1934 Act Registration No. 1-14700

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 6-K

 

 

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16 OF

THE SECURITIES EXCHANGE ACT OF 1934

For the month of September 2012

 

 

Taiwan Semiconductor Manufacturing Company Ltd.

(Translation of Registrant’s Name Into English)

 

 

No. 8, Li-Hsin Rd. 6,

Hsinchu Science Park,

Taiwan

(Address of Principal Executive Offices)

 

 

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

Form 20-F  x            Form 40-F  ¨

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

Yes  ¨             No  x

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

 

 

 

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SIGNATURES

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

 

 

				Taiwan Semiconductor Manufacturing Company Ltd.
Date: September 4, 2012				By		/s/ Lora Ho
						Lora Ho
						Senior Vice President & Chief Financial Officer

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Taiwan Semiconductor Manufacturing

Company Limited

Financial Statements for the

Six Months Ended June 30, 2012 and 2011 and

Independent Auditors’ Report

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INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Shareholders

Taiwan Semiconductor Manufacturing Company Limited

We have audited the accompanying balance sheets of Taiwan Semiconductor Manufacturing Company Limited as of June 30, 2012 and 2011, and the related statements of income, changes in shareholders’ equity and cash flows for the six months then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Taiwan Semiconductor Manufacturing Company Limited as of June 30, 2012 and 2011, and the results of its operations and its cash flows for the six months then ended in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, requirements of the Business Accounting Law and Guidelines Governing Business Accounting with respect to financial accounting standards, and accounting principles generally accepted in the Republic of China.

We have also audited, in accordance with the Rules Governing the Audit of Financial Statements by Certified Public Accountants and auditing standards generally accepted in the Republic of China, the consolidated financial statements of Taiwan Semiconductor Manufacturing Company Limited and subsidiaries as of and for the six months ended June 30, 2012 and 2011 on which we have issued an unqualified opinion.

August 14, 2012

Notice to Readers

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

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

 

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Taiwan Semiconductor Manufacturing Company Limited

BALANCE SHEETS

JUNE 30, 2012 AND 2011

(In Thousands of New Taiwan Dollars, Except Par Value)

 

 

 

 

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

 

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Taiwan Semiconductor Manufacturing Company Limited

STATEMENTS OF INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011

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

 

 

		2012										2011
				Amount				%						Amount				%
GROSS SALES (Notes 2 and 23)				$	234,483,507									$	212,301,752
SALES RETURNS AND ALLOWANCES (Notes 2 and 8)					3,734,225										1,907,979
NET SALES					230,749,282				100						210,393,773				100
COST OF SALES (Notes 9, 18 and 23)					121,938,291				53						113,265,613				54
GROSS PROFIT BEFORE AFFILIATES ELIMINATION					108,810,991				47						97,128,160				46
REALIZED (UNREALIZED) GROSS PROFIT FROM AFFILIATES (Note 2)					(139,950	)			-						249,480				-
GROSS PROFIT					108,671,041				47						97,377,640				46
OPERATING EXPENSES (Notes 18 and 23)
Research and development					18,351,671				8						15,283,607				7
General and administrative					8,402,018				4						6,029,204				3
Marketing					1,155,674				-						1,211,366				1
Total operating expenses					27,909,363				12						22,524,177				11
INCOME FROM OPERATIONS					80,761,678				35						74,853,463				35
NON-OPERATING INCOME AND GAINS
Equity in earnings of equity method investees, net (Notes 2 and 10)					5,083,116				3						2,914,860				2
Interest income					464,380				-						402,293				-
Settlement income (Note 25)					448,275				-						433,425				-
Technical service income (Note 23)					232,904				-						224,238				-
Foreign exchange gain, net (Note 2)					213,731				-						322,334				-
Others (Notes 2 and 23)					305,738				-						461,096				-
Total non-operating income and gains					6,748,144				3						4,758,246				2

(Continued)

 

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Taiwan Semiconductor Manufacturing Company Limited

STATEMENTS OF INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011

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

 

 

		2012												2011
				Amount				%								Amount				%
NON-OPERATING EXPENSES AND LOSSES
Impairment loss of financial assets (Notes 2, 6 and 22)				$	2,677,529				1							$	-				-
Impairment loss on idle assets (Note 2)					418,330				-								-				-
Interest expense					370,798				-								146,374				-
Valuation loss on financial instruments, net (Notes 2, 5 and 22)					150,310				-								197,255				-
Loss on disposal of property, plant and equipment (Notes 2 and 23)					66,620				-								153,131				-
Others (Note 2)					7,869				-								122,232				-
Total non-operating expenses and losses					3,691,456				1								618,992				-
INCOME BEFORE INCOME TAX					83,818,366				37								78,992,717				37
INCOME TAX EXPENSE (Notes 2 and 17)					8,531,562				4								6,764,610				3
NET INCOME				$	75,286,804				33							$	72,228,107				34

 

		2012												2011
				Before Income Tax				After Income Tax								Before Income Tax				After Income Tax
EARNINGS PER SHARE (NT$, Note 21)
Basic earnings per share				$	3.23			$	2.90							$	3.05			$	2.79
Diluted earnings per share				$	3.23			$	2.90							$	3.05			$	2.79

 

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

 

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Taiwan Semiconductor Manufacturing Company Limited

STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011

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

 

 

