Form 6-K

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 October 2011

 

 

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  x            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  x

(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: October 27, 2011     By  

/s/ Lora Ho

      Lora Ho
      Senior Vice President & Chief Financial Officer


Taiwan Semiconductor Manufacturing

Company Limited

Financial Statements for the

Nine Months Ended September 30, 2011 and 2010 and

Independent Accountants’ Review Report


INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

The Board of Directors and Shareholders

Taiwan Semiconductor Manufacturing Company Limited

We have reviewed the accompanying balance sheets of Taiwan Semiconductor Manufacturing Company Limited as of September 30, 2011 and 2010, and the related statements of income and cash flows for the nine months then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to issue a report on these financial statements based on our reviews.

We conducted our reviews in accordance with Statement on Auditing Standards No. 36, “Review of Financial Statements,” issued by the Auditing Standards Committee of the Accounting Research and Development Foundation of the Republic of China. A review consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the Republic of China, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, requirements of the Business Accounting Law and Guidelines Governing Business Accounting with respect to financial accounting standards, and accounting principles generally accepted in the Republic of China.

We have also reviewed, in accordance with Statement on Auditing Standards No. 36, the consolidated financial statements of Taiwan Semiconductor Manufacturing Company Limited and subsidiaries as of and for the nine months ended September 30, 2011 and 2010 on which we have issued an unqualified review report.

October 21, 2011

Notice to Readers

The accompanying financial statements are intended only to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to review such financial statements are those generally accepted and applied in the Republic of China.

For the convenience of readers, the accountants’ review 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 accountants’ review report and financial statements shall prevail.

 

- 1 -


Taiwan Semiconductor Manufacturing Company Limited

BALANCE SHEETS

SEPTEMBER 30, 2011 AND 2010

(In Thousands of New Taiwan Dollars, Except Par Value)

(Reviewed, Not Audited)

 

 

     2011     2010  
     Amount     %     Amount     %  

ASSETS

        

CURRENT ASSETS

        

Cash and cash equivalents (Notes 2 and 4)

   $ 67,150,733        9      $ 90,399,569        14   

Financial assets at fair value through profit or loss (Notes 2, 5 and 24)

     583,010        —          14,383        —     

Available-for-sale financial assets (Notes 2, 6 and 24)

     2,735,777        1        4,048,549        1   

Held-to-maturity financial assets (Notes 2, 7 and 24)

     250,165        —          5,598,471        1   

Receivables from related parties (Notes 3 and 25)

     28,680,784        4        25,218,595        4   

Notes and accounts receivable (Note 3)

     21,894,123        3        27,263,732        4   

Allowance for doubtful receivables (Notes 2, 3 and 8)

     (485,120     —          (540,000     —     

Allowance for sales returns and others (Notes 2 and 8)

     (5,916,289     (1     (6,590,121     (1

Other receivables from related parties (Notes 3 and 25)

     1,491,316        —          657,787        —     

Other financial assets (Note 26)

     279,163        —          282,002        —     

Inventories (Notes 2 and 9)

     23,262,847        3        23,773,530        4   

Deferred income tax assets (Notes 2 and 18)

     918,938        —          1,965,666        —     

Prepaid expenses and other current assets

     1,730,515        1        1,243,888        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     142,575,962        20        173,336,051        27   
  

 

 

   

 

 

   

 

 

   

 

 

 

LONG-TERM INVESTMENTS (Notes 2, 6, 7, 10, 11 and 24)

        

Investments accounted for using equity method

     124,251,210        17        115,519,229        18   

Available-for-sale financial assets

     —          —          1,036,502        —     

Held-to-maturity financial assets

     1,404,002        —          1,658,671        —     

Financial assets carried at cost

     497,835        —          497,835        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total long-term investments

     126,153,047        17        118,712,237        18   
  

 

 

   

 

 

   

 

 

   

 

 

 

PROPERTY, PLANT AND EQUIPMENT (Notes 2, 12 and 25)

        

Cost

        

Buildings

     147,429,338        20        127,695,671        19   

Machinery and equipment

     967,085,889        133        836,615,885        129   

Office equipment

     13,407,880        2        11,310,109        2   
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,127,923,107        155        975,621,665        150   

Accumulated depreciation

     (779,461,665     (107     (685,650,928     (105

Advance payments and construction in progress

     88,918,961        12        40,621,708        6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net property, plant and equipment

     437,380,403        60        330,592,445        51   
  

 

 

   

 

 

   

 

 

   

 

 

 

INTANGIBLE ASSETS

        

Goodwill (Note 2)

     1,567,756        —          1,567,756        —     

Deferred charges, net (Notes 2 and 13)

     4,674,675        1        5,608,464        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total intangible assets

     6,242,431        1        7,176,220        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

OTHER ASSETS

        

Deferred income tax assets (Notes 2 and 18)

     11,090,792        1        10,200,761        2   

Refundable deposits

     4,689,418        1        9,059,889        1   

Others (Notes 2 and 25)

     1,152,898        —          437,617        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other assets

     16,933,108        2        19,698,267        3   
  

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL

   $ 729,284,951        100      $ 649,515,220        100   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

- 2 -


     2011     2010  
     Amount     %     Amount     %  

LIABILITIES AND SHAREHOLDERS’ EQUITY

        

CURRENT LIABILITIES

        

Short-term loans (Note 14)

   $ 36,019,654        5      $ 37,596,000        6   

Financial liabilities at fair value through profit or loss (Notes 2, 5 and 24)

     173,829        —          73,530        —     

Accounts payable

     8,103,660        1        9,645,148        1   

Payables to related parties (Note 25)

     3,161,048        —          3,451,537        1   

Income tax payable (Notes 2 and 18)

     7,680,498        1        5,252,509        1   

Other payables to related parties (Note 25)

     10,693,900        1        —          —     

Accrued profit sharing to employees and bonus to directors (Notes 2 and 20)

     6,932,701        1        8,201,440        1   

Payables to contractors and equipment suppliers

     19,036,040        3        26,017,941        4   

Accrued expenses and other current liabilities (Notes 16, 24 and 25)

     12,029,835        2        13,471,370        2   

Current portion of bonds payable (Notes 15 and 24)

     4,500,000        1        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     108,331,165        15        103,709,475        16   
  

 

 

   

 

 

   

 

 

   

 

 

 

LONG-TERM LIABILITIES

        

Bonds payable (Notes 15 and 24)

     18,000,000        2        4,500,000        1   

Other long-term payables (Notes 16 and 24)

     —          —          156,650        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total long-term liabilities

     18,000,000        2        4,656,650        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

OTHER LIABILITIES

        

Accrued pension cost (Notes 2 and 17)

     3,830,575        1        3,815,765        —     

Guarantee deposits (Note 28)

     495,013        —          809,698        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other liabilities

     4,325,588        1        4,625,463        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     130,656,753        18        112,991,588        17   
  

 

 

   

 

 

   

 

 

   

 

 

 

CAPITAL STOCK - NT$10 PAR VALUE (Note 20)

        

Authorized: 28,050,000 thousand shares

        

Issued: 25,915,149 thousand shares in 2011

        

            25,907,344 thousand shares in 2010

     259,151,492        35        259,073,440        40   
  

 

 

   

 

 

   

 

 

   

 

 

 

CAPITAL SURPLUS (Notes 2 and 20)

     55,689,739        8        55,634,070        9   
  

 

 

   

 

 

   

 

 

   

 

 

 

RETAINED EARNINGS (Note 20)

        

Appropriated as legal capital reserve

     102,399,995        14        86,239,494        14   

Appropriated as special capital reserve

     6,433,874        1        1,313,047        —     

Unappropriated earnings

     181,838,097        25        137,506,581        21   
  

 

 

   

 

 

   

 

 

   

 

 

 
     290,671,966        40        225,059,122        35   
  

 

 

   

 

 

   

 

 

   

 

 

 

OTHERS (Notes 2, 22 and 24)

        

Cumulative translation adjustments

     (5,586,618     (1     (3,761,669     (1

Unrealized gain (loss) on financial instruments

     (1,226,783     —          518,669        —     

Treasury stock: 1,000 thousand shares

     (71,598     —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 
     (6,884,999     (1     (3,243,000     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     598,628,198        82        536,523,632        83   
  

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL

   $ 729,284,951        100      $ 649,515,220        100   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

- 3 -


Taiwan Semiconductor Manufacturing Company Limited

STATEMENTS OF INCOME

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

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

(Reviewed, Not Audited)

 

 

     2011      2010  
     Amount      %      Amount     %  

GROSS SALES (Notes 2 and 25)

   $ 318,455,856          $ 308,832,522     

SALES RETURNS AND ALLOWANCES (Notes 2 and 8)

     3,242,741            8,715,191     
  

 

 

       

 

 

   

NET SALES

     315,213,115         100         300,117,331        100   

COST OF SALES (Notes 9, 19 and 25)

     175,237,212         55         154,784,733        52   
  

 

 

    

 

 

    

 

 

   

 

 

 

GROSS PROFIT

     139,975,903         45         145,332,598        48   

REALIZED (UNREALIZED) GROSS PROFIT FROM AFFILIATES (Note 2)

     346,768         —           (136,536     —     
  

 

 

    

 

 

    

 

 

   

 

 

 

REALIZED GROSS PROFIT

     140,322,671         45         145,196,062        48   
  

 

 

    

 

 

    

 

 

   

 

 

 

OPERATING EXPENSES (Notes 19 and 25)

          

Research and development

     23,347,808         7         20,084,456        6   

General and administrative

     9,130,402         3         8,168,276        3   

Marketing

     1,756,516         1         2,175,006        1   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total operating expenses

     34,234,726         11         30,427,738        10   
  

 

 

    

 

 

    

 

 

   

 

 

 

INCOME FROM OPERATIONS

     106,087,945         34         114,768,324        38   
  

 

 

    

 

 

    

 

 

   

 

 

 

NON-OPERATING INCOME AND GAINS

          

Equity in earnings of equity method investees, net (Notes 2 and 10)

     3,531,943         1         4,677,062        2   

Valuation gain on financial instruments, net (Notes 2, 5 and 24)

     782,810         1         156,175        —     

Interest income

     512,604         —           555,085        —     

Settlement income (Note 28)

     492,870         —           6,343,524        2   

Technical service income (Note 25)

     325,505         —           354,756        —     

Others (Notes 2 and 25)

     663,413         —           266,309        —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Total non-operating income and gains

     6,309,145         2         12,352,911        4   
  

 

 

    

 

 

    

 

 

   

 

 

 

(Continued)

 

- 4 -


Taiwan Semiconductor Manufacturing Company Limited

STATEMENTS OF INCOME

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

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

(Reviewed, Not Audited)

 

 

     2011      2010  
     Amount      %      Amount      %  

NON-OPERATING EXPENSES AND LOSSES

           

Foreign exchange loss, net (Note 2)

   $ 657,798         1       $ —           —     

Interest expense (Note 25)

     276,154         —           142,824         —     

Loss on disposal of property, plant and equipment (Note 2)

     191,120         —           38         —     

Casualty loss (Note 9)

     —           —           190,992         —     

Others

     138,653         —           113,881         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-operating expenses and losses

     1,263,725         1         447,735         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

