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 May 2016

 

 

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:             .)

 

 

 

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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: May 17, 2016				By		/s/ Lora Ho
						Lora Ho
						Senior Vice President & Chief Financial Officer

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		Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries   Consolidated Financial Statements for the Three Months Ended March 31, 2016 and 2015 and Independent Accountants’ Review Report

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INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

The Board of Directors and Shareholders

Taiwan Semiconductor Manufacturing Company Limited

We have reviewed the accompanying consolidated balance sheets of Taiwan Semiconductor Manufacturing Company Limited and subsidiaries (the “Company”) as of March 31, 2016 and 2015 and the related consolidated statements of comprehensive income, changes in equity and cash flows for the three months ended March 31, 2016 and 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to issue a report on these consolidated 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 consolidated 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 consolidated financial statements referred to above for them to be in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers and International Accounting Standard 34, “Interim Financial Reporting,” endorsed by the Financial Supervisory Commission of the Republic of China.

 

May 10, 2016

Notice to Readers

The accompanying consolidated financial statements are intended only to present the consolidated 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 consolidated 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 consolidated financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language accountants’ review report and consolidated financial statements shall prevail.

 

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Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(In Thousands of New Taiwan Dollars)

 

 

		March 31, 2016 (Reviewed)								December 31, 2015 (Audited)								March 31, 2015 (Reviewed)
		Amount				%				Amount				%				Amount				%
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Note 6)		$	617,984,318				36			$	562,688,930				34			$	437,412,411				28
Financial assets at fair value through profit or loss (Note 7)			618,810				—				6,026				—				297,698				—
Available-for-sale financial assets (Note 8)			22,232,905				1				14,299,361				1				68,204,390				5
Held-to-maturity financial assets (Note 9)			7,561,182				1				9,166,523				1				13,060,038				1
Hedging derivative financial assets (Note 10)			—				—				1,739				—				—				—
Notes and accounts receivable, net (Note 11)			96,273,270				6				85,059,675				5				98,529,745				6
Receivables from related parties (Note 32)			683,818				—				505,722				—				592,021				—
Other receivables from related parties (Note 32)			141,009				—				125,018				—				162,908				—
Inventories (Notes 12 and 36)			57,242,320				3				67,052,270				4				64,599,666				4
Other financial assets (Notes 4, 33 and 36)			7,057,944				—				4,305,358				—				3,946,604				—
Other current assets (Note 17)			2,695,531				—				3,533,369				—				3,688,211				—
Total current assets			812,491,107				47				746,743,991				45				690,493,692				44
NONCURRENT ASSETS
Held-to-maturity financial assets (Note 9)			17,525,301				1				6,910,873				—				—				—
Financial assets carried at cost (Note 13)			4,093,568				—				3,990,882				—				1,817,677				—
Investments accounted for using equity method (Note 14)			24,715,683				1				24,091,828				2				30,363,144				2
Property, plant and equipment (Note 15)			844,305,450				49				853,470,392				52				813,219,884				52
Intangible assets (Note 16)			13,989,513				1				14,065,880				1				13,138,963				1
Deferred income tax assets (Note 4)			7,561,741				1				6,384,974				—				6,246,031				1
Refundable deposits			443,337				—				430,802				—				442,633				—
Other noncurrent assets (Note 17)			1,399,936				—				1,428,676				—				1,173,031				—
Total noncurrent assets			914,034,529				53				910,774,307				55				866,401,363				56
TOTAL		$	1,726,525,636				100			$	1,657,518,298				100			$	1,556,895,055				100
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Short-term loans (Note 18)		$	34,690,040				2			$	39,474,000				2			$	18,683,595				1
Financial liabilities at fair value through profit or loss (Note 7)			16				—				72,610				—				64,929				—
Hedging derivative financial liabilities (Note 10)			458				—				—				—				11,627,838				1
Accounts payable			18,513,952				1				18,575,286				1				18,595,310				1
Payables to related parties (Note 32)			1,115,073				—				1,149,988				—				1,609,613				—
Salary and bonus payable			8,580,300				1				11,702,042				1				8,032,667				1
Accrued profit sharing bonus to employees and compensation to directors and supervisors (Notes 22 and 28)			25,395,073				1				20,958,893				1				23,436,465				1
Payables to contractors and equipment suppliers			33,953,061				2				26,012,192				2				27,372,814				2
Income tax payable (Note 4)			41,474,426				2				32,901,106				2				38,954,401				2
Provisions (Note 19)			10,090,163				1				10,163,536				1				8,130,817				1
Long-term liabilities - current portion (Note 20)			33,272,901				2				23,517,612				1				—				—
Accrued expenses and other current liabilities (Note 21)			28,807,760				2				27,701,329				2				31,056,696				2
Total current liabilities			235,893,223				14				212,228,594				13				187,565,145				12
NONCURRENT LIABILITIES
Bonds payable (Note 20)			181,151,058				11				191,965,082				12				213,208,771				14
Long-term bank loans			30,000				—				32,500				—				40,000				—
Deferred income tax liabilities (Note 4)			13,831				—				31,271				—				159,538				—
Obligations under finance leases			—				—				—				—				799,612				—
Net defined benefit liability (Note 4)			7,437,455				—				7,448,026				—				6,553,652				—
Guarantee deposits (Note 21)			19,492,280				1				21,564,801				1				23,715,049				2
Others (Note 19)			1,561,713				—				1,613,545				—				937,535				—
Total noncurrent liabilities			209,686,337				12				222,655,225				13				245,414,157				16
Total liabilities			445,579,560				26				434,883,819				26				432,979,302				28
EQUITY ATTRIBUTABLE TO SHAREHOLDERS OF THE PARENT
Capital stock (Note 22)			259,303,805				15				259,303,805				16				259,303,020				17
Capital surplus (Note 22)			56,317,375				3				56,300,215				3				56,274,436				4
Retained earnings (Note 22)
Appropriated as legal capital reserve			177,640,561				11				177,640,561				11				151,250,682				10
Unappropriated earnings			781,434,518				45				716,653,025				43				632,904,503				40
			959,075,079				56				894,293,586				54				784,155,185				50
Others (Note 22)			5,276,848				—				11,774,113				1				24,110,858				1
Equity attributable to shareholders of the parent			1,279,973,107				74				1,221,671,719				74				1,123,843,499				72
NONCONTROLLING INTERESTS			972,969				—				962,760				—				72,254				—
Total equity			1,280,946,076				74				1,222,634,479				74				1,123,915,753				72
TOTAL		$	1,726,525,636				100			$	1,657,518,298				100			$	1,556,895,055				100

