Edgar Filing: TAIWAN SEMICONDUCTOR MANUFACTURING CO LTD

Taiwan Semiconductor Manufacturing Company Ltd.

Date: November 15, 2016

/s/ Lora Ho

Senior Vice President & Chief Financial Officer

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 November 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: .)

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 Limited and Subsidiaries

		Consolidated Financial Statements for the Nine Months Ended September 30, 2016 and 2015 and Independent Accountants’ Review Report

LOGO

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 September 30, 2016 and 2015 and the related consolidated statements of comprehensive income for the three months ended September 30, 2016 and 2015 and for the nine months ended September 30, 2016 and 2015, as well as the consolidated statements of changes in equity and cash flows for the nine months ended September 30, 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 Regulations 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.

LOGO

November 8, 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.

- 1 -

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(In Thousands of New Taiwan Dollars)


	September 30, 2016 (Reviewed)					December 31, 2015 (Audited)				September 30, 2015 (Reviewed)
	Amount			%		Amount		%		Amount		%

ASSETS

CURRENT ASSETS
Cash and cash equivalents (Note 6)	$	463,971,657			27	$	562,688,930		34	$	515,731,398		33
Financial assets at fair value through profit or loss (Notes 4 and 7)		1,848,317			—		6,026		—		98,835		—
Available-for-sale financial assets (Notes 8 and 14)		45,815,003			3		14,299,361		1		1,597,602		—
Held-to-maturity financial assets (Note 9)		5,320,041			—		9,166,523		1		7,362,003		1
Hedging derivative financial assets (Note 10)		—			—		1,739		—		96,153		—
Notes and accounts receivable, net (Note 11)		129,118,058			8		85,059,675		5		96,611,632		6
Receivables from related parties (Note 32)		170,704			—		505,722		—		511,008		—
Other receivables from related parties (Note 32)		149,684			—		125,018		—		128,490		—
Inventories (Notes 12 and 36)		53,882,144			3		67,052,270		4		65,066,214		4
Other financial assets (Notes 4, 33 and 36)		5,866,961			—		4,305,358		—		3,613,680		—
Other current assets (Note 17)		3,448,916			—		3,533,369		—		2,844,481		—


Total current assets		709,591,485			41		746,743,991		45		693,661,496		44


NONCURRENT ASSETS
Held-to-maturity financial assets (Note 9)		27,430,893			2		6,910,873		—		2,571,357		—
Financial assets carried at cost (Note 13)		3,788,041			—		3,990,882		—		1,507,749		—
Investments accounted for using equity method (Note 14)		18,691,554			1		24,091,828		2		26,935,985		2
Property, plant and equipment (Note 15)		934,928,493			54		853,470,392		52		830,825,109		53
Intangible assets (Note 16)		14,630,613			1		14,065,880		1		13,196,292		1
Deferred income tax assets (Note 4)		7,506,051			1		6,384,974		—		5,743,803		—
Refundable deposits		509,564			—		430,802		—		400,263		—
Other noncurrent assets (Note 17)		1,610,069			—		1,428,676		—		1,376,756		—


Total noncurrent assets		1,009,095,278			59		910,774,307		55		882,557,314		56


TOTAL	$	1,718,686,763			100	$	1,657,518,298		100	$	1,576,218,810		100


LIABILITIES AND EQUITY

CURRENT LIABILITIES
Short-term loans (Note 18)	$	37,648,800			2	$	39,474,000		2	$	33,564,120		2
Financial liabilities at fair value through profit or loss (Notes 4 and 7)		224,525			—		72,610		—		179,363		—
Hedging derivative financial liabilities (Note 10)		1,039			—		—		—		—		—
Accounts payable		24,936,790			1		18,575,286		1		18,057,750		1
Payables to related parties (Note 32)		1,039,778			—		1,149,988		—		1,128,121		—
Salary and bonus payable		12,183,218			1		11,702,042		1		10,428,126		1
Accrued profit sharing bonus to employees and compensation to directors and supervisors (Notes 22 and 28)		16,252,681			1		20,958,893		1		16,105,423		1
Payables to contractors and equipment suppliers		58,789,579			3		26,012,192		2		34,338,079		2
Income tax payable (Note 4)		27,970,532			2		32,901,106		2		24,464,158		2
Provisions (Note 19)		11,512,994			1		10,163,536		1		9,898,270		1
Long-term liabilities - current portion (Note 20)		38,109,680			2		23,517,612		1		23,515,931		1
Accrued expenses and other current liabilities (Note 21)		28,885,496			2		27,701,329		2		30,010,029		2


Total current liabilities		257,555,112			15		212,228,594		13		201,689,370		13


NONCURRENT LIABILITIES
Bonds payable (Note 20)		152,138,965			9		191,965,082		12		191,970,754		12
Long-term bank loans		24,200			—		32,500		—		35,000		—
Deferred income tax liabilities (Note 4)		37,510			—		31,271		—		153,932		—
Net defined benefit liability (Note 4)		7,475,381			—		7,448,026		—		6,611,531		—
Guarantee deposits (Note 21)		15,872,972			1		21,564,801		1		23,208,034		2
Others (Note 19)		1,689,974			—		1,613,545		—		1,555,245		—


Total noncurrent liabilities		177,239,002			10		222,655,225		13		223,534,496		14


Total liabilities		434,794,114			25		434,883,819		26		425,223,866		27


EQUITY ATTRIBUTABLE TO SHAREHOLDERS OF THE PARENT
Capital stock (Note 22)		259,303,805			15		259,303,805		16		259,303,805		16

Capital surplus (Note 22)		56,269,958			3		56,300,215		3		56,298,728		4

Retained earnings (Note 22)
Appropriated as legal capital reserve		208,297,945			12		177,640,561		11		177,640,561		11
Unappropriated earnings		764,460,228			45		716,653,025		43		644,577,881		41

		972,758,173			57		894,293,586		54		822,218,442		52

Others (Note 22)		(5,218,902	)		—		11,774,113		1		13,138,191		1


Equity attributable to shareholders of the parent		1,283,113,034			75		1,221,671,719		74		1,150,959,166		73

NONCONTROLLING INTERESTS		779,615			—		962,760		—		35,778		—


Total equity		1,283,892,649			75		1,222,634,479		74		1,150,994,944		73


TOTAL	$	1,718,686,763			100	$	1,657,518,298		100	$	1,576,218,810		100

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

- 2 -

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

(Reviewed, Not Audited)


	For the Three Months Ended September 30												For the Nine Months Ended September 30
	2016						2015						2016						2015
	Amount			%			Amount			%			Amount			%			Amount			%

NET REVENUE (Notes 24, 32 and 38)	$	260,405,885			100		$	212,504,909			100		$	685,711,092			100		$	639,978,805			100

COST OF REVENUE (Notes 12, 28, 32 and 36)		128,366,813			49			110,188,424			52			347,960,308			51			328,509,564			51


GROSS PROFIT BEFORE REALIZED (UNREALIZED) GROSS PROFIT ON SALES TO ASSOCIATES		132,039,072			51			102,316,485			48			337,750,784			49			311,469,241			49

REALIZED (UNREALIZED) GROSS PROFIT ON SALES TO ASSOCIATES		11,717			—			19,271			—			(28,181	)		—			735			—


GROSS PROFIT		132,050,789			51			102,335,756			48			337,722,603			49			311,469,976			49


OPERATING EXPENSES (Notes 28 and 32)
Research and development		18,724,320			7			16,486,365			8			51,246,823			7			49,880,041			8
General and administrative		5,584,814			2			4,296,668			2			14,096,947			2			13,126,301			2
Marketing		1,531,454			1			1,377,131			1			4,383,455			1			4,247,546			1


Total operating expenses		25,840,588			10			22,160,164			11			69,727,225			10			67,253,888			11