INCOME BEFORE INCOME TAX

     111,133,365         35         126,673,500         42   

INCOME TAX EXPENSE (Notes 2 and 18)

     8,510,734         2         5,788,940         2   
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INCOME

   $ 102,622,631         33       $ 120,884,560         40   
  

 

 

    

 

 

    

 

 

    

 

 

 
     2011      2010  
     Before
Income
Tax
     After
Income
Tax
     Before
Income
Tax
     After
Income
Tax
 

EARNINGS PER SHARE (NT$, Note 23)

           

Basic earnings per share

   $ 4.29       $ 3.96       $ 4.89       $ 4.67   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

   $ 4.29       $ 3.96       $ 4.89       $ 4.66   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

- 5 -


Taiwan Semiconductor Manufacturing Company Limited

STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(In Thousands of New Taiwan Dollars)

(Reviewed, Not Audited)

 

 

     2011     2010  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

   $ 102,622,631      $ 120,884,560   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     76,638,870        61,013,582   

Unrealized (realized) gross profit from affiliates

     (346,768     136,536   

Amortization of premium/discount of financial assets

     9,120        13,756   

Gain on disposal of available-for-sale financial assets, net

     (35,151     —     

Loss on disposal of financial assets carried at cost

     —          1,263   

Equity in earnings of equity method investees, net

     (3,531,943     (4,677,062

Cash dividends received from equity method investees

     2,941,548        422,490   

Loss (gain) on disposal of property, plant and equipment and other assets, net

     70,696        (40,510

Settlement income from receiving equity securities

     —          (4,434,364

Deferred income tax

     478,443        (273,785

Changes in operating assets and liabilities:

    

Decrease (increase) in:

    

Financial assets and liabilities at fair value through profit or loss

     (417,015     240,890   

Receivables from related parties

     (3,003,144     (2,676,822

Notes and accounts receivable

     356,782        (7,379,212

Allowance for doubtful receivables

     (2,880     109,000   

Allowance for sales returns and others

     (1,425,155     (1,993,511

Other receivables from related parties

     (100,558     23,875   

Other financial assets

     139,043        822,070   

Inventories

     2,366,196        (4,943,314

Prepaid expenses and other current assets

     (387,631     (339,265

Increase (decrease) in:

    

Accounts payable

     (2,673,005     456,994   

Payables to related parties

     586,598        1,412,195   

Income tax payable

     571,629        (3,508,611

Accrued profit sharing to employees and bonus to directors

     (4,026,768     1,430,102   

Accrued expenses and other current liabilities

     (1,489,045     (3,522,931

Accrued pension cost

     66,557        8,589   

Deferred credits

     —          (47,873
  

 

 

   

 

 

 

Net cash provided by operating activities

     169,409,050        153,138,642   
  

 

 

   

 

 

 

(Continued)

 

- 6 -


Taiwan Semiconductor Manufacturing Company Limited

STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(In Thousands of New Taiwan Dollars)

(Reviewed, Not Audited)

 

 

     2011     2010  

CASH FLOWS FROM INVESTING ACTIVITIES

    

Cash contributed related to spin-off

   $ (1,270,340   $ —     

Acquisitions of:

    

Property, plant and equipment

     (175,162,624     (138,922,267

Investments accounted for using equity method

     (2,734,568     (8,125,980

Financial assets carried at cost

     —          (480

Proceeds from disposal or redemption of:

    

Available-for-sale financial assets

     1,035,151        —     

Held-to-maturity financial assets

     4,539,000        14,893,000   

Financial assets carried at cost

     —          3,370   

Property, plant and equipment and other assets

     3,055,991        62,293   

Increase in deferred charges

     (1,069,352     (1,177,741

Decrease (increase) in refundable deposits

     3,949,331        (6,361,773

Increase in other assets

     (18,200     —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (167,675,611     (139,629,578
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Increase in short-term loans

     5,111,017        37,596,000   

Increase in other payables to related parties

     10,693,900        —     

Proceeds from issuance of bonds

     18,000,000        —     

Decrease in guarantee deposits

     (252,874     (191,678

Proceeds from exercise of employee stock options

     155,955        150,760   

Acquisition of treasury stock

     (71,598     —     

Cash dividends

     (77,730,236     (77,708,120
  

 

 

   

 

 

 

Net cash used in financing activities

     (44,093,836     (40,153,038
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (42,360,397     (26,643,974

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     109,511,130        117,043,543   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 67,150,733      $ 90,399,569   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

    

Interest paid

   $ 292,211      $ 171,888   
  

 

 

   

 

 

 

Income tax paid

   $ 7,436,712      $ 9,477,093   
  

 

 

   

 

 

 

INVESTING ACTIVITIES AFFECTING BOTH CASH AND NON-CASH ITEMS

    

Acquisition of property, plant and equipment

   $ 153,008,625      $ 135,815,549   

Decrease in payables to contractors and equipment suppliers

     22,154,481        3,229,638   

Nonmonetary exchange trade-out price

     (482     (122,920
  

 

 

   

 

 

 

Cash paid

   $ 175,162,624      $ 138,922,267   
  

 

 

   

 

 

 

 

(Continued)

 

- 7 -


Taiwan Semiconductor Manufacturing Company Limited

STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(In Thousands of New Taiwan Dollars)

(Reviewed, Not Audited)

 

 

     2011     2010  

Disposal of property, plant and equipment and other assets

   $ 3,173,046      $ 620,872   

Increase in other receivables from related parties

     (116,573     (435,659

Nonmonetary exchange trade-out price

     (482     (122,920
  

 

 

   

 

 

 

Cash received

   $ 3,055,991      $ 62,293   
  

 

 

   

 

 

 

NON-CASH FINANCING ACTIVITIES

    

Current portion of bonds payable

   $ 4,500,000      $ —     
  

 

 

   

 

 

 

Current portion of other long-term payables (under accrued expenses and other current liabilities)

   $ 816,379      $ 614,061   
  

 

 

   

 

 

 

SUPPLEMENTAL INFORMATION FOR SPIN-OFF BUSINESSES

In August 2011, the Company transferred the solid state lighting and solar businesses into its wholly-owned, newly incorporated subsidiaries, TSMC Solid State Lighting Ltd. (TSMC SSL) and TSMC Solar Ltd. (TSMC Solar), respectively. The relevant information about spin-off was as follows:

 

     TSMC SSL     TSMC Solar     Total  

Acquired investments accounted for using equity method

   $ 2,270,000      $ 11,180,000      $ 13,450,000   
  

 

 

   

 

 

   

 

 

 

Non-cash items transferred

      

Current assets

     36,050        18,807        54,857   

Long-term investments

     2,872        7,912,710        7,915,582   

Property, plant and equipment

     1,929,563        2,372,214        4,301,777   

Other assets

     234,696        201,677        436,373   

Current liabilities

     (292,728     (337,439     (630,167

Other liabilities

     (36,272     (25,218     (61,490

Capital surplus

     —          (56,094     (56,094

Unrealized gain (loss) on financial instruments

     —          (3,298     (3,298

Cumulative translation adjustments

     256        221,864        222,120   
  

 

 

   

 

 

   

 

 

 
     (1,874,437     (10,305,223     (12,179,660
  

 

 

   

 

 

   

 

 

 

Cash contributed related to spin-off

   $ 395,563      $ 874,777      $ 1,270,340   
  

 

 

   

 

 

   

 

 

 

 

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

 

- 8 -


Taiwan Semiconductor Manufacturing Company Limited

NOTES TO FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

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

(Reviewed, Not Audited)

 

 

1. GENERAL

Taiwan Semiconductor Manufacturing Company Limited (the “Company” or “TSMC”), a Republic of China (R.O.C.) corporation, was incorporated on February 21, 1987. The Company 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. Beginning in 2010, the Company also engages in the researching, developing, designing, manufacturing and selling of solid state lighting devices and related applications products and systems, and renewable energy and efficiency related technologies and products. In August 2011, the Company transferred its solid state lighting and solar businesses into its wholly-owned, newly incorporated subsidiaries, TSMC SSL and TSMC Solar, respectively.

On September 5, 1994, its shares were listed on the Taiwan Stock Exchange (TSE). 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).

As of September 30, 2011 and 2010, the Company had 29,920 and 28,953 employees, respectively.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The financial statements are presented in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, Business Accounting Law, Guidelines Governing Business Accounting, and accounting principles generally accepted in the R.O.C.

For the convenience of readers, the accompanying 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 financial statements shall prevail.

Significant accounting policies are summarized as follows:

Foreign-currency Transactions

Foreign-currency transactions other than derivative contracts are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occur. Exchange gains or losses derived from foreign-currency transactions or monetary assets and liabilities denominated in foreign currencies are recognized in earnings.

At the balance sheet date, monetary assets and liabilities denominated in foreign currencies are revalued at prevailing exchange rates with the resulting gains or losses recognized in earnings.

Use of Estimates

The preparation of financial statements in conformity with the aforementioned guidelines, law and principles requires management to make reasonable assumptions and estimates of matters that are inherently uncertain. The actual results may differ from management’s estimates.

 

- 9 -


Classification of Current and Noncurrent Assets and Liabilities

Current assets are assets held for trading purposes and assets expected to be converted to cash, sold or consumed within one year from the balance sheet date. Current liabilities are obligations incurred for trading purposes and obligations expected to be settled within one year from the balance sheet date. Assets and liabilities that are not classified as current are noncurrent assets and liabilities, respectively.

Cash Equivalents

Repurchase agreements collateralized by government bonds acquired with maturities of less than three months from the date of purchase are classified as cash equivalents. The carrying amount approximates fair value due to their short term nature.

Financial Assets/Liabilities at Fair Value Through Profit or Loss

Derivatives that do not meet the criteria for hedge accounting are initially recognized at fair value, with transaction costs expensed as incurred. The derivatives are remeasured at fair value subsequently with changes in fair value recognized in earnings. A regular way purchase or sale of financial assets is accounted for using settlement date accounting.

Fair value is estimated using valuation techniques incorporating estimates and assumptions that are consistent with prevailing market conditions. When the fair value is positive, the derivative is recognized as a financial asset; when the fair value is negative, the derivative is recognized as a financial liability.

Available-for-sale Financial Assets

Available-for-sale financial assets are initially recognized at fair value plus transaction costs that are directly attributable to the acquisition. Changes in fair value from subsequent remeasurement are reported as a separate component of shareholders’ equity. The corresponding accumulated gains or losses are recognized in earnings when the financial asset is derecognized from the balance sheet. A regular way purchase or sale of financial assets is accounted for using settlement date accounting.

The fair value of overseas publicly traded stock is determined using the closing prices at the end of the period. The fair value of debt securities is determined using the average of bid and asked prices at the end of the period.

Any difference between the initial carrying amount of a debt security and the amount due at maturity is amortized using the effective interest method, with the amortization recognized in earnings.

If there is objective evidence which indicates that a financial asset is impaired, a loss is recognized. If, in a subsequent period, the amount of the impairment loss decreases, for equity securities, the previously recognized impairment loss is reversed to the extent of the decrease and recorded as an adjustment to shareholders’ equity; for debt securities, the amount of the decrease is recognized in earnings, provided that the decrease is clearly attributable to an event which occurred after the impairment loss was recognized.

