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 2018

 

 

Taiwan Semiconductor Manufacturing Company Ltd.

(Translation of Registrant’s Name Into English)

 

 

No. 8, Li-Hsin Rd. 6,

Hsinchu Science Park,

Taiwan

(Address of Principal Executive Offices)

 

 

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

Form 20-F    ☒            Form 40-F  ☐

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

Yes  ☐            No  ☒

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

 

 

 

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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 7, 2018				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, 2018 and 2017 and Independent Auditors’ Review Report

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INDEPENDENT AUDITORS’ REVIEW REPORT

The Board of Directors and Shareholders

Taiwan Semiconductor Manufacturing Company Limited

Introduction

We have reviewed the accompanying consolidated financial statements of Taiwan Semiconductor Manufacturing Company Limited and its subsidiaries (the “Company”) as of March 31, 2018 and 2017 and the consolidated statements of comprehensive income, changes in equity and cash flows for the three-month periods then ended, and the notes to the consolidated financial statements, including a summary of significant accounting policies. Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with the Regulations Governing the Preparation of Financial Reports by Securities Issuers and International Accounting Standard 34, “Interim Financial Reporting,” endorsed and issued into effect by the Financial Supervisory Commission of the Republic of China. Our responsibility is to express a conclusion on the consolidated financial statements based on our reviews.

Scope of Review

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

Conclusion

Based on our reviews, nothing has come to our attention that caused us to believe that the accompanying consolidated financial statements do not present fairly, in all material respects the financial position of the entity as at March 31, 2018 and 2017, and of its consolidated financial performance and its consolidated cash flows for the three-month periods then ended in accordance with the Regulations Governing the Preparation of Financial Reports by Securities Issuers and International Accounting Standard 34, “Interim Financial Reporting,” endorsed and issued into effect by the Financial Supervisory Commission of the Republic of China.

 

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

 

Deloitte & Touche

Taipei, Taiwan

Republic of China

April 20, 2018

Notice to Readers

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

For the convenience of readers, the independent auditors’ review report and the accompanying consolidated financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language independent auditors’ review report and consolidated financial statements shall prevail.

 

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Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(In Thousands of New Taiwan Dollars)

 

 

