1934 Act Registration No. 1-31731

 

 

 

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

Dated March 30, 2010

 

 

Chunghwa Telecom Co., Ltd.

(Translation of Registrant’s Name into English)

 

 

21-3 Hsinyi Road Sec. 1,

Taipei, Taiwan, 100 R.O.C.

(Address of Principal Executive Office)

 

 

(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): Not applicable )

 

 

 

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SIGNATURE

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

Date: 2010/03/30

 

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Exhibit

 

Exhibit		Description
1		Press Release to Report Operating Results for 2009 Full Year
2		Press Release to Capital Reduction Plan for Year 2010
3		Financial Statements for the Years Ended December 31, 2009 and 2008 and Independent Auditors’ Report (Stand Alone)
4		Consolidated Financial Statements for the Years Ended December 31, 2009 and 2008 and Independent Auditors’ Report

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Exhibit 1

Chunghwa Telecom Reports Operating Results for Fiscal Year 2009

Taipei, Taiwan, R.O.C. March 30, 2010 - Chunghwa Telecom Co., Ltd. (TAIEX: 2412, NYSE: CHT) (“Chunghwa” or “the Company”), today reported its operating results for the year ending December 31, 2009. All figures were presented on a consolidated basis and prepared in accordance with generally accepted accounting principles in the Republic of China (“ROC GAAP”).

(Comparisons, unless otherwise stated, are to the prior year period)

Financial Highlights for Full Year 2009:

 

•

Total consolidated revenue decreased by 1.6% to NT$198.4 billion

 

•

Mobile communications business revenue decreased by 2.6% to NT$86.5 billion; mobile value-added services (VAS) revenue increased by 20.5% to NT$8.45 billion

 

•

Internet business revenue increased by 2.7% to NT$23.7 billion; internet value-added services (VAS) revenue increased by 18.0% to NT$2.0 billion

 

•

Domestic fixed communications business revenue decreased by 2.2% to NT$71.5 billion

 

•

International fixed communications business revenue decreased by 4.3% to NT$15.2 billion

 

•

Total operating costs and expenses decreased by 0.8% to NT$142.0billion

 

•

Net income totaled NT$43.8 billion, representing a decrease of 2.8%

 

•

Basic earnings per share (EPS) decreased by 2.8% to NT$4.51

Financial Highlights for the Fourth Quarter of 2009:

 

•

Total consolidated revenue increased by 2.6% to NT$51.1 billion

 

•

Mobile communications business revenue increased by 1.6% to NT$21.9 billion

 

•

Internet business revenue increased by 9.5% to NT$6.4 billion

 

•

Domestic fixed communications business revenue decreased by 0.2% to NT$18.5 billion

 

•

International fixed communications business revenue decreased by 6.1% to NT$3.7 billion

 

•

Total operating costs and expenses decreased by 0.4% to NT$38.0 billion

 

•

Net income totaled NT$10.6 billion, representing an increase of 24.6%

 

•

Basic earnings per share (EPS) increased by 24.6% to NT$1.09

 

1

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Dr. Shyue-Ching Lu, Chairman and Chief Executive Officer of Chunghwa Telecom said, “I am proud that we were able to sustain our overall market leadership and achieve solid results in 2009, despite the challenges brought on by a difficult economic climate, intense competition in the mobile services and broadband access markets and the tragic impact of Typhoon Morakot in Taiwan. We swiftly implemented cost controlling initiatives to address the weakened economic conditions, while also improving our value-added services, MOD/IPTV offering and key Enterprise solutions. Our firm commitment to investments in innovation has not wavered and, moving forward, we plan to continue enhance our VAS, accelerate our fiber deployment and further enrich our MOD/IPTV content in order to execute our growth plan.”

Revenue

Chunghwa’s total consolidated revenue for full year 2009 decreased by 1.6% year-over-year to NT$198.4 billion, of which 43.6% was from the mobile business, 11.9% was from the internet business, 36.0% was from the domestic fixed business, 7.7% was from the international fixed business and the remainder was from others. The primary reasons for the revenue decline were economic downturn and market competition.

For the mobile business, total revenue for 2009 amounted to NT$86.5 billion, representing a decline of 2.6% year-over-year. The decrease was mainly due to the average revenue per user (ARPU) decline resulting from the market competition and the overall economic environment. Furthermore, the decline in handset sales from the slow economic environment also contributed to the revenue decrease.

Chunghwa’s internet business revenue increased by 2.7% year-over-year to NT$23.7 billion in 2009, mainly attributable to the successful promotion for corporate solution and internet VAS revenue growth from internet security services, and on-line music service etc.

For 2009, domestic fixed revenue totaled NT$71.5 billion, representing a decrease of 2.2% year-over-year. Of this, local and DLD revenues decreased by 3.9% to NT$33.2 billion and 12.7% to NT$7.4 billion year-over-year, respectively. The decrease of local revenue was mainly due to the deteriorating economic environment, as well as mobile and VOIP substitution. The decrease of DLD revenue was a result of a mandated interconnection tariff decrease by the National Communication Commission (“NCC”) and the economic downturn.

Broadband revenue, including ADSL and FTTx, decreased slightly by 0.3% year-over-year to NT$19.9 billion. Although FTTx revenue increased as more ADSL subscribers migrated to fiber solutions, such an increase did not fully offset the ADSL revenue decrease that was the result of the migration to FTTx, market competition and the mandatory NCC tariff reduction.

International fixed revenue decreased by 4.3%, primarily because of the economic downturn, which resulted in the substitution of cost-saving services, such as VOIP, for traditional International Direct Dialing (IDD) services.

 

2

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Finally, others revenue increased by 74.3% to NT$1.5 billion in 2009 compared to the same period of 2008.

For the fourth quarter of 2009, total revenue was NT$51.1 billion, representing a 2.6% increase from the same period of 2008. Of this amount, the mobile business contributed 42.9%, the internet business was 12.6%, the domestic fixed business was 36.2%, the international fixed business was 7.3%, and the remainder was from others.

Costs and expenses

Total operating costs and expenses for 2009 were NT$142.0 billion, a decrease of 0.8% compared to 2008. This decrease was mainly due to decrease in depreciation, material & maintenance expenses, as well as decline in cost of sales from Senao due to its decreased sales.

For the fourth quarter of 2009, total operating costs and expenses were NT$38.0 billion, a decrease of 0.4% compared to the fourth quarter of 2008. The decrease can largely be attributed to a decrease in material and maintenance expenses, as well as decreased depreciation expense.

Income Tax

Income tax expense for 2009 were NT$12.7 billion, representing a decrease of 8.3% compared to NT$13.9 billion for 2008. This decrease was mainly due to the decreased operating profit.

EBITDA and Net Income

EBITDA and operating profit for 2009 decreased by 4.2% to NT$92.7 billion and by 3.7% to NT$56.4 billion, respectively, primarily due to the revenue decline. The Company’s EBITDA margin and operating profit margin for 2009 were 46.7% and 28.4%, respectively, compared to a 48.0% EBITDA margin and a 29.0% operating profit margin, respectively, for 2008. Net income for 2009 decreased by 2.8% year-over-year to NT$43.8 billion. The primary reason for the net income decrease was the decline in revenue.

EBITDA and operating profit for the fourth quarter of 2009 increased by 4.4% to NT$22.1billion and by12.7% to NT$13.2 billion, respectively. The reasons for these increases were the overall revenue growth and the reduced operating costs and expenses. The EBITDA margin and operating profit margin for the fourth quarter of 2009 were 43.3% and 25.7%, respectively; both are up compared to 42.6% and 23.4%, respectively, for the fourth quarter of 2008.

Net income increased by 24.6% to NT$10.6 billion for the fourth quarter of 2009, primarily due to the NT$1.2 billion financial asset impairment recognized in the fourth quarter in 2008.

 

3

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Capital Expenditures (“Capex”)

Total capex for 2009 amounted to NT$25.5 billion, a 15.4% decrease compared to that of 2008. The decrease of capex was owing to the economic downturn. Of the NT$25.5 billion capex figure, 62.3% was used for the domestic fixed communications business, 19.7% was for mobile business, 8.2% was for internet business, 5.1% was for international fixed communications business and the remainder was for other uses.

Cash Flow

Cash flow from operating activities for 2009 decreased by 15.9% to NT$77.3 billion compared to 2008. This was primarily because of the revenue decline, a NT$4.0 billion increased pension fund contributions due to the income tax rate adjustment in 2010, the NT$3.2 billion income tax refund received in 2008, the 2009 revenue decline as well as the change of other operating assets and liabilities.

For the fourth quarter of 2009, our net cash flow from operating activities decreased by 22.6% year-over-year to NT$27.8 billion. This was primarily because of the increased pension fund contributions as mentioned.

As of December 31, 2009, the Company’s cash and cash equivalents totaled NT$73.3 billion, a decrease of 9.9% year-over-year, primarily due to the capital reduction distribution to shareholders in March of 2009.

Businesses Performance Highlights:

Broadband/ HiNet Business

 

•

Total broadband subscribers were 4.3 million as of December 31, 2009. Chunghwa made important progress over the course of 2009: There was a strong growth in FTTx subscriptions, with 568,000 net additions bringing the total to 1.64 million subscribers. ADSL subscribers decreased by 575,000 to 2.67 million. By the end of 2009, the number of ADSL and FTTx subscriptions with a service speed greater than 8 Mbps reached 2.0 million, representing 46.8% of total broadband subscribers, compared to 36.9% at the end of 2008.

 

•

HiNet subscribers totaled 4.07 million at the end of 2009, which were 35,000 less year over year.

Mobile Business

 

•

As of December 31, 2009, Chunghwa had 9.27 million mobile subscribers, an increase of 3.6% compare to 8.95 million at the end of 2008.

 

•

Chunghwa had 1.17 million net additions to its 3G subscriber base during 2009, recording a 32.9% year-over-year growth, bringing the total to 4.73 million as of December 31, 2009.

 

4

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•

Mobile VAS revenue for 2009 was up 20.5% year-over-year to NT$84.5 billion, of which SMS revenue was up 12.3% year-over-year and mobile Internet revenue was up 54.3% year-over-year.

Domestic/International Fixed-line Businesses

 

•

As of the end of 2009, the Company maintained its leading fixed-line market position, with fixed-line subscribers totaling 12.45 million.

Financial Statements

Financial statements and additional operational data can be found on the Company’s website at www.cht.com.tw/ir/filedownload.

Note Concerning Forward-looking Statements

Please be advised that Chunghwa’s 2009 full year annual report including the complete U.S. GAAP reconciled financial statements and footnotes will be part of the Form 20-F to be filed to U.S. SEC. This Form 20-F, or the 2009 full year annual report, will be available at the U.S. SEC and on Chunghwa’s website no later than June 30, 2010.

Except for statements in respect of historical matters, the statements made in this press release contain “forward-looking statements” within the meaning of Section 27A of the U.S. Securities Act of 1933 and Section 21E of the U.S. Securities Exchange Act of 1934. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual performance, financial condition or results of operations of Chunghwa to be materially different from what may be implied by such forward-looking statements. Investors are cautioned that actual events and results could differ materially from those statements as a result of a number of factors including, among other things: extensive regulation of telecom industry; the intensely competitive telecom industry; our relationship with our labor union; general economic and political conditions, including those related to the telecom industry; possible disruptions in commercial activities caused by natural and human induced events and disasters, including terrorist activity, armed conflict and highly contagious diseases, such as SARS; and those risks identified in the section entitled “Risk Factors” in Chunghwa’s annual reports on Form F-20 filed with the SEC.

The forward-looking statements in this press release reflect the current belief of Chunghwa as of the date of this press release and we undertake no obligation to update these forward-looking statements for events or circumstances that occur subsequent to such date.

 

5

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About Chunghwa Telecom

Chunghwa Telecom (TAIEX 2412, NYSE: CHT) is the leading telecom service provider in Taiwan. Chunghwa Telecom provides fixed-line, mobile and Internet and data services to residential and business customers in Taiwan.

 

		Contact:		Fu-fu Shen
		Phone:		+886 2 2344 5488
		Email:		chtir@cht.com.tw

 

6

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Exhibit 2

Chunghwa Telecom Announces NT$19.3 billion

Capital Reduction Plan for Year 2010

Taipei, Taiwan, R.O.C. March 30, 2010 - Chunghwa Telecom Co., Ltd (TAIEX: 2412, NYSE: CHT) (“Chunghwa” or “the Company”) today announced that its Board of Directors has approved a 20% of capital reduction from Chunghwa’s existing outstanding common stock, equivalent to approximately NT$19.39 billion for fiscal year 2010. As a result of this capital reduction, the Company will cancel 1,939,361,636 outstanding common shares by exchanging one existing common share for 0.8 new shares while distributing NT$2 per share to its shareholders. All related procedures and timetables will be announced following shareholder approval of this proposal at the Annual General Meeting scheduled to be held on June 18, 2010.