																																						Others
																																												Unrealized
		Capital Stock - Common Stock																Retained Earnings																						Cumulative				Gain/Loss						Total
				Shares										Capital						Legal				Special				Unappropriated												Translation				On Financial						Shareholders’
				(In Thousands)				Amount						Surplus						Capital Reserve				Capital Reserve				Earnings				Total								Adjustments				Instruments						Equity
BALANCE, JANUARY 1, 2012					25,916,222			$	259,162,226					$	55,846,357					$	102,399,995			$	6,433,874			$	213,357,286			$	322,191,155							$	(6,433,369	)		$	(1,172,855	)				$	629,593,514
Appropriations of prior year’s earnings
Legal capital reserve					-				-						-						13,420,128				-				(13,420,128	)			-								-				-						-
Special capital reserve					-				-						-						-				1,172,350				(1,172,350	)			-								-				-						-
Cash dividends to shareholders - NT$3.00 per share					-				-						-						-				-				(77,748,668	)			(77,748,668	)							-				-						(77,748,668	)
Net income for the six months ended June 30, 2012					-				-						-						-				-				75,286,804				75,286,804								-				-						75,286,804
Adjustment arising from changes in percentage of ownership in equity method investees					-				-						83,954						-				-				-				-								-				-						83,954
Translation adjustments					-				-						-						-				-				-				-								(1,397,526	)			-						(1,397,526	)
Issuance of stock from exercising employee stock options					4,487				44,868						94,838						-				-				-				-								-				-						139,706
Net changes of valuation gain/loss on available-for-sale financial assets					-				-						-						-				-				-				-								-				1,508,301						1,508,301
Net change in shareholders’ equity from equity method investees					-				-						-						-				-				-				-								-				(795	)					(795	)
BALANCE, JUNE 30, 2012					25,920,709			$	259,207,094					$	56,025,149					$	115,820,123			$	7,606,224			$	196,302,944			$	319,729,291							$	(7,830,895	)		$	334,651					$	627,465,290
BALANCE, JANUARY 1, 2011					25,910,078			$	259,100,787					$	55,698,434					$	86,239,494			$	1,313,047			$	178,227,030			$	265,779,571							$	(6,543,163	)		$	109,289					$	574,144,918
Appropriations of prior year’s earnings
Legal capital reserve					-				-						-						16,160,501				-				(16,160,501	)			-								-				-						-
Special capital reserve					-				-						-						-				5,120,827				(5,120,827	)			-								-				-						-
Cash dividends to shareholders - NT$3.00 per share					-				-						-						-				-				(77,730,236	)			(77,730,236	)							-				-						(77,730,236	)
Net income for the six months ended June 30, 2011					-				-						-						-				-				72,228,107				72,228,107								-				-						72,228,107
Adjustment arising from changes in percentage of ownership in equity method investees					-				-						14,643						-				-				-				-								-				-						14,643
Translation adjustments					-				-						-						-				-				-				-								(4,917,884	)			-						(4,917,884	)
Issuance of stock from exercising employee stock options					4,205				42,044						89,310						-				-				-				-								-				-						131,354
Net changes of valuation gain/loss on available-for-sale financial assets					-				-						-						-				-				-				-								-				176,970						176,970
Net change in shareholders’ equity from equity method investees					-				-						-						-				-				-				-								-				(98,351	)					(98,351	)
BALANCE, JUNE 30, 2011					25,914,283			$	259,142,831					$	55,802,387					$	102,399,995			$	6,433,874			$	151,443,573			$	260,277,442							$	(11,461,047	)		$	187,908					$	563,949,521

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

 

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Taiwan Semiconductor Manufacturing Company Limited

STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011

(In Thousands of New Taiwan Dollars)

 

 

		2012				2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	75,286,804			$	72,228,107
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			57,167,176				49,954,937
Unrealized (realized) gross profit from affiliates			139,950				(249,480	)
Amortization of premium/discount of financial assets			1,142				7,757
Gain on disposal of available-for-sale financial assets, net			-				(35,151	)
Equity in earnings of equity method investees, net			(5,083,116	)			(2,914,860	)
Cash dividends received from equity method investees			1,285,480				1,914,392
Loss on disposal of property, plant and equipment and other assets, net			56,220				10,251
Impairment loss of financial assets			2,677,529				-
Impairment loss on idle assets			418,330				-
Deferred income tax			2,096,079				336,498
Changes in operating assets and liabilities:
Financial assets and liabilities at fair value through profit or loss			22,693				(25,289	)
Receivables from related parties			(13,699,193	)			(1,668,051	)
Notes and accounts receivable			(1,684,241	)			(1,546,839	)
Allowance for sales returns and others			1,374,315				(1,699,667	)
Other receivables from related parties			(65,063	)			(64,293	)
Other financial assets			(33,744	)			(5,588	)
Inventories			(5,575,450	)			(2,758,344	)
Prepaid expenses and other current assets			(86,602	)			284,243
Accounts payable			2,787,642				(2,091,732	)
Payables to related parties			615,433				811,641
Income tax payable			(3,868,404	)			(1,032,551	)
Accrued profit sharing to employees and bonus to directors			5,076,820				4,900,168
Accrued expenses and other current liabilities			3,582,071				(1,875,486	)
Accrued pension cost			22,332				35,858
Net cash provided by operating activities			122,514,203				114,516,521
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of:
Property, plant and equipment			(105,768,037	)			(139,147,091	)
Investments accounted for using equity method			(2,170,738	)			(511,390	)
Proceeds from return of capital by investees			186,726				-
Proceeds from disposal or redemption of:
Available-for-sale financial assets			-				1,035,151
Held-to-maturity financial assets			-				2,675,000
Property, plant and equipment and other assets			83,226				2,068,298

(Continued)

 

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Taiwan Semiconductor Manufacturing Company Limited

STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011

(In Thousands of New Taiwan Dollars)

 

 

		2012				2011
Increase in deferred charges		$	(674,769	)		$	(788,025	)
Decrease in refundable deposits			228,229				3,841,898
Decrease (increase) in other assets			30,798				(22,600	)
Net cash used in investing activities			(108,084,565	)			(130,848,759	)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in short-term loans			4,846,057				2,232,244
Proceeds from issuance of bonds			17,000,000				-
Repayment of bonds			(4,500,000	)			-
Decrease in guarantee deposits			(188,903	)			(245,004	)
Proceeds from exercise of employee stock options			139,706				131,354
Net cash provided by financing activities			17,296,860				2,118,594
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			31,726,498				(14,213,644	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			85,262,521				109,511,130
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	116,989,019			$	95,297,486
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid		$	266,881			$	221,853
Income tax paid		$	10,270,194			$	7,417,035
INVESTING ACTIVITIES AFFECTING BOTH CASH AND NON-CASH ITEMS
Acquisition of property, plant and equipment		$	116,448,332			$	133,768,114
Decrease (increase) in payables to contractors and equipment suppliers			(10,630,116	)			5,379,459
Increase in payables to related parties			(50,110	)			-
Nonmonetary exchange trade-out price			(69	)			(482	)
Cash paid		$	105,768,037			$	139,147,091
Disposal of property, plant and equipment and other assets		$	65,393			$	2,905,302
Decrease (increase) in other receivables to related parties			17,902				(836,522	)
Nonmonetary exchange trade-out price			(69	)			(482	)
Cash received		$	83,226			$	2,068,298
Acquisition of deferred charges		$	787,769			$	788,025
Increase in other long-term payables (including current portion)			(113,000	)			-
Cash paid		$	674,769			$	788,025

