requirements for hedge accounting upon initial application of IFRS 9. In addition, due to the amendments to the Regulations Governing the Preparation of Financial Reports by Securities Issuers, all derivative and non-derivative financial assets and financial liabilities which are designated as hedging instruments are presented as financial assets and financial liabilities for hedging starting 2018.

 

2)

IFRS 15 “Revenue from Contracts with Customers” and related amendments

IFRS 15 establishes principles for recognizing revenue that apply to all contracts with customers, and will supersede IAS 18, “Revenue,” IAS 11, “Construction Contracts,” and a number of revenue-related interpretations. Please refer to Note 4 for information relating to the relevant accounting policies.

The Company elected only to retrospectively apply IFRS 15 to contracts that were not completed on January 1, 2018 and elected not to restate prior reporting period with the cumulative effect of the initial application recognized at the date of initial application.

The impact on assets, liabilities and equity when retrospectively applying IFRS 15 on January 1, 2018 is detailed below:

 

 

- 13 -

---

(1)

Prior to the application of IFRS 15, the Company recognizes revenue based on the accounting treatment of the sales of goods. Under IFRS 15, certain subsidiaries and associates accounted for using equity method will change to recognize revenue over time because customers are deemed to have control over the products when the products are manufactured. As a result, the Company will recognize contract assets (classified under other current assets) and adjust related assets and equity accordingly.

 

(2)

Prior to the application of IFRS 15, the Company recognized the estimation of sales returns and allowance as provisions. Under IFRS 15, the Company recognizes such estimation as refund liability (classified under accrued expenses and other current liabilities).

The following table shows the amount affected in the current period by the application of IFRS 15 as compared to IAS 18:

Impact on Assets, Liabilities and Equity

 

Impact on Total Comprehensive Income

 

 

- 14 -

---

3)

Please refer to Note 32 for the disclosure of amendment to IAS 7 “Disclosure Initiative”

 

b.

Amendments to the Regulations Governing the Preparation of Financial Reports by Securities Issuers for application starting from 2019 and the IFRSs issued by IASB and endorsed by FSC with effective date starting 2019

 

 

Note 1:

Unless stated otherwise, the above New IFRSs are effective for annual periods beginning on or after their respective effective dates.

 

Note 2:

The FSC permits the election for early adoption of the amendments starting from 2018.

 

Note 3:

The Company shall apply these amendments to plan amendments, curtailments or settlements occurring on or after January 1, 2019.

Except for the following items, the Company believes that the adoption of aforementioned standards or interpretations will not have a significant effect on the Company’s accounting policies.

 

1)

IFRS 16 “Leases”

IFRS 16 sets out the accounting standards for leases that will supersede IAS 17 and a number of related interpretations.

Upon initial application of IFRS 16, if the Company is a lessee, it will recognize right-of-use assets and lease liabilities for all leases on the consolidated balance sheets except for low-value and short-term leases. The Company may elect to apply the accounting method similar to the accounting for operating lease under IAS 17 to the low-value and short-term leases. In the consolidated statements of comprehensive income, the Company will present the depreciation expense charged on the right-of-use asset and interest expense accrued on the lease liability under cost of revenue/operating expenses and finance costs, respectively; interest is computed by using effective interest method. On the consolidated statements of cash flows, cash payments for both the principal and interest portion of the lease liability will be classified within financing activities. Currently, payments under operating lease contracts are recognized as expenses on a straight-line basis. Cash flows for operating leases are classified within operating activities on the consolidated statements of cash flows.

Under initial application of IFRS 16, the Company anticipates applying retrospectively with the cumulative effect of this standard at the date of initial application, comparative information will not be restated. As of the date the accompanying consolidated financial statements were issued, the related effect will be disclosed when the Company completes the evaluation.

 

- 15 -

---

c.

The IFRSs issued by IASB but not yet endorsed and issued into effect by FSC

 

 

Note 1:

The Company shall apply these amendments to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2020 and to asset acquisitions that occur on or after the beginning of that period.

 

Note 2:

The Company shall apply these amendments prospectively for annual reporting periods beginning on or after January 1, 2020.

As of the date the accompanying consolidated financial statements were issued, the Company continues in evaluating the impact on its financial position and financial performance as a result of the initial adoption of the aforementioned standards or interpretations. The related impact will be disclosed when the Company completes the evaluation.

 

4.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Except for the following, the accounting policies applied in these consolidated financial statements are consistent with those applied in the consolidated financial statements for the year ended December 31, 2017.