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

 

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Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

(Reviewed, Not Audited)

 

 

		Three Months Ended March 31
		2016								2015
		Amount				%				Amount				%
NET REVENUE (Notes 24, 32 and 38)		$	203,495,361				100			$	222,034,144				100
COST OF REVENUE (Notes 12, 28, 32 and 36)			112,124,894				55				112,585,333				51
GROSS PROFIT BEFORE UNREALIZED GROSS PROFIT ON SALES TO ASSOCIATES			91,370,467				45				109,448,811				49
UNREALIZED GROSS PROFIT ON SALES TO ASSOCIATES			(32,889	)			—				(19,547	)			—
GROSS PROFIT			91,337,578				45				109,429,264				49
OPERATING EXPENSES (Notes 28 and 32)
Research and development			15,618,963				7				16,781,463				7
General and administrative			3,844,935				2				4,366,053				2
Marketing			1,415,099				1				1,390,996				1
Total operating expenses			20,878,997				10				22,538,512				10
OTHER OPERATING INCOME AND EXPENSES, NET (Note 28)			8,733				—				(264,629	)			—
INCOME FROM OPERATIONS (Note 38)			70,467,314				35				86,626,123				39
NON-OPERATING INCOME AND EXPENSES
Share of profits of associates and joint venture			840,895				—				1,134,649				1
Other income			1,332,589				1				881,782				—
Foreign exchange gain (loss), net (Note 37)			(1,093,618	)			(1	)			48,183				—
Finance costs			(850,580	)			—				(793,942	)			—
Other gains and losses (Note 25)			1,559,299				1				362,185				—
Total non-operating income and expenses			1,788,585				1				1,632,857				1
INCOME BEFORE INCOME TAX			72,255,899				36				88,258,980				40
INCOME TAX EXPENSE (Notes 4 and 26)			7,463,302				4				9,275,072				4
NET INCOME			64,792,597				32				78,983,908				36

(Continued)

 

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Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

(Reviewed, Not Audited)

 

 

		Three Months Ended March 31
		2016								2015
		Amount				%				Amount				%
OTHER COMPREHENSIVE INCOME (LOSS) (Notes 22 and 26)
Items that may be reclassified subsequently to profit or loss
Exchange differences arising on translation of foreign operations		$	(6,593,053	)			(3	)		$	(2,279,138	)			(1	)
Changes in fair value of available-for-sale financial assets			51,294				—				(204,815	)			—
Share of other comprehensive income of associates and joint venture			26,157				—				843,163				—
Income tax benefit (expense) related to items that may be reclassified subsequently			17,440				—				(4,793	)			—
Other comprehensive loss for the period, net of income tax			(6,498,162	)			(3	)			(1,645,583	)			(1	)
TOTAL COMPREHENSIVE INCOME FOR THE PERIOD		$	58,294,435				29			$	77,338,325				35
NET INCOME (LOSS) ATTRIBUTABLE TO:
Shareholders of the parent		$	64,781,493				32			$	78,989,911				36
Noncontrolling interests			11,104				—				(6,003	)			—
		$	64,792,597				32			$	78,983,908				36
TOTAL COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO:
Shareholders of the parent		$	58,284,228				29			$	77,351,478				35
Noncontrolling interests			10,207				—				(13,153	)			—
		$	58,294,435				29			$	77,338,325				35
		2016								2015
		Income Attributable to Shareholders of the Parent								Income Attributable to Shareholders of the Parent
EARNINGS PER SHARE (NT$, Note 27)
Basic earnings per share		$					2.50			$					3.05
Diluted earnings per share		$					2.50			$					3.05

 

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

 

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Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In Thousands of New Taiwan Dollars)

(Reviewed, Not Audited)

 

 

		Equity Attributable to Shareholders of the Parent
																										Others
		Capital Stock - Common Stock												Retained Earnings												Foreign Currency				Unrealized Gain/Loss from Available-
		Shares (In Thousands)				Amount				Capital Surplus				Legal Capital Reserve				Unappropriated Earnings				Total				Translation Reserve				for-sale Financial Assets				Cash Flow Hedges Reserve				Total				Total				Noncontrolling Interests				Total Equity
BALANCE, JANUARY 1, 2016			25,930,380			$	259,303,805			$	56,300,215			$	177,640,561			$	716,653,025			$	894,293,586			$	11,039,949			$	734,771			$	(607	)		$	11,774,113			$	1,221,671,719			$	962,760			$	1,222,634,479
Net income for the three months ended March 31, 2016			—				—				—				—				64,781,493				64,781,493				—				—				—				—				64,781,493				11,104				64,792,597
Other comprehensive income (loss) for the three months ended March 31, 2016, net of income tax			—				—				—				—				—				—				(6,587,294	)			89,938				91				(6,497,265	)			(6,497,265	)			(897	)			(6,498,162	)
Total comprehensive income (loss) for the three months ended March 31, 2016			—				—				—				—				64,781,493				64,781,493				(6,587,294	)			89,938				91				(6,497,265	)			58,284,228				10,207				58,294,435
Adjustments to share of changes in equities of associates and joint venture			—				—				17,160				—				—				—				—				—				—				—				17,160				2				17,162
BALANCE, March 31, 2016			25,930,380			$	259,303,805			$	56,317,375			$	177,640,561			$	781,434,518			$	959,075,079			$	4,452,655			$	824,709			$	(516	)		$	5,276,848			$	1,279,973,107			$	972,969			$	1,280,946,076
BALANCE, JANUARY 1, 2015			25,929,662			$	259,296,624			$	55,989,922			$	151,250,682			$	553,914,592			$	705,165,274			$	4,502,113			$	21,247,483			$	(305	)		$	25,749,291			$	1,046,201,111			$	127,221			$	1,046,328,332
Net income for the three months ended March 31, 2015			—				—				—				—				78,989,911				78,989,911				—				—				—				—				78,989,911				(6,003	)			78,983,908
Other comprehensive income (loss) for the three months ended March 31, 2015, net of income tax			—				—				—				—				—				—				(2,258,112	)			619,879				(200	)			(1,638,433	)			(1,638,433	)			(7,150	)			(1,645,583	)
Total comprehensive income (loss) for the three months ended March 31, 2015			—				—				—				—				78,989,911				78,989,911				(2,258,112	)			619,879				(200	)			(1,638,433	)			77,351,478				(13,153	)			77,338,325
Issuance of stock from exercise of employee stock options			640				6,396				23,793				—				—				—				—				—				—				—				30,189				—				30,189
Adjustments to share of changes in equities of associates and joint venture			—				—				261,752				—				—				—				—				—				—				—				261,752				(26	)			261,726
From share of changes in equities of subsidiaries			—				—				(1,031	)			—				—				—				—				—				—				—				(1,031	)			1,031				—
Decrease in noncontrolling interests			—				—				—				—				—				—				—				—				—				—				—				(179	)			(179	)
Effect of disposal of subsidiary			—				—				—				—				—				—				—				—				—				—				—				(42,640	)			(42,640	)
BALANCE, March 31, 2015			25,930,302			$	259,303,020			$	56,274,436			$	151,250,682			$	632,904,503			$	784,155,185			$	2,244,001			$	21,867,362			$	(505	)		$	24,110,858			$	1,123,843,499			$	72,254			$	1,123,915,753