Shu Yeh, Chief Financial Officer of Chunghwa, commented, “We are very pleased that the Board has approved this round of capital reduction, the fourth year we are returning cash to our shareholders via capital reduction plan. The key reasons for conducting the capital reduction via Chunghwa’s outstanding common stock this year are to reduce the Company’s cost of capital, to effectively improve return on equity (ROE), and to continue our commitment in delivering value to our shareholders.”

Changes in outstanding common shares:

 

Current outstanding common shares		9,696,808,181
Common shares to be cancelled via capital reduction		(1,939,361,636	)
Outstanding common shares after capital reduction		7,757,446,545

 

*	1 ADS =10 shares

About Chunghwa Telecom

Chunghwa Telecom (TAIEX 2412, NYSE: CHT) is the leading telecom service provider in Taiwan. Chunghwa Telecom provides fixed line, mobile and Internet and data services to residential and business customers in Taiwan.

For inquiries:

Fu-fu Shen

Investor Relations

+886 2 2344 5488

chtir@cht.com.tw

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Exhibit 3

 

		Chunghwa Telecom Co., Ltd.
		Financial Statements for the
		Years Ended December 31, 2009 and 2008 and
		Independent Auditors’ Report

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INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Stockholders

Chunghwa Telecom Co., Ltd.

We have audited the accompanying balance sheets of Chunghwa Telecom Co., Ltd. as of December 31, 2009 and 2008, and the related statements of income, changes in stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the Rules Governing the Audit of Financial Statements by Certified Public Accountants and auditing standards generally accepted in the Republic of China. Those rules and standards required that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to first paragraph present fairly, in all material respects, the financial position of the Company as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the years then ended in conformity with the Securities and Exchange Act, the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, requirements of the Business Accounting Law and Guidelines Governing Business Accounting relevant to financial accounting standards, and accounting principles generally accepted in the Republic of China.

As discussed in Note 3 to the financial statements on January 1, 2008, the Company adopted Interpretation 96-052 issued by the Accounting and Research Development Foundation of the Republic of China that requires companies to record bonuses paid to employees, directors and supervisors as an expense rather than an appropriation of earnings. The Company early adopted the new Statements of Financial Accounting Standards No. 41, “Operating Segments” (“SFAS No. 41”) beginning from September 1, 2009.

 

- 1 -

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We have also audited the consolidated financial statements of the Company and its subsidiaries as of and for the years ended December 31, 2009 and 2008, and have expressed a modified unqualified opinion on those consolidated financial statements.

March 10, 2010

Notice to Readers

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

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

 

- 2 -

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CHUNGHWA TELECOM CO., LTD.

BALANCE SHEETS

DECEMBER 31, 2009 AND 2008

(Amounts in Thousands of New Taiwan Dollars, Except Par Value Data)

 

 

The accompanying notes are an integral part of the financial statements.   (With Deloitte & Touche audit report dated March 10, 2010)

 

- 3 -

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CHUNGHWA TELECOM CO., LTD.

STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

(Amounts in Thousands of New Taiwan Dollars, Except Earnings Per Share Data)

 

 

		2009					2008
		Amount			%		Amount			%
NET REVENUES (Note 24)		$	184,040,272		100		$	186,780,650		100
OPERATING COSTS (Note 24)			97,229,277		53			95,812,214		52
GROSS PROFIT			86,810,995		47			90,968,436		48
OPERATING EXPENSES (Note 24)
Marketing			25,210,891		13			27,306,113		14
General and administrative			3,303,370		2			3,345,977		2
Research and development			3,155,752		2			3,151,789		2
Total operating expenses			31,670,013		17			33,803,879		18
INCOME FROM OPERATIONS			55,140,982		30			57,164,557		30
NON-OPERATING INCOME AND GAINS
Interest income			454,464		—			1,866,875		1
Equity in earnings of equity method investees, net			281,340		—			362,314		—
Valuation gain on financial instruments, net			100,688		—			550,649		1
Foreign exchange gain, net			87,597		—			329,408		—
Gain on disposal of property, plant and equipment, net			5,147		—			—		—
Others			646,593		1			397,631		—
Total non-operating income and gains			1,575,829		1			3,506,877		2
NON-OPERATING EXPENSES AND LOSSES
Loss on disposal of financial instruments, net			194,133		—			660,331		—
Loss arising from natural calamities			148,747		—			—		—
Impairment loss on assets			95,349		—			1,164,105		1
Interest expense			2,776		—			404		—
Loss on disposal of property, plant and equipment, net			—		—			276,710		—
Others			112,385		—			97,019		—
Total non-operating expenses and losses			553,390		—			2,198,569		1
INCOME BEFORE INCOME TAX			56,163,421		31			58,472,865		31
INCOME TAX EXPENSE (Notes 2 and 21)			12,405,995		7			13,462,523		7
NET INCOME		$	43,757,426		24		$	45,010,342		24

(Continued)

 

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CHUNGHWA TELECOM CO., LTD.

STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

(Amounts in Thousands of New Taiwan Dollars, Except Earnings Per Share Data)

 

 

		2009						2008
		Income Before Income Tax			Net Income			Income Before Income Tax			Net Income
EARNINGS PER SHARE (Notes 2 and 22)
Basic earnings per share		$	5.79		$	4.51		$	6.03		$	4.64
Diluted earnings per share		$	5.77		$	4.50		$	6.02		$	4.63

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

 

(With Deloitte & Touche audit report dated March 10, 2010)		(Concluded)

 

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CHUNGHWA TELECOM CO., LTD.

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

(Amounts in Thousands of New Taiwan Dollars Except Dividend Per Share Data)

 

 

		Common Stock							Preferred Stock					Additional Paid-in Capital				Retained Earnings
		Shares (Thousands)			Amount				Shares (Thousands)		Amount							Legal Reserve			Special Reserve				Unappropriated Earnings
BALANCE, JANUARY 1, 2008		9,667,845			$	96,678,451			—		$	—		$	200,605,563			$	48,036,210		$	2,678,723			$	48,317,617
Adjustment of additional paid-in capital from revaluation of land to income upon disposal		—				—			—			—			—				—			—				—
Appropriations of 2007 earnings
Legal reserve		—				—			—			—			—				4,823,356			—				(4,823,356	)
Reversal of special reserve		—				—			—			—			—				—			(3,304	)			3,304
Cash dividend - NT$4.26 per share		—				—			—			—			—				—			—				(40,716,130	)
Stock dividend - NT$0.1 per share		95,578				955,778			—			—			—				—			—				(955,778	)
Employees’ bonus - cash		—				—			—			—			—				—			—				(1,303,605	)
Employees’ bonus - stock		43,453				434,535			—			—			—				—			—				(434,535	)
Remuneration to board of directors and supervisors		—				—			—			—			—				—			—				(43,454	)
Capital surplus transferred to common stock		1,911,555				19,115,554			—			—			(19,115,554	)			—			—				—
Capital reduction (Note 18)		(1,911,555	)			(19,115,554	)		—			—			—				—			—				—
Net income in 2008		—				—			—			—			—				—			—				45,010,342
Unrealized loss on financial instruments held by investees		—				—			—			—			—				—			—				—
Equity adjustments in investees		—				—			—			—			—				—			—				(54,583	)
Cumulative translation adjustment for foreign-currency investments held by investees		—				—			—			—			—				—			—				—
Defined benefit pension plan adjustments of investees		—				—			—			—			—				—			—				—
Special reserve for gain arising from disposal of land		—				—			—			—			—				—			475				(475	)
Cancellation of treasury stock - 110,068 thousand common shares (Notes 2 and 19)		(110,068	)			(1,100,682	)		—			—			(2,283,739	)			—			—				(3,723,073	)
Unrealized loss on financial instruments		—				—			—			—			—				—			—				—
BALANCE, DECEMBER 31, 2008		9,696,808				96,968,082			—			—			179,206,270				52,859,566			2,675,894				41,276,274
Adjustment of additional paid-in capital from revaluation of land to income upon disposal		—				—			—			—			—				—			—				—
Appropriations of 2008 earnings
Legal reserve		—				—			—			—			—				4,127,675			—				(4,127,675	)
Cash dividend - NT$3.83 per share		—				—			—			—			—				—			—				(37,138,775	)
Cancellation of preferred stock (Note 18)		—				—			—			—			—				—			—				—
Capital surplus transferred to common stock		969,680				9,696,808			—			—			(9,696,808	)			—			—				—
Capital reduction (Note 18)		(969,680	)			(9,696,808	)		—			—			—				—			—				—
Net income in 2009		—				—			—			—			—				—			—				43,757,426
Unrealized gain on financial instruments held by investees		—				—			—			—			—				—			—				—
Equity adjustments in investees		—				—			—			—			301				—			—				(17,288	)
Cumulative translation adjustment for foreign-currency investments held by investees		—				—			—			—			—				—			—				—
Defined benefit pension plan adjustments of investees		—				—			—			—			—				—			—				—
Unrealized gain on financial instruments		—				—			—			—			—				—			—				—
BALANCE, DECEMBER 31, 2009		9,696,808			$	96,968,082			—		$	—		$	169,509,763			$	56,987,241		$	2,675,894			$	43,749,962

 

		Other Adjustments
		Cumulative Translation Adjustments				Unrecognized Net Loss of Pension				Unrealized Gain (Loss) on Financial Instruments				Unrealized Revaluation Increment				Treasury Stock				Total Stockholders’ Equity
BALANCE, JANUARY 1, 2008		$	(1,980	)		$	(90	)		$	37,508			$	5,823,200			$	(7,107,494	)		$	395,067,708
Adjustment of additional paid-in capital from revaluation of land to income upon disposal			—				—				—				(10,013	)			—				(10,013	)
Appropriations of 2007 earnings
Legal reserve			—				—				—				—				—				—
Reversal of special reserve			—				—				—				—				—				—
Cash dividend - NT$4.26 per share			—				—				—				—				—				(40,716,130	)
Stock dividend - NT$0.1 per share			—				—				—				—				—				—
Employees’ bonus - cash			—				—				—				—				—				(1,303,605	)
Employees’ bonus - stock			—				—				—				—				—				—
Remuneration to board of directors and supervisors			—				—				—				—				—				(43,454	)
Capital surplus transferred to common stock			—				—				—				—				—				—
Capital reduction (Note 18)			—				—				—				—				—				(19,115,554	)
Net income in 2008			—				—				—				—				—				45,010,342
Unrealized loss on financial instruments held by investees			—				—				(18,613	)			—				—				(18,613	)
Equity adjustments in investees			—				—				—				—				—				(54,583	)
Cumulative translation adjustment for foreign-currency investments held by investees			31,454				—				—				—				—				31,454
Defined benefit pension plan adjustments of investees			—				6				—				—				—				6
Special reserve for gain arising from disposal of land			—				—				—				—				—				—
Cancellation of treasury stock - 110,068 thousand common shares (Notes 2 and 19)			—				—				—				—				7,107,494				—
Unrealized loss on financial instruments			—				—				(2,291,137	)			—				—				(2,291,137	)
BALANCE, DECEMBER 31, 2008			29,474				(84	)			(2,272,242	)			5,813,187				—				376,556,421
Adjustment of additional paid-in capital from revaluation of land to income upon disposal			—				—				—				(9,741	)			—				(9,741	)
Appropriations of 2008 earnings
Legal reserve			—				—				—				—				—				—
Cash dividend - NT$3.83 per share			—				—				—				—				—				(37,138,775	)
Cancellation of preferred stock (Note 18)			—				—				—				—				—				—
Capital surplus transferred to common stock			—				—				—				—				—				—
Capital reduction (Note 18)			—				—				—				—				—				(9,696,808	)
Net income in 2009			—				—				—				—				—				43,757,426
Unrealized gain on financial instruments held by investees			—				—				36,011				—				—				36,011
Equity adjustments in investees			—				—				—				—				—				(16,987	)
Cumulative translation adjustment for foreign-currency investments held by investees			(21,848	)			—				—				—				—				(21,848	)
Defined benefit pension plan adjustments of investees			—				(43,666	)			—				—				—				(43,666	)
Unrealized gain on financial instruments			—				—				1,789,102				—				—				1,789,102
BALANCE, DECEMBER 31, 2009		$	7,626			$	(43,750	)		$	(447,129	)		$	5,803,446			$	—			$	375,211,135

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

(With Deloitte & Touche audit report dated March 10, 2010)

 

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CHUNGHWA TELECOM CO., LTD.