(Continued)

 

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Taiwan Semiconductor Manufacturing Company Limited

STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011

(In Thousands of New Taiwan Dollars)

 

 

		2012				2011
NON-CASH INVESTING AND FINANCING ACTIVITIES
Idle assets reclassified from property, plant and equipment		$	418,330			$	-
Current portion of other long-term payables (under accrued expenses and other current liabilities)		$	59,000			$	897,298
Current portion of bonds payable		$	-			$	4,500,000

 

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

 

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Taiwan Semiconductor Manufacturing Company Limited

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011

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

 

 

1.

GENERAL

Taiwan Semiconductor Manufacturing Company Limited (the “Company” or “TSMC”), a Republic of China (R.O.C.) corporation, was incorporated on February 21, 1987. The Company is a dedicated foundry in the semiconductor industry which engages mainly in the manufacturing, selling, packaging, testing and computer-aided design of integrated circuits and other semiconductor devices and the manufacturing of masks. Beginning in 2010, the Company also engages in the researching, developing, designing, manufacturing and selling of solid state lighting devices and related applications products and systems, and renewable energy and efficiency related technologies and products. In August 2011, the Company transferred its solid state lighting and solar businesses into its wholly-owned, newly incorporated subsidiaries, TSMC Solid State Lighting Ltd. (TSMC SSL) and TSMC Solar Ltd. (TSMC Solar), respectively.

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

As of June 30, 2012 and 2011, the Company had 31,648 and 30,364 employees, respectively.

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The financial statements are presented in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, Business Accounting Law, Guidelines Governing Business Accounting, and accounting principles generally accepted in the R.O.C.

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

Significant accounting policies are summarized as follows:

 

Foreign-currency Transactions

Foreign-currency transactions other than derivative contracts 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.

 

Use of Estimates

The preparation of financial statements in conformity with the aforementioned guidelines, law and principles requires management to make reasonable assumptions and estimates of matters that are inherently uncertain. The actual results may differ from management’s estimates.

 

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Classification of Current and Noncurrent Assets and Liabilities

Current assets are assets held for trading purposes and assets expected to be converted to cash, sold or consumed within one year from the balance sheet date. Current liabilities are obligations incurred for trading purposes and 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

Repurchase agreements collateralized by government bonds, corporate bonds and short-term commercial paper acquired with maturities of less than three months from the date of purchase are classified as cash equivalents. The carrying amount approximates fair value due to their short term nature.

Financial Assets/Liabilities at Fair Value Through Profit or Loss

Derivatives that do not meet the criteria for hedge accounting are initially recognized at fair value, with transaction costs expensed as incurred. The derivatives are remeasured at fair value subsequently with changes in fair value recognized in earnings. A regular way purchase or sale of financial assets is accounted for using settlement date accounting.

Fair value is estimated using valuation techniques incorporating estimates and assumptions that are consistent with prevailing market conditions. When the fair value is positive, the derivative is recognized as a financial asset; when the fair value is negative, the derivative is recognized as a financial liability.

Available-for-sale Financial Assets

Available-for-sale financial assets are initially recognized at fair value plus transaction costs that are directly attributable to the acquisition. Changes in fair value from subsequent remeasurement are reported as a separate component of shareholders’ 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 settlement date accounting.

The fair value of overseas publicly traded stock is determined using the closing prices at the end of the period.

Any difference between the initial carrying amount of a debt security and the amount due at maturity is amortized using the effective interest method, with the amortization recognized in earnings.

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, for equity securities, the previously recognized impairment loss is reversed to the extent of the decrease and recorded as an adjustment to shareholders’ 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

Debt securities for which the Company has a positive intention and ability to hold to maturity are categorized as held-to-maturity financial assets and are carried at amortized cost. Those financial assets are initially recognized at fair value plus transaction costs that are directly attributable to the acquisition. Gains or losses are recognized at the time of derecognition, impairment or amortization. A regular way purchase or sale of financial assets is accounted for using settlement date accounting.

 

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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.

Financial Assets Carried at Cost

Investments for which the Company does not exercise significant influence and that do not have a quoted market price in an active market and whose fair value cannot be reliably measured, such as non-publicly traded stocks and mutual funds, are carried at their original cost. The costs of non-publicly traded stocks and mutual funds are determined using the weighted-average method. 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.

Cash dividends are recognized as investment income upon resolution of shareholders of an investee. Stock dividends are recorded as an increase in the number of shares held and do not affect investment income. The cost per share is recalculated based on the new total number of shares.

Allowance for Doubtful Receivables

An allowance for doubtful receivables is provided based on a review of the collectability of receivables. The Company assesses the collectability of receivables by performing the account aging analysis and examining current trends in the credit quality of its customers.

The Company’s provision was originally set at 1% of the amount of outstanding receivables. On January 1, 2011, the Company adopted the third revision of Statement of Financial Accounting Standards (SFAS) No. 34, “Financial Instruments: Recognition and Measurement (SFAS No. 34).” One of the main revisions is that the impairment of receivables originated by the Company is subject to the provisions of SFAS No. 34. Accordingly, the Company evaluates for indication of impairment of accounts receivable based on an individual and collective basis at the end of each reporting period. When objective evidence indicates that the estimated future cash flow of accounts receivable decreases as a result of one or more events that occurred after the initial recognition of the accounts receivable, such accounts receivable are deemed to be impaired.

