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 March 2014

 

 

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: March 06, 2014				By		/s/ Lora Ho
						Lora Ho
						Senior Vice President & Chief Financial Officer

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Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

Consolidated Financial Statements for the

Years Ended December 31, 2013 and 2012 and

Independent Auditors’ Report

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REPRESENTATION LETTER

The entities that are required to be included in the combined financial statements of Taiwan Semiconductor Manufacturing Company Limited as of and for the year ended December 31, 2013, under the Criteria Governing the Preparation of Affiliation Reports, Consolidated Business Reports and Consolidated Financial Statements of Affiliated Enterprises are the same as those included in the consolidated financial statements prepared in conformity with the Statement of Financial Accounting Standards No. 7, “Consolidated Financial Statements.” In addition, the information required to be disclosed in the combined financial statements is included in the consolidated financial statements. Consequently, Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries do not prepare a separate set of combined financial statements.

Very truly yours,

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LIMITED

By

 

 

MORRIS CHANG

Chairman

February 18, 2014

 

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INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Shareholders

Taiwan Semiconductor Manufacturing Company Limited

We have audited the accompanying consolidated balance sheets of Taiwan Semiconductor Manufacturing Company Limited and subsidiaries as of December 31, 2013 and 2012 and January 1, 2012 and the related consolidated statements of comprehensive income, changes in equity and cash flows for the years ended December 31, 2013 and 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Taiwan Semiconductor Manufacturing Company Limited and subsidiaries as of December 31, 2013 and 2012 and January 1, 2012, and the results of their consolidated operations and their consolidated cash flows for the years then ended in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, the International Financial Reporting Standards, International Accounting Standards, interpretation as well as related guidance translated by Accounting Research and Development Foundation endorsed by the Financial Supervisory Commission of the Republic of China with the effective dates.

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 parent company only financial statements of Taiwan Semiconductor Manufacturing Company Limited as of and for the years ended December 31, 2013 and 2012 on which we have issued an unqualified opinion.

 

February 18, 2014

Notice to Readers

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

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

Member of Deloitte Touche Tohmatsu Limited

 

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Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(In Thousands of New Taiwan Dollars)

 

 

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

 

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Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

 

		2013								2012
		Amount				%				Amount				%
NET REVENUE (Notes 5, 26, 37 and 42)		$	597,024,197				100			$	506,745,234				100
COST OF REVENUE (Notes 12, 33 and 37)			316,057,820				53				262,583,098				52
GROSS PROFIT BEFORE UNREALIZED GROSS PROFIT ON SALES TO ASSOCIATES			280,966,377				47				244,162,136				48
UNREALIZED GROSS PROFIT ON SALES TO ASSOCIATES			(20,870	)			—				(25,029	)			—
GROSS PROFIT			280,945,507				47				244,137,107				48
OPERATING EXPENSES (Notes 5, 33 and 37)
Research and development			48,118,165				8				40,383,195				8
General and administrative			18,928,544				3				17,631,694				3
Marketing			4,516,525				1				4,495,986				1
Total operating expenses			71,563,234				12				62,510,875				12
OTHER OPERATING INCOME AND EXPENSES, NET (Notes 27 and 33)			47,090				—				(449,364	)			—
INCOME FROM OPERATIONS (Note 42)			209,429,363				35				181,176,868				36
NON-OPERATING INCOME AND EXPENSES
Share of profits of associates and joint venture (Notes 14 and 42)			3,972,031				1				2,073,729				—
Other income (Note 28)			2,342,123				—				1,716,093				—
Foreign exchange gain, net			285,460				—				582,498				—
Finance costs (Notes 10 and 29)			(2,646,776	)			—				(1,020,422	)			—
Other gains and losses (Notes 30 and 37)			2,104,921				—				(2,852,310	)			—
Total non-operating income and expenses			6,057,759				1				499,588				—
INCOME BEFORE INCOME TAX			215,487,122				36				181,676,456				36
INCOME TAX EXPENSE (Notes 31 and 42)			27,468,185				5				15,552,654				3
NET INCOME			188,018,937				31				166,123,802				33

(Continued)

 

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Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

 

		2013								2012
		Amount				%				Amount				%
OTHER COMPREHENSIVE INCOME (LOSS) (Notes 10, 14, 23, 24 and 31)
Exchange differences arising on translation of foreign operations		$	3,668,509				1			$	(4,322,697	)			(1	)
Changes in fair value of available-for-sale financial assets			13,290,385				2				9,534,269				2
Cash flow hedges			—				—				232				—
Share of other comprehensive income (loss) of associates and joint venture			(59,740	)			—				53,748				—
Actuarial loss from defined benefit plans			(662,074	)			—				(685,978	)			—
Income tax benefit (expense) related to components of other comprehensive income			115,168				—				(326,942	)			—
Other comprehensive income for the year, net of income tax			16,352,248				3				4,252,632				1
TOTAL COMPREHENSIVE INCOME FOR THE YEAR		$	204,371,185				34			$	170,376,434				34
NET INCOME (LOSS) ATTRIBUTABLE TO:
Shareholders of the parent		$	188,146,790				31			$	166,318,286				33
Noncontrolling interests			(127,853	)			—				(194,484	)			—
		$	188,018,937				31			$	166,123,802				33
TOTAL COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO:
Shareholders of the parent		$	204,505,782				34			$	170,521,543				34
Noncontrolling interests			(134,597	)			—				(145,109	)			—
		$	204,371,185				34			$	170,376,434				34

 

		2013				2012
		Income Attributable to Shareholders of the Parent				Income Attributable to Shareholders of the Parent
EARNINGS PER SHARE (NT$, Note 32)
Basic earnings per share		$	7.26			$	6.42
Diluted earnings per share		$	7.26			$	6.41

 

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

 

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Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

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

 

		Equity Attributable to Shareholders of the Parent
																														Others
																														Foreign Currency Translation Reserve				Unrealized Gain/Loss from Available- for-sale Financial Assets
		Capital Stock- Common Stock												Retained Earnings
		Shares (In Thousands)				Amount				Capital Surplus				Legal Capital Reserve				Special Capital Reserve				Unappropriated Earnings				Total												Cash Flow Hedges Reserve				Total				Total				Noncontrolling Interests				Total Equity
BALANCE, JANUARY 1, 2012			25,916,222			$	259,162,226			$	55,471,662			$	102,399,995			$	6,433,874			$	211,630,458			$	320,464,327			$	(6,433,364	)		$	(1,172,762	)		$	(93	)		$	(7,606,219	)		$	627,491,996			$	2,436,649			$	629,928,645
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	)			—				(77,748,668	)
Total			—				—				—				13,420,128				1,172,350				(92,341,146	)			(77,748,668	)			—				—				—				—				(77,748,668	)			—				(77,748,668	)
Net income in 2012			—				—				—				—				—				166,318,286				166,318,286				—				—				—				—				166,318,286				(194,484	)			166,123,802
Other comprehensive income in 2012, net of income tax			—				—				—				—				—				(622,477	)			(622,477	)			(4,320,442	)			9,146,083				93				4,825,734				4,203,257				49,375				4,252,632
Total comprehensive income in 2012			—				—				—				—				—				165,695,809				165,695,809				(4,320,442	)			9,146,083				93				4,825,734				170,521,543				(145,109	)			170,376,434
Issuance of stock from exercise of employee stock options			8,213				82,131				160,357				—				—				—				—				—				—				—				—				242,488				—				242,488
Stock option compensation cost of subsidiary			—				—				—				—				—				—				—				—				—				—				—				—				6,219				6,219
Adjustments to share of changes in equity of associates and joint venture			—				—				2,588				—				—				—				—				—				—				—				—				2,588				—				2,588
Adjustments arising from changes in percentage of ownership in subsidiaries			—				—				40,733				—				—				—				—				—				—				—				—				40,733				(40,733	)			—
Increase in noncontrolling interests			—				—				—				—				—				—				—				—				—				—				—				—				286,200				286,200
BALANCE, DECEMBER 31, 2012			25,924,435				259,244,357				55,675,340				115,820,123				7,606,224				284,985,121				408,411,468				(10,753,806	)			7,973,321				—				(2,780,485	)			720,550,680				2,543,226				723,093,906
Appropriations of prior year’s earnings
Legal capital reserve			—				—				—				16,615,880				—				(16,615,880	)			—				—				—				—				—				—				—				—
Reversal of special capital reserve			—				—				—				—				(4,820,483	)			4,820,483				—				—				—				—				—				—				—				—
Cash dividends to shareholders - NT$3.00 per share			—				—				—				—				—				(77,773,307	)			(77,773,307	)			—				—				—				—				(77,773,307	)			—				(77,773,307	)
Total			—				—				—				16,615,880				(4,820,483	)			(89,568,704	)			(77,773,307	)			—				—				—				—				(77,773,307	)			—				(77,773,307	)
Net income in 2013			—				—				—				—				—				188,146,790				188,146,790				—				—				—				—				188,146,790				(127,853	)			188,018,937
Other comprehensive income in 2013, net of income tax			—				—				—				—				—				(591,799	)			(591,799	)			3,613,444				13,337,460				(113	)			16,950,791				16,358,992				(6,744	)			16,352,248
Total comprehensive income in 2013			—				—				—				—				—				187,554,991				187,554,991				3,613,444				13,337,460				(113	)			16,950,791				204,505,782				(134,597	)			204,371,185
Issuance of stock from exercise of employee stock options			4,182				41,814				82,756				—				—				—				—				—				—				—				—				124,570				—				124,570
Stock option compensation cost of subsidiary			—				—				—				—				—				—				—				—				—				—				—				—				5,312				5,312
Adjustments to share of changes in equity of associates and joint venture			—				—				38,084				—				—				—				—				—				—				—				—				38,084				—				38,084
Adjustments arising from changes in percentage of ownership in subsidiaries			—				—				62,446				—				—				—				—				—				—				—				—				62,446				(62,446	)			—
Increase in noncontrolling interests			—				—				—				—				—				—				—				—				—				—				—				—				188,488				188,488
Effect of deconsolidation of subsidiary			—				—				—				—				—				—				—				—				—				—				—				—				(2,273,153	)			(2,273,153	)
BALANCE, DECEMBER 31, 2013			25,928,617			$	259,286,171			$	55,858,626			$	132,436,003			$	2,785,741			$	382,971,408			$	518,193,152			$	(7,140,362	)		$	21,310,781			$	(113	)		$	14,170,306			$	847,508,255			$	266,830			$	847,775,085

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

 

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Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of New Taiwan Dollars)

 

