Edgar Filing: CHUNGHWA TELECOM CO LTD

Form 6-K

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 October 27, 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 )

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: 2010/10/27


Chunghwa Telecom Co., Ltd.

By:		/S/ SHU YEH
Name:		Shu Yeh
Title:		Senior Vice President CFO

Exhibit


Exhibit		Description

1		Press Release to Report Operating Results for the Third Quarter of 2010

2		Financial Statements for the Nine Months Ended September 30, 2010 and 2009 and Independent Accountants’ Review Report (Stand Alone)

3		Consolidated Financial Statements for the Nine Months Ended September 30, 2010 and 2009 and Independent Accountants’ Review Report

4		GAAP Reconciliations of Consolidated Financial Statements for the Nine Months Ended September, 2010 and 2009

LOGO

Chunghwa Telecom Reports Operating Results for

the Third Quarter of 2010

Taipei, Taiwan, R.O.C. October 27, 2010 - Chunghwa Telecom Co., Ltd. (TAIEX: 2412; NYSE: CHT) (“Chunghwa” or “the Company”), today reported its operating results for the third quarter and first nine months of 2010. All figures are presented on a consolidated basis and were prepared in accordance with generally accepted accounting principles of the Republic of China (“ROC GAAP”).

Dr. Shyue-Ching Lu, Chairman of Chunghwa Telecom, said, “I’m pleased to report a 1.6% year-over-year rise in revenue during the third quarter of 2010, driven by the continuing economic recovery and the success of our marketing initiatives. The solid revenue mix from our core business was boosted by an increase in mobile value-added services, Internet services and broadband access revenues. Our prudent cost management initiatives resulted in stable operating income, with net income growing 9.5% year-over-year due to the tax rate reduction from 25% to 17%. Looking ahead, we expect to be able to report satisfactory performance for the full year 2010, with fourth quarter revenue projected to be NT$46.80 billion.”

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

Financial Highlights for the Third Quarter of 2010:

•

Total consolidated revenue increased by 1.6% to NT$50.9 billion

•

Mobile communications business revenue increased by 1.0% to NT$22.3 billion; mobile value added revenue increased by 32.3% to NT$2.8 billion

•

Internet business revenue increased by 10.2% to NT$6.4 billion

•

Domestic fixed communications business revenue decreased by 1.1% to NT$17.5 billion; broadband access revenue increased by 3.0% to NT$5.1 billion

•

International fixed communications business revenue decreased by 1.9% to NT$4.0 billion

•

Total operating costs and expenses increased by 1.5% to NT$36.4 billion

•

Net income totaled NT$12.0 billion, representing an increase of 9.5%

•

Basic earnings per share (EPS) increased by 9.5% to NT$1.23

Financial Highlights for the First Nine Months of 2010:

•

Total consolidated revenue increased by 2.0% to NT$150.1 billion

•

Mobile communications business revenue increased by 3.1% to NT$66.6 billion

•

Internet business revenue increased by 6.4% to NT$18.3 billion

•

Domestic fixed communications business revenue decreased by 1.7% to NT$52.1 billion; broadband access revenue increased by 2.0% to NT$15.2 billion

•

International fixed communications business revenue increased by 1.5% to NT$11.7 billion

•

Total operating costs and expenses increased by 1.8% to NT$105.9 billion

•

Net income totaled NT$36.9 billion, representing an increase of 11.3%

•

Basic EPS increased by 11.3% to NT$3.81

Revenue

Chunghwa’s total consolidated revenue for the third quarter of 2010 increased by 1.6% year-over-year to NT$50.9 billion, of which 34.5% was from its domestic fixed business, 43.8% was from its mobile business, 12.6% was from its Internet business, 7.9% was from its international fixed business and the remainder was from other business segments. The primary reasons for the year-over-year increase were the economic recovery and the Company’s marketing initiatives.

Domestic fixed line business revenue totaled NT$17.5 billion, representing a decrease of 1.1% year-over-year. Local revenues decreased by 2.1% year-over-year to NT$8.1 billion, mainly due to mobile and Voice over Internet Protocol (VOIP) substitution. The 17.1% decline in domestic long-distance revenues to NT$1.7 billion was also due to mobile and VOIP substitution, and the mandated tariff reduction.

Broadband access revenue, including Asymmetric Digital Subscriber Line (“ADSL”) and Fiber to the x (“FTTx”), increased by 3.0% year-over-year to NT$5.1 billion. Although ADSL access revenue decreased as more ADSL subscribers migrated to fiber solutions, the decrease was fully offset by growth in FTTx access revenue. Chunghwa believes that this migration will continue as customers continue to migrate to FTTx services, and that broadband revenue will therefore increase over time.

Mobile revenue increased by 1.0% year-over-year to NT$22.3 billion, mainly due to growth in mobile VAS revenue relating to the Company’s smartphone promotion and handset sales.

Internet revenue increased by 10.2% to NT$6.4 billion, mainly attributable to Internet services growth, which was driven by the increase in broadband subscribers and the migration of ADSL subscribers to fiber solutions.

International fixed-line revenue decreased by 1.9% to NT$4.0 billion, mainly due to VOIP substitution and market competition that was partially offset by growth in leased line revenue.

Finally, other revenue increased by 70.6% to NT$0.6 billion in the third quarter of 2010 compared to the same period of 2009, primarily due to the consolidation of subsidiaries.

For the first nine months of 2010, total revenue was NT$150.1 billion, a 2.0% increase from the same period last year, with the domestic fixed business accounting for 34.7%, the mobile business contributing 44.4%, the Internet business 12.2%, the international fixed business 7.8%, and the remainder from others.

Costs and Expenses

Total operating costs and expenses for the third quarter of 2010 were NT$36.4 billion, an increase of 1.5% year-over-year, mainly due to the increased cost of corporate Information and Communications Technology (“ICT”) services and corporate solutions, and the performance-based bonus accrual relating to net income growth.

Total operating costs and expenses for the first nine months of 2010 increased 1.8% year-over-year to NT$105.9 billion, due to the increased performance-based bonus accrual and cost of sales.

Income Tax

Income tax expenses for the third quarter of 2010 were NT$2.3 billion, representing a 27% decrease compared to the same period of 2009. This decrease resulted from the government’s income tax rate reduction from 25% to 17% this year.

EBITDA/Operating income/Net Income

Operating income for the third quarter of 2010 increased by 1.8% year-over-year to NT$14.4 billion. EBITDA decreased by 1.2% to NT$22.9 billion, primarily as a result of the mandated National Communications Commission (“NCC”) tariff reduction and changing cost structure. The Company’s EBITDA margin and operating income margin for the third quarter of 2010 were 45.0% and 28.4%, respectively, compared to 46.3% and 28.3%, respectively, for the same period of 2009.

Net income for the third quarter of 2010 increased by 9.5% year-over-year to NT$12.0 billion, primarily due to the revenue growth and lower income tax rate.

For the first nine months of 2010, operating income amounted to NT$44.2 billion, a rise of 2.3% year-over-year. EBITDA decreased by 0.9% to NT$69.9 billion. Net income reached NT$36.9 billion, a 11.3% increase, mainly due to the revenue growth and income tax rate reduction.

Capital Expenditure (“Capex”)

Total capex for the third quarter of 2010 amounted to NT$6.2 billion, representing a decrease of 1.4% year-over-year. Of the NT$6.2 billion in capex, 55.4% was spent on the domestic fixed communications business, 27.4% on the mobile communications business, 7.4% on the Internet business, 7.0% on the international fixed communications business and the remainder was used for other purposes.

Cash Flow

Cash flow from operating activities for the third quarter of 2010 was NT$19.5 billion, a 28.1% increase compared to the same period of 2009.

As of September 30, 2010, the Company’s cash and cash equivalents had increased 20.9% year-over year to NT$67.4 billion.

Performance Highlights by Business Line:

Domestic Fixed/Broadband/HiNet Business

•

As of the end of September 2010, the Company maintained its leading fixed-line market position, with fixed-line subscribers totaling 12.3 million.