Because of the Company’s short average collection period, the amount of the impairment loss recognized is the difference between the carrying amount of accounts receivable and estimated future cash flows without considering the discounting effect. Changes in the carrying amount of the allowance account are recognized as bad debt expense which is recorded in the operating expenses - general and administrative. When accounts receivable are considered uncollectable, the amount is written off against the allowance account.

Inventories

Inventories are recorded at standard cost and adjusted to approximate weighted-average cost on the balance sheet date.

Inventories are stated at the lower of cost or net realizable value. Inventory write-downs are made on an item-by-item basis, except where it may be appropriate to group similar or related items. Net realizable value is the estimated selling price of inventories less all estimated costs of completion and necessary selling costs.

 

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Investments Accounted for Using Equity Method

Investments in companies wherein the Company exercises significant influence over the operating and financial policy decisions are accounted for using the equity method. The Company’s share of the net income or net loss of an investee is recognized in the “equity in earnings/losses of equity method investees, net” account. The cost of an investment shall be analyzed and the cost of investment in excess of the fair value of identifiable net assets acquired, representing goodwill, shall not be amortized. If the fair value of identifiable net assets acquired exceeds the cost of investment, the excess shall be proportionately allocated as reductions to fair values of non-current assets (except for financial assets other than investments accounted for using the equity method and deferred income tax assets). When an indication of impairment is identified, the carrying amount of the investment is reduced, with the related impairment loss recognized in earnings.

When the Company subscribes for additional investee’s 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’s 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 capital surplus. Cash dividends received from an investee shall reduce the carrying amount of the investment. Stock dividends are recorded as an increase in the number of shares held and do not affect investment income.

Gains or losses on sales from the Company to equity method investees are deferred in proportion to the Company’s ownership percentages in the investees until such gains or losses are realized through transactions with third parties. The entire amount of the gains or losses on sales to investees over which the Company has a controlling interest is deferred until such gains or losses are realized through subsequent sales of the related products to third parties. Gains or losses on sales from equity method investees to the Company are deferred in proportion to the Company’s ownership percentages in the investees until they are realized through transactions with third parties. Gains or losses on sales between equity method investees over each of which the Company has control are deferred in proportion to the Company’s weighted-average ownership percentage in the investee which records gains or losses. In transactions between equity method investees over either or both of which the Company has no control, gains or losses on sales are deferred in proportion to the multiplication of the Company’s weighted-average ownership percentages in the investees. Such gains or losses are deferred until they are realized through transactions with third parties.

If an investee’s functional currency is a foreign currency, differences will result from the translation of the investee’s financial statements into the reporting currency of the Company. Such differences are charged or credited to cumulative translation adjustments, a separate component of shareholders’ equity.

Property, Plant and Equipment, Assets Leased to Others and Idle Assets

Property, plant and equipment and assets leased to others are stated at cost less accumulated depreciation. 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. Significant additions, renewals and betterments incurred during the construction period are capitalized. Maintenance and repairs are expensed as incurred.

Depreciation is computed using the straight-line method over the following estimated service lives: buildings - 10 to 20 years; machinery and equipment - 5 years; and office equipment - 3 to 5 years.

Upon sale or disposal of property, plant and equipment and assets leased to others, the related cost and accumulated depreciation are deducted from the corresponding accounts, with any gain or loss recorded as non-operating gains or losses in the period of sale or disposal.

 

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When property, plant and equipment are determined to be idle or useless, they are transferred to idle assets at the lower of the net realizable value or carrying amount. Depreciation on the idle assets is provided continuously, and the idle assets are tested for impairment on a periodical basis.

Intangible Assets

Goodwill represents the excess of the consideration paid for acquisition over the fair value of identifiable net assets acquired. Goodwill is no longer amortized and instead is tested for impairment annually, or more frequently if events or changes in circumstances suggest that the carrying amount may not be recoverable. If an event occurs or circumstances change which indicate that the fair value of goodwill is more likely than not below its carrying amount, an impairment loss is recognized. A subsequent reversal of such impairment loss is not allowed.

Deferred charges consist of technology license fees, software and system design costs and patent and others. The amounts are amortized over the following periods: Technology license fees - the estimated life of the technology or the term of the technology transfer contract; software and system design costs - 3 years; patent and others - the economic life or contract period. 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 previously recognized impairment loss 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 amortization, as if no impairment loss had been recognized.

Expenditures related to research activities and those related to development activities that do not meet the criteria for capitalization are charged to expense when incurred.

Pension Costs

For employees who participate in defined contribution pension plans, pension costs are recorded based on the actual contributions made to employees’ individual pension accounts during their service periods. For employees who participate in defined benefit pension plans, pension costs are recorded based on actuarial calculations.

Income Tax

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

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

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

Income tax on unappropriated earnings at a rate of 10% is expensed in the year of shareholder approval which is the year subsequent to the year the earnings are generated.

 

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Stock-based Compensation

Employee stock options that were granted or modified in the period from January 1, 2004 to December 31, 2007 are accounted for by the interpretations issued by the Accounting Research and Development Foundation of the Republic of China. The Company adopted the intrinsic value method and any compensation cost determined using this method is recognized in earnings over the employee vesting period. Employee stock option plans that were granted or modified after December 31, 2007 are accounted for using fair value method in accordance with SFAS No. 39, “Accounting for Share-based Payment.” The Company did not grant or modify any employee stock options since January 1, 2008.

Revenue Recognition and Allowance for Sales Returns and Others

The Company recognizes revenue when evidence of an arrangement exists, the rewards of ownership and significant risk of the goods has been transferred to the buyer, price is fixed or determinable, and collectability is reasonably assured. Provisions for estimated sales returns and other allowances are recorded in the period the related revenue is recognized, based on historical experience, management’s judgment, and any known factors that would significantly affect the allowance.

Sales prices are determined using fair value taking into account related sales discounts agreed to by the Company and its customers. Sales agreements typically provide that payment is due 30 days from invoice date for a majority of the customers and 30 to 45 days after the end of the month in which sales occur for some customers. Since the receivables from sales are collectible within one year and such transactions are frequent, fair value of the receivables is equivalent to the nominal amount of the cash to be received.