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

 

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Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of New Taiwan Dollars)

(Reviewed, Not Audited)

 

 

		Three Months Ended March 31
		2016				2015
CASH FLOWS FROM OPERATING ACTIVITIES
Income before income tax		$	72,255,899			$	88,258,980
Adjustments for:
Depreciation expense			54,950,729				54,706,227
Amortization expense			896,332				771,769
Finance costs			850,580				793,942
Share of profits of associates and joint venture			(840,895	)			(1,134,649	)
Interest income			(1,332,589	)			(881,782	)
Loss (gain) on disposal of property, plant and equipment, net			(8,235	)			4,081
Loss (gain) on disposal of available-for-sale financial assets, net			10,829				(2,961	)
Gain on disposal of financial assets carried at cost, net			(14,381	)			(42,243	)
Unrealized gross profit on sales to associates			32,889				19,547
Gain on foreign exchange, net			(1,293,976	)			(1,054,551	)
Loss (gain) from hedging instruments			11,870				(4,592,076	)
Loss (gain) arising from changes in fair value of available-for-sale financial assets in hedge effective portion			(10,625	)			4,602,284
Changes in operating assets and liabilities:
Derivative financial instruments			(685,378	)			(526,938	)
Notes and accounts receivable, net			(12,473,495	)			16,205,075
Receivables from related parties			(178,096	)			(279,066	)
Other receivables from related parties			(15,991	)			15,717
Inventories			9,809,950				1,738,305
Other financial assets			(3,129,147	)			(425,720	)
Other current assets			837,838				(32,060	)
Accounts payable			3,728				(2,573,738	)
Payables to related parties			(7,283	)			118,123
Salary and bonus payable			(3,121,742	)			(2,541,255	)
Accrued profit sharing bonus to employees and compensation to directors and supervisors			4,436,180				5,383,645
Accrued expenses and other current liabilities			760,672				(82,857	)
Provisions			(64,147	)			(2,314,512	)
Net defined benefit liability			(10,571	)			(14,130	)
Cash generated from operations			121,670,945				156,119,157
Income taxes paid			(142,092	)			(118,496	)
Net cash generated by operating activities			121,528,853				156,000,661
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of:
Available-for-sale financial assets			(11,171,713	)			—
Held-to-maturity financial assets			(12,439,373	)			(9,372,767	)
Financial assets carried at cost			(187,378	)			(31,533	)

(Continued)

 

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Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of New Taiwan Dollars)

(Reviewed, Not Audited)

 

 

		Three Months Ended March 31
		2016				2015
Property, plant and equipment		$	(38,141,373	)		$	(48,875,682	)
Intangible assets			(1,003,705	)			(1,151,372	)
Proceeds from disposal or redemption of:
Available-for-sale financial assets			2,943,420				36,021
Held-to-maturity financial assets			3,000,000				800,000
Financial assets carried at cost			14,381				9,125
Property, plant and equipment			12,470				30,161
Derecognition of hedging derivative financial instrument			(9,647	)			—
Interest received			1,541,119				874,723
Net cash inflow from disposal of subsidiary (Note 30)			—				601,047
Refundable deposits paid			(55,609	)			(189,442	)
Refundable deposits refunded			47,608				101,714
Decrease in receivables for temporary payments			102,433				—
Net cash used in investing activities			(55,347,367	)			(57,168,005	)
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in short-term loans			(4,114,866	)			(17,341,135	)
Interest paid			(689,803	)			(861,616	)
Guarantee deposits received			200,080				176,072
Guarantee deposits refunded			(202,243	)			(174,920	)
Proceeds from exercise of employee stock options			—				30,189
Decrease in noncontrolling interests			—				(179	)
Net cash used in financing activities			(4,806,832	)			(18,171,589	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS			(6,079,266	)			(1,779,163	)
NET INCREASE IN CASH AND CASH EQUIVALENTS			55,295,388				78,881,904
CASH AND CASH EQUIVALENTS INCLUDED IN NONCURRENT ASSETS HELD FOR SALE, BEGINNING OF PERIOD			—				81,478
CASH AND CASH EQUIVALENT ON CONSOLIDATED BALANCE SHEET, BEGINNING OF PERIOD			562,688,930				358,449,029
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	617,984,318			$	437,412,411

 

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

 

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Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2016 and 2015

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

(Reviewed, Not Audited)

 

 

1.

GENERAL

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

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

The address of its registered office and principal place of business is No. 8, Li-Hsin Rd. 6, Hsinchu Science Park, Taiwan. The principal operating activities and operating segments information of TSMC and its subsidiaries (collectively as the “Company”) are described in Notes 4 and 38.