		March 31, 2018 (Reviewed)								December 31, 2017 (Audited)								March 31, 2017 (Reviewed)
		Amount				%				Amount				%				Amount				%
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Note 6)		$	577,782,963				28			$	553,391,696				28			$	564,725,266				29
Financial assets at fair value through profit or loss (Note 7)			963,915				—				569,751				—				5,374,003				—
Financial assets at fair value through other comprehensive income (Note 8)			95,713,446				4				—				—				—				—
Available-for-sale financial assets (Note 9)			—				—				93,374,153				5				71,083,797				4
Held-to-maturity financial assets (Note 10)			—				—				1,988,385				—				18,140,374				1
Financial assets at amortized cost (Note 11)			9,888,741				1				—				—				—				—
Hedging derivative financial assets (Note 13)			—				—				34,394				—				—				—
Hedging financial assets (Note 13)			26,357				—				—				—				—				—
Notes and accounts receivable, net (Note 14)			106,601,372				5				121,133,248				6				108,532,829				6
Receivables from related parties (Note 32)			1,179,312				—				1,184,124				—				494,839				—
Other receivables from related parties (Note 32)			130,070				—				171,058				—				135,051				—
Inventories (Note 15)			85,215,899				4				73,880,747				4				50,389,022				3
Other financial assets (Note 33)			11,667,264				1				7,253,114				—				3,761,484				—
Other current assets (Note 19)			39,947,321				2				4,222,440				—				3,025,168				—
Total current assets			929,116,660				45				857,203,110				43				825,661,833				43
NONCURRENT ASSETS
Financial assets at fair value through other comprehensive income (Note 8)			6,035,904				—				—				—				—				—
Held-to-maturity financial assets (Note 10)			—				—				18,833,329				1				20,499,458				1
Financial assets at amortized cost (Note 11)			10,033,241				1				—				—				—				—
Financial assets carried at cost (Note 12)			—				—				4,874,257				—				4,079,292				—
Investments accounted for using equity method (Note 16)			18,307,517				1				17,861,488				1				19,940,062				1
Property, plant and equipment (Note 17)			1,055,366,207				51				1,062,542,322				53				1,037,364,143				54
Intangible assets (Note 18)			13,674,295				1				14,175,140				1				14,278,436				1
Deferred income tax assets (Note 4)			12,987,042				1				12,105,463				1				10,644,401				—
Refundable deposits			2,121,209				—				1,283,414				—				572,005				—
Other noncurrent assets (Note 19)			1,513,731				—				2,983,120				—				1,624,131				—
Total noncurrent assets			1,120,039,146				55				1,134,658,533				57				1,109,001,928				57
TOTAL		$	2,049,155,806				100			$	1,991,861,643				100			$	1,934,663,761				100
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Short-term loans (Notes 20 and 30)		$	56,731,350				3			$	63,766,850				3			$	54,666,000				3
Financial liabilities at fair value through profit or loss (Note 7)			170,673				—				26,709				—				124,935				—
Hedging derivative financial liabilities (Note 13)			—				—				15,562				—				3,908				—
Hedging financial liabilities (Note 13)			79,182				—				—				—				—				—
Accounts payable			27,817,670				1				28,412,807				1				23,081,567				1
Payables to related parties (Note 32)			1,224,307				—				1,656,356				—				1,171,195				—
Salary and bonus payable			10,201,325				1				14,254,871				1				10,703,656				1
Accrued profit sharing bonus to employees and compensation to directors and supervisors (Notes 24 and 29)			29,529,009				1				23,419,135				1				28,857,625				1
Payables to contractors and equipment suppliers			47,828,289				2				55,723,774				3				57,671,953				3
Income tax payable (Note 4)			44,096,800				2				33,479,311				2				52,874,433				3
Provisions (Note 21)			—				—				13,961,787				1				11,298,320				1
Long-term liabilities - current portion (Note 22)			49,356,740				2				58,401,122				3				44,909,680				2
Accrued expenses and other current liabilities (Notes 23, 30 and 32)			75,199,897				4				65,588,396				3				36,217,252				2
Total current liabilities			342,235,242				16				358,706,680				18				321,580,524				17
NONCURRENT LIABILITIES
Bonds payable (Notes 22 and 30)			83,400,000				4				91,800,000				5				134,198,769				7
Long-term bank loans			—				—				—				—				19,360				—
Deferred income tax liabilities (Note 4)			285,644				—				302,205				—				90,944				—
Net defined benefit liability (Note 4)			8,818,705				1				8,850,704				1				8,537,369				—
Guarantee deposits (Notes 23 and 30)			5,991,361				—				7,586,790				—				12,321,468				1
Others			1,819,825				—				1,855,621				—				1,605,302				—
Total noncurrent liabilities			100,315,535				5				110,395,320				6				156,773,212				8
Total liabilities			442,550,777				21				469,102,000				24				478,353,736				25
EQUITY ATTRIBUTABLE TO SHAREHOLDERS OF THE PARENT
Capital stock (Note 24)			259,303,805				13				259,303,805				13				259,303,805				13
Capital surplus (Note 24)			56,305,751				3				56,309,536				3				56,282,118				3
Retained earnings (Note 24)
Appropriated as legal capital reserve			241,722,663				12				241,722,663				12				208,297,945				11
Unappropriated earnings			1,082,967,237				53				991,639,347				49				951,339,122				49
			1,324,689,900				65				1,233,362,010				61				1,159,637,067				60
Others (Note 24)			(34,401,067	)			(2	)			(26,917,818	)			(1	)			(19,709,627	)			(1	)
Equity attributable to shareholders of the parent			1,605,898,389				79				1,522,057,533				76				1,455,513,363				75
NON-CONTROLLING INTERESTS			706,640				—				702,110				—				796,662				—
Total equity			1,606,605,029				79				1,522,759,643				76				1,456,310,025				75
TOTAL		$	2,049,155,806				100			$	1,991,861,643				100			$	1,934,663,761				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
		2018								2017
		Amount				%				Amount				%
NET REVENUE (Notes 25, 32 and 37)		$	248,078,671				100			$	233,914,400				100
COST OF REVENUE (Notes 15, 29 and 32)			123,103,977				50				112,428,734				48
GROSS PROFIT BEFORE REALIZED (UNREALIZED) GROSS PROFIT ON SALES TO ASSOCIATES			124,974,694				50				121,485,666				52
REALIZED (UNREALIZED) GROSS PROFIT ON SALES TO ASSOCIATES			(117,155	)			—				3,970				—
GROSS PROFIT			124,857,539				50				121,489,636				52
OPERATING EXPENSES (Notes 29 and 32)
Research and development			20,428,594				8				19,412,393				8
General and administrative			4,851,708				2				5,247,603				2
Marketing			1,448,092				1				1,496,487				1
Total operating expenses			26,728,394				11				26,156,483				11
OTHER OPERATING INCOME AND EXPENSES, NET (Note 29)			(1,302,199	)			—				19,237				—
INCOME FROM OPERATIONS (Note 37)			96,826,946				39				95,352,390				41
NON-OPERATING INCOME AND EXPENSES
Share of profits of associates			681,791				—				666,810				—
Other income			3,154,642				1				2,104,979				1
Foreign exchange gain (loss), net (Note 36)			(676,980	)			—				99,795				—
Finance costs			(807,966	)			—				(816,664	)			—
Other gains and losses, net (Note 26)			765,188				—				415,189				—
Total non-operating income and expenses			3,116,675				1				2,470,109				1
INCOME BEFORE INCOME TAX			99,943,621				40				97,822,499				42
INCOME TAX EXPENSE (Notes 4 and 27)			10,156,047				4				10,201,591				5
NET INCOME			89,787,574				36				87,620,908				37