OTHER OPERATING INCOME AND EXPENSES, NET (Note 28)		51,921			—			(1,786,668	)		—			55,059			—			(2,131,983	)		—


INCOME FROM OPERATIONS (Note 38)		106,262,122			41			78,388,924			37			268,050,437			39			242,084,105			38


NON-OPERATING INCOME AND EXPENSES
Share of profits of associates and joint venture		881,376			—			925,854			—			2,614,537			—			2,876,252			—
Other income		1,521,234			1			1,066,001			—			4,646,589			1			3,492,533			1
Foreign exchange gain (loss), net (Note 37)		(409,625	)		—			2,571,011			1			(2,310,461	)		—			2,326,899			—
Finance costs		(822,667	)		—			(792,941	)		—			(2,494,672	)		—			(2,370,284	)		—
Other gains and losses (Note 25)		817,175			—			1,235,770			1			3,405,475			—			21,375,777			3


Total non-operating income and expenses		1,987,493			1			5,005,695			2			5,861,468			1			27,701,177			4


INCOME BEFORE INCOME TAX		108,249,615			42			83,394,619			39			273,911,905			40			269,785,282			42

INCOME TAX EXPENSE (Notes 4 and 26)		11,460,502			5			8,077,319			4			39,801,916			6			36,071,170			5


NET INCOME		96,789,113			37			75,317,300			35			234,109,989			34			233,714,112			37


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		(10,123,965	)		(4	)		13,245,566			6			(17,070,485	)		(2	)		7,597,640			1
Changes in fair value of available-for-sale financial assets		59,051			—			(3,622,659	)		(1	)		80,327			—			(20,455,403	)		(3	)
Share of other comprehensive income (loss) of associates and joint venture		(11,372	)		—			(354,145	)		—			(2,743	)		—			239,665			—
Income tax benefit (expense) related to items that may be reclassified subsequently		(33,879	)		—			15,553			—			(6,239	)		—			(2,551	)		—


Other comprehensive income (loss) for the period, net of income tax		(10,110,165	)		(4	)		9,284,315			5			(16,999,140	)		(2	)		(12,620,649	)		(2	)


TOTAL COMPREHENSIVE INCOME FOR THE PERIOD	$	86,678,948			33		$	84,601,615			40		$	217,110,849			32		$	221,093,463			35


NET INCOME (LOSS) ATTRIBUTABLE TO:
Shareholders of the parent	$	96,759,056			37		$	75,329,224			35		$	234,046,870			34		$	233,736,649			37
Noncontrolling interests		30,057			—			(11,924	)		—			63,119			—			(22,537	)		—

	$	96,789,113			37		$	75,317,300			35		$	234,109,989			34		$	233,714,112			37


TOTAL COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO:
Shareholders of the parent	$	86,652,080			33		$	84,613,016			40		$	217,053,855			32		$	221,125,549			35
Noncontrolling interests		26,868			—			(11,401	)		—			56,994			—			(32,086	)		—


	$	86,678,948			33		$	84,601,615			40		$	217,110,849			32		$	221,093,463			35


	For the Three Months Ended September 30												For the Nine Months Ended September 30
	2016						2015						2016						2015
	Income Attributable to Shareholders of the Parent						Income Attributable to Shareholders of the Parent						Income Attributable to Shareholders of the Parent						Income Attributable to Shareholders of the Parent

EARNINGS PER SHARE (NT$, Note 27)
Basic earnings per share	$				3.73		$				2.91		$				9.03		$				9.01

Diluted earnings per share	$				3.73		$				2.91		$				9.03		$				9.01


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

- 3 -

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

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

(Reviewed, Not Audited)


	Equity Attributable to Shareholders of the Parent
																Others
	Capital Stock - Common Stock							Retained Earnings								Foreign 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

Appropriations of prior year’s earnings
Legal capital reserve		—		—		—			30,657,384		(30,657,384	)		—			—			—			—			—			—			—			—
Cash dividends to shareholders - NT$6.0 per share		—		—		—			—		(155,582,283	)		(155,582,283	)		—			—			—			—			(155,582,283	)		—			(155,582,283	)

Total		—		—		—			30,657,384		(186,239,667	)		(155,582,283	)		—			—			—			—			(155,582,283	)		—			(155,582,283	)


Net income for the nine months ended September 30, 2016		—		—		—			—		234,046,870			234,046,870			—			—			—			—			234,046,870			63,119			234,109,989

Other comprehensive income (loss) for the nine months ended September 30, 2016, net of income tax		—		—		—			—		—			—			(17,091,106	)		97,601			490			(16,993,015	)		(16,993,015	)		(6,125	)		(16,999,140	)


Total comprehensive income (loss) for the nine months ended September 30, 2016		—		—		—			—		234,046,870			234,046,870			(17,091,106	)		97,601			490			(16,993,015	)		217,053,855			56,994			217,110,849


Disposal of investments accounted for using equity method		—		—		(56,169	)		—		—			—			—			—			—			—			(56,169	)		—			(56,169	)

Adjustments to share of changes in equities of associates and joint venture		—		—		18,875			—		—			—			—			—			—			—			18,875			9			18,884

From share of changes in equities of subsidiaries		—		—		7,037			—		—			—			—			—			—			—			7,037			(7,037	)		—

Decrease in noncontrolling interests		—		—		—			—		—			—			—			—			—			—			—			(231,157	)		(231,157	)

Effect of disposal of subsidiary		—		—		—			—		—			—			—			—			—			—			—			(1,954	)		(1,954	)


BALANCE, SEPTEMBER 30, 2016		25,930,380	$	259,303,805	$	56,269,958		$	208,297,945	$	764,460,228		$	972,758,173		$	(6,051,157	)	$	832,372		$	(117	)	$	(5,218,902	)	$	1,283,113,034		$	779,615		$	1,283,892,649


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

Appropriations of prior year’s earnings
Legal capital reserve		—		—		—			26,389,879		(26,389,879	)		—			—			—			—			—			—			—			—
Cash dividends to shareholders - NT$4.5 per share		—		—		—			—		(116,683,481	)		(116,683,481	)		—			—			—			—			(116,683,481	)		—			(116,683,481	)

Total		—		—		—			26,389,879		(143,073,360	)		(116,683,481	)		—			—			—			—			(116,683,481	)		—			(116,683,481	)


Net income (loss) for the nine months ended September 30, 2015		—		—		—			—		233,736,649			233,736,649			—			—			—			—			233,736,649			(22,537	)		233,714,112

Other comprehensive income (loss) for the nine months ended September 30, 2015, net of income tax		—		—		—			—		—			—			7,507,537			(20,118,301	)		(336	)		(12,611,100	)		(12,611,100	)		(9,549	)		(12,620,649	)


Total comprehensive income (loss) for the nine months ended September 30, 2015		—		—		—			—		233,736,649			233,736,649			7,507,537			(20,118,301	)		(336	)		(12,611,100	)		221,125,549			(32,086	)		221,093,463


Issuance of stock from exercise of employee stock options		718		7,181		130,974			—		—			—			—			—			—			—			138,155			—			138,155

Disposal of investments accounted for using equity method		—		—		(26,537	)		—		—			—			—			—			—			—			(26,537	)		—			(26,537	)

Adjustments to share of changes in equities of associates and joint venture		—		—		230,222			—		—			—			—			—			—			—			230,222			149			230,371

From share of changes in equities of subsidiaries		—		—		(25,853	)		—		—			—			—			—			—			—			(25,853	)		25,853			—

Decrease in noncontrolling interests		—		—		—			—		—			—			—			—			—			—			—			(42,719	)		(42,719	)

Effect of disposal of subsidiary		—		—		—			—		—			—			—			—			—			—			—			(42,640	)		(42,640	)


BALANCE, SEPTEMBER 30, 2015		25,930,380	$	259,303,805	$	56,298,728		$	177,640,561	$	644,577,881		$	822,218,442		$	12,009,650		$	1,129,182		$	(641	)	$	13,138,191		$	1,150,959,166		$	35,778		$	1,150,994,944