 

2.	THE AUTHORIZATION OF FINANCIAL STATEMENTS

The accompanying consolidated financial statements were reported to the Board of Directors and issued on May 10, 2016.

 

3.	APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS

The Company has not applied the following International Financial Reporting Standards (IFRS), International Accounting Standards (IASs), Interpretations of International Financial Reporting Standards, and Interpretations of IASs (collectively, “IFRSs”) issued by the International Accounting Standards Board (IASB) but not endorsed by the Financial Supervisory Commission (FSC). On March 10, 2016, the FSC preannounced the scope of IFRSs to be endorsed and will take effect from January 1, 2017. The scope includes all IFRSs that were issued by the IASB before January 1, 2016 and have effective dates on or before January 1, 2017, which means the scope excludes those that are not yet effective as of January 1, 2017 such as IFRS 9 “Financial Instruments” and IFRS 15 “Revenue from Contracts with Customers” and those with undetermined effective dates. In addition, the FSC announced that an entity should apply IFRS 15 starting January 1, 2018. As of the date the consolidated financial statements were issued, the FSC has not announced the effective dates of other new, amended and revised standards and interpretations.

 

 

(Continued)

 

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(Concluded)

 

Note 1:

The aforementioned new, revised or amended standards or interpretations are effective after fiscal year beginning on or after the effective dates, unless specified otherwise.

Note 2:

The amendment to IFRS 5 is applied prospectively to changes in a method of disposal that occur in annual periods beginning on or after January 1, 2016; the remaining amendments are effective for annual periods beginning on or after January 1, 2016.

Except for the following, the initial application of the above new standards and interpretations has not had any material impact on the Company’s accounting policies:

 

a.

IFRS 9, “Financial Instruments”

All recognized financial assets currently in the scope of IAS 39, “Financial Instruments: Recognition and Measurement,” will be subsequently measured at either the amortized cost or the fair value. The classification and measurement requirements in IFRS 9 are stated as follows:

For the debt instruments invested by the Company, if the contractual cash flows that are solely for payments of principal and interest on the principal amount outstanding, the classification and measurement requirements are stated as follows:

 

1)

If the objective of the Company’s business model is to hold the financial asset to collect the contractual cash flows, such assets are measured at the amortized cost. Interest revenue should be recognized in profit or loss by using the effective interest method, continuously assessed for impairment and the impairment loss or reversal of impairment loss should be recognized in profit and loss.

 

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2)

If the objective of the Company’s business model is to hold the financial asset both to collect the contractual cash flows and to sell the financial assets, such assets are measured at fair value through other comprehensive income and are continuously assessed for impairment. Interest revenue should be recognized in profit or loss by using the effective interest method. A gain or loss on a financial asset measured at fair value through other comprehensive income should be recognized in other comprehensive income, except for impairment gains or losses and foreign exchange gains and losses. When such financial asset is derecognized or reclassified, the cumulative gain or loss previously recognized in other comprehensive income is reclassified from equity to profit or loss.

The other financial assets which do not meet the aforementioned criteria should be measured at the fair value through profit or loss. However, the Company may irrevocably designate an investment in equity instruments that is not held for trading as measured at fair value through other comprehensive income. All relevant gains and losses shall be recognized in other comprehensive income, except for dividends which are recognized in profit or loss. No subsequent impairment assessment is required, and the cumulative gain or loss previously recognized in other comprehensive income cannot be reclassified from equity to profit or loss.

IFRS 9 adds a new expected loss impairment model to measure the impairment of financial assets. A loss allowance for expected credit losses should be recognized on financial assets measured at amortized cost and financial assets mandatorily measured at fair value through other comprehensive income. If the credit risk on a financial instrument has not increased significantly since initial recognition, the Company should measure the loss allowance for that financial instrument at an amount equal to 12-month expected credit losses. If the credit risk on a financial instrument has increased significantly since initial recognition and is not deemed to be a low credit risk, the Company should measure the loss allowance for that financial instrument at an amount equal to the lifetime expected credit losses. The Company should always measure the loss allowance at an amount equal to lifetime expected credit losses for trade receivables.

The main change in IFRS 9 is the increase of the eligibility of hedge accounting. It allows reporters to reflect risk management activities in the financial statements more closely as it provides more opportunities to apply hedge accounting. A fundamental difference to IAS 39 is that IFRS 9 (a) increases the scope of hedged items eligible for hedge accounting. For example, the risk components of non-financial items may be designated as hedging accounting; (b) revises a new way to account for the gain or loss recognition arising from hedging derivative financial instruments, which results in a less volatility in profit or loss; and (c) is necessary for there to be an economic relationship between the hedged item and hedging instrument instead of performing the retrospective hedge effectiveness testing.

 

b.

IFRS 15, “Revenue from Contracts with Customers” and related amendment

IFRS 15 establishes principles for recognizing revenue that apply to all contracts with customers, and will supersede IAS 18, “Revenue,” IAS 11, “Construction Contracts,” and a number of revenue-related interpretations.

When applying IFRS 15, the Company shall recognize revenue by applying the following steps:

 

•

Identify the contract with the customer;

 

•

Identify the performance obligations in the contract;

 

•

Determine the transaction price;

 

•

Allocate the transaction price to the performance obligations in the contracts; and

 

•

Recognize revenue when the entity satisfies a performance obligation.

When IFRS 15 and related amendment are effective, the Company may elect to apply this Standard either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this Standard recognized at the date of initial application.

 

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c.

IFRS 16, “Leases”

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

Under IFRS 16, if the Company is a lessee, it shall recognize right-of-use assets and lease liabilities for all leases on the consolidated balance sheets except for low-value and short-term leases. The Company may elect to apply the accounting method similar to the accounting for operating lease under IAS 17 to the low-value and short-term leases. On the consolidated statements of comprehensive income, the Company should present the depreciation expense charged on the right-of-use asset separately from interest expense accrued on the lease liability; interest is computed by using effective interest method. On the consolidated statements of cash flows, cash payments for both the principal and interest portion of the lease liability are classified within financing activities.