Held-to-maturity Financial Assets

Debt securities for which the Company has a positive intention and ability to hold to maturity are categorized as held-to-maturity financial assets and are carried at amortized cost. Those financial assets are initially recognized at fair value plus transaction costs that are directly attributable to the acquisition. Gains or losses are recognized at the time of derecognition, impairment or amortization. A regular way purchase or sale of financial assets is accounted for using settlement date accounting.

 

- 10 -


If there is objective evidence which indicates that a financial asset is impaired, a loss is recognized. If, in a subsequent period, the amount of the impairment loss decreases and the decrease is clearly attributable to an event which occurred after the impairment loss was recognized, the previously recognized impairment loss is reversed to the extent of the decrease. The reversal may not result in a carrying amount that exceeds the amortized cost that would have been determined as if no impairment loss had been recognized.

Financial Assets Carried at Cost

Investments for which the Company does not exercise significant influence and that do not have a quoted market price in an active market and whose fair value cannot be reliably measured, such as non-publicly traded stocks and mutual funds, are carried at their original cost. The costs of non-publicly traded stocks and mutual funds are determined using the weighted-average method. If there is objective evidence which indicates that a financial asset is impaired, a loss is recognized. A subsequent reversal of such impairment loss is not allowed.

Cash dividends are recognized as investment income upon resolution of shareholders of an investee but are accounted for as a reduction to the original cost of investment if such dividends are declared on the earnings of the investee attributable to the period prior to the purchase of the investment. Stock dividends are recorded as an increase in the number of shares held and do not affect investment income. The cost per share is recalculated based on the new total number of shares.

Allowance for Doubtful Receivables

An allowance for doubtful receivables is provided based on a review of the collectability of receivables. The Company assesses the collectability of receivables by performing the account aging analysis and examining current trends in the credit quality of its customers.

The Company’s provision was originally set at 1% of the amount of outstanding receivables. On January 1, 2011, the Company adopted the third revision of Statement of Financial Accounting Standards (SFAS) No. 34, “Financial Instruments: Recognition and Measurement (SFAS No. 34).” One of the main revisions is that the impairment of receivables originated by the Company is subject to the provisions of SFAS No. 34. Companies are required to evaluate for indication of impairment of accounts receivable based on an individual and collective basis at the end of each reporting period. When objective evidence indicates that the estimated future cash flow of accounts receivable decreases as a result of one or more events that occurred after the initial recognition of the accounts receivable, such accounts receivable are deemed to be impaired.

Because of the Company’s short average collection period, the amount of the impairment loss recognized is the difference between the carrying amount of accounts receivable and estimated future cash flows without considering the discounting effect. Changes in the carrying amount of the allowance account are recognized as bad debt expense which is recorded in the operating expenses - general and administrative. When accounts receivable are considered uncollectable, the amount is written off against the allowance account.

Inventories

Inventories are recorded at standard cost and adjusted to approximate weighted-average cost on the balance sheet date.

Inventories are stated at the lower of cost or net realizable value. Inventory write-downs are made on an item-by-item basis, except where it may be appropriate to group similar or related items. Net realizable value is the estimated selling price of inventories less all estimated costs of completion and necessary selling costs.

 

- 11 -


Investments Accounted for Using Equity Method

Investments in companies wherein the Company exercises significant influence over the operating and financial policy decisions are accounted for using the equity method. The Company’s share of the net income or net loss of an investee is recognized in the “equity in earnings/losses of equity method investees, net” account. The cost of an investment shall be analyzed and the cost of investment in excess of the fair value of identifiable net assets acquired, representing goodwill, shall not be amortized. If the fair value of identifiable net assets acquired exceeds the cost of investment, the excess shall be proportionately allocated as reductions to fair values of non-current assets (except for financial assets other than investments accounted for using the equity method and deferred income tax assets). When an indication of impairment is identified, the carrying amount of the investment is reduced, with the related impairment loss recognized in earnings.

When the Company subscribes for additional investee’s shares at a percentage different from its existing ownership percentage, the resulting carrying amount of the investment in the investee differs from the amount of the Company’s share of the investee’s equity. The Company records such a difference as an adjustment to long-term investments with the corresponding amount charged or credited to capital surplus.

Gains or losses on sales from the Company to equity method investees are deferred in proportion to the Company’s ownership percentages in the investees until such gains or losses are realized through transactions with third parties. The entire amount of the gains or losses on sales to investees over which the Company has a controlling interest is deferred until such gains or losses are realized through subsequent sales of the related products to third parties. Gains or losses on sales from equity method investees to the Company are deferred in proportion to the Company’s ownership percentages in the investees until they are realized through transactions with third parties. Gains or losses on sales between equity method investees over each of which the Company has control are deferred in proportion to the Company’s weighted-average ownership percentage in the investee which records gains or losses. In transactions between equity method investees over either or both of which the Company has no control, gains or losses on sales are deferred in proportion to the multiplication of the Company’s weighted-average ownership percentages in the investees. Such gains or losses are deferred until they are realized through transactions with third parties.

If an investee’s functional currency is a foreign currency, differences will result from the translation of the investee’s financial statements into the reporting currency of the Company. Such differences are charged or credited to cumulative translation adjustments, a separate component of shareholders’ equity.

Property, Plant and Equipment and Assets Leased to Others

Property, plant and equipment and assets leased to others are stated at cost less accumulated depreciation. When an indication of impairment is identified, any excess of the carrying amount of an asset over its recoverable amount is recognized as a loss. If the recoverable amount increases in a subsequent period, the amount previously recognized as impairment would be reversed and recognized as a gain. However, the adjusted amount may not exceed the carrying amount that would have been determined, net of depreciation, as if no impairment loss had been recognized. Significant additions, renewals and betterments incurred during the construction period are capitalized. Maintenance and repairs are expensed as incurred.

Depreciation is computed using the straight-line method over the following estimated service lives: buildings - 10 to 20 years; machinery and equipment - 5 years; and office equipment - 3 to 5 years.

Upon sale or disposal of property, plant and equipment and assets leased to others, the related cost and accumulated depreciation are deducted from the corresponding accounts, with any gain or loss recorded as non-operating gains or losses in the period of sale or disposal.

 

- 12 -


Intangible Assets

Goodwill represents the excess of the consideration paid for acquisition over the fair value of identifiable net assets acquired. Goodwill is no longer amortized and instead is tested for impairment annually, or more frequently if events or changes in circumstances suggest that the carrying amount may not be recoverable. If an event occurs or circumstances change which indicate that the fair value of goodwill is more likely than not below its carrying amount, an impairment loss is recognized. A subsequent reversal of such impairment loss is not allowed.

Deferred charges consist of technology license fees, software and system design costs and patent and others. The amounts are amortized over the following periods: Technology license fees - the estimated life of the technology or the term of the technology transfer contract; software and system design costs - 3 years; patent and others - the economic life or contract period. When an indication of impairment is identified, any excess of the carrying amount of an asset over its recoverable amount is recognized as a loss. If the recoverable amount increases in a subsequent period, the previously recognized impairment loss would be reversed and recognized as a gain. However, the adjusted amount may not exceed the carrying amount that would have been determined, net of amortization, as if no impairment loss had been recognized.

Expenditures related to research activities and those related to development activities that do not meet the criteria for capitalization are charged to expense when incurred.

Pension Costs

For employees who participate in defined contribution pension plans, pension costs are recorded based on the actual contributions made to employees’ individual pension accounts during their service periods. For employees who participate in defined benefit pension plans, pension costs are recorded based on actuarial calculations.

Income Tax

The Company applies an inter-period allocation for its income tax whereby deferred income tax assets and liabilities are recognized for the tax effects of temporary differences and unused tax credits. Valuation allowances are provided to the extent, if any, that it is more likely than not that deferred income tax assets will not be realized. A deferred tax asset or liability is classified as current or noncurrent in accordance with the classification of its related asset or liability. However, if a deferred tax asset or liability does not relate to an asset or liability in the financial statements, then it is classified as either current or noncurrent based on the expected length of time before it is realized or settled.

Any tax credits arising from purchases of machinery and equipment, research and development expenditures and personnel training expenditures are recognized using the flow-through method.

Adjustments of prior years’ tax liabilities are added to or deducted from the current period’s tax provision.

Income tax on unappropriated earnings at a rate of 10% is expensed in the year of shareholder approval which is the year subsequent to the year the earnings are generated.

Stock-based Compensation

Employee stock options that were granted or modified in the period from January 1, 2004 to December 31, 2007 are accounted for by the interpretations issued by the Accounting Research and Development Foundation of the Republic of China. The Company adopted the intrinsic value method and any compensation cost determined using this method is recognized in earnings over the employee vesting period. Employee stock option plans that were granted or modified after December 31, 2007 are accounted for using fair value method in accordance with SFAS No. 39, “Accounting for Share-based Payment.” The Company did not grant or modify any employee stock options since January 1, 2008.

 

- 13 -


Treasury Stock

Treasury stock represents the outstanding shares that the Company buys back from market, which is stated at cost and shown as a deduction in shareholders’ equity. When the Company retires treasury stock, the treasury stock account is reduced and the common stock as well as the capital surplus - additional paid-in capital are reversed on a pro rata basis. When the book value of the treasury stock exceeds the sum of the par value and additional paid-in capital, the difference is charged to capital surplus - treasury stock transactions and to retained earnings for any remaining amount. While disposing of the treasury stock, the treasury stock shall be reversed, and if the disposal value is greater than the book value, the amount in excess of the book value shall be credited to additional paid-in capital - treasury stock.

Revenue Recognition and Allowance for Sales Returns and Others

The Company recognizes revenue when evidence of an arrangement exists, the rewards of ownership and significant risk of the goods has been transferred to the buyer, price is fixed or determinable, and collectability is reasonably assured. Provisions for estimated sales returns and other allowances are recorded in the period the related revenue is recognized, based on historical experience, management’s judgment, and any known factors that would significantly affect the allowance.

Sales prices are determined using fair value taking into account related sales discounts agreed to by the Company and its customers. Sales agreements typically provide that payment is due 30 days from invoice date for a majority of the customers and 30 to 45 days after the end of the month in which sales occur for some customers. Since the receivables from sales are collectible within one year and such transactions are frequent, fair value of the receivables is equivalent to the nominal amount of the cash to be received.

Spin-off

In accordance with the Company’s organization realignment, the Company contributed net assets, including cash, to the newly formed subsidiaries in exchange for all of the shares of those subsidiaries. The net assets transferred are reflected at their net book value without recognizing any gain or loss.

 

3. ACCOUNTING CHANGES

On January 1, 2011, the Company prospectively adopted the newly revised SFAS No. 34, “Financial Instruments: Recognition and Measurement.” The main revisions include (1) finance lease receivables are now covered by SFAS No. 34; (2) the scope of the applicability of SFAS No. 34 to insurance contracts is amended; (3) loans and receivables originated by the Company are now covered by SFAS No. 34; (4) additional guidelines on impairment testing of financial assets carried at amortized cost when the debtor has financial difficulties and the terms of obligations have been modified; and (5) accounting treatment by a debtor for modifications in the terms of obligations. This accounting change did not have a significant effect on the Company’s financial statements as of and for the nine months ended September 30, 2011.