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

- 4 -

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of New Taiwan Dollars)

(Reviewed, Not Audited)


	Nine Months Ended September 30
	2016			2015

CASH FLOWS FROM OPERATING ACTIVITIES
Income before income tax	$	273,911,905		$	269,785,282
Adjustments for:
Depreciation expense		164,665,319			163,884,425
Amortization expense		2,725,524			2,365,320
Finance costs		2,494,672			2,370,284
Share of profits of associates and joint venture		(2,614,537	)		(2,876,252	)
Interest income		(4,509,169	)		(2,875,858	)
Loss (gain) on disposal of property, plant and equipment, net		(61,491	)		49,503
Impairment loss on property, plant and equipment		—			2,317,424
Impairment loss on intangible assets		—			58,514
Impairment loss on financial assets		55,055			132,015
Gain on disposal of available-for-sale financial assets, net		(83,138	)		(21,482,011	)
Gain on disposal of financial assets carried at cost, net		(37,831	)		(82,128	)
Loss (gain) on disposal of investments accounted for using equity method, net		259,960			(2,305,323	)
Loss from liquidation of subsidiaries		36,105			—
Unrealized (realized) gross profit on sales to associates		28,181			(735	)
Loss (gain) on foreign exchange, net		(2,542,581	)		2,492,659
Dividend income		(137,420	)		(616,675	)
Loss from hedging instruments		14,763			137,124
Loss (gain) arising from changes in fair value of available-for-sale financial assets in hedge effective portion		(14,634	)		298,751
Gain from lease agreement modification		—			(428,388	)
Changes in operating assets and liabilities:
Financial instruments at fair value through profit or loss		(1,690,376	)		(213,641	)
Notes and accounts receivable, net		(48,540,162	)		15,780,788
Receivables from related parties		335,018			(198,053	)
Other receivables from related parties		(24,666	)		51,115
Inventories		13,170,126			1,271,757
Other financial assets		(1,285,255	)		1,049,004
Other current assets		84,453			925,665
Accounts payable		5,807,444			(3,106,992	)
Payables to related parties		(82,578	)		(363,369	)
Salary and bonus payable		481,176			(145,796	)
Accrued profit sharing bonus to employees and compensation to directors and supervisors		(4,706,212	)		(1,947,397	)
Accrued expenses and other current liabilities		1,337,333			198,533
Provisions		1,398,158			(540,919	)
Net defined benefit liability		27,355			43,749

Cash generated from operations		400,502,497			426,028,375
Income taxes paid		(45,887,694	)		(40,821,123	)


Net cash generated by operating activities		354,614,803			385,207,252

(Continued)

- 5 -

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of New Taiwan Dollars)

(Reviewed, Not Audited)


	Nine Months Ended September 30
	2016			2015

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of:
Available-for-sale financial assets	$	(51,587,356	)	$	(3,628	)
Held-to-maturity financial assets		(25,112,300	)		(19,301,111	)
Financial assets carried at cost		(240,743	)		(87,970	)
Property, plant and equipment		(215,502,503	)		(172,993,344	)
Intangible assets		(2,989,442	)		(2,657,499	)
Land use right		(805,318	)		—
Proceeds from disposal or redemption of:
Available-for-sale financial assets		20,654,629			53,990,941
Held-to-maturity financial assets		7,400,000			13,900,000
Financial assets carried at cost		160,498			357,993
Investments accounted for using equity method		—			3,962,848
Property, plant and equipment		93,720			70,433
Proceeds from return of capital of financial assets carried at cost		65,383			—
Derecognition of hedging derivative financial instruments		(11,974	)		—
Costs from entering into hedging transactions		—			(495,348	)
Interest received		4,679,716			2,606,926
Net cash inflow from disposal of subsidiary (Note 30)		—			601,047
Other dividends received		137,420			616,675
Dividends received from investments accounted for using equity method		5,478,790			3,407,126
Refundable deposits paid		(140,056	)		(267,994	)
Refundable deposits refunded		74,455			227,253
Decrease in receivables for temporary payments		706,718			—


Net cash used in investing activities		(256,938,363	)		(116,065,652	)


CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in short-term loans		(157,064	)		(2,628,330	)
Repayment of bonds		(23,471,600	)		—
Repayment of long-term bank loans		(6,120	)		—
Interest paid		(3,148,821	)		(2,704,853	)
Decrease in obligations under finance leases		—			(29,098	)
Guarantee deposits received		996,803			557,639
Guarantee deposits refunded		(500,835	)		(552,993	)
Cash dividends		(155,582,283	)		(116,683,481	)
Proceeds from exercise of employee stock options		—			33,891
Decrease in noncontrolling interests		(231,666	)		(42,719	)


Net cash used in financing activities		(182,101,586	)		(122,049,944	)


EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		(14,292,127	)		10,109,235

(Continued)

- 6 -

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of New Taiwan Dollars)

(Reviewed, Not Audited)


	Nine Months Ended September 30
	2016			2015

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	$	(98,717,273	)	$	157,200,891

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	$	463,971,657		$	515,731,398


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

- 7 -

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 November 8, 2016.

3.	APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS

As of the date that the accompanying consolidated financial statements were issued, the Company has not applied the following International Financial Reporting Standards (IFRS), International Accounting Standards (IASs), Interpretations of IFRS, and Interpretations of IASs issued by the International Accounting Standards Board (IASB) (collectively, “IFRSs”).

The IFRSs in issue and endorsed by Financial Supervisory Commission (FSC) with effective date starting 2017

According to Rule No. 1050026834 issued by the FSC, the following IFRSs endorsed by the FSC should be adopted by the Company starting 2017.


New, Revised or Amended Standards and Interpretations		Effective Date Issued by IASB (Note 1)

Annual Improvements to IFRSs 2010 - 2012 Cycle		July 1, 2014 or transactions on or after July 1, 2014
Annual Improvements to IFRSs 2011 - 2013 Cycle		July 1, 2014
Annual Improvements to IFRSs 2012 - 2014 Cycle		January 1, 2016 (Note 2)
Amendments to IFRS 10, IFRS 12 and IAS 28 “Investment Entities: Applying the Consolidation Exception”		January 1, 2016

(Continued)

- 8 -


New, Revised or Amended Standards and Interpretations		Effective Date Issued by IASB (Note 1)

Amendment to IFRS 11 “Accounting for Acquisitions of Interests in Joint Operations”		January 1, 2016
Amendment to IAS 1 “Disclosure Initiative”		January 1, 2016
Amendments to IAS 16 and IAS 38 “Clarification of Acceptable Methods of Depreciation and Amortization”		January 1, 2016
Amendment to IAS 19 “Defined Benefit Plans: Employee Contributions”		July 1, 2014
Amendment to IAS 27 “Equity Method in Separate Financial Statements”		January 1, 2016
Amendment to IAS 36 “Recoverable Amount Disclosures for Non-Financial Assets”		January 1, 2014
Amendment to IAS 39 “Novation of Derivatives and Continuation of Hedge Accounting”		January 1, 2014

(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 Company believes that the adoption of aforementioned IFRSs with effective date starting 2017 will not have a significant effect on the Company’s consolidated financial statements:

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

The amendments to IAS 36 clarify that the Company is required to disclose the recoverable amount of an asset or a cash-generating unit only when an impairment loss on the asset has been recognized or reversed during the period. Furthermore, if the recoverable amount for which impairment loss has been recognized or reversed is fair value less costs of disposal, the Company is required to disclose the fair value hierarchy. If the fair value measurements are categorized within Level 2 or Level 3, the valuation technique and key assumptions used to measure the fair value are disclosed. The discount rate used is disclosed if such fair value less costs of disposal is measured by using present value technique. 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 IFRSs with effective date starting 2017. The related impact will be disclosed when the Company completes the evaluation.