When IFRS 16 becomes effective, the Company may elect to apply this Standard either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of the initial application of this Standard recognized at the date of initial application.

 

d.

Amendments to IAS 36, “Recoverable Amount Disclosures for Non-Financial Assets”

The amendments to IAS 36 clarify that the Company is only required to disclose the recoverable amount in the period of impairment accrual or reversal. Moreover, if the recoverable amount of impaired assets is based on fair value less costs of disposal, the Company should also disclose the discount rate used. The Company expects the aforementioned amendments will result in a broader disclosure of recoverable amount for non-financial assets.

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

 

4.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Except for the following, the accounting policies applied in these consolidated financial statements are consistent with those applied in the consolidated financial statements for the year ended December 31, 2015.

For the convenience of readers, the accompanying consolidated financial statements have been translated into English from the original Chinese version prepared and used in the R.O.C. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language consolidated financial statements shall prevail.

Statement of Compliance

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

 

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Basis of Consolidation

The basis for the consolidated financial statements

The basis for the consolidated financial statements applied in these consolidated financial statements is consistent with those applied in the consolidated financial statements for the year ended December 31, 2015.

The subsidiaries in the consolidated financial statements

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

 

 

(Continued)

 

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(Concluded)

 

Note a:

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

 

Note b:

Due to the expiration of the investment agreement between Emerging Alliance and TSMC, Emerging Alliance completed the liquidation procedures in April 2016.

 

Note c:

In August 2015, TSMC Solar ceased its manufacturing operations. TSMC Solar and TSMC GN were incorporated into TSMC in December 2015. After the incorporation, TSMC Solar Europe GmbH, the 100% owned subsidiary of TSMC Solar, is held directly by TSMC and TSMC Solar Europe GmbH has started the liquidation procedures. TSMC Solar NA, the 100% owned subsidiary of TSMC Solar, completed the liquidation procedures in December 2015.

 

Note d:

To simplify overseas investments structure, in the second quarter of 2014, the Board of Directors of TSMC Solar approved to file for the liquidation of TSMC Solar Europe. The liquidation procedure was completed in the second quarter of 2015 and TSMC Solar Europe GmbH, the 100% owned subsidiary of TSMC Solar Europe, was held directly by TSMC Solar.

 

Note e:

The Company acquired OmniVision Technologies, Inc.’s (“OVT’s”) 49.1% ownership in VisEra Holding and 100% ownership in Taiwan OmniVision Investment Holding Co. (“OVT Taiwan”) on November 20, 2015. As a result, the Company has obtained controls of VisEra Holding and OVT Taiwan; therefore the Company has consolidated VisEra Holding, OVT Taiwan and VisEra Tech, held directly by VisEra Holding, since November 20, 2015. Please refer to Note 29.

 

Note f:

OVT Taiwan that originally acquired by the Company was renamed as Chi Cherng in December 2015.

Under an investment agreement entered into with the municipal government of Nanjing, China on March 28, 2016, the Company will make an investment in Nanjing in the amount of approximately US$3 billion to establish a wholly-owned subsidiary managing a 300mm wafer fab and design service center.

Retirement Benefits

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

Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax. The interim period income tax expense is accrued using the tax rate that would be applicable to expected total annual earnings, that is, the estimated average annual effective income tax rate applied to the pre-tax income of the interim period.

Insurance Claim

The Company recognizes insurance claim reimbursement for losses incurred related to disaster damages. Insurance claim reimbursements are recorded, net of any deductible amounts, at the time while there is evidence that the claim reimbursement is virtually certain to be received.

 

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

The same critical accounting judgments and key sources of estimates and uncertainty have been followed in these consolidated financial statements as were applied in the preparation of the Company’s consolidated financial statements for the year ended December 31, 2015.

 

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6.	CASH AND CASH EQUIVALENTS

 

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

 

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

 

The Company entered into derivative contracts 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 derivative contracts.

Outstanding forward exchange contracts consisted of the following:

 

 

(Continued)

 

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(Concluded)

Outstanding cross currency swap contracts consisted of the following:

 

 

8.	AVAILABLE-FOR-SALE FINANCIAL ASSETS

 

 

9.	HELD-TO-MATURITY FINANCIAL ASSETS

 

 

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10.	HEDGING DERIVATIVE FINANCIAL INSTRUMENTS

 

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

The outstanding interest rate futures contracts consisted of the following:

 

The Company’s investments in publicly traded stocks are exposed to the risk of market price fluctuations. Accordingly, the Company entered into stock forward contracts to sell shares at a contracted price determined by specific percentage of the spot price on the trade date in a specific future period in order to hedge the fair value risk caused by changes in equity prices.

The outstanding stock forward contracts consisted of the following:

 

 

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11.	NOTES AND ACCOUNTS RECEIVABLE, NET

 

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

Except for those impaired, for the rest of the notes and accounts receivable, the account aging analysis at the end of the reporting period is summarized in the following table. Notes and accounts receivable include amounts that are past due but for which the Company has not recognized a specific allowance for doubtful receivables after the assessment since there has not been a significant change in the credit quality of its customers and the amounts are still considered recoverable.

Aging analysis of notes and accounts receivable, net

 

Movements of the allowance for doubtful receivables

 

 

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Aging analysis of accounts receivable that is individually determined as impaired

 

 

12.	INVENTORIES

 

Reversal of the reserve for inventory write-downs resulting from the increase in net realizable value in the amount of NT$544,672 thousand (excluding earthquake losses) and write-down of inventories to net realizable value in the amount of NT$1,769,358 thousand, respectively, were included in the cost of revenue for the three months ended March 31, 2016 and 2015. Please refer to related earthquake losses in Note 36.

 

13.	FINANCIAL ASSETS CARRIED AT COST

 

Since there is a wide range of estimated fair values of the Company’s investments in non-publicly traded stocks, the Company concludes that the fair value cannot be reliably measured and therefore should be measured at the cost less any impairment.

The common stock of Richwave Technology Corp. was listed on the Taiwan Stock Exchange Corporation in November 2015. Thus, the Company reclassified the aforementioned investment from financial assets carried at cost to available-for-sale financial assets.