(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
		2018								2017
		Amount				%				Amount				%
OTHER COMPREHENSIVE INCOME (LOSS) (Notes 24 and 27)
Items that will not be reclassified subsequently to profit or loss:
Unrealized loss on investments in equity instruments at fair value through other comprehensive income		$	(19,507	)			—			$	—				—
Gain on hedging instruments			37,282				—				—				—
Share of other comprehensive income of associates			62				—				—				—
Income tax benefit related to items that will not be reclassified subsequently			39,206				—				—				—
			57,043				—				—				—
Items that may be reclassified subsequently to profit or loss:
Exchange differences arising on translation of foreign operations			(6,476,486	)			(3	)			(21,243,594	)			(9	)
Changes in fair value of available-for-sale financial assets			—				—				(93,470	)			—
Unrealized loss on investments in debt instruments at fair value through other comprehensive income			(727,410	)			—				—				—
Share of other comprehensive loss of associates			(39,352	)			—				(61,657	)			—
Income tax benefit related to items that may be reclassified subsequently			—				—				46,400				—
			(7,243,248	)			(3	)			(21,352,321	)			(9	)
Other comprehensive loss for the period, net of income tax			(7,186,205	)			(3	)			(21,352,321	)			(9	)
TOTAL COMPREHENSIVE INCOME FOR THE PERIOD		$	82,601,369				33			$	66,268,587				28
NET INCOME (LOSS) ATTRIBUTABLE TO:
Shareholders of the parent		$	89,784,622				36			$	87,628,898				37
Non-controlling interests			2,952				—				(7,990	)			—
		$	89,787,574				36			$	87,620,908				37

(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
		2018								2017
		Amount				%				Amount				%
TOTAL COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO:
Shareholders of the parent		$	82,596,052				33			$	66,274,790				28
Non-controlling interests			5,317				—				(6,203	)			—
		$	82,601,369				33			$	66,268,587				28
		2018								2017
		Income Attributable to Shareholders of the Parent								Income Attributable to Shareholders of the Parent
EARNINGS PER SHARE (NT$, Note 28)
Basic earnings per share		$					3.46			$					3.38
Diluted earnings per share		$					3.46			$					3.38

 