Spin-off

In accordance with the Company’s organization realignment, the Company contributed net assets, including cash, to the newly formed subsidiaries in exchange for all of the shares of those subsidiaries. The net assets transferred are reflected at their net book value without recognizing any gain or loss.

 

3.	ACCOUNTING CHANGES

On January 1, 2011, the Company prospectively adopted the newly revised SFAS No. 34, “Financial Instruments: Recognition and Measurement.” The main revisions include (1) finance lease receivables are now covered by SFAS No. 34; (2) the scope of the applicability of SFAS No. 34 to insurance contracts is amended; (3) loans and receivables originated by the Company are now covered by SFAS No. 34; (4) additional guidelines on impairment testing of financial assets carried at amortized cost when the debtor has financial difficulties and the terms of obligations have been modified; and (5) accounting treatment by a debtor for modifications in the terms of obligations. This accounting change did not have a significant effect on the Company’s financial statements as of and for the six months ended June 30, 2011.

On January 1, 2011, the Company adopted the newly issued SFAS No. 41, “Operating Segments.” The statement requires identification and disclosure of operating segments on the basis of how the Company’s chief operating decision maker regularly reviews information in order to allocate resources and assess performance. This statement supersedes SFAS No. 20, “Segment Reporting” and it only changes the disclosure of segment reporting due to the adoption. The Company has conformed to the disclosure requirement and provided the operating segments disclosure in the consolidated financial statements.

 

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4.	CASH AND CASH EQUIVALENTS

 

 

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

 

The Company entered into derivative contracts during the six months ended June 30, 2012 and 2011 to manage exposures due to fluctuations of foreign exchange rates. The derivative contracts entered into by the Company did not meet the criteria for hedge accounting. Therefore, the Company did not apply hedge accounting treatment for its derivative contracts.

Outstanding forward exchange contracts consisted of the following:

 

		Maturity Date		Contract Amount (In Thousands)
June 30, 2012
Sell US$/Buy JPY		July 2012		US$211,000/JPY16,778,329
Sell US$/Buy EUR		July 2012		US$46,396/EUR37,000
Sell NT$/Buy JPY		July 2012		NT$1,127,870/JPY3,000,000

Outstanding cross currency swap contracts consisted of the following:

 

Maturity Date		Contract Amount (In Thousands)		Range of Interest Rates Paid		Range of Interest Rates Received
June 30, 2011
July 2011		US$128,000/NT$3,699,250		0.46%-1.01%		-

For the six months ended June 30, 2012 and 2011, net losses on derivative financial instruments were NT$150,310 thousand and NT$197,255 thousand, respectively.

 

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6.	AVAILABLE-FOR-SALE FINANCIAL ASSETS

Available-for-sale financial assets held by the Company are overseas publicly traded stock. For the six months ended June 30, 2012, the Company recognized an impairment loss on available-for-sale financial assets of NT$2,677,529 thousand due to the significant decline in fair value.

 

7.	HELD-TO-MATURITY FINANCIAL ASSETS

 

 

8.	ALLOWANCES FOR DOUBTFUL RECEIVABLES, SALES RETURNS AND OTHERS

As of June 30, 2012 and 2011, the balance of the allowance for doubtful receivables was NT$485,120 thousand and NT$488,000 thousand, respectively. There was no additions or deductions of allowances for doubtful receivables for the six months ended June 30, 2012 and 2011.

Movements of the allowance for sales returns and others were as follows:

 

 

9.	INVENTORIES

 

Write-down of inventories to net realizable value in the amount of NT$776,757 thousand and NT$258,871 thousand, respectively, were included in the cost of sales for the six months ended June 30, 2012 and 2011.

 

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10.	INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD

 

In the second half year of 2011, the Company continually increased its investment in TSMC China for the amount of NT$6,759,300 thousand, and the Company has received the approval from the Investment Commission of Ministry of Economic Affairs.

To foster a stronger sense of corporate entrepreneurship and facilitate business specializations in order to strengthen overall profitability and operational efficiency, the Company transferred its solid state lighting and solar businesses into its wholly-owned, newly incorporated subsidiaries, TSMC SSL and TSMC Solar, in August 2011. Furthermore, the Company adjusted its investment structure by transferring TSMC Lighting NA to TSMC SSL and transferring Motech, TSMC Solar Europe, TSMC Solar NA and part of VTAF III to TSMC Solar. As of August 1, 2011, the net book values of the Company’s certain assets, liabilities and shareholders’ equity, including cash, contributed to TSMC SSL and TSMC Solar in exchange for all the shares of TSMC SSL and TSMC Solar amounted to NT$2,270,000 thousand and NT$11,180,000 thousand, respectively.

In January 2012, the Company invested NT$100,000 thousand and established a wholly-owned subsidiary, TSMC GN, which engages mainly in investment activities. In February 2012, the Company participated directly or through TSMC GN in the issuance of new shares by TSMC SSL and TSMC Solar for cash. As of June 30, 2012, the Company’s percentages of ownership in TSMC SSL and TSMC Solar were to 95% and 99%, respectively.

 

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For the six months ended June 30, 2012 and 2011, equity in earnings of equity method investees was a net gain of NT$5,083,116 thousand and NT$2,914,860 thousand, respectively.

As of June 30, 2012 and 2011, the quoted market price of publicly traded stocks in unrestricted investments accounted for using the equity method (VIS and GUC) were NT$13,587,844 thousand and NT$14,691,013 thousand, respectively.

Movements of the difference between the cost of investments and the Company’s share in investees’ net assets allocated to depreciable assets were as follows:

 

As of June 30, 2012 and 2011, balance of the aforementioned difference allocated to goodwill was NT$1,061,885 thousand and NT$1,415,565 thousand, respectively. There was no acquisition or impairment in goodwill for the six months ended June 30, 2012 and 2011.