 

14.	INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD

Investments accounted for using the equity method consisted of the following:

 

 

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a.

Investments in associates

Associates consisted of the following:

 

The Company acquired OVT’s 49.1% ownership in VisEra Holding on November 20, 2015. As a result, the Company has obtained control of VisEra Holding and consolidated VisEra Holding since November 20, 2015. The Company included the Xintec shares held by VisEra Holding and total percentage of ownership over Xintec increased to 41.4%.

In June 2015, Motech merged with Topcell Solar International Co., Ltd with exchange of shares. As a result, the Company’s percentage of ownership over Motech decreased to 18.0%. In the fourth quarter of 2015, the Company sold 29,160 thousand common shares of Motech and recognized a disposal gain of NT$202,384 thousand. After the sale, the Company’s percentage of ownership over Motech decreased to 12.0%. Motech continues to be accounted for using equity method as the Company still retains significant influence over Motech.

In the second quarter of 2015, the Company sold 82,000 thousand common shares of VIS and recognized a disposal gain of NT$2,263,539 thousand. After the sale, the Company owned approximately 28.3% of the equity interest in VIS.

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

 

 

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b.

Investments in joint venture

Joint venture consisted of the following:

 

The Company acquired OVT’s 49.1% ownership in VisEra Holding on November 20, 2015. As a result, the Company has obtained control of VisEra Holding and consolidated VisEra Holding since November 20, 2015. Please refer to Note 29 for related disclosures.

 

15.	PROPERTY, PLANT AND EQUIPMENT

 

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

 

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For the year ended December 31, 2015, the Company recognized an impairment loss of NT$259,568 thousand under foundry segment since the carrying amount of some of property, plant and equipment is expected to be unrecoverable. Such impairment loss was included in other operating income and expenses for the year ended December 31, 2015.

In August 2015, TSMC Solar ceased its manufacturing operations. In the third quarter of 2015, the Company recognized an impairment loss of NT$2,286,016 thousand since the carrying amounts of some of machinery and equipment, office equipment and mechanical and electrical power equipment were expected to be unrecoverable. Such impairment loss was included in other operating income and expenses for the year ended December 31, 2015.

The Company had a building lease agreement with leasing terms from December 2003 to November 2018 and such lease was accounted for as a finance lease. In August 2015, the lease was determined to be an operating lease due to a modification on lease conditions; as such, the Company recognized a gain of NT$430,041 thousand from the modification. Such gain was included in other operating income and expenses for the year ended December 31, 2015.

 

16.	INTANGIBLE ASSETS

 

 

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The Company’s goodwill has been tested for impairment at the end of the annual reporting period and the recoverable amount is determined based on the value in use. The value in use was calculated based on the cash flow forecast from the financial budgets covering the future five-year period, and the Company used annual discount rate of 8.40% in its test of impairment for December 31, 2015 to reflect the relevant specific risk in the cash-generating unit.

In August 2015, TSMC Solar ceased its manufacturing operation and the Company recognized an impairment loss of NT$58,514 thousand in the third quarter of 2015 since the carrying amounts of technology license fees, software and system design costs were expected to be unrecoverable. Such impairment loss was included in other operating income and expenses for the year ended December 31, 2015.

 

17.	OTHER ASSETS

 

 

18.	SHORT-TERM LOANS

 

 

19.	PROVISIONS

 

 

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Provisions for sales returns and allowances are estimated based on historical experience, management judgment, and any known factors that would significantly affect the returns and allowances, and are recognized as a reduction of revenue in the same period of the related product sales.

The provision for warranties represents the present value of the Company’s best estimate of the future outflow of the economic benefits that will be required under the Company’s obligations for warranties. The best estimate has been made on the basis of historical warranty trends of business.

 

20.	BONDS PAYABLE

 

The major terms of overseas unsecured bonds are as follows:

 

 

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21.	GUARANTEE DEPOSITS

 

Starting from the second quarter of 2015, some of guarantee deposits were refunded to customers by offsetting related accounts receivable.

 

22.

EQUITY

 

a.

Capital stock

 

A holder of issued common shares with par value of NT$10 per share is entitled to vote and to receive dividends.

The authorized shares include 500,000 thousand shares allocated for the exercise of employee stock options.

As of March 31, 2016, 1,072,635 thousand ADSs of TSMC were traded on the NYSE. The number of common shares represented by the ADSs was 5,363,175 thousand shares (one ADS represents five common shares).

 

b.

Capital surplus

 

 

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Under the Company Law, 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 and convertible bonds) may be used to offset a deficit; in addition, when the Company has no deficit, such capital surplus may be distributed as cash dividends or stock dividends up to a certain percentage of TSMC’s paid-in capital. The capital surplus from share of changes in equities of subsidiaries may be used to offset a deficit.

 

c.

Retained earnings and dividend policy

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

 

1)

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

 

2)

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

 

3)

Bonus to directors and profit sharing to employees of TSMC of not more than 0.3% and not less than 1% of the remainder, respectively. Directors who also serve as executive officers of TSMC are not entitled to receive the bonus to directors. TSMC 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;

 

4)

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

TSMC’s existing Articles of Incorporation also provide that profits of TSMC 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.

In accordance with the amendments to the Company Act in May 2015, the recipients of dividends and bonuses are limited to shareholders and do not include employees. The consequential amendments to TSMC’s Articles of Incorporation had been proposed by TSMC’s Board of Directors on February 2, 2016 and are subject to the resolution of the shareholders in their meeting to be held on June 7, 2016 (expected). For information about the accrual basis of profit sharing bonus to employees and compensation to directors for the three months ended March 31, 2016 and 2015, and the appropriations for the years ended December 31, 2015 and 2014, please refer to employee benefits expense in Note 28.

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 in cash or stocks for the portion in excess of 25% of the paid-in capital if the Company incurs no loss.

Pursuant to existing regulations, the Company is required to set aside additional special capital reserve equivalent to the net debit balance of the other components of stockholders’ equity, such as the accumulated balance of foreign currency translation reserve, unrealized valuation gain/loss from available-for-sale financial assets, gain/loss from changes in fair value of hedging instruments in cash flow hedges, etc. For the subsequent decrease in the deduction amount to stockholders’ equity, any special reserve appropriated may be reversed to the extent that the net debit balance reverses.