The IFRSs issued by IASB but not yet endorsed by FSC

The Company has not applied the following IFRSs issued by the IASB but not endorsed by the FSC. The FSC announced that the Company 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 IFRSs.

- 9 -


New, Revised or Amended Standards and Interpretations		Effective Date Issued by IASB (Note 3)

Amendment to IFRS 2 “Classification and Measurement of Share-based Payment Transactions”		January 1, 2018
IFRS 9 “Financial Instruments”		January 1, 2018
Amendments to IFRS 9 and IFRS 7 “Mandatory Effective Date of IFRS 9 and Transition Disclosure”		January 1, 2018
Amendments to IFRS 10 and IAS 28 “Sale or Contribution of Assets between an Investor and its Associate or Joint Venture”		Effective date to be determined by IASB
IFRS 15 “Revenue from Contracts with Customers”		January 1, 2018
Amendment to IFRS 15 “Clarifications to IFRS 15”		January 1, 2018
IFRS 16 “Leases”		January 1, 2019
Amendment to IAS 7 “Disclosure Initiative”		January 1, 2017
Amendment to IAS 12 “Recognition of Deferred Tax Assets for Unrealized Losses”		January 1, 2017

Note 3:

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

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

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:

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.

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.

- 10 -

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 changes in hedge accounting amended the application requirements for hedge accounting to better reflect the entity’s risk management activities. Compared with IAS 39, the main changes include: (1) enhancing types of transactions eligible for hedge accounting, specifically broadening the risks eligible for hedge accounting of non-financial items; (2) changing the way hedging derivative instruments are accounted for to reduce profit or loss volatility; and (3) replacing retrospective effectiveness assessment with the principle of economic relationship between the hedging instrument and the hedged item.

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.

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.

- 11 -

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.

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.

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:

Establishment

and Operating

Location

Percentage of Ownership

Name of Investor

Name of Investee

Main Businesses and Products

September 30,

2016

December 31,
2015

September 30,

2015

Note

TSMC

TSMC North America

Selling and marketing of integrated circuits and semiconductor devices

San Jose, California, U.S.A.

100%

—

TSMC Japan Limited (TSMC Japan)

Marketing activities

Yokohama, Japan

100%

TSMC Partners, Ltd. (TSMC Partners)

Investing in companies involved in the design, manufacture, and other related business in the semiconductor industry

Tortola, British Virgin Islands

100%

TSMC Korea Limited (TSMC Korea)

Customer service and technical supporting activities

Seoul, Korea

100%

TSMC Europe B.V. (TSMC Europe)

Marketing and engineering supporting activities

Amsterdam, the Netherlands

100%

TSMC Global, Ltd. (TSMC Global)

Investment activities

Tortola, British Virgin Islands

100%

—

(Continued)

- 12 -


			Establishment and Operating Location	Percentage of Ownership
Name of Investor	Name of Investee	Main Businesses and Products	Establishment and Operating Location	September 30, 2016	December 31, 2015	September 30, 2015	Note

TSMC	TSMC China Company Limited (TSMC China)	Manufacturing and selling of integrated circuits at the order of and pursuant to product design specifications provided by customers	Shanghai, China	100%	100%	100%	—
	TSMC Nanjing Company Limited (TSMC Nanjing)	Manufacturing and selling of integrated circuits at the order of and pursuant to product design specifications provided by customers	Nanjing, China	100%	—	—	b)
	VentureTech Alliance Fund III, L.P. (VTAF III)	Investing in new start-up technology companies	Cayman Islands	98%	98%	98%	a)
	VentureTech Alliance Fund II, L.P. (VTAF II)	Investing in new start-up technology companies	Cayman Islands	98%	98%	98%	a)
	Emerging Alliance Fund, L.P. (Emerging Alliance)	Investing in new start-up technology companies	Cayman Islands	—	99.5%	99.5%	a), c)
	TSMC Solar Ltd. (TSMC Solar)	Engaged in researching, developing, designing, manufacturing and selling renewable energy and saving related technologies and products	Tai-Chung, Taiwan	—	—	99%	d)
	TSMC Guang Neng Investment, Ltd. (TSMC GN)	Investment activities	Taipei, Taiwan	—	—	100%	d)
	TSMC Solar Europe GmbH	Selling of solar related products and providing customer service	Hamburg, Germany	100%	100%	—	a), d)
	Chi Cherng Investment Co., Ltd. (Chi Cherng)	Investment activities	Taipei, Taiwan	100%	100%	—	e), f)
	VisEra Technologies Company Ltd. (VisEra Tech)	Engaged in manufacturing electronic spare parts and in researching, developing, designing, manufacturing, selling, packaging and testing of color filter	Hsin-Chu, Taiwan	87%	—	—	e), g)
TSMC Partners	TSMC Design Technology Canada Inc. (TSMC Canada)	Engineering support activities	Ontario, Canada	100%	100%	100%	a)
	TSMC Technology, Inc. (TSMC Technology)	Engineering support activities	Delaware, U.S.A.	100%	100%	100%	a)
	TSMC Development, Inc. (TSMC Development)	Investment activities	Delaware, U.S.A.	100%	100%	100%	—
	InveStar Semiconductor Development Fund, Inc. (ISDF)	Investing in new start-up technology companies	Cayman Islands	97%	97%	97%	a)
	InveStar Semiconductor Development Fund, Inc. (II) LDC. (ISDF II)	Investing in new start-up technology companies	Cayman Islands	97%	97%	97%	a)
	VisEra Holding Company (VisEra Holding)	Investing in companies involved in the design, manufacturing and other related businesses in the semiconductor industry	Cayman Islands	100%	98%	49%	a), e), g)
TSMC Development	WaferTech, LLC (WaferTech)	Manufacturing, selling, testing and computer-aided designing of integrated circuits and other semiconductor devices	Washington, U.S.A.	100%	100%	100%	—
VTAF III	Mutual-Pak Technology Co., Ltd. (Mutual-Pak)	Manufacturing of electronic parts, wholesaling and retailing of electronic materials, and researching, developing and testing of RFID	New Taipei, Taiwan	58%	58%	58%	—
	Growth Fund Limited (Growth Fund)	Investing in new start-up technology companies	Cayman Islands	100%	100%	100%	a)
VTAF III, VTAF II and Emerging Alliance	VentureTech Alliance Holdings, LLC (VTA Holdings)	Investing in new start-up technology companies	Delaware, U.S.A.	—	100%	100%	a), c)
VTAF III, VTAF II and TSMC	VentureTech Alliance Holdings, LLC (VTA Holdings)	Investing in new start-up technology companies	Delaware, U.S.A.	100%	—	—	a), c)
TSMC Solar	TSMC Solar North America, Inc. (TSMC Solar NA)	Selling and marketing of solar related products	Delaware, U.S.A.	—	—	100%	a), d)
	TSMC Solar Europe GmbH	Selling of solar modules and related products and providing customer service	Hamburg, Germany	—	—	100%	a), d)
VisEra Holding	VisEra Tech	Engaged in manufacturing electronic spare parts and in researching, developing, designing, manufacturing, selling, packaging and testing of color filter	Hsin-Chu, Taiwan	—	87%	87%	e), g)

(Concluded)

- 13 -

Note a:

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

Note b:

Under the 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 subsidiary managing a 300mm wafer fab with the capacity of 20,000 12-inch wafers per month, and a design service center. TSMC Nanjing was established in May 2016.

Note c:

Due to the expiration of the investment agreement between Emerging Alliance and TSMC, Emerging Alliance completed the liquidation procedures in April 2016. Emerging Alliance’s ownership in VTA Holdings is held directly by TSMC.

Note d:

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 subsidiary of TSMC Solar, is held directly by TSMC and TSMC Solar Europe GmbH has started the liquidation procedures. TSMC Solar NA, the subsidiary of TSMC Solar, completed the liquidation procedures in December 2015.