On January 1, 2011, the Company adopted the newly issued SFAS No. 41, “Operating Segments.” The statement requires identification and disclosure of operating segments on the basis of how the Company’s chief operating decision maker regularly reviews information in order to allocate resources and assess performance. This statement supersedes SFAS No. 20, “Segment Reporting.” The Company conformed to the disclosure requirements as of and for the nine months ended September 30, 2011. The information for the nine months ended September 30, 2010 has been recast to reflect the new segment reporting requirement.

 

- 14 -


4. CASH AND CASH EQUIVALENTS

 

     September 30  
     2011      2010  

Cash and deposits in banks

   $ 63,280,563       $ 87,348,689   

Repurchase agreements collateralized by government bonds

     3,870,170         3,050,880   
  

 

 

    

 

 

 
   $ 67,150,733       $ 90,399,569   
  

 

 

    

 

 

 

 

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

 

     September 30  
     2011      2010  

Trading financial assets

     

Forward exchange contracts

   $ 583,010       $ 3,241   

Cross currency swap contracts

     —           11,142   
  

 

 

    

 

 

 
   $ 583,010       $ 14,383   
  

 

 

    

 

 

 

Trading financial liabilities

     

Forward exchange contracts

   $ 66,378       $ 73,530   

Cross currency swap contracts

     107,451         —     
  

 

 

    

 

 

 
   $ 173,829       $ 73,530   
  

 

 

    

 

 

 

The Company entered into derivative contracts during the nine months ended September 30, 2011 and 2010 to manage exposures due to fluctuations of foreign exchange rates. The derivative contracts entered into by the Company did not meet the criteria for hedge accounting. Therefore, the Company did not apply hedge accounting treatment for its derivative contracts.

Outstanding forward exchange contracts consisted of the following:

 

     Maturity Date   

Contract Amount

(In Thousands)

September 30, 2011

     

Sell NT$/Buy US$

   October 2011    NT$10,093,875/US$350,000

Sell US$/Buy NT$

   October 2011    US$110,000/NT$3,292,775

September 30, 2010

     

Sell EUR/Buy NT$

   October 2010    EUR139,000/NT$5,851,568

Sell US$/Buy NT$

   October 2010    US$30,000/NT$939,400

 

- 15 -


Outstanding cross currency swap contracts consisted of the following:

 

Maturity Date   

Contract Amount

(In Thousands)

   Range of
Interest Rates
Paid
    Range of
Interest Rates
Received
 

September 30, 2011

       

October 2011

   US$117,000/NT$3,470,950      1.27%-4.40     0.00%-0.00

September 30, 2010

       

October 2010

   US$90,000/NT$2,830,540      0.46     0.00%-0.00

For the nine months ended September 30, 2011 and 2010, changes in fair value related to derivative financial instruments recognized in earnings was a net gain of NT$782,810 thousand and NT$156,175 thousand, respectively.

 

6. AVAILABLE-FOR-SALE FINANCIAL ASSETS

 

     September 30  
     2011     2010  

Overseas publicly traded stock

   $ 2,735,777      $ 4,048,549   

Corporate bonds

     —          1,036,502   
  

 

 

   

 

 

 
     2,735,777        5,085,051   

Current portion

     (2,735,777     (4,048,549
  

 

 

   

 

 

 
   $ —        $ 1,036,502   
  

 

 

   

 

 

 

 

7. HELD-TO-MATURITY FINANCIAL ASSETS

 

     September 30  
     2011     2010  

Corporate bonds

   $ 1,654,167      $ 7,257,142   

Current portion

     (250,165     (5,598,471
  

 

 

   

 

 

 
   $ 1,404,002      $ 1,658,671   
  

 

 

   

 

 

 

 

8. ALLOWANCES FOR DOUBTFUL RECEIVABLES, SALES RETURNS AND OTHERS

Movements of the allowance for doubtful receivables were as follows:

 

     Nine Months Ended September 30  
     2011     2010  

Balance, beginning of period

   $ 488,000      $ 431,000   

Provision

     —          109,000   

Write-off

     (2,880     —     
  

 

 

   

 

 

 

Balance, end of period

   $ 485,120      $ 540,000   
  

 

 

   

 

 

 

 

- 16 -


Movements of the allowance for sales returns and others were as follows:

 

     Nine Months Ended September 30  
     2011     2010  

Balance, beginning of period

   $ 7,341,444      $ 8,583,632   

Provision

     3,242,741        8,715,191   

Write-off

     (4,667,896     (10,708,702
  

 

 

   

 

 

 

Balance, end of period

   $ 5,916,289      $ 6,590,121   
  

 

 

   

 

 

 

 

9. INVENTORIES

 

     September 30  
     2011      2010  

Finished goods

   $ 4,260,884       $ 3,007,453   

Work in process

     16,517,292         18,087,605   

Raw materials

     1,410,292         1,490,972   

Supplies and spare parts

     1,074,379         1,187,500   
  

 

 

    

 

 

 
   $ 23,262,847       $ 23,773,530   
  

 

 

    

 

 

 

Write-down of inventories to net realizable value in the amount of NT$300,629 thousand and NT$582,149 thousand, respectively, were included in the cost of sales for the nine months ended September 30, 2011 and 2010. Inventory losses related to earthquake in the amount of NT$190,992 thousand were classified under non-operating expenses and losses for the nine months ended September 30, 2010.

 

10. INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD

 

     September 30  
     2011      2010  
     Carrying
Amount
     % of
Ownership
     Carrying
Amount
     % of
Ownership
 

TSMC Global Ltd. (TSMC Global)

   $ 44,274,921         100       $ 44,892,711         100   

TSMC Partners, Ltd. (TSMC Partners)

     34,888,811         100         33,943,317         100   

TSMC Solar

     10,847,842         100         —           —     

Vanguard International Semiconductor Corporation (VIS)

     8,918,553         38         9,424,817         38   

TSMC China Company Limited (TSMC China)

     8,460,740         100         3,654,158         100   

Systems on Silicon Manufacturing Company Pte Ltd. (SSMC)

     6,109,136         39         6,890,171         39   

TSMC North America

     3,001,878         100         2,827,009         100   

TSMC SSL

     2,063,176         100         —           —     

Xintec Inc. (Xintec)

     1,610,795         40         1,618,701         41   

VentureTech Alliance Fund III, L.P. (VTAF III)

     1,247,111         52         2,852,802         99   

Global UniChip Corporation (GUC)

     1,117,076         35         1,061,303         35   

(Continued)

 

- 17 -


     September 30  
     2011      2010  
     Carrying
Amount
     % of
Ownership
     Carrying
Amount
     % of
Ownership
 

VentureTech Alliance Fund II, L.P. (VTAF II)

   $ 1,022,280         98       $ 1,093,417         98   

Emerging Alliance Fund, L.P. (Emerging Alliance)

     291,196         99         320,426         99   

TSMC Europe B.V. (TSMC Europe)

     209,723         100         182,022         100   

TSMC Japan Limited (TSMC Japan)

     165,630         100         150,896         100   

TSMC Korea Limited (TSMC Korea)

     22,342         100         20,559         100   

Motech Industries Inc. (Motech)

     —           —           6,533,432         20   

TSMC Solar Europe B.V. (TSMC Solar Europe)

     —           —           25,638         100   

TSMC Solar North America, Inc. (TSMC Solar NA)

     —           —           24,717         100   

TSMC Lighting North America, Inc. (TSMC Lighting NA)

     —           —           3,133         100   
  

 

 

       

 

 

    
   $ 124,251,210          $ 115,519,229      
  

 

 

       

 

 

    

(Concluded)

In the third quarter of 2011, the Company increased its investment in TSMC China for the amount of NT$2,176,000 thousand, and the Company has received the approval from the Investment Commission of Ministry of Economic Affairs.

For the renewable energy and efficiency related businesses development, the Company established wholly-owned subsidiaries, TSMC Solar NA, TSMC Solar Europe and TSMC Lighting NA, in the third quarter of 2010. In addition, to foster a stronger sense of corporate entrepreneurship and facilitate business specializations in order to strengthen overall profitability and operational efficiency, the Company transferred its solid state lighting and solar businesses into its wholly-owned, newly incorporated subsidiaries, TSMC SSL and TSMC Solar, in August 2011. Furthermore, the Company adjusted its investment structure by transferring TSMC Lighting NA to TSMC SSL and transferring Motech, TSMC Solar Europe, TSMC Solar NA and part of VTAF III to TSMC Solar. As of August 1, 2011, the net book values of the Company’s certain assets, liabilities and shareholders’ equity, including cash, contributed to TSMC SSL and TSMC Solar in exchange for all the shares of TSMC SSL and TSMC Solar amounted to NT$2,270,000 thousand and NT$11,180,000 thousand, respectively.

For the year ended December 31, 2010, the Company increased its investment in VTAF III for the amount of NT$1,862,278 thousand, and the Company’s percentage of ownership in VTAF III increased from 98% to 99%. Primarily due to the aforementioned transfer, the Company’s percentage of ownership further decreased to 52%.

In February 2010, the Company subscribed to 75,316 thousand shares of Motech through a private placement for NT$6,228,661 thousand; after the subscription, the Company’s percentage of ownership in Motech was 20%. Transfer of the aforementioned common shares within three years is prohibited unless permitted by other related regulations.

 

- 18 -


For the nine months ended September 30, 2011 and 2010, equity in earnings/losses of equity method investees was a net gain of NT$3,531,943 thousand and NT$4,677,062 thousand, respectively. Related equity in earnings/losses of equity method investees were determined based on the reviewed financial statements, except those of Emerging Alliance, TSMC Europe, TSMC Japan and TSMC Korea for the nine months ended September 30, 2011 and those of VTAF II, Emerging Alliance, TSMC Europe, TSMC Japan and TSMC Korea for the nine months ended September 30, 2010. The Company believes that, had the aforementioned equity method investees’ financial statements been reviewed, any adjustments arising would have no material effect on the Company’s financial statements.

As of September 30, 2011 and 2010, the quoted market price of publicly traded stocks in unrestricted investments accounted for using the equity method (VIS and GUC) were NT$12,574,108 thousand and NT$13,789,014 thousand, respectively.