 

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The appropriations of 2015 and 2014 earnings have been approved by TSMC’s Board of Directors in its meeting held on February 2, 2016 and by TSMC’s shareholders in its meeting held on June 9, 2015, respectively. The appropriations and dividends per share were as follows:

 

The appropriations of earnings for 2015 are to be presented for approval in the TSMC’s shareholders’ meeting to be held on June 7, 2016 (expected).

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

 

d.

Others

Changes in others were as follows:

 

 

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The exchange differences arising on translation of foreign operation’s net assets from its functional currency to TSMC’s presentation currency are recognized directly in other comprehensive income and also accumulated in the foreign currency translation reserve.

Unrealized gain/loss on available-for-sale financial assets represents the cumulative gains or losses arising from the fair value measurement on available-for-sale financial assets that are recognized in other comprehensive income, excluding the amounts recognized in profit or loss for the effective portion from changes in fair value of the hedging instruments. When those available-for-sale financial assets have been disposed of or are determined to be impaired subsequently, the related cumulative gains or losses in other comprehensive income are reclassified to profit or loss.

The cash flow hedges reserve represents the cumulative effective portion of gains or losses arising on changes in fair value of the hedging instruments entered into as cash flow hedges. The cumulative gains or losses arising on changes in fair value of the hedging instruments that are recognized and accumulated in cash flow hedges reserve will be reclassified to profit or loss only when the hedge transaction affects profit or loss.

 

23.	SHARE-BASED PAYMENT

The Company did not issue employee stock option plans for the three months ended March 31, 2016 and 2015. Information about the TSMC’s outstanding employee stock options is described as follows:

 

 

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

The employee stock options have been fully exercised in the second quarter of 2015.

Information about TSMC’s outstanding stock options was as follows:

 

March 31, 2015
Range of Exercise Price (NT$)		Weighted-average Remaining Contractual Life (Years)
$47.2		0.1

 

24.	NET REVENUE

 

 

25.	OTHER GAINS AND LOSSES

 

 

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26.	INCOME TAX

 

a.

Income tax expense recognized in profit or loss

 

 

b.

Income tax expense recognized in other comprehensive income

 

 

c.

Integrated income tax information

 

The estimated and actual creditable ratio for distribution of TSMC’s earnings of 2015 and 2014 were 12.71% and 11.13%, respectively; however, effective from January 1, 2015, the creditable ratio for individual shareholders residing in the Republic of China will be half of the original creditable ratio according to the revised Article 66 - 6 of the Income Tax Law.

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.

All of TSMC’s earnings generated prior to December 31, 1997 have been appropriated.

 

d.

Income tax examination

The tax authorities have examined income tax returns of TSMC through 2013. All investment tax credit adjustments assessed by the tax authorities have been recognized accordingly.

 

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27.	EARNINGS PER SHARE

 

EPS is computed as follows:

 

 

28.	ADDITIONAL INFORMATION OF EXPENSES BY NATURE

 

 

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Under the Company Act as amended in May 2015, the Company’s Articles of Incorporation should stipulate a fixed amount or ratio of annual profit to be distributed as profit sharing bonus to employees. The Company expects to make amendments to the Company’s Articles of Incorporation to be approved during the 2016 annual shareholders’ meeting.

TSMC accrued profit sharing bonus to employees based on a percentage of net income before income tax, profit sharing bonus to employees and compensation to directors during the period, which amounted to NT$4,344,524 thousand for the three months ended March 31, 2016. TSMC accrued profit sharing bonus to employees based on certain percentage of net income during the period, which amounted to NT$5,282,686 thousand for the three months ended March 31, 2015. Compensation to directors was expensed based on estimated amount payable. If there is a change in the proposed amounts after the annual consolidated financial statements are authorized for issue, the differences are recorded as a change in accounting estimate.

The Board of Directors of TSMC held on February 2, 2016 approved the profit sharing bonus to employees and compensation to directors in the amounts of NT$20,556,888 thousand and NT$356,186 thousand in cash for payment in 2015, respectively. There is no significant difference between the aforementioned approved amounts and the amounts charged against earnings of 2015. After the amendments to TSMC’s Articles of Incorporation to be approved during the TSMC’s shareholders’ meeting to be held on June 7, 2016 (expected), the appropriations of profit sharing bonus to employees and compensation to directors for 2015 are to be submitted to the shareholders’ meeting.

TSMC’s profit sharing bonus to employees and compensation to directors in the amounts of NT$17,645,966 thousand and NT$406,854 thousand in cash for 2014, respectively, had been approved by the shareholders in its meetings held on June 9, 2015. The aforementioned approved amount has no difference with the one approved by the Board of Directors in its meetings held on February 10, 2015 and the same amount had been charged against earnings of 2014.

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

 

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29.	CONSOLIDATION OF SUBSIDIARY

Due to a Chinese consortium’s acquisition of OVT, major shareholders of VisEra Holding and OVT Taiwan, the Company acquired OVT’s 49.1% ownership in VisEra Holding and 100% ownership in OVT Taiwan on November 20, 2015. The related information is as follows:

 

a.

Subsidiaries acquired

 

 

b.

Considerations transferred

 

 

c.

Assets acquired and liabilities assumed at the date of acquisition

 

 

(Continued)

 

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(Concluded)

 

d.

Goodwill arising on acquisition

 

 

e.

Net cash outflow on acquisition of subsidiaries

 

 

f.

Impact of acquisitions on the results of the Company

The results of VisEra Holding since the acquisition date included in the consolidated statements of comprehensive income for the year ended December 31, 2015 were as follows:

 

Had the business combination of VisEra Holding been in effect on January 1, 2015, the Company’s net revenue and net income for the year ended December 31, 2015 would have been NT$846,401,819 thousand and NT$306,687,674 thousand, respectively. This pro-forma information is for illustrative purposes only and is not necessarily an indication of revenue and results of operations of the Company that actually would have been achieved had the acquisition been completed on January 1, 2015, nor is it intended to be a projection of future results. The aforementioned pro-forma net revenue and net income were calculated based on the fair value of assets acquired and liabilities assumed at the date of acquisition.

