1934 Act Registration No. 1-14700

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 6-K

 

 

REPORT OF FOREIGN PRIVATE ISSUER

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

THE SECURITIES EXCHANGE ACT OF 1934

For the month of May 2012

 

 

Taiwan Semiconductor Manufacturing Company Ltd.

(Translation of Registrant’s Name Into English)

 

 

No. 8, Li-Hsin Rd. 6,

Hsinchu Science Park,

Taiwan

(Address of Principal Executive Offices)

 

 

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

Form 20-F  x            Form 40-F  ¨

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

Yes  ¨            No  x

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

 

 

 

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SIGNATURES

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

 

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

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Taiwan Semiconductor Manufacturing Company Limited

Financial Statements for the

Three Months Ended March 31, 2012 and 2011 and

Independent Accountants’ Review Report

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INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

The Board of Directors and Shareholders

Taiwan Semiconductor Manufacturing Company Limited

We have reviewed the accompanying balance sheets of Taiwan Semiconductor Manufacturing Company Limited as of March 31, 2012 and 2011, and the related statements of income and cash flows for the three months then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to issue a report on these financial statements based on our reviews.

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

Based on our reviews, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, requirements of the Business Accounting Law and Guidelines Governing Business Accounting with respect to financial accounting standards, and accounting principles generally accepted in the Republic of China.

We have also reviewed, in accordance with Statement on Auditing Standards No. 36, the consolidated financial statements of Taiwan Semiconductor Manufacturing Company Limited and subsidiaries as of and for the three months ended March 31, 2012 and 2011 on which we have issued an unqualified review report.

April 24, 2012

Notice to Readers

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

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

 

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Taiwan Semiconductor Manufacturing Company Limited

BALANCE SHEETS

MARCH 31, 2012 AND 2011

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

(Reviewed, Not Audited)

 

 

 

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

 

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Taiwan Semiconductor Manufacturing Company Limited

STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

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

(Reviewed, Not Audited)

 

 

		2012								2011
		Amount				%				Amount				%
GROSS SALES (Notes 2 and 23)		$	105,573,837							$	103,940,307
SALES RETURNS AND ALLOWANCES (Notes 2 and 8)			1,325,101								1,391,829
NET SALES			104,248,736				100				102,548,478				100
COST OF SALES (Notes 9, 18 and 23)			55,752,853				53				53,489,888				52
GROSS PROFIT BEFORE AFFILIATES ELIMINATION			48,495,883				47				49,058,590				48
REALIZED GROSS PROFIT FROM AFFILIATES (Note 2)			74,029				—				56,207				—
GROSS PROFIT			48,569,912				47				49,114,797				48
OPERATING EXPENSES (Notes 18 and 23)
Research and development			8,614,378				8				7,314,458				7
General and administrative			4,359,676				4				2,985,064				3
Marketing			555,455				1				664,712				1
Total operating expenses			13,529,509				13				10,964,234				11
INCOME FROM OPERATIONS			35,040,403				34				38,150,563				37
NON-OPERATING INCOME AND GAINS
Equity in earnings of equity method investees, net (Notes 2 and 10)			984,787				1				1,577,135				2
Foreign exchange gain, net (Note 2)			246,139				—				380,003				—
Interest income			233,789				—				149,283				—
Technical service income (Note 23)			107,336				—				115,244				—
Others (Notes 2 and 23)			8,306				—				238,143				—
Total non-operating income and gains			1,580,357				1				2,459,808				2

(Continued)

 

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Taiwan Semiconductor Manufacturing Company Limited

STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

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

(Reviewed, Not Audited)

 

 

		2012								2011
		Amount				%				Amount				%
NON-OPERATING EXPENSES AND LOSSES
Impairment loss on idle assets (Note 2)		$	438,828				1			$	—				—
Valuation loss on financial instruments, net (Notes 2, 5 and 22)			221,272				—				256,988				—
Interest expense			191,644				—				71,582				—
Loss on disposal of property, plant and equipment (Notes 2 and 23)			34,864				—				164,502				—
Others (Note 2)			6,870				—				34,083				—
Total non-operating expenses and losses			893,478				1				527,155				—
INCOME BEFORE INCOME TAX			35,727,282				34				40,083,216				39
INCOME TAX EXPENSE (Notes 2 and 17)			2,253,095				2				3,805,443				4
NET INCOME		$	33,474,187				32			$	36,277,773				35
		2012								2011
		Before Income Tax				After Income Tax				Before Income Tax				After Income Tax
EARNINGS PER SHARE (NT$, Note 21)
Basic earnings per share		$	1.38			$	1.29			$	1.55			$	1.40
Diluted earnings per share		$	1.38			$	1.29			$	1.55			$	1.40

 

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

 

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Taiwan Semiconductor Manufacturing Company Limited

STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(In Thousands of New Taiwan Dollars)

(Reviewed, Not Audited)

 

 

		2012				2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	33,474,187			$	36,277,773
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			26,403,157				23,872,606
Realized gross profit from affiliates			(74,029	)			(56,207	)
Amortization of premium/discount of financial assets			571				4,180
Equity in earnings of equity method investees, net			(984,787	)			(1,577,135	)
Loss on disposal of property, plant and equipment and other assets, net			33,385				68,332
Impairment loss on idle assets			438,828				—
Deferred income tax			(543,272	)			1,011,225
Changes in operating assets and liabilities:
Financial assets and liabilities at fair value through profit or loss			62,855				(4,411	)
Receivables from related parties			(8,135,137	)			(2,044,267	)
Notes and accounts receivable			808,166				(1,909,453	)
Allowance for sales returns and others			351,326				(569,789	)
Other receivables from related parties			(6,729	)			(66,347	)
Other financial assets			(23,141	)			42,527
Inventories			(2,723,178	)			(3,247,180	)
Prepaid expenses and other current assets			(693,246	)			250,101
Accounts payable			1,614,782				(1,521,635	)
Payables to related parties			(99,995	)			496,861
Income tax payable			2,767,241				2,593,727
Accrued profit sharing to employees and bonus to directors			2,251,310				2,456,340
Accrued expenses and other current liabilities			286,730				(2,177,677	)
Accrued pension cost			(3,748	)			5,736
Net cash provided by operating activities			55,205,276				53,905,307
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of:
Property, plant and equipment			(47,146,132	)			(77,193,490	)
Investments accounted for using equity method			(2,151,483	)			(423,220	)
Proceeds from disposal of:
Property, plant and equipment and other assets			19,381				553,698
Proceeds from return of capital by investees			21,537				—
Increase in deferred charges			(395,772	)			(181,158	)
Decrease (increase) in refundable deposits			(10,008	)			3,845,196
Decrease (increase) in other assets			200				(23,199	)
Net cash used in investing activities			(49,662,277	)			(73,422,173	)

(Continued)

 

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Taiwan Semiconductor Manufacturing Company Limited

STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(In Thousands of New Taiwan Dollars)

(Reviewed, Not Audited)

 

 

		2012				2011
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in short-term loans		$	8,761,188			$	3,267,731
Proceeds from issuance of bonds			17,000,000				—
Repayment of bonds			(4,500,000	)			—
Decrease in guarantee deposits			(59,099	)			(52,415	)
Proceeds from exercise of employee stock options			136,204				127,288
Net cash provided by financing activities			21,338,293				3,342,604
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			26,881,292				(16,174,262	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			85,262,521				109,511,130
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	112,143,813			$	93,336,868
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid		$	218,625			$	181,409
Income tax paid		$	48,229			$	213,963
INVESTING ACTIVITIES AFFECTING BOTH CASH AND NON-CASH ITEMS
Acquisition of property, plant and equipment		$	47,544,436			$	68,902,831
Decrease (increase) in payables to contractors and equipment suppliers			(398,304	)			8,290,659
Cash paid		$	47,146,132			$	77,193,490
Disposal of property, plant and equipment and other assets		$	51,500			$	1,037,746
Increase in other receivables from related parties			(32,119	)			(484,048	)
Cash received		$	19,381			$	553,698
NON-CASH INVESTING AND FINANCING ACTIVITIES
Idle assets reclassified from property, plant and equipment		$	438,828			$	—
Current portion of bonds payable		$	—			$	4,500,000
Current portion of other long-term payables (under accrued expenses and other current liabilities)		$	—			$	912,591

 

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

 

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Taiwan Semiconductor Manufacturing Company Limited

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

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

(Reviewed, Not Audited)

 

 

1.

GENERAL

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

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

As of March 31, 2012 and 2011, the Company had 30,053 and 30,283 employees, respectively.

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

Significant accounting policies are summarized as follows:

Foreign-currency Transactions

Foreign-currency transactions other than derivative contracts are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occur. Exchange gains or losses derived from foreign-currency transactions or monetary assets and liabilities denominated in foreign currencies are recognized in earnings.

At the balance sheet date, monetary assets and liabilities denominated in foreign currencies are revalued at prevailing exchange rates with the resulting gains or losses recognized in earnings.

Use of Estimates

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

 

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Classification of Current and Noncurrent Assets and Liabilities

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

Cash Equivalents

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

Financial Assets/Liabilities at Fair Value Through Profit or Loss

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

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

Available-for-sale Financial Assets

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

The fair value of overseas publicly traded stock is determined using the closing prices at the end of the period. The fair value of debt securities is determined using the average of bid and asked prices at the end of the period.

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

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

Held-to-maturity Financial Assets

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

 

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

Financial Assets Carried at Cost

Investments for which the Company does not exercise significant influence and that do not have a quoted market price in an active market and whose fair value cannot be reliably measured, such as non-publicly traded stocks and mutual funds, are carried at their original cost. The costs of non-publicly traded stocks and mutual funds are determined using the weighted-average method. If there is objective evidence which indicates that a financial asset is impaired, a loss is recognized. A subsequent reversal of such impairment loss is not allowed.

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

Allowance for Doubtful Receivables

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

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

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

Inventories

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

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

 

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Investments Accounted for Using Equity Method

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

When the Company subscribes for additional investee’s shares at a percentage different from its existing ownership percentage, the resulting carrying amount of the investment in the investee differs from the amount of the Company’s share of the investee’s equity. The Company records such a difference as an adjustment to long-term investments with the corresponding amount charged or credited to capital surplus. Cash dividends received from an investee shall reduce the carrying amount of the investment. Stock dividends are recorded as an increase in the number of shares held and do not affect investment income.

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

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

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

Property, plant and equipment and assets leased to others are stated at cost less accumulated depreciation. When an indication of impairment is identified, any excess of the carrying amount of an asset over its recoverable amount is recognized as a loss. If the recoverable amount increases in a subsequent period, the amount previously recognized as impairment would be reversed and recognized as a gain. However, the adjusted amount may not exceed the carrying amount that would have been determined, net of depreciation, as if no impairment loss had been recognized. Significant additions, renewals and betterments incurred during the construction period are capitalized. Maintenance and repairs are expensed as incurred.

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

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

 

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

Intangible Assets

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

Deferred charges consist of technology license fees, software and system design costs and patent and others. The amounts are amortized over the following periods: Technology license fees - the estimated life of the technology or the term of the technology transfer contract; software and system design costs - 3 years; patent and others - the economic life or contract period. When an indication of impairment is identified, any excess of the carrying amount of an asset over its recoverable amount is recognized as a loss. If the recoverable amount increases in a subsequent period, the previously recognized impairment loss would be reversed and recognized as a gain. However, the adjusted amount may not exceed the carrying amount that would have been determined, net of amortization, as if no impairment loss had been recognized.

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

Pension Costs

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

Income Tax

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

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

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

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

 

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Stock-based Compensation

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

Revenue Recognition and Allowance for Sales Returns and Others

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

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

Spin-off

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

 

3.	ACCOUNTING CHANGES

On January 1, 2011, the Company prospectively adopted the newly revised SFAS No. 34, “Financial Instruments: Recognition and Measurement.” The main revisions include (1) finance lease receivables are now covered by SFAS No. 34; (2) the scope of the applicability of SFAS No. 34 to insurance contracts is amended; (3) loans and receivables originated by the Company are now covered by SFAS No. 34; (4) additional guidelines on impairment testing of financial assets carried at amortized cost when the debtor has financial difficulties and the terms of obligations have been modified; and (5) accounting treatment by a debtor for modifications in the terms of obligations. This accounting change did not have a significant effect on the Company’s financial statements as of and for the three months ended March 31, 2011.

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

 

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4.	CASH AND CASH EQUIVALENTS

 

		March 31
		2012				2011
Cash and deposits in banks		$	109,392,852			$	91,709,652
Repurchase agreements collateralized by corporate bonds			1,913,846				—
Repurchase agreements collateralized by government bonds			837,115				1,627,216
		$	112,143,813			$	93,336,868

 

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

 

		March 31
		2012				2011
Trading financial assets
Forward exchange contracts		$	—			$	11,605
Trading financial liabilities
Forward exchange contracts		$	47,930			$	15,028

The Company entered into derivative contracts during the three months ended March 31, 2012 and 2011 to manage exposures due to fluctuations of foreign exchange rates. The derivative contracts entered into by the Company did not meet the criteria for hedge accounting. Therefore, the Company did not apply hedge accounting treatment for its derivative contracts.

Outstanding forward exchange contracts consisted of the following:

 

		Maturity Date		Contract Amount (In Thousands)
March 31, 2012
Sell NT$/Buy JPY		April 2012		NT$847,282/JPY2,300,000
Sell US$/Buy JPY		April 2012		US$39,743/JPY3,190,365
March 31, 2011
Sell NT$/Buy JPY		April 2011		NT$1,173,256/JPY3,268,300
Sell NT$/Buy EUR		April 2011		NT$83,800/EUR2,000
Sell EUR/Buy NT$		April 2011		EUR59,550/NT$2,494,130

Net losses on derivative financial instruments for the three months ended March 31, 2012 and 2011 were NT$221,272 thousand and NT$256,988 thousand, respectively.

 

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6.	AVAILABLE-FOR-SALE FINANCIAL ASSETS

 

		March 31
		2012				2011
Overseas publicly traded stock		$	2,618,029			$	4,069,307
Corporate bonds			—				1,036,044
			2,618,029				5,105,351
Current portion			(2,618,029	)			(4,069,307	)
		$	—			$	1,036,044

 

7.	HELD-TO-MATURITY FINANCIAL ASSETS

 

		March 31
		2012				2011
Corporate bonds		$	1,402,856			$	6,198,107
Current portion			(700,849	)			(4,792,967	)
		$	702,007			$	1,405,140

 

8.	ALLOWANCES FOR DOUBTFUL RECEIVABLES, SALES RETURNS AND OTHERS

As of March 31, 2012 and 2011, the balance of the allowance for doubtful receivables was NT$485,120 thousand and NT$488,000 thousand, respectively. There was no additions or deductions of allowances for doubtful receivables for the three months ended March 31, 2012 and 2011.

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

 

		Three Months Ended March 31
		2012				2011
Balance, beginning of period		$	4,887,879			$	7,341,444
Provision			1,325,101				1,391,829
Write-off			(973,775	)			(1,961,618	)
Balance, end of period		$	5,239,205			$	6,771,655

 

9.	INVENTORIES

 

		March 31
		2012				2011
Finished goods		$	4,242,403			$	6,988,136
Work in process			18,281,729				18,111,238
Raw materials			2,095,010				2,566,796
Supplies and spare parts			957,433				1,227,358
		$	25,576,575			$	28,893,528

Write-down of inventories to net realizable value in the amount of NT$680,850 thousand and NT$650,892 thousand, respectively, were included in the cost of sales for the three months ended March 31, 2012 and 2011.

 

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10.	INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD

 

		March 31
		2012								2011
		Carrying Amount				% of Ownership				Carrying Amount				% of Ownership
TSMC Global Ltd. (TSMC Global)		$	43,137,920				100			$	42,523,518				100
TSMC Partners, Ltd. (TSMC Partners)			34,664,194				100				32,779,954				100
TSMC China Company Limited (TSMC China)			14,095,161				100				4,721,701				100
TSMC Solar			9,456,531				99				—				—
Vanguard International Semiconductor Corporation (VIS)			8,986,165				41				9,456,221				38
Systems on Silicon Manufacturing Company Pte Ltd. (SSMC)			5,388,363				39				7,256,841				39
TSMC SSL			3,541,201				95				—				—
TSMC North America			3,035,002				100				2,843,416				100
Xintec Inc. (Xintec)			1,546,668				40				1,678,379				41
VentureTech Alliance Fund III, L.P. (VTAF III)			1,437,397				53				2,672,382				99
Global UniChip Corporation (GUC)			1,191,165				35				1,164,288				35
VentureTech Alliance Fund II, L.P. (VTAF II)			740,533				98				1,041,270				98
TSMC Europe B.V. (TSMC Europe)			213,849				100				192,329				100
Emerging Alliance Fund, L.P. (Emerging Alliance)			205,484				99				290,203				99
TSMC Japan Limited (TSMC Japan)			149,861				100				144,224				100
TSMC Guang Neng Investment, Ltd. (TSMC GN)			84,751				100				—				—
TSMC Korea Limited (TSMC Korea)			23,468				100				21,093				100
Motech Industries Inc. (Motech)			—				—				6,770,069				20
TSMC Solar North America, Inc. (TSMC Solar NA)			—				—				7,945				100
TSMC Solar Europe B.V. (TSMC Solar Europe)			—				—				406,305				100
TSMC Lighting North America, Inc. (TSMC Lighting NA)			—				—				2,942				100
		$	127,897,713							$	113,973,080

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

To foster a stronger sense of corporate entrepreneurship and facilitate business specializations in order to strengthen overall profitability and operational efficiency, the Company transferred its solid state lighting and solar businesses into its wholly-owned, newly incorporated subsidiaries, TSMC SSL and TSMC Solar, in August 2011. Furthermore, the Company adjusted its investment structure by transferring TSMC Lighting NA to TSMC SSL and transferring Motech, TSMC Solar Europe, TSMC Solar NA and part of VTAF III to TSMC Solar. As of August 1, 2011, the net book values of the Company’s certain assets, liabilities and shareholders’ equity, including cash, contributed to TSMC SSL and TSMC Solar in exchange for all the shares of TSMC SSL and TSMC Solar amounted to NT$2,270,000 thousand and NT$11,180,000 thousand, respectively. Due to the aforementioned transfer and the effect of the subsequent cash injection of NT$135,297 thousand, the Company’s percentage of ownership in VTAF III decreased to 53%.

 

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In January 2012, the Company invested NT$100,000 thousand and established a wholly-owned subsidiary, TSMC GN, which engages mainly in investment activities. In February 2012, the Company participated directly or through TSMC GN in the issuance of new shares by TSMC SSL and TSMC Solar for cash. As a portion of the shares were reserved for TSMC GN and the employees of TSMC SSL and TSMC Solar to subscribe, the Company did not subscribe to the shares at a percentage consistent with its pre-existing ownership. As a result, the Company’s percentage of ownership in TSMC SSL and TSMC Solar decreased to 95% and 99%, respectively.

For the three months ended March 31, 2012 and 2011, equity in earnings of equity method investees was a net gain of NT$984,787 thousand and NT$1,577,135 thousand, respectively.

As of March 31, 2012 and 2011, the quoted market price of publicly traded stocks in unrestricted investments accounted for using the equity method (VIS and GUC) were NT$13,192,202 thousand and NT$13,160,444 thousand, respectively.

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

 

		Three Months Ended March 31
		2012				2011
Balance, beginning of period		$	275,584			$	2,504,496
Amortizations			(63,410	)			(238,356	)
Balance, end of period		$	212,174			$	2,266,140

As of March 31, 2012 and 2011, balance of the aforementioned difference allocated to goodwill was NT$1,061,885 thousand and NT$1,415,565 thousand, respectively. There was no acquisition or impairment in goodwill for the three months ended March 31, 2012 and 2011.

 

11.	FINANCIAL ASSETS CARRIED AT COST

 

		March 31
		2012				2011
Non-publicly traded stocks		$	338,584			$	338,584
Mutual funds			159,251				159,251
		$	497,835			$	497,835

 

12.	PROPERTY, PLANT AND EQUIPMENT

 

		Three Months Ended March 31, 2012
		Balance, Beginning of Period				Additions (Deductions)				Disposals				Reclassification				Balance, End of Period
Cost
Buildings		$	149,495,478			$	14,405,480			$	(12,594	)		$	—			$	163,888,364
Machinery and equipment			984,978,666				87,369,338				(308,114	)			(741,891	)			1,071,297,999
Office equipment			13,824,434				1,312,037				(278,199	)			—				14,858,272
			1,148,298,578			$	103,086,855			$	(598,907	)		$	(741,891	)			1,250,044,635

 

(Continued)

 

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		Three Months Ended March 31, 2012
		Balance, Beginning of Period				Additions (Deductions)				Disposals				Reclassification				Balance, End of Period
Accumulated depreciation
Buildings		$	90,274,267			$	2,247,176			$	(11,327	)		$	—			$	92,510,116
Machinery and equipment			704,885,017				23,318,864				(306,293	)			(303,063	)			727,594,525
Office equipment			9,581,513				344,754				(278,199	)			—				9,648,068
			804,740,797			$	25,910,794			$	(595,819	)		$	(303,063	)			829,752,709
Advance payments and construction in progress			110,815,752			$	(55,542,419	)		$	(41,012	)		$	—				55,232,321
		$	454,373,533															$	475,524,247
																			(Concluded	)
		Three Months Ended March 31, 2011
		Balance, Beginning of Period				Additions (Deductions)				Disposals				Reclassification				Balance, End of Period
Cost
Buildings		$	128,646,942			$	15,465,320			$	(9,707	)		$	—			$	144,102,555
Machinery and equipment			852,733,592				66,496,059				(198,589	)			—				919,031,062
Office equipment			11,730,537				805,809				(138,838	)			—				12,397,508
			993,111,071			$	82,767,188			$	(347,134	)		$	—				1,075,531,125
Accumulated depreciation
Buildings			81,347,877			$	2,112,051			$	(9,707	)		$	—				83,450,221
Machinery and equipment			616,495,207				20,975,058				(196,951	)			—				637,273,314
Office equipment			8,762,361				263,217				(138,838	)			—				8,886,740
			706,605,445			$	23,350,326			$	(345,496	)		$	—				729,610,275
Advance payments and construction in progress			80,348,673			$	(13,864,357	)		$	(1,083,807	)		$	—				65,400,509
		$	366,854,299															$	411,321,359

No interest was capitalized during the three months ended March 31, 2012 and 2011.

 

13.	DEFERRED CHARGES, NET

 

		Three Months Ended March 31, 2012
		Balance, Beginning of Period				Additions				Amortization				Balance, End of Period
Technology license fees		$	1,617,310			$	—			$	(104,922	)		$	1,512,388
Software and system design costs			2,316,571				140,829				(269,288	)			2,188,112
Patent and others			785,363				254,943				(115,797	)			924,509
		$	4,719,244			$	395,772			$	(490,007	)		$	4,625,009
		Three Months Ended March 31, 2011
		Balance, Beginning of Period				Additions				Amortization				Balance, End of Period
Technology license fees		$	2,277,832			$	—			$	(167,493	)		$	2,110,339
Software and system design costs			2,075,935				36,691				(252,004	)			1,860,622
Patent and others			1,102,660				144,467				(101,349	)			1,145,778
		$	5,456,427			$	181,158			$	(520,846	)		$	5,116,739

 

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14.	SHORT-TERM LOANS

 

		March 31
		2012				2011
Unsecured loans:
US$1,174,700 thousand, due in April 2012, and annual interest at 0.41%-0.74% in 2012; US$1,086,000 thousand and EUR52,000 thousand, due in April 2011, and annual interest at 0.40%-0.87% in 2011		$	34,687,716			$	34,176,368

 

15.	BONDS PAYABLE

 

		March 31
		2012				2011
Domestic unsecured bonds:
Issued in September 2011 and repayable in September 2016, 1.40% interest payable annually		$	10,500,000			$	—
Issued in September 2011 and repayable in September 2018, 1.63% interest payable annually			7,500,000				—
Issued in January 2012 and repayable in January 2017, 1.29% interest payable annually			10,000,000				—
Issued in January 2012 and repayable in January 2019, 1.46% interest payable annually			7,000,000				—
Issued in January 2002 and repayable in January 2012, 3.00% interest payable annually			—				4,500,000
			35,000,000				4,500,000
Current portion			—				(4,500,000	)
		$	35,000,000			$	—

 

16.	PENSION PLANS

The pension mechanism under the Labor Pension Act (the “Act”) is deemed a defined contribution plan. Pursuant to the Act, the Company has made monthly contributions equal to 6% of each employee’s monthly salary to employees’ pension accounts and recognized pension costs of NT$280,701 thousand and NT$281,631 thousand for the three months ended March 31, 2012 and 2011, respectively.

The Company has a defined benefit plan under the Labor Standards Law that provides benefits based on an employee’s length of service and average monthly salary for the six-month period prior to retirement. The Company contributes an amount equal to 2% of salaries paid each month to a pension fund (the Fund), which is administered by the Labor Pension Fund Supervisory Committee (the Committee) and deposited in the Committee’s name in the Bank of Taiwan. The Company recognized pension costs of NT$70,905 thousand and NT$75,423 thousand for the three months ended March 31, 2012 and 2011, respectively.

 

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

 

		Three Months Ended March 31
		2012				2011
The Fund
Balance, beginning of period		$	3,017,351			$	2,835,231
Contributions			72,010				71,165
Interest			26,304				27,083
Payments			(4,886	)			(3,495	)
Balance, end of period		$	3,110,779			$	2,929,984
Accrued pension cost
Balance, beginning of period		$	3,860,898			$	3,824,601
Accruals (deductions)			(3,748	)			5,736
Balance, end of period		$	3,857,150			$	3,830,337

 

17.	INCOME TAX

 

a.

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

 

		Three Months Ended March 31
		2012				2011
Income tax expense based on “income before income tax” at statutory rate (17%)		$	6,073,638			$	6,814,147
Tax effect of the following:
Tax-exempt income			(1,870,035	)			(3,478,506	)
Temporary and permanent differences			(485,734	)			(561,554	)
Income tax credits used			(950,630	)			—
Income tax currently payable		$	2,767,239			$	2,774,087

 

b.

Income tax expense consisted of the following:

 

		Three Months Ended March 31
		2012				2011
Income tax currently payable		$	2,767,239			$	2,774,087
Other income tax adjustments			29,128				20,131
Net change in deferred income tax assets
Investment tax credits			361,473				(486,686	)
Temporary differences			187,562				166,629
Valuation allowance			(1,092,307	)			1,331,282
Income tax expense		$	2,253,095			$	3,805,443

 

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c.

Net deferred income tax assets consisted of the following:

 

		March 31
		2012				2011
Current deferred income tax assets
Investment tax credits		$	5,563,872			$	4,182,893
Temporary differences
Allowance for sales returns and others			523,921				575,591
Unrealized gain/loss on financial instruments			308,777				62,060
Others			132,258				44,359
		$	6,528,828			$	4,864,903
Noncurrent deferred income tax assets
Investment tax credits		$	14,254,615			$	18,279,007
Temporary differences
Depreciation			1,737,772				1,891,415
Others			269,057				199,860
Valuation allowance			(9,245,784	)			(13,984,044	)
		$	7,015,660			$	6,386,238

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

 

d.

Integrated income tax information:

The balance of the imputation credit account as of March 31, 2012 and 2011 was NT$4,003,228 thousand and NT$1,669,533 thousand, respectively.

The estimated and actual creditable ratios for distribution of earnings of 2011 and 2010 were 6.67% and 4.96%, respectively.

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

 

e.

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

 

f.

As of March 31, 2012, investment tax credits consisted of the following:

 

Law/Statute		Item		Total Creditable Amount				Remaining Creditable Amount				Expiry Year
Statute for Upgrading Industries		Purchase of machinery and equipment		$	1,165,765			$	804,292			2012
					6,513,605				6,513,605			2013
					7,006,655				7,006,655			2014
					482,351				482,351			2015
				$	15,168,376			$	14,806,903

 

(Continued)

 

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Law/Statute		Item		Total Creditable Amount				Remaining Creditable Amount				Expiry Year
Statute for Upgrading Industries		Research and development expenditures		$	4,994,463			$	4,994,463			2013
Statute for Upgrading Industries		Personnel training expenditures		$	17,121			$	17,121			2013
Statute for Industrial Innovation		Research and development expenditures		$	589,157			$	—			2012

(Concluded)

 

g.

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

 

		Tax-exemption Period
Construction and expansion of 2004		2008 to 2012
Construction and expansion of 2005		2010 to 2014
Construction and expansion of 2006		2011 to 2015

 

h.

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

 

18.	LABOR COST, DEPRECIATION AND AMORTIZATION

 

		Three Months Ended March 31, 2012
		Classified as Cost of Sales				Classified as Operating Expenses				Total
Labor cost
Salary and bonus		$	5,797,911			$	4,368,584			$	10,166,495
Labor and health insurance			297,921				194,107				492,028
Pension			213,350				138,256				351,606
Meal			152,266				74,756				227,022
Welfare			53,767				35,961				89,728
Others			9,739				13,578				23,317
		$	6,524,954			$	4,825,242			$	11,350,196
Depreciation		$	23,482,941			$	2,427,853			$	25,910,794
Amortization		$	307,786			$	182,221			$	490,007

 

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		Three Months Ended March 31, 2011
		Classified as Cost of Sales				Classified as Operating Expenses				Total
Labor cost
Salary and bonus		$	6,117,303			$	4,260,569			$	10,377,872
Labor and health insurance			307,843				168,284				476,127
Pension			230,885				126,169				357,054
Meal			165,359				65,669				231,028
Welfare			58,360				32,769				91,129
Others			14,252				7,681				21,933
		$	6,894,002			$	4,661,141			$	11,555,143
Depreciation		$	21,800,953			$	1,545,577			$	23,346,530
Amortization		$	324,635			$	196,211			$	520,846

 

19.	SHAREHOLDERS’ EQUITY

As of March 31, 2012, 1,091,849 thousand ADSs of the Company were traded on the NYSE. The number of common shares represented by the ADSs was 5,459,243 thousand (one ADS represents five common shares).

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

Capital surplus consisted of the following:

 

		March 31
		2012				2011
Additional paid-in capital		$	23,866,634			$	23,715,050
From merger			22,804,510				22,805,390
From convertible bonds			8,892,847				8,893,190
From long-term investments			444,328				367,797
Donations			55				55
		$	56,008,374			$	55,781,482

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

 

a.

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

 

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b.

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

 

c.

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

 

d.

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

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

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

The Company accrued profit sharing to employees based on certain percentage of net income during the period, which amounted to NT$2,236,553 thousand and NT$2,443,687 thousand for the three months ended March 2012 and 2011, respectively. Bonuses to directors were expensed based on estimated amount of payment. If the actual amounts subsequently resolved by the shareholders differ from the estimated amounts, the differences are recorded in the year of shareholders’ resolution as a change in accounting estimate. If profit sharing is resolved to be distributed to employees in stock, the number of shares is determined by dividing the amount of profit sharing by the closing price (after considering the effect of dividends) of the shares on the day preceding the shareholders’ meeting.

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

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

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

The appropriations of earnings for 2011 and 2010 had been approved in a Board of Directors’ meeting held on February 14, 2012 and a shareholders’ meeting held on June 9, 2011, respectively. The appropriations and dividends per share were as follows:

 

		Appropriation of Earnings								Dividends Per  Share (NT$)
		For Fiscal Year 2011				For Fiscal Year 2010				For Fiscal Year 2011				For Fiscal Year 2010
Legal capital reserve		$	13,420,128			$	16,160,501
Special capital reserve			1,172,350				5,120,827
Cash dividends to shareholders			77,748,668				77,730,236			$	3.00			$	3.00
		$	92,341,146			$	99,011,564

 

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The Board of Directors also resolved on February 14, 2012 to appropriate profit sharing to employees and bonus to directors in the amounts of NT$8,990,026 thousand and NT$62,324 thousand in cash for 2011, respectively. There is no significant difference between the aforementioned resolved amounts and the amounts charged against earnings of 2011.

The appropriations of earnings, profit sharing to employees and bonus to directors for 2011 are to be resolved in the shareholders’ meeting held on June 12, 2012 (expected).

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

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

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

 

20.	STOCK-BASED COMPENSATION PLANS

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

Options of the plans that had never been granted or had been granted but subsequently canceled had expired as of March 31, 2012.

Information about outstanding options for the three months ended March 31, 2012 and 2011 was as follows:

 

		Number of Options (In Thousands)				Weighted-average Exercise Price (NT$)
Three months ended March 31, 2012
Balance, beginning of period			14,293			$	32.1
Options exercised			(4,382	)			31.1
Balance, end of period			9,911				32.6

 

(Continued)

 

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		Number of Options (In Thousands)				Weighted-average Exercise Price (NT$)
Three months ended March 31, 2011
Balance, beginning of period			21,437			$	32.3
Options exercised			(4,115	)			30.9
Balance, end of period			17,322				32.6

(Concluded)

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

As of March 31, 2012, information about outstanding options was as follows:

 

		Options Outstanding
Range of Exercise Price (NT$)		Number of Options (In Thousands)				Weighted-average Remaining Contractual Life (Years)		Weighted-average Exercise Price (NT$)
$20.9-$29.3			6,972			1.1		$	27.0
38.0-  50.1			2,939			2.7			45.7
			9,911			1.6			32.6

As of March 31, 2012, all of the above outstanding options were exercisable.

No compensation cost was recognized under the intrinsic value method for the three months ended March 31, 2012 and 2011. Had the Company used the fair value based method to evaluate the options using the Black-Scholes model, the valuation assumptions at the various grant dates and pro forma results of the Company for the three months ended March 31, 2012 and 2011 would have been as follows:

 

Valuation assumptions:
Expected dividend yield		1.00%-3.44%
Expected volatility		43.77%-46.15%
Risk free interest rate		3.07%-3.85%
Expected life		5 years

 

		Three Months Ended March 31
		2012				2011
Net income:
Net income as reported		$	33,474,187			$	36,277,773
Pro forma net income			33,402,682				36,273,711
Earnings per share (EPS) - after income tax (NT$):
Basic EPS as reported		$	1.29			$	1.40
Pro forma basic EPS			1.29				1.40
Diluted EPS as reported			1.29				1.40
Pro forma diluted EPS			1.29				1.40

 

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21.	EARNINGS PER SHARE

EPS is computed as follows:

 

		Amounts (Numerator)								Number of Shares				EPS (NT$)
		Before Income Tax				After Income Tax				(Denominator) (In Thousands)				Before Income Tax				After Income Tax
Three months ended March 31, 2012
Basic EPS
Earnings available to common shareholders		$	35,727,282			$	33,474,187				25,917,646			$	1.38			$	1.29
Effect of dilutive potential common shares			—				—				8,800
Diluted EPS
Earnings available to common shareholders (including effect of dilutive potential common shares)		$	35,727,282			$	33,474,187				25,926,446			$	1.38			$	1.29
Three months ended March 31, 2011
Basic EPS
Earnings available to common shareholders		$	40,083,216			$	36,277,773				25,912,506			$	1.55			$	1.40
Effect of dilutive potential common shares			—				—				11,060
Diluted EPS
Earnings available to common shareholders (including effect of dilutive potential common shares)		$	40,083,216			$	36,277,773				25,923,566			$	1.55			$	1.40

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

The average number of shares outstanding for EPS calculation has been considered for the effect of retrospective adjustments. This adjustment caused each of the basic and diluted after income tax EPS for the three months ended March 31, 2011 to remain at NT$1.40.

 

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22.	DISCLOSURES FOR FINANCIAL INSTRUMENTS

 

a.

Fair values of financial instruments were as follows:

 

		March 31
		2012								2011
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
Assets
Financial assets at fair value through profit or loss		$	—			$	—			$	11,605			$	11,605
Available-for-sale financial assets			2,618,029				2,618,029				5,105,351				5,105,351
Held-to-maturity financial assets			1,402,856				1,422,299				6,198,107				6,253,752
Financial assets carried at cost			497,835				—				497,835				—
Liabilities
Financial liabilities at fair value through profit or loss			47,930				47,930				15,028				15,028
Bonds payable (including current portion)			35,000,000				35,248,224				4,500,000				4,542,890
Other long-term payables (including current portion)			—				—				912,591				912,591

 

b.

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

 

1)

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

 

2)

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

 

3)

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

 

4)

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

 

5)

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

 

6)

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

 

c.

Valuation gains (losses) arising from changes in fair value of derivatives contracts determined using valuation techniques were recognized as net losses of NT$47,930 thousand and NT$3,423 thousand for the three months ended March 31, 2012 and 2011, respectively.

 

d.

As of March 31, 2012 and 2011, financial assets exposed to fair value interest rate risk were NT$1,402,856 thousand and NT$7,245,756 thousand, respectively, financial liabilities exposed to fair value interest rate risk were NT$69,735,646 thousand and NT$38,691,396 thousand, respectively.

 

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e.

Movements of the unrealized gains or losses on financial instruments for the three months ended March 31, 2012 and 2011 were as follows:

 

		Three Months Ended March 31, 2012
		From Available- for-sale Financial Assets				Equity-method Investments				Total
Balance, beginning of period		$	(1,511,599	)		$	338,744			$	(1,172,855	)
Recognized directly in shareholders’ equity			743				288,865				289,608
Balance, end of period		$	(1,510,856	)		$	627,609			$	(883,247	)
		Three Months Ended March 31, 2011
		From Available- for-sale Financial Assets				Equity-method Investments				Total
Balance, beginning of period		$	(395,306	)		$	504,595			$	109,289
Recognized directly in shareholders’ equity			128,353				(192,769	)			(64,416	)
Balance, end of period		$	(266,953	)		$	311,826			$	44,873

 

f.

Information about financial risks

 

1)

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

 

2)

Credit risk. Credit risk represents the potential loss that would be incurred by the Company if the counter-parties or third-parties breached contracts. Financial instruments with positive fair values at the balance sheet date are evaluated for credit risk. The Company evaluated whether the financial instruments for any possible counter-parties or third-parties are reputable financial institutions, business enterprises, and government agencies and accordingly, the Company believed that the Company’s exposure to credit risk was not significant.

 

3)

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

 

4)

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

 

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23.	RELATED PARTY TRANSACTIONS

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

 

a.

Subsidiaries

TSMC North America

TSMC China

TSMC Europe

TSMC Japan

 

b.

Investees

Xintec (holding a controlling financial interest)

SSMC (accounted for using the equity method)

VIS (accounted for using the equity method)

 

c.

Indirect subsidiaries

WaferTech, LLC (WaferTech)

TSMC Technology, Inc. (TSMC Technology)

TSMC Design Technology Canada, Inc. (TSMC Canada)

 

d.

Indirect investee

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

 

e.

Others

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

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

 

		2012								2011
		Amount				%				Amount				%
For the three months ended March 31
Sales
TSMC North America		$	64,861,377				61			$	57,007,986				55
Others			994,464				1				567,051				—
		$	65,855,841				62			$	57,575,037				55
Purchases
TSMC China		$	3,192,921				25			$	2,419,959				19
WaferTech			1,623,602				12				1,770,429				14
SSMC			873,056				7				955,937				7
VIS			732,490				6				1,325,127				10
Others			—				—				65,792				1
		$	6,422,069				50			$	6,537,244				51

 

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		2012								2011
		Amount				%				Amount				%
Manufacturing expenses
Xintec (outsourcing and rent)		$	23,487				—			$	84,600				—
VisEra (outsourcing)			4,024				—				5,937				—
VIS (rent)			—				—				7,104				—
Others			—				—				770				—
		$	27,511				—			$	98,411				—
Research and development expenses
TSMC Technology (primarily consulting fee)		$	148,681				2			$	113,013				2
TSMC Canada (primarily consulting fee)			52,350				1				42,489				—
TSMC Europe (primarily consulting fee)			13,513				—				8,774				—
VIS (primarily rent)			—				—				1,999				—
Others			2,556				—				13,476				—
		$	217,100				3			$	179,751				2
Marketing expenses - commission
TSMC Europe		$	82,247				15			$	90,915				14
TSMC Japan			71,086				13				66,614				10
TSMC China			16,450				3				16,320				2
Others			5,190				1				5,375				1
		$	174,973				32			$	179,224				27
Sales of property, plant and equipment and other assets
TSMC China		$	41,011				80			$	592,339				57
VisEra			9,000				17				—				—
WaferTech			—				—				64,255				6
VIS			—				—				35,208				4
Others			10				—				—				—
		$	50,021				97			$	691,802				67
Non-operating income and gains
VIS (primarily technical service income)		$	54,829				4			$	68,905				3
SSMC (primarily technical service income)			52,326				3				44,817				2
TSMC China (primarily technical service income and gains on disposal of property, plant and equipment)			181				—				6,801				—
Others			3,189				—				—				—
		$	110,525				7			$	120,523				5
Non-operating expenses and losses
TSMC China (primarily losses on disposal of property, plant and equipment)		$	4,675				—			$	—				—

 

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		2012								2011
		Amount				%				Amount				%
As of March 31
Receivables
TSMC North America		$	32,359,734				98			$	27,517,143				99
Others			552,937				2				261,098				1
		$	32,912,671				100			$	27,778,241				100
Other receivables
SSMC		$	1,192,278				87			$	45,415				3
VIS			99,977				7				153,680				8
TSMC China			43,296				3				1,593,520				86
Others			36,742				3				60,061				3
		$	1,372,293				100			$	1,852,676				100
Payables
TSMC China		$	1,137,485				39			$	855,485				28
WaferTech			576,902				20				550,219				18
VIS			519,259				18				953,003				31
SSMC			382,415				13				395,820				13
Others			276,526				10				316,784				10
		$	2,892,587				100			$	3,071,311				100
Other assets (deferred credits)
TSMC China		$	(3,182	)			—			$	33,833				2
VisEra			(1,122	)			—				—				—
Others			(10	)			—				—				—
		$	(4,314	)			—			$	33,833				2

The sales prices and payment terms to related parties were not significantly different from those of sales to third parties. For other related party transactions, prices and terms were determined in accordance with mutual agreements.

The Company leased certain buildings, facilities, and machinery and equipment from Xintec. The lease terms and prices were determined in accordance with mutual agreements. The rental expense was paid monthly and the related expenses were classified under manufacturing expenses. The lease expired in June 2011.

The Company leased certain office space and facilities from VIS. The lease terms and prices were determined in accordance with mutual agreements. The rental expense was paid monthly and the related expenses were classified under research and development expenses and manufacturing expenses. The lease expired in April 2011.

The Company deferred the disposal gains/losses (classified under other assets and deferred credits) derived from sales of property, plant and equipment and other assets to TSMC China and VisEra, and then recognized such gains/losses (classified under non-operating gains and losses) over the depreciable lives of the disposed assets.

 

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24.	SIGNIFICANT LONG-TERM LEASES

The Company leases several parcels of land from the Science Park Administration. These operating leases expire on various dates from December 2012 to January 2032 and can be renewed upon expiration.

As of March 31, 2012, future lease payments were as follows:

 

Year		Amount
2012 (2nd to 4th quarter)		$	347,649
2013			439,841
2014			425,328
2015			415,008
2016			404,844
2017 and thereafter			3,400,454
		$	5,433,124

 

25.	SIGNIFICANT COMMITMENTS AND CONTINGENCIES

Significant commitments and contingencies of the Company as of March 31, 2012, excluding those disclosed in other notes, were as follows:

 

a.

Under a technical cooperation agreement with Industrial Technology Research Institute, the R.O.C. Government or its designee approved by the Company can use up to 35% of the Company’s capacity if the Company’s outstanding commitments to its customers are not prejudiced. The term of this agreement is for five years beginning from January 1, 1987 and is automatically renewed for successive periods of five years unless otherwise terminated by either party with one year prior notice.

 

b.

Under several foundry agreements, the Company shall reserve a portion of its production capacity for certain major customers that have guarantee deposits with the Company. As of March 31, 2012, the Company had a total of US$11,330 thousand of guarantee deposits.

 

c.

Under a Shareholders Agreement entered into with Philips and EDB Investments Pte Ltd. on March 30, 1999, the parties formed a joint venture company, SSMC, which is an integrated circuit foundry in Singapore. The Company’s equity interest in SSMC was 32%. Nevertheless, Philips parted with its semiconductor company which was renamed as NXP B.V. in September 2006. The Company and NXP B.V. purchased all the SSMC shares owned by EDB Investments Pte Ltd. pro rata according to the Shareholders Agreement on November 15, 2006. After the purchase, the Company and NXP B.V. currently own approximately 39% and 61% of the SSMC shares respectively. The Company and Philips (now NXP B.V.) are required, in the aggregate, to purchase at least 70% of SSMC’s capacity, but the Company alone is not required to purchase more than 28% of the capacity. If any party defaults on the commitment and the capacity utilization of SSMC fall below a specific percentage of its capacity, the defaulting party is required to compensate SSMC for all related unavoidable costs.

 

d.

In August 2006, TSMC filed a lawsuit against Semiconductor Manufacturing International Corporation, SMIC (Shanghai) and SMIC Americas (aggregately referred to as “SMIC”) in the Superior Court of California for Alameda County for breach of a 2005 agreement that settled an earlier trade secret misappropriation and patent infringement litigation between the parties, as well as for trade secret misappropriation, seeking injunctive relief and monetary damages. In September 2006, SMIC filed a cross-complaint against TSMC in the same court alleging breach of settlement agreement, implied covenant of good faith and fair dealing. SMIC also filed a civil action against TSMC in November 2006 with the Beijing People’s High Court alleging defamation and breach of good faith. On June 10, 2009, the Beijing People’s High Court ruled in favor of TSMC and dismissed SMIC’s lawsuit. On November 4, 2009, after a two-month trial, a jury in the California action found SMIC to have both

 

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breached the 2005 settlement agreement and misappropriated TSMC’s trade secrets. TSMC has subsequently settled both lawsuits with SMIC. Pursuant to the new settlement agreement, the parties have agreed to the entry of a stipulated judgment in favor of TSMC in the California action, and to the dismissal of SMIC’s appeal against the Beijing High Court’s finding in favor of TSMC. Under the new settlement agreement and the related stipulated judgment, SMIC has agreed to make cash payments by installments to TSMC totaling US$200 million, which are in addition to the US$135 million previously paid to TSMC under the 2005 settlement agreement, and, conditional upon relevant government regulatory approvals, to issue to TSMC a total of 1,789,493,218 common shares of Semiconductor Manufacturing International Corporation and a three-year warrant to purchase 695,914,030 common shares (subject to adjustment) of Semiconductor Manufacturing International Corporation at HK$1.30 per share (subject to adjustment). TSMC has received the approval from the Investment Commission of Ministry of Economic Affairs and acquired the above mentioned common shares in July 2010, which are recorded within available for sale financial assets, and obtained the subsequent cash settlement income in accordance with the agreement.

 

e.

In June 2010, Keranos, LLC. filed a lawsuit in the U.S. District Court for the Eastern District of Texas alleging that TSMC, TSMC North America, and several other leading technology companies infringe three expired U.S. patents. In response, TSMC, TSMC North America, and several co-defendants in the Texas case filed a lawsuit against Keranos in the U.S. District Court for the Northern District of California in November 2010, seeking a judgment declaring that they did not infringe the asserted patents, and that those patents are invalid. These two litigations have been consolidated into a single case in the U.S. District Court for the Eastern District of Texas. The outcome cannot be determined at this time.

 

f.

In December 2010, Ziptronix, Inc. filed a complaint in the U.S. District Court for the Northern District of California accusing TSMC, TSMC North America and one other company of allegedly infringing six U.S. patents. This litigation is in its very early stages and therefore the outcome of the case cannot be determined at this time.

 

26.	EXCHANGE RATE INFORMATION OF FOREIGN-CURRENCY FINANCIAL ASSETS AND LIABILITIES

The significant financial assets and liabilities denominated in foreign currencies were as follows:

 

		March 31
		2012								2011
		Foreign Currencies (In Thousands)				Exchange Rate (Note)				Foreign Currencies (In Thousands)				Exchange Rate (Note)
Financial assets
Monetary items
USD		$	1,983,180				29.529			$	1,919,150				29.468
EUR			177,041				39.26				127,036				41.81
JPY			23,367,649				0.3579				29,399,539				0.3541
Non-monetary items
HKD			688,955				3.80				1,073,696				3.79
Investments accounted for using equity method
USD			2,992,576				29.529				3,022,391				29.468
EUR			5,447				39.26				14,318				41.81
JPY			418,722				0.3579				407,297				0.3541
RMB			3,009,759				4.69				1,049,606				4.50

 

(Continued)

 

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		March 31
		2012								2011
		Foreign Currencies (In Thousands)				Exchange Rate (Note)				Foreign Currencies (In Thousands)				Exchange Rate (Note)
Financial liabilities
Monetary items
USD		$	1,969,944				29.529			$	1,915,005				29.468
EUR			181,806				39.26				163,964				41.81
JPY			30,416,402				0.3579				32,211,580				0.3541

(Concluded)

Note:    Exchange rate represents the number of N.T. dollars for which one foreign currency could be exchanged.

 

27.	ADDITIONAL DISCLOSURES

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

 

a.

Financings provided: Please see Table 1 attached;

 

b.

Endorsement/guarantee provided: None;

 

c.

Marketable securities held: Please see Table 2 attached;

 

d.

Marketable securities acquired or disposed of at costs or prices of at least NT$100 million or 20% of the paid-in capital: Please see Table 3 attached;

 

e.

Acquisition of individual real estate properties at costs of at least NT$100 million or 20% of the paid-in capital: Please see Table 4 attached;

 

f.

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

 

g.

Total purchases from or sales to related parties of at least NT$100 million or 20% of the paid-in capital: Please see Table 5 attached;

 

h.

Receivables from related parties amounting to at least NT$100 million or 20% of the paid-in capital: Please see Table 6 attached;

 

i.

Names, locations, and related information of investees over which the Company exercises significant influence: Please see Table 7 attached;

 

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j.

Information about derivatives of investees over which the Company has a controlling interest:

Do not meet the criteria for hedge accounting

 

1)

TSMC China

TSMC China entered into forward exchange contracts during the three months ended March 31, 2012 to manage exposures due to foreign exchange rate fluctuations. Outstanding forward exchange contract as of March 31, 2012 consisted of the following:

 

		Maturity Date		Contract Amount (In Thousands)
Sell US$/Buy EUR		April 2012		US$1,565/EUR1,200
Sell US$/Buy JPY		April 2012		US$2,584/JPY213,257

For the three months ended March 31, 2012, net gains arising from forward exchange contracts of TSMC China amounted to NT$2,855 thousand.

 

2)

Xintec

Xintec entered into forward exchange contracts during the three months ended March 31, 2012 to manage exposures due to foreign exchange rate fluctuations. Outstanding forward exchange contracts as of March 31, 2012 consisted of the following:

 

		Maturity Date		Contract Amount (In Thousands)
Sell US$/Buy NT$		April 2012 to May 2012		US$10,800/NT$318,434

For the three months ended March 31, 2012, net gains arising from forward exchange contracts of Xintec amounted to NT$10,057 thousand.

 

3)

TSMC Partners

TSMC Partners entered into forward exchange contracts during the three months ended March 31, 2012 to manage exposures due to foreign exchange rate fluctuations. Outstanding forward exchange contracts as of March 31, 2012 consisted of the following:

 

		Maturity Date		Contract Amount (In Thousands)
Sell RMB/Buy US$		April 2012		RMB1,230,782/US$195,000

For the three months ended March 31, 2012, net losses arising from forward exchange contracts of TSMC Partners amounted to NT$14,647 thousand.

 

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4)

TSMC Solar

TSMC Solar entered into derivative contracts during the three months ended March 31, 2012 to manage exposures due to foreign exchange rate fluctuations. Outstanding forward exchange contracts as of March 31, 2012 consisted of the following:

 

		Maturity Date		Contract Amount (In Thousands)
Sell NT$/Buy US$		April 2012		NT$128,180/US$4,340
Sell NT$/Buy JPY		April 2012		NT$9,441/JPY26,000

Outstanding cross currency swap contracts as of March 31, 2012 consisted of the following:

 

Maturity Date		Contract Amount (In Thousands)		Range of Interest Rates Paid				Range of Interest Rates Received
April 2012		NT$604,165/US$20,450			0.00	%		0.07%-0.20%

For the three months ended March 31, 2012, net losses arising from derivative financial instruments of TSMC Solar amounted to NT$14,747 thousand.

 

5)

TSMC SSL

TSMC SSL entered into forward exchange contracts during the three months ended March 31, 2012 to manage exposures due to foreign exchange rate fluctuations. Outstanding forward exchange contracts as of March 31, 2012 consisted of the following:

 

		Maturity Date		Contract Amount (In Thousands)
Sell NT$/Buy US$		April 2012 to May 2012		NT$59,240/US$2,010
Sell NT$/Buy JPY		April 2012		NT$13,068/JPY36,000

For the three months ended March 31, 2012, net losses arising from forward exchange contracts of TSMC SSL amounted to NT$7,251 thousand.

Meet the criteria for hedge accounting

Xintec monitors and manages the financial risk through the analysis of business environment and evaluation of entity’s financial risks. Further, Xintec seeks to reduce the effects of future cash flow related interest rate exposures by primarily using derivative financial instruments.

Xintec is exposed to interest rate risk because its long-term bank loans bear floating interest rates. Accordingly, Xintec enters into interest rate swap contract to hedge such a cash flow interest rate risk. As of March 31, 2012, the outstanding interest rate swap contract of Xintec consisted of the following:

 

Hedged Item

Hedging Financial Instrument

Fair Value March 31, 2012

Expected Cash Flow Generated Period

Expected Timing for the Recognition of Gains or Losses from Hedge

Long-term bank loans

Interest rate swap contract

$

(135

)

2011 to 2012

2011 to 2012

 

- 36 -

---

For the three months ended March 31, 2012, the adjustment for current period to shareholder’s equity amounted to a loss of NT$1 thousand for the above Xintec’s interest rate swap contract. The amount removed from shareholder’s equity and recognized as a loss amounted to NT$98 thousand.

 

k.

Information on investment in Mainland China

 

1)

The name of the investee in Mainland China, the main businesses and products, its issued capital, method of investment, information on inflow or outflow of capital, percentage of ownership, equity in the net gain or net loss, ending balance, amount received as dividends from the investee, and the limitation on investee: Please see Table 8 attached.

 

2)

Significant direct or indirect transactions with the investee, its prices and terms of payment, unrealized gain or loss, and other related information which is helpful to understand the impact of investment in Mainland China on financial reports: Please see Note 23.

 

28.	OPERATING SEGMENTS INFORMATION

The Company has provided the operating segments disclosure in the consolidated financial statements.

 

29.	THE AUTHORIZATION OF FINANCIAL STATEMENTS

The financial statements were approved by the management on April 24, 2012.

 

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TABLE 1

Taiwan Semiconductor Manufacturing Company Limited and Investees

FINANCINGS PROVIDED

FOR THE THREE MONTHS ENDED MARCH 31, 2012

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

 

 

																																		Collateral												Financing
No.		Financing Company		Counter- party		Financial Statement Account		Maximum Balance for the Period (US$ in Thousands) (Note 3)				Ending Balance (US$ in Thousands) (Note 3)				Amount Actually Drawn (US$ in Thousands)				Interest Rate		Nature for Financing		Transaction Amounts				Reason for Financing		Allowance for Bad Debt												Financing Limits for Each Borrowing Company (Note 1)				Company’s Total Financing Amount Limits (Note 2)
																																		Item				Value
1		TSMC Partners		TSMC China		Long-term receivables from related parties		$ (US$	7,382,250 250,000	)		$ (US$	7,382,250 250,000	)		$ (US$	7,382,250 250,000	)		0.25%-0.26%		The need for short-term financing		$	—			Purchase equipment		$	—				—			$	—			$	34,664,194			$	34,664,194
				TSMC Solar		Other receivables from related parties		(US$	1,181,160 40,000	)		(US$	1,181,160 40,000	)		(US$	723,461 24,500	)		0.4017%-0.4757%		The need for short-term financing			—			Operating capital			—				—				—				3,466,419
				TSMC SSL		Other receivables from related parties		(US$	885,870 30,000	)		(US$	885,870 30,000	)			—			0.4545%		The need for short-term financing			—			Operating capital			—				—				—				3,466,419

 

Note 1:

The total amount for lending to a company for funding for a short-term period shall not exceed ten percent (10%) of the net worth of TSMC Partners. In addition, the total amount lendable to any one borrower shall be no more than thirty percent (30%) of the borrower’s net worth. While offshore subsidiaries whose voting shares are 100% owned, directly or indirectly, by TSMC are not subject to the above restrictions. The restriction of thirty percent (30%) of the borrower’s net worth will not apply to subsidiaries whose voting shares are 90% or more owned, directly or indirectly, by TSMC.

Note 2:

The total amount available for lending purpose shall not exceed the net worth of TSMC Partners.

Note 3:

The maximum balance for the period and ending balance represents the amounts approved by Board of Directors.

 

- 38 -

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TABLE 2

Taiwan Semiconductor Manufacturing Company Limited and Investees

MARKETABLE SECURITIES HELD

MARCH 31, 2012

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

 

 

Held Company Name		Marketable Securities Type and Name		Relationship with the Company		Financial Statement Account		March 31, 2012																Note
								Shares/Units (In  Thousands)				Carrying Value (Foreign Currencies in Thousands)				Percentage of Ownership (%)				Market Value or Net Asset Value (Foreign Currencies in Thousands)
TSMC		Corporate bond
		Nan Ya Plastics Corporation		—		Held-to-maturity financial assets			—			$	1,099,699				N/A			$	1,117,010
		China Steel Corporation		—		”			—				303,157				N/A				305,289
		Stock
		Semiconductor Manufacturing International Corporation		—		Available-for-sale financial assets			1,789,493				2,618,029				7				2,618,029
		TSMC Global		Subsidiary		Investments accounted for using equity method			1				43,137,920				100				43,137,920
		TSMC Partners		Subsidiary		”			988,268				34,664,194				100				34,664,194
		TSMC Solar		Subsidiary		”			1,118,000				9,456,531				99				9,456,531
		VIS		Investee accounted for using equity method		”			628,223				8,986,165				41				8,009,850
		SSMC		Investee accounted for using equity method		”			314				5,388,363				39				5,174,379
		TSMC SSL		Subsidiary		”			430,400				3,541,201				95				3,541,201
		TSMC North America		Subsidiary		”			11,000				3,035,002				100				3,035,002
		Xintec		Investee with a controlling financial interest		”			94,011				1,546,668				40				1,546,668
		GUC		Investee accounted for using equity method		”			46,688				1,191,165				35				5,182,352
		TSMC Europe		Subsidiary		”			—				213,849				100				213,849
		TSMC Japan		Subsidiary		”			6				149,861				100				149,861
		TSMC Korea		Subsidiary		”			80				23,468				100				23,468
		United Industrial Gases Co., Ltd.		—		Financial assets carried at cost			16,783				193,584				10				372,714
		Shin-Etsu Handotai Taiwan Co., Ltd.		—		”			10,500				105,000				7				348,269
		W.K. Technology Fund IV		—		”			4,000				40,000				2				42,581
		Fund
		Horizon Ventures Fund		—		Financial assets carried at cost			—				103,992				12				103,992
		Crimson Asia Capital		—		”			—				55,259				1				55,259
		Capital
		TSMC China		Subsidiary		Investments accounted for using equity method			—				14,095,161				100				14,115,767
		VTAF III		Subsidiary		”			—				1,437,397				53				1,416,270
		VTAF II		Subsidiary		”			—				740,533				98				734,522
		Emerging Alliance		Subsidiary		”			—				205,484				99				205,484
		TSMC GN		Subsidiary		”			—				84,751				100				84,751
TSMC Solar		Stock
		Motech		Investee accounted for using equity method		Investments accounted for using equity method			87,480				5,219,263				20				3,576,900
		TSMC Solar Europe		Subsidiary		”			—				168,129				100				168,129
		TSMC Solar NA		Subsidiary		”			1				35,897				100				35,897
		Capital
		VTAF III		Investee accounted for using equity method		Investments accounted for using equity method			—				1,640,461				46				1,640,461

(Continued)

 

- 39 -

---

Held Company Name		Marketable Securities Type and Name		Relationship with the Company		Financial Statement Account		March 31, 2012																Note
								Shares/Units (In  Thousands)				Carrying Value (Foreign Currencies in Thousands)				Percentage  of Ownership (%)				Market Value or Net Asset Value (Foreign Currencies in Thousands)
TSMC SSL		Stock
		TSMC Lighting NA		Subsidiary		Investments accounted for using equity method			1			$	2,912				100			$	2,912
TSMC GN		Stock
		TSMC Solar		Subsidiary		Investments accounted for using equity method			3,759				31,755				—				31,755
		TSMC SSL		Subsidiary		”			5,425				44,838				1				44,838
TSMC Partners		Corporate bond
		General Elec Cap Corp. Mtn		—		Held-to-maturity financial assets			—			US$	20,038				N/A			US$	20,496
		Stock
		TSMC Development, Inc. (TSMC Development)		Subsidiary		Investments accounted for using equity method			1			US$	470,564				100			US$	470,564
		VisEra Holding Company		Investee accounted for using equity method		”			43,000			US$	96,445				49			US$	96,445
		InveStar Semiconductor Development Fund, Inc. (ISDF)		Subsidiary		”			787			US$	14,041				97			US$	14,041
		TSMC Technology		Subsidiary		”			1			US$	10,942				100			US$	10,942
		InveStar Semiconductor Development Fund, Inc. (II) LDC. (ISDF II)		Subsidiary		”			14,153			US$	11,455				97			US$	11,455
		TSMC Canada		Subsidiary		”			2,300			US$	4,258				100			US$	4,258
		Mcube Inc.		Investee accounted for using equity method		”			6,333				—				25				—
		Fund
		Shanghai Walden Venture Capital Enterprise		—		Financial assets carried at cost			—			US$	5,000				8			US$	5,000
TSMC North America		Stock
		Spansion Inc.		—		Available-for-sale financial assets			270			US$	3,287				—			US$	3,287
TSMC Development		Corporate bond
		GE Capital Corp.		—		Held-to-maturity financial assets			—			US$	20,059				N/A			US$	20,496
		JP Morgan Chase & Co.		—		”			—			US$	15,000				N/A			US$	14,850
		Stock
		WaferTech		Subsidiary		Investments accounted for using equity method			293,640			US$	229,723				100			US$	229,723
Emerging Alliance		Common stock
		RichWave Technology Corp.		—		Financial assets carried at cost			4,074			US$	1,545				10			US$	1,545
		Global Investment Holding Inc.		—		”			11,124			US$	3,065				6			US$	3,065
		Preferred stock
		Audience, Inc.		—		Financial assets carried at cost			1,654			US$	250				—			US$	250
		Next IO, Inc.		—		”			8			US$	500				—			US$	500
		Pixim, Inc.		—		”			4,641			US$	1,137				2			US$	1,137
		QST Holdings, LLC		—		”			—			US$	142				4			US$	142
		Capital
		VentureTech Alliance Holdings, LLC (VTA Holdings)		Subsidiary		Investments accounted for using equity method			—				—				7				—
VTAF II		Common stock
		Aether Systems, Inc.		—		Financial assets carried at cost			1,800			US$	1,701				23			US$	1,701
		RichWave Technology Corp.		—		”			1,267			US$	1,036				3			US$	1,036
		Sentelic		—		”			1,806			US$	2,607				9			US$	2,607

(Continued)

 

- 40 -

---

Held Company Name		Marketable Securities Type and Name		Relationship with the Company		Financial Statement Account		March 31, 2012																Note
								Shares/Units (In  Thousands)				Carrying Value (Foreign Currencies in Thousands)				Percentage of Ownership (%)				Market Value or Net Asset Value (Foreign Currencies in Thousands)
VTAF II		Preferred stock
		5V Technologies, Inc.		—		Financial assets carried at cost			2,890			US$	2,168				4			US$	2,168
		Aquantia		—		”			4,556			US$	4,316				3			US$	4,316
		Audience, Inc.		—		”			12,378			US$	2,378				3			US$	2,378
		Impinj, Inc.		—		”			475			US$	1,000				—			US$	1,000
		Next IO, Inc.		—		”			132			US$	1,110				2			US$	1,110
		Pixim, Inc.		—		”			33,347			US$	1,878				2			US$	1,878
		Power Analog Microelectronics		—		”			7,330			US$	3,482				21			US$	3,482
		QST Holdings, LLC		—		”			—			US$	593				13			US$	593
		Capital
		VTA Holdings		Subsidiary		Investments accounted for using equity method			—				—				31				—
VTAF III		Common stock
		Mutual-Pak Technology Co., Ltd.		Subsidiary		Investments accounted for using equity method			14,168			US$	1,771				58			US$	1,771
		InvenSense, Inc.		—		Available-for-sale financial assets			796			US$	14,415				1			US$	14,415
		Accton Wireless Broadband Corp.		—		Financial assets carried at cost			2,249			US$	315				6			US$	315
		Preferred stock
		BridgeLux, Inc.		—		Financial assets carried at cost			7,522			US$	9,379				3			US$	9,379
		GTBF, Inc.		—		”			1,154			US$	1,500				N/A			US$	1,500
		LiquidLeds Lighting Corp.		—		”			1,600			US$	800				11			US$	800
		Neoconix, Inc.		—		”			3,916			US$	4,779				4			US$	4,779
		Powervation, Ltd.		—		”			449			US$	7,030				16			US$	7,030
		Stion Corp.		—		”			8,152			US$	55,474				20			US$	55,474
		Tilera, Inc.		—		”			3,890			US$	3,025				2			US$	3,025
		Validity Sensors, Inc.		—		”			9,340			US$	3,456				4			US$	3,456
		Capital
		Growth Fund Limited (Growth Fund)		Subsidiary		Investments accounted for using equity method			—			US$	480				100			US$	480
		VTA Holdings		Subsidiary		”			—				—				62				—
Growth Fund		Common stock
		Veebeam		—		Financial assets carried at cost			10			US$	25				—			US$	25
ISDF		Common stock
		Integrated Memory Logic, Inc.		—		Available-for-sale financial assets			1,320			US$	4,743				2			US$	4,743
		Memsic, Inc.		—		”			1,286			US$	5,412				5			US$	5,412
		Preferred stock
		Sonics, Inc.		—		Financial assets carried at cost			230			US$	497				2			US$	497
ISDF II		Common stock
		Memsic, Inc.		—		Available-for-sale financial assets			1,072			US$	4,513				5			US$	4,513
		Alchip Technologies Limited		—		Financial assets carried at cost			7,520			US$	3,664				14			US$	3,664
		Sonics, Inc.		—		”			278			US$	10				3			US$	10
		Goyatek Technology, Corp.		—		”			745			US$	163				6			US$	163
		Auden Technology MFG. Co., Ltd.		—		”			1,049			US$	223				3			US$	223
		Preferred stock
		Sonics, Inc.		—		Financial assets carried at cost			264			US$	455				3			US$	455

(Continued)

 

- 41 -

---

Held Company Name

Marketable Securities Type and Name

Relationship with the Company

Financial Statement Account

March 31, 2012

Note

Shares/Units (In  Thousands)

Carrying Value (Foreign Currencies in Thousands)

Percentage  of Ownership (%)

Market Value or Net Asset Value (Foreign Currencies in Thousands)

Xintec

Capital

Compositech Ltd.

—

Financial assets carried at cost

587

$

—

3

$

—

TSMC Solar Europe

Stock

TSMC Solar Europe GmbH

Subsidiary

Investments accounted for using equity method

1

EUR 4,186

100

EUR 4,186

TSMC Global

Corporate bond

Aust + Nz Banking Group

—

Held-to-maturity financial assets

20,000

US$

20,000

N/A

US$

19,995

Commonwealth Bank of Australia

—

”

25,000

US$

25,000

N/A

US$

24,796

Commonwealth Bank of Australia

—

”

25,000

US$

25,000

N/A

US$

24,898

Deutsche Bank AG London

—

”

20,000

US$

19,913

N/A

US$

20,225

JP Morgan Chase + Co.

—

”

35,000

US$

35,036

N/A

US$

35,216

Nationwide Building Society-UK Government Guarantee

—

”

8,000

US$

8,000

N/A

US$

8,001

Westpac Banking Corp.

—

”

25,000

US$

25,000

N/A

US$

24,884

Westpac Banking Corp. 12/12 Frn

—

”

5,000

US$

5,000

N/A

US$

5,012

Government bond

Societe De Financement De Lec

—

Held-to-maturity financial assets

15,000

US$

15,000

N/A

US$

15,003

Money market fund

Ssga Cash Mgmt Global Offshore

—

Available-for-sale financial assets

133

US$

133

N/A

US$

133

(Concluded)

 

- 42 -

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TABLE 3

Taiwan Semiconductor Manufacturing Company Limited and Investees

MARKETABLE SECURITIES ACQUIRED AND DISPOSED OF AT COSTS OR PRICES OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL

FOR THE THREE MONTHS ENDED MARCH 31, 2012

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

 

 

Company Name		Marketable Securities Type and Name		Financial Statement Account		Counter- party				Nature of Relationship		Beginning Balance								Acquisition								Disposal																Ending Balance (Note 2)
												Shares/Units (In Thousands)				Amount (Foreign Currencies in Thousands)				Shares/Units (In Thousands) (Note 1)				Amount (Foreign Currencies in Thousands)				Shares/Units (In Thousands)				Amount (Foreign Currencies in Thousands)				Carrying Value (Foreign Currencies in Thousands)				Gain (Loss) on Disposal (Foreign Currencies in Thousands)				Shares/Units (In Thousands)				Amount (Foreign Currencies in Thousands)
TSMC		Stock
		TSMC SSL		Investments accounted for using equity method			—			Subsidiary			227,000			$	1,746,893				203,400			$	2,034,000				—			$	—			$	—			$	—				430,400			$	3,541,201
		TSMC GN		”			—			Subsidiary			—				—				—				100,000				—				—				—				—				—				84,751

 

Note 1:

The shares/units and amount of marketable securities acquired do not include stock dividends from investees.

Note 2:

The ending balance includes translation adjustments, equity in earnings/losses of equity method investees and other adjustments to long-term investments accounted for using equity method.

 

- 43 -

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TABLE 4

Taiwan Semiconductor Manufacturing Company Limited and Investees

ACQUISITION OF INDIVIDUAL REAL ESTATE PROPERTIES AT COSTS OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL

FOR THE THREE MONTHS ENDED MARCH 31, 2012

(Amounts in Thousands of New Taiwan Dollars)

 

 

Company Name

Types of Property

Transaction Date

Transaction Amount

Payment Term

Counter- party

Nature of Relationships

Prior Transaction of Related Counter-party

Price Reference

Purpose of Acquisition

Other Terms

Owner

Relationships

Transfer Date

Amount

TSMC

Fab

January 1, 2012 to March 30, 2012

$

950,083

By the construction progress

Da Cin Construction Co., Ltd.

—

N/A

N/A

N/A

N/A

Public bidding

Manufacturing purpose

None

Fab

March 7, 2012 to March 29, 2012

372,426

By the construction progress

Fu Tsu Construction Co., Ltd.

—

N/A

N/A

N/A

N/A

Public bidding

Manufacturing purpose

None

Fab

March 19, 2012 to March 29, 2012

394,839

By the construction progress

China Steel Structure Co., Ltd.

—

N/A

N/A

N/A

N/A

Public bidding

Manufacturing purpose

None

 

- 44 -

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TABLE 5

Taiwan Semiconductor Manufacturing Company Limited and Investees

TOTAL PURCHASES FROM OR SALES TO RELATED PARTIES OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL

FOR THE THREE MONTHS ENDED MARCH 31, 2012

(Amounts in Thousands of New Taiwan Dollars)

 

 

Company Name		Related Party		Nature of Relationships		Transaction Details												Abnormal Transaction								Notes/Accounts Payable or Receivable								Note
						Purchases/ Sales		Amount				% to Total				Payment Terms		Unit Price (Note)				Payment Terms (Note)				Ending Balance				% to Total
TSMC		TSMC North America		Subsidiary		Sales		$	64,861,377				61			Net 30 days after invoice date			—				—			$	32,359,734				62
		GUC		Investee accounted for using equity method		Sales			920,220				1			Net 30 days after monthly closing			—				—				552,558				1
		TSMC China		Subsidiary		Purchases			3,192,921				25			Net 30 days after monthly closing			—				—				(1,137,485	)			8
		WaferTech		Indirect subsidiary		Purchases			1,623,602				12			Net 30 days after monthly closing			—				—				(576,902	)			4
		SSMC		Investee accounted for using equity method		Purchases			873,056				7			Net 30 days after monthly closing			—				—				(382,415	)			3
		VIS		Investee accounted for using equity method		Purchases			732,490				6			Net 30 days after monthly closing			—				—				(519,259	)			3
Xintec		Omni Vision		Parent company of director (represented for Xintec)		Sales			191,163				33			Net 30 days after monthly closing			—				—				107,690				40

 

Note:

The sales prices and payment terms to related parties were not significantly different from those of sales to third parties. For other related party transactions, prices and terms were determined in accordance with mutual agreements.

 

- 45 -

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TABLE 6

Taiwan Semiconductor Manufacturing Company Limited and Investees

RECEIVABLES FROM RELATED PARTIES AMOUNTING TO AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL

MARCH 31, 2012

(Amounts in Thousands of New Taiwan Dollars)

 

 

Company Name		Related Party		Nature of Relationships		Ending Balance				Turnover Days (Note 1)				Overdue								Amounts Received in Subsequent Period				Allowance for Bad Debts
														Amount				Action Taken
TSMC		TSMC North America		Subsidiary		$	32,379,073				40			$	10,263,324				—			$	12,832,204			$	—
		SSMC		Investee accounted for using equity method			1,192,278				(Note 2	)			—				—				—				—
		GUC		Investee accounted for using equity method			552,558				33				535				—				283,209				—
Xintec		OmniVision		Parent company of director (represented for Xintec)			107,690				83				—				—				—				—

 

Note 1:

The calculation of turnover days excludes other receivables from related parties.

Note 2:

The ending balance is primarily consisted of other receivables, which is not applicable for the calculation of turnover days.

 

- 46 -

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TABLE 7

Taiwan Semiconductor Manufacturing Company Limited and Investees

NAMES, LOCATIONS, AND RELATED INFORMATION OF INVESTEES OVER WHICH THE COMPANY EXERCISES SIGNIFICANT INFLUENCE

MARCH 31, 2012

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

 

 

Investor Company		Investee Company		Location		Main Businesses and Products		Original Investment Amount								Balance as of March 31, 2012												Net Income (Losses) of the Investee (Foreign Currencies in Thousands)				Equity in the Earnings (Losses) (Note 1) (Foreign Currencies in Thousands)				Note
								March 31, 2012 (Foreign Currencies in Thousands)				December 31, 2011 (Foreign Currencies in Thousands)				Shares (In  Thousands)				Percentage of Ownership				Carrying Value (Foreign Currencies in Thousands)
TSMC		TSMC Global		Tortola, British Virgin Islands		Investment activities		$	42,327,245			$	42,327,245				1				100			$	43,137,920			$	171,518			$	171,518			Subsidiary
		TSMC Partners		Tortola, British Virgin Islands		Investing in companies involved in the design, manufacture, and other related business in the semiconductor industry			31,456,130				31,456,130				988,268				100				34,664,194				427,678				427,678			Subsidiary
		TSMC China		Shanghai, China		Manufacturing and selling of integrated circuits at the order of and pursuant to product design specifications provided by customers			18,939,667				18,939,667				—				100				14,095,161				875,143				895,570			Subsidiary
		TSMC Solar		Tai-Chung, Taiwan		Engaged in researching, developing, designing, manufacturing and selling renewable energy and saving related technologies and products			11,180,000				11,180,000				1,118,000				99				9,456,531				(563,533	)			(640,173	)		Subsidiary
		VIS		Hsin-Chu, Taiwan		Research, design, development, manufacture, packaging, testing and sale of memory integrated circuits, LSI, VLSI and related parts			13,232,288				13,232,288				628,223				41				8,986,165				24,096				(53,605	)		Investee accounted for using equity method
		SSMC		Singapore		Fabrication and supply of integrated circuits			5,120,028				5,120,028				314				39				5,388,363				1,027,831				398,701			Investee accounted for using equity method
		TSMC North America		San Jose, California, U.S.A.		Selling and marketing of integrated circuits and semiconductor devices			333,718				333,718				11,000				100				3,035,002				97,510				97,510			Subsidiary
		TSMC SSL		Hsin-Chu, Taiwan		Engaged in researching, developing, designing, manufacturing and selling solid state lighting devices and related applications products and systems			4,304,000				2,270,000				430,400				95				3,541,201				(279,037	)			(265,677	)		Subsidiary
		Xintec		Taoyuan, Taiwan		Wafer level chip size packaging service			1,357,890				1,357,890				94,011				40				1,546,668				(117,292	)			(60,118	)		Investee with a controlling financial interest
		VTAF III		Cayman Islands		Investing in new start-up technology companies			2,070,101				2,074,155				—				53				1,437,397				(25,475	)			(23,509	)		Subsidiary
		GUC		Hsin-Chu, Taiwan		Researching, developing, manufacturing, testing and marketing of integrated circuits			386,568				386,568				46,688				35				1,191,165				99,536				35,056			Investee accounted for using equity method
		VTAF II		Cayman Islands		Investing in new start-up technology companies			949,267				949,267				—				98				740,533				(2,725	)			(2,671	)		Subsidiary
		Emerging Alliance		Cayman Islands		Investing in new start-up technology companies			892,855				892,855				—				99				205,484				(2,434	)			(2,422	)		Subsidiary
		TSMC Europe		Amsterdam, the Netherlands		Marketing and engineering supporting activities			15,749				15,749				—				100				213,849				8,682				8,682			Subsidiary
		TSMC Japan		Yokohama, Japan		Marketing activities			83,760				83,760				6				100				149,861				1,523				1,523			Subsidiary
		TSMC Korea		Seoul, Korea		Customer service and technical supporting activities			13,656				13,656				80				100				23,468				110				110			Subsidiary
		TSMC GN		Taipei, Taiwan		Investment activities			100,000				—				—				100				84,751				(3,386	)			(3,386	)		Subsidiary
TSMC Solar		Motech		Taipei, Taiwan		Manufacturing and sales of solar cells, crystalline silicon solar cell, and test and measurement instruments and design and construction of solar power systems			6,228,661				6,228,661				87,480				20				5,219,263				(988,198	)			Note 2			Investee accounted for using equity method
		VTAF III		Cayman Islands		Investing in new start-up technology companies			1,797,496				1,795,131				—				46				1,640,461				(25,475	)			Note 2			Investee accounted for using equity method
		TSMC Solar Europe		Amsterdam, the Netherlands		Investing in solar related business			411,032				411,032				—				100				168,129				(35,781	)			Note 2			Subsidiary
		TSMC Solar NA		Delaware, U.S.A.		Selling and marketing of solar related products			147,686				147,686				1				100				35,897				(15,073	)			Note 2			Subsidiary
TSMC SSL		TSMC Lighting NA		Delaware, U.S.A.		Selling and marketing of solid state lighting related products			3,133				3,133				1				100				2,912				(7	)			Note 2			Subsidiary

(Continued)

 

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Investor Company		Investee Company		Location		Main Businesses and Products		Original Investment Amount								Balance as of March 31, 2012												Net Income (Losses) of the Investee (Foreign Currencies in Thousands)				Equity in the Earnings (Losses) (Note 1) (Foreign Currencies in Thousands)				Note
								March 31, 2012 (Foreign Currencies in Thousands)				December 31, 2011 (Foreign Currencies in Thousands)				Shares (In Thousands)				Percentage of Ownership				Carrying Value (Foreign Currencies in Thousands)
TSMC Partners		TSMC Development		Delaware, U.S.A.		Investment activities		US$	0.001			US$	0.001				1				100			US$	470,564			US$	10,529				Note 2			Subsidiary
		VisEra Holding Company		Cayman Islands		Investing in companies involved in the design, manufacturing, and other related businesses in the semiconductor industry		US$	43,000			US$	43,000				43,000				49			US$	96,445			US$	281				Note 2			Investee accounted for using equity method
		ISDF		Cayman Islands		Investing in new start-up technology companies		US$	787			US$	787				787				97			US$	14,041			US$	2,456				Note 2			Subsidiary
		TSMC Technology		Delaware, U.S.A.		Engineering support activities		US$	0.001			US$	0.001				1				100			US$	10,942			US$	327				Note 2			Subsidiary
		ISDF II		Cayman Islands		Investing in new start-up technology companies		US$	14,153			US$	14,153				14,153				97			US$	11,455			US$	(47	)			Note 2			Subsidiary
		TSMC Canada		Ontario, Canada		Engineering support activities		US$	2,300			US$	2,300				2,300				100			US$	4,258			US$	99				Note 2			Subsidiary
		Mcube Inc.		Delaware, U.S.A.		Research, development, and sale of micro-semiconductor device		US$	1,800			US$	1,800				6,333				25				—			US$	(3,224	)			Note 2			Investee accounted for using equity method
TSMC Development		WaferTech		Washington, U.S.A.		Manufacturing, selling, testing and computer-aided designing of integrated circuits and other semiconductor devices		US$	280,000			US$	280,000				293,640				100			US$	229,723			US$	9,604				Note 2			Subsidiary
VTAF III		Mutual-Pak Technology Co., Ltd.		Taipei, Taiwan		Manufacturing and selling of electronic parts and researching, developing, and testing of RFID		US$	4,718			US$	3,937				14,168				58			US$	1,771			US$	(281	)			Note 2			Subsidiary
		Growth Fund		Cayman Islands		Investing in new start-up technology companies		US$	1,830			US$	1,830				—				100			US$	480			US$	(30	)			Note 2			Subsidiary
		VTA Holdings		Delaware, U.S.A.		Investing in new start-up technology companies			—				—				—				62				—				—				Note 2			Subsidiary
VTAF II		VTA Holdings		Delaware, U.S.A.		Investing in new start-up technology companies			—				—				—				31				—				—				Note 2			Subsidiary
Emerging Alliance		VTA Holdings		Delaware, U.S.A.		Investing in new start-up technology companies			—				—				—				7				—				—				Note 2			Subsidiary
TSMC Solar Europe		TSMC Solar Europe GmbH		Hamburg, Germany		Selling of solar related products and providing customer service		EUR	9,900			EUR	9,900				1				100			EUR	4,186			EUR		(916)			Note 2			Subsidiary
TSMC GN		TSMC Solar		Tai-Chung, Taiwan		Engaged in researching, developing, designing, manufacturing and selling renewable energy and saving related technologies and products		$	37,590			$	—				3,759				—			$	31,755			$	(563,533	)			Note 2			Investee accounted for using equity method
		TSMC SSL		Hsin-Chu, Taiwan		Engaged in researching, developing, designing, manufacturing and selling solid state lighting devices and related applications products and systems			54,254				—				5,425				1				44,838				(279,037	)			Note 2			Investee accounted for using equity method

 

Note 1:

Equity in earnings/losses of investees includes the effect of unrealized gross profit from affiliates.

Note 2:

The equity in the earnings/losses of the investee company is not reflected herein as such amount is already included in the equity in the earnings/losses of the investor company.

(Concluded)

 

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TABLE 8

Taiwan Semiconductor Manufacturing Company Limited and Investees

INFORMATION ON INVESTMENT IN MAINLAND CHINA

FOR THE THREE MONTHS ENDED MARCH 31, 2012

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

 

 

Investee Company		Main Businesses and Products		Total Amount of Paid-in Capital (Foreign Currencies in Thousands)				Method of Investment		Accumulated Outflow of Investment from Taiwan as of January 1, 2012 (US$ in Thousand)				Investment Flows								Accumulated Outflow of Investment from Taiwan as of March 31, 2012 (US$ in Thousands)				Percentage of Ownership				Equity in the Earnings (Losses)				Carrying Value as of March 31, 2012 (US$ in Thousands)				Accumulated Inward Remittance of Earnings as of March 31, 2012
														Outflow (US$ in Thousands)				Inflow
TSMC China		Manufacturing and selling of integrated circuits at the order of and pursuant to product design specifications provided by customers
				$	18,939,667			(Note 1)		$	18,939,667			$	—			$	—			$	18,939,667				100	%		$	895,570			$	14,095,161			$	—
				(RMB	4,502,080	)				(US$	596,000	)										(US$	596,000	)
Shanghai Walden Venture Capital Enterprise		Investing in new start-up technology companies
					953,709			(Note 2)			147,485				—				—				147,485				8	%			(Note 3)				147,645				—
				(US$	31,488	)				(US$	5,000	)										(US$	5,000	)										(US$	5,000	)

 

Accumulated Investment in Mainland China as of March 31, 2012 (US$ in Thousand)				Investment Amounts Authorized by Investment Commission, MOEA (US$ in Thousand)				Upper Limit on Investment (US$ in Thousand)
$ (US$	19,087,152 601,000)			$ (US$	19,087,152 601,000	)		$ (US$	19,087,152 601,000	)

 

Note 1:

TSMC directly invested US$596,000 thousand in TSMC China.

Note 2:

TSMC indirectly invested in China company through third region, TSMC Partners.

Note 3:

TSMC Partners invested in financial assets carried at cost, equity in the earnings from which was not recognized.

 

- 49 -

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Taiwan Semiconductor Manufacturing

Company Limited and Subsidiaries

Consolidated Financial Statements for the

Three Months Ended March 31, 2012 and 2011 and

Independent Accountants’ Review Report

---

INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

The Board of Directors and Shareholders

Taiwan Semiconductor Manufacturing Company Limited

We have reviewed the accompanying consolidated balance sheets of Taiwan Semiconductor Manufacturing Company Limited and subsidiaries as of March 31, 2012 and 2011, and the related consolidated statements of income and cash flows for the three months then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to issue a report on these consolidated financial statements based on our reviews.

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

Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers and accounting principles generally accepted in the Republic of China.

April 24, 2012

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

For the convenience of readers, the accountants’ review report and the accompanying 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 accountants’ review report and consolidated financial statements shall prevail.

 

- 1 -

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Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2012 AND 2011

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

(Reviewed, Not Audited)

 

 

 

 

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

- 2 -

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Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

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

(Reviewed, Not Audited)

 

 

		2012								2011
		Amount				%				Amount				%
GROSS SALES (Notes 2 and 26)		$	106,877,069							$	106,835,757
SALES RETURNS AND ALLOWANCES (Notes 2 and 8)			1,369,394								1,458,262
NET SALES (Note 33)			105,507,675				100				105,377,495				100
COST OF SALES (Notes 9, 21 and 26)			55,221,092				52				53,706,783				51
GROSS PROFIT BEFORE AFFILIATES ELIMINATION			50,286,583				48				51,670,712				49
REALIZED GROSS PROFIT FROM AFFILIATES (Note 2)			74,029				—				—				—
GROSS PROFIT			50,360,612				48				51,670,712				49
OPERATING EXPENSES (Notes 21 and 26)
Research and development			9,162,781				9				7,963,628				8
General and administrative			4,659,024				4				3,342,828				3
Marketing			1,100,839				1				1,201,276				1
Total operating expenses			14,922,644				14				12,507,732				12
INCOME FROM OPERATIONS (Note 33)			35,437,968				34				39,162,980				37
NON-OPERATING INCOME AND GAINS
Interest income			501,236				1				373,284				—
Foreign exchange gain, net (Note 2)			429,743				—				403,081				1
Technical service income (Notes 26 and 29)			107,156				—				114,949				—
Gain on settlement and disposal of financial assets, net (Notes 2 and 25)			73,591				—				124,926				—
Equity in earnings of equity method investees, net (Notes 2 and 10)			20,952				—				520,109				1
Gain on disposal of property, plant and equipment and other assets (Notes 2 and 26)			2,235				—				96,311				—
Others			67,292				—				200,121				—
Total non-operating income and gains			1,202,205				1				1,832,781				2

(Continued)

 

- 3 -

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Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

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

(Reviewed, Not Audited)

 

 

		2012								2011
		Amount				%				Amount				%
NON-OPERATING EXPENSES AND LOSSES
Impairment loss on idle assets (Note 2)		$	442,312				1			$	—				—
Valuation loss on financial instruments, net (Notes 2, 5 and 25)			245,005				—				282,237				1
Interest expense			217,691				—				119,922				—
Impairment of financial assets (Notes 2, 12 and 25)			4,390				—				58,537				—
Loss on disposal of property, plant and equipment (Note 2)			3,730				—				145,476				—
Others (Note 2)			73,341				—				77,147				—
Total non-operating expenses and losses			986,469				1				683,319				1
INCOME BEFORE INCOME TAX			35,653,704				34				40,312,442				38
INCOME TAX EXPENSE (Notes 2 and 20)			2,288,372				2				3,885,350				3
NET INCOME		$	33,365,332				32			$	36,427,092				35
ATTRIBUTABLE TO:
Shareholders of the parent		$	33,474,187				32			$	36,277,773				35
Minority interests			(108,855	)			—				149,319				—
		$	33,365,332				32			$	36,427,092				35

 

		2012								2011
		Income Attributable  to Shareholders of the Parent								Income Attributable  to Shareholders of the Parent
		Before Income Tax				After Income Tax				Before Income Tax				After Income Tax
EARNINGS PER SHARE (NT$, Note 24)
Basic earnings per share		$	1.38			$	1.29			$	1.55			$	1.40
Diluted earnings per share		$	1.38			$	1.29			$	1.55			$	1.40

 

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

 

- 4 -

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Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(In Thousands of New Taiwan Dollars)

(Reviewed, Not Audited)

 

 

		2012				2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income attributable to shareholders of the parent		$	33,474,187			$	36,277,773
Net income (loss) attributable to minority interests			(108,855	)			149,319
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			28,005,407				24,816,388
Realized gross profit from affiliates			(74,029	)			—
Amortization of premium/discount of financial assets			1,753				7,797
Impairment of financial assets			4,390				58,537
Gain on disposal of available-for-sale financial assets, net			(82,376	)			(111,511	)
Loss (gain) on disposal of financial assets carried at cost, net			8,785				(13,415	)
Equity in earnings of equity method investees, net			(20,952	)			(520,109	)
Loss on disposal of property, plant and equipment and other assets, net			1,495				49,165
Impairment loss on idle assets			442,312				—
Deferred income tax			(608,211	)			1,037,018
Changes in operating assets and liabilities:
Financial assets and liabilities at fair value through profit or loss			60,998				24,451
Receivables from related parties			(461,550	)			1,421
Notes and accounts receivable			(6,965,308	)			(3,253,774	)
Allowance for doubtful receivables			(3	)			(936	)
Allowance for sales returns and others			363,803				(590,336	)
Other receivables from related parties			(33,996	)			(74,509	)
Other financial assets			46,132				(39,472	)
Inventories			(2,918,568	)			(3,381,255	)
Prepaid expenses and other current assets			(995,057	)			74,947
Accounts payable			1,733,684				(1,476,564	)
Payables to related parties			(422,204	)			560,715
Income tax payable			2,855,433				2,660,276
Accrued profit sharing to employees and bonus to directors and supervisors			2,246,386				2,489,966
Accrued expenses and other current liabilities			499,872				(2,273,179	)
Accrued pension cost			(4,874	)			5,366
Net cash provided by operating activities			57,048,654				56,478,079

(Continued)

 

- 5 -

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Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(In Thousands of New Taiwan Dollars)

(Reviewed, Not Audited)

 

 

		2012				2011
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of:
Property, plant and equipment		$	(48,570,613	)		$	(81,262,394	)
Available-for-sale financial assets			(1,477	)			(13,865,070	)
Financial assets carried at cost			—				(1,670	)
Proceeds from disposal or redemption of:
Available-for-sale financial assets			89,733				13,459,391
Held-to-maturity financial assets			594,140				—
Financial assets carried at cost			45,053				63,254
Property, plant and equipment and other assets			13,155				381,310
Increase in deferred charges			(403,491	)			(188,183	)
Decrease (increase) in refundable deposits			(8,644	)			3,846,614
Increase in other assets			(6,987	)			(5,992	)
Net cash used in investing activities			(48,249,131	)			(77,572,740	)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in short-term loans			8,761,188				2,962,424
Proceed from long-term bank loans			—				800,000
Repayment of long-term bank loans			—				(61,943	)
Proceeds from issuance of bonds			17,000,000				—
Repayment of bonds			(4,500,000	)			—
Decrease in obligations under capital leases			(81,995	)			—
Decrease in other long-term payables			(1,434,277	)			—
Decrease in guarantee deposits			(38,389	)			(74,455	)
Proceeds from exercise of employee stock options			136,204				127,288
Increase in minority interests			298,654				15,840
Net cash provided by financing activities			20,141,385				3,769,154
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			28,940,908				(17,325,507	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS			(1,593,246	)			(1,116,448	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			143,472,277				147,886,955
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	170,819,939			$	129,445,000

(Continued)

 

- 6 -

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Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(In Thousands of New Taiwan Dollars)

(Reviewed, Not Audited)

 

 

		2012				2011
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid		$	235,441			$	221,837
Income tax paid		$	48,354			$	218,178
INVESTING ACTIVITIES AFFECTING BOTH CASH AND NON-CASH ITEMS
Acquisition of property, plant and equipment		$	48,099,028			$	73,205,035
Decrease in payables to contractors and equipment suppliers			471,585				8,058,230
Nonmonetary exchange trade-out price			—				(871	)
Cash paid		$	48,570,613			$	81,262,394
Disposal of property, plant and equipment and other assets		$	13,155			$	382,181
Nonmonetary exchange trade-out price			—				(871	)
Cash received		$	13,155			$	381,310
Acquisition of available-for-sale financial assets		$	1,477			$	13,989,666
Increase in accrued expenses and other current liabilities			—				(124,596	)
Cash paid		$	1,477			$	13,865,070
Disposal of available-for-sale financial assets		$	89,733			$	13,646,465
Increase in other financial assets			—				(187,074	)
Cash received		$	89,733			$	13,459,391
NON-CASH FINANCING ACTIVITIES
Idle assets reclassified from property, plant and equipment		$	442,312			$	—
Current portion of bonds payable		$	—			$	4,500,000
Current portion of long-term bank loans		$	93,750			$	240,759
Current portion of other long-term payables (under accrued expenses and other current liabilities)		$	1,850,950			$	4,134,622

 

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

 

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Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

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

(Reviewed, Not Audited)

 

 

1.

GENERAL

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

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

As of March 31, 2012 and 2011, TSMC and its subsidiaries had 35,594 and 35,665 employees, respectively.

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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:

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of all directly and indirectly majority owned subsidiaries of TSMC, and the accounts of investees in which TSMC’s ownership percentage is less than 50% but over which TSMC has a controlling interest. All significant intercompany balances and transactions are eliminated upon consolidation.

 

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The consolidated entities were as follows:

 

				Percentage of Ownership March 31
Name of Investor		Name of Investee		2012				2011				Remark
TSMC		TSMC North America			100	%			100	%		—
		TSMC Japan Limited (TSMC Japan)			100	%			100	%		—
		TSMC Partners, Ltd. (TSMC Partners)			100	%			100	%		—
		TSMC Korea Limited (TSMC Korea)			100	%			100	%		—
		TSMC Europe B.V. (TSMC Europe)			100	%			100	%		—
		TSMC Global, Ltd. (TSMC Global)			100	%			100	%		—
		TSMC China Company Limited (TSMC China)			100	%			100	%		—
		VentureTech Alliance Fund III, L.P. (VTAF III)			53	%			99	%		(Note 1)
		VentureTech Alliance Fund II, L.P. (VTAF II)			98	%			98	%		—
		Emerging Alliance Fund, L.P. (Emerging Alliance)			99.5	%			99.5	%		—
		Global Unichip Corporation (GUC)			(Note	2)			35	%		—
		Xintec Inc. (Xintec)			40	%			41	%		TSMC obtained three out of five director positions and has a controlling interest in Xintec
		TSMC SSL			95	%			—			Established in August 2011 TSMC and TSMC GN aggregately has a controlling interest of 96% in TSMC SSL
		TSMC Solar			99	%			—			Established in August 2011 TSMC and TSMC GN aggregately has a controlling interest of 99% in TSMC Solar
		TSMC Guang Neng Investment, Ltd. (TSMC GN)			100	%			—			Established in January 2012
TSMC Partners		TSMC Design Technology Canada Inc. (TSMC Canada)			100	%			100	%		—
		TSMC Technology, Inc. (TSMC Technology)			100	%			100	%		—
		TSMC Development, Inc. (TSMC Development)			100	%			100	%		—
		InveStar Semiconductor Development Fund, Inc. (ISDF)			97	%			97	%		—
		InveStar Semiconductor Development Fund, Inc. (II) LDC. (ISDF II)			97	%			97	%		—
TSMC Development		WaferTech, LLC (WaferTech)			100	%			100	%		—
VTAF III		Mutual-Pak Technology Co., Ltd. (Mutual-Pak)			58	%			57	%		—
		Growth Fund Limited (Growth Fund)			100	%			100	%		—
VTAF III, VTAF II and Emerging Alliance		VentureTech Alliance Holdings, LLC (VTA Holdings)			100	%			100	%		—
GUC		Global Unichip Corp.-NA (GUC-NA)			(Note 2	)			100	%		—
		Global Unichip Japan Co., Ltd. (GUC-Japan)			(Note 2	)			100	%		—
		Global Unichip Europe B.V. (GUC-Europe)			(Note 2	)			100	%		—
		Global Unichip (BVI) Corp. (GUC-BVI)			(Note 2	)			100	%		—
GUC-BVI		Global Unichip (Shanghai) Company, Limited (GUC-Shanghai)			(Note 2	)			100	%		—

(Continued)

 

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				Percentage of Ownership March 31
Name of Investor		Name of Investee		2012				2011				Remark
TSMC SSL		TSMC Lighting North America, Inc. (TSMC Lighting NA)			100	%			100	%		(Note 1)
TSMC Solar		TSMC Solar North America, Inc. (TSMC Solar NA)			100	%			100	%		(Note 1)
		TSMC Solar Europe B.V. (TSMC Solar Europe)			100	%			100	%		(Note 1)
		VentureTech Alliance Fund III, L.P. (VTAF III)			46	%			—			(Note 1)
TSMC Solar Europe		TSMC Solar Europe GmbH			100	%			100	%		(Note 1)

(Concluded)

 

Note 1:		In August 2011, TSMC adjusted its investment structure by transferring TSMC Lighting NA to TSMC SSL and transferring TSMC Solar Europe, TSMC Solar NA and part of VTAF III to TSMC Solar.
Note 2:		Since July 2011, TSMC is no longer deemed to be a controlling entity of GUC and its subsidiaries due to the termination of a Shareholders’ Agreement. As a result, GUC and its subsidiaries are no longer consolidated and are accounted for using the equity method.

The following diagram presents information regarding the relationship and ownership percentages between TSMC and its consolidated investees as of March 31, 2012:

 

Since July 2011, TSMC is no longer deemed to be a controlling entity of GUC and its subsidiaries due to the termination of a Shareholders’ Agreement. As a result, GUC and its subsidiaries are no longer consolidated and are accounted for using the equity method.

TSMC North America is engaged in selling and marketing of integrated circuits and semiconductor devices. TSMC Japan, TSMC Korea and TSMC Europe are engaged mainly in marketing or customer service, engineering and technical supporting activities. TSMC Partners is engaged in investment in companies involved in the design, manufacture, and other related business in the semiconductor industry. TSMC Global, TSMC Development and TSMC GN are engaged in investing activities. TSMC China is engaged in the manufacturing and selling of integrated circuits pursuant to the orders from and product design specifications provided by customers. Emerging Alliance, VTAF II, VTAF III, VTA Holdings, ISDF, ISDF II and Growth Fund are engaged in investing in new start-up technology companies. TSMC Canada and TSMC Technology are engaged mainly in engineering support activities. WaferTech is engaged in the manufacturing, selling, testing and computer-aided designing of integrated circuits and other semiconductor devices. Xintec is engaged in the provision of wafer packaging service. TSMC SSL is engaged in researching, developing, designing, manufacturing and selling solid state lighting devices and related applications products and systems. TSMC Lighting NA is engaged in selling and marketing of solid state lighting related products. TSMC Solar is engaged in researching, developing, designing, manufacturing and selling renewable energy and energy saving related technologies and products. TSMC Solar NA is engaged in selling and marketing of solar related products. TSMC Solar Europe

 

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is engaged in investing activities of solar related business. TSMC Solar Europe GmbH is engaged in the selling and customer service of solar cell modules and related products. Mutual-Pak is engaged in the manufacturing and selling of electronic parts and researching, developing and testing of RFID.

To foster a stronger sense of corporate entrepreneurship and facilitate business specializations in order to strengthen overall profitability and operational efficiency, TSMC transferred its solid state lighting and solar businesses into its wholly-owned, newly incorporated subsidiaries, TSMC SSL and TSMC Solar, in August 2011. In February 2012, TSMC SSL and TSMC Solar issued new shares for cash, in which a portion of shares were subscribed by their employees and TSMC GN. As a result, the Company’s percentage of ownership in TSMC SSL and TSMC Solar decreased to 96% and 99%, respectively.

TSMC together with its subsidiaries are hereinafter referred to collectively as the “Company.”

Minority interests in the aforementioned subsidiaries are presented as a separate component of shareholders’ equity.

Foreign-currency Transactions and Translation of Foreign-currency Financial Statements

Foreign-currency transactions other than derivative contracts are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occur. Exchange gains or losses derived from foreign-currency transactions or monetary assets and liabilities denominated in foreign currencies are recognized in earnings.

At the balance sheet date, monetary assets and liabilities denominated in foreign currencies are revalued at prevailing exchange rates with the resulting gains or losses recognized in earnings.

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

Use of Estimates

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

Classification of Current and Noncurrent Assets and Liabilities

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

Cash Equivalents

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

 

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Financial Assets/Liabilities at Fair Value Through Profit or Loss

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

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

Available-for-sale Financial Assets

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

Fair value is determined as follows: Open-end mutual funds and money market funds - net asset values at the end of the period; publicly traded stocks - closing prices at the end of the period; and other debt securities - average of bid and asked prices at the end of the period.

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

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

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

Held-to-maturity Financial Assets

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

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

 

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Hedging Derivative Financial Instruments

Hedge derivatives are mainly derivatives instruments that are for cash flow hedge purposes and determined to be an effective hedge. The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognized in shareholders’ equity. The amount recognized in shareholders’ equity is recognized in profit or loss in the same period or period during which the hedged forecast transaction or an asset or liability arising from the hedged forecast transaction affects profit or loss. However, if all or a portion of a loss recognized in shareholders’ equity is not expected to be recovered in the future, the amount that is not expected to be recovered is reclassified into profit or loss.

Financial Assets Carried at Cost

Investments for which the Company does not exercise significant influence and that do not have a quoted market price in an active market and whose fair value cannot be reliably measured, such as non-publicly traded stocks and mutual funds, are carried at their original cost. The costs of non-publicly traded stocks and mutual funds are determined using the weighted-average method. If there is objective evidence which indicates that a financial asset is impaired, a loss is recognized. A subsequent reversal of such impairment loss is not allowed.

The accounting treatment for cash dividends and stock dividends arising from financial assets carried at cost is the same as that for cash and stock dividends arising from available-for-sale financial assets.

Allowance for Doubtful Receivables

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

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

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

Inventories

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

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

 

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Investments Accounted for Using Equity Method

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

When the Company subscribes for additional investee’s shares at a percentage different from its existing ownership percentage, the resulting carrying amount of the investment in the investee differs from the amount of the Company’s share of the investee’s equity. The Company records such a difference as an adjustment to long-term investments with the corresponding amount charged or credited to capital surplus. Cash dividends received from an investee shall reduce the carrying amount of the investment. Stock dividends are recorded as an increase in the number of shares held and do not affect investment income.

Gains or losses on sales from the Company to equity method investees or from equity method investees to the Company are deferred in proportion to the Company’s ownership percentages in the investees until such gains or losses are realized through transactions with third parties.

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

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

Property, plant and equipment and assets leased to others are stated at cost less accumulated depreciation. Properties covered by agreements qualifying as capital leases are carried at the lower of the leased equipment’s market value or the present value of the minimum lease payments at the inception date of the lease, with the corresponding amount recorded as obligations under capital leases. Borrowing costs directly attributable to the acquisition or construction of property, plant and equipment are capitalized as part of the cost of those assets. When an indication of impairment is identified, any excess of the carrying amount of an asset over its recoverable amount is recognized as a loss. If the recoverable amount increases in a subsequent period, the amount previously recognized as impairment would be reversed and recognized as a gain. However, the adjusted amount may not exceed the carrying amount that would have been determined, net of depreciation, as if no impairment loss had been recognized. Significant additions, renewals and betterments incurred during the construction period are capitalized. Maintenance and repairs are expensed as incurred.

Depreciation is computed using the straight-line method over the following estimated service lives: 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.

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

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

 

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Intangible Assets

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

Deferred charges consist of technology license fees, software and system design costs and patent and others. The amounts are amortized over the following periods: Technology license fees - the estimated life of the technology or the term of the technology transfer contract; software and system design costs - 2 to 5 years; patent and others - the economic life or contract period. When an indication of impairment is identified, any excess of the carrying amount of an asset over its recoverable amount is recognized as a loss. If the recoverable amount increases in a subsequent period, the previously recognized impairment loss would be reversed and recognized as a gain. However, the adjusted amount may not exceed the carrying amount that would have been determined, net of amortization, as if no impairment loss had been recognized.

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

Pension Costs

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

Income Tax

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

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

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

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

Stock-based Compensation

Employee stock options that were granted or modified in the period from January 1, 2004 to December 31, 2007 are accounted for by the interpretations issued by the Accounting Research and Development Foundation of the Republic of China. The Company adopted the intrinsic value method and any compensation cost determined using this method is recognized in earnings over the employee vesting period. Employee stock option plans that were granted or modified after December 31, 2007 are accounted for using fair value method in accordance with SFAS No. 39, “Accounting for Share-based Payment.” Under the statement, the value of the stock options granted, which is equal to the best available estimate of the number of stock options

 

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expected to vest multiplied by the grant-date fair value, is expensed on a straight-line basis over the vesting period, with a corresponding adjustment to capital surplus - employee stock options. The estimate is revised if subsequent information indicates that the number of stock options expected to vest differs from previous estimates.

Revenue Recognition and Allowance for Sales Returns and Others

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

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

 

3.	ACCOUNTING CHANGES

On January 1, 2011, the Company prospectively adopted the newly revised SFAS No. 34, “Financial Instruments: Recognition and Measurement.” The main revisions include (1) finance lease receivables are now covered by SFAS No. 34; (2) the scope of the applicability of SFAS No. 34 to insurance contracts is amended; (3) loans and receivables originated by the Company are now covered by SFAS No. 34; (4) additional guidelines on impairment testing of financial assets carried at amortized cost when the debtor has financial difficulties and the terms of obligations have been modified; and (5) accounting treatment by a debtor for modifications in the terms of obligations. This accounting change did not have a significant effect on the Company’s consolidated financial statements as of and for the three months ended March 31, 2011.

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

 

4.	CASH AND CASH EQUIVALENTS

 

		March 31
		2012				2011
Cash and deposits in banks		$	168,044,810			$	127,349,258
Repurchase agreements collateralized by corporate bonds			1,938,014				—
Repurchase agreements collateralized by government bonds			837,115				1,627,216
Corporate bonds			—				383,092
Agency bonds			—				85,434
		$	170,819,939			$	129,445,000

 

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

 

		March 31
		2012				2011
Trading financial assets
Forward exchange contracts		$	1,376			$	12,283
Cross currency swap contracts			282				—
		$	1,658			$	12,283
Trading financial liabilities
Forward exchange contracts		$	60,207			$	48,850
Cross currency swap contracts			831				—
		$	61,038			$	48,850

The Company entered into derivative contracts during the three months ended March 31, 2012 and 2011 to manage exposures due to fluctuations of foreign exchange rates. The derivative contracts entered into by the Company did not meet the criteria for hedge accounting. Therefore, the Company did not apply hedge accounting treatment for derivative contracts.

Outstanding forward exchange contracts consisted of the following:

 

		Maturity Date		Contract Amount (In Thousands)
March 31, 2012
Sell NT$/Buy JPY		April 2012		NT$869,791/JPY2,362,000
Sell NT$/Buy US$		April 2012 to May 2012		NT$ 187,420/US$6,350
Sell US$/Buy JPY		April 2012		US$42,327/JPY3,403,622
Sell US$/Buy EUR		April 2012		US$ 1,565/EUR1,200
Sell US$/Buy NT$		April 2012 to May 2012		US$10,800/NT$318,434
Sell RMB/Buy US$		April 2012		RMB1,230,782/US$195,000
March 31, 2011
Sell NT$/Buy JPY		April 2011		NT$1,173,256/JPY3,268,300
Sell NT$/Buy EUR		April 2011		NT$ 83,800/EUR2,000
Sell EUR/Buy NT$		April 2011		EUR59,550/NT$2,494,130
Sell NT$/Buy US$		April 2011		NT$ 53,267/US$1,800
Sell RMB/Buy US$		April 2011 to June 2011		RMB925,865/US$140,500
Sell US$/Buy JPY		April 2011		US$1,531/JPY 124,092
Sell US$/Buy NT$		April 2011 to May 2011		US$ 9,000/NT$265,008

 

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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
March 31, 2012
April 2012		NT$	604,165/US$20,450				0.00	%		0.07%-0.20%

Net losses on derivative financial instruments for the three months ended March 31, 2012 and 2011 were NT$245,005 thousand and NT$282,237 thousand, respectively.

 

6.	AVAILABLE-FOR-SALE FINANCIAL ASSETS

 

		March 31
		2012				2011
Publicly traded stocks		$	3,573,873			$	4,567,080
Money market funds			3,928				145,015
Corporate bonds			—				16,650,404
Agency bonds			—				6,931,552
Government bonds			—				916,160
Open-end mutual funds			—				390,351
			3,577,801				29,600,562
Current portion			(3,577,801	)			(28,564,518	)
		$	—			$	1,036,044

 

7.	HELD-TO-MATURITY FINANCIAL ASSETS

 

		March 31
		2012				2011
Corporate bonds		$	7,841,495			$	12,639,303
Government bonds			442,935				442,020
			8,284,430				13,081,323
Current portion			(6,253,618	)			(5,388,732	)
		$	2,030,812			$	7,692,591

 

8.	ALLOWANCES FOR DOUBTFUL RECEIVABLES, SALES RETURNS AND OTHERS

Movements of the allowance for doubtful receivables were as follows:

 

		Three Months Ended March 31
		2012				2011
Balance, beginning of period		$	490,952			$	504,029
Reversal			(3	)			(855	)
Effect of exchange rate changes			(67	)			(81	)
Balance, end of period		$	490,882			$	503,093

 

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

 

		Three Months Ended March 31
		2012				2011
Balance, beginning of period		$	5,068,263			$	7,546,264
Provision			1,369,394				1,458,262
Write-off			(1,005,591	)			(2,044,133	)
Effect of exchange rate changes			(3,656	)			(4,465	)
Balance, end of period		$	5,428,410			$	6,955,928

 

9.	INVENTORIES

 

		March 31
		2012				2011
Finished goods		$	4,381,500			$	7,600,064
Work in process			19,414,011				19,320,917
Raw materials			2,270,363				2,853,159
Supplies and spare parts			1,693,276				2,013,099
		$	27,759,150			$	31,787,239

Write-down of inventories to net realizable value in the amount of NT$642,307 thousand and NT$672,567 thousand, respectively, were included in the cost of sales for the three months ended March 31, 2012 and 2011.

 

10.	INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD

 

		March 31
		2012								2011
		Carrying Amount				% of Ownership				Carrying Amount				% of Ownership
Vanguard International Semiconductor Corporation (VIS)		$	8,986,165				41			$	9,456,221				38
Systems on Silicon Manufacturing Company Pte Ltd. (SSMC)			5,388,363				39				7,256,841				39
Motech Industries Inc. (Motech)			5,219,263				20				6,770,069				20
VisEra Holding Company (VisEra Holding)			2,847,918				49				2,512,421				49
GUC			1,191,165				35				—				—
Mcube Inc. (Mcube)			—				25				—				26
		$	23,632,874							$	25,995,552

Since July 2011, TSMC is no longer deemed to be a controlling entity of GUC and its subsidiaries due to the termination of a Shareholders’ Agreement. As a result, GUC and its subsidiaries are no longer consolidated and are accounted for using the equity method.

For the three months ended March 31, 2012 and 2011, equity in earnings of equity method investees was a net gain of NT$20,952 thousand and NT$520,109 thousand, respectively.

 

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The quoted market price of publicly traded stocks in unrestricted investments accounted for using the equity method was NT$13,192,202 thousand (VIS and GUC) as of March 31, 2012 and NT$8,795,129 thousand (VIS) as of March 31, 2011.

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

 

		Three Months Ended March 31
		2012				2011
Balance, beginning of period		$	1,645,810			$	2,491,891
Amortization			(145,731	)			(244,977	)
Balance, end of period		$	1,500,079			$	2,246,914

As of March 31, 2012 and 2011, balance of the aforementioned difference allocated to goodwill was NT$1,415,565 thousand. There was no acquisition or impairment in goodwill for the three months ended March 31, 2012 and 2011.

 

11.	HEDGING DERIVATIVE FINANCIAL INSTRUMENTS

 

		March 31
		2012				2011
Hedging derivative financial liabilities
Interest rate swap contract		$	135			$	676

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 outstanding interest rate swap contract consisted of the following:

 

Contract Amount (In Thousands)		Maturity Date		Range of Interest Rates Paid		Range of Interest Rates Received
March 31, 2012
NT$68,000		August 31, 2012		1.38%			0.86%
March 31, 2011
NT$116,000		August 31, 2012		1.38%			0.66%-0.68%

For the three months ended March 31, 2012 and 2011, the adjustment for the current period to shareholders’ equity amounted to net losses of NT$1 thousand and NT$676 thousand, respectively; and the amount removed from shareholders’ equity and recognized as a loss from the above interest rate swap contract amounted to NT$98 thousand and NT$226 thousand, respectively.

 

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12.	FINANCIAL ASSETS CARRIED AT COST

 

		March 31
		2012				2011
Non-publicly traded stocks		$	3,873,289			$	4,050,346
Mutual funds			306,896				159,251
		$	4,180,185			$	4,209,597

The common stock of InvenSense, Inc. was listed on the NYSE in November 2011. Thus, the Company reclassified the aforementioned investments from financial assets carried at cost to available-for-sale financial assets.

For the three months ended March 31, 2012 and 2011, the Company recognized impairment on financial assets carried at cost of NT$4,390 thousand and NT$58,537 thousand, respectively.

 

13.	PROPERTY, PLANT AND EQUIPMENT

 

		Three Months Ended March 31, 2012
		Balance, Beginning of Period				Additions (Deductions)				Disposals				Reclassification				Effect of Exchange Rate Changes				Balance, End of Period
Cost
Land and land improvements		$	1,541,128			$	14,470			$	—			$	—			$	(19,737	)		$	1,535,861
Buildings			172,872,550				14,567,591				(12,594	)			—				(520,257	)			186,907,290
Machinery and equipment			1,057,588,736				90,006,940				(358,689	)			(760,386	)			(1,622,050	)			1,144,854,551
Office equipment			16,969,266				1,361,503				(290,826	)			—				(57,232	)			17,982,711
Leased asset			791,480				—				—				—				(19,746	)			771,734
			1,249,763,160			$	105,950,504			$	(662,109	)		$	(760,386	)		$	(2,239,022	)			1,352,052,147
Accumulated depreciation
Land and land improvements			355,555			$	6,775			$	—			$	—			$	(8,951	)			353,379
Buildings			101,004,047				2,665,331				(11,327	)			—				(264,163	)			103,393,888
Machinery and equipment			762,774,355				24,384,987				(354,753	)			(318,074	)			(1,383,961	)			785,102,554
Office equipment			11,820,728				407,695				(290,379	)			—				(47,032	)			11,891,012
Leased asset			297,535				10,077				—				—				(7,467	)			300,145
			876,252,220			$	27,474,865			$	(656,459	)		$	(318,074	)		$	(1,711,574	)			901,040,978
Advance payments and construction in progress			116,863,976			$	(57,851,476	)		$	—			$	(248	)		$	(106,959	)			58,905,293
		$	490,374,916																			$	509,916,462

 

		Three Months Ended March 31, 2011
		Balance, Beginning of Period				Additions (Deductions)				Disposals				Reclassification				Effect of Exchange Rate Changes				Balance, End of Period
Cost
Land and land improvements		$	891,197			$	652,011			$	—			$	—			$	(23,403	)		$	1,519,805
Buildings			145,966,024				16,229,827				(9,707	)			—				(429,136	)			161,757,008
Machinery and equipment			913,155,252				68,138,372				(248,904	)			—				(1,534,301	)			979,510,419
Office equipment			14,856,582				875,855				(145,803	)			—				(54,702	)			15,531,932
Leased asset			701,552				—				—				—				(16,777	)			684,775
			1,075,570,607			$	85,896,065			$	(404,414	)		$	—			$	(2,058,319	)			1,159,003,939
Accumulated depreciation
Land and land improvements			328,792			$	6,682			$	—			$	—			$	(9,706	)			325,768
Buildings			90,472,703				2,392,872				(9,707	)			—				(238,029	)			92,617,839
Machinery and equipment			671,268,636				21,494,836				(247,266	)			—				(1,478,448	)			691,037,758
Office equipment			10,957,676				327,377				(145,786	)			—				(47,085	)			11,092,182
Leased asset			250,350				8,376				—				—				(5,917	)			252,809
			773,278,157			$	24,230,143			$	(402,759	)		$	—			$	(1,779,185	)			795,326,356
Advance payments and construction in progress			86,151,573			$	(12,691,030	)		$	(429,691	)		$	(199	)		$	(118,856	)			72,911,797
		$	388,444,023																			$	436,589,380

The Company entered into agreements to lease buildings that qualify as capital leases. The term of the leases is from December 2003 to December 2018.

 

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As of March 31, 2012, future lease payments were as follows:

 

Year		Amount
2012 (2nd to 4th quarter)		$	27,216
2013			27,216
2014			27,216
2015			27,216
2016			27,216
2017 and thereafter			761,477
		$	897,557

During the three months ended March 31, 2012, the Company capitalized the borrowing costs directly attributable to the acquisition or construction of property, plant and equipment. Information about capitalized interest was as follows:

 

		Three Months Ended March 31, 2012
Capitalized interest		$	3,174
Capitalization rates			1.08%-1.20%

 

14.	DEFERRED CHARGES, NET

 

		Three Months Ended March 31, 2012
		Balance, Beginning of Period				Additions				Amortization				Reclassification				Effect of Exchange Rate Changes				Balance, End of Period
Technology license fee		$	1,682,892			$	147,825			$	(115,452	)		$	191,580			$	(1,117	)		$	1,905,728
Software and system design costs			2,366,483				144,206				(275,841	)			248				(357	)			2,234,739
Patent and others			1,118,189				259,285				(136,893	)			—				(2,509	)			1,238,072
		$	5,167,564			$	551,316			$	(528,186	)		$	191,828			$	(3,983	)		$	5,378,539

 

		Three Months Ended March 31, 2011
		Balance, Beginning of Period				Additions				Amortization				Reclassification				Effect of Exchange Rate Changes				Balance, End of Period
Technology license fee		$	2,455,348			$	—			$	(185,338	)		$	—			$	(108	)		$	2,269,902
Software and system design costs			2,333,271				38,065				(291,150	)			199				(151	)			2,080,234
Patent and others			1,238,466				150,118				(108,322	)			—				(2,361	)			1,277,901
		$	6,027,085			$	188,183			$	(584,810	)		$	199			$	(2,620	)		$	5,628,037

 

15.	SHORT-TERM LOANS

 

		March 31
		2012				2011
Unsecured loans:
US$1,174,700 thousand, due in April 2012, and annual interest at 0.41%-0.74% in 2012; US$1,086,000 thousand and EUR 52,000 thousand, due in April 2011, and annual interest at 0.40%-0.87% in 2011		$	34,687,716			$	34,176,368

 

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16.	BONDS PAYABLE

 

		March 31
		2012				2011
Domestic unsecured bonds:
Issued in September 2011 and repayable in September 2016, 1.40% interest payable annually		$	10,500,000			$	—
Issued in September 2011 and repayable in September 2018, 1.63% interest payable annually			7,500,000				—
Issued in January 2012 and repayable in January 2017, 1.29% interest payable annually			10,000,000				—
Issued in January 2012 and repayable in January 2019, 1.46% interest payable annually			7,000,000				—
Issued in January 2002 and repayable in January 2012, 3.00% interest payable annually			—				4,500,000
			35,000,000				4,500,000
Current portion			—				(4,500,000	)
		$	35,000,000			$	—

 

17.	LONG-TERM BANK LOANS

 

		March 31
		2012				2011
Bank loans for working capital:
Repayable in full in one lump sum payment in June 2016, annual interest at 1.08%		$	650,000			$	—
Repayable in full in one lump sum payment in March 2014, annual interest at 1.16% in 2012 and 1.02%-1.04% in 2011			500,000				500,000
Repayable from July 2012 in 16 quarterly installments, annual interest at 1.21% in 2012			300,000				—
Repayable from September 2012 in 16 quarterly installments, annual interest at 1.21%			200,000				—
Repayable from September 2012 in 6 installments before March 2015, annual interest at 1.14%, repayable in full in one lump sum payment in June 2011			—				300,000
Secured loans:
Repayable from August 2009 in 17 quarterly installments, annual interest at 0.69%-1.30% in 2011, repayable in full in one lump sum payment in June 2011			—				481,321
			1,650,000				1,281,321
Current portion			(93,750	)			(240,759	)
		$	1,556,250			$	1,040,562

Pursuant to the loan agreements, financial ratios calculated based on semi-annual and annual financial statements of Xintec must comply with predetermined financial covenants.

 

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As of March 31, 2012, future principal repayments for the long-term bank loans were as follows:

 

Year of Repayment		Amount
2012 (2nd to 4th quarter)		$	62,500
2013			125,000
2014			625,000
2015			125,000
2016			712,500
		$	1,650,000

 

18.	OTHER LONG-TERM PAYABLES

 

		March 31
		2012				2011
Payables for acquisition of property, plant and equipment (Note 29g)		$	1,762,363			$	6,942,466
Payables for technology transfer			147,645				—
Payables for royalties			—				1,041,830
			1,910,008				7,984,296
Current portion (classified under accrued expenses and other current liabilities)			(1,850,950	)			(4,134,622	)
		$	59,058			$	3,849,674

The payables for royalties were primarily attributable to several license arrangements that the Company entered into for certain semiconductor-related patents.

As of March 31, 2012, future repayments for other long-term payable were as follows:

 

Year of Repayment		Amount
2012 (2nd to 4th quarter)		$	1,850,950
2013			29,529
2014			29,529
		$	1,910,008

 

19.	PENSION PLANS

The pension mechanism under the Labor Pension Act (the “Act”) is deemed a defined contribution plan. Pursuant to the Act, TSMC, GUC, 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 Solar NA and TSMC Solar Europe GmbH are required by local regulations to make monthly contributions at certain percentages of the basic salary of their employees. Pursuant to the aforementioned Act and local regulations, the Company recognized pension costs of NT$330,541 thousand and NT$323,975 thousand for the three months ended March 31, 2012 and 2011, respectively.

 

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TSMC, GUC, 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. The Company recognized pension costs of NT$72,757 thousand and NT$76,010 thousand for the three months ended March 31, 2012 and 2011, respectively.

Movements in the Funds and accrued pension cost under the defined benefit plans were summarized as follows:

 

		Three Months Ended March 31
		2012				2011
The Funds
Balance, beginning of period		$	3,098,039			$	2,888,852
Contributions			74,987				72,122
Interest			26,304				27,246
Payments			(4,886	)			(3,495	)
Balance, end of period		$	3,194,444			$	2,984,725
Accrued pension cost
Balance, beginning of period		$	3,908,508			$	3,812,351
Accruals (deductions)			(4,874	)			5,366
Balance, end of period		$	3,903,634			$	3,817,717

 

20.	INCOME TAX

 

a.

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

 

		Three Months Ended March 31
		2012				2011
Income tax expense based on “income before income tax” at statutory rates		$	6,340,599			$	7,186,305
Tax effect of the following:
Tax-exempt income			(1,969,889	)			(3,634,868	)
Temporary and permanent differences			(474,142	)			(565,085	)
Net operating loss carryforwards used			(74,692	)			(118,323	)
Investment tax credits used			(950,630	)			(12,061	)
Income tax currently payable		$	2,871,246			$	2,855,968

 

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b.

Income tax expense consisted of the following:

 

		Three Months Ended March 31
		2012				2011
Income tax currently payable		$	2,871,246			$	2,855,968
Income tax adjustments on prior years			—				2,669
Other income tax adjustments			34,132				23,669
Net change in deferred income tax assets
Investment tax credits			358,026				(484,374	)
Net operating loss carryforwards			(135,895	)			116,494
Temporary differences			201,392				101,136
Valuation allowance			(1,040,529	)			1,269,788
Income tax expense		$	2,288,372			$	3,885,350

 

c.

Net deferred income tax assets consisted of the following:

 

		March 31
		2012				2011
Current deferred income tax assets
Investment tax credits		$	5,592,737			$	4,257,923
Temporary differences
Allowance for sales returns and others			542,558				597,393
Unrealized gain/loss on financial instruments			309,022				62,060
Others			442,348				332,930
Valuation allowance			(150,600	)			(150,639	)
		$	6,736,065			$	5,099,667
Noncurrent deferred income tax assets
Investment tax credits		$	14,362,586			$	18,844,684
Net operating loss carryforwards			2,570,085				2,537,753
Temporary differences
Depreciation			1,893,192				2,087,167
Others			686,233				574,518
Valuation allowance			(12,266,895	)			(17,444,947	)
		$	7,245,201			$	6,599,175

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

As of March 31, 2012, the net operating loss carryforwards generated by WaferTech, TSMC Development, Mutual-Pak, TSMC SSL and TSMC Solar would expire on various dates through 2023.

 

d.

Integrated income tax information:

The balance of the imputation credit account of TSMC as of March 31, 2012 and 2011 was NT$4,003,228 thousand and NT$1,669,533 thousand, respectively.

The estimated and actual creditable ratios for distribution of TSMC’s earnings of 2011 and 2010 were 6.67% and 4.96%, respectively.

 

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

 

e.

All of TSMC’s earnings generated prior to December 31, 1997 have been appropriated.

 

f.

As of March 31, 2012, investment tax credits of TSMC, Xintec and Mutual-Pak and TSMC SSL consisted of the following:

 

Law/Statute		Item		Total Creditable Amount				Remaining Creditable Amount				Expiry Year
Statute for Upgrading Industries		Purchase of machinery and equipment		$	1,172,726			$	811,253				2012
					6,524,655				6,524,655				2013
					7,041,416				7,041,416				2014
					509,388				509,388				2015
				$	15,248,185			$	14,886,712
Statute for Upgrading Industries		Research and development expenditures		$	31,434			$	31,434				2012
					5,020,041				5,020,041				2013
				$	5,051,475			$	5,051,475
Statute for Upgrading Industries		Personnel training expenditures		$	15			$	15				2012
					17,121				17,121				2013
				$	17,136			$	17,136
Statute for Industrial Innovation		Research and development expenditures		$	589,157			$	—				2012

 

g.

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

 

		Tax-exemption Period
Construction and expansion of 2004 by TSMC		2008 to 2012
Construction and expansion of 2005 by TSMC		2010 to 2014
Construction and expansion of 2006 by TSMC		2011 to 2015
Construction and expansion of 2002, 2003 and 2006 by Xintec		2010 to 2014

 

h.

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

 

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21.	LABOR COST, DEPRECIATION AND AMORTIZATION

 

		Three Months Ended March 31, 2012
		Classified as Cost of Sales				Classified as Operating Expenses				Total
Labor cost
Salary and bonus		$	6,564,090			$	5,329,776			$	11,893,866
Labor and health insurance			319,585				251,194				570,779
Pension			234,537				168,761				403,298
Meal			170,595				80,306				250,901
Welfare			180,108				69,902				250,010
Others			22,678				78,408				101,086
		$	7,491,593			$	5,978,347			$	13,469,940
Depreciation		$	24,845,297			$	2,629,568			$	27,474,865
Amortization		$	323,428			$	204,758			$	528,186

 

		Three Months Ended March 31, 2011
		Classified as Cost of Sales				Classified as Operating Expenses				Total
Labor cost
Salary and bonus		$	6,891,851			$	5,199,990			$	12,091,841
Labor and health insurance			330,938				222,319				553,257
Pension			245,467				154,518				399,985
Meal			181,445				70,146				251,591
Welfare			177,414				65,708				243,122
Others			24,039				75,221				99,260
		$	7,851,154			$	5,787,902			$	13,639,056
Depreciation		$	22,615,937			$	1,610,410			$	24,226,347
Amortization		$	342,059			$	242,751			$	584,810

 

22.	SHAREHOLDERS’ EQUITY

As of March 31, 2012, 1,091,849 thousand ADSs of TSMC were traded on the NYSE. The number of common shares represented by the ADSs was 5,459,243 thousand (one ADS represents five common shares).

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

 

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Capital surplus consisted of the following:

 

		March 31
		2012				2011
Additional paid-in capital		$	23,866,634			$	23,715,050
From merger			22,804,510				22,805,390
From convertible bonds			8,892,847				8,893,190
From long-term investments			444,328				367,797
Donations			55				55
		$	56,008,374			$	55,781,482

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:

 

a.

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

 

b.

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

 

c.

Bonus to directors and profit sharing to employees of 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;

 

d.

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$2,236,553 thousand and NT$2,443,687 thousand for the three months ended March 31, 2012 and 2011, respectively. Bonuses to directors were expensed based on estimated amount of payment. If the actual amounts subsequently resolved by the shareholders differ from the estimated amounts, the differences are recorded in the year of shareholders’ resolution as a change in accounting estimate. If profit sharing is resolved to be distributed to employees in stock, the number of shares is determined by dividing the amount of profit sharing by the closing price (after considering the effect of dividends) of the shares on the day preceding the shareholders’ meeting.

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

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

 

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

The appropriations of earnings for 2011 and 2010 had been approved in TSMC’s Board of Directors’ meeting held on February 14, 2012 and TSMC’s shareholders’ meeting held on June 9, 2011, respectively. The appropriations and dividends per share were as follows:

 

		Appropriation of Earnings								Dividends Per Share (NT$)
		For Fiscal Year 2011				For Fiscal Year 2010				For Fiscal Year 2011				For Fiscal Year 2010
Legal capital reserve		$	13,420,128			$	16,160,501
Special capital reserve			1,172,350				5,120,827
Cash dividends to shareholders			77,748,668				77,730,236			$	3.00			$	3.00
		$	92,341,146			$	99,011,564

TSMC’s Board of Directors also resolved on February 14, 2012 to appropriate profit sharing to employees and bonus to directors in the amounts of NT$8,990,026 thousand and NT$62,324 thousand in cash for 2011, respectively. There is no significant difference between the aforementioned resolved amounts and the amounts charged against earnings of 2011.

The appropriations of earnings, profit sharing to employees and bonus to directors for 2011 are to be resolved in the TSMC’s shareholders’ meeting held on June 12, 2012 (expected).

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

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

Under the Integrated Income Tax System that became effective on January 1, 1998, 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.

 

23.	STOCK-BASED COMPENSATION PLANS

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

 

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Options of the plans that had never been granted or had been granted but subsequently canceled had expired as of March 31, 2012.

Information about TSMC’s outstanding options for the three months ended March 31, 2012 and 2011 was as follows:

 

		Number of Options (In Thousands)				Weighted- average Exercise Price (NT$)
Three months ended March 31, 2012
Balance, beginning of period			14,293			$	32.1
Options exercised			(4,382	)			31.1
Balance, end of period			9,911				32.6
Three months ended March 31, 2011
Balance, beginning of period			21,437			$	32.3
Options exercised			(4,115	)			30.9
Balance, end of period			17,322				32.6

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

As of March 31, 2012, information about TSMC’s outstanding options was as follows:

 

		Options Outstanding
Range of Exercise Price (NT$)		Number of Options (In Thousands)				Weighted-average Remaining Contractual Life (Years)				Weighted-average Exercise Price (NT$)
$20.9-$29.3			6,972				1.1			$	27.0
38.0-  50.1			2,939				2.7				45.7
			9,911				1.6				32.6

As of March 31, 2012, all of the above outstanding options were exercisable.

Xintec’s Employee Stock Option Plans, consisting of the Xintec 2007 Plan and Xintec 2006 Plan, were approved by the SFB on June 26, 2007 and July 3, 2006, respectively. The maximum number of options authorized to be granted under the Xintec 2007 Plan and Xintec 2006 Plan was 6,000 thousand each, with each option eligible to subscribe for one common share of Xintec when exercised. The options may be granted to qualified employees of Xintec or any of its subsidiaries. The options of all the plans are valid for ten years and exercisable at certain percentages subsequent to the second anniversary of the grant date.

 

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Information about Xintec’s outstanding options for the three months ended March 31, 2012 and 2011 was as follows:

 

		Number of Options (In Thousands)				Weighted- average Exercise Price (NT$)
Three months ended March 31, 2012
Balance, beginning of period			825			$	15.1
Options exercised			(203	)			17.6
Balance, end of period			622				14.3
Three months ended March 31, 2011
Balance, beginning of period			1,832			$	15.1
Options exercised			(642	)			14.3
Options canceled			(18	)			17.7
Balance, end of period			1,172				15.6

The exercise prices have been adjusted to reflect the distribution of earnings by Xintec in accordance with the plans.

As of March 31, 2012, information about Xintec’s outstanding and exercisable options was as follows:

 

		Options Outstanding												Options Exercisable
Range of Exercise Price (NT$)		Number of Options (In Thousands)				Weighted- average Remaining Contractual Life (Years)				Weighted- average Exercise Price (NT$)				Number of Options (In Thousands)				Weighted- average Exercise Price (NT$)
$10.9-$12.7			227				4.5			$	11.0				221			$	11.0
14.9-  18.8			395				5.4				16.2				390				16.2
			622				5.1				14.3				611				14.3

No compensation cost was recognized under the intrinsic value method for the three months ended March 31, 2012 and 2011. Had the Company used the fair value based method to evaluate the options using the Black-Scholes model, the valuation assumptions at the various grant dates and pro forma results of the Company for the three months ended March 31, 2012 and 2011 would have been as follows:

 

		TSMC		Xintec
Valuation assumptions:
Expected dividend yield		1.00%-3.44%		0.80%
Expected volatility		43.77%-46.15%		31.79%-47.42%
Risk free interest rate		3.07%-3.85%		1.88%-2.45%
Expected life		5 years		3 years

 

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		Three Months Ended March 31
		2012				2011
Net income attributable to shareholders of the parent:
As reported		$	33,474,187			$	36,277,773
Pro forma			33,402,682				36,273,711
Earnings per share (EPS) - after income tax (NT$):
Basic EPS as reported		$	1.29			$	1.40
Pro forma basic EPS			1.29				1.40
Diluted EPS as reported			1.29				1.40
Pro forma diluted EPS			1.29				1.40

The Board of Directors of TSMC SSL and TSMC Solar resolved on November 21, 2011 to issue new shares for cash and reserved 17,175 thousand shares and 12,341 thousand shares, respectively, for their employees to subscribe to, according to the Company Law. The aforementioned shares were fully vested on the grant date.

Information about TSMC SSL’s and TSMC Solar’s employee stock options related to the aforementioned new shares issued was as follows:

 

		TSMC SSL								TSMC Solar
		Number of Options (In Thousands)				Weighted- average Exercise Price (NT$)				Number of Options (In Thousands)				Weighted- average Exercise Price (NT$)
Three months ended March 31, 2012
Balance, beginning of period			—			$	—				—			$	—
Options granted			17,175				10.0				12,341				10.0
Options exercised			(17,175	)			10.0				(12,341	)			10.0
Balance, end of period			—				—				—				—

The grant date of aforementioned stock options was January 9, 2012. TSMC SSL and TSMC Solar used the Black-Scholes model to determine the fair value of the options. The valuation assumptions were as follows:

 

		TSMC SSL				TSMC Solar
Valuation assumptions:
Stock price on grant date (NT$/share)		$	8.9			$	9.0
Exercise price (NT$/share)		$	10.0			$	10.0
Expected volatility			40.32	%			40.32	%
Expected life			40 days				40 days
Risk free interest rate			0.76	%			0.76	%

The stock price on grant date was determined based on the cost approach. The expected volatility was calculated using the historical rate of return based on the TSE Optoelectronic Index.

The fair value of the aforementioned stock option was close to nil, and accordingly, no compensation cost was recognized.

 

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24.	EARNINGS PER SHARE

EPS is computed as follows:

 

										Number of				EPS (NT$)
		Amounts (Numerator)								Shares				Before				After
		Before Income Tax				After Income Tax				(Denominator) (In Thousands)				Income Tax				Income Tax
Three months ended March 31, 2012
Basic EPS
Earnings available to common shareholders of the parent		$	35,776,923			$	33,474,187				25,917,646			$	1.38			$	1.29
Effect of dilutive potential common shares			—				—				8,800
Diluted EPS
Earnings available to common shareholders of the parent (including effect of dilutive potential common shares)		$	35,776,923			$	33,474,187				25,926,446			$	1.38			$	1.29
Three months ended March 31, 2011
Basic EPS
Earnings available to common shareholders of the parent		$	40,139,062			$	36,277,773				25,912,506			$	1.55			$	1.40
Effect of dilutive potential common shares			—				—				11,060
Diluted EPS
Earnings available to common shareholders of the parent (including effect of dilutive potential common shares)		$	40,139,062			$	36,277,773				25,923,566			$	1.55			$	1.40

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

The average number of shares outstanding for EPS calculation has been considered for the effect of retrospective adjustments. This adjustment caused each of the basic and diluted after income tax EPS for the three months ended March 31, 2011 to remain at NT$1.40.

 

25.	DISCLOSURES FOR FINANCIAL INSTRUMENTS

 

a.

Fair values of financial instruments were as follows:

 

		March 31
		2012								2011
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
Assets
Financial assets at fair value through profit or loss		$	1,658			$	1,658			$	12,283			$	12,283
Available-for-sale financial assets			3,577,801				3,577,801				29,600,562				29,600,562
Held-to-maturity financial assets			8,284,430				8,328,272				13,081,323				13,206,182
Financial assets carried at cost			4,180,185				—				4,209,597				—

 

(Continued)

 

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		March 31
		2012								2011
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
Liabilities
Financial liabilities at fair value through profit or loss		$	61,038			$	61,038			$	48,850			$	48,850
Hedging derivative financial liabilities			135				135				676				676
Bonds payable (including current portion)			35,000,000				35,248,224				4,500,000				4,542,890
Long-term bank loans (including current portion)			1,650,000				1,650,000				1,281,321				1,281,321
Other long-term payables (including current portion)			1,910,008				1,910,008				7,984,296				7,984,296
Obligations under capital leases (including current portion)			772,414				772,414				678,403				678,403

(Concluded)

 

b.

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

 

1)

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

 

2)

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

 

3)

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

 

4)

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

 

5)

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

 

6)

Fair values of long-term bank loans, other long-term payables and obligations under capital leases were based on the present value of expected cash flows, which approximate their carrying amounts.

 

c.

Valuation gains (losses) arising from changes in fair value of derivatives contracts determined using valuation techniques were recognized as a net loss of NT$59,380 thousand and NT$36,567 thousand for the three months ended March 31, 2012 and 2011, respectively.

 

d.

As of March 31, 2012 and 2011, financial assets exposed to fair value interest rate risk were NT$8,290,016 thousand and NT$38,127,088 thousand, respectively; financial liabilities exposed to fair value interest rate risk were NT$72,283,531 thousand and NT$46,346,763 thousand, respectively; and financial liabilities exposed to cash flow interest rate risk were NT$1,650,135 thousand and NT$1,281,321 thousand, respectively.

 

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e.

Movements of the unrealized gains or losses on financial instruments for the three months ended March 31, 2012 and 2011 were as follows:

 

		Three Months Ended March 31, 2012
		From Available- for-sale Financial Assets				Equity Method Investments				Gain (Loss) on Cash Flow Hedges				Total
Balance, beginning of period		$	(1,155,091	)		$	(17,671	)		$	(93	)		$	(1,172,855	)
Recognized directly in shareholders’ equity			354,534				15,012				—				369,546
Removed from shareholders’ equity and recognized in earnings			(79,977	)			—				39				(79,938	)
Balance, end of period		$	(880,534	)		$	(2,659	)		$	(54	)		$	(883,247	)

 

		Three Months Ended March 31, 2011
		From Available- for-sale Financial Assets				Equity Method Investments				Gain (Loss) on Cash Flow Hedges				Total
Balance, beginning of period		$	86,158			$	23,462			$	(331	)		$	109,289
Recognized directly in shareholders’ equity			56,915				(13,204	)			57				43,768
Removed from shareholders’ equity and recognized in earnings			(108,184	)			—				—				(108,184	)
Balance, end of period		$	34,889			$	10,258			$	(274	)		$	44,873

 

f.

Information about financial risks

 

1)

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

 

2)

Credit risk. Credit risk represents the potential loss that would be incurred by the Company if the counter-parties or third-parties breached contracts. Financial instruments with positive fair values at the balance sheet date are evaluated for credit risk. The Company evaluated whether the financial instruments for any possible counter-parties or third-parties are reputable financial institutions, business enterprises and government agencies and accordingly, the Company believed that the Company’s exposure to credit risk was not significant.

 

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3)

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

 

4)

Cash flow interest rate risk. The Company mainly invests in fixed-interest-rate debt securities. Therefore, cash flows are not expected to fluctuate significantly due to changes in market interest rates. The long-term bank loans were floating-rate loans; therefore, changes in the market interest rates will result in changes in the interest rate of the long-term bank loans, which will affect future cash flows.

 

g.

The Company seeks to reduce the effects of future cash flow related interest rate changes by primarily using derivative financial instruments.

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. Information about outstanding interest rate swap contract consisted of the following:

 

Hedged Item

Hedging Financial Instrument

Fair Value

Expected Cash Flow Generated Period

Expected Timing for the Recognition of Gains or Losses from Hedge

March 31, 2012

Long-term bank loans

Interest rate swap contract

$

(135

)

2011 to 2012

2011 to 2012

March 31, 2011

Long-term bank loans

Interest rate swap contract

(676

)

2010 to 2012

2010 to 2012

 

26.	RELATED PARTY TRANSACTIONS

Except as disclosed in the consolidated financial statements and other notes, the following is a summary of significant related party transactions:

 

a.

Investees of TSMC

GUC (prior to July 2011, GUC was a subsidiary. Since July 2011, GUC is accounted for using the equity method.)

VIS (accounted for using the equity method)

SSMC (accounted for using the equity method)

 

b.

Indirect investee

VisEra Technology Company, Ltd. (VisEra), an indirect investee accounted for using the equity method by TSMC.

Mcube, an indirect investee accounted for using the equity method by TSMC.

 

c.

Others

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

 

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		2012								2011
		Amount				%				Amount				%
For the three months ended March 31
Sales
GUC		$	1,067,692				1			$	—				—
VIS			62,072				—				48,962				—
Others			18,112				—				3,322				—
		$	1,147,876				1			$	52,284				—
Purchases
SSMC		$	873,056				2			$	955,937				2
VIS			732,490				1				1,333,377				2
Others			—				—				65,792				—
		$	1,605,546				3			$	2,355,106				4
Manufacturing expenses
VisEra (primarily outsourcing)		$	4,703				—			$	21,173				—
VIS (primarily rent)			—				—				7,104				—
		$	4,703				—			$	28,277				—
Research and development expense
VisEra		$	1,814				—			$	5,366				—
VIS (primarily rent)			—				—				1,999				—
		$	1,814				—			$	7,365				—
Sales of property, plant and equipment and other assets
VisEra		$	9,000				68			$	—				—
VIS			—				—				35,208				9
		$	9,000				68			$	35,208				9
Purchase of property, plant and equipment
VisEra		$	—				—			$	11,110				—
Non-operating income and gains
VIS (primarily technical service income)		$	54,829				5			$	68,905				4
SSMC (primarily technical service income)			52,326				4				44,817				2
Others			39				—				—				—
		$	107,194				9			$	113,722				6
As of March 31
Receivables
GUC		$	640,578				99			$	—				—
Mcube			6,357				1				737				57
VisEra			379				—				564				43
		$	647,314				100			$	1,301				100

 

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		2012								2011
		Amount				%				Amount				%
Other receivables
SSMC		$	1,192,278				92			$	45,415				23
VIS			99,977				7				153,680				77
Others			9,450				1				—				—
		$	1,301,705				100			$	199,095				100
Payables
VIS		$	519,259				57			$	954,914				67
SSMC			382,415				42				395,820				28
Others			4,643				1				77,066				5
		$	906,317				100			$	1,427,800				100

The sales prices and payment terms to related parties were not significantly different from those of sales to third parties. For other related party transactions, prices and terms were determined in accordance with mutual agreements.

The Company leased certain office space and facilities from VIS. The lease terms and prices were determined in accordance with mutual agreements. The rental expense was paid monthly and the related expenses were classified under research and development expenses and manufacturing expenses. The lease expired in April 2011.

 

27.	PLEDGED OR MORTGAGED ASSETS

The Company provided certain assets as collateral mainly for long-term bank loans, land lease agreements and customs duty guarantee, which were as follows:

 

		March 31
		2012				2011
Other financial assets		$	118,296			$	118,418
Property, plant and equipment, net			—				1,048,102
Other assets			—				20,000
		$	118,296			$	1,186,520

 

28.	SIGNIFICANT LONG-TERM LEASES

The Company leases several parcels of land, factory and office premises from the Science Park Administration and Jhongli Industrial Park Service Center. These operating leases expire on various dates from April 2012 to January 2032 and can be renewed upon expiration.

The Company entered into lease agreements for its office premises and certain office equipment located in the United States, Japan, Shanghai and Taiwan. These operating leases expire between 2012 and 2020 and can be renewed upon expiration.

 

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As of March 31, 2012, future lease payments were as follows:

 

Year		Amount
2012 (2nd to 4th quarter)		$	478,646
2013			602,305
2014			575,138
2015			564,884
2016			553,294
2017 and thereafter			4,023,254
		$	6,797,521

 

29.	SIGNIFICANT COMMITMENTS AND CONTINGENCIES

Significant commitments and contingencies of the Company as of March 31, 2012, excluding those disclosed in other notes, were as follows:

 

a.

Under a technical cooperation agreement with Industrial Technology Research Institute, the R.O.C. Government or its designee approved by TSMC can use up to 35% of TSMC’s capacity if TSMC’s outstanding commitments to its customers are not prejudiced. The term of this agreement is for five years beginning from January 1, 1987 and is automatically renewed for successive periods of five years unless otherwise terminated by either party with one year prior notice.

 

b.

Under several foundry agreements, TSMC shall reserve a portion of its production capacity for certain major customers that have guarantee deposits with TSMC. As of March 31, 2012, TSMC had a total of US$11,330 thousand of guarantee deposits.

 

c.

Under a Shareholders Agreement entered into with Philips and EDB Investments Pte Ltd. on March 30, 1999, the parties formed a joint venture company, SSMC, which is an integrated circuit foundry in Singapore. TSMC’s equity interest in SSMC was 32%. Nevertheless, Philips parted with its semiconductor company which was renamed as NXP B.V. in September 2006. TSMC and NXP B.V. purchased all the SSMC shares owned by EDB Investments Pte Ltd. pro rata according to the Shareholders Agreement on November 15, 2006. After the purchase, TSMC and NXP B.V. currently own approximately 39% and 61% of the SSMC shares respectively. TSMC and Philips (now NXP B.V.) are required, in the aggregate, to purchase at least 70% of SSMC’s capacity, but TSMC alone is not required to purchase more than 28% of the capacity. If any party defaults on the commitment and the capacity utilization of SSMC fall below a specific percentage of its capacity, the defaulting party is required to compensate SSMC for all related unavoidable costs.

 

d.

In August 2006, TSMC filed a lawsuit against Semiconductor Manufacturing International Corporation, SMIC (Shanghai) and SMIC Americas (aggregately referred to as “SMIC”) in the Superior Court of California for Alameda County for breach of a 2005 agreement that settled an earlier trade secret misappropriation and patent infringement litigation between the parties, as well as for trade secret misappropriation, seeking injunctive relief and monetary damages. In September 2006, SMIC filed a cross-complaint against TSMC in the same court alleging breach of settlement agreement, implied covenant of good faith and fair dealing. SMIC also filed a civil action against TSMC in November 2006 with the Beijing People’s High Court alleging defamation and breach of good faith. On June 10, 2009, the Beijing People’s High Court ruled in favor of TSMC and dismissed SMIC’s lawsuit. On November 4, 2009, after a two-month trial, a jury in the California action found SMIC to have both breached the 2005 settlement agreement and misappropriated TSMC’s trade secrets. TSMC has subsequently settled both lawsuits with SMIC. Pursuant to the new settlement agreement, the parties have agreed to the entry of a stipulated judgment in favor of TSMC in the California action, and to the dismissal of SMIC’s appeal against the Beijing High Court’s finding in favor of TSMC. Under the new settlement agreement and the related stipulated judgment, SMIC has agreed to make cash payments by installments to TSMC totaling US$200 million, which

 

- 40 -

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are in addition to the US$135 million previously paid to TSMC under the 2005 settlement agreement, and, conditional upon relevant government regulatory approvals, to issue to TSMC a total of 1,789,493,218 common shares of Semiconductor Manufacturing International Corporation and a three-year warrant to purchase 695,914,030 common shares (subject to adjustment) of Semiconductor Manufacturing International Corporation at HK$1.30 per share (subject to adjustment). TSMC has received the approval from the Investment Commission of Ministry of Economic Affairs and acquired the above mentioned common shares in July 2010, which are recorded within available for sale financial assets, and obtained the subsequent cash settlement income in accordance with the agreement.

 

e.

In June 2010, Keranos, LLC. filed a lawsuit in the U.S. District Court for the Eastern District of Texas alleging that TSMC, TSMC North America, and several other leading technology companies infringe three expired U.S. patents. In response, TSMC, TSMC North America, and several co-defendants in the Texas case filed a lawsuit against Keranos in the U.S. District Court for the Northern District of California in November 2010, seeking a judgment declaring that they did not infringe the asserted patents, and that those patents are invalid. These two litigations have been consolidated into a single case in the U.S. District Court for the Eastern District of Texas. The outcome cannot be determined at this time.

 

f.

In December 2010, Ziptronix, Inc. filed a complaint in the U.S. District Court for the Northern District of California accusing TSMC, TSMC North America and one other company of allegedly infringing six U.S. patents. This litigation is in its very early stages and therefore the outcome of the case cannot be determined at this time.

 

g.

TSMC entered into an agreement with a counterparty in 2003 whereby TSMC China is obligated to purchase certain property, plant and equipment at the agreed-upon price within the contract period. If the purchase is not completed, TSMC China is obligated to compensate the counterparty for the loss incurred. The property, plant and equipment have been in use by TSMC China since 2004 and are being depreciated over their estimated service lives. The related obligation totaled NT$1,762,363 thousand and NT$6,942,466 thousand as of March 31, 2012 and 2011, respectively, which is included in other long-term payables.

 

h.

Amounts available under unused letters of credit as of March 31, 2012 were NT$95,244 thousand.

 

30.	EXCHANGE RATE INFORMATION OF FOREIGN-CURRENCY FINANCIAL ASSETS AND LIABILITIES

The significant financial assets and liabilities denominated in foreign currencies were as follows:

 

		March 31
		2012						2011
		Foreign Currencies (In Thousands)				Exchange Rate (Note)		Foreign Currencies (In Thousands)				Exchange Rate (Note)
Financial assets
Monetary items
USD		$	4,147,426			29.529		$	4,105,193			29.40-29.468
EUR			186,593			39.26-39.41			142,865			41.71-41.81
JPY			23,809,395			0.3579-0.3592			30,343,009			0.3541-0.3550
RMB			208,023			4.69			196,111			4.5-4.511

 

(Continued)

 

- 41 -

---

		March 31
		2012						2011
		Foreign Currencies (In Thousands)				Exchange Rate (Note)		Foreign Currencies (In Thousands)				Exchange Rate (Note)
Financial assets
Non-monetary items
USD		$	152,073			29.529		$	142,851			29.40-29.468
HKD			688,955			3.80			1,073,696			3.79
Investments accounted for using equity method
USD			271,675			29.529			320,411			29.468
Financial liabilities
Monetary items
USD			2,044,403			29.529			2,130,487			29.40-29.468
EUR			186,260			39.26-39.41			169,447			41.71-41.81
JPY			30,848,324			0.3579-0.3592			32,939,519			0.3541-0.3550
RMB			226,981			4.69			583,750			4.5-4.511

(Concluded)

Note: Exchange rate represents the number of N.T. dollars for which one foreign currency could be exchanged.

 

31.	PRE-DISCLOSURE OF THE ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS

According to the Rule No. 0990004943 issued by the Financial Supervisory Commission (FSC) on February 2, 2010, the Company is required to provide pre-disclosure regarding the adoption of the International Financial Reporting Standards (IFRSs) in the consolidated financial statements as follows.

 

a.

On May 14, 2009, the FSC announced the roadmap of IFRSs adoption for R.O.C. companies. Accordingly, starting 2013, companies with shares listed on the TSE 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) and issued by the FSC. To comply with the aforementioned amendments, the Company established a taskforce to monitor and execute the IFRSs adoption plan. The important plan items, responsible divisions and plan progress are listed as follows.

 

Plan Item		Responsible Division		Plan Progress
1)      Establish the IFRSs taskforce		Accounting division		Finished
2)      Complete the identification of GAAP differences and impact		Accounting division, finance division and employee benefit and payroll section		Finished

 

(Continued)

 

- 42 -

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Plan Item		Responsible Division		Plan Progress
3)      Complete the identification of consolidated entities under IFRSs		Accounting division		Finished
4)      Evaluate potential effect to business operations		Accounting division, finance division, employee benefit and payroll section and business system integration division		Finished
5)      Complete the preliminary evaluation of resources and budget needed for IFRSs adoption		Accounting division and business system integration division		Finished
6)      Set up a work plan for IFRSs adoption		Accounting division and business system integration division		Finished
7)      Personnel training		Accounting division		Finished
8)      Determine IFRSs accounting policies		Accounting division, finance division and employee benefit and payroll section		Finished
9)      Develop financial statement template under IFRSs		Accounting division and finance division		Finished
10)    Complete evaluation, configuration and testing of the IT systems		Accounting division and business system integration division		Finished
11)    Communicate with related departments on the impact of IFRSs adoption		Accounting division		Finished
12)    Complete the preparation of opening balance sheet under IFRSs		Accounting division		Finished
13)    Complete modification to the relevant internal controls		Accounting division and internal audit division		In progress according to the plan
14)    Prepare comparative financial information under IFRSs for 2012		Accounting division and finance division		In progress according to the plan

(Concluded)

 

- 43 -

---

b.

Exemptions from IFRS 1

IFRS 1, “First-time Adoption of International Financial Reporting Standards,” establishes the procedures for the Company’s first consolidated financial statements prepared in accordance with IFRSs. According to IFRS 1, the Company is required to determine the accounting policies under IFRSs and retrospectively apply to those accounting policies in its opening balance sheet at the date of transition to IFRSs (January 1, 2012; the transition date); except for optional exemptions and mandatory exceptions to such retrospective application provided under IFRS 1. The main optional exemptions the Company adopted are summarized as follows:

 

1)

Business combinations. The Company elected not to apply IFRS 3, “Business Combinations,” retrospectively to business combinations occurred before January 1, 2012. Therefore, in the opening balance sheet, the amount of goodwill generated from past business combinations remains the same compared with the one under R.O.C. GAAP as of December 31, 2011.

 

2)

Employee benefits. The Company elected to recognize all cumulative actuarial gains and losses in retained earnings as of January 1, 2012. In addition, the Company elected to apply the exemption disclosure requirement provided by IFRS 1, in which the amounts of present value of defined benefit obligations, the fair value of plan assets, the surplus or deficit in the plan and the experience adjustments are determined for each accounting period prospectively from the transition date.

 

3)

Share-based payment. The Company elected to take the optional exemption from applying IFRS 2, “Share-based Payment,” retrospectively for the shared-based payment transactions granted and vested before January 1, 2012.

 

c.

As of March 31, 2012, based on the Company’s assessment, the significant differences between the Company’s current accounting policies under R.O.C. GAAP and the ones under IFRSs are stated as follows:

 

1)

Reconciliation of consolidated balance sheet as of January 1, 2012

 

						Effect of Transition to IFRSs
R.O.C. GAAP						Recognition and Measurement				Presentation				IFRSs
Item		Amount				Difference				Difference				Amount				Item		Note
Current assets
Cash and cash equivalents		$	143,472,277			$	—			$	—			$	143,472,277			Cash and cash equivalents
Financial assets at fair value through profit or loss			15,360				—				—				15,360			Financial assets at fair value through profit or loss
Available-for-sale financial assets			3,308,770				—				—				3,308,770			Available-for-sale financial assets
Held-to-maturity financial assets			3,825,680				—				—				3,825,680			Held-to-maturity financial assets
Receivables from related parties			185,764				—				—				185,764			Receivables from related parties
Notes and accounts receivable			46,321,240				—				(490,952	)			45,830,288			Notes and accounts receivable
Allowance for doubtful receivables			(490,952	)			—				490,952				—			—
Allowance for sales returns and others			(5,068,263	)			—				5,068,263				—			—		a)
Other receivables from related parties			122,292				—				—				122,292			Other receivables from related parties
Other financial assets			617,142				—				—				617,142			Other receivables
Inventories			24,840,582				—				—				24,840,582			Inventories
Deferred income tax assets			5,936,490				—				(5,936,490	)			—			—		b)
Prepaid expenses and other current assets			2,174,014				—				—				2,174,014			Other current asset
Total current assets			225,260,396				—				(868,227	)			224,392,169			Total current assets
Long-term investments
Investments accounted for using equity method			24,900,332				(13,401	)			—				24,886,931			Investments accounted for using equity method		e)
Held-to-maturity financial assets			5,243,167				—				—				5,243,167			Held-to-maturity financial assets

 

(Continued)

 

- 44 -

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						Effect of Transition to IFRSs
R.O.C. GAAP						Recognition and Measurement				Presentation				IFRSs
Item		Amount				Difference				Difference				Amount				Item		Note
Financial assets carried at cost		$	4,315,005			$	—			$	—			$	4,315,005			Financial assets carried at cost
Total long-term investments			34,458,504				(13,401	)			—				34,445,103			Total long-term investments
Net property, plant and equipment			490,374,916				—				47,237				490,422,153			Property, plant and equipment		c)
Intangible assets			10,861,563				—				—				10,861,563			Intangible assets
Other assets
Deferred income tax assets			7,436,717				231,011				5,936,490				13,604,218			Deferred income tax assets		b), d)
Refundable deposits			4,518,863				—				—				4,518,863			Refundable deposits
Others			1,353,983				—				(47,237	)			1,306,746			Others		c)
Total other assets			13,309,563				231,011				5,889,253				19,429,827			Total other assets
Total		$	774,264,942			$	217,610			$	5,068,263			$	779,550,815			Total
Current liabilities
Short-term loans		$	25,926,528			$	—			$	—			$	25,926,528			Short-term loans
Financial liabilities at fair value through profit or loss			13,742				—				—				13,742			Financial liabilities at fair value through profit or loss
Hedging derivative financial liabilities			232				—				—				232			Hedging derivative financial liabilities
Accounts payable			10,530,487				—				—				10,530,487			Accounts payable
Payables to related parties			1,328,521				—				—				1,328,521			Payables to related parties
Income tax payable			10,656,124				—				—				10,656,124			Income tax payable
Salary and bonus payable			6,148,499				—				—				6,148,499			Salary and bonus payable
Accrued profit sharing to employees and bonus to directors and supervisors			9,081,293				—				—				9,081,293			Accrued profit sharing to employees and bonus to directors and supervisors
Payables to contractors and equipment suppliers			35,540,526				—				—				35,540,526			Payables to contractors and equipment suppliers
Accrued expenses and other current liabilities			13,218,235				—				—				13,218,235			Accrued expenses and other current liabilities
Current portion of bonds payable and long-term bank loans			4,562,500				—				—				4,562,500			Current portion of bonds payable and long-term bank loans
—			—				—				5,068,263				5,068,263			Provisions		a)
Total current liabilities			117,006,687				—				5,068,263				122,074,950			Total current liabilities
Long-term liabilities
Bonds payable			18,000,000				—				—				18,000,000			Bonds payable
Long-term bank loans			1,587,500				—				—				1,587,500			Long-term bank loans
Obligations under capital leases			870,993				—				—				870,993			Obligations under capital leases
Total long-term liabilities			20,458,493				—				—				20,458,493			Total long-term liabilities
Other liabilities
Accrued pension cost			3,908,508				2,332,516				—				6,241,024			Accrued pension cost		d)
Guarantee deposits			443,983				—				—				443,983			Guarantee deposits
—			—				—				2,889				2,889			Provisions
Others			403,720				—				(2,889	)			400,831			Others
Total other liabilities			4,756,211				2,332,516				—				7,088,727			Total other liabilities
Total liabilities			142,221,391				2,332,516				5,068,263				149,622,170			Total liabilities
Equity attributable to shareholders of the parent
Capital stock			259,162,226				—				—				259,162,226			Capital stock
Capital surplus			55,846,357				(374,695	)			—				55,471,662			Capital surplus		e)
Retained earnings																		Retained earnings
Appropriated as legal capital reserve			102,399,995				—				—				102,399,995			Appropriated as legal capital reserve
Appropriated as special capital reserve			6,433,874				—				—				6,433,874			Appropriated as special capital reserve
Unappropriated earnings			213,357,286				(1,726,828	)			—				211,630,458			Unappropriated earnings		d), e)
			322,191,155				(1,726,828	)			—				320,464,327
Others
Cumulative translation adjustments			(6,433,369	)			5				—				(6,433,364	)		Foreign currency translation reserve		e)
Unrealized gain (loss) on financial instruments			(1,172,855	)			—				93				(1,172,762	)		Unrealized gain (loss) from available-for-sales financial assets
—			—				—				(93	)			(93	)		Cash flow hedging reserve
			(7,606,224	)			5				—				(7,606,219	)
Equity attributable to shareholders of the parent		$	629,593,514			$	(2,101,518	)		$	—			$	627,491,996			Equity attributable to shareholders of the parent
Minority interests			2,450,037				(13,388	)			—				2,436,649			Noncontrolling interests
Total shareholders’ equity			632,043,551				(2,114,906	)			—				629,928,645			Total shareholders’ equity
Total		$	774,264,942			$	217,610			$	5,068,263			$	779,550,815			Total

(Concluded)

 

- 45 -

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2)

Reconciliation of consolidated balance sheet as of March 31, 2012

 

						Effect of Transition to IFRSs
R.O.C. GAAP						Recognition and Measurement				Presentation				IFRSs
Item		Amount				Difference				Difference				Amount				Item		Note
Current assets
Cash and cash Equivalents		$	170,819,939			$	—			$	—			$	170,819,939			Cash and cash equivalents
Financial assets at fair value through profit or loss			1,658				—				—				1,658			Financial assets at fair value through profit or loss
Available-for-sale financial assets			3,577,801				—				—				3,577,801			Available-for-sale financial assets
Held-to-maturity financial assets			6,253,618				—				—				6,253,618			Held-to-maturity financial assets
Receivables from related parties			647,314				—				—				647,314			Receivables from related parties
Notes and accounts receivable			53,286,548				—				(490,882	)			52,795,666			Notes and accounts receivable
Allowance for doubtful receivables			(490,882	)			—				490,882				—			—
Allowance for sales returns and others			(5,428,410	)			—				5,428,410				—			—		a)
Other receivables from related parties			1,301,705				—				—				1,301,705			Other receivables from related parties
Other financial assets			571,010				—				—				571,010			Other receivables
Inventories			27,759,150				—				—				27,759,150			Inventories
Deferred income tax assets			6,736,065				—				(6,736,065	)			—			—		b)
Prepaid expenses and other current assets			3,087,516				—				—				3,087,516			Other current assets
Total current assets			268,123,032				—				(1,307,655	)			266,815,377			Total current assets
Long-term investments
Investments accounted for using equity method			23,632,874				(52,765	)			—				23,580,109			Investments accounted for using equity method		e)
Held-to-maturity financial assets			2,030,812				—				—				2,030,812			Held-to-maturity financial assets
Financial assets carried at cost			4,180,185				—				—				4,180,185			Financial assets carried at cost
Total long-term investments			29,843,871				(52,765	)			—				29,791,106			Total long-term investments
Net property, plant and equipment			509,916,462				—				37,042				509,953,504			Property, plant and equipment		c)
Intangible assets			10,969,136				—				—				10,969,136			Intangible assets
Other assets
Deferred income tax assets			7,245,201				229,265				6,736,065				14,210,531			Deferred income tax assets		b), d)
Refundable deposits			4,527,507				—				—				4,527,507			Refundable deposits
Others			1,265,176				—				(37,042	)			1,228,134			Others		c)
Total other assets			13,037,884				229,265				6,699,023				19,966,172			Total other assets
Total		$	831,890,385			$	176,500			$	5,428,410			$	837,495,295			Total
Current liabilities
Short-term loans		$	34,687,716			$	—			$	—			$	34,687,716			Short-term loans
Financial liabilities at fair value through profit or loss			61,038				—				—				61,038			Financial liabilities at fair value through profit or loss
Hedging derivative financial liabilities			135				—				—				135			Hedging derivative financial liabilities
Accounts payable			13,262,122				—				—				13,262,122			Accounts payable
Payables to related parties			906,317				—				—				906,317			Payables to related parties
Income tax payable			13,511,557				—				—				13,511,557			Income tax payable

 

(Continued)

 

- 46 -

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						Effect of Transition to IFRSs
R.O.C. GAAP						Recognition and Measurement				Presentation				IFRSs
Item		Amount				Difference				Difference				Amount				Item		Note
Accrued profit sharing to employees and bonus to directors and supervisors		$	11,327,679			$	—			$	—			$	11,327,679			Accrued profit sharing to employees and bonus to directors
Payables to contractors and equipment suppliers			34,070,990				—				—				34,070,990			Payables to contractors and equipment suppliers
Accrued expenses and other current liabilities			18,279,337				—				—				18,279,337			Accrued expenses and other current liabilities
Current portion of bonds payable and long-term bank loans			93,750				—				—				93,750			Current portion of bonds payable and long-term bank loans
—			—				—				5,428,410				5,428,410			Provisions		a)
Total current liabilities			126,200,641				—				5,428,410				131,629,051			Total current liabilities
Long-term liabilities
Bonds payable			35,000,000				—				—				35,000,000			Bonds payable
Long-term bank loans			1,556,250				—				—				1,556,250			Long-term bank loans
Other long-term payable			59,058				—				—				59,058			Other long-term payable
Obligations under capital leases			742,931				—				—				742,931			Obligations under capital leases
Total long-term liabilities			37,358,239				—				—				37,358,239			Total long-term liabilities
Other liabilities
Accrued pension cost			3,903,634				2,314,418				—				6,218,052			Accrued pension cost		d)
Guarantee deposits			405,594				—				—				405,594			Guarantee deposits
—			—				—				3,083				3,083			Provisions
Others			439,868				—				(3,083	)			436,785			Others
Total other liabilities			4,749,096				2,314,418				—				7,063,514			Total other liabilities
Total liabilities			168,307,976				2,314,418				5,428,410				176,050,804			Total liabilities
Equity attributable to shareholders of the parent
Capital stock			259,206,046				—				—				259,206,046			Capital stock
Capital surplus			56,008,374				(415,322	)			—				55,593,052			Capital surplus		e)
Retained earnings																		Retained earnings
Appropriated as legal capital reserve			102,399,995				—				—				102,399,995			Appropriated as legal capital reserve
Appropriated as special capital reserve			6,433,874				—				—				6,433,874			Appropriated as special capital reserve
Unappropriated earnings			246,831,473				(1,709,381	)			—				245,122,092			Unappropriated earnings		d), e)
			355,665,342				(1,709,381	)			—				353,955,961
Others
Cumulative translation adjustments			(9,064,188	)			16				—				(9,064,172	)		Foreign currency translation reserve		e)
Unrealized gain (loss) on financial instruments			(883,247	)			—				54				(883,193	)		Unrealized gain (loss) from available-for-sales financial assets
—			—				—				(54	)			(54	)		Cash flow hedging reserve
			(9,947,435	)			16				—				(9,947,419	)
Equity attributable to shareholders of the parent			660,932,327				(2,124,687	)			—				658,807,640			Equity attributable to shareholders of the parent
Minority interests			2,650,082				(13,231	)			—				2,636,851			Noncontrolling interests
Total shareholders’ equity			663,582,409				(2,137,918	)			—				661,444,491			Total shareholders’ equity
Total		$	831,890,385			$	176,500			$	5,428,410			$	837,495,295			Total

(Concluded)

 

- 47 -

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3)

Reconciliation of consolidated statement of comprehensive income for the three months ended March 31, 2012

 

						Effect of Transition to IFRSs
R.O.C. GAAP						Recognition and Measurement				Presentation				IFRSs
Item		Amount				Difference				Difference				Amount				Item		Note
Net sales		$	105,507,675			$	—			$	107,156			$	105,614,831			Net sales		f)
Cost of sales			55,221,092				(10,745	)			—				55,210,347			Cost of sales		d)
Gross profit before affiliates elimination			50,286,583				10,745				107,156				50,404,484			Gross profit before affiliates elimination
Realized gross profit from affiliates			74,029				—				—				74,029			Realized profit from affiliates
Gross profit			50,360,612				10,745				107,156				50,478,513			Gross profit
Operating expenses
Research and development			9,162,781				(4,929	)			—				9,157,852			Research and development		d)
General and administrative			4,659,024				(2,020	)			—				4,657,004			General and administrative		d)
Marketing			1,100,839				(404	)			—				1,100,435			Marketing		d)
Total operating expenses			14,922,644				(7,353	)			—				14,915,291
—			—				—				(445,909	)			(445,909	)		Other operating gains and losses		f)
Income from operations			35,437,968				18,098				(338,753	)			35,117,313			Income from operations
Non-operating income and gains
Interest income			501,236				—				(501,236	)			—			—		f)
Foreign exchange gain, net			429,743				—				—				429,743			Foreign exchange gain, net
Technical service income			107,156				—				(107,156	)			—			—		f)
Gain on settlement and Disposal of financial assets, net			73,591				—				(73,591	)			—			—		f)
Equity in earnings of equity method investees, net			20,952				1,252				—				22,204			Equity in earnings of equity method investees, net		e)
Gain on disposal of property, plant and equipment and other assets			2,235				—				(2,235	)			—			—		f)
Others			67,292				—				(67,292	)			—			—		f)
—			—				—				501,236				501,236			Other income		f)
—			—				—				(179,751	)			(179,751	)		Other gains and losses		f)
			1,202,205				1,252				(430,025	)			773,432
Non-operating expenses and losses
Impairment loss on idle assets			442,312				—				(442,312	)			—			—		f)
Valuation loss on Financial instruments, net			245,005				—				(245,005	)			—			—		f)
Interest expense			217,691				—				—				217,691			Finance cost
Impairment of financial assets			4,390				—				(4,390	)			—			—		f)
Loss on disposal of property, plant and equipment			3,730				—				(3,730	)			—			—		f)
Others			73,341				—				(73,341	)			—			—		f)
			986,469				—				(768,778	)			217,691
Income before income tax			35,653,704				19,350				—				35,673,054			Income before income tax
Income tax expense			(2,288,372	)			(1,746	)			—				(2,290,118	)		Income tax expense		d)
Net income		$	33,365,332			$	17,604			$	—				33,382,936			Net income
															(2,624,773	)		Exchange differences on translating foreign operations
															97			Cash flow hedges
															280,020			Net valuation gain on available-for-sale financial assets
															42,708			Share of other comprehensive income of associates and joint venture
															(2,301,948	)		Other comprehensive income for the period, net of tax effect
														$	31,080,988			Total comprehensive income for the period

 

- 48 -

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4)

Notes to the reconciliation of the significant differences:

 

a)

Allowance for sales returns and others

Under R.O.C. GAAP, provisions for estimated sales returns and others are recognized as a reduction in revenue in the period the related revenue is recognized based on historical experience. Allowance for sales returns and others is recorded as a deduction in accounts receivable. Under IFRSs, the allowance for sales returns and others is a present obligation with uncertain timing and an amount that arises from past events and is therefore reclassified as provisions (classified under current liabilities) in accordance with IAS No 37, “Provisions, Contingent Liabilities and Contingent Assets.”

As of March 31, 2012 and January 1, 2012, the amounts reclassified from allowance for sales returns and others to provisions were NT$5,428,410 thousand and NT$5,068,263 thousand, respectively.

 

b)

Classifications of deferred income tax asset/liability and valuation allowance

Under R.O.C. GAAP, a deferred tax asset and liability is classified as current or non-current in accordance with the classification of its related asset or liability. However, if a deferred income tax asset or liability does not relate to an asset or liability in the financial statements, it is classified as either current or non-current based on the expected length of time before it is realized or settled. Under IFRSs, a deferred tax asset and liability is classified as non-current asset or liability.

In addition, under R.O.C. GAAP, valuation allowances are provided to the extent, if any, that it is more likely than not that deferred income tax assets will not be realized. In accordance with IAS No 12, “Income Taxes,” deferred tax assets are only recognized to the extent that it is probable that there will be sufficient taxable profits and the valuation allowance account is no longer used.

As of March 31, 2012 and January 1, 2012, the amounts reclassified from deferred income tax assets to non-current assets were NT$6,736,065 thousand and NT$5,936,490 thousand, respectively.

 

c)

The classification of leased assets and idle assets

Under R.O.C. GAAP, leased assets and idle assets are classified under other assets. Under IFRSs, the aforementioned items are classified as property, plant and equipment according to their nature. Leased assets are mainly dormitories leased to employees and factories leased to suppliers. In accordance with IAS No 40, “Investment Property,” the dormitories leased to employees are not classified as investment properties; factories leased to suppliers are not considered as investment properties since they cannot be sold separately and comprise only an insignificant portion of the plant.

As of March 31, 2012 and January 1, 2012, the amounts reclassified from leased assets and idle assets to property, plant and equipment were NT$37,042 thousand and NT$47,237 thousand, respectively.

 

d)

Employee benefits

The Company had previously applied an actuarial valuation on its defined benefit obligation and recognized the related pension cost and retirement benefit obligation in conformity with R.O.C. GAAP. Under IFRSs, the Company should carry out actuarial valuation on defined benefit obligation in accordance with IAS No. 19, “Employee Benefits.”

 

- 49 -

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In addition, under R.O.C. GAAP, it is not allowed to recognize actuarial gains and losses from defined benefit plans directly to equity; instead, actuarial gains and losses should be accounted for under the corridor approach which resulted in the deferral of gains and losses. When using the corridor approach, actuarial gains and losses should be amortized over the expected average remaining working lives of the participating employees.

Under IAS No. 19, “Employee Benefits,” the Company elects to recognize actuarial gains and losses immediately in full in the period in which they occur, as other comprehensive income. The subsequent reclassification to earnings is not permitted.

At the transition date, the Company performed the actuarial valuation under IAS No. 19, “Employee Benefits,” and recognized the valuation difference directly to retained earnings under the requirement of IFRS 1. As of March 31, 2012 and January 1, 2012, accrued pension cost was adjusted for an increase of NT$2,314,418 thousand and NT$2,332,516 thousand, respectively; deferred income tax assets were adjusted for an increase of NT$229,265 thousand and NT$231,011 thousand, respectively. Pension cost and income tax expense for the three months ended March 31, 2012 were also adjusted for a decrease of NT$18,098 thousand and an increase of NT$1,746 thousand, respectively.

 

e)

Investments accounted for using the equity method

The Company has evaluated significant differences between current accounting policies and IFRSs for the Company’s associates and joint ventures accounted for using the equity method. The significant difference is mainly due to the adjustment to employee benefits.

In addition, if the investing company subscribes for additional investee’s shares at a percentage different from its existing ownership percentage that results in a decrease in the investing company’s holding percentage in the investee, the resulting carrying amount of the investment in the investee differs from the amount of its share in the investee’s equity. Under R.O.C. GAAP, the investing company records such a difference as an adjustment to long-term investments with the corresponding amount charged or credited to capital surplus. Under IFRSs, such transaction is deemed a disposal and aforementioned difference is recognized in earnings accordingly.

As of March 31, 2012 and January 1, 2012, as a result of the differences mentioned above, investment accounted for using the equity method was adjusted for a decrease of NT$52,765 thousand and NT$13,401 thousand, respectively; cumulative translation adjustments was adjusted for an increase of NT$16 thousand and NT$5 thousand, respectively; capital surplus was adjusted for a decrease of NT$415,322 thousand and NT$374,695 thousand, respectively. In addition, equity in earnings of equity method investees was adjusted for an increase of NT$1,252 thousand for the three months ended March 31, 2012.

 

f)

The reclassification of line items in the consolidated statement of comprehensive income

In accordance with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers before its amendment due to the adoption of IFRSs, income from operations in the consolidated income statement only includes net sales, cost of sales and operating expenses. Under IFRSs, based on the nature of operating transactions, technical service income is reclassified under net sales; rental revenue, depreciation of rental assets, net loss on disposal of property, plant and equipment and other assets, and impairment loss on idle assets, are reclassified under other operating gains and losses, which are reflected in income from operations.

 

- 50 -

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Under IFRSs, based on the nature of operating transactions, the Company reclassified technical service income of NT$107,156 thousand for the three months ended March 31, 2012 to net sales, rental revenue of NT$254 thousand, net loss on disposal of property, plant and equipment and other assets of NT$1,495 thousand, depreciation of rental assets of NT$2,356 thousand and impairment loss on idle assets of NT$442,312 thousand to other operating gains and losses. In addition, interest income of NT$501,236 thousand was also reclassified to other income; net gain of settlement and disposal of financial assets of NT$73,591 thousand, others of NT$67,038 thousand (under non-operating income and gains), net valuation loss on financial instruments of NT$245,005 thousand, impairment of financial assets of NT$4,390 thousand as well as others of NT$70,985 thousand (under non-operating expenses and losses) were reclassified to other gains and losses for the three months ended March 31, 2012.

 

d.

The Company’s aforementioned assessment is based on the 2010 version of IFRSs translated by ARDF and the Guidelines Governing the Preparation of Financial Reports by Securities Issuers issued by FSC on December 22, 2011. However, the assessment result may be impacted as FSC may issue new rules governing the adoption of IFRSs, and as other laws and regulations may be amended to comply with the adoption of IFRSs. Actual results may differ from these assessments.

 

32.	ADDITIONAL DISCLOSURES

Following are the additional disclosures required by the SFB for TSMC and its investees in which all significant intercompany balances and transactions are eliminated upon consolidation:

 

a.

Financings provided: Please see Table 1 attached;

 

b.

Endorsement/guarantee provided: None;

 

c.

Marketable securities held: Please see Table 2 attached;

 

d.

Marketable securities acquired or disposed of at costs or prices of at least NT$100 million or 20% of the paid-in capital: Please see Table 3 attached;

 

e.

Acquisition of individual real estate properties at costs of at least NT$100 million or 20% of the paid-in capital: Please see Table 4 attached;

 

f.

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

 

g.

Total purchases from or sales to related parties of at least NT$100 million or 20% of the paid-in capital: Please see Table 5 attached;

 

h.

Receivables from related parties amounting to at least NT$100 million or 20% of the paid-in capital: Please see Table 6 attached;

 

i.

Names, locations, and related information of investees over which TSMC exercises significant influence: Please see Table 7 attached;

 

j.

Information on investment in Mainland China

 

1)

The name of the investee in Mainland China, the main businesses and products, its issued capital, method of investment, information on inflow or outflow of capital, percentage of ownership, equity in the net gain or net loss, ending balance, amount received as dividends from the investee, and the limitation on investee: Please see Table 8 attached.

 

- 51 -

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2)

Significant direct or indirect transactions with the investee, its prices and terms of payment, unrealized gain or loss, and other related information which is helpful to understand the impact of investment in Mainland China on financial reports: Please see Table 9 attached.

 

k.

Intercompany relationships and significant intercompany transactions: Please see Table 9 attached.

 

33.	OPERATING SEGMENT INFORMATION

The Company’s only reportable segment is the foundry segment. The foundry segment engages mainly in the manufacturing, selling, packaging, testing and computer-aided design of integrated circuits and other semiconductor devices and the manufacturing of masks. The Company also had other operating segments that did not exceed the quantitative threshold. These segments mainly engage in the researching, developing, and providing SoC (System on Chip) design and also engage in the researching, developing, designing, manufacturing and selling of solid state lighting devices and renewable energy and efficiency related technologies and products.

The Company uses the operating profit as the measurement for segment profit and the basis of performance assessment. There was no material inconsistency between the accounting policies of the operating segment and the accounting policies described in Note 2.

The Company’s operating segment information was as follows:

 

		Foundry				Others				Elimination				Total
Three months ended March 31, 2012
Sales from external customers		$	105,461,676			$	45,999			$	—			$	105,507,675
Sales among intersegments			—				—				—				—
Operating profit (loss)			35,979,165				(541,197	)			—				35,437,968
Three months ended March 31, 2011
Sales from external customers			103,290,219				2,087,276				—				105,377,495
Sales among intersegments			703,023				6,224				(709,247	)			—
Operating profit (loss)			39,370,261				(207,281	)			—				39,162,980

 

34.	THE AUTHORIZATION OF FINANCIAL STATEMENTS

The financial statements were approved by the management on April 24, 2012.

 

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TABLE 1

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

FINANCINGS PROVIDED

FOR THE THREE MONTHS ENDED MARCH 31, 2012

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

 

 

		Financing		Counter-		Financial Statement		Maximum Balance for the Period (US$ in Thousands)				Ending Balance (US$ in Thousands)				Amount Actually Drawn (US$ in				Interest		Nature for		Transaction				Reason for		Allowance for Bad				Collateral								Financing Limits for Each Borrowing Company				Financing Company’s Total Financing Amount Limits
No.		Company		party		Account		(Note 3)				(Note 3)				Thousands)				Rate		Financing		Amounts				Financing		Debt				Item				Value				(Note 1)				(Note 2)
1		TSMC Partners		TSMC China		Long-term receivables from related parties		$	7,382,250			$	7,382,250			$	7,382,250			0.25%-0.26%		The need for short-term financing		$	—			Purchase equipment		$	—				—			$	—			$	34,664,194			$	34,664,194
								(US$	250,000	)		(US$	250,000	)		(US$	250,000	)
				TSMC Solar		Other receivables from related parties			1,181,160				1,181,160				723,461			0.4017%-0.4757%		The need for short-term financing			—			Operating capital			—				—				—				3,466,419
								(US$	40,000	)		(US$	40,000	)		(US$	24,500	)
				TSMC SSL		Other receivables from related parties			885,870				885,870				—			0.4545%		The need for short-term financing			—			Operating capital			—				—				—				3,466,419
								(US$	30,000	)		(US$	30,000	)

 

Note 1:

The total amount for lending to a company for funding for a short-term period shall not exceed ten percent (10%) of the net worth of TSMC Partners. In addition, the total amount lendable to any one borrower shall be no more than thirty percent (30%) of the borrower’s net worth. While offshore subsidiaries whose voting shares are 100% owned, directly or indirectly, by TSMC are not subject to the above restrictions. The restriction of thirty percent (30%) of the borrower’s net worth will not apply to subsidiaries whose voting shares are 90% or more owned, directly or indirectly, by TSMC.

Note 2:

The total amount available for lending purpose shall not exceed the net worth of TSMC Partners.

Note 3:

The maximum balance for the period and ending balance represents the amounts approved by Board of Directors.

 

- 53 -

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TABLE 2

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

MARKETABLE SECURITIES HELD

MARCH 31, 2012

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

 

 

								March 31, 2012
Held Company Name		Marketable Securities Type and Name		Relationship with the Company		Financial Statement Account		Shares/ Units (In Thousands)				Carrying Value (Foreign Currencies in Thousands)				Percentage of Ownership (%)				Market Value or Net Asset Value (Foreign Currencies in Thousands)				Note
TSMC		Corporate bond
		Nan Ya Plastics Corporation		—		Held-to-maturity financial assets			—			$	1,099,699				N/A			$	1,117,010
		China Steel Corporation		—		”			—				303,157				N/A				305,289
		Stock
		Semiconductor Manufacturing International Corporation		—		Available-for-sale financial assets			1,789,493				2,618,029				7				2,618,029
		TSMC Global		Subsidiary		Investments accounted for using equity method			1				43,137,920				100				43,137,920
		TSMC Partners		Subsidiary		”			988,268				34,664,194				100				34,664,194
		TSMC Solar		Subsidiary		”			1,118,000				9,456,531				99				9,456,531
		VIS		Investee accounted for using equity method		”			628,223				8,986,165				41				8,009,850
		SSMC		Investee accounted for using equity method		”			314				5,388,363				39				5,174,379
		TSMC SSL		Subsidiary		”			430,400				3,541,201				95				3,541,201
		TSMC North America		Subsidiary		”			11,000				3,035,002				100				3,035,002
		Xintec		Investee with a controlling financial interest		”			94,011				1,546,668				40				1,546,668
		GUC		Investee accounted for using equity method		”			46,688				1,191,165				35				5,182,352
		TSMC Europe		Subsidiary		”			—				213,849				100				213,849
		TSMC Japan		Subsidiary		”			6				149,861				100				149,861
		TSMC Korea		Subsidiary		”			80				23,468				100				23,468
		United Industrial Gases Co., Ltd.		—		Financial assets carried at cost			16,783				193,584				10				372,714
		Shin-Etsu Handotai Taiwan Co., Ltd.		—		”			10,500				105,000				7				348,269
		W.K. Technology Fund IV		—		”			4,000				40,000				2				42,581
		Fund
		Horizon Ventures Fund		—		Financial assets carried at cost			—				103,992				12				103,992
		Crimson Asia Capital		—		”			—				55,259				1				55,259
		Capital
		TSMC China		Subsidiary		Investments accounted for using equity method			—				14,095,161				100				14,115,767
		VTAF III		Subsidiary		”			—				1,437,397				53				1,416,270
		VTAF II		Subsidiary		”			—				740,533				98				734,522
		Emerging Alliance		Subsidiary		”			—				205,484				99				205,484
		TSMC GN		Subsidiary		”			—				84,751				100				84,751
TSMC Solar		Stock
		Motech		Investee accounted for using equity method		Investments accounted for using equity method			87,480				5,219,263				20				3,576,900
		TSMC Solar Europe		Subsidiary		”			—				168,129				100				168,129
		TSMC Solar NA		Subsidiary		”			1				35,897				100				35,897
		Capital
		VTAF III		Investee accounted for using equity method		Investments accounted for using equity method			—				1,640,461				46				1,640,461

 

(Continued)

 

- 54 -

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								March 31, 2012
Held Company Name		Marketable Securities Type and Name		Relationship with the Company		Financial Statement Account		Shares/ Units (In Thousands)				Carrying Value (Foreign Currencies in Thousands)				Percentage of Ownership (%)				Market Value or Net Asset Value (Foreign Currencies in Thousands)				Note
TSMC SSL		Stock
		TSMC Lighting NA		Subsidiary		Investments accounted for using equity method			1			$	2,912				100			$	2,912
TSMC GN		Stock
		TSMC Solar		Subsidiary		Investments accounted for using equity method			3,759				31,755				—				31,755
		TSMC SSL		Subsidiary		”			5,425				44,838				1				44,838
TSMC Partners		Corporate bond
		General Elec Cap Corp. Mtn		—		Held-to-maturity financial assets			—			US$	20,038				N/A			US$	20,496
		Stock
		TSMC Development, Inc. (TSMC Development)		Subsidiary		Investments accounted for using equity method			1			US$	470,564				100			US$	470,564
		VisEra Holding Company		Investee accounted for using equity method		”			43,000			US$	96,445				49			US$	96,445
		InveStar Semiconductor Development Fund, Inc. (ISDF)		Subsidiary		”			787			US$	14,041				97			US$	14,041
		TSMC Technology		Subsidiary		”			1			US$	10,942				100			US$	10,942
		InveStar Semiconductor Development Fund, Inc. (II) LDC. (ISDF II)		Subsidiary		”			14,153			US$	11,455				97			US$	11,455
		TSMC Canada		Subsidiary		”			2,300			US$	4,258				100			US$	4,258
		Mcube Inc.		Investee accounted for using equity method		”			6,333				—				25				—
		Fund
		Shanghai Walden Venture Capital Enterprise		—		Financial assets carried at cost			—			US$	5,000				8			US$	5,000
TSMC North America		Stock
		Spansion Inc.		—		Available-for-sale financial assets			270			US$	3,287				—			US$	3,287
TSMC Development		Corporate bond
		GE Capital Corp.		—		Held-to-maturity financial assets			—			US$	20,059				N/A			US$	20,496
		JP Morgan Chase & Co.		—		”			—			US$	15,000				N/A			US$	14,850
		Stock
		WaferTech		Subsidiary		Investments accounted for using equity method			293,640			US$	229,723				100			US$	229,723
Emerging Alliance		Common stock
		RichWave Technology Corp.		—		Financial assets carried at cost			4,074			US$	1,545				10			US$	1,545
		Global Investment Holding Inc.		—		”			11,124			US$	3,065				6			US$	3,065
		Preferred stock
		Audience, Inc.		—		Financial assets carried at cost			1,654			US$	250				—			US$	250
		Next IO, Inc.		—		”			8			US$	500				—			US$	500
		Pixim, Inc.		—		”			4,641			US$	1,137				2			US$	1,137
		QST Holdings, LLC		—		”			—			US$	142				4			US$	142
		Capital
		VentureTech Alliance Holdings, LLC (VTA Holdings)		Subsidiary		Investments accounted for using equity method			—				—				7				—
VTAF II		Common stock
		Aether Systems, Inc.		—		Financial assets carried at cost			1,800			US$	1,701				23			US$	1,701
		RichWave Technology Corp.		—		”			1,267			US$	1,036				3			US$	1,036
		Sentelic		—		”			1,806			US$	2,607				9			US$	2,607

 

(Continued)

 

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								March 31, 2012
Held Company Name		Marketable Securities Type and Name		Relationship with the Company		Financial Statement Account		Shares/ Units (In Thousands)				Carrying Value (Foreign Currencies in Thousands)				Percentage of Ownership (%)				Market Value or Net Asset Value (Foreign Currencies in Thousands)				Note
VTAF II		Preferred stock
		5V Technologies, Inc.		—		Financial assets carried at cost			2,890			US$	2,168				4			US$	2,168
		Aquantia		—		”			4,556			US$	4,316				3			US$	4,316
		Audience, Inc.		—		”			12,378			US$	2,378				3			US$	2,378
		Impinj, Inc.		—		”			475			US$	1,000				—			US$	1,000
		Next IO, Inc.		—		”			132			US$	1,110				2			US$	1,110
		Pixim, Inc.		—		”			33,347			US$	1,878				2			US$	1,878
		Power Analog Microelectronics		—		”			7,330			US$	3,482				21			US$	3,482
		QST Holdings, LLC		—		”			—			US$	593				13			US$	593
		Capital
		VTA Holdings		Subsidiary		Investments accounted for using equity method			—				—				31				—
VTAF III		Common stock
		Mutual-Pak Technology Co., Ltd.		Subsidiary		Investments accounted for using equity method			14,168			US$	1,771				58			US$	1,771
		InvenSense, Inc.		—		Available-for-sale financial assets			796			US$	14,415				1			US$	14,415
		Accton Wireless Broadband Corp.		—		Financial assets carried at cost			2,249			US$	315				6			US$	315
		Preferred stock
		BridgeLux, Inc.		—		Financial assets carried at cost			7,522			US$	9,379				3			US$	9,379
		GTBF, Inc.		—		”			1,154			US$	1,500				N/A			US$	1,500
		LiquidLeds Lighting Corp.		—		”			1,600			US$	800				11			US$	800
		Neoconix, Inc.		—		”			3,916			US$	4,779				4			US$	4,779
		Powervation, Ltd.		—		”			449			US$	7,030				16			US$	7,030
		Stion Corp.		—		”			8,152			US$	55,474				20			US$	55,474
		Tilera, Inc.		—		”			3,890			US$	3,025				2			US$	3,025
		Validity Sensors, Inc.		—		”			9,340			US$	3,456				4			US$	3,456
		Capital
		Growth Fund Limited (Growth Fund)		Subsidiary		Investments accounted for using equity method			—			US$	480				100			US$	480
		VTA Holdings		Subsidiary		”			—				—				62				—
Growth Fund		Common stock
		Veebeam		—		Financial assets carried at cost			10			US$	25				—			US$	25
ISDF		Common stock
		Integrated Memory Logic, Inc.		—		Available-for-sale financial assets			1,320			US$	4,743				2			US$	4,743
		Memsic, Inc.		—		”			1,286			US$	5,412				5			US$	5,412
		Preferred stock
		Sonics, Inc.		—		Financial assets carried at cost			230			US$	497				2			US$	497
ISDF II		Common stock
		Memsic, Inc.		—		Available-for-sale financial assets			1,072			US$	4,513				5			US$	4,513
		Alchip Technologies Limited		—		Financial assets carried at cost			7,520			US$	3,664				14			US$	3,664
		Sonics, Inc.		—		”			278			US$	10				3			US$	10
		Goyatek Technology, Corp.		—		”			745			US$	163				6			US$	163
		Auden Technology MFG. Co., Ltd.		—		”			1,049			US$	223				3			US$	223
		Preferred stock
		Sonics, Inc.		—		Financial assets carried at cost			264			US$	455				3			US$	455

 

(Continued)

 

- 56 -

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								March 31, 2012
Held Company Name		Marketable Securities Type and Name		Relationship with the Company		Financial Statement Account		Shares/ Units (In Thousands)				Carrying Value (Foreign Currencies in Thousands)				Percentage of Ownership (%)				Market Value or Net Asset Value (Foreign Currencies in Thousands)				Note
Xintec		Capital
		Compositech Ltd.		—		Financial assets carried at cost			587			$	—				3			$	—
TSMC Solar Europe		Stock
		TSMC Solar Europe GmbH		Subsidiary		Investments accounted for using equity method			1			EUR	4,186				100			EUR	4,186
TSMC Global		Corporate bond
		Aust + Nz Banking Group		—		Held-to-maturity financial assets			20,000			US$	20,000				N/A			US$	19,995
		Commonwealth Bank of Australia		—		”			25,000			US$	25,000				N/A			US$	24,796
		Commonwealth Bank of Australia		—		”			25,000			US$	25,000				N/A			US$	24,898
		Deutsche Bank AG London		—		”			20,000			US$	19,913				N/A			US$	20,225
		JP Morgan Chase + Co.		—		”			35,000			US$	35,036				N/A			US$	35,216
		Nationwide Building Society-UK Government Guarantee		—		”			8,000			US$	8,000				N/A			US$	8,001
		Westpac Banking Corp.		—		”			25,000			US$	25,000				N/A			US$	24,884
		Westpac Banking Corp. 12/12 Frn		—		”			5,000			US$	5,000				N/A			US$	5,012
		Government bond
		Societe De Financement De Lec		—		Held-to-maturity financial assets			15,000			US$	15,000				N/A			US$	15,003
		Money market fund
		Ssga Cash Mgmt Global Offshore		—		Available-for-sale financial assets			133			US$	133				N/A			US$	133

(Concluded)

 

- 57 -

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TABLE 3

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

MARKETABLE SECURITIES ACQUIRED AND DISPOSED OF AT COSTS OR PRICES OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL

FOR THE THREE MONTHS ENDED MARCH 31, 2012

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

 

 

												Beginning Balance								Acquisition								Disposal																Ending Balance (Note 2)
Company Name		Marketable Securities Type and Name		Financial Statement Account		Counter- party				Nature of Relationship		Shares/ Units (In Thousands)				Amount (Foreign Currencies in Thousands)				Shares/ Units (In Thousands) (Note 1)				Amount (Foreign Currencies in Thousands)				Shares/ Units (In Thousands)				Amount (Foreign Currencies in Thousands)				Carrying Value (Foreign Currencies in Thousands)				Gain (Loss) on Disposal (Foreign Currencies in Thousands)				Shares/ Units (In Thousands)				Amount (Foreign Currencies in Thousands)
TSMC		Stock
		TSMC SSL		Investments accounted for using equity method			—			Subsidiary			227,000			$	1,746,893				203,400			$	2,034,000				—			$	—			$	—			$	—				430,400			$	3,541,201
		TSMC GN		”			—			Subsidiary			—				—				—				100,000				—				—				—				—				—				84,751

 

Note 1:

The shares/units and amount of marketable securities acquired do not include stock dividends from investees.

Note 2:

The ending balance includes translation adjustments, equity in earnings/losses of equity method investees and other adjustments to long-term investments accounted for using equity method.

 

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TABLE 4

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

ACQUISITION OF INDIVIDUAL REAL ESTATE PROPERTIES AT COSTS OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL

FOR THE THREE MONTHS ENDED MARCH 31, 2012

(Amounts in Thousands of New Taiwan Dollars)

 

 

Company Name

Types of Property

Transaction Date

Transaction Amount

Payment Term

Counter- party

Nature of Relationships

Prior Transaction of Related Counter-party

Price Reference

Purpose of Acquisition

Other Terms

Owner

Relationships

Transfer Date

Amount

TSMC

Fab

January 1, 2012 to March 30, 2012

$

950,083

By the construction progress

Da Cin Construction Co., Ltd.

—

N/A

N/A

N/A

N/A

Public bidding

Manufacturing purpose

None

Fab

March 7, 2012 to March 29, 2012

372,426

By the construction progress

Fu Tsu Construction Co., Ltd.

—

N/A

N/A

N/A

N/A

Public bidding

Manufacturing purpose

None

Fab

March 19, 2012 to March 29, 2012

394,839

By the construction progress

China Steel Structure Co., Ltd.

—

N/A

N/A

N/A

N/A

Public bidding

Manufacturing purpose

None

 

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TABLE 5

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

TOTAL PURCHASES FROM OR SALES TO RELATED PARTIES OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL

FOR THE THREE MONTHS ENDED MARCH 31, 2012

(Amounts in Thousands of New Taiwan Dollars)

 

 

Company Name		Related Party		Nature of Relationships		Transaction Details												Abnormal Transaction								Notes/Accounts Payable or Receivable								Note
						Purchases/ Sales		Amount				% to Total				Payment Terms		Unit Price (Note)				Payment Terms (Note)				Ending Balance				% to Total
TSMC		TSMC North America		Subsidiary		Sales		$	64,861,377				61			Net 30 days after invoice date			—				—			$	32,359,734				62
		GUC		Investee accounted for using equity method		Sales			920,220				1			Net 30 days after monthly closing			—				—				552,558				1
		TSMC China		Subsidiary		Purchases			3,192,921				25			Net 30 days after monthly closing			—				—				(1,137,485	)			8
		WaferTech		Indirect subsidiary		Purchases			1,623,602				12			Net 30 days after monthly closing			—				—				(576,902	)			4
		SSMC		Investee accounted for using equity method		Purchases			873,056				7			Net 30 days after monthly closing			—				—				(382,415	)			3
		VIS		Investee accounted for using equity method		Purchases			732,490				6			Net 30 days after monthly closing			—				—				(519,259	)			3
Xintec		OmniVision		Parent company of director (represented for Xintec)		Sales			191,163				33			Net 30 days after monthly closing			—				—				107,690				40

 

Note:

The sales prices and payment terms to related parties were not significantly different from those of sales to third parties. For other related party transactions, prices and terms were determined in accordance with mutual agreements.

 

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TABLE 6

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

RECEIVABLES FROM RELATED PARTIES AMOUNTING TO AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL

MARCH 31, 2012

(Amounts in Thousands of New Taiwan Dollars)

 

 

Company Name		Related Party		Nature of Relationships		Ending Balance				Turnover Days (Note 1)				Overdue								Amounts Received in Subsequent Period				Allowance for Bad Debts
														Amount				Action Taken
TSMC		TSMC North America		Subsidiary		$	32,379,073				40			$	10,263,324				—			$	12,832,204			$	—
		SSMC		Investee accounted for using equity method			1,192,278				(Note 2	)			—				—				—				—
		GUC		Investee accounted for using equity method			552,558				33				535				—				283,209				—
Xintec		OmniVision		Parent company of director (represented for Xintec)			107,690				83				—				—				—				—

 

Note 1:

The calculation of turnover days excludes other receivables from related parties.

Note 2:

The ending balance is primarily consisted of other receivables, which is not applicable for the calculation of turnover days.

 

- 61 -

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TABLE 7

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

NAMES, LOCATIONS, AND RELATED INFORMATION OF INVESTEES OVER WHICH THE COMPANY EXERCISES SIGNIFICANT INFLUENCE

MARCH 31, 2012

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

 

 

Investor Company		Investee Company		Location		Main Businesses and Products		Original Investment Amount								Balance as of March 31, 2012												Net Income (Losses) of the Investee (Foreign Currencies in Thousands)				Equity in the Earnings (Losses) (Note 1) (Foreign Currencies in Thousands)				Note
								March 31, 2012 (Foreign Currencies in Thousands)				December 31, 2011 (Foreign Currencies in Thousands)				Shares (In Thousands)				Percentage of Ownership				Carrying Value (Foreign Currencies in Thousands)
TSMC		TSMC Global		Tortola, British Virgin Islands		Investment activities		$	42,327,245			$	42,327,245				1				100			$	43,137,920			$	171,518			$	171,518			Subsidiary
		TSMC Partners		Tortola, British Virgin Islands		Investing in companies involved in the design, manufacture, and other related business in the semiconductor industry			31,456,130				31,456,130				988,268				100				34,664,194				427,678				427,678			Subsidiary
		TSMC China		Shanghai, China		Manufacturing and selling of integrated circuits at the order of and pursuant to product design specifications provided by customers			18,939,667				18,939,667				—				100				14,095,161				875,143				895,570			Subsidiary
		TSMC Solar		Tai-Chung, Taiwan		Engaged in researching, developing, designing, manufacturing and selling renewable energy and saving related technologies and products			11,180,000				11,180,000				1,118,000				99				9,456,531				(563,533	)			(640,173	)		Subsidiary
		VIS		Hsin-Chu, Taiwan		Research, design, development, manufacture, packaging, testing and sale of memory integrated circuits, LSI, VLSI and related parts			13,232,288				13,232,288				628,223				41				8,986,165				24,096				(53,605	)		Investee accounted for using equity method
		SSMC		Singapore		Fabrication and supply of integrated circuits			5,120,028				5,120,028				314				39				5,388,363				1,027,831				398,701			Investee accounted for using equity method
		TSMC North America		San Jose, California, U.S.A.		Selling and marketing of integrated circuits and semiconductor devices			333,718				333,718				11,000				100				3,035,002				97,510				97,510			Subsidiary
		TSMC SSL		Hsin-Chu, Taiwan		Engaged in researching, developing, designing, manufacturing and selling solid state lighting devices and related applications products and systems			4,304,000				2,270,000				430,400				95				3,541,201				(279,037	)			(265,677	)		Subsidiary
		Xintec		Taoyuan, Taiwan		Wafer level chip size packaging service			1,357,890				1,357,890				94,011				40				1,546,668				(117,292	)			(60,118	)		Investee with a controlling financial interest
		VTAF III		Cayman Islands		Investing in new start-up technology companies			2,070,101				2,074,155				—				53				1,437,397				(25,475	)			(23,509	)		Subsidiary
		GUC		Hsin-Chu, Taiwan		Researching, developing, manufacturing, testing and marketing of integrated circuits			386,568				386,568				46,688				35				1,191,165				99,536				35,056			Investee accounted for using equity method
		VTAF II		Cayman Islands		Investing in new start-up technology companies			949,267				949,267				—				98				740,533				(2,725	)			(2,671	)		Subsidiary
		Emerging Alliance		Cayman Islands		Investing in new start-up technology companies			892,855				892,855				—				99				205,484				(2,434	)			(2,422	)		Subsidiary
		TSMC Europe		Amsterdam, the Netherlands		Marketing and engineering supporting activities			15,749				15,749				—				100				213,849				8,682				8,682			Subsidiary
		TSMC Japan		Yokohama, Japan		Marketing activities			83,760				83,760				6				100				149,861				1,523				1,523			Subsidiary
		TSMC Korea		Seoul, Korea		Customer service and technical supporting activities			13,656				13,656				80				100				23,468				110				110			Subsidiary
		TSMC GN		Taipei, Taiwan		Investment activities			100,000				—				—				100				84,751				(3,386	)			(3,386	)		Subsidiary
TSMC Solar		Motech		Taipei, Taiwan		Manufacturing and sales of solar cells, crystalline silicon solar cell, and test and measurement instruments and design and construction of solar power systems			6,228,661				6,228,661				87,480				20				5,219,263				(988,198	)			Note 2			Investee accounted for using equity method
		VTAF III		Cayman Islands		Investing in new start-up technology companies			1,797,496				1,795,131				—				46				1,640,461				(25,475	)			Note 2			Investee accounted for using equity method

 

(Continued)

 

- 62 -

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Investor Company		Investee Company		Location		Main Businesses and Products		Original Investment Amount								Balance as of March 31, 2012												Net Income (Losses) of the Investee (Foreign Currencies in Thousands)				Equity in the Earnings (Losses) (Note 1) (Foreign Currencies in Thousands)		Note
								March 31, 2012 (Foreign Currencies in Thousands)				December 31, 2011 (Foreign Currencies in Thousands)				Shares (In Thousands)				Percentage of Ownership				Carrying Value (Foreign Currencies in Thousands)
TSMC Solar		TSMC Solar Europe		Amsterdam, the Netherlands		Investing in solar related business		$	411,032			$	411,032				—				100			$	168,129			$	(35,781	)		Note 2		Subsidiary
		TSMC Solar NA		Delaware, U.S.A.		Selling and marketing of solar related products			147,686				147,686				1				100				35,897				(15,073	)		Note 2		Subsidiary
TSMC SSL		TSMC Lighting NA		Delaware, U.S.A.		Selling and marketing of solid state lighting related products			3,133				3,133				1				100				2,912				(7	)		Note 2		Subsidiary
TSMC Partners		TSMC Development		Delaware, U.S.A.		Investment activities		US$	0.001			US$	0.001				1				100			US$	470,564			US$	10,529			Note 2		Subsidiary
		VisEra Holding Company		Cayman Islands		Investing in companies involved in the design, manufacturing, and other related businesses in the semiconductor industry		US$	43,000			US$	43,000				43,000				49			US$	96,445			US$	281			Note 2		Investee accounted for using equity method
		ISDF		Cayman Islands		Investing in new start-up technology companies		US$	787			US$	787				787				97			US$	14,041			US$	2,456			Note 2		Subsidiary
		TSMC Technology		Delaware, U.S.A.		Engineering support activities		US$	0.001			US$	0.001				1				100			US$	10,942			US$	327			Note 2		Subsidiary
		ISDF II		Cayman Islands		Investing in new start-up technology companies		US$	14,153			US$	14,153				14,153				97			US$	11,455			US$	(47	)		Note 2		Subsidiary
		TSMC Canada		Ontario, Canada		Engineering support activities		US$	2,300			US$	2,300				2,300				100			US$	4,258			US$	99			Note 2		Subsidiary
		Mcube Inc.		Delaware, U.S.A.		Research, development, and sale of micro-semiconductor device		US$	1,800			US$	1,800				6,333				25				—			US$	(3,224	)		Note 2		Investee accounted for using equity method
TSMC Development		WaferTech		Washington, U.S.A.		Manufacturing, selling, testing and computer-aided designing of integrated circuits and other semiconductor devices		US$	280,000			US$	280,000				293,640				100			US$	229,723			US$	9,604			Note 2		Subsidiary
VTAF III		Mutual-Pak Technology Co., Ltd.		Taipei, Taiwan		Manufacturing and selling of electronic parts and researching, developing, and testing of RFID		US$	4,718			US$	3,937				14,168				58			US$	1,771			US$	(281	)		Note 2		Subsidiary
		Growth Fund		Cayman Islands		Investing in new start-up technology companies		US$	1,830			US$	1,830				—				100			US$	480			US$	(30	)		Note 2		Subsidiary
		VTA Holdings		Delaware, U.S.A.		Investing in new start-up technology companies			—				—				—				62				—				—			Note 2		Subsidiary
VTAF II		VTA Holdings		Delaware, U.S.A.		Investing in new start-up technology companies			—				—				—				31				—				—			Note 2		Subsidiary
Emerging Alliance		VTA Holdings		Delaware, U.S.A.		Investing in new start-up technology companies			—				—				—				7				—				—			Note 2		Subsidiary
TSMC Solar Europe		TSMC Solar Europe GmbH		Hamburg, Germany		Selling of solar related products and providing customer service		EUR	9,900			EUR	9,900				1				100			EUR	4,186			EUR	(916	)		Note 2		Subsidiary
TSMC GN		TSMC Solar		Tai-Chung, Taiwan		Engaged in researching, developing, designing, manufacturing and selling renewable energy and saving related technologies and products			37,590				—				3,759				—				31,755				(563,533	)		Note 2		Investee accounted for using equity method
		TSMC SSL		Hsin-Chu, Taiwan		Engaged in researching, developing, designing, manufacturing and selling solid state lighting devices and related applications products and systems			54,254				—				5,425				1				44,838				(279,037	)		Note 2		Investee accounted for using equity method

 

Note 1:

Equity in earnings/losses of investees includes the effect of unrealized gross profit from affiliates.

Note 2:

The equity in the earnings/losses of the investee company is not reflected herein as such amount is already included in the equity in the earnings/losses of the investor company.

(Concluded)

 

- 63 -

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TABLE 8

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

INFORMATION ON INVESTMENT IN MAINLAND CHINA

FOR THE THREE MONTHS ENDED MARCH 31, 2012

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

 

 

				Total Amount of Paid-in Capital						Accumulated Outflow of Investment from Taiwan as of January 1,				Investment Flows								Accumulated Outflow of Investment from Taiwan as of								Equity				Carrying Value as of March 31,				Accumulated Inward Remittance of Earnings
Investee Company		Main Businesses and Products		(Foreign Currencies in Thousands)				Method of Investment		2012 (US$ in Thousand)				Outflow (US$ in Thousands)				Inflow				March 31, 2012 (US$ in Thousands)				Percentage of Ownership				in the Earnings (Losses)				2012 (US$ in Thousands)				as of March 31, 2012
TSMC China		Manufacturing and selling of integrated circuits at the order of and pursuant to product design specifications provided by customers
				$	18,939,667			(Note 1)		$	18,939,667			$	—			$	—			$	18,939,667				100	%		$	895,570			$	14,095,161			$	—
				(RMB	4,502,080	)				(US$	596,000	)										(US$	596,000	)
Shanghai Walden Venture Capital Enterprise		Investing in new start-up technology companies			953,709			(Note 2)			147,485				—				—			(US$	147,485 5,000	)			8	%			(Note 3)				147,645				—
				(US$	31,488	)				(US$	5,000	)																						(US$	5,000	)

 

Accumulated Investment in Mainland China as of March 31, 2012 (US$ in Thousand)				Investment Amounts Authorized  by Investment Commission, MOEA (US$ in Thousand)				Upper Limit on  Investment (US$ in Thousand)
$	19,087,152			$	19,087,152			$	19,087,152
(US$	601,000	)		(US$	601,000	)		(US$	601,000	)

 

Note 1:

TSMC directly invested US$596,000 thousand in TSMC China.

Note 2:

TSMC indirectly invested in China company through third region, TSMC Partners.

Note 3:

TSMC Partners invested in financial assets carried at cost, equity in the earnings from which was not recognized.

 

- 64 -

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TABLE 9

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

INTERCOMPANY RELATIONSHIPS AND SIGNIFICANT INTERCOMPANY TRANSACTIONS

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

 

 

A.	For the three months ended March 31, 2012

 

No.		Company Name		Counter Party		Nature of Relationship (Note 1)				Intercompany Transactions
										Financial Statements Item		Amount				Terms (Note 2)				Percentage of Consolidated Total Gross Sales or Total Assets
0		TSMC		TSMC North America			1			Sales		$	64,861,377				—				61	%
										Receivables from related parties			32,359,734				—				4	%
										Other receivables from related parties			19,399				—				—
										Payables to related parties			49,582				—				—
				TSMC China			1			Purchases			3,192,921				—				3	%
										Marketing expenses - commission			16,450				—				—
										Disposal of property, plant and equipment			41,011				—				—
										Loss on disposal of property, plant and equipment, net			4,675				—				—
										Other receivables from related parties			43,296				—				—
										Payables to related parties			1,137,485				—				—
										Deferred charge			3,182				—				—
				TSMC Japan			1			Marketing expenses - commission			71,086				—				—
										Payables to related parties			52,540				—				—
				TSMC Europe			1			Marketing expenses - commission			82,247				—				—
										Research and development expenses			13,513				—				—
										Payables to related parties			35,760				—				—
				TSMC Korea			1			Marketing expenses - commission			5,190				—				—
										Payables to related parties			1,308				—				—
				TSMC Technology			1			Research and development expenses			148,681				—				—
										Payables to related parties			99,495				—				—
				WaferTech			1			Sales			10,389				—				—
										Purchases			1,623,602				—				2	%
										Other receivables from related parties			3,298				—				—
										Payables to related parties			576,902				—				—
				TSMC Canada			1			Research and development expenses			52,350				—				—
										Payables to related parties			17,122				—				—
				Xintec			1			Manufacturing overhead			23,487				—				—
										Payables to related parties			16,628				—				—
				TSMC SSL			1			Miscellaneous revenue			1,575				—				—
										Other receivables from related parties			2,262				—				—
				TSMC Solar			1			Miscellaneous revenue			1,575				—				—
										Other receivables from related parties			2,045				—				—

 

(Continued)

 

- 65 -

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No.		Company Name		Counter Party		Nature of Relationship (Note 1)				Intercompany Transactions
										Financial Statements Item		Amount				Terms (Note 2)				Percentage of Consolidated Total Gross Sales or Total Assets
1		TSMC Partners		TSMC China			3			Long-term receivables from related parties		$	7,405,970				—				1	%
										Interest income			4,816				—				—
				TSMC Solar			3			Other receivables from related parties			724,439				—				—
2		TSMC Solar		TSMC Solar NA			3			Other payables from related parties			3,373				—				—

 

Note 1:

No. 1 represents the transactions from parent company to subsidiary.

No. 3 represents the transactions between subsidiaries.

Note 2:

The sales prices and payment terms of intercompany sales are not significantly different from those to third parties. For other intercompany transactions, prices and terms are determined in accordance with mutual agreements.

 

(Continued)

 

- 66 -

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B.	For the three months ended March 31, 2011

 

										Intercompany Transactions
No.		Company Name		Counter Party		Nature of Relationship (Note 1)				Financial Statements Item		Amount				Terms (Note 2)				Percentage of Consolidated Total Gross Sales or Total Assets
0		TSMC		TSMC North America			1			Sales		$	57,007,986				—				53	%
										Receivables from related parties			27,517,143				—				4	%
										Other receivables from related parties			6,653				—				—
										Payables to related parties			36,634				—				—
				TSMC China			1			Sales			7,070				—				—
										Purchases			2,419,959				—				2	%
										Marketing expenses - commission			16,320				—				—
										Sales of property, plant and equipment			592,339				—				—
										Gain on disposal of property, plant and equipment, net			6,506				—				—
										Other receivables from related parties			1,593,520				—				—
										Payables to related parties			855,485				—				—
										Deferred debits			33,833				—				—
				TSMC Japan			1			Marketing expenses - commission			66,614				—				—
										Payables to related parties			24,004				—				—
				TSMC Europe			1			Marketing expenses - commission			90,915				—				—
										Research and development expenses			8,774				—				—
										Payables to related parties			36,246				—				—
				TSMC Korea			1			Marketing expenses - commission			5,375				—				—
										Payables to related parties			1,363				—				—
				GUC			1			Sales			455,936				—				—
										Research and development expenses			5,717				—				—
										Receivables from related parties			260,981				—				—
										Payables to related parties			1,915				—				—
				TSMC Technology			1			Research and development expenses			113,013				—				—
										Payables to related parties			76,694				—				—
				WaferTech			1			Sales			2,027				—				—
										Purchases			1,770,429				—				2	%
										Sales of property, plant and equipment			64,255				—				—
										Payables to related parties			550,219				—				—
				TSMC Canada			1			Research and development expenses			42,489				—				—
										Payables to related parties			15,036				—				—
				Xintec			1			Research and development expenses			2,755				—				—
										Manufacturing overhead			84,600				—				—
										Payables to related parties			53,025				—				—
				TSMC Solar Europe GmbH			1			Sales			52,526				—				—
										Other receivables from related parties			52,413				—				—
1		GUC		TSMC North America			3			Purchases			142,690				—				—
										Manufacturing overhead			92,754				—				—
										Payables to related parties			87,469				—				—
				GUC-NA			3			Operating expenses			29,539				—				—
										Manufacturing overhead			17,604				—				—
										Accrued expense			14,791				—				—
				GUC-Japan			3			Operating expenses			9,565				—				—
										Accrued expense			2,895				—				—
				GUC-Shanghai			3			Operating expenses			4,567				—				—
										Accrued expense			1,760				—				—

 

(Continued)

 

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										Intercompany Transactions
No.		Company Name		Counter Party		Nature of Relationship (Note 1)				Financial Statements Item		Amount				Terms (Note 2)				Percentage of Consolidated Total Gross Sales or Total Assets
2		TSMC Partners		TSMC China			3			Other long-term receivables		$	7,367,000				—				1	%
3		TSMC China		TSMC Partners			3			Other long-term payables			7,375,950				—				1	%

 

Note 1:

No. 1 represents the transactions from parent company to subsidiary.

No. 3 represents the transactions between subsidiaries.

Note 2:

The sales prices and payment terms of intercompany sales are not significantly different from those to third parties. For other intercompany transactions, prices and terms are determined in accordance with mutual agreements.

(Concluded)

 

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