•

Total broadband subscribers amounted to 4.3 million as of September 30, 2010 , among which 1.96 million were FTTx subscribers, accounting for 45.1% of the Company’s total broadband subscriber base. During the third quarter, Chunghwa continued its efforts to migrate ADSL subscribers to FTTx solutions. By the end of the third quarter of 2010, the number of ADSL and FTTx subscribers with a service speed greater than 8 Mbps reached 2.3 million, representing 52.8% of total broadband subscribers, compared to 50.9% at the end of June 2010.

•

HiNet subscribers totaled 4.1 million at the end of September 2010.

•

The number of Multimedia-on-Demand (“MOD”) subscribers is currently over 750 thousand up to now.

Mobile Business

•

As of September 30, 2010, Chunghwa had 9.6 million mobile subscribers, an increase of 4.3% compared to 9.2 million at the end of September 2009.

•

Chunghwa had 5.3 million 3G subscribers at the end of September 2010, accounting for 54.9% of its total subscriber base.

•

Mobile VAS revenue for the first nine months of 2010 increased 29.2% year-over-year to NT$8.0 billion; Short Message Service revenue rose 7.4% year-over-year and mobile Internet revenue increased 80% year-over-year.

•

Smartphone subscriptions accounted for 23% of total handsets offered by the Company during the first nine months of 2010. Smartphone Average Revenue per User (“ARPU”) was 125% higher than blended ARPU for the same period.

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

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 the telecom industry; the intensely competitive telecom industry; Chunghwa’s relationship with its labor union; general economic and political conditions, including those relating 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 Severe Acute Respiratory Syndrome; 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. The Company undertakes no obligation to update these forward-looking statements for events or circumstances that occur subsequent to the date of this press release.

About Chunghwa Telecom

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


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

Chunghwa Telecom Co., Ltd.

Financial Statements for the

Nine Months Ended September 30, 2010 and 2009 and

Independent Accountants’ Review Report

INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

The Board of Directors and Stockholders

Chunghwa Telecom Co., Ltd.

We have reviewed the accompanying balance sheets of Chunghwa Telecom Co., Ltd. as of September 30, 2010 and 2009, and the related statements of operations and cash flows for the nine months then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to issue a report on these financial statements based on our review.

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

As discussed in Note 12 to the financial statements, we did not review all financial statements of equity-accounted investments, the investments in which are reflected in the accompanying financial statements using the equity method of accounting. The aggregate carrying values of the equity method investees were NT$9,454,916 thousand and NT$8,942,371 thousand as of September 30, 2010 and 2009, respectively, and the equity in earnings (losses) were NT$281,448 thousand and NT$(7,358) thousand for the nine months ended September 30, 2010 and 2009, respectively.

Based on our reviews, except for the effects of such adjustments, if any, as might have been determined to be necessary had we reviewed financial statements of certain equity method investees referred to in the preceding paragraph, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with the 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, the Company early adopted the new Statements of Financial Accounting Standards No. 41, “Operating Segments” (“SFAS No. 41”) beginning from September 1, 2009.

We have also reviewed the consolidated financial statements of the Company and its subsidiaries as of and for the nine months ended September 30, 2010 and 2009, and have issued a qualified review report.

/s/ DELOITTE & TOUCHE

Deloitte & Touche

Taipei, Taiwan

The Republic of China

October 25, 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 review such financial statements are those generally accepted and applied in the Republic of China.

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

CHUNGHWA TELECOM CO., LTD.

BALANCE SHEETS

SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)


	2010				2009
	Amount		%		Amount		%
ASSETS

CURRENT ASSETS
Cash and cash equivalents (Notes 2 and 4)	$	61,033,067		15	$	50,767,239		12
Financial assets at fair value through profit or loss (Notes 2 and 5)		24,675		—		30,039		—
Available-for-sale financial assets (Notes 2 and 6)		2,434,791		1		15,851,520		4
Held-to-maturity financial assets (Notes 2 and 7)		1,343,595		—		754,882		—
Trade notes and accounts receivable, net of allowance for doubtful accounts of $2,651,982 thousand in 2010 and $2,831,426 thousand in 2009 (Notes 2 and 8)		12,369,336		3		10,612,296		2
Receivables from related parties (Note 23)		428,292		—		609,230		—
Other monetary assets (Note 9)		4,621,699		1		2,566,008		1
Inventories (Notes 2, 3 and 10)		792,688		—		1,008,582		—
Deferred income tax assets (Notes 2 and 20)		60,298		—		72,919		—
Other current assets (Note 11)		5,871,909		1		6,447,837		2


Total current assets		88,980,350		21		88,720,552		21


LONG-TERM INVESTMENTS
Investments accounted for using equity method (Notes 2 and 12)		10,716,090		2		10,140,330		2
Financial assets carried at cost (Notes 2 and 13)		2,305,354		1		2,236,048		1
Held-to-maturity financial assets (Notes 2 and 7)		7,227,058		2		4,331,829		1
Other monetary assets (Notes 14 and 24)		1,000,000		—		1,000,000		—


Total long-term investments		21,248,502		5		17,708,207		4


PROPERTY, PLANT AND EQUIPMENT (Notes 2, 15 and 23)
Cost
Land		101,292,063		24		101,258,906		24
Land improvements		1,538,009		—		1,514,307		—
Buildings		65,505,978		16		62,624,721		15
Computer equipment		15,266,878		4		15,249,625		3
Telecommunications equipment		654,799,495		155		650,698,396		152
Transportation equipment		1,958,226		—		2,233,859		—
Miscellaneous equipment		7,002,824		2		7,163,871		2

Total cost		847,363,473		201		840,743,685		196
Revaluation increment on land		5,800,909		1		5,810,342		2

		853,164,382		202		846,554,027		198
Less: Accumulated depreciation		566,502,963		134		551,961,588		129

		286,661,419		68		294,592,439		69
Construction in progress and advances related to acquisitions of equipment		13,252,196		3		15,360,010		3


Property, plant and equipment, net		299,913,615		71		309,952,449		72


INTANGIBLE ASSETS (Note 2)
3G concession		6,176,022		2		6,924,631		2
Other		364,501		—		384,396		—


Total intangible assets		6,540,523		2		7,309,027		2


OTHER ASSETS
Idle assets (Note 2)		878,896		—		926,422		—
Refundable deposits		1,409,804		—		1,368,682		1
Deferred income tax assets (Notes 2 and 20)		358,143		—		1,198,137		—
Others (Note 23)		3,336,547		1		1,061,040		—


Total other assets		5,983,390		1		4,554,281		1


TOTAL	$	422,666,380		100	$	428,244,516		100

CHUNGHWA TELECOM CO., LTD.

BALANCE SHEETS—(Continued)

SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)


	2010					2009
	Amount			%		Amount			%
LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES
Trade notes and accounts payable	$	6,254,908			1	$	6,540,756			1
Payables to related parties (Note 23)		1,524,769			—		2,099,896			—
Income tax payable (Notes 2 and 20)		2,533,663			1		2,259,422			1
Accrued expenses (Note 16)		12,457,965			3		12,476,319			3
Other current liabilities (Note 17)		15,470,146			4		15,365,263


Total current liabilities		38,241,451			9		38,741,656			4 9


DEFERRED INCOME		2,549,509			1		2,414,029			1


RESERVE FOR LAND VALUE INCREMENTAL TAX (Note 15)		94,986			—		94,986			—


OTHER LIABILITIES
Accrued pension liabilities (Notes 2 and 22)		1,263,237			—		5,197,001			1
Customers’ deposits		5,815,012			2		5,993,158			2
Deferred credit - profit on intercompany transactions (Note 23)		1,485,916			—		1,485,916			—
Others		336,708			—		239,778			—


Total other liabilities		8,900,873			2		12,915,853			3


Total liabilities		49,786,819			12		54,166,524			13


STOCKHOLDERS’ EQUITY (Notes 2, 6, 15 and 18)
Common capital stock - $10 par value;
Authorized: 12,000,000 thousand shares
Issued: 9,696,808 thousand shares in 2010 and 10,666,489 thousand shares in 2009		96,968,082			23		106,664,890			25

Additional paid-in capital
Capital surplus		169,496,289			40		169,496,289			39
Donated capital		13,170			—		13,170			—
Equity in additional paid-in capital reported by equity-method investees		2,262			—		3			—

Total additional paid-in capital		169,511,721			40		169,509,462			39

Retained earnings
Legal reserve		61,361,255			14		56,987,241			13
Special reserve		2,675,894			1		2,675,894			1
Unappropriated earnings		36,951,097			9		33,170,864			8

Total retained earnings		100,988,246			24		92,833,999			22

Other adjustments
Cumulative translation adjustments		34,421			—		14,583			—
Unrecognized net loss of pension		(84,487	)		—		(5	)		—
Unrealized loss on financial instruments		(341,868	)		—		(757,816	)		—
Unrealized revaluation increment		5,803,446			1		5,812,879			1

Total other adjustments		5,411,512			1		5,069,641			1


Total stockholders’ equity		372,879,561			88		374,077,992			87


TOTAL	$	422,666,380			100	$	428,244,516			100

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

(With Deloitte & Touche review report dated October 25, 2010)

CHUNGHWA TELECOM CO., LTD.