For the convenience of readers, the accompanying consolidated financial statements have been translated into English from the original Chinese version prepared and used in the R.O.C. 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 consolidated financial statements shall prevail.

Statement of Compliance

The accompanying consolidated financial statements have been prepared in conformity with the Regulations Governing the Preparation of Financial Reports by Securities Issuers and IAS 34, “Interim Financial Reporting,” endorsed and issued into effect by the FSC. The consolidated financial statements do not present all the disclosures required for a complete set of annual consolidated financial statements prepared under the IFRSs endorsed and issued into effect by the FSC (collectively, “Taiwan-IFRSs”).

Basis of Consolidation

The basis of preparation and the basis for the consolidated financial statements

The basis of preparation and the basis for the consolidated financial statements applied in these consolidated financial statements are consistent with those applied in the consolidated financial statements for the year ended December 31, 2017.

 

- 16 -

---

The subsidiaries in the consolidated financial statements

The detail information of the subsidiaries at the end of reporting period was as follows:

 

 

Note a:

This is an immaterial subsidiary for which the consolidated financial statements are not reviewed by the Company’s independent auditors.

Note b:

Under the investment agreement entered into with the municipal government of Nanjing, China, the Company will make an investment in Nanjing in the amount of approximately US$3 billion to establish a subsidiary operating a 300mm wafer fab with the capacity of 20,000 12-inch wafers per month, and a design service center.

Note c:

TSMC Solar Europe GmbH is under liquidation procedures.

Note d:

ISDF and ISDF II are under liquidation procedures.

Note e:

Starting December 2017, the Company no longer had the majority of voting power and control over Mutual-Pak. As a result, Mutual-Pak is no longer consolidated and is accounted for using the equity method.

Financial Assets

The classification of financial assets depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. Regular way purchases or sales of financial assets are recognized and derecognized on a trade date or settlement date basis for which financial assets were classified in the same way, respectively. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace.

 

- 17 -

---

a.

Category of financial assets and measurement

2018

Financial assets are classified into the following categories: financial assets at FVTPL, investments in debt instruments and equity instruments at FVTOCI, and financial assets at amortized cost.

 

1)

Financial asset at FVTPL

For certain financial assets which include debt instruments that do not meet the criteria of amortized cost or FVTOCI, it is mandatorily required to measure them at FVTPL. Any gain or loss arising from remeasurement is recognized in profit or loss. The net gain or loss recognized in profit or loss incorporates any interest earned on the financial asset.

 

2)

Investments in debt instruments at FVTOCI

Debt instruments with contractual terms specifying that cash flows are solely payments of principal and interest on the principal amount outstanding, together with objective of collecting contractual cash flows and selling the financial assets, are measured at FVTOCI.

Interest income calculated using the effective interest method, foreign exchange gains and losses and impairment gains or losses on investments in debt instruments at FVTOCI are recognized in profit or loss. Other changes in the carrying amount of these debt instruments are recognized in other comprehensive income and will be reclassified to profit or loss when these debt instruments are disposed.

 

3)

Investments in equity instruments at FVTOCI

On initial recognition, the Company may irrevocably designate investments in equity investments that is not held for trading as at FVTOCI.

Investments in equity instruments at FVTOCI are subsequently measured at fair value with gains and losses arising from changes in fair value recognized in other comprehensive income and accumulated in other equity.

Dividends on these investments in equity instruments at FVTOCI are recognized in profit or loss when the Company’s right to receive the dividends is established, unless the Company’s right clearly represent a recovery of part of the cost of the investment.

 

4)

Measured at amortized cost

Cash and cash equivalents, debt instrument investments, notes and accounts receivable (including related parties), other receivables and refundable deposits are measured at amortized cost.

Debt instruments with contractual terms specifying that cash flows are solely payments of principal and interest on the principal amount outstanding, together with objective of holding financial assets in order to collect contractual cash flows, are measured at amortized cost.

Subsequent to initial recognition, financial assets measured at amortized cost are measured at amortized cost, which equals to carrying amount determined by the effective interest method less any impairment loss.

 

- 18 -

---

2017

Financial assets are classified into the following specified categories: Financial assets at FVTPL, available-for-sale financial assets, held-to-maturity financial assets and loans and receivables.

 

1)

Financial asset at FVTPL

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.

Financial assets at fair value through profit or loss are stated at fair value, with any gains or losses arising on remeasurement recognized in profit or loss.