Movements of the difference between the cost of investments and the Company’s share in investees’ net assets allocated to depreciable assets were as follows:

 

     Nine Months Ended September 30  
     2011     2010  

Balance, beginning of period

   $ 2,504,496      $ 1,429,118   

Additions

     —          2,055,660   

Amortizations

     (641,656     (726,392

Effect of spin-off

     (1,507,430     —     
  

 

 

   

 

 

 

Balance, end of period

   $ 355,410      $ 2,758,386   
  

 

 

   

 

 

 

Movements of the difference allocated to goodwill were as follows:

 

     Nine Months Ended September 30  
     2011     2010  

Balance, beginning of period

   $ 1,415,565      $ 1,061,885   

Additions

     —          353,680   

Effect of spin-off

     (353,680     —     
  

 

 

   

 

 

 

Balance, end of period

   $ 1,061,885      $ 1,415,565   
  

 

 

   

 

 

 

 

11. FINANCIAL ASSETS CARRIED AT COST

 

     September 30  
     2011      2010  

Non-publicly traded stocks

   $ 338,584       $ 338,584   

Mutual funds

     159,251         159,251   
  

 

 

    

 

 

 
   $ 497,835       $ 497,835   
  

 

 

    

 

 

 

 

- 19 -


12. PROPERTY, PLANT AND EQUIPMENT

 

     Nine Months Ended September 30, 2011  
     Balance,
Beginning of
Period
     Additions      Disposals     Reclassification     Effect of
Spin-off
   

Balance,

End of Period

 

Cost

              

Buildings

   $ 128,646,942       $ 20,274,732       $ (34,499   $ (388   $ (1,457,449   $ 147,429,338   

Machinery and equipment

     852,733,592         117,352,327         (1,672,870     (27,279     (1,299,881     967,085,889   

Office equipment

     11,730,537         2,016,312         (299,897     —          (39,072     13,407,880   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     993,111,071       $ 139,643,371       $ (2,007,266   $ (27,667   $ (2,796,402     1,127,923,107   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated depreciation

              

Buildings

     81,347,877       $ 6,648,533       $ (11,864   $ (55   $ (25,639     87,958,852   

Machinery and equipment

     616,495,207         67,519,124         (1,619,962     (15,623     (192,323     682,186,423   

Office equipment

     8,762,361         857,053         (299,897     —          (3,127     9,316,390   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     706,605,445       $ 75,024,710       $ (1,931,723   $ (15,678   $ (221,089     779,461,665   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Advance payments and construction in progress

     80,348,673       $ 13,365,254       $ (3,068,502   $ —        $ (1,726,464     88,918,961   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
   $ 366,854,299                $ 437,380,403   
  

 

 

             

 

 

 

 

     Nine Months Ended September 30, 2010  
    

Balance,

Beginning of
Period

     Additions      Disposals     Reclassification    

Balance,

End of Period

 

Cost

            

Buildings

   $ 124,522,047       $ 3,309,121       $ (135,497   $ —        $ 127,695,671   

Machinery and equipment

     713,426,126         124,067,387         (1,017,470     139,842        836,615,885   

Office equipment

     10,781,099         1,185,072         (655,620     (442     11,310,109   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     848,729,272       $ 128,561,580       $ (1,808,587   $ 139,400        975,621,665   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Accumulated depreciation

            

Buildings

     73,525,160       $ 6,012,896       $ (128,466   $ —          79,409,590   

Machinery and equipment

     545,693,910         52,869,076         (1,017,066     139,842        597,685,762   

Office equipment

     8,545,253         666,347         (655,582     (442     8,555,576   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     627,764,323       $ 59,548,319       $ (1,801,114   $ 139,400        685,650,928   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Advance payments and construction in progress

     33,786,577       $ 7,253,969       $ (418,838   $ —          40,621,708   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
   $ 254,751,526              $ 330,592,445   
  

 

 

           

 

 

 

No interest was capitalized during the nine months ended September 30, 2011 and 2010.

 

13. DEFERRED CHARGES, NET

 

     Nine Months Ended September 30, 2011  
    

Balance,

Beginning of

Period

     Additions      Amortization    

Effect of

Spin-off

   

Balance,

End of Period

 

Technology license fees

   $ 2,277,832       $ 10,308       $ (502,825   $ —        $ 1,785,315   

Software and system design costs

     2,075,935         905,237         (786,921     (19,392     2,174,859   

Patent and others

     1,102,660         153,807         (318,269     (223,697     714,501   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
   $ 5,456,427       $ 1,069,352       $ (1,608,015   $ (243,089   $ 4,674,675   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

     Nine Months Ended September 30, 2010  
    

Balance,

Beginning of

Period

     Additions      Amortization    

Balance,

End of Period

 

Technology license fees

   $ 2,979,801       $ —         $ (534,476   $ 2,445,325   

Software and system design costs

     1,646,973         966,623         (652,432     1,961,164   

Patent and others

     1,264,911         211,118         (274,054     1,201,975   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 5,891,685       $ 1,177,741       $ (1,460,962   $ 5,608,464   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

- 20 -


14. SHORT-TERM LOANS

 

     September 30  
     2011      2010  

Unsecured loans:

     

US$1,058,200 thousand and EUR88,725 thousand, due by November 2011, and annual interest at 0.40%-1.50% in 2011; US$1,200,000 thousand, due by October 2010, and annual interest at 0.39%-0.54% in 2010

   $ 36,019,654       $ 37,596,000   
  

 

 

    

 

 

 

 

15. BONDS PAYABLE

 

     September 30  
     2011     2010  

Domestic unsecured bonds:

    

Issued in September 2011 and repayable in September 2016, 1.40% interest payable annually

   $ 10,500,000      $ —     

Issued in September 2011 and repayable in September 2018, 1.63% interest payable annually

     7,500,000        —     

Issued in January 2002 and repayable in January 2012, 3.00% interest payable annually

     4,500,000        4,500,000   
  

 

 

   

 

 

 
     22,500,000        4,500,000   

Current portion

     (4,500,000     —     
  

 

 

   

 

 

 
   $ 18,000,000      $ 4,500,000   
  

 

 

   

 

 

 

 

16. OTHER LONG-TERM PAYABLES

The Company’s other long-term payables mainly resulted from license agreements for certain semiconductor-related patents.

As of September 30, 2011, future payments for other long-term payables (classified under accrued expenses and other current liabilities) due within one year amounted to NT$816,379 thousand.

 

17. PENSION PLANS

The pension mechanism under the Labor Pension Act (the “Act”) is deemed a defined contribution plan. Pursuant to the Act, the Company has made monthly contributions equal to 6% of each employee’s monthly salary to employees’ pension accounts and recognized pension costs of NT$843,618 thousand and NT$672,785 thousand for the nine months ended September 30, 2011 and 2010, respectively.

The Company has a defined benefit plan under the Labor Standards Law that provides benefits based on an employee’s length of service and average monthly salary for the six-month period prior to retirement. The Company contributes an amount equal to 2% of salaries paid each month to a pension fund (the Fund), which is administered by the Labor Pension Fund Supervisory Committee (the Committee) and deposited in the Committee’s name in the Bank of Taiwan. The Company recognized pension costs of NT$226,549 thousand and NT$177,084 thousand for the nine months ended September 30, 2011 and 2010, respectively.

 

- 21 -


Movements of the Fund and accrued pension cost under the defined benefit plan were summarized as follows:

 

     Nine Months Ended September 30  
     2011     2010  

The Fund

    

Balance, beginning of period

   $ 2,835,231      $ 2,595,717   

Contributions

     161,157        159,705   

Interest

     27,083        41,105   

Payments

     (7,339     (11,050
  

 

 

   

 

 

 

Balance, end of period

   $ 3,016,132      $ 2,785,477   
  

 

 

   

 

 

 

Accrued pension cost

    

Balance, beginning of period

   $ 3,824,601      $ 3,807,176   

Accruals

     66,557        8,589   

Effect of spin-off

     (60,583     —     
  

 

 

   

 

 

 

Balance, end of period

   $ 3,830,575      $ 3,815,765   
  

 

 

   

 

 

 

 

18. INCOME TAX

 

  a. A reconciliation of income tax expense based on “income before income tax” at the statutory rate and income tax currently payable was as follows:

 

     Nine Months Ended September 30  
     2011     2010  

Income tax expense based on “income before income tax” at statutory rate (17%)

   $ 18,892,672      $ 21,534,495   

Tax effect of the following:

    

Tax-exempt income

     (10,599,946     (12,295,454

Temporary and permanent differences

     (948,657     (616,048

Additional income tax under Alternative Minimum Tax Act

     116,718        —     

Additional tax at 10% on unappropriated earnings

     6,259,344        127,489   

Income tax credits used

     (6,259,344     (3,678,333
  

 

 

   

 

 

 

Income tax currently payable

   $ 7,460,787      $ 5,072,149   
  

 

 

   

 

 

 

 

  b. Income tax expense consisted of the following:

 

     Nine Months Ended September 30  
     2011     2010  

Income tax currently payable

   $ 7,460,787      $ 5,072,149   

Income tax adjustments on prior years

     464,078        980,428   

Other income tax adjustments

     107,426        10,148   

Net change in deferred income tax assets

    

Investment tax credits

     2,367,900        (6,965,003

Temporary differences

     229,708        65,697   

Valuation allowance

     (2,118,272     6,625,521   

Effect of spin-off

     (893     —     
  

 

 

   

 

 

 

Income tax expense

   $ 8,510,734      $ 5,788,940   
  

 

 

   

 

 

 

 

- 22 -


  c. Net deferred income tax assets consisted of the following:

 

     September 30  
     2011     2010  

Current deferred income tax assets

    

Investment tax credits

   $ —        $ 1,096,995   

Temporary differences

    

Allowance for sales returns and others

     502,885        566,750   

Unrealized gain/loss on financial instruments

     288,760        65,589   

Others

     127,293        236,332   
  

 

 

   

 

 

 
   $ 918,938      $ 1,965,666   
  

 

 

   

 

 

 

Noncurrent deferred income tax assets

    

Investment tax credits

   $ 19,607,314      $ 20,599,749   

Temporary differences

    

Depreciation

     1,829,967        1,990,080   

Others

     188,001        35,785   

Valuation allowance

     (10,534,490     (12,424,853
  

 

 

   

 

 

 
   $ 11,090,792      $ 10,200,761   
  

 

 

   

 

 

 

Effective in May 2010, the Article 5 of the Income Tax Law of the Republic of China was amended, in which the income tax rate of profit-seeking enterprises would be reduced from 20% to 17%. The last amended income tax rate of 17% is retroactively applied on January 1, 2010. The Company recalculated its deferred tax assets in accordance with the new amended Article and adjusted the resulting difference as an income tax expense in 2010.

Under Article 10 of the Statute for Industrial Innovation (SII) legislated and effective in May 2010, a profit-seeking enterprise may deduct up to 15% of its research and development expenditures from its income tax payable for the period in which these expenditures are incurred, but this deduction should not exceed 30% of the income tax payable for that period. This incentive is retroactive to January 1, 2010 and effective until December 31, 2019.

 

  d. Integrated income tax information:

The balance of the imputation credit account as of September 30, 2011 and 2010 was NT$4,016,138 thousand and NT$1,669,533 thousand, respectively.

The estimated and actual creditable ratios for distribution of earnings of 2010 and 2009 were 4.95% and 9.85%, respectively.

The imputation credit allocated to shareholders is based on its balance as of the date of the dividend distribution. The estimated creditable ratio may change when the actual distribution of the imputation credit is made.

 

  e. All earnings generated prior to December 31, 1997 have been appropriated.