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
																																		Unrealized Gain(Loss) on Financial Assets at Fair Value Through Other Comprehensive Income
																														Unrealized Gain(Loss) from Available- for-sale Financial Assets
																										Foreign Currency Translation Reserve																				Unearned Stock-Based Employee Compensation
		Capital Stock - Common Stock												Retained Earnings																												Gain(Loss) on Hedging Instruments
		Shares												Legal Capital				Unappropriated																				Cash Flow Hedges Reserve																				Non-controlling				Total
		(In Thousands)				Amount				Capital Surplus				Reserve				Earnings				Total																												Total				Total				Interests				Equity
BALANCE, JANUARY 1, 2018			25,930,380			$	259,303,805			$	56,309,536			$	241,722,663			$	991,639,347			$	1,233,362,010			$	(26,697,680	)		$	(214,074	)		$	—			$	4,226			$	—			$	(10,290	)		$	(26,917,818	)		$	1,522,057,533			$	702,110			$	1,522,759,643
Effect of retrospective application			—				—				—				—				1,556,319				1,556,319				—				214,074				(524,915	)			(4,226	)			4,226				—				(310,841	)			1,245,478				342				1,245,820
ADJUSTED BALANCE, JANUARY 1, 2018			25,930,380				259,303,805				56,309,536				241,722,663				993,195,666				1,234,918,329				(26,697,680	)			—				(524,915	)			—				4,226				(10,290	)			(27,228,659	)			1,523,303,011				702,452				1,524,005,463
Net income for the three months ended March 31, 2018			—				—				—				—				89,784,622				89,784,622				—				—				—				—				—				—				—				89,784,622				2,952				89,787,574
Other comprehensive income (loss) for the three months ended March 31, 2018, net of income tax			—				—				—				—				—				—				(6,515,676	)			—				(705,702	)			—				32,808				—				(7,188,570	)			(7,188,570	)			2,365				(7,186,205	)
Total comprehensive income (loss) for the three months ended March 31, 2018			—				—				—				—				89,784,622				89,784,622				(6,515,676	)			—				(705,702	)			—				32,808				—				(7,188,570	)			82,596,052				5,317				82,601,369
Disposal of investments in equity instruments at fair value through other comprehensive income			—				—				—				—				(13,051	)			(13,051	)			—				—				13,051				—				—				—				13,051				—				—				—
Adjustments to share of changes in equities of associates			—				—				(3,825	)			—				—				—				—				—				—				—				—				3,111				3,111				(714	)			—				(714	)
Donation from shareholders			—				—				40				—				—				—				—				—				—				—				—				—				—				40				6				46
Decrease in non-controlling interests			—				—				—				—				—				—				—				—				—				—				—				—				—				—				(1,135	)			(1,135	)
BALANCE, March 31, 2018			25,930,380			$	259,303,805			$	56,305,751			$	241,722,663			$	1,082,967,237			$	1,324,689,900			$	(33,213,356	)		$	—			$	(1,217,566	)		$	—			$	37,034			$	(7,179	)		$	(34,401,067	)		$	1,605,898,389			$	706,640			$	1,606,605,029
BALANCE, JANUARY 1, 2017			25,930,380			$	259,303,805			$	56,272,304			$	208,297,945			$	863,710,224			$	1,072,008,169			$	1,661,237			$	2,641			$	—			$	105			$	—			$	—			$	1,663,983			$	1,389,248,261			$	802,865			$	1,390,051,126
Net income (loss) for the three months ended March 31, 2017			—				—				—				—				87,628,898				87,628,898				—				—				—				—				—				—				—				87,628,898				(7,990	)			87,620,908
Other comprehensive income (loss) for the three months ended March 31, 2017, net of income tax			—				—				—				—				—				—				(21,304,092	)			(50,016	)			—				—				—				—				(21,354,108	)			(21,354,108	)			1,787				(21,352,321	)
Total comprehensive income (loss) for the three months ended March 31, 2017			—				—				—				—				87,628,898				87,628,898				(21,304,092	)			(50,016	)			—				—				—				—				(21,354,108	)			66,274,790				(6,203	)			66,268,587
Adjustments to share of changes in equities of associates			—				—				9,814				—				—				—				—				—				—				—				—				(19,502	)			(19,502	)			(9,688	)			—				(9,688	)
BALANCE, March 31, 2017			25,930,380			$	259,303,805			$	56,282,118			$	208,297,945			$	951,339,122			$	1,159,637,067			$	(19,642,855	)		$	(47,375	)		$	—			$	105			$	—			$	(19,502	)		$	(19,709,627	)		$	1,455,513,363			$	796,662			$	1,456,310,025