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. In November 2016, the Board of Directors of TSMC approved that Chi Cherng will be incorporated into TSMC.

Note g:

To simplify investment structure, VisEra Tech owned by VisEra Holding was transferred to TSMC in the third quarter of 2016. In October 2016, VisEra Holding was also merged into TSMC Partners, the subsidiary of TSMC.

Financial Instruments Designated as at Fair Value through Profit or Loss

A financial instrument may be designated as at fair value through profit or loss (FVTPL) upon initial recognition. The financial instrument forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Company’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis.

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.

Government Grants

Government grants are not recognized until there is reasonable assurance that the Company will comply with the conditions attaching to them and that the grants will be received.

Government grants whose primary condition is that the Company should purchase, construct or otherwise acquire non-current assets (mainly including land use right and depreciable assets) are recognized as a deduction from the carrying amount of the related assets and recognized as a reduced depreciation or amortization charge in profit or loss over the contract period or useful lives of the related assets. Government grants that are receivables as compensation for expenses already incurred are deducted from incurred expenses in the period in which they become receivables.

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.

- 14 -

6.	CASH AND CASH EQUIVALENTS


	September 30, 2016		December 31, 2015		September 30, 2015

Cash and deposits in banks	$	463,671,592	$	557,270,910	$	510,693,940
Repurchase agreements collateralized by corporate bonds		300,065		5,132,778		3,961,517
Repurchase agreements collateralized by government bonds		—		285,242		576,463
Repurchase agreements collateralized by short-term commercial paper		—		—		499,478


	$	463,971,657	$	562,688,930	$	515,731,398

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


	September 30, 2016		December 31, 2015		September 30, 2015

Financial assets

Held for trading
Cross currency swap contracts	$	186,592	$	—	$	25,197
Forward exchange contracts		84,591		6,026		73,638

		271,183		6,026		98,835


Designated as at FVTPL
Time deposit		1,577,134		—		—


	$	1,848,317	$	6,026	$	98,835


Financial liabilities

Held for trading
Forward exchange contracts	$	194,557	$	72,610	$	179,363
Cross currency swap contracts		20,642		—		—

		215,199		72,610		179,363


Designated as at FVTPL
Forward exchange contracts		9,326		—		—


	$	224,525	$	72,610	$	179,363

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.

- 15 -

Outstanding forward exchange contracts consisted of the following:


		Contract Amount
	Maturity Date	(In Thousands)

September 30, 2016

Sell NT$/Buy EUR	October 2016		NT$5,875,971/EUR166,500
Sell NT$/Buy JPY	October 2016 to November 2016		NT$18,401,384/JPY58,842,475
Sell US$/Buy EUR	October 2016		US$5,597/EUR5,000
Sell US$/Buy NT$	October 2016 to November 2016		US$54,000/NT$1,695,076
Sell US$/Buy RMB	October 2016 to June 2017		US$282,020/RMB1,883,798

December 31, 2015

Sell US$/Buy JPY	January 2016		US$128,418/JPY15,449,355
Sell US$/Buy RMB	January 2016		US$226,000/RMB1,464,472
Sell US$/Buy NT$	January 2016 to February 2016		US$440,000/NT$14,434,179

September 30, 2015

Sell EUR/Buy US$	October 2015		EUR3,400/US$3,810
Sell NT$/Buy US$	October 2015		NT$1,828,624/US$56,000
Sell US$/Buy EUR	October 2015		US$25,692/EUR23,000
Sell US$/Buy NT$	October 2015 to November 2015		US$845,000/NT$27,667,518
Sell US$/Buy RMB	October 2015 to November 2015		US$188,000/RMB1,199,447

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, 2016

October 2016

US$1,646,000/ NT$51,816,590

0.69%-0.90%

—

September 30, 2015

October 2015

NT$3,216,025/ US$98,500

—

0.18%

8.	AVAILABLE-FOR-SALE FINANCIAL ASSETS


	September 30, 2016		December 31, 2015		September 30, 2015

Corporate bonds	$	20,459,534	$	6,267,768	$	—
Agency bonds		10,679,092		2,627,367		—
Corporate issued asset-backed securities		7,326,334		3,154,366		—
Government bonds		4,304,642		878,377		—
Publicly traded stocks		3,045,401		1,371,483		1,597,196
Money market funds		—		—		406


	$	45,815,003	$	14,299,361	$	1,597,602

- 16 -

9.	HELD-TO-MATURITY FINANCIAL ASSETS


	September 30, 2016		December 31, 2015		September 30, 2015

Corporate bonds/Bank debentures	$	25,476,134	$	8,143,146	$	7,539,404
Negotiable certificate of deposit		4,706,100		4,934,250		—
Structured product		2,568,700		3,000,000		—
Commercial paper		—		—		2,393,956


	$	32,750,934	$	16,077,396	$	9,933,360


Current portion	$	5,320,041	$	9,166,523	$	7,362,003
Noncurrent portion		27,430,893		6,910,873		2,571,357


	$	32,750,934	$	16,077,396	$	9,933,360

10.

HEDGING DERIVATIVE FINANCIAL INSTRUMENTS


	September 30, 2016		December 31, 2015		September 30, 2015

Financial assets - current

Fair value hedges
Interest rate futures contracts	$	—	$	1,739	$	—
Stock forward contracts		—		—		96,153


	$	—	$	1,739	$	96,153


Financial liabilities - current

Fair value hedges
Interest rate futures contracts	$	1,039	$	—	$	—

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:


Maturity Period	Contract Amount (US$ in Thousands)

September 30, 2016

December 2016	US$	5,500

December 31, 2015

March 2016	US$	13,800

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.

- 17 -

The outstanding stock forward contracts consisted of the following:


	September 30, 2016		December 31, 2015		September 30, 2015

Contract amount (US$ in thousands)	$	—	$	—	$	814,135
					(US$	24,741	)

11.

NOTES AND ACCOUNTS RECEIVABLE, NET


	September 30, 2016			December 31, 2015			September 30, 2015

Notes and accounts receivable	$	129,598,103		$	85,547,926		$	97,115,658
Allowance for doubtful receivables		(480,045	)		(488,251	)		(504,026	)


Notes and accounts receivable, net	$	129,118,058		$	85,059,675		$	96,611,632

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


	September 30, 2016			December 31, 2015			September 30, 2015

Neither past due nor impaired	$	116,427,755		$	71,482,666		$	87,742,721
Past due but not impaired
Past due within 30 days		10,259,847			13,577,009			8,585,713
Past due 31-60 days		1,945,254			—			283,198
Past due 61-120 days		485,202			—			—


	$	129,118,058		$	85,059,675		$	96,611,632

Movements of the allowance for doubtful receivables

	Individually Assessed for Impairment			Collectively Assessed for Impairment			Total

Balance at January 1, 2016	$	10,241		$	478,010		$	488,251
Provision		—			321			321
Reversal/Write-off		(8,393	)		—			(8,393	)
Effect of exchange rate changes		—			(134	)		(134	)


Balance at September 30, 2016	$	1,848		$	478,197		$	480,045

(Continued)

- 18 -


	Individually Assessed for Impairment		Collectively Assessed for Impairment			Total

Balance at January 1, 2015	$	8,093	$	478,637		$	486,730
Provision		28,593		20,670			49,263
Reversal		—		(32,832	)		(32,832	)
Effect of exchange rate changes		775		90			865


Balance at September 30, 2015	$	37,461	$	466,565		$	504,026

(Concluded) Aging analysis of accounts receivable that is individually determined as impaired

	September 30, 2016		December 31, 2015			September 30, 2015

Not past due	$	—	$	—		$	1,136
Past due 1-30 days		—		—			3,327
Past due 31-60 days		—		—			4,207
Past due 61-120 days		—		—			3,264
Past due over 121 days		1,848		10,241			25,527


	$	1,848	$	10,241		$	37,461

12.