		2013				2012
CASH FLOWS FROM OPERATING ACTIVITIES
Income before income tax		$	215,487,122			$	181,676,456
Adjustments for:
Depreciation expense			153,979,847				129,168,514
Amortization expense			2,202,022				2,180,775
Stock option compensation cost of subsidiary			5,312				6,219
Finance costs			2,646,776				1,020,422
Share of profits of associates and joint venture			(3,972,031	)			(2,073,729	)
Interest income			(1,835,980	)			(1,645,036	)
Gain on disposal of property, plant and equipment and intangible assets, net			(48,848	)			(103	)
Impairment loss on property, plant and equipment			—				444,505
Impairment loss of financial assets			352,214				4,231,602
Gain on disposal of available-for-sale financial assets, net			(1,267,086	)			(399,598	)
Gain on disposal of financial assets carried at cost, net			(44,721	)			(141,491	)
Loss (gain) on disposal of investments in associates			733				(4,977	)
Gain on deconsolidation of subsidiary			(293,578	)			—
Unrealized gross profit on sales to associates			20,870				25,029
Loss (gain) on foreign exchange, net			317,547				(3,219,144	)
Dividend income			(506,143	)			(71,057	)
Income from receipt of equity securities in settlement of trade receivables			(9,977	)			(886	)
Loss on hedging instruments			5,602,779				—
Gain on arising from changes in fair value of available-for-sale financial assets in hedge effective portion			(5,071,118	)			—
Changes in operating assets and liabilities:
Derivative financial instruments			(32,189	)			(22,311	)
Notes and accounts receivable, net			(14,131,066	)			(11,947,191	)
Receivables from related parties			(204,278	)			(168,047	)
Other receivables from related parties			50,589				(63,258	)
Inventories			122,472				(12,989,916	)
Other financial assets			18,578				53,182
Other current assets			(312,251	)			648,051
Accounts payable			346,401				3,656,358
Payables to related parties			850,094				(605,182	)
Salary and bonus payable			883,925				1,386,797
Accrued profit sharing to employees and bonus to directors and supervisors			1,552,210				2,105,298
Accrued expenses and other current liabilities			3,531,017				2,051,785
Provisions			1,595,810				977,901
Accrued pension cost			9,554				(5,769	)
Cash generated from operations			361,846,606				296,275,199
Income taxes paid			(14,463,069	)			(11,312,039	)
Net cash generated by operating activities			347,383,537				284,963,160

(Continued)

 

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Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of New Taiwan Dollars)

 

		2013				2012
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of:
Available-for-sale financial assets		$	(21,303	)		$	(31,525,876	)
Held-to-maturity financial assets			(1,795,949	)			—
Financial assets carried at cost			(27,165	)			(56,512	)
Property, plant and equipment			(287,594,773	)			(246,137,361	)
Intangible assets			(2,750,361	)			(1,782,299	)
Proceeds from disposal or redemption of:
Available-for-sale financial assets			2,418,578				964,367
Held-to-maturity financial assets			5,145,850				2,711,440
Financial assets carried at cost			67,986				353,656
Property, plant and equipment			173,554				157,484
Other assets			—				26,688
Costs from entering into hedging transactions			(143,982	)			—
Interest received			1,790,725				1,719,026
Other dividends received			506,143				71,057
Dividends received from associates			2,141,881				2,088,472
Refundable deposits paid			(98,888	)			(517,162	)
Refundable deposits refunded			113,399				2,609,313
Net cash outflow from deconsolidation of subsidiary (Note 34)			(979,910	)			—
Net cash used in investing activities			(281,054,215	)			(269,317,707	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of bonds			130,844,821				62,000,000
Repayment of bonds			—				(4,500,000	)
Increase (decrease) in short-term loans			(19,636,240	)			9,747,094
Increase in long-term bank loans			690,000				50,000
Repayment of long-term bank loans			(62,500	)			(212,500	)
Repayment of other long-term payables			(853,788	)			(2,367,866	)
Interest paid			(1,330,886	)			(736,607	)
Guarantee deposits received			41,519				15,671
Guarantee deposits refunded			(113,087	)			(255,764	)
Decrease in obligations under finance leases			(27,796	)			(108,863	)
Proceeds from exercise of employee stock options			124,570				242,488
Cash dividends			(77,773,307	)			(77,748,668	)
Increase in noncontrolling interests			202,619				286,200
Net cash generated by (used in) financing activities			32,105,925				(13,588,815	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS			849,612				(2,118,327	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			99,284,859				(61,689	)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR			143,410,588				143,472,277
CASH AND CASH EQUIVALENTS, END OF YEAR		$	242,695,447			$	143,410,588

 

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

 

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Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

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

 

1.

GENERAL

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

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

The address of its registered office and principal place of business is No. 8, Li-Hsin Rd. 6, Hsinchu Science Park, Taiwan. The principal operating activities and operating segments information of TSMC and its subsidiaries (collectively as the “Company”) are described in Notes 4 and 42.

 

2.	THE AUTHORIZATION OF FINANCIAL STATEMENTS

The accompanying consolidated financial statements were approved and authorized for issue by the Board of Directors on February 18, 2014.

 

3.	APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSs)

On May 14, 2009, the Financial Supervisory Commission (FSC) announced the roadmap of IFRSs adoption for R.O.C. companies. Accordingly, starting 2013, companies with shares listed on the TWSE or traded on the Taiwan GreTai Securities Market or Emerging Stock Market should prepare the consolidated financial statements in accordance with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, the IFRSs, International Accounting Standards (IASs), interpretations as well as related guidance translated by Accounting Research and Development Foundation (ARDF) endorsed by the FSC with the effective dates (collectively, “Taiwan-IFRSs”.)

 

a.

New and revised standards, amendments and interpretations in issue but not yet effective

As of the date that the accompanying consolidated financial statements were authorized for issue, the new, revised or amended IFRSs, IASs, interpretations and related guidance in issue but not yet adopted by the Company as well as the effective dates issued by the International Accounting Standards Board (IASB), are stated as follows; however, the initial adoption to the following standards and interpretations is still subject to the effective date to be published by the FSC except that the standards and interpretation included in the 2013 Taiwan-IFRSs version should be adopted by the Company starting 2015.

 

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New, Revised or Amended Standards and Interpretations		Effective Date Issued by IASB (Note)
Included in the 2013 Taiwan-IFRSs version
Amendments to IFRSs Improvements to IFRSs 2009 - Amendment to IAS 39		January 1, 2009 or January 1, 2010
Amendment to IAS 39 Embedded Derivatives		Effective in fiscal year ended on or after June 30, 2009
Improvements to IFRSs 2010		July 1, 2010 or January 1, 2011
Annual Improvements to IFRSs 2009 - 2011 Cycle		January 1, 2013
Amendments to IFRS 1 Limited Exemption from Comparative IFRS 7 Disclosures for First - time Adopters		July 1, 2010
Amendments to IFRS 1 Severe Hyperinflation and Removal of Fixed Dates for First - time Adopters		July 1, 2011
Amendments to IFRS 1 Government Loans		January 1, 2013
Amendment to IFRS 7 Disclosures - offsetting Financial Assets and Financial Liabilities		January 1, 2013
Amendment to IFRS 7 Disclosures - Transfers of Financial Assets		July 1, 2011
IFRS 10 Consolidated Financial Statements		January 1, 2013
IFRS 11 Joint Arrangements		January 1, 2013
IFRS 12 Disclosure of Interests in Other Entities		January 1, 2013
Amendments to IFRS 10, IFRS 11 and IFRS 12 Consolidated financial Statements, Joint Arrangements, and Disclosure of Interests in Other Entities: Transition Guidance		January 1, 2013
Amendments to IFRS 10, IFRS 12 and IAS 27 Investment Entities		January 1, 2014
IFRS 13 Fair Value Measurement		January 1, 2013
Amendment to IAS 1 Presentation of Items of Other Comprehensive Income		July 1, 2012
Amendment to IAS 12 Deferred Tax: Recovery of Underlying Assets		January 1, 2012
Amendment to IAS 19 Employee Benefits		January 1, 2013
Amendment to IAS 27 Separate Financial Statements		January 1, 2013
Amendment to IAS 28 Investments in Associates and Joint Ventures		January 1, 2013
Amendment to IAS 32 Offsetting of Financial Assets and Financial Liabilities		January 1, 2014
IFRIC 20 Stripping Costs in the Production Phase of A Surface Mine		January 1, 2013
Not included in the 2013 Taiwan-IFRSs version
Annual Improvements to IFRSs 2010 - 2012 Cycle		July 1, 2014 or transactions on or after July 1, 2014
Annual Improvements to IFRSs 2011 - 2013 Cycle		July 1, 2014
IFRS 9 Financial Instruments		Not yet determined
Amendments to IFRS 9 and IFRS 7 Mandatory Effective Date and Transition Disclosure		Not yet determined
IFRS 14 Regulatory Deferral Accounts		January 1, 2016
Amendment to IAS 19 Defined Benefit Plans: Employee Contributions		July 1, 2014
Amendment to IAS 36 Recoverable Amount Disclosures for Non-Financial Assets		January 1, 2014
Amendment to IAS 39 Novation of Derivatives and Continuation of Hedge Accounting		January 1, 2014
IFRIC 21 Levies		January 1, 2014

 

Note:

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

 

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b.

Significant changes in accounting policy resulted from new and revised standards, amendments and interpretations in issue but not yet effective

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

 

1)

IFRS 9, “Financial Instruments”

Under IFRS 9, all recognized financial assets currently in the scope of IAS 39, “Financial Instruments: Recognition and Measurement,” will be subsequently measured at either the amortized cost or the fair value. If the objective of the Company’s business model is to hold the financial asset to collect the contractual cash flows which are solely for payments of principal and interest on the principal amount outstanding, such assets are measured at the amortized cost. All other financial assets must be measured at the fair value through profit or loss as of the end of the reporting period.

The main change in IFRS 9 is the increase of the eligibility of hedge accounting. It allows reporters to reflect risk management activities in the financial statements more closely as it provides more opportunities to apply hedge accounting. A fundamental difference to IAS 39 is that IFRS 9 (a) increases the scope of hedged items eligible for hedge accounting. For example, the risk components of non-financial items may be designated as hedging accounting; (b) revises a new way to account for the gain or loss recognition arising from hedging derivative financial instruments, which results in a less volatility in profit or loss; and (c) is necessary for there to be an economic relationship between the hedged item and hedging instrument instead of performing the retrospective hedge effectiveness testing.

The amendment to IFRS 9 issued by IASB introduces the new hedge accounting model and removed the original mandatory effective date of January 1, 2015 (on and after). IASB will reconsider the appropriate effective date once the standard is complete with a new impairment model and the finalization of any limited amendments to classification and measurement.

 

2)

IFRS 12, “Disclosure of Interests in Other Entities”

IFRS 12 is a standard that requires a broader disclosure in an entity’s interests in subsidiaries, joint arrangements, associates and unconsolidated entities. The objective of IFRS 12 is to specify the disclosure information provided by the entity that enables the users of financial statements in evaluating the nature of, and risks associated with, its interests in other entities and the effects of those interests on the entity’s financial assets and liabilities, as well as the involvement of the owners of noncontrolling interests towards the entity. The Company expects the application of IFRS 12 will result in more extensive disclosures of interests in other entities in the financial statements.

 

3)

IFRS 13, “Fair Value Measurement”

IFRS 13 establishes a single source of guidance for fair value measurements and disclosures about fair value measurements. It defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements. The disclosure requirements in IFRS 13 are more extensive than those required in the current standards. For example, quantitative and qualitative disclosures based on the three-level fair value hierarchy currently required for financial instruments only will be extended by IFRS 13 to cover all assets and liabilities within its scope.