 

11.	FINANCIAL ASSETS CARRIED AT COST

 

 

12.	PROPERTY, PLANT AND EQUIPMENT

 

 

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		Six Months Ended June 30, 2011
				Balance, Beginning of Period				Additions				Disposals				Reclassification				Balance, End of Period
Cost
Buildings				$	128,646,942			$	18,154,973			$	(11,175	)		$	-			$	146,790,740
Machinery and equipment					852,733,592				98,688,934				(1,119,442	)			(27,667	)			950,275,417
Office equipment					11,730,537				1,424,494				(239,066	)			-				12,915,965
					993,111,071			$	118,268,401			$	(1,369,683	)		$	(27,667	)			1,109,982,122
Accumulated depreciation
Buildings					81,347,877			$	4,360,111			$	(9,762	)		$	-				85,698,226
Machinery and equipment					616,495,207				44,015,931				(1,079,340	)			(15,678	)			659,416,120
Office equipment					8,762,361				547,690				(239,066	)			-				9,070,985
					706,605,445			$	48,923,732			$	(1,328,168	)		$	(15,678	)			754,185,331
Advance payments and construction in progress					80,348,673			$	15,499,713			$	(2,802,779	)		$	-				93,045,607
				$	366,854,299															$	448,842,398

No interest was capitalized during the six months ended June 30, 2012 and 2011.

 

13.	DEFERRED CHARGES, NET

 

		Six Months Ended June 30, 2012
				Balance, Beginning of Period				Additions				Amortization				Reclassification				Balance, End of Period
Technology license fees				$	1,617,310			$	-			$	(209,844	)		$	-			$	1,407,466
Software and system design costs					2,316,571				375,826				(544,876	)			(57,438	)			2,090,083
Patent and others					785,363				411,943				(246,792	)			57,438				1,007,952
				$	4,719,244			$	787,769			$	(1,001,512	)		$	-			$	4,505,501

 

		Six Months Ended June 30, 2011
				Balance, Beginning of Period				Additions				Amortization				Balance, End of Period
Technology license fees				$	2,277,832			$	-			$	(334,985	)		$	1,942,847
Software and system design costs					2,075,935				672,362				(507,499	)			2,240,798
Patent and others					1,102,660				115,663				(185,393	)			1,032,930
				$	5,456,427			$	788,025			$	(1,027,877	)		$	5,216,575

 

14.	SHORT-TERM LOANS

 

		June 30
				2012				2011
Unsecured loans:
US$1,029,700 thousand, due by August 2012, and annual interest at 0.53%-0.77% in 2012; US$922,000 thousand and EUR158,350 thousand, due in July 2011, and annual interest at 0.35%-1.53% in 2011				$	30,772,585			$	33,140,881

 

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15.	BONDS PAYABLE

 

		June 30
				2012				2011
Domestic unsecured bonds:
Issued in September 2011 and repayable in September 2016, 1.40% interest payable annually				$	10,500,000			$	-
Issued in September 2011 and repayable in September 2018, 1.63% interest payable annually					7,500,000				-
Issued in January 2012 and repayable in January 2017, 1.29% interest payable annually					10,000,000				-
Issued in January 2012 and repayable in January 2019, 1.46% interest payable annually					7,000,000				-
Issued in January 2002 and repayable in January 2012, 3.00% interest payable annually					-				4,500,000
					35,000,000				4,500,000
Current portion					-				(4,500,000	)
				$	35,000,000			$	-

With the approval from the Financial Supervisory Commission, the Company issued domestic unsecured bonds in the amount of NT$18,900,000 thousand in August 2012.

 

16.	PENSION PLANS

The pension mechanism under the Labor Pension Act (the “Act”) is deemed a defined contribution plan. Pursuant to the Act, the Company has made monthly contributions equal to 6% of each employee’s monthly salary to employees’ pension accounts and recognized pension costs of NT$564,181 thousand and NT$555,524 thousand for the six months ended June 30, 2012 and 2011, respectively.

The Company has a defined benefit plan under the Labor Standards Law that provides benefits based on an employee’s length of service and average monthly salary for the six-month period prior to retirement. The Company contributes an amount equal to 2% of salaries paid each month to a pension fund (the Fund), which is administered by the Labor Pension Fund Supervisory Committee (the Committee) and deposited in the Committee’s name in the Bank of Taiwan. The Company recognized pension costs of NT$141,823 thousand and NT$150,832 thousand for the six months ended June 30, 2012 and 2011, respectively.

Movements of the Fund and accrued pension cost under the defined benefit plan were summarized as follows:

 

		Six Months Ended June 30
				2012				2011
The Fund
Balance, beginning of period				$	3,017,351			$	2,835,231
Contributions					116,685				116,010
Interest					26,304				27,083
Payments					(10,791	)			(3,833	)
Balance, end of period				$	3,149,549			$	2,974,491
Accrued pension cost
Balance, beginning of period				$	3,860,898			$	3,824,601
Accruals					22,332				35,858
Balance, end of period				$	3,883,230			$	3,860,459

 

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17.	INCOME TAX

 

a.

A reconciliation of income tax expense based on “income before income tax” at the statutory rates and income tax currently payable was as follows:

 

 

b.

Income tax expense consisted of the following:

 

 

c.

Deferred income tax assets consisted of the following:

 

 

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

 

d.

Integrated income tax information:

The balance of the imputation credit account as of June 30, 2012 and 2011 was NT$14,283,587 thousand and NT$8,826,775 thousand, respectively.

The estimated and actual creditable ratios for distribution of earnings of 2011 and 2010 were 6.69% and 4.96%, respectively.

The imputation credit allocated to shareholders is based on its balance as of the date of the dividend distribution. The estimated creditable ratio may change when the actual distribution of the imputation credit is made.

 

e.

All earnings generated prior to December 31, 1997 have been appropriated.

 

f.

As of June 30, 2012, investment tax credits consisted of the following:

 

 

g.

The profits generated from the following projects are exempt from income tax for a five-year period:

 

 

h.

The tax authorities have examined income tax returns of the Company through 2008. All investment tax credit adjustments assessed by the tax authorities have been recognized accordingly.