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

(Amounts in Thousands of New Taiwan Dollars)

 

 

		2009				2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	43,757,426			$	45,010,342
Impairment loss on assets			95,349				1,164,105
Provision for doubtful accounts			454,402				503,753
Depreciation and amortization			35,972,878				37,968,938
Amortization of premium of financial assets			15,295				3,258
Loss on disposal of financial instruments, net			194,133				660,331
Valuation gain on financial instruments, net			(100,688	)			(550,649	)
Valuation loss on inventory			11,550				23,320
Loss (gain) on disposal of property, plant and equipment, net			(5,147	)			276,710
Loss arising from natural calamities			148,747				—
Equity in earnings of equity method investees, net			(281,340	)			(362,314	)
Dividends received from equity investees			393,115				435,285
Deferred income taxes			1,092,773				(178,971	)
Changes in operating assets and liabilities:
Decrease (increase) in:
Financial assets held for trading			215,658				(207,463	)
Trade notes and accounts receivable			(1,322,076	)			(218,461	)
Receivables from related parties			(40,202	)			(131,390	)
Other monetary assets			371,339				4,860,343
Inventories			(205,463	)			(254,588	)
Other current assets			601,970				(1,010,310	)
Increase (decrease) in:
Trade notes and accounts payable			(1,338,719	)			(454,187	)
Payables to related parties			(324,270	)			553,070
Income tax payable			(1,275,644	)			(1,526,874	)
Accrued expenses			819,458				723,521
Other current liabilities			501,273				650,762
Deferred income			411,467				567,147
Accrued pension liabilities			(3,956,431	)			1,252,424
Net cash provided by operating activities			76,206,853				89,758,102
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of available-for-sale financial assets			(8,617,262	)			(7,271,995	)
Proceeds from disposal of available-for-sale financial assets			7,642,345				6,639,849
Acquisition of held-to-maturity financial assets			(2,099,875	)			(3,326,951	)
Proceeds from disposal of held-to-maturity financial assets			868,860				659,605
Acquisition of financial assets carried at cost			—				(485,859	)
Proceeds from disposal of financial assets carried at cost			285,859				354,933
Acquisition of investments accounted for using equity method			(1,637,615	)			(4,461,562	)
Proceeds from disposal of long-term investments			—				44,047
Acquisition of property, plant and equipment			(24,344,334	)			(29,660,351	)
Proceeds from disposal of property, plant and equipment			64,599				2,642,439

(Continued)

 

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CHUNGHWA TELECOM CO., LTD.

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

(Amounts in Thousands of New Taiwan Dollars)

 

 

		2009				2008
Increase in intangible assets		$	(233,471	)		$	(258,290	)
Increase in other assets			(329,770	)			(331,620	)
Net cash used in investing activities			(28,400,664	)			(35,455,755	)
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in customers’ deposits			(95,111	)			(160,733	)
Decrease in other liabilities			(201,273	)			(135,309	)
Cash dividends paid			(37,138,775	)			(40,716,130	)
Remuneration to board of directors and supervisors and bonus to employees			—				(1,347,059	)
Capital reduction			(19,115,554	)			(9,557,777	)
Net cash used in financing activities			(56,550,713	)			(51,917,008	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			(8,744,524	)			2,385,339
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR			77,137,903				74,752,564
CASH AND CASH EQUIVALENTS, END OF YEAR		$	68,393,379			$	77,137,903
SUPPLEMENTAL INFORMATION
Interest paid		$	37			$	404
Income tax paid		$	12,588,866			$	15,168,368
NON-CASH FINANCING ACTIVITIES
Reclassification from common capital stock to due to stockholders for capital reduction		$	9,696,808			$	19,115,554
CASH AND NON-CASH INVESTING ACTIVITIES
Increase in property, plant and equipment		$	24,257,098			$	30,493,115
Payables to suppliers			87,236				(832,764	)
		$	24,344,334			$	29,660,351

(Continued)

 

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CHUNGHWA TELECOM CO., LTD.

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

(Amounts in Thousands of New Taiwan Dollars)

 

The acquisition of InfoExplorer Co., Ltd. (“IFE”) was made on January 20, 2009. The following table presents the allocation of acquisition costs of IFE to assets acquired and liabilities assumed based on their fair values on the basis of the final data on May 7, 2009:

 

Cash and cash equivalents		$	457,990
Receivables			13,479
Other current assets			14,792
Property, plant, and equipment			40,221
Identifiable intangible assets			53,001
Refundable deposits			2,468
Other assets			2,338
Payables			(83,319	)
Income tax payable			(246	)
Other current liabilities			(153	)
Total			500,571
Percentage of ownership			49.07	%
			245,630
Goodwill			37,870
Acquisition costs of acquired subsidiary (cash prepaid for long-term investments in December 2008)		$	283,500

(Continued)

 

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CHUNGHWA TELECOM CO., LTD.

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

(Amounts in Thousands of New Taiwan Dollars)

 

The acquisition of additional interest of Chunghwa Investment Co., Ltd. (“CHI”) and its subsidiaries was made on September 9, 2009. The following table presents the allocation of acquisition costs of Chunghwa Investment Co., Ltd. and its subsidiaries to assets acquired and liabilities assumed based on their fair values on the basis of the final data performed:

 

Cash and cash equivalents		$	913,593
Financial assets at fair value through profit or loss			51,357
Available-for-sale financial assets			568,377
Trade notes and accounts receivable			76,258
Inventories			60,040
Other current assets			19,429
Investments accounted for using equity method			57,339
Financial assets carried at cost			155,714
Property, plant, and equipment			90,278
Identifiable intangible assets			33,662
Other assets			22,462
Trade notes and accounts payable			(33,665	)
Accrued expenses			(16,496	)
Income tax payable			(1,289	)
Short-term loans			(20,000	)
Long-term loans			(24,238	)
Other liabilities			(1,115	)
Subtotal			1,951,706
Minority interests			(100,071	)
Total			1,851,635
Percentage of additional ownership			40	%
			740,654
Goodwill			18,055
Acquisition costs of acquired subsidiary paid in cash		$	758,709

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

 

(With Deloitte & Touche audit report dated March 10, 2010)		(Concluded)

 

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CHUNGHWA TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

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

 

 

1.

GENERAL

Chunghwa Telecom Co., Ltd. (“Chunghwa”) was incorporated on July 1, 1996 in the Republic of China (“ROC”) pursuant to the Article 30 of the Telecommunications Act. Chunghwa is a company limited by shares and, prior to August 2000, was wholly owned by the Ministry of Transportation and Communications (“MOTC”). Prior to July 1, 1996, the current operations of Chunghwa were carried out under the Directorate General of Telecommunications (“DGT”). The DGT was established by the MOTC in June 1943 to take primary responsibility in the development of telecommunications infrastructure and to formulate policies related to telecommunications. On July 1, 1996, the telecom operations of the DGT were spun-off as Chunghwa which continues to carry out the business and the DGT continues to be the industry regulator.

As the dominate telecommunications service provider of fixed-line and Global System for Mobile Communications (“GSM”) in the ROC, Chunghwa is subject to additional regulations imposed by ROC.

Effective August 12, 2005, the MOTC had completed the process of privatizing Chunghwa by reducing the government ownership to below 50% in various stages. In July 2000, Chunghwa received approval from the Securities and Futures Commission (the “SFC”) for a domestic initial public offering and its common shares were listed and traded on the Taiwan Stock Exchange (the “TSE”) on October 27, 2000. Certain of Chunghwa’s common shares had been sold, in connection with the foregoing privatization plan, in domestic public offerings at various dates from August 2000 to July 2003. Certain of Chunghwa’s common shares had also been sold in an international offering of securities in the form of American Depository Shares (“ADS”) on July 17, 2003 and were listed and traded on the New York Stock Exchange (the “NYSE”). The MOTC sold common shares of Chunghwa by auction in the ROC on August 9, 2005 and completed the second international offering on August 10, 2005. Upon completion of the share transfers associated with these offerings on August 12, 2005, the MOTC owned less than 50% of the outstanding shares of Chunghwa and completed the privatization plan.

As of December 31, 2009 and 2008, the Company had 24,668 and 24,551 employees, respectively.

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The financial statements were prepared in conformity with the Securities and Exchange Act, the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, requirements of the Business Accounting Law, Guidelines Governing Business Accounting relevant to financial accounting standards, and accounting principles generally accepted in the ROC (“ROC GAAP”). The preparation of financial statements requires management to make reasonable estimates and assumptions on allowances for doubtful accounts, valuation allowances on inventories, depreciation of property, plant and equipment, impairment of assets, bonuses paid to employees, directors and supervisors, pension plans and income tax which are inherently uncertain. Actual results may differ from these estimates. The significant accounting policies are summarized as follows:

Classification of Current and Noncurrent Assets and Liabilities

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

 

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Cash Equivalents

Cash equivalents is commercial paper with maturities of three months or less from the date of acquisition. The carrying amount approximates fair value.

Financial Assets and Liabilities at Fair Value Through Profit or Loss

Financial instruments classified as financial assets or financial liabilities at fair value through profit or loss (“FVTPL”) include financial assets or financial liabilities held for trading and those designated as at FVTPL on initial recognition. The Company recognizes a financial asset or a financial liability when the Company becomes a party to the contractual provisions of the financial instrument. A financial asset is derecognized when the Company loses control of its contractual rights over the financial asset. A financial liability is derecognized when the obligation specified in the relevant contract is discharged, cancelled or expired.

Financial instruments at FVTPL are initially measured at fair value. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at FVTPL are recognized as expenses as incurred. Financial assets or financial liabilities at FVTPL are remeasured at fair value, subsequently with changes in fair value recognized in earnings. Cash dividends received subsequently (including those received in the period of investment) are recognized as income. On derecognition of a financial asset or a financial liability, the difference between its carrying amount and the sum of the consideration received and receivable or consideration paid and payable is recognized in earnings. A regular way purchase or sale of financial assets is accounted for using trade date accounting.

Derivatives that do not meet the criteria for hedge accounting is classified as financial assets or financial liabilities held for trading. When the fair value is positive, the derivative is recognized as a financial asset, when the fair value is negative, the derivative is recognized as a financial liability.

Available-for-sale Financial Assets

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

The recognition and derecognition of available-for-sale financial assets are similar to those of financial assets at FVTPL.

Fair values are determined as follows: Listed stocks - at closing prices at the balance sheet date; open-end mutual funds - at net asset values at the balance sheet date; bonds - quoted at prices provided by the Taiwan GreTai Securities Market; and financial assets and financial liabilities without quoted prices in an active market - at values determined using valuation techniques.

Cash dividends are recognized in earnings on the ex-dividend date, except for the dividends declared before acquisition which are treated as a reduction of investment cost. Stock dividends are recorded as an increase in the number of shares and do not affect investment income. The total number of shares subsequent to the increase of stock dividends is used for recalculate cost per share.

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

 

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Held-to-maturity Financial Assets

Held-to-maturity financial assets are carried at amortized cost using the effective interest method. Those financial assets are initially recognized at fair value plus transaction costs that are directly attributable to the acquisition. Gains and losses are recognized at the time of derecognition, impairment or amortization. A regular way purchase or sale of financial assets is accounted for using trade date accounting.

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

Revenue Recognition, Account Receivables and Allowance for Doubtful Receivables

Revenues are recognized when they are realized or realizable and earned. Revenues are realized or realizable and earned when the Company has persuasive evidence of an arrangement, the goods have been delivered or the services have been rendered to the customer, the sales price is fixed or determinable and collectibility is reasonably assured.

Revenue is measured at the fair value of the consideration received or receivable and represents amounts agreed between the Company and the customers for goods sold in the normal course of business, net of sales discounts and volume rebates. For trade receivables due within one year from the balance sheet date, as the nominal value of the consideration to be received approximates its fair value and transactions are frequent, fair value of the consideration is not determined by discounting all future receipts using an imputed rate of interest.

Usage revenues from fixed-line services (including local, domestic long distance and international long distance), cellular services, Internet and data services, and interconnection and call transfer fees from other telecommunications companies and carriers are billed in arrears and are recognized based upon minutes of traffic processed when the services are provided in accordance with contract terms.

The costs of providing services are recognized as incurred. Incentives to third party dealers for inducing business which are payable when the end user enters into an airtime contract are recognized in marketing expenses as incurred.

Other revenues are recognized as follows: (a) one-time subscriber connection fees (on fixed-line services) are deferred and recognized over the average expected customer service periods, (b) monthly fees (on fixed-line services, wireless and Internet and data services) are accrued every month, and (c) prepaid services (fixed line, cellular and Internet) are recognized as income based upon actual usage by customers or when the right to use those services expires.

Where the Company enters into transactions which involve both the provision of air time bundled with products such as 3G data card and handset, total consideration received from handsets in these arrangements is allocated and measured using units of accounting within the arrangement based on relative fair values limited to the amount that is not contingent upon the delivery of other items or services.

Where the Company sells products to third party cellular phone stores the Company records the direct sale of the products, typically handsets, as gross revenue when the Company is the primary obligor in the arrangement and when title is passed and the products are accepted by the stores.

An allowance for doubtful receivables is provided based on a review of the collectibility of accounts receivable. The Company determines the amount of allowance for doubtful receivables by examining the aging analysis of outstanding accounts receivable as well as historical collection experience.

 

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Inventories

Inventories including merchandise and work-in-process are stated at the lower of cost (weighted-average cost) or net realizable value item by item, except for those that may be appropriate to group items of similar or related inventories. Net realizable value is the estimated selling price of inventories less all estimated costs of completion and costs necessary to make the sale. The calculation of the cost of inventory is derived using the weighted- average method.