 

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4)

Amendments to IAS 1, “Presentation of Items of Other Comprehensive Income”

The amendments to IAS 1 introduce a new disclosure terminology for other comprehensive income, which require additional disclosures in other comprehensive income. The items of other comprehensive income will be grouped into two categories: (a) items that will not be reclassified subsequently to profit or loss; and (b) items that will be reclassified subsequently to profit or loss when specific conditions are met. In addition, income tax on items of other comprehensive income is also required to be allocated on the same basis. The Company expects the aforementioned amendments will change the Company’s presentation on the statement of comprehensive income.

 

5)

Amendments to IAS 19, “Employee Benefits”

The amendments to IAS 19 change the accounting for defined benefit plans, which require the Company to recognize changes in defined benefit obligations or assets, to disclose the components of the defined benefit costs, to eliminate the corridor approach and to accelerate the recognition of past service cost. According to the amendments, all actuarial gains and losses will be recognized immediately through other comprehensive income; the past service cost, on the other hand, will be expensed immediately when it incurs and no longer be amortized over the average period before vested on a straight-line basis. In addition, the amendment also requires a broader disclosure in defined benefit plans.

 

6)

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

The amendments to IAS 36 clarify that the Company is only required to disclose the recoverable amount in the year of impairment accrual or reversal. Moreover, if the recoverable amount of impaired assets is based on fair value less costs of disposal, the Company should also disclose the discount rate used. The Company expects the aforementioned amendments will result in a broader disclosure of recoverable amount for non-financial assets.

 

c.

Impact of the application of the new and revised standards, amendments and interpretations in issue but not yet effective on the consolidated financial statements of the Company

As of the date that the accompanying consolidated financial statements were approved and authorized for issue, the Company continues in evaluating the impact on its financial position and financial performance as a result of the initial adoption of the above standards or interpretations. The related impact will be disclosed when the Company completes the evaluation.

 

4.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements are the first Taiwan-IFRSs annual consolidated financial statements prepared for the year ended December 31, 2013. The Company’s date of transition to Taiwan-IFRSs is January 1, 2012, and the effect of the transition to Taiwan-IFRSs is disclosed in Note 43.

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

Significant accounting policies are summarized as follows:

Statement of Compliance

The accompanying consolidated financial statements have been prepared in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, the IFRSs, IASs, interpretations as well as related guidance translated by the ARDF endorsed by the FSC with the effective dates.

 

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Basis of Preparation

The accompanying consolidated financial statements have been prepared on the historical cost basis except for financial instruments that are measured at fair values, as explained in the accounting policies below. Historical cost is generally based on the fair value of the consideration given in exchange for the assets.

The opening balance sheet at the date of transition is prepared in accordance with the recognition and measurement required by IFRS 1. According to IFRS 1, the Company is required to apply each effective IFRS retrospectively in its opening balance sheet at the date of transition to Taiwan-IFRSs; except for optional exemptions and mandatory exceptions to such retrospective application provided under IFRS 1. The main optional exemptions the Company adopted are described in Note 43.

Basis of Consolidation

The basis for the consolidated financial statements

The consolidated financial statements incorporate the financial statements of TSMC and entities controlled by TSMC (its subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

Income and expenses of subsidiaries acquired or disposed of are included in the consolidated statement of comprehensive income from the effective date of acquisition and up to the effective date of disposal, as appropriate. Total comprehensive income of subsidiaries is attributed to the shareholders of the parent and to the noncontrolling interests even if this results in the noncontrolling interests having a deficit balance.

When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by the Company.

All intra-group transactions, balances, income and expenses are eliminated in full on consolidation.

Changes in the Company’s ownership interests in subsidiaries that do not result in the Company losing control over the subsidiaries are accounted for as equity transactions. The carrying amounts of the Company’s interests and the noncontrolling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the noncontrolling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity and attributed to shareholders of the parent.

When the Company loses control of a subsidiary, a gain or loss is recognized in profit or loss and is calculated as the difference between:

 

a.

the aggregate of the fair value of consideration received and the fair value of any retained interest at the date when control is lost; and

 

b.

the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiary and any noncontrolling interest.

The Company shall account for all amounts recognized in other comprehensive income in relation to the subsidiary on the same basis as would be required if the Company had directly disposed of the related assets and liabilities.

The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the cost on initial recognition of an investment in an associate.

 

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The subsidiaries in the consolidated financial statements

The detail information of the subsidiaries at the end of reporting period was as follows:

 

						Establishment and Operating Location		Percentage of Ownership
Name of Investor		Name of Investee		Main Businesses and Products				December 31, 2013				December 31, 2012				January 1, 2012				Note
TSMC		TSMC North America		Selling and marketing of integrated circuits and semiconductor devices		San Jose, California, U.S.A.			100	%			100	%			100	%		—
		TSMC Japan Limited (TSMC Japan)		Marketing activities		Yokohama, Japan			100	%			100	%			100	%		a)
		TSMC Partners, Ltd. (TSMC Partners)		Investing in companies involved in the design, manufacture, and other related business in the semiconductor industry		Tortola, British Virgin Islands			100	%			100	%			100	%		—
		TSMC Korea Limited (TSMC Korea)		Customer service and technical supporting activities		Seoul, Korea			100	%			100	%			100	%		a)
		TSMC Europe B.V. (TSMC Europe)		Marketing and engineering supporting activities		Amsterdam, the Netherlands			100	%			100	%			100	%		a)
		TSMC Global, Ltd. (TSMC Global)		Investment activities		Tortola, British Virgin Islands			100	%			100	%			100	%		—
		TSMC China Company Limited (TSMC China)		Manufacturing and selling of integrated circuits at the order of and pursuant to product design specifications provided by customers		Shanghai, China			100	%			100	%			100	%		—
		VentureTech Alliance Fund III, L.P. (VTAF III)		Investing in new start-up technology companies		Cayman Islands			50	%			50	%			53	%		—
		VentureTech Alliance Fund II, L.P. (VTAF II)		Investing in new start-up technology companies		Cayman Islands			98	%			98	%			98	%		—
		Emerging Alliance Fund, L.P. (Emerging Alliance)		Investing in new start-up technology companies		Cayman Islands			99.5	%			99.5	%			99.5	%		a)
		Xintec Inc. (Xintec)		Wafer level chip size packaging service		Taoyuan, Taiwan			b	)			40	%			40	%		—
		TSMC Solid State Lighting Ltd. (TSMC SSL)		Engaged in researching, developing, designing, manufacturing and selling solid state lighting devices and related applications products and systems		Hsin-Chu, Taiwan			92	%			95	%			100	%		TSMC and TSMC GN aggregately have a controlling interest of 93% in TSMC SSL.
		TSMC Solar Ltd. (TSMC Solar)		Engaged in researching, developing, designing, manufacturing and selling renewable energy and saving related technologies and products		Tai-Chung, Taiwan			99	%			99	%			100	%		TSMC and TSMC GN aggregately have a controlling interest of 99% in TSMC Solar.
		TSMC Guang Neng Investment, Ltd. (TSMC GN)		Investment activities		Taipei, Taiwan			100	%			100	%			—			—
TSMC Partners		TSMC Design Technology Canada Inc. (TSMC Canada)		Engineering support activities		Ontario, Canada			100	%			100	%			100	%		a)
		TSMC Technology, Inc. (TSMC Technology)		Engineering support activities		Delaware, U.S.A.			100	%			100	%			100	%		a)
		TSMC Development, Inc. (TSMC Development)		Investment activities		Delaware, U.S.A.			100	%			100	%			100	%		—
		InveStar Semiconductor Development Fund, Inc. (ISDF)		Investing in new start-up technology companies		Cayman Islands			97	%			97	%			97	%		a)
		InveStar Semiconductor Development Fund, Inc. (II) LDC. (ISDF II)		Investing in new start-up technology companies		Cayman Islands			97	%			97	%			97	%		a)
TSMC Development		WaferTech, LLC (WaferTech)		Manufacturing, selling, testing and computer-aided designing of integrated circuits and other semiconductor devices		Washington, U.S.A.			100	%			100	%			100	%		—
VTAF III		Mutual-Pak Technology Co., Ltd. (Mutual-Pak)		Manufacturing and selling of electronic parts and researching, developing, and testing of RFID		Taipei, Taiwan			58	%			58	%			57	%		a)
		Growth Fund Limited (Growth Fund)		Investing in new start-up technology companies		Cayman Islands			100	%			100	%			100	%		a)
VTAF III, VTAF II and Emerging Alliance		VentureTech Alliance Holdings, LLC (VTA Holdings)		Investing in new start-up technology companies		Delaware, U.S.A.			100	%			100	%			100	%		a)
TSMC SSL		TSMC Lighting North America, Inc. (TSMC Lighting NA)		Selling and marketing of solid state lighting related products		Delaware, U.S.A.			100	%			100	%			100	%		a)
TSMC Solar		TSMC Solar North America, Inc. (TSMC Solar NA)		Selling and marketing of solar related products		Delaware, U.S.A.			100	%			100	%			100	%		a)
		TSMC Solar Europe B.V. (TSMC Solar Europe)		Investing in solar related business		Amsterdam, the Netherlands			100	%			100	%			100	%		a)
		VentureTech Alliance Fund III, L.P. (VTAF III)		Investing in new start-up technology companies		Cayman Islands			49	%			49	%			46	%		—
TSMC Solar Europe		TSMC Solar Europe GmbH		Selling of solar related products and providing customer service		Hamburg, Germany			100	%			100	%			100	%		a)

 

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Note a:

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

Note b:

TSMC has no power to govern the financial and operating policies of Xintec starting June 2013 due to the loss of power to cast the majority of votes at meetings of the Board of Directors. As a result, Xintec is no longer consolidated and is accounted for using the equity method. Please refer to Note 34.

Foreign Currencies

The financial statements of each individual consolidated entity were expressed in the currency which reflected its primary economic environment (functional currency). The functional currency of TSMC and presentation currency of the consolidated financial statements are both New Taiwan Dollars (NT$). In preparing the consolidated financial statement, the operating results and financial positions of each consolidated entity are translated into NT$.

In preparing the financial statements of each individual consolidated entity, transactions in currencies other than the entity’s functional currency (foreign currencies) are recognized at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Such exchange differences are recognized in profit or loss in the year in which they arise. Non-monetary items measured at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Exchange differences arising on the retranslation of non-monetary items are included in profit or loss for the year except for exchange differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognized directly in other comprehensive income, in which case, the exchange differences are also recognized directly in other comprehensive income. Non-monetary items that are measured in terms of historical cost in foreign currencies are not retranslated.

For the purposes of presenting consolidated financial statements, the assets and liabilities of the Company’s foreign operations are translated into NT$ using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for the period. Exchange differences arising, if any, are recognized in other comprehensive income and accumulated in equity (attributed to noncontrolling interests as appropriate).

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 end of the reporting period. Current liabilities are obligations incurred for trading purposes and obligations expected to be settled within one year from the end of the reporting period. Assets and liabilities that are not classified as current are noncurrent assets and liabilities, respectively.

Cash Equivalents

Cash equivalents, for the purpose of meeting short-term cash commitments, consist of highly liquid time deposits and investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

Financial Instruments

Financial assets and liabilities shall be recognized when the Company becomes a party to the contractual provisions of the instruments.

Financial assets and liabilities are initially recognized at fair values. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss. Fair value is determined in the manner described in Note 36.