 

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18.	LABOR COST, DEPRECIATION AND AMORTIZATION

 

 

 

19.	SHAREHOLDERS’ EQUITY

As of June 30, 2012, 1,091,702 thousand ADSs of the Company were traded on the NYSE. The number of common shares represented by the ADSs was 5,458,511 thousand (one ADS represents five common shares).

Capital surplus can be used to offset a deficit under the Company Law. However, the capital surplus generated from donations and the excess of the issuance price over the par value of capital stock (including the stock issued for new capital, mergers, convertible bonds and the surplus from treasury stock transactions) may be appropriated as stock dividends, which are limited to a certain percentage of the Company’s paid-in capital. In addition, the capital surplus from long-term investments may not be used for any purpose. However, according to the revised Company Law, effective January 2012, the aforementioned capital surplus generated from donations and the excess of the issuance price over the par value of capital stock can also be used to distribute cash in proportion to original shareholders’ holding.

 

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Capital surplus consisted of the following:

 

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

 

a.

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

 

b.

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

 

c.

Bonus to directors and profit sharing to employees of the Company of not more than 0.3% and not less than 1% of the remainder, respectively. Directors who also serve as executive officers of the Company are not entitled to receive the bonus to directors. The Company may issue profit sharing to employees in stock of an affiliated company meeting the conditions set by the Board of Directors or, by the person duly authorized by the Board of Directors;

 

d.

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

The Company’s Articles of Incorporation also provide that profits of the Company may be distributed by way of cash dividend and/or stock dividend. However, distribution of profits shall be made preferably by way of cash dividend. Distribution of profits may also be made by way of stock dividend; provided that the ratio for stock dividend shall not exceed 50% of the total distribution.

Any appropriations of the profits are subject to shareholders’ approval in the following year.

The Company accrued profit sharing to employees based on certain percentage of net income during the period, which amounted to NT$5,043,952 thousand and NT$4,873,630 thousand for the six months ended June 2012 and 2011, respectively. Bonuses to directors were expensed based on estimated amount of payment. If the actual amounts subsequently resolved by the shareholders differ from the estimated amounts, the differences are recorded in the year of shareholders’ resolution as a change in accounting estimate. If profit sharing is resolved to be distributed to employees in stock, the number of shares is determined by dividing the amount of profit sharing by the closing price (after considering the effect of dividends) of the shares on the day preceding the shareholders’ meeting.

The Company no longer has supervisors since January 1, 2007. The required duties of supervisors are being fulfilled by the Audit Committee.

According to the revised Company Law, effective January 2012, the appropriation for legal capital reserve shall be made until the reserve equals the Company’s paid-in capital. The reserve may be used to offset a deficit, or be distributed as dividends in cash or stocks for the portion in excess of 25% of the paid-in capital if the Company incurs no loss.

 

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A special capital reserve equivalent to the net debit balance of the other components of shareholders’ equity (for example, cumulative translation adjustments and unrealized loss on financial instruments, but excluding treasury stock) shall be made from unappropriated earnings pursuant to existing regulations promulgated by the Securities and Futures Bureau (SFB). Any special reserve appropriated may be reversed to the extent that the net debit balance reverses.

The appropriations of earnings for 2011 and 2010 had been approved in the shareholders’ meetings held on June 12, 2012 and June 9, 2011, respectively. The appropriations and dividends per share were as follows:

 

The Company’s profit sharing to employees and bonus to directors in the amounts of NT$8,990,026 thousand and NT$62,324 thousand in cash for 2011, respectively, and profit sharing to employees and bonus to directors in the amounts of NT$10,908,338 thousand and NT$51,131 thousand in cash for 2010, respectively, had been approved in the shareholders’ meeting held on June 12, 2012 and June 9, 2011, respectively. The resolved amounts of the profit sharing to employees and bonus to directors were consistent with the resolutions of meeting of the Board of Directors held on February 14, 2012 and February 15, 2011 and same amount had been charged against earnings of 2011 and 2010, respectively.

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

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

 

20.	STOCK-BASED COMPENSATION PLANS

The Company’s Employee Stock Option Plans, consisting of the 2004 Plan, 2003 Plan and 2002 Plan, were approved by the SFB on January 6, 2005, October 29, 2003 and June 25, 2002, respectively. The maximum number of options authorized to be granted under the 2004 Plan, 2003 Plan and 2002 Plan was 11,000 thousand, 120,000 thousand and 100,000 thousand, respectively, with each option eligible to subscribe for one common share when exercised. The options may be granted to qualified employees of the Company or any of its domestic or foreign subsidiaries, in which the Company’s shareholding with voting rights, directly or indirectly, is more than fifty percent (50%). The options of all the plans are valid for ten years and exercisable at certain percentages subsequent to the second anniversary of the grant date. Under the terms of the plans, the options are granted at an exercise price equal to the closing price of the Company’s common shares listed on the TWSE on the grant date.

Options of the plans that had never been granted or had been granted but subsequently canceled had expired as of June 30, 2012.

 

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Information about outstanding options for the six months ended June 30, 2012 and 2011 was as follows:

 

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

As of June 30, 2012, information about outstanding options was as follows:

 

As of June 30, 2012, all of the above outstanding options were exercisable.

No compensation cost was recognized under the intrinsic value method for the six months ended June 30, 2012 and 2011. Had the Company used the fair value based method to evaluate the options using the Black-Scholes model, the valuation assumptions at the various grant dates and pro forma results of the Company for the six months ended June 30, 2012 and 2011 would have been as follows:

 

 

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21.	EARNINGS PER SHARE

EPS is computed as follows:

 

If the Company may settle the obligation by cash, by issuing shares, or in combination of both cash and shares, profit sharing to employees which will be settled in shares should be included in the weighted average number of shares outstanding in calculation of diluted EPS, if the shares have a dilutive effect. The number of shares is estimated by dividing the amount of profit sharing to employees in stock by the closing price (after considering the dilutive effect of dividends) of the common shares on the balance sheet date. Such dilutive effect of the potential shares needs to be included in the calculation of diluted EPS until the shares of profit sharing to employees are resolved in the shareholders’ meeting in the following year.