 

- 23 -


  f. As of September 30, 2011, investment tax credits consisted of the following:

 

Law/Statute    Item    Total
Creditable
Amount
     Remaining
Creditable
Amount
     Expiry
Year

Statute for Upgrading Industries

  

Purchase of machinery and equipment

   $ 3,202,253       $ 597,292       2012
        6,513,605         6,513,605       2013
        7,002,482         7,002,482       2014
        482,351         482,351       2015
     

 

 

    

 

 

    
     

 

$

 

17,200,691

 

  

  

 

$

 

14,595,730

 

  

  
     

 

 

    

 

 

    

Statute for Upgrading Industries

  

Research and development expenditures

   $ 1,772,824       $ —         2012
        4,994,463         4,994,463       2013
     

 

 

    

 

 

    
     

 

$

 

6,767,287

 

  

  

 

$

 

4,994,463

 

  

  
     

 

 

    

 

 

    

Statute for Upgrading Industries

  

Personnel training expenditures

   $ 17,391       $ —         2012
        17,121         17,121       2013
     

 

 

    

 

 

    
     

 

$

 

34,512

 

  

   $ 17,121      
     

 

 

    

 

 

    

Statute for Industrial Innovation

  

Research and development expenditures

   $ 1,864,168       $ —         2011
     

 

 

    

 

 

    

 

  g. The profits generated from the following projects are exempt from income tax for a five-year period:

 

     Tax-exemption Period

Construction and expansion of 2003

   2007 to 2011

Construction and expansion of 2004

   2008 to 2012

Construction and expansion of 2005

   2010 to 2014

Construction and expansion of 2006

   2011 to 2015

 

  h. The tax authorities have examined income tax returns of the Company through 2008. All investment tax credit adjustments assessed by the tax authorities have been recognized accordingly.

 

19. LABOR COST, DEPRECIATION AND AMORTIZATION

 

     Nine Months Ended September 30, 2011  
     Classified as
Cost of Sales
     Classified as
Operating
Expenses
     Total  

Labor cost

        

Salary and bonus

   $ 17,952,195       $ 12,634,100       $ 30,586,295   

Labor and health insurance

     930,786         531,192         1,461,978   

Pension

     681,369         388,798         1,070,167   

Meal

     486,450         202,667         689,117   

(Continued)

 

- 24 -


     Nine Months Ended September 30, 2011  
     Classified as
Cost of Sales
     Classified as
Operating
Expenses
     Total  

Welfare

   $ 175,648       $ 101,976       $ 277,624   

Others

     33,348         27,488         60,836   
  

 

 

    

 

 

    

 

 

 
   $ 20,259,796       $ 13,886,221       $ 34,146,017   
  

 

 

    

 

 

    

 

 

 

Depreciation

   $ 70,045,124       $ 4,971,754       $ 75,016,878   
  

 

 

    

 

 

    

 

 

 

Amortization

   $ 1,044,257       $ 563,758       $ 1,608,015   
  

 

 

    

 

 

    

 

 

 

(Concluded)

 

     Nine Months Ended September 30, 2010  
     Classified as
Cost of Sales
     Classified as
Operating
Expenses
     Total  

Labor cost

        

Salary and bonus

   $ 17,941,777       $ 13,265,190       $ 31,206,967   

Labor and health insurance

     670,276         382,460         1,052,736   

Pension

     540,957         308,912         849,869   

Meal

     403,413         163,910         567,323   

Welfare

     161,132         95,271         256,403   

Others

     50,792         18,560         69,352   
  

 

 

    

 

 

    

 

 

 
   $ 19,768,347       $ 14,234,303       $ 34,002,650   
  

 

 

    

 

 

    

 

 

 

Depreciation

   $ 55,796,317       $ 3,739,803       $ 59,536,120   
  

 

 

    

 

 

    

 

 

 

Amortization

   $ 933,660       $ 527,302       $ 1,460,962   
  

 

 

    

 

 

    

 

 

 

 

20. SHAREHOLDERS’ EQUITY

As of September 30, 2011, 1,092,313 thousand ADSs of the Company were traded on the NYSE. The number of common shares represented by the ADSs was 5,461,567 thousand (one ADS represents five common shares).

Capital surplus can only be used to offset a deficit under the Company Law. However, the capital surplus generated from donations and the excess of the issuance price over the par value of capital stock (including the stock issued for new capital, mergers, convertible bonds and the surplus from treasury stock transactions) may be appropriated as stock dividends, which are limited to a certain percentage of the Company’s paid-in capital. In addition, the capital surplus from long-term investments may not be used for any purpose.

 

- 25 -


Capital surplus consisted of the following:

 

     September 30  
     2011      2010  

Additional paid-in capital

   $ 23,734,158       $ 23,562,191   

From merger

     22,805,390         22,805,390   

From convertible bonds

     8,893,190         8,893,190   

From long-term investments

     256,946         373,244   

Donations

     55         55   
  

 

 

    

 

 

 
   $ 55,689,739       $ 55,634,070   
  

 

 

    

 

 

 

The Company’s Articles of Incorporation provide that, when allocating the net profits for each fiscal year, the Company shall first offset its losses in previous years and then set aside the following items accordingly:

 

  a. Legal capital reserve at 10% of the profits left over, until the accumulated legal capital reserve equals the Company’s paid-in capital;

 

  b. Special capital reserve in accordance with relevant laws or regulations or as requested by the authorities in charge;

 

  c. Bonus to directors and profit sharing to employees of the Company of not more than 0.3% and not less than 1% of the remainder, respectively. Directors who also serve as executive officers of the Company are not entitled to receive the bonus to directors. The Company may issue profit sharing to employees in stock of an affiliated company meeting the conditions set by the Board of Directors or, by the person duly authorized by the Board of Directors;

 

  d. Any balance left over shall be allocated according to the resolution of the shareholders’ meeting.

The Company’s Articles of Incorporation also provide that profits of the Company may be distributed by way of cash dividend and/or stock dividend. However, distribution of profits shall be made preferably by way of cash dividend. Distribution of profits may also be made by way of stock dividend; provided that the ratio for stock dividend shall not exceed 50% of the total distribution.

Any appropriations of the profits are subject to shareholders’ approval in the following year.

The Company accrued profit sharing to employees based on certain percentage of net income during the period, which amounted to NT$6,887,967 thousand and NT$8,162,440 thousand for the nine months ended September 30, 2011 and 2010, respectively. Bonuses to directors were accrued based on estimated amount of payment. If the actual amounts subsequently resolved by the shareholders differ from the estimated amounts, the differences are recorded in the year of shareholders’ resolution as a change in accounting estimate. If profit sharing is resolved to be distributed to employees in stock, the number of shares is determined by dividing the amount of profit sharing by the closing price (after considering the effect of dividends) of the shares on the day preceding the shareholders’ meeting.

The Company no longer has supervisors since January 1, 2007. The required duties of supervisors are being fulfilled by the Audit Committee.

The appropriation for legal capital reserve shall be made until the reserve equals the Company’s paid-in capital. The reserve may be used to offset a deficit, or be distributed as dividends and bonuses for the portion in excess of 50% of the paid-in capital if the Company has no unappropriated earnings and the reserve balance has exceeded 50% of the Company’s paid-in capital. The Company Law also prescribes that, when the reserve has reached 50% of the Company’s paid-in capital, up to 50% of the reserve may be transferred to capital.

 

- 26 -


A special capital reserve equivalent to the net debit balance of the other components of shareholders’ equity (for example, cumulative translation adjustments and unrealized loss on financial instruments, but excluding treasury stock) shall be made from unappropriated earnings pursuant to existing regulations promulgated by the Securities and Futures Bureau (SFB). Any special reserve appropriated may be reversed to the extent that the net debit balance reverses.

The appropriations of earnings for 2010 and 2009 had been approved in the shareholders’ meetings held on June 9, 2011 and June 15, 2010, respectively. The appropriations and dividends per share were as follows:

 

     Appropriation of Earnings      Dividends Per  Share
(NT$)
 
     For Fiscal
Year 2010
     For Fiscal
Year 2009
     For Fiscal
Year 2010
     For Fiscal
Year 2009
 

Legal capital reserve

   $ 16,160,501       $ 8,921,784         

Special capital reserve

     5,120,827         1,313,047         

Cash dividends to shareholders

     77,730,236         77,708,120       $ 3.00       $ 3.00   
  

 

 

    

 

 

       
   $ 99,011,564       $ 87,942,951         
  

 

 

    

 

 

       

TSMC’s profit sharing to employees to be paid in cash and bonus to directors in the amounts of NT$10,908,338 thousand and NT$51,131 thousand for 2010, respectively, and profit sharing to employees to be paid in cash and bonus to directors in the amounts of NT$6,691,338 thousand and NT$67,692 thousand for 2009, respectively, had been approved in the shareholders’ meeting held on June 9, 2011 and June 15, 2010, respectively. The resolved amounts of the profit sharing to employees and bonus to directors were consistent with the resolutions of meeting of the Board of Directors held on February 15, 2011 and February 9, 2010 and same amount had been charged against earnings of 2010 and 2009, respectively.

The information about the appropriations of profit sharing to employees and bonus to directors is available at the Market Observation Post System website.

Under the Integrated Income Tax System that became effective on January 1, 1998, R.O.C. resident shareholders are allowed a tax credit for their proportionate share of the income tax paid by the Company on earnings generated since January 1, 1998.

 

21. STOCK-BASED COMPENSATION PLANS

The Company’s Employee Stock Option Plans, consisting of the 2004 Plan, 2003 Plan and 2002 Plan, were approved by the SFB on January 6, 2005, October 29, 2003 and June 25, 2002, respectively. The maximum number of options authorized to be granted under the 2004 Plan, 2003 Plan and 2002 Plan was 11,000 thousand, 120,000 thousand and 100,000 thousand, respectively, with each option eligible to subscribe for one common share when exercised. The options may be granted to qualified employees of the Company or any of its domestic or foreign subsidiaries, in which the Company’s shareholding with voting rights, directly or indirectly, is more than fifty percent (50%). The options of all the plans are valid for ten years and exercisable at certain percentages subsequent to the second anniversary of the grant date. Under the terms of the plans, the options are granted at an exercise price equal to the closing price of the Company’s common shares listed on the TSE on the grant date.

Options of the plans that had never been granted or had been granted but subsequently canceled had expired as of September 30, 2011.

 

- 27 -


Information about outstanding options for the nine months ended September 30, 2011 and 2010 was as follows:

 

    

Number of

Options

(In Thousands)

   

Weighted-

average

Exercise Price

(NT$)

 
Nine months ended September 30, 2011     

Balance, beginning of period

     21,437      $ 31.4   

Options exercised

     (5,071     30.8   
  

 

 

   

Balance, end of period

     16,366        31.8   
  

 

 

   
Nine months ended September 30, 2010     

Balance, beginning of period

     28,810      $ 32.4   

Options exercised

     (4,638     32.5   
  

 

 

   

Balance, end of period

     24,172        32.5   
  

 

 

   

The number of outstanding options and exercise prices have been adjusted to reflect the distribution of earnings in accordance with the plans.

As of September 30, 2011, information about outstanding options was as follows:

 

       Options Outstanding  
Range of Exercise Price      Number of Options      Weighted-average
Remaining
Contractual Life
     Weighted-average
Exercise Price
 
(NT$)      (In Thousands)      (Years)      (NT$)  
  $20.9-$29.3         12,361         1.5       $ 27.3   
  38.0-  50.1         4,005         3.2         45.7   
  

 

 

       
     16,366         1.9         31.8   
  

 

 

       

As of September 30, 2011, all of the above outstanding options were exercisable.