INVENTORIES


	September 30, 2016		December 31, 2015		September 30, 2015

Finished goods	$	4,878,237	$	7,974,902	$	10,138,370
Work in process		43,386,241		53,632,056		49,216,582
Raw materials		2,876,452		3,038,756		3,422,366
Supplies and spare parts		2,741,214		2,406,556		2,288,896


	$	53,882,144	$	67,052,270	$	65,066,214

Write-down of inventories to net realizable value (excluding earthquake losses) was included in the cost of revenue, which were as follows. Please refer to related earthquake losses in Note 36.


	Three Months Ended September 30				Nine Months Ended September 30
	2016		2015		2016		2015

Inventory losses	$	400,040	$	97,971	$	1,051,173	$	1,465,692

- 19 -

13.

FINANCIAL ASSETS CARRIED AT COST


	September 30, 2016		December 31, 2015		September 30, 2015

Non-publicly traded stocks	$	2,921,975	$	3,268,100	$	1,215,789
Mutual funds		866,066		722,782		291,960


	$	3,788,041	$	3,990,882	$	1,507,749

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 stocks of Impinj, Inc. and Richwave Technology Corp. were listed in July 2016 and November 2015, respectively. Accordingly, the Company reclassified the aforementioned investments 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:


	September 30, 2016		December 31, 2015		September 30, 2015

Associates	$	18,691,554	$	24,091,828	$	23,585,244
Joint venture		—		—		3,350,741


	$	18,691,554	$	24,091,828	$	26,935,985

Investments in associates

Associates consisted of the following:


		Place of	Carrying Amount						% of Ownership and Voting Rights Held by the Company
Name of Associate	Principal Activities	Incorporation and Operation	September 30, 2016		December 31, 2015		September 30, 2015		September 30, 2016		December 31, 2015		September 30, 2015

Vanguard International Semiconductor Corporation (VIS)	Research, design, development, manufacture, packaging, testing and sale of memory integrated circuits, LSI, VLSI and related parts	Hsinchu, Taiwan	$	8,422,487	$	8,446,054	$	8,201,681		28%		28%		28%
Systems on Silicon Manufacturing Company Pte Ltd. (SSMC)	Fabrication and supply of integrated circuits	Singapore		6,436,314		9,511,515		8,961,566		39%		39%		39%
Xintec Inc. (Xintec)	Wafer level chip size packaging service	Taoyuan, Taiwan		2,711,649		2,928,362		2,240,223		41%		41%		35%
Global Unichip Corporation (GUC)	Researching, developing, manufacturing, testing and marketing of integrated circuits	Hsinchu, Taiwan		1,121,104		1,152,335		1,079,023		35%		35%		35%
Motech Industries, Inc. (Motech)	Manufacturing and sales of solar cells, crystalline silicon solar cell, and test and measurement instruments and design and construction of solar power systems	New Taipei, Taiwan		—		2,053,562		3,102,751		—		12%		18%


			$	18,691,554	$	24,091,828	$	23,585,244

- 20 -

Starting June 2016, the Company has no longer served as Motech’s board of director. As a result, the Company exercises no significant influence over Motech. Therefore, Motech is no longer accounted for using the equity method. Further, such investment was reclassified to available-for-sale financial assets and the Company recognized a disposal loss of NT$259,960 thousand.

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 continued to be accounted for using equity method as the Company still retained significant influence over Motech.

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%. To simplify investment structure, Xintec owned by VisEra Holding was transferred to TSMC in the third quarter of 2016.

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.


Name of Associate	September 30, 2016		December 31, 2015		September 30, 2015

VIS	$	27,203,497	$	19,868,766	$	17,315,536

Xintec	$	3,800,278	$	3,605,534	$	3,256,518

GUC	$	3,534,271	$	3,081,399	$	2,712,565

Motech			$	2,636,054	$	3,179,890

Investments in joint venture

Joint venture consisted of the following:

Place of

Carrying Amount

% of Ownership and Voting
Rights Held by the Company

Name of Joint Venture

Principal Activities

Incorporation
and Operation

September 30,

2016

December 31,
2015

September 30,

2015

September 30,

2016

December 31,
2015

September 30,

2015

VisEra Holding

Investing in companies involved in the design, manufacturing and other related businesses in the semiconductor industry

Cayman Islands

—

3,350,741

—

49%

15.

PROPERTY, PLANT AND EQUIPMENT


	Land and Land Improvements			Buildings			Machinery and Equipment			Office Equipment			Assets under Finance Leases			Equipment under Installation and Construction in Progress			Total

Cost

Balance at January 1, 2016	$	4,067,391		$	296,801,864		$	1,893,489,604		$	30,700,049		$	7,113		$	192,111,548		$	2,417,177,569
Additions		—			6,915,391			129,035,170			3,832,079			—			107,584,121			247,366,761
Disposals or retirements		—			(13,373	)		(2,659,973	)		(386,859	)		—			—			(3,060,205	)
Reclassification		—			—			—			7,113			(7,113	)		—			—
Effect of exchange rate changes		(39,552	)		(1,469,279	)		(4,899,538	)		(113,918	)		—			(103,092	)		(6,625,379	)


Balance at September 30, 2016	$	4,027,839		$	302,234,603		$	2,014,965,263		$	34,038,464		$	—		$	299,592,577		$	2,654,858,746

(Continued)

- 21 -


	Land and Land Improvements			Buildings			Machinery and Equipment			Office Equipment			Assets under Finance Leases			Equipment under Installation and Construction in Progress		Total

Accumulated depreciation and impairment

Balance at January 1, 2016	$	506,185		$	157,910,155		$	1,385,857,655		$	19,426,069		$	7,113		$	—	$	1,563,707,177
Additions		22,193			13,210,805			148,223,485			3,208,836			—			—		164,665,319
Disposals or retirements		—			(7,327	)		(2,631,853	)		(386,796	)		—			—		(3,025,976	)
Reclassification		—			—			—			7,113			(7,113	)		—		—
Effect of exchange rate changes		(24,135	)		(1,109,652	)		(4,199,447	)		(83,033	)		—			—		(5,416,267	)


Balance at September 30, 2016	$	504,243		$	170,003,981		$	1,527,249,840		$	22,172,189		$	—		$	—	$	1,719,930,253


Carrying amounts at January 1, 2016	$	3,561,206		$	138,891,709		$	507,631,949		$	11,273,980		$	—		$	192,111,548	$	853,470,392

Carrying amounts at September 30, 2016	$	3,523,596		$	132,230,622		$	487,715,423		$	11,866,275		$	—		$	299,592,577	$	934,928,493


Cost

Balance at January 1, 2015	$	4,036,785		$	269,163,850		$	1,754,170,227		$	27,960,835		$	841,154		$	109,334,736	$	2,165,507,587
Additions		—			24,150,678			123,991,559			2,406,587			—			28,365,554		178,914,378
Disposals or retirements		—			(6,180	)		(1,908,608	)		(880,917	)		—			—		(2,795,705	)
Lease agreement modification		—			—			—			—			(820,963	)		—		(820,963	)
Effect of exchange rate changes		30,892			471,030			2,593,902			53,458			(13,076	)		26,861		3,163,067


Balance at September 30, 2015	$	4,067,677		$	293,779,378		$	1,878,847,080		$	29,539,963		$	7,115		$	137,727,151	$	2,343,968,364


Accumulated depreciation and impairment

Balance at January 1, 2015	$	459,140		$	141,245,913		$	1,188,388,402		$	16,767,934		$	447,397		$	—	$	1,347,308,786
Additions		21,494			11,968,771			149,087,602			2,781,445			25,113			—		163,884,425
Disposals or retirements		—			(5,313	)		(1,832,675	)		(836,801	)		—			—		(2,674,789	)
Lease agreement modification		—			—			—			—			(458,612	)		—		(458,612	)
Impairment		—			278,057			2,028,627			10,740			—			—		2,317,424
Effect of exchange rate changes		18,215			380,506			2,339,517			34,566			(6,783	)		—		2,766,021


Balance at September 30, 2015	$	498,849		$	153,867,934		$	1,340,011,473		$	18,757,884		$	7,115		$	—	$	1,513,143,255


Carrying amounts at September 30, 2015	$	3,568,828		$	139,911,444		$	538,835,607		$	10,782,079		$	—		$	137,727,151	$	830,825,109

(Concluded)

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.