STATEMENTS OF INCOME

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)


	2010				2009
	Amount		%		Amount		%

NET REVENUES (Note 23)	$	138,602,526		100	$	136,596,459		100

OPERATING COSTS (Note 23)		72,143,264		52		71,095,312		52


GROSS PROFIT		66,459,262		48		65,501,147		48


OPERATING EXPENSES (Note 23)
Marketing		18,443,267		13		18,569,125		13
General and administrative		2,526,906		2		2,461,866		2
Research and development		2,375,599		2		2,319,273		2


Total operating expenses		23,345,772		17		23,350,264		17


INCOME FROM OPERATIONS		43,113,490		31		42,150,883		31


NON-OPERATING INCOME AND GAINS
Equity in earnings of equity method investees, net		534,863		1		218,455		—
Interest income		312,443		—		388,762		—
Foreign exchange gain, net		29,655		—		62,023		—
Dividend income		17,156		—		53,286		—
Valuation gain on financial instruments, net		8,226		—		129,078		—
Others		181,817		—		408,822		1


Total non-operating income and gains		1,084,160		1		1,260,426		1


NON-OPERATING EXPENSES AND LOSSES
Loss on disposal of financial instruments, net		102,098		—		160,559		—
Interest expense		75,472		—		2,775		—
Impairment loss on assets		52,916		—		85,349		—
Loss arising from natural calamities		14,152		—		186,271		1
Loss on disposal of property, plant and equipment, net		10,821		—		9,627		—
Others		27,964		—		105,149		—


Total non-operating expenses and losses		283,423		—		549,730		1


INCOME BEFORE INCOME TAX		43,914,227		32		42,861,579		31

INCOME TAX EXPENSES (Notes 2 and 20)		6,970,037		5		9,682,660		7


NET INCOME	$	36,944,190		27	$	33,178,919		24

(Continued)

CHUNGHWA TELECOM CO., LTD.

STATEMENTS OF INCOME

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)


	2010				2009
	Income Before Income Tax		Net Income		Income Before Income Tax		Net Income

EARNINGS PER SHARE (Note 21)
Basic earnings per share	$	4.53	$	3.81	$	4.42	$	3.42

Diluted earnings per share	$	4.51	$	3.80	$	4.41	$	3.41

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

(With Deloitte & Touche review report dated October 25, 2010)

(Concluded)

CHUNGHWA TELECOM CO., LTD.

STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(Amounts in Thousands of New Taiwan Dollars)

(Reviewed, Not Audited)


	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	36,944,190		$	33,178,919
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for doubtful accounts		261,579			359,634
Depreciation and amortization		25,414,775			27,103,118
Valuation loss on inventory		15,789			—
Valuation gain on financial instruments, net		(8,226	)		(129,078	)
Amortization of premium of financial assets		26,531			11,171
Loss on disposal of financial instruments, net		102,098			160,559
Loss on disposal of property, plant and equipment, net		10,821			9,627
Impairment loss on assets		52,916			85,349
Loss arising from natural calamities		14,152			186,271
Equity in earnings of equity method investees, net		(534,863	)		(218,455	)
Cash dividends received from equity method investees		278,677			393,115
Deferred income taxes		40,682			280,840
Changes in operating assets and liabilities:
Financial assets held for trading		(2,712	)		188,167
Trade notes and accounts receivable		(1,554,923	)		(775,339	)
Receivables from related parties		(45,074	)		(266,214	)
Other current monetary assets		(1,210,998	)		(421,660	)
Inventories		378,045			(15,973	)
Other current assets		(2,349,101	)		(2,438,631	)
Trade notes and accounts payable		(1,697,982	)		(2,635,281	)
Payables to related parties		(330,973	)		(77,413	)
Income tax payable		(1,624,323	)		(3,174,208	)
Accrued expenses		(4,042,095	)		(3,204,283	)
Other current liabilities		898,710			943,460
Accrued pension liabilities		55,280			32,613
Deferred income		65,745			341,732


Net cash provided by operating activities		51,158,720			49,918,040


CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of available-for-sale financial assets		(1,774,165	)		(7,162,765	)
Proceeds from disposal of available-for-sale financial assets		14,389,794			6,793,213
Acquisition of held-to-maturity financial assets		(4,556,071	)		(1,948,505	)
Proceeds from disposal of held-to-maturity financial assets		988,144			664,160
Acquisition of financial assets carried at cost		(79,306	)		—
Proceeds from disposal of financial assets carried at cost		—			285,859
Acquisition of investments accounted for using equity method		(320,740	)		(1,637,615	)
Acquisition of property, plant and equipment		(15,412,218	)		(16,151,324	)

(Continued)

CHUNGHWA TELECOM CO., LTD.

STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(Amounts in Thousands of New Taiwan Dollars)

(Reviewed, Not Audited)


	2010			2009
Proceeds from disposal of property, plant and equipment	$	16,018		$	2,527
Acquisition of intangible assets		(125,543	)		(143,894	)
Increase in other assets		(2,600,594	)		(489,914	)


Net cash used in investing activities		(9,474,681	)		(19,788,258	)


CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in customers’ deposits		(90,096	)		(59,508	)
Increase (decrease) in other liabilities		111,594			(186,609	)
Cash dividends paid		(39,369,041	)		(37,138,775	)
Cash paid to stockholders for capital reduction		(9,696,808	)		(19,115,554	)


Net cash used in financing activities		(49,044,351	)		(56,500,446	)


NET DECREASE IN CASH AND CASH EQUIVALENTS		(7,360,312	)		(26,370,664	)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		68,393,379			77,137,903


CASH AND CASH EQUIVALENTS, END OF PERIOD	$	61,033,067		$	50,767,239


SUPPLEMENTAL INFORMATION
Interest paid	$	68,780		$	36

Income tax paid	$	8,553,678		$	12,576,321


CASH AND NON-CASH INVESTING ACTIVITIES
Increase in property, plant and equipment	$	13,995,359		$	15,048,613
Payables to suppliers		1,416,859			1,102,711

	$	15,412,218		$	16,151,324

(Continued)

CHUNGHWA TELECOM CO., LTD.

STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(Amounts in Thousands of New Taiwan Dollars)

(Reviewed, Not Audited)

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	)

		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)

CHUNGHWA TELECOM CO., LTD.

STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(Amounts in Thousands of New Taiwan Dollars)

(Reviewed, Not Audited)

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 review report dated October 25, 2010)

(Concluded)

CHUNGHWA TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)

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 to 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 September 30, 2010 and 2009, the Company had 24,398 and 24,434 employees, respectively.

CHUNGHWA TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)

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, remuneration to board of directors and supervisors, pension plans and income tax, etc. These estimates and assumptions are inherently uncertain and actual results may differ significantly. 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 the balance sheet date. Current liabilities are obligations expected to be settled within one year from the balance sheet date. Assets and liabilities that are not classified as current are noncurrent assets and liabilities, respectively.

Cash Equivalents

Cash equivalents are commercial paper and treasury bills purchased 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 are 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 losses 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. 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 are 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 are 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.

CHUNGHWA TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)

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 acquisitions 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.

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.

CHUNGHWA TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)

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.

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.

Investments Accounted for using Equity Method

Investments in companies in which the Company exercises significant influence over the operating and financial policy decisions are accounted for by 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 the Company 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 the 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 to 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.

CHUNGHWA TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)

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”.

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, accumulated depreciation, accumulated impairment losses and any unrealized revaluation increment are deducted from the corresponding accounts, and any gain or loss recorded is 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 fee 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 to 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 that do not meet relative criteria shall be expensed as incurred.

Idle Assets

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

CHUNGHWA TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)

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 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.

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 when the calculation is positive: (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.

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.

CHUNGHWA TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)

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.

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 period end; stockholders’ equity - historical rates, income and expenses - average rates during the period. 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.

3. EFFECT OF CHANGES IN ACCOUNTING PRINCIPLE

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”.

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 in operating cost.

CHUNGHWA TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)

4. CASH AND CASH EQUIVALENTS


	September 30
	2010		2009

Cash
Cash on hand	$	77,778	$	83,616
Bank deposits		3,608,258		10,146,655
Negotiable certificate of deposit, annual yield rate - ranging from 0.47%-0.56 % and 0.15%-0.23% for 2010 and 2009, respectively		53,900,000		38,350,000

		57,586,036		48,580,271

Cash equivalents
Commercial paper purchased, annual yield rate - ranging from 0.32%-0.35% and 0.16% for 2010 and 2009, respectively		3,196,982		2,186,968
Treasury bills, annual yield rate - 0.32%		250,049		—

		3,447,031		2,186,968

	$	61,033,067	$	50,767,239

As of September 30, 2010 and 2009, foreign deposits in bank were as following:


	September 30
	2010		2009

United States of America - New York (US$605 thousand and US$610 thousand for 2010 and 2009, respectively)	$	18,947	$	19,653

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


	September 30
	2010		2009

Derivatives - financial assets
Currency swap contracts	$	24,675	$	30,039

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 April 14, 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.

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

CHUNGHWA TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)

Outstanding currency swap contracts as of September 30, 2010 and 2009 were as follows:

Currency

Maturity Period

Contract Amount
(In Thousands)

September 30, 2010

Currency swap contracts

US$

/NT$

2010.10

US$

30,000 /NT$964,375

September 30, 2009

Currency swap contracts

US$

/NT$

2009.10

US$

45,000 /NT$1,477,195

Net gain arising from financial assets and liabilities at fair value through profit or loss for the nine months ended September 30, 2010 were $15,286 thousand (including realized settlement loss of $2,712 thousand and valuation gain of $17,998 thousand) and net gain arising from financial assets and liabilities at fair value through profit or loss for the nine months ended September 30, 2009 were $67,027 thousand (including realized settlement loss of $54,600 thousand and valuation gain of $121,627 thousand).

6. AVAILABLE-FOR-SALE FINANCIAL ASSETS


	September 30
	2010		2009
Open-end mutual funds	$	2,434,791	$	15,694,200
Real estate investment trust fund		—		154,615
Domestic listed stocks		—		2,705

	$	2,434,791	$	15,851,520

Movements of unrealized gains (loss) on available-for-sale financial assets were as follows:


	Nine Months Ended September 30
	2010			2009
Balance, beginning of period	$	(466,803	)	$	(2,255,905	)
Recognized in stockholder’s equity		25,232			1,426,091
Transferred to profit or loss		99,386			69,424

Balance, end of period	$	(342,185	)	$	(760,390	)

As a result of the global economic and financial crisis have significantly changed, the Company 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 for the nine months ended September 30, 2009.

CHUNGHWA TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)

7. HELD-TO-MATURITY FINANCIAL ASSETS


	September 30
	2010		2009
Corporate bonds, nominal interest rate ranging from 0.83%-4.75% and 0.75%-4.75% for 2010 and 2009, respectively; effective interest rate ranging from 0.83%-2.95% and 0.75%-2.95% for 2010 and 2009, respectively	$	8,171,501	$	4,384,755
Bank debentures, nominal interest rate ranging from 1.93%-2.11% and 1.95%-2.24% for 2010 and 2009, respectively; effective interest rate ranging from 2.45%-2.90% and 1.14%-2.90% for 2010 and 2009, respectively		399,152		697,256
Collateralized loan obligation, nominal and effective interest rates were 2.18%		—		4,700

		8,570,653		5,086,711
Less: Current portion		1,343,595		754,882

	$	7,227,058	$	4,331,829

8. ALLOWANCE FOR DOUBTFUL ACCOUNTS


	Nine Months Ended September 30
	2010			2009
Balance, beginning of period	$	2,774,868		$	2,992,143
Provision for doubtful accounts		250,912			353,193
Accounts receivable written off		(373,798	)		(513,910	)

Balance, end of period	$	2,651,982		$	2,831,426

9. OTHER MONETARY ASSETS - CURRENT


	September 30
	2010		2009
Receivables from disposal of financial instruments	$	1,649,419	$	135,780
Accrued custodial receipts from other carriers		505,572		573,121
Others		2,466,708		1,857,107

	$	4,621,699	$	2,566,008

10. INVENTORIES


	September 30
	2010		2009
Work in process	$	434,550	$	683,324
Merchandise		358,138		325,258

	$	792,688	$	1,008,582

CHUNGHWA TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)

The operating costs related to inventories were $6,085,759 thousand (including the valuation loss on inventories of $15,789 thousand) and $3,711,971 thousand for the nine months ended September 30, 2010 and 2009, respectively.

11. OTHER CURRENT ASSETS


	September 30
	2010		2009
Prepaid expenses	$	2,784,687	$	2,901,038
Spare parts		1,988,991		2,453,230
Prepaid rents		847,341		872,619
Miscellaneous		250,890		220,950

	$	5,871,909	$	6,447,837

12. INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD


	September 30
	2010				2009
	Carrying Value		% of Ownership		Carrying Value		% of Ownership
Listed
Senao International Co., Ltd. (“SENAO”)	$	1,352,399		28	$	1,279,942		29

Non-listed
Light Era Development Co., Ltd. (“LED”)		2,866,083		100		2,936,402		100
Chunghwa Investment Co., Ltd. (“CHI”)		1,717,158		89		1,623,434		89
Chunghwa Telecom Singapore Pte., Ltd. (“CHTS”)		1,470,709		100		1,403,076		100
Chunghwa System Integration Co., Ltd. (“CHSI”)		714,093		100		721,879		100
Donghwa Telecom Co., Ltd. (“DHT”)		553,763		100		226,291		100
CHIEF Telecom Inc. (“CHIEF”)		507,834		69		439,382		69
Taiwan International Standard Electronics Co., Ltd. (“TISE”)		476,566		40		464,265		40
Viettel-CHT Co., Ltd. (“Viettel-CHT”)		265,652		30		271,002		30
InfoExploer Co., Ltd. (“IFE”)		256,070		49		282,652		49
Chunghwa International Yellow Pages Co., Ltd. (“CIYP”)		187,299		100		161,091		100
Skysoft Co., Ltd. (“SKYSOFT”)		91,094		30		88,842		30
Chunghwa Telecom Global, Inc. (“CHTG”)		83,005		100		69,682		100
Spring House Entertainment Inc. (“SHE”)		67,912		56		52,532		56
KingWay Technology Co., Ltd. (“KWT”)		63,241		33		68,410		33
So-net Entertainment Taiwan (“So-net”)		26,134		30		40,060		30
Chunghwa Telecom Japan Co., Ltd. (“CHTJ”)		17,078		100		11,388		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

		9,363,691				8,860,388

	$	10,716,090			$	10,140,330

CHUNGHWA TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)

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.

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 increased its investment in Chunghwa Telecom Singapore Pte., Ltd. (“CHTS”) for $610,659 thousand in July 2009. 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 increased its investment in Donghwa Telecom Co., Ltd. (“DHT”) for $320,740 thousand in August 2010. DHT engages mainly in international telecommunications, IP fictitious internet and internet transfer services.

Chunghwa participated in the capital increase of Viettel-CHT in September 2009, by investing $197,088 thousand cash. Viettel-CHT engages mainly in IDC services.

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

Chunghwa 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.

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.

Market value of the listed investment accounted for using equity method calculated at its closing prices as of September 30, 2010 and 2009 was $3,638,899 thousand and $3,387,693 thousand, respectively.

The equity in earnings (losses) of equity investees for the nine months ended September 30, 2010 and 2009 are based on unreviewed financial statements except the equity in earnings of SENAO.

The aggregate carrying values of the equity method investments whose financial statements have not been reviewed were $9,454,916 thousand and $8,942,371 thousand as of September 30, 2010 and 2009 respectively. The equity in earnings (losses) were $281,448 thousand and $(7,358) thousand for the nine months ended September 30, 2010 and 2009, respectively.

CHUNGHWA TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)

13. FINANCIAL ASSETS CARRIED AT COST


	September 30
	2010				2009
	Carrying Amount		% of Ownership		Carrying Amount		% of Ownership
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
Innovation Works Development Fund, L. P. (“IWDF”)		38,035		13		—		—
RPTI International (“RPTI”)		34,500		10		34,500		10
Innovation Works Limited (“IW”)		21,271		7		—		—
CQi Energy Infocom Inc. (“CQi”)		20,000		18		—		—
Essence Technology Solution, Inc. (“ETS”)		—		9		10,000		9

	$	2,305,354			$	2,236,048

Chunghwa invested in IWDF for $38,035 thousand in June 2010. IWDF invests mainly in start-up companies of E-commerce, mobile internet and cloud computing, etc.

Chunghwa invested in IW for $10,565 thousand and $10,706 thousand in June and July, 2010, respectively. IW invests mainly in start-up companies and mentors such companies in the E-commerce, mobile internet and cloud computing fields, etc.

Chunghwa invested in CQi for $20,000 thousand in June 2010. CQi engages mainly in intelligent energy network management services.

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 in 2009.

Chunghwa participated in TFC’s capital increase in October 2008 and prepaid $285,859 thousand. However, TFC was 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 do not have a quoted market price in an active market and the fair values cannot be reliably measured; therefore, these investments are carried at original cost.

14. OTHER NONCURRENT MONETARY ASSETS


	September 30
	2010		2009
Piping Fund	$	1,000,000	$	1,000,000

CHUNGHWA TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)

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 Fixed-Line Fund administered by the Taipei City Government. This fund was used to finance various telecommunications infrastructure projects.

15. PROPERTY, PLANT AND EQUIPMENT


	September 30
	2010		2009
Cost
Land	$	101,292,063	$	101,258,906
Land improvements		1,538,009		1,514,307
Buildings		65,505,978		62,624,721
Computer equipment		15,266,878		15,249,625
Telecommunications equipment		654,799,495		650,698,396
Transportation equipment		1,958,226		2,233,859
Miscellaneous equipment		7,002,824		7,163,871

		847,363,473		840,743,685
Revaluation increment on land		5,800,909		5,810,342

		853,164,382		846,554,027

Accumulated depreciation
Land improvements		991,512		937,395
Buildings		18,140,831		17,063,296
Computer equipment		11,983,548		11,690,281
Telecommunications equipment		527,725,094		514,138,890
Transportation equipment		1,729,349		2,040,143
Miscellaneous equipment		5,932,629		6,091,583

		566,502,963		551,961,588

Construction in progress and advances related to acquisition of equipment		13,252,196		15,360,010

Property, plant and equipment, net	$	299,913,615	$	309,952,449

Pursuant to the related regulations, Chunghwa revalued its land owned as of April 30, 2000 based on the publicly announced values as of July 1, 1999. These revaluations which were 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 stockholder’s equity - other adjustments. As of September 30, 2010, capital surplus from revaluation of land had decreased to $5,803,446 thousand by disposal of some revaluated assets.

Depreciation on property, plant and equipment for the nine months ended September 30, 2010 and 2009 amounted to $24,530,510 thousand and $26,299,984 thousand, respectively. No interest expense was capitalized for the nine months ended September 30, 2010 and 2009.

Chunghwa reclassified the unused property, plant and equipment amounting to $52,916 thousand to idle assets and recognized the impairment loss of $52,916 thousand on those assets for the nine months ended September 30, 2010.

CHUNGHWA TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)

16. ACCRUED EXPENSES


	September 30
	2010		2009
Accrued salary and compensation	$	6,879,169	$	6,735,762
Accrued franchise fees		1,663,281		1,681,359
Accrued employees’ bonus and remuneration to directors and supervisors		1,642,796		1,261,057
Other accrued expenses		2,272,719		2,798,141

	$	12,457,965	$	12,476,319

17. OTHER CURRENT LIABILITIES


	September 30
	2010		2009
Advances from subscribers	$	6,901,360	$	6,014,455
Amounts collected in trust for others		2,283,634		2,481,843
Payables to equipment suppliers		1,390,268		945,640
Refundable customers’ deposits		1,079,008		1,026,561
Payables to contractors		1,003,571		1,847,980
Miscellaneous		2,812,305		3,048,784

	$	15,470,146	$	15,365,263

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 September 30, 2010.

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 4, 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 September 30, 2010, the outstanding ADSs were 956,491 thousand common shares, which equaled approximately 95,649 thousand units and represented 9.86% of Chunghwa’s total outstanding common shares.

CHUNGHWA TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)

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 NT$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.

For the nine months ended September 30, 2010 and 2009, 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.

CHUNGHWA TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)

The appropriations and distributions of the 2009 and 2008 earnings of Chunghwa have been approved by the stockholders on June 18, 2010 and June 19, 2009 as follows:


	Appropriation and Distribution				Dividend Per Share
	2009		2008		2009		2008
Legal reserve	$	4,374,014	$	4,127,675	$	—	$	—
Special reserve		—		475		—		—
Cash dividends		39,369,041		37,138,775		4.06		3.83

The amounts for bonuses to employees and remuneration to directors and supervisors approved in the stockholders’ meeting on June 18, 2010, were $1,800,929 thousand and $41,211 thousand paid by cash, respectively. There was no difference between the initial accrual amounts and the amounts resolved in stockholders’ meeting of the aforementioned bonuses to employees and the remuneration to directors and supervisors.

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 paid by cash, respectively. 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 nine months ended September 30, 2009.

Information on the appropriation of Chunghwa’s earnings, employee bonus and remuneration to directors and supervisors resolved by the board of directors and approved by the stockholders is available at the Market Observation Post System website.

The stockholders, at the stockholders’ meeting held on June 18, 2010, also resolved to reduce the amount of capital in Chunghwa by a cash distribution to its stockholders in the amount of $19,393,616 thousand in order to improve the financial condition of Chunghwa and better utilize its excess funds. The stockholders further authorized the board of directors of Chunghwa to designate the record date of capital reduction. The capital reduction plan was effectively registered with FSC.

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.

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.

CHUNGHWA TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)

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.

19. COMPENSATION, DEPRECIATION AND AMORTIZATION EXPENSES


	Nine Months Ended September 30, 2010
	Cost of Services		Operating Expenses		Total
Compensation expense
Salaries	$	9,011,084	$	6,294,183	$	15,305,267
Insurance		749,893		523,887		1,273,780
Pension		1,257,537		841,655		2,099,192
Other compensation		7,175,012		4,956,345		12,131,357

	$	18,193,526	$	12,616,070	$	30,809,596

Depreciation expense	$	23,263,148	$	1,267,362	$	24,530,510

Amortization expense	$	768,833	$	115,432	$	884,265


	Nine Months Ended September 30, 2009
	Cost of Services		Operating Expenses		Total
Compensation expense
Salaries	$	9,081,304	$	6,197,076	$	15,278,380
Insurance		719,816		499,502		1,219,318
Pension		1,210,960		861,146		2,072,106
Other compensation		6,206,061		4,184,134		10,390,195

	$	17,218,141	$	11,741,858	$	28,959,999

Depreciation expense	$	24,884,906	$	1,415,078	$	26,299,984

Amortization expense	$	683,182	$	119,299	$	802,481

CHUNGHWA TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)

20. 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:


	Nine Months Ended September 30
	2010			2009
Income tax expense computed at statutory income tax rate	$	7,465,419		$	10,715,385
Add (deduct) tax effect of:
Permanent differences		(112,380	)		(141,822	)
Temporary differences		614			4,445
10% undistributed earnings		1,286			6,441
Investment tax credits		(423,657	)		(1,043,990	)

Income tax payable	$	6,931,282		$	9,540,459

The balance of income tax payable as of September 30, 2010 and 2009 was shown net of prepaid income tax.

b.	Income tax expense consists of the following:


	Nine Months Ended September 30
	2010			2009
Income tax payable	$	6,931,282		$	9,540,459
Income tax - separated		3,688			55,684
Income tax - deferred		40,682			280,840
Adjustments of prior years’ income tax		(5,615	)		(194,323	)

	$	6,970,037		$	9,682,660

In May 2010, 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 20% to 17%, effective January 1, 2010. After the Legislative Yuan passed the amendment of Article 5 of the Income Tax Law, 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.

Under Article 10 of the Statute for Industrial Innovation (SII) passed by the Legislative Yuan in April 2010, a profit-seeking enterprise may deduct up to 15% of its research and development expenditures from its income tax payable for the fiscal year in which these expenditures are incurred, but this deduction should not exceed 30% of the income tax payable for that fiscal year. This incentive took effect from January 1, 2010 and is effective till December 31, 2019.

CHUNGHWA TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)

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


	September 30
	2010			2009
Current
Provision for doubtful accounts	$	269,611		$	364,658
Unrealized accrued expense		71,632			64,491
Valuation gain on financial instruments, net		(9,202	)		(18,574	)
Unrealized foreign exchange loss (gain)		(13,443	)		14,520
Other		11,311			12,482

		329,909			437,577
Valuation allowance		(269,611	)		(364,658	)

Net deferred income tax assets-current	$	60,298		$	72,919

Noncurrent
Accrued pension cost	$	295,140		$	1,133,974
Impairment loss		60,597			64,163
Loss arising from natural calamities		2,406			—

Net deferred income tax assets - noncurrent	$	358,143		$	1,198,137

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


	September 30
	2010		2009
Balance of Imputation Credit Account (ICA)	$	2,478	$	146,047

The actual creditable rates distribution of Chunghwa’s of 2009 and 2008 for earnings were 26.48% and 30.61%, respectively.

e.	Undistributed earnings information

As of September 30, 2010 and 2009, there is no earnings generated prior to June 30, 1998 in Chunghwa’s undistributed earnings.

Income tax returns through the year ended December 31, 2005 have been examined by the ROC tax authorities.

CHUNGHWA TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)

21. EARNINGS PER SHARE

EPS was calculated as follows:


	Amount (Numerator)						Weighted- average Number of Common Shares Outstanding (Denominator)		Earnings Per Share (Dollars)
	Income Before Income Tax			Net Income					Income Before Income Tax		Net Income
Nine months ended September 30, 2010
Basic EPS
Income available to stockholders	$	43,914,227		$	36,944,190			9,696,808	$	4.53	$	3.81

Effect of dilutive potential common stock
SENAO’s stock options		(5,411	)		(5,411	)		—
Employee bonus		—			—			30,204

Diluted EPS
Income available to stockholders	$	43,908,816		$	36,938,779			9,727,012	$	4.51	$	3.80


Nine months ended September 30, 2009
Basic EPS
Income available to stockholders	$	42,861,579		$	33,178,919			9,696,808	$	4.42	$	3.42

Effect of dilutive potential common stock
SENAO’s stock options		(4,215	)		(4,215	)		—
Employee bonus		—			—			29,742

Diluted EPS
Income available to stockholders	$	42,857,364		$	33,174,704			9,726,550	$	4.41	$	3.41

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 nine months ended September 30, 2010. 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 nine months ended September 30, 2010 and 2009 was due to the effect of potential common stock of stock options by SENAO.

CHUNGHWA TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)

22. 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 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.

The pension plan under the Labor Pension Act of ROC (the “LPA”) 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 balance of Chunghwa’s plan assets subject to defined benefit plan were $12,377,459 thousand and $6,095,935 thousand as of September 30, 2010 and 2009, respectively.

Pension costs of Chunghwa were $2,155,022 thousand ($2,058,648 thousand subject to defined benefit plan and $96,374 thousand subject to defined contribution plan) and $2,126,884 thousand ($2,049,176 thousand subject to defined benefit plan and $77,708 thousand subject to defined contribution plan) for the nine months ended September 30, 2010 and 2009, respectively.

23. 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)

CHUNGHWA TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)


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 Co., Ltd. (“CIHC”)		Subsidiary of CHI, which was equity-method investee before Chunghwa obtained control over CHI on September 9, 2009
Chunghwa Precision Test Tech. Co., Ltd. (“CHPT”)		Subsidiary of CHI, which was equity-method investee 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, which completed its liquidation procedure in September 2010
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 SIS
CHI One Investment Co., Ltd. (“COI”)		Subsidiary of CIHC
Yao Yong Real Property Co., Ltd. (“YYRP”)		Subsidiary of LED
InfoExplorer International Co., Ltd. (“IESA”)		Subsidiary of IFE
InfoExplorer (Hong Kong) Co., Ltd. (“IEHK”)		Subsidiary of IESA
Chunghwa Precision Test Tech. USA Corporation (“CHPT (US)”)		Subsidiary of CHPT
Taiwan International Standard Electronics Co., Ltd. (“TISE”)		Equity-method investee
So-net Entertainment Taiwan Co., Ltd. (“So-net”)		Equity-method investee
Skysoft Co., Ltd. (“SKYSOFT”)		Equity-method investee
Senao Networks, Inc. (“SNI”)		Equity-method investee of SENAO
ST-2 Satellite Ventures Pte., Ltd. (“STS”)		Equity-method investee of CHTS

(Concluded)

CHUNGHWA TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)

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


	September 30
	2010				2009
	Amount		%		Amount		%
1) Receivables from related parties
Trade notes, accounts receivable and other receivables
SENAO	$	296,852		69	$	382,723		63
CHTG		28,215		7		20,973		3
CHIEF		22,250		5		21,227		4
CIYP		20,696		5		29,200		5
DHT		19,504		5		10,604		2
SHE		19,025		4		7,626		1
CHSI		3,950		1		124,623		20
Others		17,800		4		12,254		2

	$	428,292		100	$	609,230		100

2) Payables
Trade notes payable, accounts payable and accrued expenses
SENAO	$	741,574		49	$	674,209		32
CHSI		147,253		10		212,492		10
TISE		54,032		4		718,339		35
CHTG		48,077		3		44,941		2
CHIEF		41,079		3		45,899		2
DHT		32,994		2		46,484		2
CIYP		6,980		—		41,682		2
Others		58,180		4		20,974		1

		1,130,169		75		1,805,020		86

Payables to contractors
CHSI		21,000		1		—		—
TISE		—		—		15,412		1
Others		1,782		—		—		—

		22,782		1		15,412		1

Amounts collected in trust for others
SENAO		230,663		15		255,005		12
CIYP		109,775		7		21,095		1
Others		31,380		2		3,364		—

		371,818		24		279,464		13

	$	1,524,769		100	$	2,099,896		100

CHUNGHWA TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)


	Nine Months Ended September 30
	2010				2009
	Amount		%		Amount		%

3) Revenues

SENAO	$	1,207,271		1	$	597,522		1
So-net		226,811		—		49,174		—
CHIEF		186,349		—		178,630		—
CHTG		55,121		—		42,552		—
SKYSOFT		29,203		—		25,677		—
LED		21,368		—		3,362		—
CHSI		18,392		—		12,008		—
CIYP		11,670		—		13,913		—
DHT		—		—		18,832		—
Others		28,279		—		29,816		—


	$	1,784,464		1	$	971,486		1


4) Operating costs and expenses

SENAO	$	3,736,432		4	$	4,067,833		5
TISE		550,367		1		764,174		1
CHSI		506,302		1		362,686		—
CHIEF		217,222		—		228,951		—
CHTG		104,406		—		49,560		—
IFE		84,717		—		7,422		—
SHE		39,669		—		45,170		—
CIYP		24,446		—		35,621		—
DHT		3,366		—		28,627		—
Others		61,673		—		20,110		—


	$	5,328,600		6	$	5,610,154		6


5) Acquisition of property, plant and equipment

CHSI	$	316,881		2	$	363,175		2
TISE		234,530		2		780,611		5
IFE		54,310		—		819		—
DHT		30,854		—		—		—
CHTG		18,407		—		21,360		—
SENAO		1,799		—		268		—
Others		5,994		—		—		—


	$	662,775		4	$	1,166,233		7

Chunghwa has entered into a contract with ST-2 Satellite Ventures Pte., Ltd. on March 12, 2010 to lease capacity on the ST-2 satellite. This lease term is 15 years and the total contract value is approximately $6,000,000 thousand (SG$260,723 thousand). The Company has prepaid $1,998,668 thousand which was classified as other assets-others. As of September 30, 2010, the ST-2 satellite is still under construction.

The Company has leased property to LED since April 2010. The leased term is 15 years and the rent is charged monthly.

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 in 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 TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)

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 - others. 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.

24. SIGNIFICANT COMMITMENTS AND CONTINGENCIES

As of September 30, 2010, in addition to those disclosed in other notes, Chunghwa’s remaining commitments under non-cancelable contracts with various parties were as follows:

a.	Acquisitions of land and buildings of $187,875 thousand.

b.	Acquisitions of telecommunications equipment of $19,335,234 thousand.

c.	Contracts to print billing, envelopes and selling gifts $36,924 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:


Year	Rental Amount

2010 (from October 1, 2010 to December 31, 2010)	$	482,095
2011		1,634,686
2012		1,210,527
2013		830,756
2014 and thereafter		1,088,362

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.

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 not 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 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. On April 7, 2010, the Taiwan High Court rendered its judgment, ruling that we need to pay $23,284 thousand as compensation in addition to the $16,870 thousand from the Taiwan Taipei District Court judgment, along with interest calculated at 5% per annum from July 23, 2005 to the payment date and 12.5% of Chunghwa Post Co., Ltd.’s court fees from its original suit and subsequent appeal as compensation. Chunghwa has filed an appeal at the Supreme Court of the Republic of China within the statutory period.

CHUNGHWA TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)

25. FAIR VALUE OF FINANCIAL INSTRUMENTS

a.	Fair values of financial instruments were as follows:


	September 30
	2010				2009
	Carrying Amount		Fair Value		Carrying Amount		Fair Value

Assets
Cash and cash equivalents	$	61,033,067	$	61,033,067	$	50,767,239	$	50,767,239
Financial assets at fair value through profit or loss		24,675		24,675		30,039		30,039
Available-for-sale financial assets		2,434,791		2,434,791		15,851,520		15,851,520
Held-to-maturity financial assets - current		1,343,595		1,343,595		754,882		754,882
Trade notes and accounts receivable, net		12,369,336		12,369,336		10,612,296		10,612,296
Receivables from related parties		428,292		428,292		609,230		609,230
Other current monetary assets		4,621,699		4,621,699		2,566,008		2,566,008
Financial assets carried at cost		2,305,354		—		2,236,048		—
Held-to-maturity financial assets - noncurrent		7,227,058		7,227,058		4,331,829		4,331,829
Other noncurrent monetary assets		1,000,000		1,000,000		1,000,000		1,000,000
Refundable deposits		1,409,804		1,409,804		1,368,682		1,368,682
Liabilities
Trade notes and accounts payable		6,254,908		6,254,908		6,540,756		6,540,756
Payables to related parties		1,524,769		1,524,769		2,099,896		2,099,896
Accrued expenses		12,457,965		12,457,965		12,476,319		12,476,319
Amounts collected in trust for others (included in “other current liabilities”)		2,283,634		2,283,634		2,481,843		2,481,843
Payables to equipment suppliers (included in “other current liabilities”)		1,390,268		1,390,268		945,640		945,640
Refundable customers’ deposits (included in “other current liabilities”)		1,079,008		1,079,008		1,026,561		1,026,561
Payables to contractors (included in “other current liabilities”)		1,003,571		1,003,571		1,847,980		1,847,980
Customers’ deposits		5,815,012		5,815,012		5,993,158		5,993,158

CHUNGHWA TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)

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

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.

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 available-for-sale financial assets are not readily available, valuation techniques are used incorporating estimates and assumptions that are consistent with prevailing market conditions.

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

c.	Fair values of financial instruments were as follow:


	Amount Based on Quoted Market Price				Amount Determined Using Valuation Techniques
	September 30				September 30
	2010		2009		2010		2009

Assets
Financial assets at fair value through profit or loss	$	—	$	—	$	24,675	$	30,039
Available-for-sale financial assets		2,434,791		15,851,520		—		—

d.	Information about financial risks

Market risk

The foreign exchange rate fluctuations would result in Chunghwa’s foreign-currency-dominated assets and liabilities, outstanding currency swap contracts exposed to rate risk.

The financial instruments categorized as available-for-sale financial assets are mainly listed stocks and open-end mutual funds. Therefore, the market risk is the fluctuations of market price. In order to manage this risk, Chunghwa would assess the risk before investing therefore, no material market risk are anticipated.

Credit risk

Credit risk represents the potential loss that would be incurred by Chunghwa if the counter-parties or third-parties breached contracts. Financial instruments with positive fair values at the balance sheet date are evaluated for credit risk. The counter-parties or third-parties of the aforementioned financial instruments are reputable financial institutions and corporations. Management does not expect Chunghwa’s exposure to default by those parties to be material.

Liquidation risk

Chunghwa has sufficient operating capital to meet cash needs upon settlement of derivative financial instruments. Therefore, the liquidation risk is low.

The financial instruments of the Company categorized as available-for-sale financial assets are publicly-traded, easily converted to cash. Therefore, no material liquidation risk are anticipated. The financial instruments categorized as financial assets carried at cost are investments that do not have a quoted market price in an active market. Therefore, material liquidation risk is anticipated.

CHUNGHWA TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)

Cash flow interest rate risk

Chunghwa engages in investments in fixed-interest-rate debt securities. Therefore, cash flows from such securities are not expected to fluctuate significantly due to changes in market interest rates.

In addition, Chunghwa engages in investments in floating-interest-rate debt securities. The changes in market interest rate would impact the floating-interest rate; therefore, cash flows from such securities are expected to fluctuate due to changes in market interest rates.

e.	Fair value hedge

Chunghwa entered into currency swap contracts to hedge the fluctuation in exchange rates of beneficiary certificate denominated in foreign currency. No transaction met the criteria for hedge accounting for the nine months ended September 30, 2010. The transaction was assessed as highly effective for the nine months ended September 30, 2009. There are no hedge currency swap contracts existed as of September 30, 2009.

According to the regulations of Securities and Futures Bureau, Chunghwa should disclose the derivative transactions of Chunghwa’s investees, SENAO and CHI, which was as follows:

Holding period and contract amounts

SENAO and CHI entered into forward exchange contracts and index future contracts to reduce the exposure to foreign currency risk and price risk.

The outstanding forward exchange contracts as of September 30, 2010 and 2009 were as follows:

Currency

Maturity Date

Contract Amount
(In Thousands)

September 30, 2010

Forward exchange contracts - buy

NTD/USD

2010.10

NT$

186,033/US$5,880

September 30, 2009

Forward exchange contracts - buy

NTD/USD

2009.10

NT$

252,968/US$7,783

Outstanding index future contracts of CHI as of September 30, 2010 were as follows:


	Maturity Period		Units		Contract Amount (In Thousands)

TAIEX futures		2010.10		6	NT$	9,140
TAIEX futures		2010.12		20	NT$	31,468

Market risk

The foreign exchange rate fluctuations would result in SENAO’s foreign-currency-dominated assets and liabilities and open forward exchange contracts exposed to rate risk.

The fluctuations of market price would result in CHI’s index future contracts exposed to price risk.

CHUNGHWA TELECOM CO., LTD.

NOTES TO FINANCIAL STATEMENTS—(Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Reviewed, Not Audited)

Credit risk

Credit risk represents the potential loss that would be incurred by SENAO and CHI if the counter-parties or third-parties breached contracts. Financial instruments with positive fair values at the balance sheet date are evaluated for credit risk. The counter-parties or third-parties to the aforementioned financial instruments are reputable financial institutions. Management does not expect SENAO’s and CHI’s exposure to default by those parties to be material. The largest amount of exposure to default by those parties of the financial instruments of SENAO and CHI is the same as carrying value.

Liquidation risk

SENAO and CHI have sufficient operating capital to meet cash needs upon settlement of derivative financial instruments. Therefore, the liquidation risk is low.