No compensation cost was recognized under the intrinsic value method for the nine months ended September 30, 2011 and 2010. Had the Company used the fair value based method to evaluate the options using the Black-Scholes model, the assumptions at the various grant dates and pro forma results of the Company for the nine months ended September 30, 2011 and 2010 would have been as follows:

 

Assumptions:

  

Expected dividend yield

   1.00%-3.44%

Expected volatility

   43.77%-46.15%

Risk free interest rate

   3.07%-3.85%

Expected life

   5 years

 

- 28 -


     Nine Months Ended September 30  
     2011      2010  

Net income:

     

Net income as reported

   $ 102,622,631       $ 120,884,560   

Pro forma net income

     102,618,784         120,871,974   

Earnings per share (EPS) - after income tax (NT$):

     

Basic EPS as reported

   $ 3.96       $ 4.67   

Pro forma basic EPS

     3.96         4.67   

Diluted EPS as reported

     3.96         4.66   

Pro forma diluted EPS

     3.96         4.66   

 

22. TREASURY STOCK

 

            (Shares in Thousands)  
Purpose of Treasury Stock    Number of
Shares,
Beginning of
Period
     Addition      Number of
Shares, End of
Period
 
Nine months ended September 30, 2011         

Shareholders executed the appraisal right

     —           1,000         1,000   
  

 

 

    

 

 

    

 

 

 

In August 2011, at the option of the shareholders of the Company, certain shareholders requested the Company to buy back their shares pursuant to the Company Law. As of September 30, 2011, the book value and market value of treasury stock were NT$71,598 thousand and NT$69,998 thousand, respectively.

Under the Securities and Exchange Act, the Company shall neither pledge treasury stock nor exercise shareholders’ rights on these shares, such as rights to dividends and to vote.

 

23. EARNINGS PER SHARE

EPS is computed as follows:

 

                  

Number of

Shares

(Denominator)

(In Thousands)

     EPS (NT$)  
     Amounts (Numerator)        

Before

Income

Tax

    

After

Income

Tax

 
    

Before

Income Tax

    

After

Income Tax

          
                
Nine months ended September 30, 2011               

Basic EPS

              

Earnings available to common shareholders

   $ 111,133,365       $ 102,622,631         25,913,755       $ 4.29       $ 3.96   
           

 

 

    

 

 

 

Effect of dilutive potential common shares

     —           —           10,178         
  

 

 

    

 

 

    

 

 

       

Diluted EPS

              

Earnings available to common shareholders (including effect of dilutive potential common shares)

   $ 111,133,365       $ 102,622,631         25,923,933       $ 4.29       $ 3.96   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(Continued)

 

- 29 -


                  

Number of

Shares

(Denominator)

(In Thousands)

     EPS (NT$)  
     Amounts (Numerator)        

Before

Income

Tax

    

After

Income

Tax

 
    

Before

Income Tax

    

After

Income Tax

          
                
Nine months ended September 30, 2010               

Basic EPS

              

Earnings available to common shareholders

   $ 126,673,500       $ 120,884,560         25,904,889       $ 4.89       $ 4.67   
           

 

 

    

 

 

 

Effect of dilutive potential common shares

     —           —           12,923         
  

 

 

    

 

 

    

 

 

       

Diluted EPS

              

Earnings available to common shareholders (including effect of dilutive potential common shares)

   $ 126,673,500       $ 120,884,560         25,917,812       $ 4.89       $ 4.66   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(Concluded)

If the Company may settle the obligation by cash, by issuing shares, or in combination of both cash and shares, profit sharing to employees which will be settled in shares should be included in the weighted average number of shares outstanding in calculation of diluted EPS, if the shares have a dilutive effect. The number of shares is estimated by dividing the amount of profit sharing to employees in stock by the closing price (after considering the dilutive effect of dividends) of the common shares on the balance sheet date. Such dilutive effect of the potential shares needs to be included in the calculation of diluted EPS until the shares of profit sharing to employees are resolved in the shareholders’ meeting in the following year.

The average number of shares outstanding for EPS calculation has been considered for the effect of retrospective adjustments. This adjustment caused each of the basic and diluted after income tax EPS for the nine months ended September 30, 2010 to remain at NT$4.67 and NT$4.66, respectively.

 

24. DISCLOSURES FOR FINANCIAL INSTRUMENTS

 

  a. Fair values of financial instruments were as follows:

 

    September 30  
    2011     2010  
    Carrying
Amount
    Fair Value     Carrying
Amount
    Fair Value  

Assets

       

Financial assets at fair value through profit or loss

  $ 583,010      $ 583,010      $ 14,383      $ 14,383   

Available-for-sale financial assets

    2,735,777        2,735,777        5,085,051        5,085,051   

Held-to-maturity financial assets

    1,654,167        1,682,068        7,257,142        7,348,294   

Financial assets carried at cost

    497,835        —          497,835        —     

Liabilities

       

Financial liabilities at fair value through profit or loss

    173,829        173,829        73,530        73,530   

Bonds payable (including current portion)

    22,500,000        22,561,211        4,500,000        4,547,696   

Other long-term payables (including current portion)

    816,379        816,379        770,711        770,711   

 

- 30 -


  b. Methods and assumptions used in the estimation of fair values of financial instruments

 

  1) The aforementioned financial instruments do not include cash and cash equivalents, receivables, other financial assets, refundable deposits, short-term loans, payables and guarantee deposits. The carrying amounts of these financial instruments approximate their fair values due to their short maturities.

 

  2) Except for derivatives, available-for-sale and held-to-maturity financial assets were based on their quoted market prices.

 

  3) The fair values of those derivatives are determined using valuation techniques incorporating estimates and assumptions that were consistent with prevailing market conditions.

 

  4) Financial assets carried at cost have no quoted prices in an active market and entail an unreasonably high cost to obtain verifiable fair values. Therefore, no fair value is presented.

 

  5) Fair value of bonds payable was based on their quoted market price.

 

  6) Fair value of other long-term payables was based on the present value of expected cash flows, which approximates their carrying amount.

 

  c. The changes in fair value of derivatives contracts for the nine months ended September 30, 2011 and 2010 estimated using valuation techniques were recognized as a net gain of NT$409,181 thousand and a net loss of NT$59,147 thousand, respectively.

 

  d. As of September 30, 2011 and 2010, financial assets exposed to fair value interest rate risk were NT$2,237,177 thousand and NT$8,308,027 thousand, respectively, financial liabilities exposed to fair value interest rate risk were NT$58,693,483 thousand and NT$42,169,530 thousand, respectively.

 

  e. Movements of the unrealized gains or losses on financial instruments for the nine months ended September 30, 2011 and 2010 were as follows:

 

     Nine Months Ended September 30, 2011  
     From
Available-
for-sale
Financial Assets
    Equity-
method
Investments
    Total  

Balance, beginning of period

   $ (395,306   $ 504,595      $ 109,289   

Recognized directly in shareholders’ equity

     (1,035,704     (261,919     (1,297,623

Removed from shareholders’ equity and recognized in earnings

     (35,151     —          (35,151

Effect of spin-off

     (3,298     —          (3,298
  

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ (1,469,459   $ 242,676      $ (1,226,783
  

 

 

   

 

 

   

 

 

 
     Nine Months Ended September 30, 2010  
     From
Available-
for-sale
Financial Assets
    Equity-
method
Investments
    Total  

Balance, beginning of period

   $ 46,672      $ 406,949      $ 453,621   

Recognized directly in shareholders’ equity

     (330,396     395,444        65,048   
  

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ (283,724   $ 802,393      $ 518,669   
  

 

 

   

 

 

   

 

 

 

 

- 31 -


  f. Information about financial risks

 

  1) Market risk. The derivative financial instruments categorized as financial assets/liabilities at fair value through profit or loss are mainly used to hedge the market exchange rate fluctuations of foreign-currency assets and liabilities; therefore, the market exchange rate risk of derivatives will be offset by the foreign exchange risk of these hedged items. Available-for-sale financial assets and held-to-maturity financial assets held by the Company are mainly fixed-interest-rate debt securities and overseas publicly traded stock; therefore, the fluctuations in market interest rates and market prices will result in changes in fair values of these debt securities.

 

  2) Credit risk. Credit risk represents the potential loss that would be incurred by the Company if the counter-parties or third-parties breached contracts. Financial instruments with positive fair values at the balance sheet date are evaluated for credit risk. The Company evaluated whether the financial instruments for any possible counter-parties or third-parties are reputable financial institutions, business enterprises, and government agencies and accordingly, the Company believed that the Company’s exposure to credit risk was not significant.

 

  3) Liquidity risk. The Company has sufficient operating capital and bank facilities to meet cash needs upon settlement of derivative financial instruments and bonds payable. Therefore, the liquidity risk is low.

 

  4) Cash flow interest rate risk. The Company mainly invests in fixed-interest-rate debt securities. Therefore, cash flows are not expected to fluctuate significantly due to changes in market interest rates.

 

25. RELATED PARTY TRANSACTIONS

The Company engages in business transactions with the following related parties:

 

  a. Subsidiaries

TSMC North America

TSMC China

TSMC Europe

TSMC Japan

TSMC Global

 

  b. Investees

Xintec (holding a controlling financial interest)

GUC (accounted for using the equity method, as the Company had no controlling interest in GUC since July 2011)

VIS (accounted for using the equity method)

SSMC (accounted for using the equity method)

 

  c. Indirect subsidiaries

WaferTech, LLC (WaferTech)

TSMC Technology, Inc. (TSMC Technology)

TSMC Design Technology Canada Inc. (TSMC Canada)

 

- 32 -


  d. Indirect investee

VisEra Technology Company, Ltd. (VisEra), an indirect investee accounted for using the equity method.

 

  e. Others

Related parties over which the Company has control or exercises significant influence but with which the Company had no material transactions.

Transactions with the aforementioned parties, other than those disclosed in other notes, are summarized as follows:

 

     2011      2010  
     Amount      %      Amount      %  
For the nine months ended September 30            

Sales

           

TSMC North America

   $ 175,631,354         55       $ 160,415,902         52   

Others

     3,003,084         1         2,094,763         1   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 178,634,438         56       $ 162,510,665         53   
  

 

 

    

 

 

    

 

 

    

 

 

 

Purchases

           

TSMC China

   $ 7,576,707         20       $ 6,206,526         17   

WaferTech

     5,753,541         16         5,958,529         17   

VIS

     4,313,015         12         3,643,305         10   

SSMC

     2,963,867         8         3,383,596         10   

Others

     126,405         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 20,733,535         56       $ 19,191,956         54   
  

 

 

    

 

 

    

 

 

    

 

 

 

Manufacturing expenses

           

Xintec (rent and outsourcing)

   $ 234,394         —         $ 214,590         —     

VisEra (outsourcing)

     12,807         —           34,434         —     

VIS (rent)

     5,902         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 253,103         —         $ 249,024         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Marketing expenses - commission

           

TSMC Europe

   $ 278,938         16       $ 321,483         15   

TSMC Japan

     204,379         11         196,939         9   

TSMC China

     48,001         3         42,140         2   

Others

     15,239         1         14,362         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 546,557         31       $ 574,924         26   
  

 

 

    

 

 

    

 

 

    

 

 

 

Research and development expenses

           

TSMC Technology (primarily consulting fee)

   $ 379,328         2       $ 425,892         2   

TSMC Canada (primarily consulting fee)

     134,611         1         141,212         1   

TSMC Europe

     32,781         —           18,989         —     

VIS (primarily rent)

     1,984         —           8,730         —     

Others

     27,432         —           19,961         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 576,136         3       $ 614,784         3   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

- 33 -


     2011      2010  
     Amount      %      Amount      %  

Sales of property, plant and equipment and other assets

           

TSMC China

   $ 2,691,880         85       $ 383,473         62   

WaferTech

     72,880         2         31,679         5   

VIS

     36,008         1         37,011         6   

Others

     253         —           10,660         2   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,801,021         88       $ 462,823         75   
  

 

 

    

 

 

    

 

 

    

 

 

 

Purchases of property, plant and equipment

           

TSMC China

   $ 70,491         —         $ 66,097         —     

VIS

     —           —           15,865         —     

WaferTech

     —           —           9,624         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 70,491         —         $ 91,586         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-operating income and gains

           

VIS (primarily technical service income)

   $ 179,067         3       $ 226,256         2   

SSMC (primarily technical service income)

     160,376         2         145,625         1   

TSMC China

     99,973         2         42,425         —     

VisEra (rent)

     2,200         —           —           —     

Others

     1,516         —           9,655         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 443,132         7       $ 423,961         3   
  

 

 

    

 

 

    

 

 

    

 

 

 
As of September 30            

Receivables

           

TSMC North America

   $ 28,158,589         98       $ 24,574,148         97   

Others

     522,195         2         644,447         3   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 28,680,784         100       $ 25,218,595         100   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other receivables

           

TSMC China

   $ 1,318,300         88       $ 383,334         58   

VIS

     85,453         6         150,589         23   

SSMC

     47,921         3         49,752         8   

WaferTech

     10,058         1         39,956         6   

Others

     29,584         2         34,156         5   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,491,316         100       $ 657,787         100   
  

 

 

    

 

 

    

 

 

    

 

 

 

Payables

           

VIS

   $ 1,011,671         32       $ 1,122,687         33   

TSMC China

     878,485         28         873,981         25   

WaferTech

     657,374         21         671,004         19   

SSMC

     342,654         11         434,236         13   

Others

     270,864         8         349,629         10   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,161,048         100       $ 3,451,537         100   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other assets

           

TSMC China

   $ 9,048         1       $ 20,821         5   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

- 34 -


The sales prices and payment terms to related parties were not significantly different from those of sales to third parties. For other related party transactions, prices and terms were determined in accordance with mutual agreements.

The Company leased certain buildings, facilities, and machinery and equipment from Xintec. The lease terms and prices were determined in accordance with mutual agreements. The rental expense was paid monthly and the related expenses were classified under manufacturing expenses.

The Company leased certain office space and facilities from VIS. The lease terms and prices were determined in accordance with mutual agreements. The rental expense was paid monthly and the related expenses were classified under research and development expenses and manufacturing expenses.

The Company leased certain machinery and equipment to VisEra. The lease terms and prices were determined in accordance with mutual agreements. The rental income was received monthly and the related income was classified under non-operating income and gains.

The Company deferred the disposal losses (classified under other assets) derived from sales of property, plant and equipment to TSMC China, and then recognized such losses (classified under non-operating gains and losses) over the depreciable lives of the disposed assets.

The Company borrowed funds from related parties (classified under other payable from related parties) in July 2011. Additional disclosures consisted of the following:

 

     Nine Months Ended September 30, 2011  
Financing Name    Maximum
Balance
     Date    Ending
Balance
    

Interest

Rate

    Interest
Expense
    

Interest

Payable

 

TSMC Global

   $ 24,684,000       July 2011 to December 2011    $ 10,693,900         0.3544   $ 19,771       $ 20,398   
  

 

 

       

 

 

      

 

 

    

 

 

 

 

26. PLEDGED OR MORTGAGED ASSETS

As of September 30, 2011, the Company had no assets set aside as collateral. As of September 30, 2010, the Company had pledged time deposits of NT$25,864 thousand (classified as other financial assets) as collateral for land lease agreements and customs duty guarantee.

 

27. SIGNIFICANT LONG-TERM LEASES

The Company leases several parcels of land from the Science Park Administration. These operating leases expire on various dates from December 2011 to September 2030 and can be renewed upon expiration.

As of September 30, 2011, future lease payments were as follows:

 

Year    Amount  

2011 (4th quarter)

   $ 108,337   

2012

     470,829   

2013

     446,091   

2014

     431,747   

2015

     421,426   

2016 and thereafter

     3,886,798   
  

 

 

 
   $ 5,765,228   
  

 

 

 

 

- 35 -


28. SIGNIFICANT COMMITMENTS AND CONTINGENCIES

Significant commitments and contingencies of the Company as of September 30, 2011, excluding those disclosed in other notes, were as follows:

 

  a. Under a technical cooperation agreement with ITRI, the R.O.C. Government or its designee approved by the Company can use up to 35% of the Company’s capacity if the Company’s outstanding commitments to its customers are not prejudiced. The term of this agreement is for five years beginning from January 1, 1987 and is automatically renewed for successive periods of five years unless otherwise terminated by either party with one year prior notice.

 

  b. Under several foundry agreements, the Company shall reserve a portion of its production capacity for certain major customers that have guarantee deposits with the Company. As of September 30, 2011, the Company had a total of US$14,051 thousand of guarantee deposits.

 

  c. Under a Shareholders Agreement entered into with Philips and EDB Investments Pte Ltd. on March 30, 1999, the parties formed a joint venture company, SSMC, which is an integrated circuit foundry in Singapore. The Company’s equity interest in SSMC was 32%. Nevertheless, Philips parted with its semiconductor company which was renamed as NXP B.V. in September 2006. The Company and NXP B.V. purchased all the SSMC shares owned by EDB Investments Pte Ltd. pro rata according to the Shareholders Agreement on November 15, 2006. After the purchase, the Company and NXP B.V. currently own approximately 39% and 61% of the SSMC shares respectively. The Company and Philips (now NXP B.V.) are required, in the aggregate, to purchase at least 70% of SSMC’s capacity, but the Company alone is not required to purchase more than 28% of the capacity. If any party defaults on the commitment and the capacity utilization of SSMC fall below a specific percentage of its capacity, the defaulting party is required to compensate SSMC for all related unavoidable costs.

 

  d. In August 2006, TSMC filed a lawsuit against Semiconductor Manufacturing International Corporation, SMIC (Shanghai) and SMIC Americas (aggregately referred to as “SMIC”) in the Superior Court of California for Alameda County for breach of a 2005 agreement that settled an earlier trade secret misappropriation and patent infringement litigation between the parties, as well as for trade secret misappropriation, seeking injunctive relief and monetary damages. In September 2006, SMIC filed a cross-complaint against TSMC in the same court alleging breach of settlement agreement, implied covenant of good faith and fair dealing. SMIC also filed a civil action against TSMC in November 2006 with the Beijing People’s High Court alleging defamation and breach of good faith. On June 10, 2009, the Beijing People’s High Court ruled in favor of TSMC and dismissed SMIC’s lawsuit. On November 4, 2009, after a two-month trial, a jury in the California action found SMIC to have both breached the 2005 settlement agreement and misappropriated TSMC’s trade secrets. TSMC has subsequently settled both lawsuits with SMIC. Pursuant to the new settlement agreement, the parties have agreed to the entry of a stipulated judgment in favor of TSMC in the California action, and to the dismissal of SMIC’s appeal against the Beijing High Court’s finding in favor of TSMC. Under the new settlement agreement and the related stipulated judgment, SMIC has agreed to make cash payments by installments to TSMC totaling US$200 million, which are in addition to the US$135 million previously paid to TSMC under the 2005 settlement agreement, and, conditional upon relevant government regulatory approvals, to issue to TSMC a total of 1,789,493,218 common shares of Semiconductor Manufacturing International Corporation and a three-year warrant to purchase 695,914,030 common shares (subject to adjustment) of Semiconductor Manufacturing International Corporation at HK$1.30 per share (subject to adjustment). TSMC has received the approval from the Investment Commission of Ministry of Economic Affairs and acquired the above mentioned common shares in July 2010 and obtained the subsequent cash settlement income in accordance with the agreement.

 

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  e. In June 2010, Keranos, LLC. filed a lawsuit in the U.S. District Court for the Eastern District of Texas alleging that TSMC, TSMC North America, and several other leading technology companies infringe three expired U.S. patents. In response, TSMC, TSMC North America, and several co-defendants in the Texas case filed a lawsuit against Keranos in the U.S. District Court for the Northern District of California in November 2010, seeking a judgment declaring that they did not infringe the asserted patents, and that those patents are invalid. These two litigations have been consolidated into a single case in the U.S. District Court for the Eastern District of Texas. The outcome cannot be determined at this time.

 

  f. In December 2010, Ziptronix, Inc. filed a complaint in the U.S. District Court for the Northern District of California accusing TSMC, TSMC North America and one other company of allegedly infringing six U.S. patents. This litigation is in its very early stages and therefore the outcome of the case cannot be determined at this time.

 

29. SPIN-OFF BUSINESS INFORMATION

To foster a stronger sense of corporate entrepreneurship and facilitate business specializations in order to strengthen overall profitability and operational efficiency, the Company transferred its solid state lighting and solar businesses into its wholly-owned, newly incorporated subsidiaries, TSMC SSL and TSMC Solar, on August 1, 2011. As of August 1, 2011, the net book values transferred to TSMC SSL and TSMC Solar amounted to NT$2,270,000 thousand and NT$11,180,000 thousand, respectively.

The book values of transferred assets and liabilities were as follows:

 

     TSMC SSL     TSMC Solar     Total  

Current assets

   $ 431,613      $ 893,584      $ 1,325,197   

Long-term investments

     2,872        7,912,710        7,915,582   

Property, plant and equipment

     1,929,563        2,372,214        4,301,777   

Other assets

     234,696        201,677        436,373   

Current liabilities

     (292,728     (337,439     (630,167

Other liabilities

     (36,272     (25,218     (61,490

Capital surplus

     —          (56,094     (56,094

Unrealized gain (loss) on financial instruments

     —          (3,298     (3,298

Cumulative translation adjustments

     256        221,864        222,120   
  

 

 

   

 

 

   

 

 

 
   $ 2,270,000      $ 11,180,000      $ 13,450,000   
  

 

 

   

 

 

   

 

 

 

 

30. OTHERS

The significant financial assets and liabilities denominated in foreign currencies were as follows:

 

     September 30  
     2011      2010  
    

Foreign
Currencies

(In Thousands)

    

Exchange Rate

(Note)

    

Foreign
Currencies

(In Thousands)

    

Exchange Rate

(Note)

 
Financial assets            

Monetary items

           

USD

   $ 1,785,057         30.554         1,900,339         31.330   

EUR

     125,219         41.56         205,287         42.73   

JPY

     21,473,431         0.3996         19,229,106         0.3766   

(Continued)

 

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    September 30  
    2011     2010  
   

Foreign
Currencies

(In Thousands)

   

Exchange Rate

(Note)

   

Foreign
Currencies

(In Thousands)

   

Exchange Rate

(Note)

 

Non-monetary items

       

HKD

  $ 697,902        3.92      $ 1,002,116        4.04   

Investments accounted for using equity method

       

USD

    2,964,545        30.554        2,949,112        31.330   

EUR

    5,046