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.

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.

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.

- 22 -

16.

INTANGIBLE ASSETS


	Goodwill			Technology License Fees			Software and System Design Costs			Patent and Others			Total

Cost

Balance at January 1, 2016	$	6,104,784		$	8,454,304		$	19,474,428		$	4,879,026		$	38,912,542
Additions		—			907,268			2,184,076			416,310			3,507,654
Retirements		—			—			(4,787	)		—			(4,787	)
Effect of exchange rate changes		(209,202	)		349			(11,068	)		(9,947	)		(229,868	)


Balance at September 30, 2016	$	5,895,582		$	9,361,921		$	21,642,649		$	5,285,389		$	42,185,541


Accumulated amortization

Balance at January 1, 2016	$	—		$	4,779,388		$	16,431,666		$	3,635,608		$	24,846,662
Additions		—			1,005,254			1,227,616			492,654			2,725,524
Retirements		—			—			(4,787	)		—			(4,787	)
Effect of exchange rate changes		—			349			(10,100	)		(2,720	)		(12,471	)


Balance at September 30, 2016	$	—		$	5,784,991		$	17,644,395		$	4,125,542		$	27,554,928


Carrying amounts at January 1, 2016	$	6,104,784		$	3,674,916		$	3,042,762		$	1,243,418		$	14,065,880

Carrying amounts at September 30, 2016	$	5,895,582		$	3,576,930		$	3,998,254		$	1,159,847		$	14,630,613


Cost

Balance at January 1, 2015	$	5,888,813		$	6,350,253		$	18,697,098		$	4,292,555		$	35,228,719
Additions		—			1,068,240			416,977			440,090			1,925,307
Retirements		—			—			(100,272	)		—			(100,272	)
Effect of exchange rate changes		161,845			(6,542	)		2,281			1,753			159,337


Balance at September 30, 2015	$	6,050,658		$	7,411,951		$	19,016,084		$	4,734,398		$	37,213,091


Accumulated amortization

Balance at January 1, 2015	$	—		$	3,778,912		$	14,861,146		$	3,057,151		$	21,697,209
Additions		—			693,671			1,245,215			426,434			2,365,320
Retirements		—			—			(100,272	)		—			(100,272	)
Impairment		—			58,130			384			—			58,514
Effect of exchange rate changes		—			(6,542	)		2,073			497			(3,972	)


Balance at September 30, 2015	$	—		$	4,524,171		$	16,008,546		$	3,484,082		$	24,016,799


Carrying amounts at September 30, 2015	$	6,050,658		$	2,887,780		$	3,007,538		$	1,250,316		$	13,196,292

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.

- 23 -

17.

OTHER ASSETS


	September 30, 2016		December 31, 2015		September 30, 2015

Tax receivable	$	2,344,133	$	2,026,509	$	1,671,508
Prepaid expenses		1,061,724		1,457,044		1,079,711
Long-term receivable		353,000		360,000		369,500
Others		1,300,128		1,118,492		1,100,518


	$	5,058,985	$	4,962,045	$	4,221,237


Current portion	$	3,448,916	$	3,533,369	$	2,844,481
Noncurrent portion		1,610,069		1,428,676		1,376,756


	$	5,058,985	$	4,962,045	$	4,221,237

18.

SHORT-TERM LOANS


	September 30, 2016		December 31, 2015		September 30, 2015

Unsecured loans Amount	$	37,648,800	$	39,474,000	$	33,564,120


Original loan content
US$ (in thousands)	$	1,200,000	$	1,200,000	$	1,020,000
Annual interest rate		0.80%-0.84%		0.50%-0.77%		0.38%-0.47%
Maturity date		Due in October 2016		Due by February 2016		Due in October 2015

19.

PROVISIONS


	September 30, 2016		December 31, 2015		September 30, 2015

Sales returns and allowances	$	11,512,994	$	10,163,536	$	9,898,270
Warranties		32,375		46,304		46,805


	$	11,545,369	$	10,209,840	$	9,945,075


Current portion	$	11,512,994	$	10,163,536	$	9,898,270
Noncurrent portion (classified under other noncurrent liabilities)		32,375		46,304		46,805


	$	11,545,369	$	10,209,840	$	9,945,075


	Sales Returns and Allowances			Warranties			Total

Nine months ended September 30, 2016

Balance, beginning of period	$	10,163,536		$	46,304		$	10,209,840
Provision (Reversal)		22,811,145			(10,788	)		22,800,357
Payment		(21,399,058	)		(3,141	)		(21,402,199	)
Effect of exchange rate changes		(62,629	)		—			(62,629	)


Balance, end of period	$	11,512,994		$	32,375		$	11,545,369

(Continued)

- 24 -


	Sales Returns and Allowances			Warranties			Total

Nine months ended September 30, 2015

Balance, beginning of period	$	10,445,452		$	19,828		$	10,465,280
Provision		11,957,512			39,353			11,996,865
Payment		(12,526,015	)		(11,769	)		(12,537,784	)
Effect of exchange rate changes		21,321			(607	)		20,714


Balance, end of period	$	9,898,270		$	46,805		$	9,945,075

(Concluded)

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


	September 30, 2016			December 31, 2015			September 30, 2015

Domestic unsecured bonds	$	154,200,000		$	166,200,000		$	166,200,000
Overseas unsecured bonds		36,080,100			49,342,500			49,359,000

		190,280,100			215,542,500			215,559,000
Less: Discounts on bonds payable		(41,135	)		(67,306	)		(77,315	)
Less: Current portion		(38,100,000	)		(23,510,112	)		(23,510,931	)


	$	152,138,965		$	191,965,082		$	191,970,754

The major terms of overseas unsecured bonds are as follows:


Issuance Period	Total Amount (US$ in Thousands)		Coupon Rate	Repayment and Interest Payment

April 2013 to April 2016	$	350,000	0.95%	Bullet repayment; interest payable semi-annually
April 2013 to April 2018		1,150,000	1.625%	The same as above

- 25 -

21.

GUARANTEE DEPOSITS


	September 30, 2016		December 31, 2015		September 30, 2015

Capacity guarantee	$	21,961,800	$	27,549,563	$	28,792,750
Others		657,812		183,051		173,834


	$	22,619,612	$	27,732,614	$	28,966,584


Current portion (classified under accrued expenses and other current liabilities)	$	6,746,640	$	6,167,813	$	5,758,550
Noncurrent portion		15,872,972		21,564,801		23,208,034


	$	22,619,612	$	27,732,614	$	28,966,584

Some of guarantee deposits were refunded to customers by offsetting related accounts receivable.

22.

EQUITY

Capital stock


	September 30, 2016		December 31, 2015		September 30, 2015

Authorized shares (in thousands)		28,050,000		28,050,000		28,050,000

Authorized capital	$	280,500,000	$	280,500,000	$	280,500,000

Issued and paid shares (in thousands)		25,930,380		25,930,380		25,930,380

Issued capital	$	259,303,805	$	259,303,805	$	259,303,805

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 September 30, 2016, 1,072,392 thousand ADSs of TSMC were traded on the NYSE. The number of common shares represented by the ADSs was 5,361,959 thousand shares (one ADS represents five common shares).