Investments Accounted for Using Equity Method

Investments in companies where in the Company exercises significant influence over the operating and financial policy decisions are accounted for using the equity method. Under the equity method, the investment is initially stated at cost and subsequently adjusted for its proportionate share in the net earnings of the investee companies. Any cash dividends received are recognized as a reduction in the carrying value of the investments.

Gains or losses on sales from the Company to equity method investees wherein Chunghwa exercises significant influence over these equity investees are deferred in proportion to the Company’s ownership percentage in the investees until such gains or losses are realized through transactions with third parties. Gains or losses on sales from equity method investees to Chunghwa are deferred in proportion to Chunghwa’s ownership percentages in the investees until they are realized through transactions with third parties.

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

Financial Assets Carried at Cost

Investments in equity instruments that do not have a quoted price in an active market and whose fair values cannot be reliably measured such as non-publicly traded stocks are measured at their original cost. If there is objective evidence which indicates that a financial asset is impaired, a loss is recognized. A subsequent reversal of such impairment loss is not allowed.

Property, Plant and Equipment

Property, plant and equipment are stated at cost plus a revaluation increment, if any, less accumulated depreciation and accumulated impairment loss. The interest costs that are directly attributable to the acquisition, construction of a qualifying asset are capitalized as property, plant and equipment. Major renewals and betterments are capitalized, while maintenance and repairs are expensed as incurred.

When an indication of impairment is identified, any excess of the carrying amount of an asset over its recoverable amount is recognized as a loss. If the recoverable amount increases in a subsequent period, the amount previously recognized as impairment would be reversed and recognized as a gain. However, the adjusted amount may not exceed the carrying amount that would have been determined, net of depreciation, as if no impairment loss had been recognized.

An impairment loss on a revalued asset is charged to “unrealized revaluation increment” under equity to the extent available, with the balance is recognized as a loss in earnings. If the recoverable amount increases in a subsequent period, the amount previously recognized as impairment loss could be reversed and recognized as a gain, with the remaining credited to “unrealized revaluation increment”.

 

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Depreciation expense is computed using the straight-line method over the following estimated service lives: land improvements - 10 to 30 years; buildings - 10 to 60 years; computer equipment - 6 to 10 years; telecommunications equipment - 6 to 15 years; transportation equipment - 5 to 10 years; and miscellaneous equipment - 3 to 12 years.

Upon sale or disposal of property, plant and equipment, the related cost and accumulated depreciation, accumulated impairment losses and any unrealized revaluation increment are deducted from the corresponding accounts, and any gain or loss recorded as non-operating gains or losses in the period of sale or disposal.

Intangible Assets

Intangible assets mainly include 3G Concession, computer software and patents.

The 3G Concession is valid through December 31, 2018. The 3G Concession is amortized on a straight-line basis from the date operations commence through the date the license expires. Computer software costs and patents are amortized using the straight-line method over the estimated useful lives of 3-20 years.

The Company adopted the Statements of Financial Accounting Standards No. 37, “Intangible Assets.” Expenditure on research shall be expensed as incurred. Development costs are capitalized when those costs meet relative criteria and are amortized using the straight-line method over estimated useful lives. Development costs do not meet relative criteria shall be expensed as incurred.

When an indication of impairment is identified, any excess of the carrying amount of an asset over its recoverable amount is recognized as a loss. If the recoverable amount increases in a subsequent period, the amount previously recognized as impairment would be reversed and recognized as a gain. However, the adjusted amount may not exceed the carrying amount that would have been determined, as if no impairment loss had been recognized.

Idle Assets

Idle assets are carried at the lower of recoverable amount or carrying amount.

Pension Costs

For defined benefit pension plans, net periodic pension benefit cost is recorded in the statement of income and includes service cost, interest cost, expected return on plan assets, amortization of prior service costs, amortization of pension gains (losses) and curtailment or settlement gains (losses).

The Company recognizes into income, any unrecognized actuarial net gains or losses that exceed 10% of the larger of projected benefit obligations or plan assets, defined as the “corridor”. Amounts inside this 10% corridor are amortized over the average remaining service life of active plan participants. Actuarial net gains and losses occur when actual experience differs from any of the many assumptions used to value the plans. Differences between the expected and actual returns on plan assets and changes in interest rate, which affect the discount rate used to value projected plan obligations, can have a significant impact on the calculation of pension net gains and losses from year to year.

The curtailments and settlement gains (losses) resulted from the Chunghwa’s early retirement programs. Curtailment/settlement gains or losses are equal to the changes of underfunded status plus the a pro rata portion of the unrecognized prior service cost, unrecognized net gains (losses), and unrecognized transition obligations/assets, before the settlement/curtailment event multiplied by the percentage reduction in projected benefit obligation.

 

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The projected benefit obligation represents the actuarial present value of benefits expected to be paid upon retirement based on estimated future compensation levels.

The carrying amount of accrued pension liability should be the sum of the following amounts: (a) projected benefit obligation as of balance sheet date, (b) minus (plus) unamortized actuarial loss (gain), (c) minus unamortized prior service cost, and (d) minus the fair value of plan assets. If the amount determined by above calculation is negative, it is viewed as prepaid pension cost. The prepaid pension cost is measured at the lower of: (a) the amount determined above, and (b) the sum of the following amounts: (i) unamortized actuarial loss, (ii) unamortized prior service cost, and (iii) the present value of refunds from the plan or reductions in future contributions to the plan.

The measurement of benefit obligations and net periodic cost (income) is based on estimates and assumptions approved by the company’s management such as compensation, age and seniority, as well as certain assumptions, including estimates of discount rates, expected return on plan assets and rate of compensation increases.

For employees under defined contribution pension plans, pension costs are recorded based on the actual contributions made to employees’ individual pension accounts during their service periods.

Expense Recognition

The costs of providing services are recognized as incurred. The cost includes incentives to third party dealers for inducing business which are payable when the end user enters into an airtime contract.

Treasury Stock

Treasury stock is recorded at cost and shown as a reduction to stockholders’ equity. Upon cancellation of treasury stock, the treasury stock account is reduced and the common stock and capital surplus are reversed on a pro rata basis. If capital surplus is not sufficient for debiting purposes, the difference is charged to retained earnings.

Income Tax

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

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

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

Income taxes (10%) on undistributed earnings is recorded in the year of stockholders approval which is the year subsequent to the year the earnings are generated.

 

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Foreign-currency Transactions

Foreign-currency transactions are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occur. Exchange gains or losses derived from foreign-currency transactions or monetary assets and liabilities denominated in foreign currencies are recognized in earnings. At the balance sheet date, monetary assets and liabilities denominated in foreign currencies are revalued at prevailing exchange rates with the resulting gains or losses recognized in earnings.

The financial statements of foreign equity investees are translated into New Taiwan dollars at the following exchange rates. Assets and liabilities - spot rates at year-end; stockholders’ equity - historical rates, income and expenses - average rates during the year. The resulting translation adjustments are recorded as a separate component of stockholders’ equity.

Hedge Accounting

A hedging relationship qualifies for hedge accounting only if, all of the following conditions are met: (a) at the inception of the hedge, there is formal documentation of the hedging relationship and the entity’s risk management objective and strategy for undertaking the hedge; (b) the hedge is expected to be highly effective in achieving offsetting changes in fair value attributable to the hedged risk, consistently with the risk management strategy documented for that particular hedging relationship; (c) the effectiveness of the hedge can be reliably measured; (d) the hedge is assessed on an ongoing basis and determined actually to have been highly effective throughout the financial reporting periods for which the hedge was designated.

The gain or loss from remeasuring the hedging instrument at fair value and the gain or loss on the hedged item attributable to the hedged risk are recognized in earnings.

The hedging items that do not meet the criteria for hedge accounting were classified as financial assets or financial liabilities at fair value through profit or loss.

 

3.	EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES

The Company early adopted the Statement of Financial Accounting Standards No. 41 “Operating Segments” (“SFAS No. 41”) starting from September 1, 2009. This Statement supersedes the Statement of Financial accounting Standards No. 20 “Segment Reporting”. For comparative purpose, the segment information for the year ended December 31, 2008 was presented in accordance with SFAS No. 41.

The Company adopted the newly-revised Statements of Financial Accounting Standards No. 10, “Accounting for Inventories,” (“SFAS No. 10”) beginning from January 1, 2009, which requires inventories to be stated at the lower of cost (weighted-average cost) or net realizable value item by item, except for those that may be appropriate to group items of similar or related inventories. The inventory-related incomes and expenses shall be classified as operating cost. The adoption of the revised SFAS No. 10 does not have significant impact on the Company’s net income and basic earnings per share (after income tax) for the year ended December 31, 2009. The Company reclassified non-operating losses of $23,320 thousand to operating costs for the year ended December 31, 2008.

In March 2007, the ARDF issued an Interpretation 96-052 that requires companies to recognize bonuses paid to employees, directors and supervisors as an expense rather than an appropriation of earnings beginning from January 1, 2008.

 

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4.	CASH AND CASH EQUIVALENTS

 

		December 31
		2009			2008
Cash
Cash on hand		$	88,089		$	91,441
Bank deposits			4,455,444			10,207,252
Negotiable certificate of deposit, annual yield rate - ranging from 0.25%- 0.37% and 0.31%-2.45% for 2009 and 2008, respectively			63,350,000			48,485,481
			67,893,533			58,784,174
Cash equivalents
Commercial paper, annual yield rate - ranging from 0.19% and 0.70%-1.55% for 2009 and 2008, respectively			499,846			18,353,729
		$	68,393,379		$	77,137,903

As of December 31, 2009 and 2008, foreign deposits in bank were as following:

 

		December 31
		2009			2008
United States of America - New York (US$402 thousand and US$65,389 thousand for 2009 and 2008, respectively)		$	12,880		$	2,148,690
Hong Kong (US$30,572 thousand, EUR247 thousand, JPY27,844 thousand and GBP270 thousand for 2008)			—			1,039,021
		$	12,880		$	3,187,711

 

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

 

		December 31
		2009			2008
Derivatives - financial assets
Currency swap contracts		$	6,677		$	—
Index future contracts			—			242,868
Forward exchange contracts			—			15,208
		$	6,677		$	258,076
Derivatives - financial liabilities
Forward exchange contracts		$	—		$	95,515
Index future contracts			—			11,381
		$	—		$	106,896

Chunghwa entered into investment management agreements with well-known financial institutions (fund managers) to manage its investment portfolios in 2006. The investment portfolios managed by these fund managers aggregated to an original amount of US$100,000 thousand. Chunghwa terminated the investment management agreements on March 2, 2009 and asked fund managers to dispose all the investment portfolios. The fund managers had disposed all investment portfolios before June 23, 2009 and returned the proceeds to Chunghwa.

 

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Chunghwa entered into currency swap contracts, forward exchange contracts and index future contracts to reduce its exposure to foreign currency risk and variability in operating results due to fluctuations in exchange rates and stock prices. However, the aforementioned derivatives did not meet the criteria for hedge accounting and were classified as financial assets or financial liabilities held for trading.

Outstanding currency swap contracts and forward exchange contracts on December 31, 2009 and 2008 were as follows:

 

		Currency		Maturity Period		Contract Amount (In Thousands)
December 31, 2009
Currency swap contracts		USD/NTD		2010.01-04			USD45,000/NTD1,448,160
December 31, 2008
Forward exchange contracts - sell		EUR/USD		2009.01		EUR	4,240
		JPY/USD		2009.01		JPY	446,200
		GBP/USD		2009.01		GBP	1,880
		USD/NTD		2009.01		USD	96,000
		USD/JPY		2009.01		USD	1,544
		USD/EUR		2009.01		USD	777
		USD/GBP		2009.01		USD	124

The Company did not have any outstanding index future contracts on December 31, 2009.

Outstanding index future contracts on December 31, 2008 were as follows:

 

		Maturity Date		Units		Contract Amount (In Thousands)
December 31, 2008
AMSTERDAM IDX FUT		2009.01		13		EUR	642
CAC40 10 EURO FUT		2009.01		14		EUR	451
DAX INDEX FUTURE		2009.03		3		EUR	356
IBEX 35 INDX FUTR		2009.01		7		EUR	633
MINI S&P/MIB FUT		2009.03		37		EUR	712
FTSE 100 IDX FUT		2009.03		19		GBP	815
TOPIX INDEX FUTURE		2009.03		35		JPY	283,990
S&P 500 FUTURE		2009.03		16		USD	3,541
S&P 500 EMINI FUTURE		2009.03		53		USD	2,346

As of December 31, 2008, the deposits paid for index future contracts were $242,768 thousand.

 

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In September 2007, Chunghwa entered into a 10-year, foreign currency derivative contract with Goldman Sachs Group Inc. (“Goldman”) and valuations were made biweekly starting from September 20, 2007 which were 260 valuation periods totally. Under the terms of the contract, if the NT dollar/US dollar exchange rate was less than NT$31.50 per US dollar at any two consecutive bi-weekly valuation dates during the valuation period starting from October 4, 2007 to September 5, 2017, Chunghwa was required to make a cash payment to Goldman. The settlement amount was determined by the difference between the applicable exchange rates and the base amount of US$4,000 thousand. Conversely, if the NT dollar/US dollar exchange rate was above NT$31.50 per US dollar using the same valuation methodology, Goldman would have a settlement obligation to Chunghwa determined using a base amount of US$2,000 thousand. Further, if the exchange rate was at or above NT$32.70 per US dollar starting from December 12, 2007 at any time, the contract would be terminated at that time. In accordance with the terms of the contract, Chunghwa deposited US$3,000 thousand with Goldman with annual yield rate of 8%. On October 21, 2008, the exchange rate was above NT$32.70 per US dollar, so the contract was terminated at that time.

Net gain arising from financial assets and liabilities at fair value through profit or loss for the years ended December 31, 2009 and 2008 were $71,155 thousand (including realized settlement loss of $27,110 thousand and valuation gain of $98,265 thousand, respectively) and $477,792 thousand (including realized settlement loss of $46,210 thousand and valuation gain of $524,002 thousand, respectively).

 

6.	AVAILABLE-FOR-SALE FINANCIAL ASSETS

 

		December 31
		2009			2008
Open-end mutual funds		$	16,325,016		$	13,420,645
Domestic listed stocks			257,242			—
Real estate investment trust fund			102,122			194,226
Foreign listed stocks			—			546,520
		$	16,684,380		$	14,161,391

For the years ended December 31, 2009 and 2008, movements of unrealized gain or loss on financial instruments were as follows:

 

		Year Ended December 31
		2009				2008
Balance, beginning of year		$	(2,255,905	)		$	35,232
Recognized in stockholders’ equity			1,658,615				(3,174,015	)
Transferred to profit or loss			130,487				882,878
Balance, end of year		$	(466,803	)		$	(2,255,905	)

Global economic and financial circumstances have significantly changed. As a result, Chunghwa determined that the impairment losses of available for sale financial assets is other-than-temporary in nature, and recorded impairment losses of $85,349 thousand and $1,139,105 thousand for the years ended December 31, 2009 and 2008, respectively.

 

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7.	HELD-TO-MATURITY FINANCIAL ASSETS

 

		December 31
		2009			2008
Corporate bonds, nominal interest rate ranging from 0.764%-4.75% and 1.93%-2.95% for 2009 and 2008, respectively; effective interest rate ranging from 0.45%-2.95% and 1.8%-2.95% for 2009 and 2008, respectively		$	4,531,699		$	2,635,172
Bank debentures, nominal interest rate ranging from 1.865%-2.11% and 2.11%-3.85% for 2009 and 2008, respectively; effective interest rate ranging from 1.14%-2.9% and 2.33%-2.9% for 2009 and 2008, respectively			497,558			1,137,005
Collateralized loan obligation, nominal and effective interest rate was 2.175% for 2008			—			41,360
			5,029,257			3,813,537
Less: Current portion			1,099,595			769,435
		$	3,929,662		$	3,044,102

 

8.	ALLOWANCE FOR DOUBTFUL ACCOUNTS

 

		Year Ended December 31
		2009				2008
Balance, beginning of year		$	2,992,143			$	3,290,123
Provision for doubtful accounts			446,901				499,113
Accounts receivable written off			(664,176	)			(797,093	)
Balance, end of year		$	2,774,868			$	2,992,143

 

9.	OTHER MONETARY ASSETS - CURRENT

 

		December 31
		2009			2008
Accrued custodial receipts from other carriers		$	432,569		$	484,224
Other receivables			1,339,380			1,703,100
		$	1,771,949		$	2,187,324

 

10.	INVENTORIES, NET

 

		December 31
		2009			2008
Work in process		$	646,908		$	283,739
Merchandise			539,614			708,870
		$	1,186,522		$	992,609

The operating costs related to inventories were NT$6,983,989 thousand (including the valuation loss on inventories of NT$11,550 thousand), and NT$4,191,228 thousand (including the valuation loss on inventories of NT$23,320 thousand) for the years ended December 31, 2009 and 2008, respectively.

 

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11.	OTHER CURRENT ASSETS

 

		December 31
		2009			2008
Spare parts		$	2,348,894		$	2,511,153
Prepaid rents			804,687			840,889
Prepaid expenses			562,207			597,148
Miscellaneous			201,062			233,468
		$	3,916,850		$	4,182,658

 

12.	INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD

 

		December 31
		2009					2008
		Carrying Value			% of Owner- ship		Carrying Value			% of Owner- Ship
Listed
Senao International Co., Ltd. (“SENAO”)		$	1,331,859		29		$	1,331,443		29
Non-listed
Light Era Development Co., Ltd. (“LED”)			2,926,677		100			2,976,434		100
Chunghwa Investment Co., Ltd. (“CHI”)			1,651,391		89			829,716		49
Chunghwa Telecom Singapore Pte., Ltd. (“CHTS”)			1,407,519		100			791,161		100
Chunghwa System Integration Co., Ltd. (“CHSI”)			706,932		100			747,104		100
CHIEF Telecom Inc. (“CHIEF”)			447,647		69			427,848		69
Taiwan International Standard Electronics Co., Ltd. (“TISE”)			427,810		40			593,441		40
InfoExplorer Co., Ltd. (“IFE”)			276,472		49			—		—
Viettel-CHT Co., Ltd. (“Viettel-CHT”)			269,924		30			95,836		33
Donghwa Telecom Co., Ltd. (“DHT”)			230,528		100			221,537		100
Chunghwa International Yellow Pages Co., Ltd. (“CIYP”)			171,986		100			110,545		100
Skysoft Co., Ltd. (“SKYSOFT”)			89,913		30			84,992		30
KingWay Technology Co., Ltd. (“KWT”)			69,913		33			77,222		33
Chunghwa Telecom Global, Inc. (“CHTG”)			63,752		100			71,097		100
Spring House Entertainment Inc. (“SHE”)			57,095		56			45,113		56
So-Net Entertainment Taiwan (“So-net”)			30,920		30			—		—
Chunghwa Telecom Japan Co., Ltd. (“CHTJ”)			10,166		100			4,165		100
New Prospect Investments Holdings Ltd. (B.V.I.) (“New Prospect”)			—		100			—		100
Prime Asia Investments Group Ltd. (B.V.I.) (“Prime Asia”)			—		100			—		100
			8,838,645					7,076,211
Prepayments for long-term investments - InfoExplorer Co., Ltd. (“IFE”)			—		—			283,500		—
			8,838,645					7,359,711
		$	10,170,504				$	8,691,154

 

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On March 27, 2009, the board of directors of Chunghwa resolved to purchase 48,000 thousand common shares of Senao International Co., Ltd. (“SENAO”) through SENAO’s private placement. However, Chunghwa and SENAO did not complete the required procedures within the legal payment period; therefore, Chunghwa and SENAO decided to discontinue the private placement. SENAO engages mainly in selling and maintaining mobile phone and its peripheral products.

Chunghwa established 100% shares of Light Era Development Co., Ltd. (“LED”) by prepaying $3,000,000 thousand in January 2008. LED completed its incorporation on February 12, 2008. LED engages mainly in development of property for rent and sale.

Chunghwa invested in Chunghwa Investment Co., Ltd. (“CHI”) in September 2009 for $758,709 thousand. Chunghwa increased its ownership interest in CHI from 49% to 89%. CHI engages mainly in professional investing in telecommunication business and the telecommunication valued-added services.

Chunghwa established Chunghwa Telecom Singapore Pte., Ltd. (“CHTS”) in July 2008, for a purchase price of $200,000 thousand, and increased its investment in CHTS for $610,659 thousand and $579,280 thousand in July 2009 and September 2008. CHTS engages mainly in telecommunication wholesale, internet transfer services, international data, long distance call wholesales to carriers and the world satellite business. ST-1 telecommunications satellite is expected be retired in 2011; therefore, CHTS and SingTelSat Pte., Ltd. established a joint venture, ST-2 Satellite Ventures Pte., Ltd. (“STS”) in Singapore in October 2008 in order to maintain the current service. STS will engage in the installation and the operation of ST-2 telecommunications satellite.

Chunghwa prepaid $283,500 thousand to invest in InfoExplorer Co., Ltd. (“IFE”) and the record date of capital increase of IFE was January 5, 2009. Chunghwa acquired 49% of ownership. Chunghwa has control over IFE by obtaining above half of seats of the board of directors of IFE on January 20, 2009, which was IFE’s stockholder’s meeting. IFE mainly engages in information system planning and maintenance, software development, and information technology consultation services.

Chunghwa established Viettel-CHT Co., Ltd. (“Viettel-CHT”) with Viettel Co., Ltd. in Vietnam in April 2008, by investing NT$91,239 thousand cash. Chunghwa participated in the capital increase of Viettel-CHT in September 2009, by investing $197,088 thousand cash but its ownership interest of Viettel-CHT was decreased from 33% to 30%. Viettel-CHT engages mainly in IDC services.

Chunghwa invested in Donghwa Telecom Co., Ltd. (“DHT”) in September 2008 for a purchase price of $189,833 thousand. DHT engages mainly in international telecommunications, IP fictitious internet and internet transfer services.

Chunghwa invested in KingWay Technology Co., Ltd. (“KWT”) in January 2008, for a purchase price of $71,770 thousand. KWT engages mainly in publishing books, data processing and software services.

Chunghwa increased its ownership of Spring House Entertainment Inc. (“SHE”) from 30% to 56% in January 2008, for a purchase price of $39,800 thousand, and SHE becomes a subsidiary of Chunghwa. SHE engages mainly in network services, producing digital entertainment contents and broadband visual sound terrace development.

Chunghwa participated in So-net Entertainment Co., Ltd.’s capital increase on April 3, 2009, by investing $60,008 thousand cash, and acquired 30% of its shares. So-net Entertainment Co., Ltd. engages mainly in online service and sale of computer hardware.

Chunghwa established Chunghwa Telecom Japan Co., Ltd. (“CHTJ”), a 100% owned subsidiary in October 2008 by investing $6,140 thousand cash, and increased its investment on CHTJ by investing $11,151 thousand cash in January 2009. CHTJ engages mainly in telecommunication business, information processing and information providing service, development and sale of software and consulting services in telecommunication.

 

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Chunghwa has established New Prospect Investments Holdings Ltd. (B.V.I.) (“New Prospect”) and Prime Asia Investments Group Ltd. (B.V.I.) (“Prime Asia”) in March 2006, but not on operation stage yet. Both holding companies are operating as investment companies and Chunghwa has 100% ownership right in an amount of US$1 in each holding company.

The carrying values of the equity investees as of December 31, 2009 and 2008 and the equity in earnings for the years ended December 31, 2009 and 2008 are determined based on the audited financial statements of the investees for the same years as the Company.

All accounts of Chunghwa’s subsidiaries were included in Chunghwa’s consolidated financial statements.

 

13.	FINANCIAL ASSETS CARRIED AT COST

 

		December 31
		2009					2008
		Carrying Value			% of Owner- ship		Carrying Value			% of Owner- ship
Non-listed
Taipei Financial Center (“TFC”)		$	1,789,530		12		$	1,789,530		12
Industrial Bank of Taiwan II Venture Capital Co., Ltd. (“IBT II”)			200,000		17			200,000		17
Global Mobile Corp. (“GMC”)			127,018		11			127,018		11
iD Branding Ventures (“iDBV”)			75,000		8			75,000		8
RPTI International (“RPTI”)			34,500		10			34,500		12
Essence Technology Solution, Inc. (“ETS”)			—		9			10,000		9
			2,226,048					2,236,048
Prepayments for long-term investments in stocks - Taipei Financial Center (“TFC”)			—		—			285,859		—
		$	2,226,048				$	2,521,907

Chunghwa invested in IBT II in January 2008, for a purchase price of $200,000 thousand. IBT II completed its incorporation on February 13, 2008 and engages mainly in investment activities.

Chunghwa invested in GMC in December 2007, for a purchase price of $168,038 thousand for 16,796 thousand shares. GMC engages mainly in wire communication services and computer software wholesale and circuit engineering. The National Communications Commission (“NCC”) informed Chunghwa with the Communication Letter (#0974102087) on April 1, 2008 that its investment in GMC was not authorized by NCC, and notified Chunghwa on May 5, 2008 that Chunghwa should dispose of its investment in GMC no later than June 30, 2008, otherwise, NCC would fine Chunghwa according to the Telecommunication Act. In April 2008, Chunghwa disposed of a portion of its investment in GMC (4,100 thousand shares) and filed an appeal to NCC to suspend the enforcement. In July 2008, NCC resolved that according to the Administrative Penalty Act, Chunghwa could not divest of its investment in the short time period provided and that Chunghwa would not be subject to fines as noted above. In October 2008, NCC revoked the original decree about Chunghwa’s investment in GMC, therefore, Chunghwa did not dispose of its remaining holding in GMC.

After evaluating the financial assets carried at cost, Chunghwa determined the investment in RPTI was impaired and recognized an impairment loss of NT$15,000 thousand for the year ended December 31, 2008. RPTI completed a capital reduction to offset its deficits and as a result the number of shares held by Chunghwa was reduced from 9,234 thousand shares to 4,765 thousand shares. Subsequent to this capital reduction, RPTI raised additional capital through cash contributions. Chunghwa did not participate in the RPTI’s capital increase plan; therefore, Chunghwa’s ownership of RPTI is decreased to 10%.

 

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After evaluating the financial assets carried at cost, Chunghwa determined the investment in ETS was impaired and recognized an impairment loss of NT$10,000 thousand both in 2008 and 2009.

Chunghwa participated in TFC’s capital increase in October 2008 and prepaid $285,859 thousand. However, TFC is not expected to be able to collect enough amount of capital increase within a specific period; therefore TFC’s board of directors held a meeting on April 10, 2009 and resolved to withdraw its capital increase plan from Securities and Futures Bureau of Financial Supervisory Commission, Executive Yuan (“FSC”). TFC returned the prepayment to Chunghwa on May 8, 2009.

The above investments that do not have a quoted market price in an active market and whose fair values cannot be reliably measured are carried at original cost.

 

14.	OTHER MONETARY ASSETS - NONCURRENT

 

		December 31
		2009			2008
Piping Fund		$	1,000,000		$	1,000,000

As part of the government’s effort to upgrade the existing telecommunications infrastructure, Chunghwa and other public utility companies were required by the ROC government to contribute a total of $1,000,000 thousand to a Piping Fund administered by the Taipei City Government. This fund was used to finance various telecommunications infrastructure projects.

 

15.	PROPERTY, PLANT AND EQUIPMENT

 

		December 31
		2009			2008
Cost
Land		$	101,266,026		$	101,259,221
Land improvements			1,535,066			1,494,398
Buildings			62,669,377			62,612,157
Computer equipment			15,636,520			15,751,162
Telecommunications equipment			654,609,330			648,805,525
Transportation equipment			2,111,872			2,404,125
Miscellaneous equipment			7,062,450			7,247,977
Total cost			844,890,641			839,574,565
Revaluation increment on land			5,800,909			5,810,650
			850,691,550			845,385,215
Accumulated depreciation
Land improvements			951,240			898,156
Buildings			17,314,729			16,238,529
Computer equipment			11,755,940			11,590,417
Telecommunications equipment			518,037,372			502,974,534
Transportation equipment			1,884,332			2,194,104
Miscellaneous equipment			5,950,203			6,114,629
			555,893,816			540,010,369
Construction in progress and advances related to acquisition of equipment			15,715,083			15,989,495
Property, plant and equipment, net		$	310,512,817		$	321,364,341

 

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Pursuant to the related regulation, Chunghwa revalued its land owned as of April 30, 2000 based on the publicly announced value on July 1, 1999. These revaluations which have been approved by the Ministry of Auditing resulted in increases in the carrying values of property, plant and equipment of $5,986,074 thousand, liabilities for land value incremental tax of $211,182 thousand, and stockholder’s equity - other adjustments of $5,774,892 thousand.

The amendment to the Land Tax Act, relating to the article to permanently lower land value incremental tax, went effective from February 1, 2005. In accordance with the lowered tax rates, Chunghwa recomputed its land value incremental tax, and reclassified the reserve for land value incremental tax of $116,196 thousand to stockholders’ equity - other adjustments. As of December 31, 2009, the unrealized revaluation increment was decreased to $5,803,446 thousand by disposal of revaluation assets.

Depreciation on property, plant and equipment for the years ended December 31, 2009 and 2008 amounted to $34,891,495 thousand and $36,951,384 thousand, respectively. No interest expense was capitalized for the years ended December 31, 2009 and 2008.

 

16.	ACCRUED EXPENSES

 

		December 31
		2009			2008
Accrued salary and compensation		$	9,285,263		$	8,900,146
Accrued franchise fees			2,224,104			2,368,996
Accrued employees’ bonus and remuneration to directors and supervisors			1,842,140			1,764,807
Other accrued expenses			3,148,553			2,646,653
		$	16,500,060		$	15,680,602

 

17.	OTHER CURRENT LIABILITIES

 

		December 31
		2009			2008
Advances from subscribers		$	6,476,852		$	5,624,497
Payables to contractors			2,229,165			1,546,234
Amounts collected in trust for others			2,160,252			2,446,647
Payables to equipment suppliers			1,528,559			2,250,041
Refundable customers’ deposits			1,043,713			980,622
Miscellaneous			2,494,484			2,598,540
		$	15,933,025		$	15,446,581

 

18.	STOCKHOLDERS’ EQUITY

Under Chunghwa’s Articles of Incorporation, Chunghwa’s authorized capital is $120,000,000,000 which is divided into 12,000,000,000 common shares (at $10 par value per share), among which 9,696,808,181 shares are issued and outstanding as of December 31, 2009.

 

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On March 28, 2006, the board of directors approved the issuance of the 2 preferred shares, and the MOTC purchased the 2 preferred shares at par value on April 4, 2006. In accordance with the Articles of Incorporation of Chunghwa, the preferred shares would be redeemed by Chunghwa three years from the date of issuance at their par value. These preferred shares expired on April 4, 2009 and were redeemed on April 6, 2009.

For the purpose of privatizing Chunghwa, the MOTC sold 1,109,750 thousand common shares of Chunghwa in an international offering of securities in the form of American Depositary Shares (“ADS”) amounting to 110,975 thousand units (one ADS represents ten common shares) on the New York Stock Exchange on July 17, 2003. Afterwards, the MOTC sold 1,350,682 thousand common shares in the form of ADS amounting to 135,068 thousand units on August 10, 2005. Subsequently, the MOTC and Taiwan Mobile Co., Ltd. sold 505,389 thousand and 58,959 thousand common shares of Chunghwa, respectively, in the form of ADS totally amounting to 56,435 thousand units on September 29, 2006. The MOTC and Taiwan Mobile Co., Ltd. have sold 3,024,780 thousand common shares in the form of ADS amounting to 302,478 thousand units. As of December 31, 2009, the outstanding ADSs were 1,182,888 thousand common shares, which equaled approximately 118,289 thousand units and represented 12.20% of Chunghwa’s total outstanding common shares.

The ADS holders generally have the same rights and obligations as other common stockholders, subject to the provision of relevant laws. The exercise of such rights and obligations shall comply with the related regulations and deposit agreement, which stipulate, among other things, that ADS holders can, through deposit agents:

 

a.

Exercise their voting rights,

 

b.

Sell their ADSs, and

 

c.

Receive dividends declared and subscribe to the issuance of new shares.

Under the ROC Company Law, additional paid-in capital may only be utilized to offset deficits. For those companies having no deficits, additional paid-in capital arising from capital surplus can be used to increase capital stock and distribute to stockholders in proportion to their ownership at the ex-dividend date. Also, such amounts can only be declared as a stock dividend by Chunghwa at an amount calculated in accordance with the provisions of existing regulations. The combined amount of any portions capitalized each year may not exceed 10 percent of common stock issued. However, where a company undergoes an organizational change (such as a merger, acquisition, or reorganization) that results in the capitalization of undistributed earnings after the organizational change, the above restriction does not apply.

In addition, before distributing a dividend or making any other distribution to stockholders, Chunghwa must pay all outstanding taxes, recover any past losses and set aside a legal reserve equal to 10% of its net income, and depending on its business needs or requirements, may also set aside a special reserve. In accordance with the Articles of Incorporation, no less than 50% of the remaining earnings comprising remaining balance of net income, if any, plus cumulative undistributed earnings shall be distributed in the following order: (a) from 2% to 5% of distributable earnings shall be distributed to employees as employee bonus; (b) no more than 0.2% of distributable earnings shall be distributed to board of directors and supervisors as remuneration; and (c) cash dividends to be distributed shall not be less than 50% of the total amount of dividends to be distributed. If cash dividends to be distributed is less than $0.10 per share, such cash dividend shall be distributed in the form of common shares.

Chunghwa operates in a capital-intensive and technology-intensive industry and requires capital expenditures to sustain its competitive position in high-growth market. Thus, Chunghwa’s dividend policy takes into account future capital expenditure outlays. In this regard, a portion of the earnings may be retained to finance these capital expenditures. The remaining earnings can then be distributed as dividends if approved by the stockholders in the following year and will be recorded in the financial statements of that year.

 

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For the years ended December 31, 2009 and 2008, the accrual amounts for bonuses to employees and remuneration to directors and supervisors is based on management estimates including past experience and probable amount to be paid in accordance with Chunghwa’s Articles of Incorporation and Implementation Guidance for the Employee’s Bonus Distribution of Chunghwa Telecom Co., Ltd.

If the initial accrual amounts of the aforementioned bonus are significantly different from the amounts proposed by the board of directors, the difference is charged to the earnings of the year making the initial estimate. Otherwise, the difference between initial accrual amounts and the amounts resoluted in the shareholders’ meeting is charged to the earnings of the following year as a result of change of accounting estimate.

Under the ROC Company Law, the appropriation for legal reserve shall be made until the accumulated reserve equals the aggregate par value of the outstanding capital stock of Chunghwa. This reserve can only be used to offset a deficit, or when reaching 50% of the aggregate par value of the outstanding capital stock of Chunghwa, up to 50% of the reserve may, at the option of Chunghwa, be declared as a stock dividend and transferred to capital.

The appropriations and distributions of the 2008 and 2007 earnings of the company have been approved and resolved by the stockholders on June 19, 2009 and June 19, 2008 as follows:

 

		Appropriation and Distribution						Dividend Per Share
		2008			2007			2008			2007
Legal reserve		$	4,127,675		$	4,823,356		$	—		$	—
Special reserve			475			—			—			—
Reversal of special reserve			—			3,304			—			—
Cash dividends			37,138,775			40,716,130			3.83			4.26
Stock dividends			—			955,778			—			0.10
Employee bonus - cash			—			1,303,605			—			—
Employee bonus - stock			—			434,535			—			—
Remuneration to board of directors and supervisors			—			43,454			—			—

The amounts for bonuses to employees and remuneration to directors and supervisors approved in the stockholders’ meeting on June 19, 2009, were $1,629,915 thousand and $38,807 thousand, respectively. The bonus to employees was all settled in cash. The aforementioned approved amounts of the bonus to employees and the remuneration to directors and supervisors were different from the accrual amounts of $1,723,921 thousand and $40,886 thousand, respectively, reflected in the statement of income for the year ended December 31, 2008. The differences of $94,006 thousand and $2,079 thousand, respectively, were treated as change in estimates and were adjusted against earnings for the year ended December 31, 2009.

The stockholders, at a meeting held on June 19, 2009, resolved to transfer capital surplus in the amount of $9,696,808 thousand to common capital stock. The abovementioned 2009 capital increase proposal was effectively registered with FSC. The board of directors authorized the chairman of directors to decide the ex-dividend date of the aforementioned proposal and the chairman decided the ex-dividend date as August 9, 2009.

The stockholders, at the stockholders’ meeting held on June 19, 2009, also resolved to reduce the amount of capital in Chunghwa by a cash distribution to its stockholders in order to improve the financial condition of Chunghwa and better utilize its excess funds. The abovementioned 2009 capital reduction proposal was effectively approved by FSC. The board of directors of Chunghwa further authorized the chairman of board of directors of Chunghwa to designate the record date of capital reduction as of October 26, 2009. Subsequently, common capital stock was reduced by $9,696,808 thousand and the stock transfer date of capital reduction was January 28, 2010. The amount due to stockholders for capital reduction was paid in February 2010.

 

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The stockholders, at a special meeting held on August 14, 2008, resolved to transfer capital surplus in the amount of $19,115,554 thousand to common capital stock. The abovementioned 2008 capital increase proposal was effectively registered with FSC. The board of directors resolved the ex-dividend date of the aforementioned proposal as October 25, 2008.

The stockholders, at the stockholders’ meeting held on August 14, 2008, also resolved to reduce the amount of capital in Chunghwa by a cash distribution to its stockholders in order to improve the financial condition of Chunghwa and better utilize its excess funds. The capital reduction plan was effected by a transfer of capital surplus in the amount of $19,115,554 thousand to common capital stock and was effectively registered with FSC. Chunghwa designated December 30, 2008 as the record date and March 9, 2009 as the stock transfer date of capital reduction. Subsequently, common capital stock was reduced by $19,115,554 thousand and a liability for the same amount of cash to be distributed to stockholders was recorded. Such cash payment to stockholders was made in March 2009.

The stockholders, at a meeting held on June 15, 2007, resolved to transfer capital surplus in the amount of $9,667,845 thousand to common capital stock, and the capital increase proposal was effectively registered with FSC.