26. ADDITIONAL DISCLOSURES

Following are the additional disclosures required by the SFB for Chunghwa and its investees:

a.	Financings provided: Please see Table 1.

b.	Endorsement/guarantee provided: Please see Table 2.

c.	Marketable securities held: Please see Table 3.

d.	Marketable securities acquired and disposed of at costs or prices at least $100 million or 20% of the paid-in capital: Please see Table 4.

e.	Acquisition of individual real estate at costs of at least $100 million or 20% of the paid-in capital: None.

f.	Disposal of individual real estate at prices of at least $100 million or 20% of the paid-in capital: None.

g.	Total purchase from or sale to related parties amounting to at least $100 million or 20% of the paid-in capital: Please see Table 5.

h.	Receivables from related parties amounting to $100 million or 20% of the paid-in capital: Please see Table 6.

i.	Names, locations, and other information of investees on which the Company exercises significant influence: Please see Table 7.

j.	Financial transactions: Please see Notes 5 and 25.

k.	Investment in Mainland China: Please see Table 8.

27. SEGMENT FINANCIAL INFORMATION

Segment information. Please see Table 9.

TABLE 1

CHUNGHWA TELECOM CO., LTD.

FINANCINGS PROVIDED

NINE MONTHS ENDED SEPTEMBER 30, 2010

(In Thousands of New Taiwan Dollars, Unless Specified Otherwise)

No.

Financing Company

Counter-party

Financial
Statement
Account

Maximum
Balance for
the Year

Ending
Balance

Interest Rate
(Note 5)

Type of
Financing
(Note 2)

Transaction
Amount

Reason for
Short-term
Financing

Allowance for
Bad Debt

Collateral

Financing
Limit for
Each
Borrowing
Company
(Note 3)

Financing
Company’s
Financing
Amount Limit
(Note 4)

Item

Value

Chunghwa Telecom Singapore Pte., Ltd.

ST-2 Satellite Ventures Pte., Ltd.

Other receivables

(SG$

543,303

23,913

)

—

6.38

(Note 6)

—

(SG$

1,470,709

61,621

)

(SG$

1,470,709

61,621

)

Note 1:

Significant transactions between the Company and its subsidiaries or among subsidiaries are numbered as follows:

“0” for the Company.

Subsidiaries are numbered from “1”.

Note 2:

Reasons for financing are as follows:

Business relationship.

For short-term financing.

Note 3:

The upper limit of loans lending to any other party is no more than 100% of the net value of the latest financial statement of the lender.

Note 4:

The upper limit of loans lending to all other parties is no more than 100% of the net value of the latest financial statement of the lender.

Note 5:

It’s equals to the prime rate of Singapore plus 1%

Note 6:

Chunghwa Telecom Singapore Pte., Ltd. signed the joint venture contract with SingTel Sat Pte., Ltd. to establish ST-2 Satellite Ventures Pte., Ltd. which mainly engages in the installation and the operation of ST-2 telecommunications satellite. The amount was collected on April 1, 2010.

TABLE 2

CHUNGHWA TELECOM CO., LTD.

ENDORSEMENTS/GUARANTEES PROVIDED

NINE MONTHS ENDED SEPTEMBER 30, 2010

(In Thousands of New Taiwan Dollars, Unless Specified Otherwise)


No.	Endorsement/ Guarantee Provider	Guaranteed Party		Limits on Endorsement/ Guarantee Amount Provided to Each Guaranteed Party (Note 3)		Maximum Balance for the Year		Ending Balance		Amount of Endorsement/ Guarantee Collateralized by Properties		Ratio of Accumulated Endorsement/ Guarantee to Net Equity per Latest Financial Statements			Maximum Endorsement/ Guarantee Amount Allowable (Note 3)
No.	Endorsement/ Guarantee Provider	Name	Nature of Relationship (Note 2)			Maximum Balance for the Year		Ending Balance							Maximum Endorsement/ Guarantee Amount Allowable (Note 3)
25	Yao Yong Real Property Co., Ltd.	Light Era Development Co., Ltd.	d	$	3,756,752	$	3,360,000	$	2,750,000	$	2,750,000		0.7	%	$	3,756,752

Note 1:

Significant transactions between the Company and its subsidiaries or among subsidiaries are numbered as follows:

“0” for the Company.

Subsidiaries are numbered from “1”.

Note 2:

Relationships between the endorsement/guarantee provider and the guaranteed party:

Trading partner.

Majority owned subsidiary.

The Company and subsidiary owns over 50% ownership of the investee company.

A subsidiary jointly owned by the Company and the Company’s directly-owned subsidiary.

Guaranteed by the Company according to the construction contract.

An investee company. The guarantees were provided based on the Company’s proportionate share in the investee company.

Note 3:

The maximum amount of endorsement or guarantee amounts is up to 200% of the asset value of the latest financial statements of Yao Yong Real Property Co., Ltd.

TABLE 3

CHUNGHWA TELECOM CO., LTD.

MARKETABLE SECURITIES HELD

SEPTEMBER 30, 2010

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


No.	Held Company Name	Marketable Securities Type and Name	Relationship with the Company	Financial Statement Account	September 30, 2010										Note
No.	Held Company Name	Marketable Securities Type and Name	Relationship with the Company	Financial Statement Account	Shares (Thousands/ Thousand Units)		Carrying Value (Note 5)			Percentage of Ownership		Market Value or Net Asset Value			Note

0	Chunghwa Telecom Co., Ltd.	Stocks
		Senao International Co., Ltd.	Subsidiary	Investments accounted for using equity method		71,773	$	1,352,399			28	$	3,638,899			Note 4
		Light Era Development Co., Ltd.	Subsidiary	Investments accounted for using equity method		300,000		2,866,083			100		2,866,403			Note 1
		Chunghwa Investment Co., Ltd.	Subsidiary	Investments accounted for using equity method		178,000		1,717,158			89		1,790,975			Note 1
		Chunghwa Telecom Singapore Pte., Ltd.	Subsidiary	Investments accounted for using equity method		61,869		1,470,709			100		1,470,709			Note 1
		Chunghwa System Integration Co., Ltd.	Subsidiary	Investments accounted for using equity method		60,000		714,093			100		645,421			Note 1
		Donghwa Telecom Co., Ltd.	Subsidiary	Investments accounted for using equity method		129,590		553,763			100		553,763			Note 1
		CHIEF Telecom Inc.	Subsidiary	Investments accounted for using equity method		37,942		507,834			69		454,924			Note 1
		Taiwan International Standard Electronics Co., Ltd.	Equity-method investee	Investments accounted for using equity method		1,760		476,566			40		681,604			Note 1
		Viettel-CHT Co., Ltd.	Equity-method investee	Investments accounted for using equity method		—		265,652			30		265,652			Note 1
		InfoExplorer Co., Ltd.	Subsidiary	Investments accounted for using equity method		22,498		256,070			49		213,936			Note 1
		Chunghwa International Yellow Pages Co., Ltd.	Subsidiary	Investments accounted for using equity method		15,000		187,299			100		187,299			Note 1
		Skysoft Co., Ltd.	Equity-method investee	Investments accounted for using equity method		4,438		91,094			30		51,727			Note 1
		Chunghwa Telecom Global, Inc.	Subsidiary	Investments accounted for using equity method		6,000		83,005			100		105,082			Note 1
		Spring House Entertainment Inc.	Subsidiary	Investments accounted for using equity method		5,996		67,912			56		52,248			Note 1
		KingWaytek Technology Co., Ltd.	Equity-method investee	Investments accounted for using equity method		1,703		63,241			33		16,412			Note 1
		So-net Entertainment Taiwan Co., Ltd.	Equity-method investee	Investments accounted for using equity method		3,429		26,134			30		8,280			Note 1
		Chunghwa Telecom Japan Co., Ltd.	Subsidiary	Investments accounted for using equity method		1		17,078			100		18,777			Note 1
		New Prospect Investments Holdings Ltd. (B.V.I.)	Subsidiary	Investments accounted for using equity method		—	(US$	— 1 dollar	)		100	(US$	— 1 dollar	)		Note 2
		Prime Asia Investments Group Ltd. (B.V.I.)	Subsidiary	Investments accounted for using equity method		—	(US$	— 1 dollar	)		100	(US$	— 1 dollar	)		Note 2
		Taipei Financial Center Corp.	—	Financial assets carried at cost		172,927		1,789,530			12