Capital surplus


	September 30, 2016		December 31, 2015		September 30, 2015

Additional paid-in capital	$	24,184,939	$	24,184,939	$	24,184,939
From merger		22,804,510		22,804,510		22,804,510
From convertible bonds		8,892,847		8,892,847		8,892,847
From share of changes in equities of subsidiaries		107,798		100,761		78,482
From share of changes in equities of associates and joint venture		279,809		317,103		337,895
Donations		55		55		55


	$	56,269,958	$	56,300,215	$	56,298,728

- 26 -

Under the Company Act, 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 as well as associates and joint venture may be used to offset a deficit.

Retained earnings and dividend policy

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 amendments to TSMC’s Articles of Incorporation on profits distribution policy had been approved by TSMC’s shareholders in its meeting held on June 7, 2016. For policy about the profit sharing bonus to employees, please refer to Note 28.

TSMC’s amended 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:

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

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

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

TSMC’s 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.

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.

- 27 -

The appropriations of 2015 and 2014 earnings have been approved by TSMC’s shareholders in its meeting held on June 7, 2016 and on June 9, 2015, respectively. The appropriations and dividends per share were as follows:


	Appropriation of Earnings				Dividends Per Share (NT$)
	For Fiscal		For Fiscal		For Fiscal		For Fiscal
	Year 2015		Year 2014		Year 2015		Year 2014

Legal capital reserve	$	30,657,384	$	26,389,879
Cash dividends to shareholders		155,582,283		116,683,481	$	6.0	$	4.5


	$	186,239,667	$	143,073,360

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.

Others

Changes in others were as follows:


	Nine Months Ended September 30, 2016
	Foreign Currency Translation Reserve			Unrealized Gain/Loss from Available-for- sale Financial Assets			Cash Flow Hedges Reserve			Total

Balance, beginning of period	$	11,039,949		$	734,771		$	(607	)	$	11,774,113
Exchange differences arising on translation of foreign operations		(17,101,349	)		—			—			(17,101,349	)
Other comprehensive income reclassified to profit or loss upon disposal of subsidiaries		36,105			—			—			36,105
Changes in fair value of available-for-sale financial assets		—			164,311			—			164,311
Cumulative (gain)/loss reclassified to profit or loss upon disposal of available-for-sale financial assets		—			(83,098	)		—			(83,098	)
Share of other comprehensive income (loss) of associates and joint venture		(21,150	)		26,096			490			5,436
Other comprehensive loss reclassified to profit or loss upon disposal of associates		(4,712	)		(3,469	)		—			(8,181	)
Income tax effect		—			(6,239	)		—			(6,239	)


Balance, end of period	$	(6,051,157	)	$	832,372		$	(117	)	$	(5,218,902	)

- 28 -


	Nine Months Ended September 30, 2015
	Foreign Currency Translation Reserve			Unrealized Gain/Loss from Available-for- sale Financial Assets			Cash Flow Hedges Reserve			Total

Balance, beginning of period	$	4,502,113		$	21,247,483		$	(305	)	$	25,749,291
Exchange differences arising on translation of foreign operations		8,955,736			—			—			8,955,736
Changes in fair value of available-for-sale financial assets		—			(322,039	)		—			(322,039	)
Cumulative (gain)/loss reclassified to profit or loss upon disposal of available-for-sale financial assets		(1,358,840	)		(20,123,082	)		—			(21,481,922	)
Share of other comprehensive income(loss) of associates and joint venture		(93,715	)		327,320			(347	)		233,258
The proportionate share of other comprehensive income/losses reclassified to profit or loss upon partial disposal of associates		4,356			2,051			11			6,418
Income tax effect		—			(2,551	)		—			(2,551	)


Balance, end of period	$	12,009,650		$	1,129,182		$	(641	)	$	13,138,191

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.

- 29 -

23.

SHARE-BASED PAYMENT

The Company did not issue employee stock option plans for the nine months ended September 30, 2016 and 2015. Information about the TSMC’s outstanding employee stock options is described as follows:


	Number of Stock Options (In Thousands)			Weighted- average Exercise Price (NT$)

Nine months ended September 30, 2015

Balance, beginning of period		718		$	47.2
Options exercised		(718	)		47.2


Balance, end of period		—			—

Balance exercisable, end of period		—			—

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.

24.

NET REVENUE


	Three Months Ended September 30				Nine Months Ended September 30
	2016		2015		2016		2015

Net revenue from sale of goods	$	260,273,538	$	212,380,151	$	685,324,159	$	639,586,536
Net revenue from royalties		132,347		124,758		386,933		392,269


	$	260,405,885	$	212,504,909	$	685,711,092	$	639,978,805

25.

OTHER GAINS AND LOSSES


	Three Months Ended September 30						Nine Months Ended September 30
	2016			2015			2016			2015

Gain (loss) on disposal of financial assets, net
Available-for-sale financial assets	$	(6,531	)	$	3,839,644		$	83,138		$	21,482,011
Financial assets carried at cost		17,822			11,531			37,831			82,128
Gain (loss) on disposal of investments accounted for using equity method		—			—			(259,960	)		2,305,323
Other gains		45,865			37,358			108,503			64,767
Net gain (loss) on financial instruments at FVTPL
Held for trading		792,837			(2,423,547	)		3,622,788			(1,862,869	)
Designated as at FVTPL		13,185			—			(57,762	)		—

(Continued)

- 30 -


	Three Months Ended September 30						Nine Months Ended September 30
	2016			2015			2016			2015

Fair value hedges
Gain(Loss) from hedging instruments	$	785		$	600,181		$	(14,763	)	$	(137,124	)
Gain(Loss) arising from changes in fair value of available-for-sale financial assets in hedge effective portion		(73	)		(597,942	)		14,634			(298,751	)
Impairment loss of financial assets
Financial assets carried at cost		(24,183	)		(132,015	)		(55,055	)		(132,015	)
Loss from liquidation of subsidiaries		—			—			(36,105	)		—
Other losses		(22,532	)		(99,440	)		(37,774	)		(127,693	)


	$	817,175		$	1,235,770		$	3,405,475		$	21,375,777

(Concluded)

26.

INCOME TAX

Income tax expense recognized in profit or loss


	Three Months Ended September 30						Nine Months Ended September 30
	2016			2015			2016			2015

Current income tax expense
Current tax expense recognized in the current period	$	12,489,756		$	8,557,492		$	41,959,508		$	37,422,822
Income tax adjustments on prior years		(500	)		(185,523	)		(1,035,905	)		(979,196	)
Other income tax adjustments		(115,358	)		71,371			89,638			220,883

		12,373,898			8,443,340			41,013,241			36,664,509

Deferred income tax expense (benefit)
The origination and reversal of temporary differences		(913,396	)		(479,457	)		(1,211,325	)		(893,655	)
Investment tax credits and operating loss carryforward		—			113,436			—			300,316

		(913,396	)		(366,021	)		(1,211,325	)		(593,339	)


Income tax expense recognized in profit or loss	$	11,460,502		$	8,077,319		$	39,801,916		$	36,071,170

- 31 -

Income tax expense recognized in other comprehensive income


	Three Months Ended September 30					Nine Months Ended September 30
	2016			2015		2016			2015

Deferred income tax benefit (expense)
Related to unrealized gain/loss on available-for-sale financial assets	$	(33,879	)	$	15,553	$	(6,239	)	$	(2,551	)

Integrated income tax information


	September 30, 2016		December 31, 2015		September 30, 2015

Balance of the Imputation Credit Account - TSMC	$	66,840,242	$	59,973,516	$	45,850,793

The estimated and actual creditable ratio for distribution of TSMC’s earnings of 2015 and 2014 were 12.57% 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.

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.

27.

EARNINGS PER SHARE


	Three Months Ended September 30				Nine Months Ended September 30
	2016		2015		2016		2015

Basic EPS	$	3.73	$	2.91	$	9.03	$	9.01
								&nb