The stockholders, at the stockholders’ meeting held on June 15, 2007, also resolved to reduce the amount of capital in Chunghwa by a cash distribution to its stockholders in order to improve the financial condition of Chunghwa and better utilize its excess funds. The capital reduction plan was effected by a transfer of capital surplus in the amount of $9,667,845 thousand to common capital stock and was effectively registered with FSC. Chunghwa designated October 19, 2007 and December 29, 2007 as the record date and the stock transfer date of capital reduction, respectively. Subsequently, common capital stock was reduced by $9,667,845 thousand and a liability for the actual amount of cash to be distributed to stockholders of $9,557,777 thousand was recorded. The difference between the reduction in common capital stock and the distribution amount represents treasury stock of $110,068 thousand held by Chunghwa and concurrently cancelled. Such cash payment to stockholders was made in January 2008.

The appropriation of Chunghwa’s 2009 earnings has not been resolved by the board of directors as of the report date. Information on the appropriation of Chunghwa’s 2009 earnings, employee bonus and remuneration to directors and supervisors resolved by the board of directors and approved by the stockholders will be available at the Market Observation Post System website.

 

19.	TREASURY STOCK (COMMON STOCK IN THOUSANDS OF SHARES)

 

		Year Ended December 31
		2009		2008
Balance, beginning of year				110,068
Decrease		—		(110,068	)
Balance, end of year		—		—

According to the Securities and Exchange Act of the ROC, total shares of treasury stock shall not exceed 10% of Chunghwa’s stock issued. The total amount of the repurchased shares shall not be more than the total amount of retained earnings, capital surplus and realized additional paid-in capital. The Company shall neither pledge treasury stock nor exercise stockholders’ rights on these shares, such as rights to dividends and to vote.

In order to maintain its credit and stockholders’ equity, Chunghwa repurchased 121,075 thousand shares of treasury stock for $7,217,562 thousand from August 29, 2007 to October 25, 2007. On December 29, 2007, Chunghwa cancelled 11,007 thousand shares of treasury stock by reducing common stock of $110,068 thousand. The remaining of 110,068 thousand shares of treasury stock amounted to $7,107,494 thousand was cancelled on February 21, 2008.

 

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20.	COMPENSATION, DEPRECIATION AND AMORTIZATION EXPENSES

 

		Year Ended December 31, 2009
		Operating Costs			Operating Expenses			Total
Compensation expense
Salaries		$	12,124,805		$	8,238,199		$	20,363,004
Insurance			965,506			664,339			1,629,845
Pension			1,494,350			1,068,898			2,563,248
Other compensation			8,750,957			5,937,562			14,688,519
		$	23,335,618		$	15,908,998		$	39,244,616
Depreciation expense		$	33,018,154		$	1,873,341		$	34,891,495
Amortization expense		$	922,276		$	158,308		$	1,080,584
		Year Ended December 31, 2008
		Operating Costs			Operating Expenses			Total
Compensation expense
Salaries		$	12,108,552		$	8,282,400		$	20,390,952
Insurance			900,020			617,331			1,517,351
Pension			1,606,127			1,181,250			2,787,377
Other compensation			8,472,465			5,766,107			14,238,572
		$	23,087,164		$	15,847,088		$	38,934,252
Depreciation expense		$	34,925,146		$	2,026,238		$	36,951,384
Amortization expense		$	880,086		$	136,596		$	1,016,682

 

21.	INCOME TAX

 

a.

A reconciliation between income tax expense computed by applying the statutory income tax rate to income before income tax and income tax payable is as follows:

 

		Year Ended December 31
		2009				2008
Income tax expense computed at statutory income tax rate		$	14,040,845			$	14,618,206
Add (deduct) tax effects of:
Permanent differences			(167,558	)			(135,085	)
Temporary differences			(1,012,153	)			325,840
10% undistributed earning tax			6,441				—
Investment tax credits			(1,422,308	)			(1,502,112	)
Income tax payable		$	11,445,267			$	13,306,849

The balance of income tax payable as of December 31, 2009 and 2008 was shown net of prepaid income tax.

 

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b.

Income tax expense consists of the following:

 

		Year Ended December 31
		2009				2008
Income tax payable		$	11,445,267			$	13,306,849
Income tax - separated			62,278				296,901
Income tax - deferred			1,092,773				(178,971	)
Adjustments of prior years’ income tax			(194,323	)			37,744
		$	12,405,995			$	13,462,523

In May 2009, the Legislative Yuan passed the amendment of Article 5 of the Income Tax Law, which reduces the income tax rate of profit-seeking enterprises from 25% to 20% since 2010. The Company recalculated its deferred income tax assets and liabilities in accordance with the amended Article and recorded the resulting difference as an income tax expense or benefit.

 

c.

Net deferred income tax assets (liabilities) consists of the following:

 

		December 31
		2009				2008
Current
Provision for doubtful accounts		$	349,890			$	478,196
Unrealized accrued expense			50,128				22,384
Abandonment of equipment not approved by National Tax Administration			4,628				40,239
Unrealized foreign exchange loss (gain)			2,850				(35,568	)
Valuation (gain) loss on financial instruments, net			(9,181	)			13,696
Other			12,275				23,460
			410,590				542,407
Valuation allowance			(349,890	)			(478,196	)
Net deferred income tax assets-current		$	60,700			$	64,211
Noncurrent
Accrued pension cost		$	336,167			$	1,407,460
Impairment loss			62,256				80,225
Net deferred income tax assets-noncurrent		$	398,423			$	1,487,685

 

d.

The related information under the Integrated Income Tax System is as follows:

 

		December 31
		2009			2008
Balance of Imputation Credit Account (“ICA”)		$	7,429,628		$	7,285,595

The actual and the estimated creditable ratios distribution of Chunghwa’s 2008 and 2009 for earnings were 30.61% and 26.50%, respectively. The imputation credit allocated to stockholders is based on its balance as of the date of dividend distribution. The estimated creditable ratio may change when the actual distribution of imputation credit is made.

 

e.

Undistributed earnings information

All Chunghwa’s earnings generated prior to June 30, 1998 have been appropriated.

 

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Chunghwa’s income tax returns have been examined by tax authorities through 2005.

 

22.	EARNINGS PER SHARE

EPS was calculated as follows:

 

		Amount (Numerator)								Weighted- average Number of Common Shares		Earnings Per Share (Dollars)
		Income Before Income Tax				Net Income				Outstanding (Thousand) (Denominator)		Income Before Income Tax			Net Income
Year ended December 31, 2009
Basic EPS:
Income attributable to stockholders		$	56,163,421			$	43,757,426			9,696,808		$	5.79		$	4.51
Effect of dilutive potential common stock
SENAO’s stock options			(7,707	)			(7,707	)		—
Employee bonus			—				—			28,806
Diluted EPS
Income attributable to stockholders (including effect of dilutive potential common stock)		$	56,155,714			$	43,749,719			9,725,614		$	5.77		$	4.50
Year ended December 31, 2008
Basic EPS:
Income attributable to stockholders		$	58,472,865			$	45,010,342			9,696,808		$	6.03		$	4.64
Effect of dilutive potential common stock
SENAO’s stock options			(13,775	)			(13,775	)		—
Employee bonus			—				—			20,681
Diluted EPS
Income attributable to stockholders (including effect of dilutive potential common stock)		$	58,459,090			$	44,996,567			9,717,489		$	6.02		$	4.63

In March 2007, the ARDF issued an Interpretation 96-052 that requires companies to recognize bonuses paid to employees, directors and supervisors as an expense rather than an appropriation of earnings beginning from January 1, 2008. According to the Interpretation 97-169 issued by ARDF in May 2008, Chunghwa presumed that the employees bonuses to be paid will be settled in shares and takes those shares into consideration when calculating the weighted average number of outstanding shares used in the calculation of diluted EPS if the shares have a dilutive effect for the years ended December 31, 2009 and 2008. The number of shares is calculated by dividing the amount of bonuses by the closing price of the Chunghwa’s shares of the balance sheet date. The dilutive effect of the shares needs to be considered until the stockholders resolve the number of shares to be distributed to employees in their meeting in the following year.

The diluted earnings per share for the years ended December 31, 2009 and 2008 were due to the effect of potential common stock of stock options issued by SENAO.

 

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23.	PENSION PLAN

Chunghwa completed privatization plans on August 12, 2005. Chunghwa is required to pay all accrued pension obligations including service clearance payment, lump sum payment under civil service plan, additional separation payments, etc. upon the completion of the privatization in accordance with the Statute Governing Privatization of Stated-owned Enterprises. After paying all pension obligations for privatization, the plan assets of Chunghwa should be transferred to the Fund for Privatization of Government-owned Enterprises (the “Privatization Fund”) under the Executive Yuan. On August 7, 2006, Chunghwa transferred the remaining balance of fund to the Privatization Fund. However, according to the instructions of MOTC, Chunghwa would, on behalf of the MOTC, pay all accrued pension obligations including service clearance payment, lump sum payment under civil service plan, additional separation payments, etc. upon the completion of the privatization.

The pension plan under the Labor Pension Act of ROC (the “LPA”) is effective beginning July 1, 2005 and this pension mechanism is considered as a defined contribution plan. Based on the LPA, Chunghwa makes monthly contributions to employees’ individual pension accounts at 6% of monthly salaries and wages.

Chunghwa’s pension plan is considered as a defined benefit plan under the Labor Standards Law that provide benefits based on an employee’s length of service and average six-month salary prior to retirement. Chunghwa contributes an amount at 15% or less of salaries paid each month to their respective pension funds (the Funds), which are administered by the Labor Pension Fund Supervisory Committee (the Committee) and deposited in the names of the Committees in the Bank of Taiwan.

The Company used December 31 as the measurement date for their pension plans.

Pension costs of Chunghwa were $2,855,647 thousand ($2,732,388 thousand subject to defined benefit plan and $123,259 thousand subject to defined contribution plan) and $2,871,428 thousand ($2,774,274 thousand subject to defined benefit plan and $97,154 thousand subject to defined contribution plan) for the years ended December 31, 2009 and 2008, respectively.

Pension information of the defined benefit plan was summarized as follows:

 

a.

Components of net periodic pension cost

 

		Year Ended December 31
		2009				2008
Service cost		$	2,693,006			$	2,658,562
Interest cost			184,279				185,873
Expected return on plan assets			(140,875	)			(82,006	)
Amortization of unrecognized loss			(4,022	)			(2,529	)
Curtailment/settlement loss to be recognized			—				14,374
		$	2,732,388			$	2,774,274

 

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b.

Reconciliation between the fund status and accrued pension cost is summarized as follows:

 

		December 31
		2009				2008
Benefit obligation
Vested benefit obligation		$	(7,440,999	)		$	(5,658,116	)
Non-vested benefit obligation			(3,156,229	)			(2,832,135	)
Accumulated benefit obligation			(10,597,228	)			(8,490,251	)
Additional benefit obligation			(1,387,020	)			(930,915	)
Projected benefit obligation			(11,984,248	)			(9,421,166	)
Fair values of plan assets			10,787,564				4,282,694
Funded status			(1,196,684	)			(5,138,472	)
Unrecognized prior service cost effect			(45,754	)			(49,776	)
Amortization of unrecognized net loss (gain)			34,481				23,860
Accrued pension liabilities		$	(1,207,957	)		$	(5,164,388	)
c.        Vested benefit		$	10,635,994			$	7,664,921
d.        Actuarial assumptions
Discount rate used in determining present value			2.00	%			2.00	%
Rate of compensation increase			1.00	%			1.00	%
Rate of return on plan assets			1.50	%			2.50	%

 

e.

Contributions and payments of the Fund

 

		Year Ended December 31
		2009			2008
Contributions		$	6,645,316		$	1,515,234
Payments		$	177,500		$	99,293

 

24.	TRANSACTIONS WITH RELATED PARTIES

The ROC Government, one of Chunghwa’s customers held significant equity interest in Chunghwa. Chunghwa provides fixed-line services, wireless services, Internet and data and other services to the various departments and institutions of the ROC Government and other state-owned enterprises in the normal course of business and at arm’s-length prices. The information on service revenues from government bodies and related organizations have not been provided because details of the type of transactions were not summarized by Chunghwa. Chunghwa believes that all costs of doing business are reflected in the financial statements.

 

a.

Chunghwa engages in business transactions with the following related parties:

 

Company		Relationship
Senao International Co., Ltd. (“SENAO”)		Subsidiary
Light Era Development Co., Ltd. (“LED”)		Subsidiary
Chunghwa Telecom Singapore Pte., Ltd. (“CHTS”)		Subsidiary
CHIEF Telecom, Inc. (“CHIEF”)		Subsidiary
InfoExplorer Co., Ltd. (“IFE”)		Subsidiary
Chunghwa Telecom Japan Co., Ltd. (“CHTJ”)		Subsidiary
Chunghwa International Yellow Pages Co., Ltd. (“CIYP”)		Subsidiary

(Continued)

 

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Company		Relationship
Chunghwa System Integration Co., Ltd. (“CHSI”)		Subsidiary
Spring House Entertainment Inc. (“SHE”)		Subsidiary
Chunghwa Telecom Global, Inc. (“CHTG”)		Subsidiary
Donghwa Telecom Co., Ltd. (“DHT”)		Subsidiary
New Prospect Investments Holdings Ltd. (B.V.I.) (“New Prospect”)		Subsidiary
Prime Asia Investments Group Ltd. (B.V.I.) (“Prime Asia”)		Subsidiary
Chunghwa Investment Co., Ltd. (“CHI”)		Equity-method investee before Chunghwa obtained control over CHI on September 9, 2009
Chunghwa Investment Holding Company (“CIHC”)		Subsidiary of CHI before Chunghwa obtained control over CHI on September 9, 2009
Chunghwa Precision Test Tech. Co., Ltd. (“CHPT”)		Subsidiary of CHI before Chunghwa obtained control over CHI on September 9, 2009
Unigate Telecom Inc. (“Unigate”)		Subsidiary of CHIEF
CHIEF Telecom (Hong Kong) Limited (“CHK”)		Subsidiary of CHIEF
Chief International Corp. (“CIC”)		Subsidiary of CHIEF
Concord Technology Co., Ltd. (“Concord”)		Subsidiary of CHSI
Glory Network System Service (Shanghai) Co., Ltd. (“Glory”)		Subsidiary of Concord
Senao International (Samoa) Holding Ltd. (SIS)		Subsidiary of SENAO
Senao International HK Limited (SIHK)		Subsidiary of SENAO
CHI One Investment Co., Ltd. (“COI”)		Subsidiary of CHI
Taiwan International Standard Electronics Co., Ltd. (“TISE”)		Equity-method investee
So-net Entertainment Taiwan (“So-net”)		Equity-method investee
Skysoft Co., Ltd. (“SKYSOFT”)		Equity-method investee
Senao Networks, Inc. (“SNI”)		Equity-method investee of SENAO
ELTA Technology Co., Ltd. (“ELTA”)		Equity-method investee before Chunghwa sold all shares in July 2008

(Concluded)

 

b.

Significant transactions with the above related parties are summarized as follows:

 

		December 31
		2009					2008
		Amount			%		Amount			%
1)      Receivables
Trade notes and accounts receivable
SENAO		$	261,458		68		$	178,878		52
CHSI			29,422		8			41,256		12
CHIEF			23,660		6			20,906		6
CIYP			22,899		6			38,782		11
CHTG			20,399		5			18,618		5
DHT			10,112		3			9,155		3
SHE			7,706		2			10,863		3
CHTJ			3,780		1			—		—
LED			—		—			22,566		7
Others			3,782		1			1,992		1
		$	383,218		100		$	343,016		100

 

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		December 31
		2009					2008
		Amount			%		Amount			%
2)      Payables
Trade notes payable, accounts payable and accrued expenses
SENAO		$	616,052		33		$	606,990		27
CHSI			426,674		23			628,485		28
TISE			271,290		14			492,883		22
CIYP			88,527		5			35,198		2
CHIEF			51,554		3			34,215		2
DHT			39,284		2			17,063		1
CHTG			31,014		2			14,867		1
SKYSOFT			14,218		1			—		—
IFE			11,382		—			—		—
SHE			3,025		—			14,782		—
Others			6,830		—			2,947		—
			1,559,850		83			1,847,430		83
Payables to contractors
TISE			42,309		2			26,188		1
CHSI			449		—			53,502		2
			42,758		2			79,690		3
Amounts collected in trust for others
SENAO			247,091		13			244,291		11
CIYP			23,033		2			61,273		3
Others			2,985		—			4,235		—
			273,109		15			309,799		14
		$	1,875,717		100		$	2,236,919		100
		Year Ended December 31
		2009					2008
		Amount			%		Amount			%
3)      Revenues
SENAO		$	999,821		1		$	1,634,017		1
CHIEF			229,335		—			208,227		—
So-net			60,227		—			—		—
CHTG			59,288		—			140,416		—
CHSI			34,879		—			32,865		—
SKYSOFT			34,485		—			32,738		—
CIYP			19,168		—			23,499		—
IFE			14,336		—			—		—
CHTS			12,794		—			—		—
CHTJ			10,291		—			—		—
CHPT			6,641		—			6,743		—
ELTA			—		—			9,831		—
Others			15,481		—			11,047		—
		$	1,496,746		1		$	2,099,383		1

 

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		Year Ended December 31
		2009					2008
		Amount			%		Amount			%
4)      Operating costs and expenses
SENAO		$	5,172,852		5		$	6,667,907		5
TISE			481,743		—			538,389		—
CHSI			441,564		—			401,740		—
CHIEF			309,498		—			207,345		—
IFE			111,190		—			—		—
CIYP			84,334		—			50,679		—
SHE			83,868		—			51,836		—
CHTG			67,139		—			41,122		—
SKYSOFT			21,870		—			—		—
DHT			14,196		—			8,599		—
CHTS			13,613		—			—		—
ELTA			—		—			189,744		—
Others			14,997		—			14,482		—
		$	6,816,864		5		$	8,171,843		5
5)      Acquisition of property, plant and equipment
TISE		$	1,336,564		6		$	849,985		3
CHSI			771,878		3			1,388,118		5
CHTG			21,770		—			56,740		—
IFE			16,857		—			—		—
SENAO			268		—			1,701		—
SNI			—		—			355		—
		$	2,147,337		9		$	2,296,899		8

Chunghwa sold the land with a carrying value of $936,016 thousand to Light Era Development Co., Ltd. (“LED”) at the price of $2,421,932 thousand during the year ended December 31, 2008. However, since the gain on disposal of land amounting to $1,485,916 thousand is unrealized, the gain was recognized as deferred credit - profit on intercompany transactions, and will not be recognized as revenue till the gain is realized in the future.

Chunghwa sold the land with a carrying value of $378,927 thousand to LED at price of $207,030 thousand in 2008 and resulted in a disposal loss amounting to $171,897 thousand. The disposal loss on land is unrealized and the unrealized loss is included in other assets - other. The unrealized loss is not recognized in earnings until it is sold to the third party and realized in the future.

The foregoing transactions with related parties were conducted as arm’s length transactions, except for the transactions with SENAO, CHIEF, CIYP, LED, and IFE were determined in accordance with mutual agreements.

 

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c.

The compensation of directors, supervisors and managements is showed as follows:

 

		Year Ended December 31
		2009			2008
Salaries		$	51,019		$	48,355
Compensations			40,123			35,978
Bonus			47,168			48,238
		$	138,310		$	132,571

 

25.	SIGNIFICANT COMMITMENTS AND CONTINGENCIES

As of December 31, 2009, Chunghwa’s remaining commitments under non-cancelable contracts with various parties were as follows:

 

a.

Acquisition of land and buildings of $229,522 thousand.

 

b.

Acquisition of telecommunications equipment of $18,006,427 thousand.

 

c.

Contract to print billing, envelopes and marketing gifts of $60,111 thousand.

 

d.

Chunghwa also has non-cancelable operating leases covering certain buildings, computers, computer peripheral equipment and operating system software under contracts that expire in various years. Future lease payments were as follows:

 

		Rental Amount
2010		$	1,662,451
2011			1,369,972
2012			930,086
2013			601,089
2014 and thereafter			444,485

 

e.

A commitment to contribute $2,000,000 thousand to a Piping Fund administered by the Taipei City Government, of which $1,000,000 thousand was contributed by Chunghwa on August 15, 1996 (classified as long-term investment - other monetary assets). If the fund is not sufficient, Chunghwa will contribute the remaining $1,000,000 thousand upon notification from the Taipei City Government. Based on Chunghwa’s understanding of the Piping Fund terms, if the project is considered to be no longer necessary by the ROC government, Chunghwa will receive back its proportionate share of the net equity of the Piping Fund upon its dissolution. Chunghwa does not know when its contribution to the Piping Fund will be returned; therefore, Chunghwa did not discount the face amount of its contribution on the Piping Fund.

 

f.

A portion of the land used by Chunghwa during the period July 1, 1996 to December 31, 2004 was co-owned by Chunghwa and Chunghwa Post Co., Ltd. (the former Chunghwa Post Co., Ltd. directorate General of Postal Service). In accordance with the claims process in Taiwan, on July 12, 2005, the Taiwan Taipei District Court sent a claim notice to Chunghwa to reimburse Chunghwa Post Co., Ltd. in the amount of $767,852 thousand for land usage compensation due to the portion of land usage area in excess of Chunghwa’s ownership and along with interest calculated at 5% interest rate from June 30, 2005 to the payment date. Chunghwa stated that both parties have the right to use co-management land without consideration. Chunghwa Post Co., Ltd. can’t request payment for land compensation. Furthermore, Chunghwa believes that the computation used to derive the land usage compensation amount is inaccurate because most of the compensation amount has expired as result of the expiration clause. Therefore, Chunghwa has filed an appeal at the Taiwan Taipei District Court. On March 30, 2009, the Taiwan Taipei District Court rendered its judgment that Chunghwa only need to pay $16,870 thousand along with interest calculated at 5% per annum from July 23, 2005 and 4% of the court fees as the court judgment compensation. However, Chunghwa Post Co., Ltd. did not accept the judgment and filed an appeal at Taiwan High Court. Chunghwa also filed an appeal at the Taiwan High Court within the statutory period. As of the date of the audit report, the appeal is still in process.

 

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g.

Giga Media filed a civil action against Chunghwa with the Taiwan Taipei District Court (the “Court”) on June 12, 2008. The complaint alleged that Chunghwa infringed Giga Media’s ROC Patent No. I 258284 which is a Point-to-Point Protocol over Ethernet (“PPPoE”) technique used to launch fixed IP of ADSL. Giga Media is seeking damages of $500,000 thousand and interest calculated at 5% for the period from one day following the date Chunghwa received the official notification from the Court to the payment date. Giga Media withdrew this civil action on October 2, 2009.

 

26.	FAIR VALUE OF FINANCIAL INSTRUMENTS

 

a.

Carrying amounts and fair value of financial instruments were as follows:

 

		December 31
		2009						2008
		Carrying Amount			Fair Value			Carrying Amount			Fair Value
Assets
Cash and cash equivalents		$	68,393,379		$	68,393,379		$	77,137,903		$	77,137,903
Financial assets at fair value through profit or loss			6,677			6,677			258,076			258,076
Available-for-sale financial assets			16,684,380			16,684,380			14,161,391			14,161,391
Held-to-maturity financial assets - current			1,099,595			1,099,595			769,435			769,435
Trade notes and accounts receivable, net			11,065,325			11,065,325			10,190,150			10,190,150
Receivables from related parties			383,218			383,218			343,016			343,016
Other current monetary assets			1,771,949			1,771,949			2,187,324			2,187,324
Investments accounted for using equity method			10,170,504			12,287,033			8,691,154			9,620,760
Financial assets carried at cost			2,226,048			2,226,048			2,521,907			2,521,907
Held-to-maturity financial assets - noncurrent			3,929,662			3,929,662			3,044,102			3,044,102
Other noncurrent monetary assets			1,000,000			1,000,000			1,000,000			1,000,000
Refundable deposits			1,408,706			1,408,706			1,282,539			1,282,539
Liabilities
Financial liabilities at fair value through profit or loss			—			—			106,896			106,896
Trade notes and accounts payable			8,346,932			8,346,932			9,349,489			9,349,489
Payables to related parties			1,875,717			1,875,717			2,236,919			2,236,919
Accrued expenses			16,500,060			16,500,060			15,680,602			15,680,602
Due to stockholders for capital reduction			9,696,808			9,696,808			19,115,554			19,115,554
Payables to contractors (included in “other current liabilities”)			2,229,165			2,229,165			1,546,234			1,546,234
Amounts collected in trust for others (included in “other current liabilities”)			2,160,252			2,160,252			2,446,647			2,446,647
Payables to equipment suppliers (included in “other current liabilities”)			1,528,559			1,528,559			2,250,041			2,250,041
Refundable customers’ deposits (included in “other current liabilities”)			1,043,713			1,043,713			980,622			980,622
Hedging derivative financial liabilities (included in “other current liabilities”)			—			—			27,616			27,616
Customers’ deposits			5,940,403			5,940,403			6,098,605			6,098,605

 

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b.

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

 

1)

The fair values of certain financial instruments recognized in the balance sheet generally correspond to the market prices of the financial assets. Because of the short maturities of these instruments, the carrying value represents a reasonable basis to estimate fair values. This method does not apply to the financial instruments discussed in Notes 2 and 3 below.

 

2)

If the financial instruments have quoted market prices in an active market, the quoted market prices are viewed as fair values. If the market prices of the other financial instruments are not readily available, valuation techniques are used incorporating estimates and assumptions that are consistent with prevailing market conditions.

 

3)

Long-term investments are based on the net asset values or carrying values of the investments in investees, if quoted market prices are not available.

 

c.

Fair values of financial assets and liabilities using quoted market prices or valuation techniques were as follow:

 

Amount Based on Quoted Market Price

Amount Determined Using Valuation Techniques