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
		2018				2017
CASH FLOWS FROM OPERATING ACTIVITIES
Income before income tax		$	99,943,621			$	97,822,499
Adjustments for:
Depreciation expense			70,462,286				59,133,361
Amortization expense			1,035,591				1,038,824
Reversal of expected credit losses on investments in debt instruments			(1,757	)			—
Finance costs			807,966				816,664
Share of profits of associates			(681,791	)			(666,810	)
Interest income			(3,154,189	)			(2,104,979	)
Loss (gain) on disposal or retirement of property, plant and equipment, net			582,384				(22,195	)
Gain on disposal of intangible assets, net			(436	)			—
Impairment loss on financial assets			—				12,032
Loss on financial instruments at fair value through profit or loss			28,142				—
Loss on disposal of investments in debt instruments at fair value through other comprehensive income			252,328				—
Loss on disposal of available-for-sale financial assets, net			—				8,982
Unrealized (realized) gross profit on sales to associates			117,155				(3,970	)
Gain on foreign exchange, net			(1,205,272	)			(7,106,552	)
Dividend income			(453	)			—
Loss (gain) arising from fair value hedges, net			(352	)			19,487
Changes in operating assets and liabilities:
Financial instruments at fair value through profit or loss			602,734				1,010,909
Notes and accounts receivable, net			13,296,988				18,227,303
Receivables from related parties			4,812				474,720
Other receivables from related parties			40,988				11,737
Inventories			(11,335,152	)			(1,706,789	)
Other financial assets			(3,143,144	)			1,599,844
Other current assets			(1,402,930	)			369,473
Other noncurrent assets			25,301				(152,473	)
Accounts payable			(984,571	)			(3,020,849	)
Payables to related parties			(432,049	)			(90,979	)
Salary and bonus payable			(4,053,546	)			(2,978,161	)
Accrued profit sharing bonus to employees and compensation to directors and supervisors			6,109,874				5,963,619
Accrued expenses and other current liabilities			(5,776,314	)			(824,558	)
Provisions			—				(6,696,992	)
Net defined benefit liability			(31,999	)			(14,039	)
Cash generated from operations			161,106,215				161,120,108
Income taxes paid			(380,297	)			(112,064	)
Net cash generated by operating activities			160,725,918				161,008,044

(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
		2018				2017
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of:
Financial instruments at fair value through profit or loss - debt instruments		$	(183,026	)		$	—
Financial assets at fair value through other comprehensive income			(24,382,829	)			—
Available-for-sale financial assets			—				(24,675,339	)
Held-to-maturity financial assets			—				(1,695,771	)
Financial assets carried at cost			—				(202,032	)
Property, plant and equipment			(71,847,185	)			(102,505,595	)
Intangible assets			(222,548	)			(917,636	)
Proceeds from disposal or redemption of:
Financial instruments at fair value through profit or loss - debt instruments			49,438				—
Financial assets at fair value through other comprehensive income			20,123,921				—
Available-for-sale financial assets			—				18,436,274
Held-to-maturity financial assets			—				400,000
Financial assets at amortized cost			498,542				—
Property, plant and equipment			47,376				151,904
Intangible assets			492				—
Derecognition of hedging derivative financial instruments			—				(6,399	)
Derecognition of hedging financial instruments			177,209				—
Interest received			3,139,610				1,950,176
Other dividends received			453				—
Refundable deposits paid			(1,048,245	)			(191,217	)
Refundable deposits refunded			187,602				25,376
Net cash used in investing activities			(73,459,190	)			(109,230,259	)
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in short-term loans			(5,774,830	)			(250,365	)
Repayment of bonds and interest – prepaid			(33,998,915	)			—
Repayment of bonds			(16,800,000	)			(10,000,000	)
Repayment of long-term bank loans			—				(2,420	)
Interest paid			(998,257	)			(1,257,295	)
Guarantee deposits received			3,095				723,339
Guarantee deposits refunded			(57,230	)			(1,123,178	)
Donation from shareholders			46				—
Decrease in non-controlling interests			(1,135	)			—
Net cash used in financing activities			(57,627,226	)			(11,909,919	)

(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
		2018				2017
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		$	(5,248,235	)		$	(16,396,433	)
NET INCREASE IN CASH AND CASH EQUIVALENTS			24,391,267				23,471,433
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			553,391,696				541,253,833
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	577,782,963			$	564,725,266

 

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, 2018 and 2017

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

(Reviewed, Not Audited)

 

 

1.

GENERAL

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

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

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

 

2.	THE AUTHORIZATION OF FINANCIAL STATEMENTS

The accompanying consolidated financial statements were reported to the Board of Directors and issued on April 20, 2018.

 

3.	APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS

 

a.