 

2)

Available-for-sale financial assets

Available-for-sale financial assets are non-derivative financial assets that are either designated as available-for-sale or are not classified as (a) loans and receivables, (b) held-to-maturity financial assets or (c) financial assets at fair value through profit or loss.

Available-for-sale financial assets are measured at fair value. Interest income from available-for-sale monetary financial assets 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 previously recognized in other comprehensive income is reclassified to profit or loss.

Dividends on available-for-sale equity instruments are recognized in profit or loss when the Company’s right to receive the dividends is established.

Available-for-sale equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are measured at cost less any identified impairment losses at the end of each reporting period. Such equity instruments are subsequently remeasured at fair value when their fair value can be reliably measured, and the difference between the carrying amount and fair value is recognized in profit or loss or other comprehensive income.

 

3)

Held-to-maturity financial assets

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity dates that the Company has the positive intent and ability to hold to maturity. Subsequent to initial recognition, held-to-maturity financial assets are measured at amortized cost using the effective interest method less any impairment.

 

4)

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables including cash and cash equivalents, notes and accounts receivable and other receivables are measured at amortized cost using the effective interest method, less any impairment, except for those loans and receivables with immaterial discounted effect.

 

- 19 -

---

b.

Impairment of financial assets

2018

At the end of each reporting period, a loss allowance for expected credit loss is recognized for financial assets at amortized cost (including accounts receivable) and for investments in debt instruments that are measured at FVTOCI.

The loss allowance for accounts receivable is measured at an amount equal to lifetime expected credit losses. For financial assets at amortized cost and investments in debt instruments that are measured at FVTOCI, when the credit risk on the financial instrument has not increased significantly since initial recognition, a loss allowance is recognized at an amount equal to expected credit loss resulting from possible default events of a financial instrument within 12 months after the reporting date. If, on the other hand, there has been a significant increase in credit risk since initial recognition, a loss allowance is recognized at an amount equal to expected credit loss resulting from all possible default events over the expected life of a financial instrument.

The Company recognizes an impairment gain or loss in profit or loss for all financial instruments with a corresponding adjustment to their carrying amount through a loss allowance account, except for investments in debt instruments that are measured at FVTOCI, for which the loss allowance is recognized in other comprehensive income and does not reduce the carrying amount of the financial asset.

2017

Financial assets, other than those carried at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Those 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 assets, their estimated future cash flows have been affected.

For financial assets carried at amortized cost, such as trade receivables, assets that are assessed not to be impaired individually are, in addition, assessed for impairment on a collective basis. The Company assesses the collectability of receivables by performing the account aging analysis and examining current trends in the credit quality of its customers.

For financial assets carried at amortized cost, the amount of the impairment loss is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate.

For financial assets measured at amortized cost, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment loss was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the financial assets at the date the impairment loss is reversed does not exceed what the amortized cost would have been had the impairment loss not been recognized.

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 year.

In respect of available-for-sale equity instruments, impairment losses previously recognized in profit or loss are not reversed through profit or loss. Any increase in fair value subsequent to the recognition of an impairment loss is recognized in other comprehensive income and accumulated under the heading of unrealized gains or losses from available-for-sale financial assets.

 

- 20 -

---

For financial assets 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 by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account.

 

c.

Derecognition of financial assets

2018

The Company derecognizes a financial asset only when the contractual rights to the cash flows from the financial asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the financial asset to another entity.

On derecognition of a financial asset at amortized cost in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable is recognized in profit or loss. On derecognition of an investment in a debt instrument at FVTOCI, 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 is recognized in profit or loss. However, on derecognition of an investment in an equity instrument at FVTOCI, the cumulative gain or loss that had been recognized in other comprehensive income is transferred directly to retained earnings, without recycling through profit or loss.

2017

The Company derecognizes a financial asset only when the contractual rights to the cash flows from the financial asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the financial asset to another entity.

On derecognition of a financial asset in its entirety, the difference between the financial 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.

Hedge Accounting

 

a.

Fair value hedges

The Company designates certain hedging instruments, such as interest rate futures contracts, to partially hedge against the price risk caused by changes in interest rates in the Company’s investments in fixed income securities as fair value hedge. Changes in the fair value of hedging instrument 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 that are attributable to the hedged risk.

 

- 21 -

---

b.

Cash flow hedges

The Company designates certain hedging instruments, such as forward exchange contracts and foreign currency deposits, to partially hedge its foreign exchange rate risks associated with certain highly probable forecast transactions (capital expenditures). The effective portion of changes in the fair value of hedging instruments is recognized in other comprehensive income. When the forecast transactions actually take place, the associated gains or losses that were recognized in other comprehensive income are removed from equity and included in the initial cost of the hedged items. The gains or losses from hedging instruments relating to the ineffective portion are recognized immediately in profit or loss.

2018

The Company prospectively discontinues hedge accounting only when the hedging relationship ceases to meet the qualifying criteria; for instance when the hedging instrument expires or is sold, terminated or exercised.

2017

Hedge accounting was discontinued prospectively when the Company revoked the designated hedging relationship, when the hedging instrument expired or was sold, terminated, or exercised; or no longer met the criteria for hedge accounting.

Revenue Recognition

2018

The Company identifies the contract with the customers, and recognizes revenue when performance obligations are satisfied.

Revenue from the sale of goods is mainly recognized when a customer obtains control of promised goods, at which time the goods are delivered to the customer’s specific location and performance obligation is satisfied.

Revenue from sale of goods is measured at the fair value of the consideration received or receivable. Revenue is reduced for estimated customer returns, rebates and other similar allowances. Provision for estimated sales returns and other allowances is generally made and adjusted based on historical experience and the consideration of varying contractual terms to recognize refund liabilities, which is classified under accrued expenses and other current liabilities.

In principle, payment term granted to customers is due 30 days from the invoice date or 30 days from the end of the month of when the invoice is issued. Due to the short term nature of the receivables from sale of goods with the immaterial discounted effect, the Company measures them at the original invoice amounts without discounting.

2017

Revenue is measured at the fair value of the consideration received or receivable. Revenue is reduced for estimated customer returns, rebates and other similar allowances.

 

- 22 -

---

Sale of goods

Revenue from the sale of goods is recognized when the goods are delivered and titles have passed, at which time all the following conditions are satisfied:

 

•

The Company has transferred to the buyer the significant risks and rewards of ownership of the goods;

 

•

The Company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;

 

•

The amount of revenue can be measured reliably;

 

•

It is probable that the economic benefits associated with the transaction will flow to the Company; and

 

•

The costs incurred or to be incurred in respect of the transaction can be measured reliably.

In principle, payment term granted to customers is due 30 days from the invoice date or 30 days from the end of the month of when the invoice is issued. Due to the short term nature of the receivables from sale of goods with the immaterial discounted effect, the Company measures them at the original invoice amounts without discounting.

Dividend and interest income

Dividend income from investments is recognized when the shareholder’s right to receive payment has been established, provided that it is probable that the economic benefits will flow to the Company and the amount of income can be measured reliably.

Interest income from a financial asset is recognized when it is probable that the economic benefits will flow to the Company and the amount of income can be measured reliably. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable.

Retirement Benefits

Pension cost for an interim period is calculated on a year-to-date basis by using the actuarially determined pension cost rate at the end of the prior financial year.

Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax. The interim period income tax expense is accrued using the tax rate that would be applicable to expected total annual earnings, that is, the estimated average annual effective income tax rate applied to the pre-tax income of the interim period. When tax rate changes during the interim period, the effect of the change in tax rate relating to transactions recognized outside scope of profit or loss is recognized in full in the period in which the change in tax rate occurs. The effect of the change in tax rate relating to transactions recognized in profit or loss is incorporated into estimation of the average annual income tax rate, with corresponding effect recognized throughout the interim periods.

 

5.	CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION AND UNCERTAINTY

Except for the following paragraphs, the same critical accounting judgments and key sources of estimates and uncertainty have been followed in these consolidated financial statements as were applied in the preparation of the Company’s consolidated financial statements for the year ended December 31, 2017.

 

- 23 -

---

For Level 3 fair value measurement on equity investments, the Company determines the estimated fair value by selecting appropriate valuation methods primarily based on investees’ financial positions, operation results and recent financing activities, the market transaction prices of the similar investments, market conditions and the required discount factors. As such, the estimated fair value may be different from the actual disposal price in the future. The Company reassesses the fair value measurement quarterly based on the market conditions to ensure the appropriateness of the fair value measurement.

Please refer to Note 33 for information about the valuation techniques and inputs used in determining the fair value of various investments.

 

6.	CASH AND CASH EQUIVALENTS

 

Deposits in banks consisted of highly liquid time deposits that were readily convertible to known amounts of cash and were subject to an insignificant risk of changes in value.

 

7.	FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS

 

 

- 24 -

---

The Company entered into derivative contracts to manage exposures due to fluctuations of foreign exchange rates. These derivative contracts did not meet the criteria for hedge accounting. Therefore, the Company did not apply hedge accounting treatment for these derivative contracts.

Outstanding forward exchange contracts consisted of the following:

 

Investments in debt instruments at FVTOCI were classified as available-for-sale financial assets under IAS 39. Refer to Notes 3 and 9 for information relating to their reclassification and comparative information for 2017.

 

- 25 -

---

Outstanding cross currency swap contracts consisted of the following:

 

 

8.	FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME-2018

 

These investments in equity instruments are held for medium to long-term purposes and therefore are accounted for as FVTOCI.

For the nine months ended September 30, 2018, the Company sold shares of stocks for NT$730,399 thousand mainly because the strategic purpose no longer exists and the non-publicly traded investee has been merged. The related other equity-unrealized gain or loss on financial assets at FVTOCI of NT$884,415 thousand were transferred to decrease retained earnings.

For dividends from equity investments designated as at FVTOCI recognized during the three months and nine months ended September 30, 2018, please refer to Note 26. All the amounts are related to investments held at the end of the reporting period.

As of September 30, 2018, the cumulative loss allowance for expected credit loss of NT$29,598 thousand is recognized under investments in debt instruments at FVTOCI. Refer to Note 33 for information relating to their credit risk management and expected credit loss.

Investments in equity and debt instruments at FVTOCI were classified as available-for-sale financial assets and cost methods (only for equity instruments) under IAS 39. Refer to Notes 3, 9 and 12 (only for equity instruments) for information relating to their reclassification and comparative information for 2017.

 

- 26 -

---

9.	AVAILABLE-FOR-SALE FINANCIAL ASSETS-2017

 

 

10.	HELD-TO-MATURITY FINANCIAL ASSETS-2017

 

 

11.	FINANCIAL ASSETS AT AMORTIZED COST-2018

 

Financial assets at amortized cost were classified as held-to-maturity financial assets under IAS 39. Refer to Notes 3 and 10 for information relating to their reclassification and comparative information for 2017. Refer to Note 33 for information relating to credit risk management and expected credit loss for financial assets at amortized cost.

 

- 27 -

---

12.	FINANCIAL ASSETS CARRIED AT COST-2017

The Company’s investment classified as financial assets carried at cost primarily consists of non-publicly traded equity investments. Since there is a wide range of estimated fair values of the Company’s investments in non-publicly traded equity investments, the Company concludes that the fair value cannot be reliably measured and therefore should be measured at the cost less any impairment.

The stock of Aquantia was listed in November 2017. Accordingly, the Company reclassified the aforementioned investment from financial assets carried at cost to available-for-sale financial assets.

 

13.	HEDGING FINANCIAL INSTRUMENTS

2018

 

Fair value hedge

The Company entered into interest rate futures contracts, which are used to partially hedge against the price risk caused by changes in interest rates in the Company’s investments in fixed income securities. The hedge ratio is adjusted in response to the changes in the financial market and capped at 100%.

On the basis of economic relationships, the Company expects that the value of the interest rate futures contracts and the value of the hedged financial assets will change in opposite directions in response to movements in interest rates.

The main source of hedge ineffectiveness in these hedging relationships is the credit risk of the hedged financial assets, which is not reflected in the fair value of the interest rate future contracts. No other sources of ineffectiveness emerged from these hedging relationships.

 

- 28 -

---

The following tables summarize the information relating to the hedges for interest rate risk as of September 30, 2018.

 

The effect for the nine months ended September 30, 2018 is detailed below:

 

Amount of hedge ineffectiveness recognized in profit or loss is classified under other gains and losses.

Cash flow hedge

The Company entered into forward exchange contracts and foreign currency deposits to partially hedge foreign exchange rate risks associated with certain highly probable forecast transactions (capital expenditures). The hedge ratio is adjusted in response to the changes in the financial market and capped at 100%. The forward exchange contracts have maturities of 12 months or less.

On the basis of economic relationships, the Company expects that the value of forward exchange contracts and foreign currency deposits and the value of hedged transactions will change in opposite directions in response to movements in foreign exchange rates.

The main source of hedge ineffectiveness in these hedging relationships is driven by the effect of the counterparty’s own credit risk on the fair value of forward exchange contracts and foreign currency deposits. No other sources of ineffectiveness emerged from these hedging relationships.

 

- 29 -

---

The following tables summarize the information relating to the hedges for foreign currency risk as of September 30, 2018.

 

The effect for the nine months ended September 30, 2018 is detailed below:

 

For the nine months ended September 30, 2018, refer to Note 24(d) for gain or loss arising from changes in the fair value of hedging instruments and the amount transferred to initial carrying amount of hedged items.

2017

The Company’s hedging policies for 2017 are the same as those mentioned previously in 2018, the instruments employed are as follows:

 

 

- 30 -

---

The Company entered into interest rate futures contracts, which are used to partially hedge against the price risk caused by changes in interest rates in the Company’s investments in fixed income securities.

The outstanding interest rate futures contracts consisted of the following:

 

The Company entered into forward exchange contracts to partially hedge foreign exchange rate risks associated with certain highly probable forecast transactions (capital expenditures). These contracts have maturities of 12 months or less.

Outstanding forward exchange contracts consisted of the following:

 

 

14.	NOTES AND ACCOUNTS RECEIVABLE, NET

 

The Company signed a contract with the bank to sell certain accounts receivable without recourse and transaction cost required. These accounts receivable are classified as at FVTOCI because they are held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets.

 

- 31 -

---

2018

In principle, the payment term granted to customers is due 30 days from the invoice date or 30 days from the end of the month when the invoice is issued. Aside from recognizing impairment loss for credit-impaired accounts receivable, the Company recognizes loss allowance based on the expected credit loss ratio of customers by different risk levels. Such risk levels are determined with factors of historical loss ratios and customers’ financial conditions, competitiveness and business outlook. For accounts receivable past due over 90 days without collaterals or guarantees, the Company recognizes loss allowance at full amount.

Aging analysis of notes and accounts receivable, net

 

Movements of the loss allowance for accounts receivable

 

For the nine months ended September 30, 2018, the decrease in loss allowance was mainly due to the variations from accounts receivable balance of different risk levels.

2017

In principle, the payment term granted to customers is due 30 days from the invoice date or 30 days from the end of the month of when the invoice is issued. The allowance for doubtful receivables is assessed by reference to the collectability of receivables by performing the account aging analysis, historical experience and current financial condition of customers.

Except for those impaired, for the rest of the notes and accounts receivable, the account aging analysis at the end of the reporting period is summarized in the following table. There was no impairment concern for the accounts receivable that were past due without recognizing a specific allowance for doubtful receivables since there was no significant change in the credit quality of its customers after the assessment and the Company has obtained guarantee against certain receivables.

 

- 32 -

---

Aging analysis of notes and accounts receivable, net

 

Movements of the allowance for doubtful receivables

 

 

15.	INVENTORIES

 

Write-down of inventories to net realizable value (excluding computer virus outbreak losses) and reversal of write-down of inventories resulting from the increase in net realizable value were included in the cost of revenue, which were as follows. Please refer to computer virus outbreak losses in Note 38.

 

 

- 33 -

---

16.	INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD

Associates consisted of the following:

 

Starting December 2017, the Company no longer had the majority of voting power and control over Mutual-Pak. As a result, Mutual-Pak is no longer consolidated and is accounted for using the equity method.

The market prices of the investments accounted for using the equity method in publicly traded stocks calculated by the closing price at the end of the reporting period are summarized as follows. The closing price represents the quoted price in active markets, the level 1 fair value measurement.

 

 

- 34 -

---

17.	PROPERTY, PLANT AND EQUIPMENT

 

The significant part of the Company’s buildings includes main plants, mechanical and electrical power equipment and clean rooms, and the related depreciation is calculated using the estimated useful lives of 20 years, 10 years and 10 years, respectively.

In the second quarter of 2018, the Company recognized an impairment loss of NT$488,336 thousand for certain machinery and equipment that was assessed to have no future use, and the recoverable amount of certain machinery and equipment was nil. Such impairment loss was recognized in other operating income and expenses.

 

- 35 -

---

18. INTANGIBLE ASSETS

 

The Company’s goodwill has been tested for impairment at the end of the annual reporting period and the recoverable amount is determined based on the value in use. The value in use was calculated based on the cash flow forecast from the financial budgets covering the future five-year period, and the Company used annual discount rate of 8.5% in its test of impairment as of December 31, 2017 to reflect the relevant specific risk in the cash-generating unit.

For the year ended December 31, 2017, the Company assessed goodwill impairment and recognized an impairment loss of NT$13,520 thousand related to a subsidiary since the operating result of this cash generating unit was not as expected and the recoverable amount of goodwill was nil. Such impairment loss was recognized in other operating income and expenses.

 

- 36 -

---

19.	OTHER ASSETS