 

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30.	DISPOSAL OF SUBSIDIARY

In January 2015, the Board of Directors of TSMC approved a sale of TSMC SSL common shares of 565,480 thousand held by TSMC and TSMC Guang Neng to Epistar Corporation. The transaction was completed in February 2015.

 

a.

Consideration received from the disposal

 

 

b.

Gain/loss on disposal of subsidiary

 

 

c.

Net cash inflow arising from disposal of subsidiary

 

 

31.	FINANCIAL INSTRUMENTS

 

a.

Categories of financial instruments

 

(Continued)

 

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(Concluded)

 

Note:

Including financial assets carried at cost.

 

b.

Financial risk management objectives

The Company seeks to ensure sufficient cost-efficient funding readily available when needed. The Company manages its exposure to foreign currency risk, interest rate risk, equity price risk, credit risk and liquidity risk with the objective to reduce the potentially adverse effects the market uncertainties may have on its financial performance.

The plans for material treasury activities are reviewed by Audit Committees and/or Board of Directors in accordance with procedures required by relevant regulations or internal controls. During the implementation of such plans, Corporate Treasury function must comply with certain treasury procedures that provide guiding principles for overall financial risk management and segregation of duties.

 

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c.

Market risk

The Company is exposed to the market risks arising from changes in foreign exchange rates, interest rates and the prices in equity investments, and utilizes some derivative financial instruments to reduce the related risks.

Foreign currency risk

Most of the Company’s operating activities are denominated in foreign currencies. Consequently, the Company is exposed to foreign currency risk. To protect against reductions in value and the volatility of future cash flows caused by changes in foreign exchange rates, the Company utilizes derivative financial instruments, including currency forward contracts and cross currency swaps, to hedge its currency exposure. These instruments help to reduce, but do not eliminate, the impact of foreign currency exchange rate movements.

The Company also holds short-term borrowings in foreign currencies in proportion to its expected future cash flows. This allows foreign-currency-denominated borrowings to be serviced with expected future cash flows and provides a partial hedge against transaction translation exposure.

The Company’s sensitivity analysis to foreign currency risk mainly focuses on the foreign currency monetary items at the end of the reporting period. Assuming an unfavorable 10% movement in the levels of foreign exchanges against the New Taiwan dollar, the net income for the three months ended March 31, 2016 and 2015 would have decreased by NT$300,909 thousand and NT$211,761 thousand, respectively, after taking into consideration of the hedging contracts and the hedged items.

Interest rate risk

The Company is exposed to interest rate risk arising from borrowing at both fixed and floating interest rates and from fixed income securities. All of the Company’s long-term bonds have fixed interest rates and are measured at amortized cost. As such, changes in interest rates would not affect the future cash flows. On the other hand, because interest rates of the Company’s long-term bank loans are floating, changes in interest rates would affect the future cash flows but not the fair value.

Assuming the amount of floating interest rate bank loans at the end of the reporting period had been outstanding for the entire period and all other variables were held constant, a hypothetical increase in interest rates of 100 basis point (1%) would have resulted in an increase in the interest expense, net of tax, by approximately NT$83 thousand for both the three months ended March 31, 2016 and 2015.

The Company classified fixed income securities as held-to-maturity and available-for-sale financial assets. Because held-to-maturity fixed income securities are measured at amortized cost, changes in interest rates would not affect the fair value. On the other hand, available-for-sale fixed income securities are exposed to fair value fluctuations caused by changes in interest rates. To manage its exposure to the fair value fluctuations, the Company enters into interest rate futures contract to hedge against price risk caused by changes in risk-free interest rates in the Company’s investments in available-for-sale fixed income securities.

Assuming a hypothetical increase of 100 basis point (1%) in interest rates of available-for-sale fixed income securities at the end of the reporting period, the net income for the three months ended March 31, 2016 would have been unaffected as they were classified as available-for-sale; however, the other comprehensive income for the three months ended March 31, 2016 would have decreased by NT$455,802 thousand.

 

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Other price risk

The Company is exposed to equity price risk arising from available-for-sale equity investments. To reduce the equity price risk, the Company utilizes some stock forward contracts to partially hedge its exposure.

Assuming a hypothetical decrease of 5% in equity prices of the equity investments at the end of the reporting period, the net income for the three months ended March 31, 2016 and 2015 would have been unaffected as they were classified as available-for-sale; however, the other comprehensive income for the three months ended March 31, 2016 and 2015 would have decreased by NT$260,202 thousand and NT$135,041 thousand, respectively.

 

d.

Credit risk management

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Company. The Company is exposed to credit risk from operating activities, primarily trade receivables, and from investing activities, primarily deposits, fixed-income investments and other financial instruments with banks. Credit risk is managed separately for business related and financial related exposures. As of the end of the reporting period, the Company’s maximum credit risk exposure is mainly from the carrying amount of financial assets recognized in the consolidated balance sheet.

Business related credit risk

The Company has considerable trade receivables outstanding with its customers worldwide. A substantial majority of the Company’s outstanding trade receivables are not covered by collateral or credit insurance. While the Company has procedures to monitor and limit exposure to credit risk on trade receivables, there can be no assurance such procedures will effectively limit its credit risk and avoid losses. This risk is heightened during periods when economic conditions worsen.

As of March 31, 2016, December 31, 2015 and March 31, 2015, the Company’s ten largest customers accounted for 71%, 68% and 68% of accounts receivable, respectively. The Company believes the concentration of credit risk is insignificant for the remaining accounts receivable.

Financial credit risk

The Company regularly monitors and reviews the transaction limit applied to counterparties and adjusts the concentration limit according to market conditions and the credit standing of the counterparties. The Company mitigates its exposure by selecting counterparties with investment-grade credit ratings.

 

e.

Liquidity risk management

The objective of liquidity risk management is to ensure the Company has sufficient liquidity to fund its business requirements associated with existing operations over the next 12 months. The Company manages its liquidity risk by maintaining adequate cash.

The table below summarizes the maturity profile of the Company’s financial liabilities based on contractual undiscounted payments, including principal and interest.

 

 

(Continued)

 

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