 

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Financial Assets

Financial assets are classified into the following specified categories: Financial assets “at fair value through profit or loss” (FVTPL), “held-to-maturity” financial assets, “available-for-sale” financial assets and “loans and receivables”. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular way purchases or sales of financial assets are recognized and derecognized on a settlement date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace.

Financial assets at fair value through profit or loss

Derivative financial instruments that do not meet the criteria for hedge accounting are stated at fair value, with any gains or losses arising on remeasurement recognized in profit or loss.

Held-to-maturity financial assets

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

Available-for-sale financial assets

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

Stocks and money market funds held by the Company that are traded in an active market are classified as available-for-sale financial assets and are stated at fair value at the end of each reporting period.

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

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

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

Loans and receivables

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

 

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Impairment of financial assets

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

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

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

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

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

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

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

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

Derecognition of financial assets

The Company derecognizes a financial asset only when the contractual rights to the cash flows from the financial asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the financial asset to another entity.

On derecognition of a financial asset in its entirety, the difference between the financial asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognized in other comprehensive income and accumulated in equity is recognized in profit or loss.

 

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Financial Liabilities and Equity Instruments

Classification as debt or equity

Debt and equity instruments issued by the Company are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument.

Equity instruments

An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Company are recognized at the proceeds received, net of direct issue costs.

Financial liabilities

Financial liabilities are subsequently measured either at amortized cost using effective interest method or at FVTPL.

Financial liabilities measured at FVTPL are derivative financial instruments that do not meet the criteria for hedge accounting, and they are stated at fair value, with any gains or losses arising on remeasurement recognized in profit or loss.

Financial liabilities other than those held for trading purposes and designated as at FVTPL are subsequently measured at amortized cost at the end of each reporting period.

Derecognition of financial liabilities

The Company derecognizes financial liabilities when, and only when, the Company’s obligations are discharged, cancelled or they expire. The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable is recognized in profit or loss.

Derivative Financial Instruments

The Company enters into a variety of derivative financial instruments to manage its market risk exposure to foreign exchange rate, interest rate and equity price fluctuation, including forward exchange contracts, cross currency swap contracts, interest rate swaps and forward stock contracts.

Derivative financial instruments are initially recognized at fair value at the date the derivative contracts are entered into and are subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is recognized in profit or loss immediately unless the derivative financial instrument is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship.

Changes in the fair value of derivative financial instruments that are designated and qualify as fair value hedges are recognized in profit or loss immediately, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.

The effective portion of changes in the fair value of derivative financial instruments that are designated and qualify as cash flow hedges is recognized in other comprehensive income and accumulated under the heading of cash flow hedges reserve. Amounts previously recognized in other comprehensive income and accumulated in equity are reclassified to profit or loss in the period when the hedged item is recognized in profit or loss.

 

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Inventories

Inventories are stated at the lower of cost or net realizable value. Inventories are recorded at standard cost and adjusted to approximate weighted-average cost at the end of the reporting period. Net realizable value represents 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 accounted for using the equity method include investments in associates and interests in joint ventures.

An associate is an entity over which the Company has significant influence and that is neither a subsidiary nor a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

A joint venture is a contractual arrangement whereby the Company and other parties undertake an economic activity that is subject to joint control (i.e. when the strategic financial and operating policy decisions relating to the activities of the joint venture require the unanimous consent of the parties sharing control). Joint venture arrangements that involve the establishment of a separate entity in which each venturer has an interest are referred to as jointly controlled entities.

The operating results and assets and liabilities of associates and jointly controlled entities are incorporated in these consolidated financial statements using the equity method of accounting. Under the equity method, an investment in an associate or a jointly controlled entity is initially recognized in the consolidated statement of financial position at cost and adjusted thereafter to recognize the Company’s share of profit or loss and other comprehensive income of the associate and jointly controlled entity as well as the distribution received. The Company also recognized its share in the changes in the associates and jointly controlled entity.

Any excess of the cost of acquisition over the Company’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities of an associate or a jointly controlled entity recognized at the date of acquisition is recognized as goodwill, which is included within the carrying amount of the investment. Any excess of the Company’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognized immediately in profit or loss.

When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount. Any impairment loss recognized forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognized to the extent that the recoverable amount of the investment subsequently increases.

The Company discontinues the use of the equity method from the date when the Company ceases to have significant influence over an associate. When the Company retains an interest in the former associate, the Group measures the retained interest at fair value at that date. The difference between the carrying amount of the associate at the date the equity method was discontinued, and the fair value of any retained interest and any proceeds from disposing of a part interest in the associate is included in the determination of the gain or loss on disposal of the associate. In addition, the Company shall account for all amounts recognized in other comprehensive income in relation to that associate on the same basis as would be required if the associate had directly disposed of the related assets or liabilities.

 

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When the Company subscribes to additional shares in an associate or jointly controlled entity at a percentage different from its existing ownership percentage, the resulting carrying amount of the investment differs from the amount of the Company’s proportionate interest in the net assets of the associate or jointly controlled entity. The Company records such a difference as an adjustment to investments with the corresponding amount charged or credited to capital surplus. If the Company’s ownership interest is reduced due to the additional subscription to the shares of associate or joint controlled entity by other investors, the proportionate amount of the gains or losses previously recognized in other comprehensive income in relation to that associate or jointly controlled entity shall be reclassified to profit or loss on the same basis as would be required if the associate or jointly controlled entity had directly disposed of the related assets or liabilities.

When a consolidated entity transacts with an associate or a joint controlled entity, profits and losses resulting from the transactions with the associate or jointly controlled entity are recognized in the Company’ consolidated financial statements only to the extent of interests in the associate or jointly controlled entity that are not owned by the Company.

Property, Plant and Equipment

Property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment. Costs include any incremental costs that are directly attributable to the construction or acquisition of the item of property, plant and equipment.

Properties in the course of construction for production, supply or administrative purposes are carried at cost, less any recognized impairment loss. Such properties are classified to the appropriate categories of property, plant and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use.

Depreciation is recognized so as to write off the cost of the assets less their residual values over their useful lives, and it is computed using the straight-line method over the following estimated useful lives: land improvements - 20 years; buildings - 10 to 20 years; machinery and equipment - 3 to 5 years; office equipment - 3 to 15 years; and leased assets - 20 years. The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimates accounted for on a prospective basis. Land is not depreciated.

Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets. However, when there is no reasonable certainty that ownership will be obtained by the end of the lease term, assets are depreciated over the shorter of the lease term and their useful lives.

An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the assets. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in profit or loss.

Leases

Leases are classified as finance lease whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

The Company as lessor

Rental income from operating leases is recognized on a straight-line basis over the term of the relevant lease.

 

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The Company as lessee

Assets held under finance lease are initially recognized as assets of the Company at the fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the consolidated balance sheet as an obligation under finance lease.

Lease payments are apportioned between finance expense and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability.

Operating lease payments are recognized as an expense on a straight-line basis over the lease term.

Intangible Assets

Goodwill

Goodwill arising on an acquisition of a business is carried at cost as established at the date of acquisition of the business less accumulated impairment losses, if any.

Other intangible assets

Other separately acquired intangible assets with finite useful lives are carried at cost less accumulated amortization and accumulated impairment losses. Amortization is recognized using the straight-line method over the following estimated useful lives: Technology license fees - the estimated life of the technology or the term of the technology transfer contract; software and system design costs - 2 to 5 years; patent and others - the economic life or contract period. The estimated useful life and amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.

Impairment of Tangible and Intangible Assets

Goodwill

Goodwill is not amortized and instead is tested for impairment annually, or more frequently when there is an indication that the cash generating unit may be impaired. For the purpose of impairment testing, goodwill is allocated to each of the Company’s cash-generating units or groups of cash-generating units that are expected to benefit from the synergies of the combination. If the recoverable amount of a cash-generating unit is less than its carrying amount, the difference is allocated first to reduce the carrying amount of any goodwill allocated to such cash generating unit and then to the other assets of the cash generating unit pro rata based on the carrying amount of each asset in the cash generating unit. Any impairment loss for goodwill is recognized directly in profit or loss. An impairment loss recognized for goodwill is not reversed in subsequent periods.

Other tangible and intangible assets

At the end of each reporting period, the Company reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. When it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs. When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified.

 

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Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, the carrying amount of the asset or cash-generating unit is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss.

When an impairment loss subsequently reverses, the carrying amount of the asset or a cash-generating unit is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset or cash-generating unit in prior years. A reversal of an impairment loss is recognized immediately in profit or loss.

Provision

Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that the Company will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.

Revenue Recognition

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

Sale of goods

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

 

•

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

 

•

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

 

•

The amount of revenue can be measured reliably;

 

•

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

 

•

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

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

 

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Royalties, dividend and interest income

Revenue from royalties is recognized on an accrual basis in accordance with the substance of the relevant agreement (provided that it is probable that the economic benefits will flow to the Company and the amount of revenue can be measured reliably).

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

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

Retirement Benefits

For defined contribution retirement benefit plans, payments to the benefit plan are recognized as an expense when the employees have rendered service entitling them to the contribution. For defined benefit retirement benefit plans, the cost of providing benefit is recognized based on actuarial calculations.

For defined benefit retirement benefit plans, the cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial calculations being carried out at year end. Actuarial gains and losses are reported in retained earnings in the period that they are recognized as other comprehensive income.

Share-based Payment Arrangements

The Company elected to take the optional exemption under IFRS 1 for the share-based payment transactions granted and vested before the date of transition to Taiwan-IFRSs. There were no stock options granted prior to but unvested at the date of transition. Please refer to the description in Note 43 b.

The compensation costs of employee stock options that were granted after January 1, 2012 are measured at the fair value of the stock options at the grant date. The fair value of the stock option granted determined at the grant date of the stock options is expensed on a straight-line basis over the vesting period, based on the Company’s estimate of the number of stock options that will eventually vest, with a corresponding increase in capital surplus—employee stock option. The estimate is revised if subsequent information indicates that the number of stock options expected to vest differs from original estimates.

Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

Current tax

Income tax on unappropriated earnings (excluding earnings from foreign consolidated subsidiaries) at a rate of 10% is expensed in the year the shareholders approved the appropriation of earnings which is the year subsequent to the year the earnings are generated.

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

 

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Deferred tax

Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences, net operating loss carryforwards and unused tax credits to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized.

Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries and associates, and interests in joint ventures, except where the Company is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the deferred tax asset to be recovered. The deferred tax assets which originally not recognized is also reviewed at the end of each reporting period and recognized to the extent that it is probable that sufficient taxable profits will be available to allow all or part of the deferred tax asset to be recovered.

Deferred tax liabilities and assets are measured at the tax rates that are expected to apply in the year in which the liability is settled or the asset is realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Company expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

Current and deferred tax for the year

Current and deferred tax are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income or directly in equity, in which case, the current and deferred tax are also recognized in other comprehensive income or directly in equity, respectively.

 

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

In the application of the Company’s accounting policies, which are described in Note 4, the directors are required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the estimate is revised if the revision affects only that year, or in the year of the revision and future years if the revision affects both current and future years.

The following are the critical judgments, apart from those involving estimations, that the directors have made in the process of applying the Company’s accounting policies and that have the most significant effect on the amounts recognized in the consolidated financial statements.

 

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Revenue Recognition

The Company recognizes revenue when the conditions described in Note 4 are satisfied. The Company also records a provision for estimated future returns and other allowances in the same period the related revenue is recorded. Provision for estimated sales returns and other allowances is generally made and adjusted at a specific percentage based on historical experience and any known factors that would significantly affect the allowance, and our management periodically reviews the adequacy of the percentage used.

Impairment of Tangible and Intangible Assets Other than Goodwill

In the process of evaluating the potential impairment of tangible and intangible assets other than goodwill, the Company is required to make subjective judgments in determining the independent cash flows, useful lives, expected future revenue and expenses related to the specific asset groups with the consideration of the nature of semiconductor industry. Any changes in these estimates based on changed economic conditions or business strategies could result in significant impairment charges or reversal in future years.

Impairment of Goodwill

The assessment of impairment of goodwill requires the Company to make subjective judgment to determine the identified cash-generating units, allocate the goodwill to relevant cash-generating units and estimate the recoverable amount of relevant cash-generating units.

Impairment Assessment on Investment Using Equity Method

The Company assesses the impairment of investments accounted for using the equity method whenever triggering events or changes in circumstances indicate that an investment may be impaired and carrying value may not be recoverable. The Company measures the impairment based on a projected future cash flow of the investees, including the underlying assumptions of sales growth rate and capacity utilization rate formulated by such investees’ internal management team. The Company also takes into account market conditions and the relevant industry trends to ensure the reasonableness of such assumptions.

Realization of Deferred Income Tax Assets

Deferred tax assets are recognized to the extent that it is probable that future taxable profits will be available against which those deferred tax assets can be utilized. Assessment of the realization of the deferred tax assets requires the Company’s subjective judgment and estimate, including the future revenue growth and profitability, tax holidays, the amount of tax credits can be utilized and feasible tax planning strategies. Any changes in the global economic environment, the industry trends and relevant laws and regulations could result in significant adjustments to the deferred tax assets.

Valuation of Inventory

Inventories are stated at the lower of cost or net realizable value, and the Company use judgment and estimate to determine the net realizable value of inventory at the end of each reporting period.

Due to the rapid technological changes, the Company estimates the net realizable value of inventory for obsolescence and unmarketable items at the end of reporting period and then writes down the cost of inventories to net realizable value. The net realizable value of the inventory is mainly determined based on assumptions of future demand within a specific time horizon.

 

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Recognition and Measurement of Defined Benefit Plans

Accrued pension liabilities and the resulting pension expenses under defined benefit pension plans are calculated using the Projected Unit Credit Method. Actuarial assumptions comprise the discount rate, rate of employee turnover, and long-term average future salary increase. Changes in economic circumstances and market conditions will affect these assumptions and may have a material impact on the amount of the expense and the liability.

 

6.	CASH AND CASH EQUIVALENTS

 

		December 31, 2013				December 31, 2012				January 1, 2012
Cash and deposits in banks		$	238,014,580			$	140,072,294			$	139,637,363
Repurchase agreements collateralized by short-term commercial paper			2,395,644				349,341				—
Repurchase agreements collateralized by corporate bonds			1,809,344				2,691,042				—
Repurchase agreements collateralized by government bonds			475,879				297,911				3,834,914
		$	242,695,447			$	143,410,588			$	143,472,277

 

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

 

		December 31, 2013				December 31, 2012				January 1, 2012
Derivative financial assets
Forward exchange contracts		$	90,353			$	38,607			$	15,360
Cross currency swap contracts			—				947				—
		$	90,353			$	39,554			$	15,360
Derivative financial liabilities
Forward exchange contracts		$	29,573			$	12,174			$	13,623
Cross currency swap contracts			4,177				3,451				119
		$	33,750			$	15,625			$	13,742

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

 

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Outstanding forward exchange contracts consisted of the following:

 

				Contract Amount
		Maturity Date		(In Thousands)
December 31, 2013
Sell NT$/Buy EUR		January 2014		NT$4,514,314/EUR110,000
Sell NT$/Buy US$		January 2014		NT$683,749/US$22,800
Sell US$/Buy EUR		January 2014		US$340,134/EUR248,000
Sell US$/Buy JPY		January 2014		US$341,023/JPY35,754,801
Sell US$/Buy RMB		January 2014 to February 2014		US$138,000/RMB841,492
December 31, 2012
Sell NT$/Buy EUR		January 2013		NT$9,417,062/EUR246,000
Sell NT$/Buy US$		January 2013		NT$590,403/US$20,400
Sell NT$/Buy JPY		January 2013		NT$44,110/JPY130,000
Sell US$/Buy NT$		January 2013 to March 2013		US$13,700/NT$398,239
Sell US$/Buy RMB		January 2013		US$20,000/RMB124,735
January 1, 2012
Sell EUR/Buy NT$		January 2012		EUR38,600/NT$1,528,206
Sell NT$/Buy US$		January 2012 to February 2012		NT$163,491/US$5,400
Sell RMB/Buy US$		January 2012		RMB1,118,705/US$177,000
Sell US$/Buy EUR		January 2012		US$2,082/EUR1,591
Sell US$/Buy JPY		January 2012		US$3,335/JPY259,830
Sell US$/Buy NT$		January 2012 to February 2012		US$16,900/NT$510,122

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
December 31, 2013
January 2014		NT$1,639,215/US$55,080		—		1.03%-2.00%
December 31, 2012
January 2013		NT$1,083,139/US$37,280		—		0.06%
January 2013		US$275,000/NT$7,986,190		0.14%-0.17%		—
January 1, 2012
January 2012		NT$420,431/US$13,880		—		0.48%

 

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8.	AVAILABLE-FOR-SALE FINANCIAL ASSETS

 

		December 31, 2013				December 31, 2012				January 1, 2012
Publicly traded stocks		$	59,481,569			$	41,160,437			$	3,306,248
Money market funds			1,183				1,443				2,522
		$	59,482,752			$	41,161,880			$	3,308,770
Current portion		$	760,793			$	2,410,635			$	3,308,770
Noncurrent portion			58,721,959				38,751,245				—
		$	59,482,752			$	41,161,880			$	3,308,770

In October 2012, the Company acquired 5% of the outstanding equity of ASML Holding N.V. (ASML) for EUR837,816 thousand with a lock-up period of 2.5 years starting from the acquisition date. (Note 40e)

In the second quarter of 2012, the Company recognized an impairment loss on some of the foreign publicly traded stocks in the amount of NT$2,677,529 thousand due to the significant decline in fair value.

 

9.	HELD-TO-MATURITY FINANCIAL ASSETS

 

		December 31, 2013				December 31, 2012				January 1, 2012
Commercial paper		$	1,795,949			$	—			$	—
Corporate bonds			—				5,056,973				8,614,527
Government bonds			—				—				454,320
		$	1,795,949			$	5,056,973			$	9,068,847
Current portion		$	1,795,949			$	5,056,973			$	3,825,680
Noncurrent portion			—				—				5,243,167
		$	1,795,949			$	5,056,973			$	9,068,847

 

10.	HEDGING DERIVATIVE FINANCIAL INSTRUMENTS

 

		December 31, 2013				December 31, 2012				January 1, 2012
Financial liabilities
Current
Cash flow hedges
Interest rate swap contracts		$	—			$	—			$	232
Financial liabilities
Noncurrent
Fair value hedges
Stock forward contracts		$	5,481,616			$	—			$	—

 

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The Company’s investments in publicly traded stocks are exposed to the risk of market price fluctuations. Accordingly, the Company entered into stock forward contracts to sell shares at a contracted price in a specific future period in order to hedge the fair value risk caused by changes in equity prices.

The outstanding stock forward contracts consisted of the following:

 

Contract Amount (In Thousands)		Contract Price
December 31, 2013
NT$37,431,626 (US$1,256,095)		Determined by the specific percentage of spot price on the trade date

In addition, the Company’s long-term bank loans bear floating interest rates; therefore, changes in the market interest rate may cause future cash flows to be volatile. Accordingly, the Company entered into an interest rate swap contract in order to hedge cash flow risk caused by floating interest rates. The interest rate swap contract of the Company was due in August 2012. The contract information was as follows:

 

Contract Amount (In Thousands)		Maturity Date		Range of Interest Rates Paid		Range of Interest Rates Received
January 1, 2012
NT$80,000		August 31, 2012		1.38%		0.63%-0.86%

For the year ended December 31, 2012, the amount recognized in other comprehensive income and accumulated under the heading of cash flow hedges reserve from the above interest rate swap contract amounted to a net gain of NT$5 thousand; the amount reclassified from equity and recognized as a loss from the above interest rate swap contract amounted to a net loss of NT$227 thousand, which was included under finance costs in the consolidated statements of comprehensive income.

 

11.	NOTES AND ACCOUNTS RECEIVABLE, NET

 

		December 31, 2013				December 31, 2012				January 1, 2012
Notes and accounts receivable		$	72,136,514			$	58,257,798			$	46,321,240
Allowance for doubtful receivables			(486,588	)			(480,212	)			(490,952	)
Notes and accounts receivable, net		$	71,649,926			$	57,777,586			$	45,830,288

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

Except for those impaired, for the rest of the notes and accounts receivable, the account aging analysis at the end of the reporting period is summarized in the following table. Notes and accounts receivable include amounts that are past due but for which the Company has not recognized a specific allowance for doubtful receivables after the assessment since there has not been a significant change in the credit quality of its customers and the amounts are still considered recoverable.

 

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Aging analysis of notes and accounts receivable, net

 

		December 31, 2013				December 31, 2012				January 1, 2012
Neither past due nor impaired		$	64,112,564			$	47,528,952			$	39,362,390
Past due but not impaired
Past due within 30 days			7,537,362				10,248,634				6,467,898
		$	71,649,926			$	57,777,586			$	45,830,288

Movements of the allowance for doubtful receivables

 

		Years Ended December 31
		2013				2012
Balance, beginning of year		$	480,212			$	490,952
Provision			9,436				450
Write-off			—				(11,083	)
Effect of deconsolidation of subsidiary			(3,157	)			—
Effect of exchange rate changes			97				(107	)
Balance, end of year		$	486,588			$	480,212

Aging analysis of accounts receivable that is individually determined to be impaired

 

		December 31, 2013				December 31, 2012				January 1, 2012
Not past due		$	38			$	160,354			$	81,017
Past due 1-30 days			276				2,863				24,351
Past due 31-60 days			80				—				4,684
Past due 61-120 days			158				—				—
Past due over 121 days			7,824				3,157				9,769
		$	8,376			$	166,374			$	119,821

The Company held bank guarantees and other credit enhancements as collateral for certain impaired accounts receivables. As of December 31, 2013 and 2012 and January 1, 2012, the amount of the bank guarantee and other credit enhancements were US$11 thousand, US$1,000 thousand and US$2,962 thousand, respectively.

 

12.	INVENTORIES

 

		December 31, 2013				December 31, 2012				January 1, 2012
Finished goods		$	7,245,209			$	6,244,824			$	3,347,849
Work in process			26,033,625				25,713,217				17,940,960
Raw materials			2,435,269				3,864,105				1,808,615
Supplies and spare parts			1,780,790				2,008,352				1,743,158
		$	37,494,893			$	37,830,498			$	24,840,582

 

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Write-down of inventories to net realizable value in the amount of NT$664,662 thousand and NT$1,558,915 thousand, respectively, were included in the cost of revenue for the years ended December 31, 2013 and 2012.

 

13.	FINANCIAL ASSETS CARRIED AT COST

 

		December 31, 2013				December 31, 2012				January 1, 2012
Non-publicly traded stocks		$	1,865,078			$	3,314,713			$	4,004,314
Mutual funds			280,513				290,364				310,691
		$	2,145,591			$	3,605,077			$	4,315,005

Since there is a wide range of estimated fair values of the Company’s investments in non-publicly traded stocks, the Company concludes that the fair value cannot be reliably measured and therefore should be measured at the cost less any impairment.

The Company recognized impairment loss on financial assets carried at cost in the amount of NT$1,538,888 thousand and NT$367,399 thousand for the years ended December 31, 2013 and 2012, respectively.

 

14.	INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD

Investments accounted for using the equity method consisted of the following:

 

		December 31, 2013				December 31, 2012				January 1, 2012
Associates		$	24,823,807			$	20,325,277			$	22,033,567
Jointly controlled entities			3,492,453				3,035,641				2,853,364
		$	28,316,260			$	23,360,918			$	24,886,931

 

a.

Investments in associates

Associates consisted of the following:

 

				Place of Incorporation and Operation		Carrying Amount												% of Ownership and Voting Rights Held by the Company
Name of Associate		Principal Activities				December 31, 2013				December 31, 2012				January 1, 2012				December 31, 2013				December 31, 2012				January 1, 2012
Vanguard International Semiconductor Corporation (VIS)		Research, design, development, manufacture, packaging, testing and sale of memory integrated circuits, LSI, VLSI and related parts		Hsinchu, Taiwan		$	10,556,348			$	9,406,597			$	8,985,340				39	%			40	%			39	%
Systems on Silicon Manufacturing Company Pte Ltd. (SSMC)		Fabrication and supply of integrated circuits		Singapore			7,457,733				6,710,956				6,289,429				39	%			39	%			39	%
Motech Industries, Inc. (Motech)		Manufacturing and sales of solar cells, crystalline silicon solar cell, and test and measurement instruments and design and construction of solar power systems		Taipei, Taiwan			3,887,462				2,992,899				5,609,002				20	%			20	%			20	%
Xintec		Wafer level chip size packaging service		Taoyuan, Taiwan			1,866,123				—				—				40	%			—				—
Global Unichip Corporation (GUC)		Researching, developing, manufacturing, testing and marketing of integrated circuits		Hsinchu, Taiwan			1,056,141				1,214,825				1,149,796				35	%			35	%			35	%
Mcube Inc. (Mcube)		Research, development, and sale of micro-semiconductor device		Delaware, U.S.A.			—				—				—				—				25	%			25	%
						$	24,823,807			$	20,325,277			$	22,033,567

 

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In the fourth quarter of 2012, the Company recognized an impairment loss in the amount of NT$1,186,674 thousand, due to the lower estimated recoverable amount compared with the carrying amount of its investments in stocks traded on the Taiwan GreTai Securities Market. Subsequently, as the recoverable amount of the aforementioned investments was higher than its carrying amount, the impairment loss of NT$1,186,674 thousand recognized in prior year was reversed in the fourth quarter of 2013.

Since TSMC did not participate in Mcube’s issuance of new shares in the third quarter of 2013, the Company’s percentage of ownership in Mcube decreased to 18%. As a result, the Company evaluated and concluded that the Company did not exercise significant influence over Mcube. Therefore Mcube is no longer accounted for using the equity method. Further, such investment was reclassified to financial assets carried at cost. The Company also measured the fair value of retained interest in Mcube when the significant influence was lost, which has no difference with the carrying amount; accordingly, the Company did not recognize any gain or loss.

TSMC has no power to govern the financial and operating policies of Xintec starting June 2013 due to the loss of power to cast the majority of votes at meetings of the Board of Directors. As a result, Xintec is no longer consolidated and is accounted for using the equity method. Please refer to Note 34.

The summarized financial information in respect of the Company’s associates is set out below. The summarized financial information below represents amounts shown in the associates’ financial statements prepared in accordance with IFRSs, IASs, interpretations as well as related guidance translated by the ARDF endorsed by the FSC with the effective dates, which is also adjusted by the Company using the equity method of accounting.

 

		December 31, 2013				December 31, 2012				January 1, 2012
Total assets		$	96,689,523			$	82,348,735			$	87,282,437
Total liabilities			(28,141,625	)			(21,683,504	)			(20,948,855	)
Net assets		$	68,547,898			$	60,665,231			$	66,333,582
The Company’s share of net assets of associates		$	24,823,807			$	20,325,277			$	22,033,567

 

		Years Ended December 31
		2013				2012
Net revenue		$	67,752,079			$	55,746,115
Net income		$	8,325,722			$	175,900
Other comprehensive income (loss)		$	168,081			$	(24,553	)
The Company’s share of profits of associates		$	3,518,495			$	1,456,645
The Company’s share of other comprehensive income (loss) of associates		$	18,554			$	(39,238	)

 

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The market prices of the investments accounted for using the equity method in publicly traded stocks calculated by the closing price at the end of the reporting period are summarized as follows:

 

Name of Associate		December 31, 2013				December 31, 2012				January 1, 2012
VIS		$	22,239,112			$	12,658,703			$	6,627,758
Motech		$	5,345,015			$	2,383,824			$	4,645,176
GUC		$	3,454,902			$	4,692,130			$	4,645,442

 

b.

Investments in jointly controlled entities

Jointly controlled entities consisted of the following:

 

The summarized financial information in respect of the Company’s jointly controlled entity is set out below. The summarized financial information below represents amounts shown in the jointly controlled entity’s financial statements prepared in accordance with IFRSs, IASs, interpretations as well as related guidance translated by the ARDF endorsed by the FSC with the effective dates, which is also adjusted by the Company using the equity method of accounting.

 

		December 31, 2013				December 31, 2012				January 1, 2012
Current assets		$	2,335,612			$	1,887,122			$	1,616,916
Noncurrent assets		$	1,564,485			$	1,780,903			$	1,732,247
Current liabilities		$	407,184			$	631,803			$	495,066
Noncurrent liabilities		$	460			$	581			$	733

 

		Years Ended December 31
		2013				2012
Net revenue		$	1,801,619			$	1,869,049
Income from operations		$	474,787			$	522,486
Net income		$	453,536			$	617,084
Other comprehensive income (loss)		$	(78,294	)		$	92,986
Total comprehensive income		$	375,242			$	710,070
Income tax expense		$	64,311			$	135,247
The Company’s share of profits of joint venture		$	453,536			$	617,084
The Company’s share of other comprehensive income (loss) of joint venture		$	(78,294	)		$	92,986

 

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15.	PROPERTY, PLANT AND EQUIPMENT

 

				December 31, 2013				December 31, 2012				January 1, 2012
		Land and land improvements		$	3,582,717			$	1,159,755			$	1,185,573
		Buildings			103,948,570				85,610,120				71,915,740
		Machinery and equipment			404,706,105				404,382,298				294,814,381
		Office equipment			7,836,261				6,907,376				5,148,538
		Assets under finance leases			418,467				438,663				493,945
		Equipment under installation and construction in progress			272,173,793				119,063,976				116,863,976
				$	792,665,913			$	617,562,188			$	490,422,153

 

		Year Ended December 31, 2013
		Balance, Beginning of Year				Additions				Disposals				Reclassification				Effect of Deconsolidation of Subsidiary				Effect of Exchange Rate Changes				Balance, End of Year
Cost
Land and land improvements		$	1,527,124			$	3,212,000			$	—			$	—			$	(772,029	)		$	19,814			$	3,986,909
Buildings			197,411,851				31,869,046				—				3,797				(986,205	)			884,247				229,182,736
Machinery and equipment			1,279,893,177				140,223,121				(2,925,145	)			360				(5,630,854	)			2,359,135				1,413,919,794
Office equipment			20,067,943				3,791,109				(788,080	)			—				(1,055,809	)			46,869				22,062,032
Assets under finance leases			766,732				—				—				—				—				37,698				804,430
			1,499,666,827			$	179,095,276			$	(3,713,225	)		$	4,157			$	(8,444,897	)		$	3,347,763				1,669,955,901
Accumulated depreciation and impairment
Land improvements			367,369			$	27,069			$	—			$	—			$	—			$	9,754				404,192
Buildings			111,801,731				13,183,558				—				—				(226,908	)			475,785				125,234,166
Machinery and equipment			875,510,879				138,314,235				(2,809,185	)			—				(3,656,326	)			1,854,086				1,009,213,689
Office equipment			13,160,567				2,413,652				(786,464	)			—				(599,483	)			37,499				14,225,771
Assets under finance leases			328,069				41,333				—				—				—				16,561				385,963
			1,001,168,615			$	153,979,847			$	(3,595,649	)		$	—			$	(4,482,717	)		$	2,393,685				1,149,463,781
Equipment under installation and construction in progress			119,063,976			$	154,706,858			$	—			$	—			$	(1,632,860	)		$	35,819				272,173,793
		$	617,562,188																							$	792,665,913

 

		Year Ended December 31, 2012
		Balance, Beginning of Year				Additions				Disposals				Impairment				Reclassification				Effect of Exchange Rate Changes				Balance, End of Year
Cost
Land and land improvements		$	1,541,128			$	18,500			$	—			$	—			$	—			$	(32,504	)		$	1,527,124
Buildings			172,997,391				25,183,927				(54,456	)			—				(11,074	)			(703,937	)			197,411,851
Machinery and equipment			1,057,926,529				226,497,664				(2,104,900	)			—				11,040				(2,437,156	)			1,279,893,177
Office equipment			17,041,306				3,680,707				(563,454	)			—				34				(90,650	)			20,067,943
Assets under finance leases			791,480				—				—				—				—				(24,748	)			766,732
			1,250,297,834			$	255,380,798			$	(2,722,810	)		$	—			$	—			$	(3,288,995	)			1,499,666,827
Accumulated depreciation and impairment
Land improvements			355,555			$	26,983			$	—			$	—			$	—			$	(15,169	)			367,369
Buildings			101,081,651				11,154,790				(44,354	)			—				(164	)			(390,192	)			111,801,731
Machinery and equipment			763,112,148				116,070,821				(1,966,751	)			422,323				158				(2,127,820	)			875,510,879
Office equipment			11,892,768				1,875,785				(555,485	)			22,182				6				(74,689	)			13,160,567
Assets under finance leases			297,535				40,135				—				—				—				(9,601	)			328,069
			876,739,657			$	129,168,514			$	(2,566,590	)		$	444,505			$	—			$	(2,617,471	)			1,001,168,615
Equipment under installation and construction in progress			116,863,976			$	2,308,355			$	—			$	—			$	(8,525	)		$	(99,830	)			119,063,976
		$	490,422,153																							$	617,562,188

The significant part of the Company’s buildings includes main plants, mechanical and electrical power equipment and clean rooms, and the related depreciation is calculated using the estimated useful lives of 20 years, 10 years and 10 years, respectively.

For the year ended December 31, 2012, the Company recognized impairment loss of NT$444,505 thousand related to property, plant and equipment of the foundry reportable segment since the carrying amount of some of property, plant and equipment is expected to be unrecoverable.

The Company entered into agreements to lease buildings from December 2003 to November 2018 that qualify as finance leases.

 

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Future minimum lease gross payments were as follows:

 

		December 31, 2013				December 31, 2012				January 1, 2012
Minimum lease payments
Not later than 1 year		$	28,376			$	27,042			$	—
Later than 1 year and not later than 5 years			850,703				108,168				223,296
Later than five years			—				729,566				780,962
			879,079				864,776				1,004,258
Less: Future finance expenses			94,040				108,471				133,265
Present value of minimum lease payments		$	785,039			$	756,305			$	870,993
Present value of minimum lease payments
Not later than 1 year		$	27,684			$	26,382			$	—
Later than 1 year and not later than 5 years			757,355				100,821				213,411
Later than five years			—				629,102				657,582
		$	785,039			$	756,305			$	870,993
Current portion		$	8,809			$	8,190			$	—
Noncurrent portion			776,230				748,115				870,993
		$	785,039			$	756,305			$	870,993

There was no capitalization of borrowing costs for the year ended December 31, 2013. During the year ended December 31, 2012, the Company capitalized the borrowing costs directly attributable to the acquisition or construction of property, plant and equipment. For the year ended December 31, 2012, the amount of capitalized borrowing costs was NT$6,442 thousand and the capitalized interest rate was 1.08%-1.20%.

 

16.	INTANGIBLE ASSETS

 

		December 31, 2013				December 31, 2012				January 1, 2012
Goodwill		$	5,627,517			$	5,523,707			$	5,693,999
Technology license fees			1,103,161				1,461,893				1,682,892
Software and system design costs			3,647,670				2,968,942				2,366,483
Patent and others			1,112,035				1,005,027				1,118,189
		$	11,490,383			$	10,959,569			$	10,861,563

 

(Continued)

 

- 35 -

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(Concluded)

 

The Company’s goodwill has been tested for impairment at the end of the annual reporting period and the recoverable amount is determined based on the value in use. The value in use was calculated based on the cash flow forecast from the financial budgets covering the future five-year period, and the Company used annual discount rate of 8.50% and 9.00% in its test of impairment as of December 31, 2013 and 2012, respectively, to reflect the relevant specific risk in the cash-generating unit.

For the years ended December 31, 2013 and 2012, the Company did not recognize any impairment loss on goodwill.

 

17.	OTHER ASSETS

 

		December 31, 2013				December 31, 2012				January 1, 2012
Tax receivable		$	1,781,376			$	1,565,104			$	708,891
Prepaid expenses			1,081,957				1,080,236				1,436,416
Long-term receivable			820,000				767,800				785,400
Others			770,468				608,412				550,053
		$	4,453,801			$	4,021,552			$	3,480,760
Current portion		$	2,984,224			$	2,786,408			$	2,174,014
Noncurrent portion			1,469,577				1,235,144				1,306,746
		$	4,453,801			$	4,021,552			$	3,480,760

 

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18.	SHORT-TERM LOANS

 

		December 31, 2013				December 31, 2012				January 1, 2012
Unsecured loans
Amount		$	15,645,000			$	34,714,929			$	25,926,528
Original loan content
US$ (in thousands)		$	525,000			$	1,195,500			$	856,000
Annual interest rate			0.38%-0.42%				0.39%-0.58%				0.45%-1.00%
Maturity date			Due in January 2014				Due in January 2013				Due by February 2012

 

19.	PROVISIONS

 

		December 31, 2013				December 31, 2012				January 1, 2012
Sales returns and allowances		$	7,603,781			$	6,038,003			$	5,068,263
Warranties			10,452				4,891				2,889
		$	7,614,233			$	6,042,894			$	5,071,152
Current portion		$	7,603,781			$	6,038,003			$	5,068,263
Noncurrent portion			10,452				4,891				2,889
		$	7,614,233			$	6,042,894			$	5,071,152

 

		Sales Returns and Allowances				Warranties				Total
Year ended December 31, 2013
Balance, beginning of year		$	6,038,003			$	4,891			$	6,042,894
Provision made			6,633,290				6,162				6,639,452
Payment			(5,042,752	)			(890	)			(5,043,642	)
Effect of deconsolidation of subsidiary			(37,748	)			—				(37,748	)
Effect of exchange rate changes			12,988				289				13,277
Balance, end of year		$	7,603,781			$	10,452			$	7,614,233
Year ended December 31, 2012
Balance, beginning of year		$	5,068,263			$	2,889			$	5,071,152
Provision made			7,187,023				2,048				7,189,071
Payment			(6,211,170	)			—				(6,211,170	)
Effect of exchange rate changes			(6,113	)			(46	)			(6,159	)
Balance, end of year		$	6,038,003			$	4,891			$	6,042,894

Provisions for sales returns and allowances are estimated based on historical experience, management judgment, and any known factors that would significantly affect the returns and allowances, and are recognized as a reduction of revenue in the same year of the related product sales.

 

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The provision for warranties represents the present value of the Company’s best estimate of the future outflow of the economic benefits that will be required under the Company’s obligations for warranties. The estimate has been made on the basis of historical warranty trends of business and may vary as a result of new materials, altered manufacturing processes or other events affecting product quality.

 

20.	BONDS PAYABLE

 

		December 31, 2013				December 31, 2012				January 1, 2012
Domestic unsecured bonds		$	166,200,000			$	80,000,000			$	22,500,000
Overseas unsecured bonds			44,700,000				—				—
			210,900,000				80,000,000				22,500,000
Less: Discounts on bonds payable			132,375				—				—
Total		$	210,767,625			$	80,000,000			$	22,500,000
Current portion		$	—			$	—			$	4,500,000
Noncurrent portion			210,767,625				80,000,000				18,000,000
		$	210,767,625			$	80,000,000			$	22,500,000

The major terms of domestic unsecured bonds are as follows:

 

Issuance		Tranche		Issuance Period		Total Amount				Coupon Rate				Repayment and Interest Payment
100-1		A		September 2011 to September 2016		$	10,500,000				1.40	%		Bullet repayment; interest payable annually
		B		September 2011 to September 2018			7,500,000				1.63	%		”
100-2		A		January 2012 to January 2017			10,000,000				1.29	%		”
		B		January 2012 to January 2019			7,000,000				1.46	%		”
101-1		A		August 2012 to August 2017			9,900,000				1.28	%		”
		B		August 2012 to August 2019			9,000,000				1.40	%		”
101-2		A		September 2012 to September 2017			12,700,000				1.28	%		”
		B		September 2012 to September 2019			9,000,000				1.39	%		”
101-3		-		October 2012 to October 2022			4,400,000				1.53	%		”
101-4		A		January 2013 to January 2018			10,600,000				1.23	%		”
		B		January 2013 to January 2020			10,000,000				1.35	%		”
		C		January 2013 to January 2023			3,000,000				1.49	%		”

(Continued)

 

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Issuance		Tranche		Issuance Period		Total Amount				Coupon Rate				Repayment and Interest Payment
102-1		A		February 2013 to February 2018		$	6,200,000				1.23	%		Bullet repayment; interest payable annually
		B		February 2013 to February 2020			11,600,000				1.38	%		”
		C		February 2013 to February 2023			3,600,000				1.50	%		”
102-2		A		July 2013 to July 2020			10,200,000				1.50	%		”
		B		July 2013 to July 2023			3,500,000				1.70	%		”
102-3		A		August 2013 to August 2017			4,000,000				1.34	%		”
		B		August 2013 to August 2019			8,500,000				1.52	%		”
102-4		A		September 2013 to September 2016			1,500,000				1.35	%		”
		B		September 2013 to September 2017			1,500,000				1.45	%		”
		C		September 2013 to March 2019			1,400,000				1.60	%		Bullet repayment; interest payable annually (interest for the six months prior to maturity will accrue on the basis of actual days and be repayable at maturity)
		D		September 2013 to March 2021			2,600,000				1.85	%		”
		E		September 2013 to March 2023			5,400,000				2.05	%		”
		F		September 2013 to September 2023			2,600,000				2.10	%		Bullet repayment; interest payable annually
Domestic 5th		C		January 2002 to January 2012			4,500,000				3.00	%		”

(Concluded)

The major terms of foreign unsecured bonds are as follows:

 

Issuance Period		Total Amount (US$ in Thousands)				Coupon Rate				Repayment and Interest Payment
April 2013 to April 2016		$	350,000				0.95	%		Bullet repayment; interest payable semi-annually
April 2013 to April 2018			1,150,000				1.625	%		”

 

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21.	LONG-TERM BANK LOANS

 

		December 31, 2013				December 31, 2012				January 1, 2012
Bank loans for working capital:
Repayable from April 2016 in 16 quarterly installments, annual interest rate at 3.63% in 2013		$	40,000			$	—			$	—
Repayable in full in one lump sum payment in June 2016, however, reflective of a prepayment of NT$100,000 thousand in September 2012, annual interest rate at 1.08%-1.21% in 2012			—				550,000				650,000
Repayable in full in one lump sum payment in March 2015, however, reflective of a prepayment of NT$50,000 thousand in August 2012, annual interest rate at 1.16%-1.18% in 2012			—				450,000				500,000
Repayable from July 2012 in 16 quarterly installments, annual interest rate at 1.21%-1.24% in 2012			—				262,500				300,000
Repayable from September 2012 in 16 quarterly installments, annual interest rate at 1.21%-1.24% in 2012			—				175,000				200,000
Repayable from October 2013 in 16 quarterly installments, annual interest rate at 1.23%-1.24% in 2012			—				50,000				—
		$	40,000			$	1,487,500			$	1,650,000
Current portion		$	—			$	128,125			$	62,500
Noncurrent portion			40,000				1,359,375				1,587,500
		$	40,000			$	1,487,500			$	1,650,000

As of December 31, 2013, in relation to the deconsolidation of Xintec in June 2013 (refer to Note 34), long-term bank loans of Xintec have been derecognized.

 

22.	OTHER LONG-TERM PAYABLES

 

		December 31, 2013				December 31, 2012				January 1, 2012
Payables for software and system design costs		$	54,000			$	113,000			$	—
Payables for acquisition of property, plant and equipment			—				825,447				3,399,855
Payables for technology transfer			—				29,038				—
		$	54,000			$	967,485			$	3,399,855
Current portion (classified under accrued expenses and other current liabilities)		$	18,000			$	913,485			$	3,399,855
Noncurrent portion			36,000				54,000				—
		$	54,000			$	967,485			$	3,399,855

 

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TSMC entered into an agreement with a counterparty in 2003 whereby TSMC China purchased in 2004 certain property, plant and equipment. The obligations under the aforementioned agreement were fully paid in July 2013.

 

23.	RETIREMENT BENEFIT PLANS

 

a.

Defined contribution plans

The plan under the Labor Pension Act (the “Act”) is deemed a defined contribution plan. Pursuant to the Act, TSMC, Xintec, Mutual-Pak, TSMC SSL and TSMC Solar have made monthly contributions equal to 6% of each employee’s monthly salary to employees’ pension accounts. Furthermore, TSMC North America, TSMC China, TSMC Europe, TSMC Canada, TSMC Technology, TSMC Solar NA and TSMC Solar Europe GmbH also make monthly contributions at certain percentages of the basic salary of their employees. Accordingly, the Company recognized expenses of NT$1,590,414 thousand and NT$1,403,507 thousand in the consolidated statements of comprehensive income for the years ended December 31, 2013 and 2012, respectively.

 

b.

Defined benefit plans

TSMC, Xintec, TSMC SSL and TSMC Solar have defined benefit plans under the Labor Standards Law that provide benefits based on an employee’s length of service and average monthly salary for the six-month period prior to retirement. The aforementioned companies contribute an amount equal to 2% 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 Committee’s name in the Bank of Taiwan. TSMC revised its defined benefit plan in the fourth quarter of 2013 to set the employee’s mandatory retirement age. Such plan changes have reflected in the actuarial results as of December 31, 2013.

The actuarial valuations of plan assets and the present value of the defined benefit obligation were carried out by qualified actuaries. The principal assumptions of the actuarial valuation were as follows:

 

		Measurement Date
		December 31, 2013		December 31, 2012		January 1, 2012
Discount rate		2.15%		1.50%-1.75%		1.75%
Future salary rate increase		3.00%		2.00%-3.00%		2.50%-3.00%
Expected rate of return on plan assets		1.25%		1.75%-2.00%		2.00%

The pension costs of the defined benefit plans recognized in profit or loss were as follows:

 

		Years Ended December 31
		2013				2012
Current service cost		$	134,762			$	129,217
Interest cost			175,563				160,018
Expected return on plan assets			(67,324	)			(63,279	)
Past service cost			(7,240	)			(7,239	)
		$	235,761			$	218,717

 

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The pension costs of the aforementioned defined benefit plans were recognized in profit or loss by the following categories:

 

		Years Ended December 31
		2013				2012
Cost of revenue		$	152,512			$	137,857
Research and development expenses			60,864				57,536
General and administrative expenses			18,080				18,923
Marketing expenses			4,305				4,401
		$	235,761			$	218,717

For the years ended December 31, 2013 and 2012, the pre-tax actuarial loss recognized in other comprehensive income were NT$662,074 thousand and NT$685,978 thousand, respectively. As of December 31, 2013 and 2012, the pre-tax accumulated actuarial loss recognized in other comprehensive income were NT$1,348,052 thousand and NT$685,978 thousand, respectively.

The amounts arising from the defined benefit obligation of the Company in the consolidated balance sheets were as follows:

 

		December 31, 2013				December 31, 2012				January 1, 2012
Present value of defined benefit obligation		$	10,329,510			$	10,133,361			$	9,214,125
Fair value of plan assets			(3,527,847	)			(3,352,567	)			(3,120,665	)
Funded status			6,801,663				6,780,794				6,093,460
Unrecognized prior service cost			788,263				140,440				147,564
Accrued pension cost		$	7,589,926			$	6,921,234			$	6,241,024

Movements in the present value of the defined benefit obligation were as follows:

 

		Years Ended December 31
		2013				2012
Balance, beginning of year		$	10,133,361			$	9,214,125
Current service cost			134,762				129,217
Interest cost			175,563				160,018
Effect of plan changes			(655,179	)			—
Benefits paid from plan assets			(50,508	)			(26,119	)
Benefits paid directly by the Company			(7,011	)			—
Actuarial loss			638,071				656,120
Effect of deconsolidation of subsidiary			(39,549	)			—
Balance, end of year		$	10,329,510			$	10,133,361

 

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Movements in the fair value of the plan assets were as follows:

 

		Years Ended December 31
		2013				2012
Balance, beginning of year		$	3,352,567			$	3,120,665
Expected return on plan assets			67,324				63,279
Actuarial loss			(24,003	)			(29,858	)
Contributions from employer			219,062				224,600
Benefits paid			(50,508	)			(26,119	)
Effect of deconsolidation of subsidiary			(36,595	)			—
Balance, end of year		$	3,527,847			$	3,352,567

The percentage of the fair value of the plan assets by major categories at the end of reporting period was as follows:

 

		Fair Value of Plan Assets (%)
		December 31, 2013				December 31, 2012				January 1, 2012
Cash			23				25				24
Equity instruments			45				38				41
Debt instruments			32				37				35
			100				100				100

The overall expected rate of return on plan assets was based on the historical return trends, analysts’ predictions of the market over the life of related obligation, reference to the performance of the Funds operated by the Committee and the consideration of the effect that the minimum return should not be less than the average interest rate on a two-year time deposit published by the local banks. For the years ended December 31, 2013 and 2012, the actual return on plan assets were NT$43,321 thousand and NT$33,421 thousand, respectively.

The Company elects to disclose the historical information of experience adjustments from the adoption of Taiwan-IFRSs, which is as follows:

 

		December 31, 2013				December 31, 2012				January 1, 2012
Experience adjustments on plan liabilities		$	1,294,538			$	396,616			$	—
Experience adjustments on plan assets		$	(24,003	)		$	(29,858	)		$	—

The Company expects to make contributions of NT$223,524 thousand to the defined benefit plans in the next year starting from December 31, 2013.

 

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24.

EQUITY

 

a.

Capital stock

 

		December 31, 2013				December 31, 2012				January 1, 2012
Authorized shares (in thousands)			28,050,000				28,050,000				28,050,000
Authorized capital		$	280,500,000			$	280,500,000			$	280,500,000
Issued and paid shares (in thousands)			25,928,617				25,924,435				25,916,222
Issued capital		$	259,286,171			$	259,244,357			$	259,162,226

A holder of issued common shares with par value of NT$10 per share is entitled to vote and to receive dividends.

The authorized shares include 500,000 thousand shares allocated for the exercise of employee stock options.

As of December 31, 2013, 1,082,959 thousand ADSs of TSMC were traded on the NYSE. The number of common shares represented by the ADSs was 5,414,794 thousand shares (one ADS represents five common shares).

 

b.

Capital surplus

 

		December 31, 2013				December 31, 2012				January 1, 2012
Additional paid-in capital		$	24,017,363			$	23,934,607			$	23,774,250
From merger			22,804,510				22,804,510				22,804,510
From convertible bonds			8,892,847				8,892,847				8,892,847
From differences between equity purchase price and carrying amount arising from acquisition or disposal of subsidiaries			100,827				40,733				—
From share of changes in equities of associates and joint venture			43,024				2,588				—
Donations			55				55				55
		$	55,858,626			$	55,675,340			$	55,471,662

Under the Company Law, 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, the surplus from treasury stock transactions and the differences between equity purchase price and carrying amount arising from acquisition or disposal of subsidiaries) may be used to offset a deficit; in addition, when the Company has no deficit, such capital surplus may be distributed as cash dividends or stock dividends up to a certain percentage of TSMC’s paid-in capital.

 

c.

Retained earnings and dividend policy

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

 

1)

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

 

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2)

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

 

3)

Bonus to directors and profit sharing to employees of TSMC of not more than 0.3% and not less than 1% of the remainder, respectively. Directors who also serve as executive officers of TSMC are not entitled to receive the bonus to directors. TSMC 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;

 

4)

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

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

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

TSMC accrued profit sharing to employees based on certain percentage of net income during the period, which amounted to NT$12,634,665 thousand and NT$11,115,240 thousand for the years ended December 31, 2013 and 2012, respectively. Bonuses to members of the Board of Directors were expensed based on estimated amount payable. If the actual amounts subsequently approved by the shareholders differ from the amounts estimated, the differences are recorded in the year such bonuses are approved by the shareholders as a change in accounting estimate. If profit sharing approved for distribution to employees is in the form of common shares, 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 appropriation for legal capital reserve shall be made until the reserve equals the Company’s paid-in capital. The reserve may be used to offset a deficit, or be distributed as dividends in cash or stocks for the portion in excess of 25% of the paid-in capital if the Company incurs no loss.

Pursuant to existing regulations, the Company is required to set aside additional special capital reserve equivalent to the net debit balance of the other components of stockholders’ equity, such as the accumulated balance of foreign currency translation reserve, unrealized valuation gain/loss on available-for-sale financial assets, gain/loss from changes in fair value of hedging instruments in cash flow hedges, etc. For the subsequent decrease in the deduction amount to stockholders’ equity, any special reserve appropriated may be reversed to the extent that the net debit balance reverses.

The appropriations of 2012 and 2011 earnings have been approved by TSMC’s shareholders in its meetings held on June 11, 2013 and on June 12, 2012, respectively. The appropriations and dividends per share were as follows:

 

		Appropriation of Earnings								Dividends Per Share (NT$)
		For Fiscal				For Fiscal				For Fiscal				For Fiscal
		Year 2012				Year 2011				Year 2012				Year 2011
Legal capital reserve		$	16,615,880			$	13,420,128
Special capital reserve			(4,820,483	)			1,172,350
Cash dividends to shareholders			77,773,307				77,748,668			$	3.00			$	3.00
		$	89,568,704			$	92,341,146

 

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TSMC’s profit sharing to employees and bonus to members of the Board of Directors in the amounts of NT$11,115,240 thousand and NT$71,351 thousand in cash for 2012, respectively, and profit sharing to employees and bonus to members of the Board of Directors in the amounts of NT$8,990,026 thousand and NT$62,324 thousand in cash for 2011, respectively, had been approved by the shareholders in its meetings held on June 11, 2013 and June 12, 2012, respectively. The aforementioned approved amount is the same as the one approved by the Board of Directors in its meetings held on February 5, 2013 and February 14, 2012, respectively, and the same amount had been charged against earnings for the years ended December 31, 2012 and 2011, respectively.

The appropriations of earnings, payment of profit sharing to employees and bonus to members of the Board of Directors for the year ended December 31, 2012 approved by the Board of Directors of TSMC were based on the financial statements for the year ended December 31, 2012 prepared under the R.O.C. GAAP and in accordance with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers issued by the FSC before amendment.

TSMC’s appropriations of earnings for 2013 had been approved in the meeting of the Board of Directors held on February 18, 2014. The appropriations and dividends per share were as follows:

 

		Appropriation of Earnings				Dividends Per Share (NT$)
		For Fiscal Year 2013				For Fiscal Year 2013
Legal capital reserve		$	18,814,679
Special capital reserve			(2,785,741	)
Cash dividends to shareholders			77,785,851			$	3.00
		$	93,814,789

The Board of Directors of TSMC also approved the profit sharing to employees and bonus to members of the Board of Directors in the amounts of NT$12,634,665 thousand and NT$104,136 thousand in cash for payment in 2013, respectively. There is no significant difference between the aforementioned approved amounts and the amounts charged against earnings of 2013.

The appropriations of earnings, profit sharing to employees and bonus to members of the Board of Directors for 2013 are to be presented for approval in the TSMC’s shareholders’ meeting to be held on June 24, 2014 (expected).

The information about the appropriations of TSMC’s profit sharing to employees and bonus to members of the Board of Directors is available at the Market Observation Post System website.

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

 

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d.

Others

Changes in others were as follows:

 

		Year Ended December 31, 2013
		Foreign Currency Translation Reserve				Unrealized Gain/Loss from Available- for-sale Financial Assets				Cash Flow Hedges Reserve				Total
Balance, beginning of year		$	(10,753,806	)		$	7,973,321			$	—			$	(2,780,485	)