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

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

 

1)

IFRS 9 “Financial Instruments” and related amendment

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

Classification, measurement and impairment of financial assets and financial liabilities

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

 

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

 

 

 

 

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(1)

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

 

(2)

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

 

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

 

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

 

(3)

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

 

(4)

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

 

(5)

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

 

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Hedge accounting

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

 

2)

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

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

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

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

 

 

(1)

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

 

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(2)

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

The impact of continuing the application of IAS18 instead of IFRS15 for the three months ended March 31, 2018 is detailed as follows:

Impact on Assets, Liabilities and Equity

 

Impact on Total Comprehensive Income

 

 

3)

Please refer to Note 30 for the disclosure of amendment to IAS 7 “Disclosure Initiative”

 

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b.

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

 

 

Note 1:

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

Note 2:

On December 19, 2017, the FSC announced that IFRS 16 will take effect starting from January 1, 2019.

Note 3:

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

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

 

1)

IFRS 16 “Leases”

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

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.

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

 

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4.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

Statement of Compliance

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

Basis of Consolidation

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

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

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 auditors.

 

Note b:

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

 

Note c:

TSMC Solar Europe GmbH is under liquidation procedures.

 

Note d:

ISDF and ISDF II are under liquidation procedures.

 

Note e:

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

 

Note f:

VTA Holdings completed the liquidation procedures in April 2017.

Financial Assets

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

 

a.

Category of financial assets and measurement

2018

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

 

1)

Financial asset at FVTPL

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

 

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2)

Investments in debt instruments at FVTOCI

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

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

 

3)

Investments in equity instruments at FVTOCI

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

Investments in equity instruments at FVTOCI are subsequently measured at fair value with gains and losses arising from changes in fair value recognized in other comprehensive income and accumulated in other equity. The cumulative gain or loss will not be reclassified to profit or loss on disposal of the equity investments. Instead, they will be transferred to retained earnings.

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

 

4)

Measured at amortized cost

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

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

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

2017

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

 

1)

Financial asset at FVTPL

Financial assets are classified as at fair value through profit or loss when the financial asset is either held for trading or it is designated as at fair value through profit or loss.

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

 

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2)

Available-for-sale financial assets

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

Available-for-sale financial assets are measured at fair value. Interest income from available-for-sale monetary financial assets and dividends on available-for-sale equity investments are recognized in profit or loss. Other changes in the carrying amount of available-for-sale financial assets are recognized in other comprehensive income. When the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously recognized in other comprehensive income is reclassified to profit or loss.

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

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

 

3)

Held-to-maturity financial assets

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

 

4)

Loans and receivables

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

 

b.

Impairment of financial assets

2018

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

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

 

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

2017

Financial assets, other than those carried at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Those financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial assets, their estimated future cash flows have been affected.

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

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

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

When an available-for-sale financial asset is considered to be impaired, cumulative gains or losses previously recognized in other comprehensive income are reclassified to profit or loss in the year.

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

For financial assets carried at cost, the amount of the impairment loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss will not be reversed in subsequent periods.

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

Hedge Accounting

 

a.

Fair value hedges

The Company designates certain hedging instruments, such as interest rate futures contracts, to partially hedge against the price risk caused by changes in interest rates in the Company’s investments in fixed income securities as fair value hedge. Changes in the fair value of hedging instrument that are designated and qualify as fair value hedges are recognized in profit or loss immediately, together with any changes in the fair value of the hedged asset that are attributable to the hedged risk.

 

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b.

Cash flow hedges

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

2018

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

2017

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

Revenue Recognition

2018

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

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

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

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

2017

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

 

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Sale of goods

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

 

•

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

 

•

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

 

•

The amount of revenue can be measured reliably;

 

•

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

 

•

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

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

Dividend and interest income

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

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

Retirement Benefits

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

Taxation

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

 

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

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

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

 

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Please refer to Note 31 for information about the valuation techniques and inputs used in determining the fair value of various investments.

 

6.	CASH AND CASH EQUIVALENTS

 

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

 

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

 

 

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

Outstanding forward exchange contracts consisted of the following:

 

 

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

 

(Continued)

 

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(Concluded)

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

For the three months ended March 31, 2018, the Company sold shares of stocks from merged non-publicly traded company for NT$45,210 thousand and the related other equity-unrealized gain/loss on financial assets at FVTOCI of NT$13,051 thousand were transferred to decrease retained earnings.

As of March 31, 2018, the cumulative loss allowance for expected credit loss of NT$29,792 thousand is recognized under investments in debt instruments at FVTOCI. Refer to Note 31 for information relating to their credit risk management and expected credit loss.