 

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The average number of shares outstanding for EPS calculation has been considered for the effect of retrospective adjustments. This adjustment caused each of the basic and diluted after income tax EPS for the six months ended June 30, 2011 to remain at NT$2.79.

 

22.	DISCLOSURES FOR FINANCIAL INSTRUMENTS

 

a.

Fair values of financial instruments were as follows:

 

 

b.

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

 

1)

The aforementioned financial instruments do not include cash and cash equivalents, receivables, other financial assets, refundable deposits, short-term loans, payables and guarantee deposits. The carrying amounts of these financial instruments approximate their fair values due to their short maturities.

 

2)

Except for derivatives, available-for-sale and held-to-maturity financial assets were based on their quoted market prices.

 

3)

The fair values of those derivatives are determined using valuation techniques incorporating estimates and assumptions that were consistent with prevailing market conditions.

 

4)

Financial assets carried at cost 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.

 

5)

Fair value of bonds payable was based on their quoted market price.

 

6)

Fair value of other long-term payables was based on the present value of expected cash flows, which approximates their carrying amount.

 

c.

Valuation gains (losses) arising from changes in fair value of derivatives contracts determined using valuation techniques were recognized as net losses of NT$7,768 thousand and net gains of NT$17,455 thousand for the six months ended June 30, 2012 and 2011, respectively.

 

d.

As of June 30, 2012 and 2011, financial assets exposed to fair value interest rate risk were NT$1,421,235 thousand and NT$3,536,985 thousand, respectively, financial liabilities exposed to fair value interest rate risk were NT$65,799,303 thousand and NT$37,640,881 thousand, respectively.

 

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e.

Movements of the unrealized gains or losses on financial instruments for the six months ended June 30, 2012 and 2011 were as follows:

 

		Six Months Ended June 30, 2012
				From Available- for-sale Financial Assets				Equity- method Investments				Total
Balance, beginning of period				$	(1,508,301	)		$	335,446			$	(1,172,855	)
Recognized directly in shareholders’ equity					(714,048	)			(795	)			(714,843	)
Removed from shareholders’ equity and recognized in earnings					2,222,349				-				2,222,349
Balance, end of period				$	-			$	334,651			$	334,651
		Six Months Ended June 30, 2011
				From Available- for-sale Financial Assets				Equity- method Investments				Total
Balance, beginning of period				$	(395,306	)		$	504,595			$	109,289
Recognized directly in shareholders’ equity					212,121				(98,351	)			113,770
Removed from shareholders’ equity and recognized in earnings					(35,151	)			-				(35,151	)
Balance, end of period				$	(218,336	)		$	406,244			$	187,908

 

f.

Information about financial risks

 

1)

Market risk. The derivative financial instruments categorized as financial assets/liabilities at fair value through profit or loss are mainly used to hedge the market exchange rate fluctuations of foreign-currency assets and liabilities; therefore, the market exchange rate risk of derivatives will be offset by the foreign exchange risk of these hedged items. Available-for-sale financial assets and held-to-maturity financial assets held by the Company are mainly fixed-interest-rate debt securities and overseas publicly traded stock; therefore, the fluctuations in market interest rates and market prices will result in changes in fair values of these debt securities and the fluctuations in market prices will result in changes in fair values of overseas publicly traded stock.

 

2)

Credit risk. Credit risk represents the potential loss that would be incurred by the Company 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 Company evaluated whether the financial instruments for any possible counter-parties or third-parties are reputable financial institutions, business enterprises, and government agencies and accordingly, the Company believed that the Company’s exposure to credit risk was not significant.

 

3)

Liquidity risk. The Company has sufficient operating capital and bank facilities to meet cash needs upon settlement of derivative financial instruments and bonds payable. Therefore, the liquidity risk is low.

 

4)

Cash flow interest rate risk. The Company mainly invests in fixed-interest-rate debt securities. Therefore, cash flows are not expected to fluctuate significantly due to changes in market interest rates.

 

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23.	RELATED PARTY TRANSACTIONS

The Company engages in business transactions with the following related parties:

 

a.

Subsidiaries

TSMC North America

TSMC China

TSMC Europe

TSMC Japan

 

b.

Investees

Xintec (holding a controlling financial interest)

VIS (accounted for using the equity method)

SSMC (accounted for using the equity method)

GUC (accounted for using the equity method)

 

c.

Indirect subsidiaries

WaferTech, LLC (WaferTech)

TSMC Technology, Inc. (TSMC Technology)

TSMC Design Technology Canada Inc. (TSMC Canada)

 

d.

Indirect investees

VisEra Technology Company, Ltd. (VisEra) (accounted for using the equity method)

Motech (accounted for using the equity method)

 

e.

Others

Related parties over which the Company has control or exercises significant influence but with which the Company had no material transactions.

Transactions with the aforementioned parties, other than those disclosed in other notes, are summarized as follows:

 

		2012												2011
				Amount				%								Amount				%
For the six months ended June 30
Sales
TSMC North America				$	145,613,637				62							$	115,627,277				54
Others					2,331,268				1								1,474,631				1
				$	147,944,905				63							$	117,101,908				55
Purchases
TSMC China				$	7,036,635				25							$	4,935,280				19
WaferTech					3,752,087				13								3,763,210				15
VIS					1,960,314				7								2,829,238				11
SSMC					1,804,215				7								1,994,243				8
Others					-				-								124,673				-
				$	14,553,251				52							$	13,646,644				53

 

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		2012												2011
				Amount				%								Amount				%
Manufacturing expenses
Xintec (outsourcing and rent)				$	71,598				-							$	177,596				-
VisEra (outsourcing)					8,657				-								8,111				-
VIS (rent)					-				-								5,902				-
Others					230				-								-				-
				$	80,485				-							$	191,609				-
Research and development expenses
TSMC Technology (primarily consulting fee)				$	330,524				2							$	252,450				2
TSMC Canada (primarily consulting fee)					107,855				1								88,283				1
TSMC Europe (primarily consulting fee)					25,951				-								19,775				-
VIS (rent)					-				-								1,984				-
Others					6,675				-								21,718				-