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

 

9.	AVAILABLE-FOR-SALE FINANCIAL ASSETS-2017

 

 

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10.	HELD-TO-MATURITY FINANCIAL ASSETS-2017

 

 

11.	FINANCIAL ASSETS AT AMORTIZED COST-2018

 

Financial assets at amortized cost were classified as held-to-maturity financial assets under IAS 39. Refer to Notes 3 and 10 for information relating to their reclassification and comparative information for 2017. Refer to Note 31 for information relating to credit risk management and expected credit loss for financial assets at amortized cost.

 

12.	FINANCIAL ASSETS CARRIED AT COST-2017

 

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

 

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13.	HEDGING FINANCIAL INSTRUMENTS

 

2018

 

Fair value hedge

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

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

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

The following tables summarize the information relating to the hedges for interest rate risk as of March 31, 2018.

 

 

 

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The effect on comprehensive income for the three months ended March 31, 2018 is detailed below:

 

Cash flow hedge

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

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

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

The following tables summarize the information relating to the hedges for foreign currency risk.

 

 

Refer to Note 24(d) for gain or loss arising from changes in the fair value of hedging instruments and the amount transferred to initial carrying amount of hedged items.

 

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2017

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

 

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

The outstanding interest rate futures contracts consisted of the following:

 

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

Outstanding forward exchange contracts consisted of the following:

 

 

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14.	NOTES AND ACCOUNTS RECEIVABLE, NET

 

2018

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

Aging analysis of notes and accounts receivable, net

 

Movements of the loss allowance for accounts receivable

 

For the three months ended March 31, 2018, the loss allowance decreased mainly due to the decrease in the balance of accounts receivable.

2017

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

 

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

Aging analysis of notes and accounts receivable, net

 

Movements of the allowance for doubtful receivables

 

 

15.	INVENTORIES

 

Write-down of inventories to net realizable value and reversal of the reserve for inventory write-downs resulting from the increase in net realizable value in the amount of NT$700,440 thousand and NT$942,343 thousand, respectively, were included in the cost of revenue for the three months ended March 31, 2018 and 2017.

 

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16.	INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD

Associates consisted of the following:

 

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

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

 

 

17.	PROPERTY, PLANT AND EQUIPMENT

 

(Continued)

 

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(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.

 

18.	INTANGIBLE ASSETS

 

(Continued)

 

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(Concluded)

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

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

 

19.	OTHER ASSETS

 

Based on the contract terms of corporate bonds issued, prior to the date on which the principal or interests become due, the Company needs to transfer such amount in advance to a designated agent for repayment of principal and interest. The agent will repay the funds to the bond holders at maturity date.

 

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20.	SHORT-TERM LOANS

 

 

21.	PROVISIONS

The Company’s current provisions were provisions for sales returns and allowances.

 

Provisions for sales returns and allowances are estimated based on historical experience and the consideration of varying contractual terms, and are recognized as a reduction of revenue in the same year of the related product sales.

Starting from 2018, the Company recognizes the estimation of sales returns and allowance as refund liability (classified under accrued expenses and other current liabilities) upon initial application of IFRS 15.

 

22.	BONDS PAYABLE

 

 

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The major terms of overseas unsecured bonds are as follows:

 

 

23.	GUARANTEE DEPOSITS

 

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

 

24.

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, 2018, 1,068,158 thousand ADSs of TSMC were traded on the NYSE. The number of common shares represented by the ADSs was 5,340,792 thousand shares (one ADS represents five common shares).

 

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b.

Capital surplus

 

Under the relevant laws, 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 and associates and dividend of a claim extinguished by a prescription may be used to offset a deficit; however, when generated from issuance of restricted shares for employees, such capital surplus may not be used for any purpose.

 

c.

Retained earnings and dividend policy

TSMC’s 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)

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

TSMC’s Articles of Incorporation provide the policy about the profit sharing bonus to employees, please refer to Note 29.

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 earnings shall be made preferably by way of cash dividend. Distribution of earnings 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.

 

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The appropriations of 2017 and 2016 earnings have been approved by TSMC’s Board of Directors in its meeting held on February 13, 2018 and by TSMC’s shareholders in its meeting held on June 8, 2017, respectively. The appropriations and dividends per share were as follows:

 

The appropriations of earnings for 2017 are to be presented for approval in the TSMC’s shareholders’ meeting to be held on June 5, 2018 (expected).

 

d.

Others

Changes in others were as follows: