HTC — Audit Report / Information 2017

Nov 9, 2017

HTC Corporation and Subsidiaries

Consolidated Financial Statements for the Years Ended December 31, 2017 and 2016 and Independent Auditors’ Report

INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Shareholders HTC Corporation

Opinion

We have audited the accompanying consolidated financial statements of HTC Corporation and its subsidiaries (collectively referred to as the Company), which comprise the consolidated balance sheets as of December 31, 2017 and 2016, and the consolidated statements of comprehensive income, changes in equity and cash flows for the years then ended, and the notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2017 and 2016, and its consolidated financial performance and its consolidated cash flows for the years then ended, in conformity with the Regulations Governing the Preparation of Financial Reports by Securities Issuers and International Financial Reporting Standards (IFRS), International Accounting Standards (IAS), IFRIC Interpretations (IFRIC), and SIC Interpretations (SIC) endorsed and issued into effect by the Financial Supervisory Commission of Taiwan, the Republic of China.

Basis for Opinion

We conducted our audits in accordance with the Regulations Governing Auditing and Attestation of Financial Statements by Certified Public Accountants and auditing standards generally accepted in Taiwan, the Republic of China. Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Company in accordance with The Norm of Professional Ethics for Certified Public Accountant of Taiwan, the Republic of China, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements for the year ended December 31, 2017. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

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The descriptions of the key audit matters of the consolidated financial statements for the year ended December 31, 2017 are as follows:

Allowance for Doubtful Accounts

As of December 31, 2017, the balance of allowance for doubtful accounts amounted to NT$3,901,541 thousand. The allowance for doubtful accounts was arrived at by reference to the aging of receivables and credit risk assessment of customers. The Company has only one major customer. All the other customers are located in areas with varied economic situations; thus, the credit risk are also varied. The Company’s use of judgment in evaluating the adequacy of allowance for doubtful accounts and the large amount of trade receivables make the evaluation of allowance for doubtful accounts a key audit matter.

We obtained an understanding of the accounting policy on the evaluation of allowance for doubtful accounts, including the assessment of credit risk on every customer. We tested the aging schedule prepared by the Company against the supporting documents. We checked compliance with the Company’s policy on the evaluation of allowance for doubtful accounts. We compared the allowance for doubtful accounts at the end of the current and prior periods for reasonableness.

For the accounting policy on the evaluation of allowance for doubtful accounts, please refer to Note 4; for critical accounting judgments and key sources of estimation uncertainty, please refer to Note 5; and for other relevant disclosures, please refer to Notes 11 and 32.

Valuation of Inventories

The Company’s operations are mainly in the research, manufacture and sale of smart mobile devices, and the balance of inventories amounted to NT$7,381,426 thousand as of December 31, 2017. Due to the rapid change in technology, the industry is highly competitive; in addition, since the management needs to apply judgment to evaluate the net realizable value of inventories and as the balance of inventories represents a significant portion of the consolidated financial statements as of December 31, 2017, the valuation of inventories was deemed to be a key audit matter.

We evaluated the accounting policy on the assessment of inventory write-downs. We obtained an understanding of the products and their classifications and marketing plans and we tested the Company’s determination of net realizable value.

For the accounting policy on the assessment of inventory write-downs, please refer to Note 4; for critical accounting judgments and key sources of estimation uncertainty, please refer to Note 5; and for other relevant disclosures, please refer to Note 12.

Impairment of Property, Plant and Equipment, Prepayments, Intangible Assets and Deferred Tax Assets

As of December 31, 2017, the carrying amounts of property, plant and equipment, prepayments, intangible assets and deferred tax assets were NT$10,798,613 thousand, NT$3,976,719 thousand, NT$2,315,905 thousand and NT$8,990,648 thousand, respectively. The Company operates in a highly competitive environment. From previous periods, the current period operating conditions and earnings deteriorated significantly, indicating potential impairment of the assets. As impairment may be material to the consolidated financial statements for the year ended December 31, 2017, the evaluation of impairment was deemed to be a key audit matter.

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The audit procedures performed in respect of the Company’s assessment of assets for impairment included the following:

1. We obtained an understanding of the procedures and controls performed by management in assessing the impairment of assets.

2. We evaluated whether the assessment performed by management considered the operating conditions and the industry situation.

3. We evaluated the reasonableness of comparable information, discount rate and recovery rate used in the report of external expert.

For the accounting policy on the impairment of property, plant and equipment, prepayments, intangible assets and deferred tax assets, please refer to Note 4; for critical accounting judgments and key sources of estimation uncertainty, please refer to Note 5; and for other relevant disclosures, please refer to Notes 13, 17, 19 and 27.

Revenue Recognition

According to the accounting policy stated in Note 4, revenue from the sale of goods is recognized when the significant risks and ownership are transferred to the buyers. Considering that some trade receivables have become overdue indicating credit risk in customers, sales revenue may need stricter validation. Because of the significance of sales revenue, revenue recognition was deemed to be a key audit matter.

We have obtained necessary understanding and have verified the accounting policy and the design and implementation of internal controls with respect to the Company’s revenue recognition. We checked compliance with the accounting policy on revenue recognition by reviewing the relevant contracts. For ensuring the Company’s compliance with IAS 18, samples from the recognized revenue have been selected to verify if the conditions of revenue recognition were met.

Other Matters

We have also audited the parent company only financial statements of HTC Corporation as of and for the years ended December 31, 2017 and 2016 on which we have issued an unmodified opinion.

Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with the Regulations Governing the Preparation of Financial Reports by Securities Issuers, and International Financial Reporting Standards (IFRS), International Accounting Standards (IAS), IFRIC Interpretations (IFRIC), and SIC Interpretations (SIC) endorsed and issued into effect by the Financial Supervisory Commission of Taiwan, the Republic of China, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

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Those charged with governance, including management and supervisors, are responsible for overseeing the Company’s financial reporting process.

Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the auditing standards generally accepted in Taiwan, the Republic of China will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with the auditing standards generally accepted in Taiwan, the Republic of China, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

1. Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

2. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.

3. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

4. Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Company to cease to continue as a going concern.

5. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

6. Obtain sufficient and appropriate audit evidence regarding the financial information of entities or business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision, and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

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We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements for the year ended December 31, 2017 and are therefore the key audit matters. We describe these matters in our auditors’ report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The engagement partners on the audit resulting in this independent auditors’ report are Wen-Yea, Shyu and Kwan-Chung, Lai.

Deloitte & Touche Taipei, Taiwan Republic of China

March 25, 2018

Notice to Readers

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

For the convenience of readers, the independent auditors’ report and the accompanying consolidated financial statements have been translated into English from the original Chinese version prepared and used in Taiwan, 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 independent auditors’ report and consolidated financial statements shall prevail. Also, as stated in Note 4 to the consolidated financial statements, the additional footnote disclosures that are not required under accounting principles and practices generally applied in Taiwan, the Republic of China were not translated into English.

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HTC CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2017 AND 2016 (In Thousands of New Taiwan Dollars)

ASSETS CURRENT ASSETS Cash and cash equivalents (Note 6) Financial assets at fair value through profit or loss - current (Notes 7 and 32) Available-for-sale financial assets - current (Note 32) Debt investments with no active market - current (Note 32) Trade receivables, net (Notes 11 and 33) Other receivables (Note 11) Current tax assets (Note 27) Inventories (Note 12) Prepayments (Note 13) Non-current assets held for sale (Note 14) Other current financial assets (Notes 10 and 34) Other current assets Total current assets NON-CURRENT ASSETS Available-for-sale financial assets - non-current (Note 32) Financial assets measured at cost - non-current (Notes 9 and 32) Debt investments with no active market - non-current (Note 32) Investments accounted for using equity method (Note 16) Property, plant and equipment (Notes 17 and 33) Investment properties, net (Note 18) Intangible assets (Note 19) Deferred tax assets (Note 27) Refundable deposits (Note 32) Net defined benefit asset - non-current (Note 23) Other non-current assets (Note 13) Total non-current assets TOTAL LIABILITIES AND EQUITY CURRENT LIABILITIES Financial liabilities at fair value through profit or loss - current (Notes 7 and 32) Note and trade payables (Notes 20 and 33) Other payables (Note 21) Current tax liabilities (Note 27) Provisions - current (Note 22) Other current liabilities (Note 21) Total current liabilities NON-CURRENT LIABILITIES Deferred tax liabilities (Note 27) Guarantee deposits received (Note 32) Total non-current liabilities Total liabilities EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT (Note 24) Share capital - ordinary shares Capital surplus Retained earnings Legal reserve (Accumulated deficits) unappropriated earnings Other equity Total equity attributable to owners of the parent NON-CONTROLLING INTERESTS Total equity TOTAL		2017 Amount % $ 10,443,227 16 65,199 - 312,106 - - - 8,537,096 13 103,497 - 131,901 - 7,381,426 11 1,742,986 3 1,647,763 3 7,988,363 12 135,821 - 38,489,385 58 91 - 3,187,240 5 - - 413,120 1 10,798,613 16 - - 2,315,441 3 8,990,648 14 139,016 - 18,119 - 2,233,733 3 28,096,021 42 $ 66,585,406 100 $ 75,184 - 14,569,222 22 11,681,890 18 253,240 - 3,377,201 5 2,850,713 4 32,807,450 49 47,147 - 5,681 - 52,828 - 32,860,278 49 8,208,261 12 15,551,491 24 18,297,655 27 (6,093,403) (9) (2,268,428) (3) 33,695,576 51 29,552 - 33,725,128 51 $ 66,585,406 100		2016
				Amount % $ 30,080,217 29 143,642 - 199,344 - 8,067 - 15,961,835 15 168,526 - 184,817 - 14,163,571 14 1,833,499 2 - - 5,750,450 6 68,414 - 68,562,382 66 86 - 3,363,736 3 25,009 - 531,445 1 12,025,496 12 1,527,001 1 3,878,356 4 8,957,876 9 1,501,480 1 40,439 - 2,735,876 3 34,586,800 34 $ 103,149,182 100 $ 133,420 - 26,247,728 26 18,348,734 18 155,651 - 3,384,311 3 3,004,432 3 51,274,276 50 81,294 - 22,106 - 103,400 - 51,377,676 50 8,220,087 8 15,614,641 15 18,297,655 18 10,841,425 10 (1,202,302) (1) 51,771,506 50 - - 51,771,506 50 $ 103,149,182 100

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

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HTC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (In Thousands of New Taiwan Dollars, Except Loss Per Share)

OPERATING REVENUES (Notes 8, 25 and 33) OPERATING COST (Notes 12, 23, 26 and 33) GROSS PROFIT OPERATING EXPENSES (Notes 23, 26 and 33) Selling and marketing General and administrative Research and development Total operating expenses OPERATING LOSS NON-OPERATING INCOME AND EXPENSES Other income (Note 26) Other gains and losses (Notes 8, 14, 17 and 26) Finance costs Share of the profit or loss of associates and joint venture (Note 16) Total non-operating income and expenses LOSS BEFORE INCOME TAX INCOME TAX BENEFIT (Note 27) LOSS FOR THE YEAR OTHER COMPREHENSIVE INCOME AND LOSS, NET OF INCOME TAX Items that will not be reclassified to profit or loss: Remeasurement of defined benefit plans (Note 23) Income tax relating to items that will not be reclassified to profit or loss (Note 27)		2017 Amount % $ 62,119,814 100 60,780,122 98 1,339,692 2 4,792,893 8 3,532,107 5 10,440,209 17 18,765,209 30 (17,425,517) (28) 673,103 1 (85,851) - (33,315) - (87,255) - 466,682 1 (16,958,835) (27) 38,476 - (16,920,359) (27) (33,129) - 4,014 - (29,115) -		2016
				Amount % $ 78,161,158 100 68,726,567 88 9,434,591 12 8,861,758 11 4,223,697 6 10,957,200 14 24,042,655 31 (14,608,064) (19) 643,078 1 3,448,618 4 (5,298) - (62,282) - 4,024,116 5 (10,583,948) (14) 23,845 - (10,560,103) (14) (53,981) - 6,532 - (47,449) - (Continued)

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HTC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (In Thousands of New Taiwan Dollars, Except Loss Per Share)

Items that may be reclassified subsequently to profit or loss: Exchange differences on translating foreign operations Unrealized gain (loss) on available-for-sale financial assets Other comprehensive loss for the year, net of income tax TOTAL COMPREHENSIVE LOSS FOR THE YEAR NET LOSS FOR THE YEAR ATTRIBUTABLE TO Owners of the parent Non-controlling interests TOTAL COMPREHENSIVE LOSS FOR THE YEAR ATTRIBUTABLE TO Owners of the parent Non-controlling interests LOSS PER SHARE (Note 28) Basic		2017 Amount % $ (1,401,328) (2) 131,392 - (1,269,936) (2) (1,299,051) (2) $ (18,219,410) (29) $ (16,905,713) (27) (14,646) - $ (16,920,359) (27) $ (18,205,286) (29) (14,124) - $ (18,219,410) (29) $ (20.58)		2016
				Amount % $ (2,254,715) (3) (153,449) - (2,408,164) (3) (2,455,613) (3) $ (13,015,716) (17) $ (10,560,103) (14) - - $ (10,560,103) (14) $ (13,015,716) (17) - - $ (13,015,716) (17) $ (12.81)

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

(Concluded)

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HTC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (In Thousands of New Taiwan Dollars)

BALANCE, JANUARY 1, 2016 Net loss for the year ended December 31, 2016 Other comprehensive income and loss for the year ended December 31, 2016 Buy-back of treasury shares Retirement of treasury shares Share-based payments BALANCE, DECEMBER 31, 2016 Net loss for the year ended December 31, 2017 Other comprehensive income and loss for the year ended December 31, 2017 Issuance of stock from exercise of employee stock options Share-based payments Non-controlling interests BALANCE, DECEMBER 31, 2017			Equity Attributable to Owners of the Parent	Equity Attributable to Owners of the Parent			Total $ 64,792,095 (10,560,103) (2,455,613) (436,869) - 431,996 51,771,506 (16,905,713) (1,299,573) 545 128,811 - $ 33,695,576	Non- controlling Interests $ - - - - - - - (14,646) 522 - - 43,676 $ 29,552	Total Equity $ 64,792,095 (10,560,103) (2,455,613) (436,869) - 431,996 51,771,506 (16,920,359) (1,299,051) 545 128,811 43,676 $ 33,725,128
	Share Capital Ordinary Shares $ 8,318,695 - - - (111,600) 12,992 8,220,087 - - 100 (11,926) - $ 8,208,261	Capital Surplus $ 15,505,853 - - - (192,769) 301,557 15,614,641 - - 445 (63,595) - $ 15,551,491	Retained Earnings Unappropriated Earnings (Accumulated Legal Reserve Deficits) $ 18,297,655 $ 21,782,432 - (10,560,103) - (47,449) - - - (333,455) - - 18,297,655 10,841,425 - (16,905,713) - (29,115) - - - - - - $ 18,297,655 $ (6,093,403)	Other Equity	Unearned Employee Benefit $ (371,369) - - - - 117,447 (253,922) - - - 204,332 - $ (49,590)	Treasury Shares $ (200,955) - - (436,869) 637,824 - - - - - - - $ -
				Exchange Unrealized Differences on Losses on Translating Available-for- Foreign sale Financial Operations Assets $ 1,473,417 $ (13,633) - - (2,254,715) (153,449) - - - - - - (781,298) (167,082) - - (1,401,850) 131,392 - - - - - - $ (2,183,148) $ (35,690)

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

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HTC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (In Thousands of New Taiwan Dollars)

CASH FLOWS FROM OPERATING ACTIVITIES Loss before income tax Adjustments for: Depreciation expenses Amortization expenses Bad debt (reversed) expense Finance costs Interests income Dividend income Compensation costs of employee share-based payments Share of the profit or loss of associates and joint venture Net loss (gain) on disposal of property, plant and equipment Net gain on sale of investments Impairment loss on financial assets Impairment loss on non-financial assets Changes in operating assets and liabilities Decrease in financial instruments held for trading Decrease in trade receivables Decrease in other receivables Decrease in inventories Decrease in prepayments (Increase) decrease in other current assets Decrease in other non-current assets Decrease in note and trade payables Decrease in other payables Decrease in provisions Decrease in other current liabilities Cash used in operations Interest received Interest paid Income tax return (paid) Net cash used in operating activities CASH FLOWS FROM INVESTING ACTIVITIES Payments to acquire debt investment with no active market Payments to acquire financial assets measured at cost Proceeds from disposal of financial assets measured at cost Acquisition of associates Proceeds from disposal of investments accounted for using equity method Net cash inflow on acquisition of subsidiaries Payments for non-current assets held for sale Proceeds from disposal of non-current assets held of sale Payments for property, plant and equipment	2017 $ (16,958,835) 1,006,481 1,386,637 (362,870) 33,315 (283,574) (47,284) 128,811 87,255 80,397 (24,305) 109,779 6,048,636 20,207 7,787,609 77,814 1,068,702 90,513 (67,407) 396,101 (11,678,506) (6,662,537) (7,110) (1,595,625) (19,365,796) 280,246 (33,315) 109,418 (19,009,447) - (218,734) 91,107 (6,019) - 5,974 (3,830) - (262,375)	2016 $ (10,583,948) 1,752,322 1,639,516 1,175,179 5,298 (382,550) (138,761) 431,996 62,282 (3,196,381) - - 2,054,453 48,727 2,857,064 312,686 2,918,208 2,567,469 26,197 1,993,672 (3,350,657) (6,574,405) (2,607,947) (685,331) (9,674,911) 336,626 (5,298) (275,929) (9,619,512) (24,548) (203,283) - (363,754) 182,579 - - 6,060,000 (601,427) (Continued)

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HTC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (In Thousands of New Taiwan Dollars)

Proceeds from disposal of property, plant and equipment Increase in advance receipts - disposal of property Decrease in refundable deposits Payments for intangible assets Increase in other current financial assets Dividend received Net cash generated from investing activities CASH FLOWS FROM FINANCING ACTIVITIES Refund of guarantee deposits received Proceeds from exercise of employee stock options Buy-back of treasury shares Net cash used in financing activities EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS NET DECREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR CASH AND CASH EQUIVALENTS, END OF THE YEAR	2017 $ 17,766 1,388,243 1,362,464 (566) (2,237,913) 47,284 183,401 (16,425) 545 - (15,880) (795,064) (19,636,990) 30,080,217 $ 10,443,227	2016 $ 2,935,283 - 78,862 (75,455) (1,650,160) 83,844 6,421,941 (8,053) - (436,869) (444,922) (1,624,089) (5,266,582) 35,346,799 $ 30,080,217

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

(Concluded)

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HTC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise)

1. ORGANIZATION AND OPERATIONS

HTC Corporation (HTC) was incorporated on May 15, 1997 under the Company Law of Taiwan, the Republic of China. HTC and its subsidiaries (collectively referred to as the “Group” or the “Company”) are engaged in design, manufacture, assemble, process, and sell smart mobile devices and provide after-sales service.

In March 2002, HTC had its stock listed on the Taiwan Stock Exchange. On November 19, 2003, HTC listed some of its shares of stock on the Luxembourg Stock Exchange in the form of global depositary receipts.

The functional currency of HTC is New Taiwan dollars. The consolidated financial statements are presented in New Taiwan dollars since HTC is the ultimate parent of the Group.

2. APPROVAL OF FINANCIAL STATEMENTS

The consolidated financial statements were approved by HTC’s Board of Directors and authorized for issue on March 25, 2018.

1. APPLICATION OF NEW, AMENDED AND REVISED STANDARDS AND INTERPRETATIONS

2. a. Initial application of the amendments to the Regulations Governing the Preparation of Financial Reports by Securities Issuers and the International Financial Reporting Standards (IFRS), International Accounting Standards (IAS), Interpretations of IFRS (IFRIC), and Interpretations of IAS (SIC) endorsed and issued into effect by the Financial Supervisory Commission (FSC)

The initial application of the amendments to the Regulations Governing the Preparation of Financial Reports by Securities Issuers and the IFRSs endorsed and issued into effect by the FSC did not have any material impact on the Company’s accounting policies, except for the following:

Amendments to the Regulations Governing the Preparation of Financial Reports by Securities Issuers

The amendments include additions of several accounting items and requirements for disclosures of impairment of non-financial assets as a consequence of the IFRSs endorsed and issued into effect by the FSC. In addition, as a result of the post implementation review of IFRSs in Taiwan, the amendments also include emphasis on certain recognition and measurement considerations and add requirements for disclosures of related party transactions and goodwill.

The amendments stipulate that other companies or institutions of which the chairman of the Board of Directors or president serves as the chairman of the Board of Directors or the president, or is the spouse or second immediate family of the chairman of the Board of Directors or president of the Company are deemed to have a substantive related party relationship, unless it can be demonstrated that no control, joint control, or significant influence exists. Furthermore, the amendments require the disclosure of the names of the related parties and the relationship with whom the Company has significant transaction. If the transaction or balance with a specific related party is 10% or more of the Company’s respective total transaction or balance, such transaction should be separately disclosed by the name of each related party.

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The amendments also require additional disclosure if there is a significant difference between the actual operation after business combination and the expected benefit on acquisition date.

The disclosures of related party transactions will be enhanced when the above amendments are retrospectively applied in 2017, please refer to Note 33.

• b. The Regulations Governing the Preparation of Financial Reports by Securities Issuers and the IFRSs endorsed by the FSC for application starting from 2018

New, Amended or Revised Standards and Interpretations Annual Improvements to IFRSs 2014-2016 Cycle Amendment to IFRS 2 “Classification and Measurement of Share-based Payment Transactions” Amendments to IFRS 4 “Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts” IFRS 9 “Financial Instruments” Amendments to IFRS 9 and IFRS 7 “Mandatory Effective Date of IFRS 9 and Transition Disclosures” IFRS 15 “Revenue from Contracts with Customers” Amendments to IFRS 15 “Clarifications to IFRS 15 Revenue from Contracts with Customers” Amendment to IAS 7 “Disclosure Initiative” Amendments to IAS 12 “Recognition of Deferred Tax Assets for Unrealized Losses” Amendments to IAS 40 “Transfers of Investment Property” IFRIC 22 “Foreign Currency Transactions and Advance Consideration”

Effective Date Announced by IASB (Note 1)

Note 2 January 1, 2018 January 1, 2018 January 1, 2018 January 1, 2018 January 1, 2018 January 1, 2018 January 1, 2017 January 1, 2017 January 1, 2018 January 1, 2018

• Note 1: Unless stated otherwise, the above New IFRSs are effective for annual periods beginning on or after their respective effective dates.

• Note 2: The amendment to IFRS 12 is retrospectively applied for annual periods beginning on or after January 1, 2017; the amendment to IAS 28 is retrospectively applied for annual periods beginning on or after January 1, 2018.

• 1) IFRS 9 “Financial Instruments”

Classification, measurement and impairment of financial assets

With regards to financial assets, all recognized financial assets that are within the scope of IAS 39 “Financial Instruments: Recognition and Measurement” are subsequently measured at amortized cost or fair value. Under IFRS 9, the requirement for the classification of financial assets is stated below.

For the Company’s debt instruments that have contractual cash flows that are solely payments of principal and interest on the principal amount outstanding, their classification and measurement are as follows:

• a) For debt instruments, if they are held within a business model whose objective is to collect the contractual cash flows, the financial assets are measured at amortized cost and are assessed for impairment continuously with impairment loss recognized in profit or loss, if any. Interest revenue is recognized in profit or loss by using the effective interest method;

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• b) For debt instruments, if they are held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, the financial assets are measured at fair value through other comprehensive income (FVTOCI) and are assessed for impairment. Interest revenue is recognized in profit or loss by using the effective interest method, and other gains or losses shall be recognized in other comprehensive income, except for impairment gains or losses and foreign exchange gains and losses. When the debt instruments are derecognized or reclassified, the cumulative gain or loss previously recognized in other comprehensive income is reclassified from equity to profit or loss.

Except for the above, all other financial assets are measured at fair value through profit or loss. However, the Company may make an irrevocable election to present subsequent changes in the fair value of an equity investment (that is not held for trading) in other comprehensive income, with only dividend income generally recognized in profit or loss. No subsequent impairment assessment is required, and the cumulative gain or loss previously recognized in other comprehensive income cannot be reclassified from equity to profit or loss.

The Company analyzed the facts and circumstances of its financial assets that exist at December 31, 2017 and performed the assessment of the impact of IFRS 9 on the classification and measurement of financial assets. Under IFRS 9:

Listed shares, emerging market shares, and unlisted shares classified as available-for-sale will be classified as at fair value through profit or loss. Listed shares, emerging market shares, and unlisted shares classified as available-for-sale will be designated as at fair value through other comprehensive income and the fair value gains or losses accumulated in other equity will be transferred directly to retained earnings instead of being reclassified to profit or loss on disposal.

Besides this, unlisted shares measured at cost will be measured at fair value instead.

IFRS 9 requires impairment loss on financial assets to be recognized by using the “Expected Credit Losses Model”. The loss allowance is required for financial assets measured at amortized cost, financial assets mandatorily measured at FVTOCI, lease receivables, contract assets arising from IFRS 15 “Revenue from Contracts with Customers”, certain written loan commitments and financial guarantee contracts. A loss allowance for the 12-month expected credit losses is required for a financial asset if its credit risk has not increased significantly since initial recognition. A loss allowance for full lifetime expected credit losses is required for a financial asset if its credit risk has increased significantly since initial recognition and is not low. However, a loss allowance for full lifetime expected credit losses is required for trade receivables that do not constitute a financing transaction.

For purchased or originated credit-impaired financial assets, the Company takes into account the expected credit losses on initial recognition in calculating the credit-adjusted effective interest rate. Subsequently, any changes in expected losses are recognized as a loss allowance with a corresponding gain or loss recognized in profit or loss.

The Company elects not to restate prior reporting periods when applying the requirements for the classification, measurement and impairment of financial assets under IFRS 9 with the cumulative effect of the initial application recognized at the date of initial application and will provide the disclosures related to the classification and the adjustment information upon initial application of IFRS 9.

• 14 -

The anticipated impact on assets, liabilities and equity of retrospective application of the requirements for the classification, measurement and impairment of financial assets on January 1, 2018 is set out below:

		Carrying	Carrying	Adjustments	Adjustments		Adjusted
	Amount as of			Arising from			Carrying
	December		31,		Initial	Amount as		of
		2017		Application		January 1, 2018
Impact on assets, liabilities and equity
Financial assets at fair value through
profit or loss - current	$	65,199		$	-	$	65,199
Financial assets at fair value through other
comprehensive income - current			-		312,106		312,106
Financial assets at fair value through
profit or loss - non-current			-		131,742		131,742
Financial assets at fair value through other
comprehensive income - non-current			-		3,024,657		3,024,657
Available-for-sale financial assets -
current		312,106			(312,106)			-
Available-for-sale financial assets -
non-current			91		(91)			-
Financial assets measured at amortized
cost - non-current		3,187,240			(3,187,240)			-
				$	(30,932)
Accumulated deficits		(6,093,403)		$	104,732		(5,988,671)
Other equity		(2,268,428)			(135,664)		(2,404,092)
				$	(30,932)

Hedge accounting

The main changes in hedge accounting amended the application requirements for hedge accounting to better reflect the entity’s risk management activities. Compared with IAS 39, the main changes include: (1) enhancing types of transactions eligible for hedge accounting, specifically broadening the risks eligible for hedge accounting of non-financial items; (2) changing the way the hedging cost of derivative instruments are accounted for to reduce profit or loss volatility; and (3) replacing retrospective effectiveness assessment with the principle of economic relationship between the hedging instrument and the hedged item.

• 2) IFRS 15 “Revenue from Contracts with Customers” and related amendment

IFRS 15 establishes principles for recognizing revenue that apply to all contracts with customers, and will supersede IAS 18 “Revenue”, IAS 11 “Construction Contracts” and a number of revenue-related interpretations.

When applying IFRS 15, the Company recognizes revenue by applying the following steps:

• Identify the contract with the customer;

• Identify the performance obligations in the contract;

• Determine the transaction price;

• Allocate the transaction price to the performance obligations in the contract; and

• Recognize revenue when the Company satisfies a performance obligation.

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The Company accessed that the application of IFRS 15 would not have material impact on the Company’s financial position and financial performance except for the above changes of the accounting policies.

• 3) IFRIC 22“Foreign Currency Transactions and Advance Consideration”

IAS 21 stipulated that a foreign currency transaction shall be recorded on initial recognition in the functional currency by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction. IFRIC 22 further explains that the date of the transaction is the date on which an entity recognizes a non-monetary asset or non-monetary liability from payment or receipt of advance consideration. If there are multiple payments or receipts in advance, the entity shall determine the date of the transaction for each payment or receipt of advance consideration.

The Company will apply IFRIC 22 prospectively to all assets, expenses and income recognized on or after January 1, 2018 within the scope of the Interpretation. The Company accessed that the application of IFRIC 22 would not have material impact on the Company’s financial position and financial performance.

Except for the above impact, as of the date the consolidated financial statements were authorized for issue, the Company assessed that the application of other standards and interpretations would not have material impact on the Company’s financial position and financial performance.

• c. New IFRSs in issue but not yet endorsed and issued into effect by the FSC

New, Amended or Revised Standards and Interpretations Annual Improvements to IFRSs 2015-2017 Cycle Amendments to IFRS 9 “Prepayment Features with Negative Compensation” Amendments to IFRS 10 and IAS 28 “Sale or Contribution of Assets between an Investor and its Associate or Joint Venture” IFRS 16 “Leases” IFRS 17 “Insurance Contracts” Amendments to IAS 19 “Plan Amendment, Curtailment or Settlement” Amendments to IAS 28 “Long-term Interests in Associates and Joint Ventures” IFRIC 23 “Uncertainty Over Income Tax Treatments”

Effective Date Announced by IASB (Note 1)

January 1, 2019 January 1, 2019 (Note 2) To be determined by IASB January 1, 2019 (Note 3) January 1, 2021 January 1, 2019 (Note 4) January 1, 2019 January 1, 2019

• Note 1: Unless stated otherwise, the above New IFRSs are effective for annual periods beginning on or after their respective effective dates.

Note 2: The FSC permits the election for early adoption of the amendments starting from 2018.

• Note 3: On December 19, 2017, the FSC announced that IFRS 16 will take effect starting from January 1, 2019.

• Note 4: The Company shall apply these amendments to plan amendments, curtailments or settlements occurring on or after January 1, 2019.

• 16 -

1) IFRS 16 “Leases”

IFRS 16 sets out the accounting standards for leases that will supersede IAS 17 and a number of related interpretations.

Under IFRS 16, if the Company is a lessee, it shall recognize right-of-use assets and lease liabilities for all leases on the consolidated balance sheets except for low-value and short-term leases. The Company may elect to apply the accounting method similar to the accounting for operating lease under IAS 17 to the low-value and short-term leases. On the consolidated statements of comprehensive income, the Company should present the depreciation expense charged on the right-of-use asset separately from interest expense accrued on the lease liability; interest is computed by using effective interest method. On the consolidated statements of cash flows, cash payments for the principal portion of the lease liability are classified within financing activities; cash payments for interest portion are classified within operating activities.

The application of IFRS 16 is not expected to have a material impact on the accounting of the Company as lessor.

When IFRS 16 becomes effective, the Company may elect to apply this Standard either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of the initial application of this Standard recognized at the date of initial application.

2) IFRIC 23 “Uncertainty Over Income Tax Treatments”

IFRIC 23 clarifies that when there is uncertainty over income tax treatments, the Company should assume that the taxation authority will have full knowledge of all related information when making related examinations. If the Company concludes that it is probable that the taxation authority will accept an uncertain tax treatment, the Company should determine the taxable profit, tax bases, unused tax losses, unused tax credits or tax rates consistently with the tax treatments used or planned to be used in its income tax filings. If it is not probable that the taxation authority will accept an uncertain tax treatment, the Company should make estimates using either the most likely amount or the expected value of the tax treatment, depending on which method the entity expects to better predict the resolution of the uncertainty. The Company has to reassess its judgments and estimates if facts and circumstances change.

The Company may elect to apply IFRIC 23 either retrospectively to each prior reporting period presented, if this is possible without the use of hindsight, or retrospectively with the cumulative effect of the initial application of IFRIC 23 recognized at the date of initial application.

Except for the above impact, as of the date the consolidated financial statements were authorized for issue, the Company is continuously assessing the possible impact that the application of other standards and interpretations will have on the Company’s financial position and financial performance, and will disclose the relevant impact when the assessment is completed.

4. SIGNIFICANT ACCOUNTING POLICIES

Statement of Compliance

These consolidated financial statements have been prepared in accordance with the Regulations Governing the Preparation of Financial Reports by Securities Issuers and IFRSs as endorsed and issued into effect by FSC.

• 17 -

Basis of Preparation

These consolidated financial statements have been prepared on the historical cost basis except for financial instruments which are measured at fair value.

The fair value measurements are grouped into Levels 1 to 3 based on the degree to which the fair value measurement inputs are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:

• a. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities;

• b. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

• c. Level 3 inputs are unobservable inputs for the asset or liability.

For readers’ convenience, the accompanying consolidated financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If inconsistencies arise between the English version and the Chinese version or if differences arise in the interpretations between the two versions, the Chinese version of the consolidated financial statements shall prevail. However, the accompanying consolidated financial statements do not include the English translation of the additional footnote disclosures that are not required under accounting principles and practices generally applied in the Republic of China but are required by the Securities and Futures Bureau for their oversight purposes.

Classification of Current and Non-current Assets and Liabilities

Current assets include:

• a. Assets held primarily for trading purposes;

• b. Assets to be realized within twelve months after the reporting period; and

• c. Cash and cash equivalents unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period.

Current liabilities are:

• a. Liabilities held primarily for the purpose of trading;

• b. Liabilities due to be settled within twelve months after the reporting period, even if an agreement to refinance, or to reschedule payments, on a long-term basis is completed after the reporting period and before the consolidated financial statements are authorized for issue; and

• c. Liabilities for which the Company does not have an unconditional right to defer settlement for at least twelve months after the reporting period. Terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification.

Aforementioned assets and liabilities that are not classified as current are classified as non-current.

• 18 -

Basis of Consolidation

The consolidated financial statements incorporate the financial statements of the HTC and the entities controlled by the HTC (i.e. its subsidiaries). Income and expenses of subsidiaries acquired or disposed of during the period are included in the consolidated statement of profit or loss and other comprehensive income from the effective date of acquisition up to the effective date of disposal, as appropriate. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by the Company. All intra-group transactions, balances, income and expenses are eliminated in full upon consolidation.

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

When the Company loses control of a subsidiary, a gain or loss is recognized in profit or loss and is calculated as the difference between (i) the aggregate of the fair value of the consideration received and any investment retained in the former subsidiary at its fair value at the date when control is lost and (ii) the assets (including any goodwill) and liabilities and any non-controlling interests of the former subsidiary at their carrying amounts at the date when control is lost. The Company accounts for all amounts recognized in other comprehensive income in relation to that subsidiary on the same basis as would be required if the Company had directly disposed of the related assets or liabilities.

The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under IAS 39 “Financial Instruments: Recognition and Measurement” or, when applicable, the cost on initial recognition of an investment in an associate or a joint venture.

See Note 15 for the detailed information of subsidiaries (including the percentage of ownership and main business).

Business Combinations

Acquisitions of businesses are accounted for using the acquisition method. Acquisition-related costs are generally recognized in profit or loss as they are incurred.

Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after re-assessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer’s previously held interest in the acquiree, the excess is recognized immediately in profit or loss as a bargain purchase gain.

Non-controlling interests are initially measured either at fair value or at the non-controlling interests’ proportionate share of the fair value of the acquiree’s identifiable net assets.

Foreign Currencies

In preparing the financial statements of each individual group entity, transactions in currencies other than the entity’s functional currency (foreign currencies) are recognized at the rates of exchange prevailing at the dates of the transactions.

• 19 -

At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Exchange differences on monetary items arising from settlement or translation are recognized in profit or loss in the period in which they arise except for:

• a. Exchange differences on transactions entered into in order to hedge certain foreign currency risks (please refer to Note 4 “Hedge accounting” section); and

• b. Exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur in the foreseeable future (therefore forming part of the net investment in the foreign operation), which are recognized initially in other comprehensive income and reclassified from equity to profit or loss on disposal of the net investments.

Non-monetary items measured at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Exchange differences arising on the retranslation of non-monetary items are included in profit or loss for the period except for exchange differences arising from the retranslation of non-monetary items in respect of which gains and losses are recognized directly in other comprehensive income, in which case, the exchange differences are also recognized directly in other comprehensive income.

Non-monetary items that are measured at historical cost in a foreign currency are not retranslated.

For the purposes of presenting consolidated financial statements, the assets and liabilities of the Company’s foreign operations are translated into New Taiwan dollars using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are recognized in other comprehensive income and accumulated in equity (attributed to the owners of the Company and non-controlling interests as appropriate).

On the disposal of a foreign operation (i.e. a disposal of the Company’s entire interest in a foreign operation, or a disposal involving loss of control over a subsidiary that includes a foreign operation, or a partial disposal of an interest in a joint venture or an associate that includes a foreign operation of which the retained interest becomes a financial asset), all of the exchange differences accumulated in equity in respect of that operation attributable to the owners of the Company are reclassified to profit or loss.

In relation to a partial disposal of a subsidiary that does not result in the Company losing control over the subsidiary, the proportionate share of accumulated exchange differences is re-attributed to non-controlling interests of the subsidiary and is not recognized in profit or loss. For all other partial disposals, the proportionate share of the accumulated exchange differences recognized in other comprehensive income is reclassified to profit or loss.

Goodwill and fair value adjustments on identifiable assets and liabilities acquired arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the rate of exchange prevailing at the end of each reporting period. Exchange differences arising are recognized in other comprehensive income.

Inventories

Inventories consist of raw materials, finished goods and work-in-process and are stated at the lower of cost or net realizable value. Inventory write-downs are made by item, 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 costs necessary to make the sale. Inventories are recorded at weighted-average cost on the balance sheet date.

• 20 -

Investments in Associates and Joint Ventures

An associate is an entity over which the Company has significant influence and that is neither a subsidiary nor an interest in a joint venture. Joint venture is a joint arrangement whereby the Company and other parties that have joint control of the arrangement have rights to the net assets of the arrangement.

The Company uses the equity method to account for its investments in associates and joint ventures.

Under the equity method, investments in an associate and a joint venture are initially recognized in the consolidated balance sheet at cost and adjusted thereafter to recognize the Company’s share of the profit or loss and other comprehensive income of the associate and joint venture. The Company also recognizes the changes in the equity of associates and joint venture attributable to the Company.

When the Company subscribes for additional new shares of the associate and joint venture at a percentage different from its existing ownership percentage, the resulting carrying amount of the investment differs from the amount of the Company’s proportionate interest in the associate and joint venture. The Company records such a difference as an adjustment to investments accounted for by the equity method, with a corresponding amount charged or credited to capital surplus. If the Company’s ownership interest is reduced due to the additional subscription of the new shares of associate and joint venture, the proportionate amount of the gains or losses previously recognized in other comprehensive income in relation to that associate and joint venture is reclassified to profit or loss on the same basis as would be required if the investee had directly disposed of the related assets or liabilities. When the adjustment should be debited to capital surplus, but the capital surplus recognized from investments accounted for by the equity method is insufficient, the shortage is debited to retained earnings.

When the Company’s share of losses of an associate and a joint venture equals or exceeds its interest in that associate and joint venture (which includes any carrying amount of the investment accounted for by the equity method and long-term interests that, in substance, form part of the Company’s net investment in the associate and joint venture), the Company discontinues recognizing its share of further losses. Additional losses and liabilities are recognized only to the extent that the Company has incurred legal obligations, or constructive obligations, or made payments on behalf of that associate and joint venture.

Any excess of the cost of acquisition over the Company’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities of an associate and a joint venture recognized at the date of acquisition is recognized as goodwill, which is included within the carrying amount of the investment and is not amortized. Any excess of the Company’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognized immediately in profit or loss.

The entire carrying amount of the investment (including goodwill) is tested for impairment as a single asset by comparing its recoverable amount with its carrying amount. Any impairment loss recognized is deducted from the carrying amount of the investment. Any reversal of that impairment loss is recognized to the extent that the recoverable amount of the investment subsequently increases.

The Company discontinues the use of the equity method from the date on which its investment ceases to be an associate and the joint venture. Any retained investment is measured at fair value at that date and the fair value is regarded as its fair value on initial recognition as a financial asset. The difference between the previous carrying amount of the associate and the joint venture attributable to the retained interest and its fair value is included in the determination of the gain or loss on disposal of the associate and the joint venture. The Company accounts for all amounts previously recognized in other comprehensive income in relation to that associate and the joint venture on the same basis as would be required if that associate had directly disposed of the related assets or liabilities.

• 21 -

When a group entity transacts with its associate and joint venture, profits and losses resulting from the transactions with the associate and joint venture are recognized in the Company’ consolidated financial statements only to the extent of interests in the associate and the joint venture that are not related to the Company.

Property, Plant and Equipment

Property, plant and equipment are stated at cost, less accumulated depreciation and accumulated impairment loss.

Properties, plant and equipment in the course of construction are carried at cost, less any recognized impairment loss. Cost includes professional fees and borrowing costs eligible for capitalization. Such properties are depreciated and classified to the appropriate categories of property, plant and equipment when completed and ready for intended use.

Depreciation on property, plant and equipment is recognized using the straight-line method. Each significant part is depreciated separately. The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis.

On derecognition of an item of property, plant and equipment, the difference between the sales proceeds and the carrying amount of the asset is recognized in profit or loss.

Investment Properties

Investment properties are properties held to earn rentals and/or for capital appreciation. Investment properties also include land held for a currently undetermined future use.

Investment properties are measured initially at cost, including transaction costs. Subsequent to initial recognition, investment properties are measured at cost less accumulated depreciation and accumulated impairment loss. Depreciation is recognized using the straight-line method.

On derecognition of an investment property, the difference between the net disposal proceeds and the carrying amount of the asset is included in profit or loss.

Goodwill

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

For the purposes of impairment testing, goodwill is allocated to each of the Company’s cash-generating units (or groups of cash-generating units) that is expected to benefit from the synergies of the combination.

A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently when there is an indication that the unit may be impaired, by comparing its carrying amount, including the attributable goodwill, with its recoverable amount. However, if the goodwill allocated to a cash-generating unit was acquired in a business combination during the current annual period, that unit shall be tested for impairment before the end of the current annual period. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss is recognized directly in profit or loss. An impairment loss recognized for goodwill is not reversed in subsequent periods.

• 22 -

If goodwill has been allocated to a cash-generating unit and the entity disposes of an operation within that unit, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal, and is measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit retained.

Intangible Assets

Intangible assets acquired separately

Intangible assets with finite useful lives that are acquired separately are initially measured at cost and subsequently measured at cost less accumulated amortization and accumulated impairment loss. Amortization is recognized on a straight-line basis. The estimated useful life, residual value, and amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis. The residual value of an intangible asset with a finite useful life shall be assumed to be zero unless the Company expects to dispose of the intangible asset before the end of its economic life. Intangible assets with indefinite useful lives that are acquired separately are measured at cost less accumulated impairment loss.

Intangible assets acquired in a business combination

Intangible assets acquired in a business combination and recognized separately from goodwill are initially recognized at their fair value at the acquisition date (which is regarded as their cost). Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortization and accumulated impairment losses, on the same basis as intangible assets that are acquired separately.

Derecognition of intangible assets

Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognized in profit or loss when the asset is derecognized.

Impairment of Tangible and Intangible Assets Other Than Goodwill

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

Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired.

Recoverable amount is the higher of fair value less costs to sell and value in use. If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, the carrying amount of the asset or cash-generating unit is reduced to its recoverable amount, with the resulting impairment loss recognized in profit or loss.

• 23 -

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

Non-current Assets Held for Sale

Non-current assets are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the non-current asset is available for immediate sale in its present condition. To meet the criteria for the sale being highly probable, the appropriate level of management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification.

Non-current assets classified as held for sale are measured at the lower of their previous carrying amount and fair value less costs to sell. Recognition of depreciation of those assets would cease.

Financial Instruments

Financial assets and financial liabilities are recognized when a group entity becomes a party to the contractual provisions of the instruments.

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

Financial assets

All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis.

• a. Measurement category

Financial assets are classified into the following categories: Financial assets at fair value through profit or loss, available-for-sale financial assets, and loans and receivables.

• 1) Financial assets at fair value through profit or loss (FVTPL)

Financial assets are classified as at fair value through profit or loss when the financial assets are either held for trading or it is designated as at fair value through profit or loss.

A financial asset may be designated as at fair value through profit or loss upon initial recognition if:

• Such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or

• The financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Company’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or

• The contract contains one or more embedded derivatives so that the entire hybrid (combined) contract can be designated as at fair value through profit or loss.

• 24 -

Financial assets at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognized in profit or loss. The net gain or loss recognized in profit or loss incorporates any dividend or interest earned on the financial asset and is included in the ‘other gains and losses’ line item. Fair value is determined in the manner described in Note 32.

Investments in equity instruments under financial assets at FVTPL that do not have a listed market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity instruments are subsequently measured at cost less any identified impairment loss at the end of each reporting period and are recognized in a separate line item as financial assets carried at cost. The financial assets are remeasured at fair value if they can be reliably measured at fair value in a subsequent period. The difference between the carrying amount and the fair value is recognized in profit or loss.

2) Available-for-sales (AFS) financial assets

AFS financial assets are non-derivatives that are either designated as AFS or are not classified as (i) loans and receivables, (ii) held-to-maturity investments or (iii) financial assets at FVTPL.

AFS assets are stated at fair value. Changes in the carrying amount of AFS monetary financial assets relating to changes in foreign currency exchange rates (see below), interest income calculated using the effective interest method and dividends on AFS equity investments are recognized in profit or loss. Other changes in the carrying amount of AFS financial assets are recognized in other comprehensive income and accumulated under the heading of investments revaluation reserve. When the investment is disposed of or is determined to be impaired, the cumulative gain or loss that previously accumulated in the investments revaluation reserve is reclassified to profit or loss.

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

Available-for-sale equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity investments are measured at cost less any identified impairment loss at the end of each reporting period and are presented in a separate line item as financial assets carried at cost. If, in a subsequent period, the fair value of the financial assets can be reliably measured, the financial assets are remeasured at fair value. The difference between carrying amount and fair value is recognized in other comprehensive income on financial assets. Any impairment losses are recognized in profit and loss.

3) Loans and receivables

Loans and receivables (including trade receivables, cash and cash equivalent, debt investments with no active market, other current financial assets, and other receivables) are measured at amortized cost using the effective interest method, less any impairment, except for short-term receivables when the effect of discounting is immaterial.

Cash equivalent includes time deposits with original maturities within three months from the date of acquisition, highly liquid, readily convertible to a known amount of cash and be subject to an insignificant risk of changes in value. These cash equivalents are held for the purpose of meeting short-term cash commitments.

• 25 -

• b. Impairment of financial assets

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

For financial assets carried at amortized cost, such as trade receivables and other receivables assets are assessed for impairment on a collective basis even if they were assessed not to be impaired individually. Objective evidence of impairment for a portfolio of receivables could include the Company’s past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period of 60 days, as well as observable changes in national or local economic conditions that correlate with default on receivables.

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

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

For AFS equity investments, a significant or prolonged decline in the fair value of the security below its cost is considered to be objective evidence of impairment.

For all other financial assets, objective evidence of impairment includes significant financial difficulty of the issuer or counterparty, breach of contract, such as a default or delinquency in interest or principal payments, it becoming probable that the borrower will enter bankruptcy or financial re-organization and the disappearance of an active market for that financial asset because of financial difficulties.

When an AFS financial asset is considered to be impaired, cumulative gains or losses previously recognized in other comprehensive income are reclassified to profit or loss in the period.

In respect of AFS equity securities, impairment losses previously recognized in profit or loss are not reversed through profit or loss. Any increase in fair value subsequent to an impairment loss is recognized in other comprehensive income and accumulated under the heading of investments revaluation reserve. In respect of AFS debt securities, impairment losses are subsequently reversed through profit or loss if an increase in the fair value of the investment can be objectively related to an event occurring after the recognition of the impairment loss.

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

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

• 26 -

• c. Derecognition of financial assets

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

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

Equity instruments

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

Equity instruments issued by a group entity are recognized at the proceeds received, net of direct issue costs.

Repurchase of the Company’s own equity instruments is recognized in and deducted directly from equity. No gain or loss is recognized in profit or loss on the purchase, sale, issue or cancellation of the Company’s own equity instruments.

Financial liabilities

• a. Subsequent measurement

Except the following situation, all the financial liabilities are measured at amortized cost using the effective interest method:

Financial liabilities at fair value through profit or loss (FVTPL)

Financial liabilities are classified as at FVTPL when the financial liability is either held for trading or it is designated as at FVTPL.

A financial liability may be designated as at fair value through profit or loss upon initial recognition when doing so results in more relevant information and if:

• Such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or

• The financial liability forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Company’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or

• The contract contains one or more embedded derivatives so that the entire combined contract (asset or liability) can be designated as at fair value through profit or loss.

Financial liabilities at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognized in profit or loss. The net gain or loss recognized in profit or loss incorporates any interest and dividend paid on the financial liability. Fair value is determined in the manner described in Note 32.

• 27 -

• b. Derecognition of financial liabilities

The difference between the carrying amount of the financial liability derecognized and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognized in profit or loss.

Derivative financial instruments

The Company enters into a variety of derivative financial instruments to manage its exposure to foreign exchange rate risks, including foreign exchange forward contracts.

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

Derivatives embedded in non-derivative host contracts are treated as separate derivatives when they meet the definition of a derivative, their risks and characteristics are not closely related to those of the host contracts and the contracts are not measured at FVTPL.

Hedge Accounting

The Company designates certain hedging instruments, which include derivatives, embedded derivatives and non-derivatives in respect of foreign currency risk, as either cash flow hedges. Hedges of foreign exchange risk on firm commitments are accounted for as cash flow hedges.

Fair value hedges

Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognized in profit or loss immediately, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The change in the fair value of the hedging instrument and the change in the hedged item attributable to the hedged risk are recognized in profit or loss in the line item relating to the hedged item.

Hedge accounting is discontinued prospectively when the Company revokes the designated hedging relationship, or when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer meets the criteria for hedge accounting.

Cash flow hedges

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in profit or loss.

The associated gains or losses that were recognized in other comprehensive income are reclassified from equity to profit or loss as a reclassification adjustment in the line item relating to the hedged item in the same period when the hedged item affects profit or loss. If a hedge of a forecast transaction subsequently results in the recognition of a non-financial asset or a non-financial liability, the associated gains and losses that were recognized in other comprehensive income are removed from equity and are included in the initial cost of the non-financial asset or non-financial liability.

• 28 -

Hedge accounting is discontinued prospectively when the Company revokes the designated hedging relationship, or when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer meets the criteria for hedge accounting. The cumulative gain or loss on the hedging instrument that has been previously recognized in other comprehensive income from the period when the hedge was effective remains separately in equity until the forecast transaction occurs. When a forecast transaction is no longer expected to occur, the gain or loss accumulated in equity is recognized immediately in profit or loss.

Provisions

Provisions, including those arising from contractual obligation specified in service concession arrangement to maintain or restore infrastructure before it is handed over to the grantor, are measured at the best estimate of the discounted cash flows of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation.

When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.

• a. Warranty provisions

The Company provides warranty service for one year to two years. The warranty liability is estimated on the basis of evaluation of the products under warranty, past warranty experience, and pertinent factors.

• b. Provisions for contingent loss on purchase orders

The provision for contingent loss on purchase orders is estimated after taking into account the effects of changes in the product market, evaluating the foregoing effects on inventory management and adjusting the Company’s purchases.

Revenue Recognition

Revenue is measured at the fair value of the consideration received or receivable. Revenue is reduced for estimated customer returns, rebates and other similar allowances. Sales returns are recognized at the time of sale provided the seller can reliably estimate future returns and recognizes a liability for returns based on previous experience and other relevant factors.

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

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

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

• The amount of revenue can be measured reliably;

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

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

The Company does not recognize sales revenue on materials delivered to subcontractors because this delivery does not involve a transfer of risks and rewards of materials ownership.

Specifically, sales of goods are recognized when goods are delivered and title has been passed.

• 29 -

Employee Benefits

Short-term employee benefits

Liabilities recognized in respect of short-term employee benefits are measured at the undiscounted amount of the benefits expected to be paid in exchange for the related service.

Retirement benefits

Payments to defined contribution retirement benefit plans are recognized as an expense when employees have rendered service entitling them to the contributions.

Defined benefit costs (including service cost, net interest and remeasurement) under the defined benefit retirement benefit plans are determined using the projected unit credit method. Service cost (including current service cost and net interest on the net defined benefit liability (asset) are recognized as employee benefits expense in the period they occur. Remeasurement, comprising actuarial gains and losses and the return on plan assets (excluding interest), is recognized in other comprehensive income in the period in which they occur. Remeasurement recognized in other comprehensive income is reflected immediately in retained earnings and will not be reclassified to profit or loss.

Net defined benefit liability (asset) represents the actual deficit (surplus) in the Company’s defined benefit plan. Any surplus resulting from this calculation is limited to the present value of any refunds from the plans or reductions in future contributions to the plans.

- Other long term employee benefits

Other long-term employee benefits are accounted for in the same way as the accounting required for defined benefit plans except that remeasurement is recognized in profit or loss.

Termination benefits

A liability for a termination benefit is recognized at the earlier of when the Company can no longer withdraw the offer of the termination benefit and when the Company recognizes any related restructuring costs.

Share-based Payment Arrangements

Share-based payment transactions of the Company

Equity-settled share-based payments to employees are measured at the fair value of the equity instruments at the grant date.

The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Company’s estimate of equity instruments that will eventually vest, with a corresponding increase in capital surplus - employee share options. The fair value determined at the grant date of the equity-settled share-based payments is recognized as an expense in full at the grant date when the share options granted vest immediately.

Restricted shares for employees are recognized as an unearned employ’s bonus on the date of grant, with a corresponding increase in capital surplus - restricted shares for employees.

At the end of each reporting period, the Company revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognized in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to the capital surplus - employee share options and capital surplus - restricted shares for employees.

• 30 -

Taxation

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

a. Current tax

According to the Income Tax Law, an additional tax at 10% of unappropriated earnings is provided for as income tax in the year the shareholders approve to retain the earnings.

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

b. Deferred tax

Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences, unused loss carry forward and unused tax credits for purchases of machinery, equipment and technology, research and development expenditures, and personnel training expenditures to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized. Such deferred tax assets and liabilities are not recognized if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

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

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. A previously unrecognized deferred tax asset is also reviewed at the end of each reporting period and recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.

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

• c. Current and deferred tax for the year

Current and deferred tax are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income or directly in equity, in which case, the current and deferred tax are also recognized in other comprehensive income or directly in equity respectively. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination.

• 31 -

Accrued Marketing Expenses

The Company accrues marketing expenses on the basis of agreements and any known factors that would significantly affect the accruals. In addition, depending on the nature of relevant events, the accrued marketing expenses are accounted for as an increase in marketing expenses or as a decrease in revenues.

Treasury Share

When the Company acquires its outstanding shares that have not been disposed or retired, treasury share is stated at cost and shown as a deduction in shareholders’ equity. When treasury shares are sold, if the selling price is above the book value, the difference should be credited to the capital surplus - treasury share transactions. If the selling price is below the book value, the difference should first be offset against capital surplus from the same class of treasury share transactions, and the remainder, if any, debited to retained earnings. The carrying value of treasury share is calculated using the weighted-average approach in accordance with the purpose of the acquisition.

When the Company’s treasury share is retired, the treasury share account should be credited, and the capital surplus - premium on stock account and capital stock account should be debited proportionately according to the share ratio. The carrying value of treasury share in excess of the sum of its par value and premium on stock should first be offset against capital surplus from the same class of treasury share transactions, and the remainder, if any, debited to retained earnings. The sum of the par value and premium on treasury share in excess of its carrying value should be credited to capital surplus from the same class of treasury share transactions.

5. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY

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

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

a. Accrued marketing and advertising expenses

The Company recognizes sale of goods as the conditions are met. For information on the principles of revenue recognition, please refer to Note 4 “revenue recognition” section. The related marketing and advertising expenses recognized as reduction of sales amount or as current expenses are estimated on the basis of agreement, past experience and any known factors. The Company reviews the reasonableness of the estimation periodically.

As of December 31, 2017 and 2016, the carrying amounts of accrued marketing and advertising expenses were NT$5,964,240 thousand and NT$9,791,579 thousand, respectively.

• b. Allowances for doubtful debts

Receivables are assessed for impairment at the end of each reporting period and considered impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the receivables, the estimated future cash flows of the asset have been affected.

As of December 31, 2017 and 2016, the carrying amounts of allowances for doubtful debts were NT$3,901,541 thousand and NT$4,187,999 thousand, respectively.

• 32 -

• c. Impairment of tangible and intangible assets other than goodwill

The Company measures the useful life of individual assets and the probable future economic benefits in a specific asset group, which depends on subjective judgment, asset characteristics and industry, during the impairment testing process. Any change in accounting estimates due to economic circumstances and business strategies might cause material impairment in the future.

Impairment loss on tangible and intangible assets other than goodwill recognized were NT$444,972 thousand and NT$12,595 thousand for the years ended December 31, 2017 and 2016, respectively.

• d. Valuation of inventories

Inventories are measured at the lower of cost or net realizable value. Judgment and estimation are applied in the determination of net realizable value at the end of reporting period.

Inventories are usually written down to net realizable value item by item if those inventories are damaged, have become wholly or partially obsolete, or if their selling prices have declined.

As of December 31, 2017 and 2016, the carrying amounts of inventories were NT$7,381,426 thousand and NT$14,163,571 thousand, respectively.

• e. Realization of deferred tax assets

Deferred tax assets should be recognized only to the extent that the entity has sufficient taxable temporary differences or there is convincing other evidence that sufficient taxable profit will be available. The management applies judgment and accounting estimates to evaluate the realization of deferred tax assets. The management takes expected sales growth, profit rate, duration of exemption, tax credits, tax planning and etc. into account to make judgment and estimates. Any change in global economy, industry environment and regulations might cause material adjustments to deferred tax assets.

As of December 31, 2017 and 2016, the carrying amounts of deferred tax assets were NT$8,990,648 thousand and NT$8,957,876 thousand, respectively.

• f. Estimates of warranty provision

The Company estimates cost of product warranties at the time the revenue is recognized.

The estimates of warranty provision are on the basis of sold products and the amount of expenditure required for settlement of present obligation at the end of the reporting period.

The Company might recognize additional provisions because of the possible complex intellectual product malfunctions and the change of local regulations, articles and industry environment.

As of December 31, 2017 and 2016, the carrying amounts of warranty provision were NT$2,795,933 thousand and NT$3,010,969 thousand, respectively.

• 33 -

6. CASH AND CASH EQUIVALENTS

Cash on hand Checking accounts and demand deposits Time deposits (with original maturities less than three months)		December 31	December 31
		2017 $ 1,901 8,502,868 1,938,458 $ 10,443,227	2016 $ 1,811 24,722,314 5,356,092 $ 30,080,217

The market rate intervals of cash in bank at the end of the reporting period were as follows:

Bank balance	December 31
	2017 2016 0.01%-0.59% 0.01%-0.62%

7. FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS

Financial assets held for trading Derivatives financial assets (not under hedge accounting) Foreign exchange contracts Financial liabilities held for trading Derivatives financial liabilities (not under hedge accounting) Foreign exchange contracts		December 31	December 31
		2017 $ 65,199 $ 75,184	2016 $ 143,642 $ 133,420

The Company entered into forward exchange contracts to manage exposures due to exchange rate fluctuations of foreign currency denominated assets and liabilities. At the end of the reporting period, outstanding forward exchange contracts not under hedge accounting were as follows:

Forward Exchange Contracts

				Notional Amount	Notional Amount
	Buy/Sell	Currency	Maturity Date	(In Thousands)
December 31, 2017
Foreign exchange contracts	Sell	SGD/USD	2018.01.03	SGD	3,000
Foreign exchange contracts	Sell	JPY/USD	2018.01.10-2018.02.14	JPY	4,100,000
Foreign exchange contracts	Sell	GBP/USD	2018.01.19	GBP	3,000
Foreign exchange contracts	Sell	CAD/USD	2018.01.26	CAD	3,500
Foreign exchange contracts	Sell	EUR/USD	2018.01.10-2018.01.19	EUR	8,000
Foreign exchange contracts	Sell	AUD/USD	2018.02.09	AUD	1,000
Foreign exchange contracts	Buy	RMB/USD	2018.01.12-2018.02.09	RMB	750,648
Foreign exchange contracts	Buy	USD/NTD	2018.01.10-2018.03.14	USD	440,500
Foreign exchange contracts	Buy	JPY/USD	2018.01.19	JPY	2,818,335
Foreign exchange contracts	Buy	EUR/USD	2018.01.19-2018.01.26	EUR	20,000
Foreign exchange contracts	Buy	AUD/USD	2018.02.09	AUD	10,000
					(Continued)

• 34 -

				Notional Amount	Notional Amount
	Buy/Sell	Currency	Maturity Date	(In Thousands)
December 31, 2016
Foreign exchange contracts	Sell	USD/NTD	2017.01.06-2017.01.25	USD	120,000
Foreign exchange contracts	Sell	EUR/USD	2017.01.06	EUR	40,000
Foreign exchange contracts	Sell	JPY/USD	2017.01.06-2017.01.25	JPY	5,085,622
Foreign exchange contracts	Sell	GBP/USD	2017.01.06-2017.01.20	GBP	6,000
Foreign exchange contracts	Buy	RMB/USD	2017.01.06-2017.01.25	RMB	926,817
Foreign exchange contracts	Buy	CAD/USD	2017.01.11-2017.01.25	CAD	5,000
Foreign exchange contracts	Buy	USD/NTD	2017.01.06-2017.02.02	USD	387,500
Foreign exchange contracts	Buy	SGD/USD	2017.01.06-2017.01.25	SGD	252,579
Foreign exchange contracts	Buy	AUD/USD	2017.01.06-2017.01.11	AUD	4,700
					(Concluded)

8. DERIVATIVE FINANCIAL INSTRUMENTS FOR HEDGING

The Company’s foreign-currency cash flows derived from the highly probable forecast transaction may lead to risks on foreign-currency financial assets and liabilities and estimated future cash flows due to the exchange rate fluctuations. The Company assesses the risks may be significant; thus, the Company entered into derivative contracts to hedge against foreign-currency exchange risks.

Gains and losses of hedging instruments were included in the following line items in the consolidated statements of comprehensive income:

Revenues Other gains and losses	For the Year Ended December 31	For the Year Ended December 31	For the Year Ended December 31
		2017 $ (4,389) 3,538 $ (851)	2016 $ (40,299) 2,056 $ (38,243)

9. FINANCIAL ASSETS MEASURED AT COST

Domestic unlisted equity investment Overseas unlisted equity investment Overseas unlisted mutual funds Derivative financial instruments - convertible bonds Derivative financial instruments - overseas warrants Classified according to financial asset measurement categories Financial assets at fair value through profit or loss Available-for-sale financial assets		December 31	December 31
		2017 $ 626,281 1,779,994 649,223 116,226 15,516 $ 3,187,240 $ 131,742 3,055,498 $ 3,187,240	2016 $ 643,961 2,013,101 706,674 - - $ 3,363,736 $ - 3,363,736 $ 3,363,736

• 35 -

Management believed that the above unlisted equity investments and mutual funds held by the Company, whose fair value cannot be reliably measured due to the range of reasonable fair value estimates was so significant; therefore, they were measured at cost less impairment, if any, at the end of reporting period.

For the year ended December 31, 2017, the Company determined that the recoverable amounts of financial assets measured at cost were less than its carrying amounts, and thus recognized an impairment loss of NT$109,779 thousand classified as other gains and losses, please refer to Note 26.

10. OTHER CURRENT FINANCIAL ASSETS

Time deposits with original maturities more than three months		December 31	December 31
		2017 $ 7,988,363	2016 $ 5,750,450

The market rate intervals of time deposits with original maturities more than three months at the end of the reporting period were as follows:

Time deposits with original maturities more than three months	December 31
	2017 2016 1.2%-2.68% 0.7%-2.03%

For details of pledged other current financial assets, please refer to Note 34.

11. TRADE RECEIVABLES AND OTHER RECEIVABLES

Trade and overdue receivables Trade receivables Trade receivables - related parties Overdue receivables Less: Allowances for impairment loss Less: Allowances for impairment loss - overdue receivables Current Non-current Other receivables Receivables from disposal of investments Interest receivables VAT refund receivables Others Less: Allowances for impairment loss		December 31	December 31
		2017 $ 9,023,748 22,400 1,840,947 (509,052) (1,840,947) $ 8,537,096 $ 8,537,096 - $ 8,537,096 $ 1,326,104 248,786 38,350 41,799 (1,551,542) $ 103,497	2016 $ 16,818,037 15,720 1,840,947 (871,922) (1,840,947) $ 15,961,835 $ 15,961,835 - $ 15,961,835 $ 1,260,795 234,355 113,839 34,667 (1,475,130) $ 168,526 (Continued)

• 36 -

Current - other receivables Non-current - other receivables		**December 31 **	**December 31 **
		2017 $ 103,497 - $ 103,497	2016 $ 168,526 - $ 168,526 (Concluded)

Trade Receivables

The credit period on sales of goods is 30-75 days. No interest is charged on trade receivables before the due date. Thereafter, interest is charged at 1-18% per annum on the outstanding balance, which is considered to be non-controversial, to some of customers. In determining the recoverability of a trade receivable, the Company considered any change in the credit quality of the trade receivable since the date credit was initially granted to the end of the reporting period. For customers with low credit risk, the Company has recognized an allowance for doubtful debts of 1-5% against receivables past due beyond 31-90 days and of 5-100% against receivables past due beyond 91 days. For customers with high credit risk, the Company has recognized an allowance for impairment loss of 10-100% against receivables past due more than 31 days.

Before accepting any new customer, the Company’s Department of Financial and Accounting evaluates the potential customer’s credit quality and defines credit limits and scorings by customer. The factor of overdue attributed to customers are reviewed once a week and the Company evaluates the financial performance periodically for the adjustment of credit limits.

The concentration of credit risk is limited due to the fact that the customer base is diverse except for single major customer. The Company will evaluate the level of credit risk periodically and reconcile the receivables in order to control the credit condition of the single major customer.

As of the reporting date, the Company had no receivables that are past due but not impaired.

Trade receivables aged over one year were reclassified as overdue receivables which was recognized as long-term receivables.

Aging of trade receivables

1-90 days 91-180 days Over 181 days		December 31	December 31
		2017 $ 244,443 63,613 340,280 $ 648,336	2016 $ 2,120,237 445,727 323,945 $ 2,889,909

The above aging schedule was based on the past due days from end of credit term.

• 37 -

Aging of impaired trade receivables

1-90 days 91-180 days Over 181 days		December 31	December 31
		2017 $ 139,284 - - $ 139,284	2016 $ 1,887,581 130,406 - $ 2,017,987

The above aging of trade receivables after deducting the allowance for impairment loss is presented based on the past due days from end of credit term.

The movements of the allowance for doubtful trade receivables and overdue receivables were as follows:

Movement in the allowances for doubtful debts

Balance, beginning of the year Less: Impairment loss reversed Less: Amounts written off during the year as uncollectable Less: Effect of foreign currency exchange differences Balance, end of the year	For the Year Ended December 31	For the Year Ended December 31	For the Year Ended December 31
		2017 $ 2,712,869 (362,870) - - $ 2,349,999	2016 $ 3,016,914 (299,951) (4,025) (69) $ 2,712,869

Other Receivables

Receivable from disposal of investments is derived from sale of shares of Saffron Media Group Ltd. in 2013. According to the agreement, the principle and interest will be received in full in September 2018 and could be repaid by the buyer in whole or in part, at any time.

Others were primarily prepayments on behalf of vendors or customers and grants from suppliers.

The movements of the allowance for doubtful other receivables were as follows:

Balance, beginning of year Add: Impairment loss recognized Add: Effect of foreign currency exchange differences Balance, end of year	For the Year Ended December 31	For the Year Ended December 31	For the Year Ended December 31
		2017 $ 1,475,130 - 76,412 $ 1,551,542	2016 $ - 1,475,130 - $ 1,475,130

• 38 -

12. INVENTORIES

Finished goods Work-in-process Semi-finished goods Raw materials Inventory in transit		December 31	December 31
		2017 $ 1,602,962 124,318 1,094,183 4,403,010 156,953 $ 7,381,426	2016 $ 2,468,223 233,952 2,168,606 9,125,604 167,186 $ 14,163,571

The cost of inventories recognized as operation costs for the years ended December 31, 2017 and 2016 included inventory write-downs of NT$5,713,443 thousand and NT$2,041,858 thousand, respectively.

13. PREPAYMENTS

Royalty Net input VAT Prepaid equipment Prepayments to suppliers Land use right Others Current Non-current		December 31	December 31
		2017 $ 2,633,750 480,516 52,744 9,422 - 800,287 $ 3,976,719 $ 1,742,986 2,233,733 $ 3,976,719	2016 $ 3,109,677 727,750 75,954 17,431 107,732 530,831 $ 4,569,375 $ 1,833,499 2,735,876 $ 4,569,375

Prepayments for royalty were primarily for getting royalty right and were classified as current or non-current in accordance with their nature. For details of content of contracts, please refer to Note 38.

The land use right was reclassified as non-current assets held for sale in March 2017. For the detail, please see Note 14.

14. NON-CURRENT ASSETS HELD FOR SALE

Land and buildings held for sale		December 31	December 31
		2017 $ 1,647,763	2016 $ -

On December 29, 2015, the HTC’s Board of Directors resolved to sell a plot of land and buildings to Inventec Corporation for a total amount of NT$6,060,000 thousand. The Company had completed the disposal and transferred its controlling right over the subject properties to the acquirer in February 2016. For the amount of gains and losses for disposal NT$2,091,594 thousand, please see Note 26 for details.

• 39 -

On March 15, 2017, the HTC’ Board of Directors passed a resolution to sell land and factory in Shanghai to Shanghai Xingbao Information Technology Co., Ltd. with an amount of RMB630,000 thousand. The trading amount of RMB315,000 thousand has been collected and recognized as advance receipts. While the transferring process has not yet been completed, the assets was recognized as non-current assets held for sale without impairment loss valuated as of December 31, 2017.

15. SUBSIDIARIES

a. Subsidiaries included in the consolidated financial statements

The consolidated entities as of December 31, 2017 and 2016 were as follows:

Investor Investee Main Businesses HTC Corporation H.T.C. (B.V.I.) Corp. International holding company and general investing activities Communication Global Certification Inc. Import of controlled telecommunications radio-frequency devices and software services High Tech Computer Asia Pacific Pte. Ltd. International holding company; marketing, repair and after-sales services HTC Investment Corporation General investing activities PT. High Tech Computer Indonesia Marketing, repair and after-sales services HTC I Investment Corporation General investing activities HTC Holding Cooperatief U.A. International holding company HTC Investment One (BVI) Corporation Holding S3 Graphics Co., Ltd. and general investing activities HTC Investment (BVI) Corporation General investing activities HTC VIVE Holding (BVI) Corp. International holding company HTC VIVE Investment (BVI) Corp. General investing activities DeepQ Holding (BVI) Corp. International holding company HTC VR Content (BVI) Corp. 〃 HTC Smartphone (BVI) Corp. 〃 H.T.C. (B.V.I.) Corp. High Tech Computer Corp. (Suzhou) Manufacture and sale of smart mobile devices High Tech Computer Asia Pacific Pte. HTC (Australia and New Zealand) PTY. Ltd. Marketing, repair and after-sales services Ltd. HTC Philippines Corporation 〃 PT. High Tech Computer Indonesia 〃 HTC (Thailand) Limited 〃 HTC India Private Ltd. 〃 HTC Malaysia Sdn. Bhd. 〃 HTC Communication Co., Ltd. Manufacture and sale of smart mobile devices and after-sales services HTC HK, Limited International holding company; marketing, repair and after-sales services HTC Holding Cooperatief U.A. International holding company HTC Communication Technologies (SH) Design, research and development of application software HTC Vietnam Services One Member Limited Liability Company Marketing, repair and after-sales services HTC Myanmar Company Limited 〃 HTC Investment Corporation Yoda Co., Ltd. Operation of restaurant business, parking lot and building cleaning services HTC Investment One (BVI) Corporation S3 Graphics Co., Ltd. Design, research and development of graphics technology HTC Communication Technologies (SH) HTC Communication (BJ) Tech Co. Design, research and development of application software HTC HK, Limited HTC Corporation (Shanghai WGQ) Smart mobile devices examination and after-sale services and technique consultations HTC Electronics (Shanghai) Co., Ltd. Manufacture and sale of smart mobile devices HTC Myanmar Company Limited Marketing, repair and after-sales services

% of Ownership December 31 2017 2016 Remark 100.00 100.00 - 100.00 100.00 - 100.00 100.00 - 100.00 100.00 - 1.00 1.00 - 100.00 100.00 - 0.01 0.01 - 100.00 100.00 - 100.00 100.00 - 100.00 100.00 - 100.00 100.00 100.00 - 1) 100.00 - 3) 100.00 - 3) 100.00 100.00 - 100.00 100.00 - 99.99 99.99 - 99.00 99.00 - 100.00 100.00 - 99.00 99.00 - 100.00 100.00 - 100.00 100.00 - 100.00 100.00 - 99.99 99.99 - 100.00 100.00 - 100.00 100.00 - 99.00 99.00 - 100.00 100.00 - 100.00 100.00 - 100.00 100.00 - 100.00 100.00 - 100.00 100.00 - 1.00 1.00 - (Continued)

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Investor Investee Main Businesses HTC Holding Cooperatief U.A. HTC Netherlands B.V. International holding company; marketing, repair and after-sales services HTC India Private Ltd. Marketing, repair and after-sales services HTC South Eastern Europe Limited Liability Company 〃 HTC Communication Solutions Mexico, S.A DE C.V. 〃 HTC Servicios DE Operacion Mexico, S.A DE C.V. Human resources management HTC Netherlands B.V. HTC EUROPE CO., LTD. International holding company Marketing, repair and after-sales services HTC BRASIL Marketing, repair and after-sales services HTC Belgium BVBA/SPRL 〃 HTC NIPPON Corporation Sale of smart mobile devices HTC FRANCE CORPORATION International holding company; marketing, repair and after-sales services HTC South Eastern Europe Limited liability Company Marketing, repair and after-sales services HTC Nordic ApS. 〃 HTC Italia SRL 〃 HTC Germany GmbH 〃 HTC Iberia, S.L. 〃 HTC Poland sp. z.o.o. 〃 HTC Communication Canada, Ltd. 〃 HTC Communication Sweden AB 〃 HTC Luxembourg S.a.r.l. Online/download media services HTC Middle East FZ-LLC Marketing, repair and after-sales services HTC Communication Solutions Mexico, S.A DE C.V. 〃 HTC Servicios DE Operacion Mexico, S.A DE C.V. Human resources management HTC Czech RC s.r.o. Smart mobile devices examination and after-sale services and technique consultations HTC EUROPE CO., LTD. HTC America Holding Inc. International holding company HTC America Holding HTC America Inc. Sale of smart mobile devices Inc. One & Company Design, Inc. Design, research and development of application software HTC America Innovation Inc. 〃 HTC America Content Services, Inc. Online/download media services Dashwire, Inc. Design and management of cloud synchronization technology Inquisitive Minds, Inc. Development and sale of digital education platform HTC VIVE Holding (BVI) Corp. HTC VIVE TECH (BVI) Corp. International holding company HTC VIVE TECH (BVI) Corp. HTC VIVE TECH Corp. Research, development and sale of virtual reality devices HTC VIVE TECH (HK) Limited 〃 HTC VIVE TECH (HK) Limited HTC VIVE TECH (UK) Limited Research, development and sale of virtual reality devices HTC VIVE TECH (Beijing) 〃 DeepQ Holding (BVI) Corp. DeepQ (BVI) Corp. International holding company DeepQ (BVI) Corp. DeepQ Technology Corp. Medical technology and health care HTC Investment (BVI) Corporation VRChat, Inc. Development of virtual reality contents VRChat, Inc. VRChat Ca. Development Inc. Development of virtual reality contents HTC VR Content (BVI) Corp. Uomo Vitruviano Corp. Development of virtual reality contents

% of Ownership December 31 2017 2016 Remark 100.00 100.00 - 1.00 1.00 - 0.67 0.67 - 1.00 1.00 - 1.00 1.00 - 100.00 100.00 - 99.99 99.99 - 100.00 100.00 - 100.00 100.00 - 100.00 100.00 - 99.33 99.33 - 100.00 100.00 - 100.00 100.00 - 100.00 100.00 - 100.00 100.00 - 100.00 100.00 - 100.00 100.00 - 100.00 100.00 - 100.00 100.00 - 100.00 100.00 - 99.00 99.00 - 99.00 99.00 - 100.00 100.00 - 100.00 100.00 - 100.00 100.00 - 100.00 100.00 - 100.00 100.00 - 100.00 100.00 - 100.00 100.00 - 100.00 100.00 - 100.00 100.00 - 100.00 100.00 - 100.00 - 2) 100.00 - 2) 100.00 - 2) 100.00 - 1) 100.00 - 2) 53.16 - 4) 100.00 - 4) 100.00 - 3) (Concluded)

Remark:

• 1) DeepQ Holding (BVI) Corp. and DeepQ (BVI) Corp. were incorporated in March 2017.

• 2) HTC VIVE TECH (Beijing), HTC VIVE TECH (HK) Limited, HTC VIVE TECH (UK) Limited and DeepQ Technology Corp. were incorporated in June 2017.

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• 3) HTC VR Content (BVI) Corp, HTC Smartphone (BVI) Corp. and Uomo Vitruviano Corp. were incorporated in September 2017.

• 4) In August 2017, VRChat, Inc. and its subsidiary were included in consolidated financial statements for acquiring 53.16% equity interest by the Company. For details of the acquisition, please see Note 29.

• b. Subsidiary excluded from consolidated financial statements: None.

• c. Details of subsidiaries that have material non-controlling interests: None.

16. INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD

Investment in associates Investment in joint ventures Investments in Associates Unlisted equity investments East West Artists, LLC Steel Wool Games, Inc. Surgical Theater, LLC Gui Zhou Wei Ai Educational Technology Co., Ltd.		December 31	December 31
		2017 2016 $ 413,120 $ 531,445 - - $ 413,120 $ 531,445 December 31
		2017 $ 26,834 99,921 274,864 11,501 $ 413,120	2016 $ 25,532 150,282 344,080 11,551 $ 531,445

As the end of the reporting period, the proportion of ownership and voting rights in associates held by the Company were as follows:

Name of Associates East West Artist, LLC Steel Wool Games, Inc. Surgical Theater, LLC Gui Zhou Wei Ai Educational Technology Co., Ltd.	December 31
	2017 2016 30.00% 25.00% 49.00% 49.00% 16.68% 21.09% 25.00% 25.00%

The Company acquired 25% equity interest in East West Artists, LLC for US$500 thousand in December 2014, and US$500 thousand in December 2015. In May 2017, the equity interest was increased to 30% after the Company’s making an additional investment of US$200 thousand.

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In July 2015, the Company acquired 11.25% equity interest in Steel Wool Games, Inc. for US$300 thousand and such equity investment was recognized as financial assets measured at cost - non-current. In June 2016, the equity interest was increased to 49% after the Company’s making an additional investment of US$5,000 thousand. The Company’s management evaluates that the Company does exercise significant influence over Steel Wool Games, Inc. and therefore the subject equity investments are classified as an associate of the Company.

In September 2015, the Company acquired 12.30% equity interest in Surgical Theater, LLC for US$5,000 thousand and such equity investment was recognized as financial assets measured at cost - non-current. In August 2016, the equity interest was increased to 21.09% after the Company’s making an additional investment of US$6,000 thousand. In August 2017, the equity interest was decreased to 16.68% after the capital increase. The Company’s management evaluates that the Company does exercise significant influence over Surgical Theater, LLC and therefore the subject equity investments are classified as an associate of the Company.

In November 2016, the Company acquired 25% equity interest in Gui Zhou Wei Ai Educational Technology Co., Ltd. for RMB2,500 thousand with a total 25% equity interest that are accounted for under the equity method.

Aggregate information of associates that are not individually material:

The Company’s share of: Loss from continuing operations Other comprehensive income Total comprehensive loss for the year	For the Year Ended December 31	For the Year Ended December 31	For the Year Ended December 31
		2017 $ (87,255) - $ (87,255)	2016 $ (36,549) - $ (36,549)

Investments accounted for by the equity method and the share of profit or loss and other comprehensive income of those investments were calculated based on the financial statements that have not been audited. The Company’s management believes there is no material impact arising from applying the equity method accounting or the calculation of the share of profit or loss and other comprehensive income, due to the investee entities’ financial statement were not audited.

Investments in Joint Venture

The Company set up a subsidiary Huada Digital Corporation (“Huada”), whose main business is to provide software services, in December 2009. In October 2011, Chunghwa Telecom Co., Ltd. invested in Huada. In March 2012, Huada held a shareholders’ meeting and re-elected its directors and supervisors. As a result, the investment type was changed to joint venture and the Company continued to account for the subject equity investment under the equity method. The dissolution of Huada was approved in its shareholders’ meeting held in March 2016 and the date of dissolution was set on March 31, 2016. The liquidation process had been completed on July 31, 2016.

Aggregate information of joint ventures that are not individually material:

The Company’s share of: Loss from continuing operations Other comprehensive income Total comprehensive loss for the year	For the Year Ended December 31	For the Year Ended December 31	For the Year Ended December 31
		2017 $ - - $ -	2016 $ (25,733) - $ (25,733)

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Investments in joint ventures accounted for under the equity method and the share of profit or loss and other comprehensive income of those investments were calculated based on the financial statements that have not been audited. The Company’s management believes there is no material impact arising from applying the equity method accounting or the calculation of the share of profit or loss and other comprehensive income, due to the investee entities’ financial statement were not audited.

17. PROPERTY, PLANT AND EQUIPMENT

Carrying amounts Land Buildings Machinery and equipment Other equipment		December 31	December 31
		2017 $ 4,676,726 5,260,727 417,379 443,781 $ 10,798,613	2016 $ 4,674,792 5,473,812 1,267,842 609,050 $ 12,025,496

Movements of property, plant and equipment for the years ended December 31, 2017 and 2016 were as follows:

Cost Balance, beginning of the year Additions Disposals Reclassification Effect of foreign currency exchange differences Balance, end of the year Accumulated depreciation Balance, beginning of the year Depreciation expenses Disposals Reclassification Effect of foreign currency exchange differences Balance, end of the year Accumulated impairment Balance, beginning of the year Impairment loss Disposals Reclassification Effect of foreign currency exchange differences Balance, end of the year Net book value, end of the year			2017
		Land $ 4,674,792 - - - 1,934 4,676,726 - - - - - - - - - - - - $ 4,676,726	Buildings Machinery and Equipment $ 7,321,116 $ 13,614,889 54,833 128,364 - (743,914 ) - (59,186 ) 7,083 (38,345) 7,383,032 12,901,808 1,847,304 11,816,261 273,928 535,827 - (659,429 ) - (21,013 ) 1,073 (30,964) 2,122,305 11,640,682 - 530,786 - 321,138 - (831 ) - (7,868 ) - 522 - 843,747 $ 5,260,727 $ 417,379	Other Equipment $ 2,301,452 65,462 (114,964 ) - (32,607) 2,219,343 1,686,963 190,790 (100,452 ) - (19,425) 1,757,876 5,439 14,055 (3 ) - (1,805) 17,686 $ 443,781	Total $ 27,912,249 248,659 (858,878 ) (59,186 ) (61,935) 27,180,909 15,350,528 1,000,545 (759,881 ) (21,013 ) (49,316) 15,520,863 536,225 335,193 (834 ) (7,868 ) (1,283) 861,433 $ 10,798,613

• 44 -

Cost Balance, beginning of the year Additions Disposals Reclassification Effect of foreign currency exchange differences Balance, end of the year Accumulated depreciation Balance, beginning of the year Depreciation expenses Disposals Reclassification Effect of foreign currency exchange differences Balance, end of the year Accumulated impairment Balance, beginning of the year Impairment loss Effect of foreign currency exchange differences Balance, end of the year Net book value, end of the year			2016
		Land $ 6,470,507 - (1,771,623 ) 6,587 (30,679) 4,674,792 - - - - - - - - - - $ 4,674,792	Buildings Machinery and Equipment $ 7,361,368 $ 13,754,405 272,689 158,495 - (33,902 ) (201,433 ) (11,100 ) (111,508) (253,009) 7,321,116 13,614,889 1,590,155 10,912,770 269,208 1,134,773 - (27,075 ) - (6,443 ) (12,059) (197,764) 1,847,304 11,816,261 - 520,963 - 10,330 - (507) - 530,786 $ 5,473,812 $ 1,267,842	Other Equipment Total $ 2,507,338 $ 30,093,618 122,854 554,038 (251,263 ) (2,056,788 ) (1,173 ) (207,119 ) (76,304) (471,500) 2,301,452 27,912,249 1,634,316 14,137,241 304,421 1,708,402 (199,217 ) (226,292 ) (547 ) (6,990 ) (52,010) (261,833) 1,686,963 15,350,528 3,284 524,247 2,265 12,595 (110) (617) 5,439 536,225 $ 609,050 $ 12,025,496 (Concluded)

In order to reduce the cost and to improve the operational efficiency, the Company had sold part of the land in Taoyuan in May 2016 for NT$2,880,000 thousand and the net gain on disposal of the property was NT$1,108,377 thousand. For the years ended December 31, 2017 and 2016, the Company determined that the carrying amounts of some of equipment were expected to be unrecoverable, and thus recognized an impairment loss of NT$335,193 thousand and NT$12,595 thousand classified as other gains and losses, respectively. Please refer to Note 26 for details.

The above items of property, plant and equipment are depreciated on a straight-line basis over the estimated useful lives as follows:

Buildings 5-50 years Machinery and equipment 3-6 years Other equipment 3-5 years

The major component parts of the buildings held by the Company included plants, electro-powering machinery and engineering systems, etc., which are depreciated over their estimated useful lives of 40 to 50 years, 20 years and 5 to 10 years, respectively.

There were no capitalized interests for the years ended December 31, 2017 and 2016.

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18. INVESTMENT PROPERTIES, NET

Movement of investment properties, net for the years ended December 31, 2017 and 2016 were as follows:

Cost Balance, beginning of the year Eliminations Reclassification Effect of foreign currency exchange differences Balance, end of the year Accumulated depreciation Balance, beginning of the year Depreciation expense Eliminations Reclassification Effect of foreign currency exchange differences Balance, end of the year Net book value, end of the year	2017 $ 1,829,827 (1,504) (1,791,715) (36,608) - 302,826 5,936 (1,504) (301,200) (6,058) - $ -	2016 $ 1,992,798 - - (162,971) 1,829,827 284,309 43,920 - - (25,403) 302,826 $ 1,527,001

The investment properties are depreciated using the straight-line method over their estimated useful lives as follows:

Main buildings 50 years Air-conditioning 5-10 years Others 3-5 years

The Company passed a resolution to dispose investment properties in March 2017. As of December 31, 2017, the investment properties were reclassified as non-current assets held for sale since the transferring process has not yet been completed. For the detail, please refer to Note 14.

19. INTANGIBLE ASSETS

Carrying amounts Patents Goodwill Other intangible assets		December 31	December 31
		2017 $ 2,154,987 67,025 93,429 $ 2,315,441	2016 $ 3,547,151 - 331,205 $ 3,878,356

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Movements of intangible assets for the years ended December 31, 2017 and 2016 were as follows:

Cost Balance, beginning of the year Additions Eliminations Disposals Effect of foreign currency exchange differences Balance, end of the year Accumulated amortization Balance, beginning of the year Amortization expenses Eliminations Disposals Effect of foreign currency exchange differences Balance, end of the year Accumulated impairment Balance, beginning of the year Effect of foreign currency exchange differences Balance, end of the year Net book value, end of the year Cost Balance, beginning of the year Additions Effect of foreign currency exchange differences Balance, end of the year Accumulated amortization Balance, beginning of the year Amortization expenses Effect of foreign currency exchange differences Balance, end of the year			2017	2017
		Patents $ 12,197,140 - - - (729,150) 11,467,990 8,538,904 1,148,841 - - (485,827) 9,201,918 111,085 - 111,085 $ 2,154,987	Goodwill Other Intangible Assets $ 684,668 $ 1,840,154 69,186 566 - (7,093) - (38,977) (40,604) (41,030) 713,250 1,753,620 - 1,333,403 - 237,796 - (7,093) - (38,977) - (27,265) - 1,497,864 684,668 175,546 (38,443) (13,219) 646,225 162,327 $ 67,025 $ 93,429 2016		Total $ 14,721,962 69,752 (7,093) (38,977) (810,784) 13,934,860 9,872,307 1,386,637 (7,093) (38,977) (513,092) 10,699,782 971,299 (51,662) 919,637 $ 2,315,441
		Patents $ 12,434,890 - (237,750) 12,197,140 7,336,883 1,325,086 (123,065) 8,538,904	Goodwill $ 697,203 - (12,535) 684,668 - - - -	Other Intangible Assets $ 1,785,537 75,455 (20,838) 1,840,154 1,031,158 314,430 (12,185) 1,333,403	Total $ 14,917,630 75,455 (271,123) 14,721,962 8,368,041 1,639,516 (135,250) 9,872,307 (Continued)

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Accumulated impairment Balance, beginning of the year Effect of foreign currency exchange differences Balance, end of the year Net book value, end of the year			2016	2016
		Patents $ 111,085 - 111,085 $ 3,547,151	Goodwill $ 697,203 (12,535) 684,668 $ -	Other Intangible Assets $ 179,857 (4,311) 175,546 $ 331,205	Total $ 988,145 (16,846) 971,299 $ 3,878,356 (Concluded)

The Company owns patents of graphics technologies. As of December 31, 2017 and 2016, the carrying amounts of such patents were NT$2,144,678 thousand and NT$3,529,477 thousand, respectively. The patents will be fully amortized over their remaining economic lives.

20. NOTE AND TRADE PAYABLES

Note payables Trade payables Trade payables - related parties		December 31	December 31
		2017 $ 27 14,568,235 960 $ 14,569,222	2016 $ 580 26,245,282 1,866 $ 26,247,728

The average term of payment is two to four months. The Company has financial risk management policies in place to ensure that all payables are paid within the pre-agreed credit terms. According to the payment obligation adjusted by periodical negotiation with suppliers, it was recognized as an adjustment to operating costs or expenses by its nature.

21. OTHER LIABILITIES

Other payables Accrued expenses Payables for purchase of equipment Other current liabilities Advance receipts (Note 14) Agency receipts Others		December 31	December 31
		2017 $ 11,624,987 56,903 $ 11,681,890 $ 2,480,454 132,387 237,872 $ 2,850,713	2016 $ 18,254,905 93,829 $ 18,348,734 $ 2,397,707 434,266 172,459 $ 3,004,432

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Accrued Expenses

Marketing Salaries and bonuses Materials and molding expenses Services Import, export and freight Insurance Repairs, maintenance and sundry purchase Others		December 31	December 31
		2017 $ 5,964,240 2,004,912 1,796,104 766,310 181,885 111,477 76,785 723,274 $ 11,624,987	2016 $ 9,791,579 2,029,695 3,077,500 1,196,062 651,893 137,183 98,773 1,272,220 $ 18,254,905

The Company accrued marketing expenses on the basis of related agreements and other factors that would significantly affect the accruals.

22. PROVISIONS

Warranties Provisions for contingent loss on purchase orders		December 31	December 31
		2017 $ 2,795,933 581,268 $ 3,377,201	2016 $ 3,010,969 373,342 $ 3,384,311

Movement of provisions for the years ended December 31, 2017 and 2016 were as follows:

Balance, beginning of the year Provisions recognized Usage Effect of foreign currency exchange differences Balance, end of the year		2017
		Warranty Provision Provisions for Contingent Loss on Purchase Orders $ 3,010,969 $ 373,342 3,065,641 274,159 (3,268,216) (66,233) (12,461) - $ 2,795,933 $ 581,268	Total $ 3,384,311 3,339,800 (3,334,449) (12,461) $ 3,377,201

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Balance, beginning of the year Provisions recognized (reversed) Usage Effect of foreign currency exchange differences Balance, end of the year		2016
		Warranty Provision Provisions for Contingent Loss on Purchase Orders $ 5,314,365 $ 677,893 3,987,729 (271,104) (6,256,239) (33,447) (34,886) - $ 3,010,969 $ 373,342	Total $ 5,992,258 3,716,625 (6,289,686) (34,886) $ 3,384,311

The Company provides warranty service for its customers. The warranty period varies by product and is generally one year to two years. The warranties are estimated on the basis of evaluation of the products under warranty, historical warranty-trends, and pertinent factors.

The provision for contingent loss on purchase orders is estimated after taking into account the effects of changes in the product market, evaluating the foregoing effects on inventory management and adjusting the Company’s purchases.

23. RETIREMENT BENEFIT PLANS

Defined Contribution Plans

The pension plan under the Labor Pension Act (the “LPA”) is a defined contribution plan. Based on the LPA, HTC, Communication Global Certification Inc. (“CGC”) and Yoda Co., Ltd. (“Yoda”) make monthly contributions to employees’ individual pension accounts at 6% of monthly salaries and wages.

The Company has defined benefit plans for all qualified employees of HTC, CGC and Yoda in Taiwan. Besides, the employees of the Company’s subsidiary are members of a state-managed retirement benefit plan operated by local government. The subsidiary is required to contribute amounts calculated at a specified percentage of payroll costs to the retirement benefit scheme to fund the benefits. The only obligation of the Company with respect to the retirement benefit plan is to make the specified contributions to the fund.

The total expenses recognized in the consolidated statement of comprehensive income were NT$420,872 thousand and NT$463,504 thousand, representing the contributions made and to be made to these plans by the Company at the rates specified in the plans for the years ended December 31, 2017 and 2016, respectively. As of December 31, 2017 and 2016, the amounts of contributions payable were NT$76,426 thousand and NT$80,218 thousand, respectively, the amounts were paid subsequent to the end of the reporting period.

Defined Benefit Plans

The defined benefit plan adopted by HTC and CGC in accordance with the Labor Standards Law is operated by the government. Pension benefits are calculated based on the years of services and the average monthly salaries of the six months before retirement. HTC and CGC contribute amounts equal to 2% of total monthly salaries and wages to a pension fund administered by the pension fund monitoring committee. Pension contributions are deposited in the Bank of Taiwan in the committee’s name. Before the end of each year, HTC and CGC assess the balance in the pension fund. If the amount of the balance in the pension fund is inadequate to pay retirement benefits for employees who conform to retirement requirements in the next year, HTC and CGC are required to fund the difference in one appropriation that

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should be made before the end of March of the following year. The pension fund is managed by the Bureau of Labor Funds, Ministry of Labor (“the Bureau”); HTC and CGC has no right to influence the investment policy and strategy.

The amounts included in the consolidated balance sheets in respect of the obligation on HTC and CGC under the defined benefit plans were as follows:

Present value of defined benefit obligation Fair value of plan assets Net defined benefit asset		December 31	December 31
		2017 $ (581,492) 599,611 $ 18,119	2016 $ (533,819) 574,258 $ 40,439

Movements in net defined benefit asset were as follows:

	Present Value
	of Defined
	Benefit	Fair Value of	Net	Defined
	Obligation	Plan Assets	Benefit Asset
Balance at January 1, 2016	$ (474,875)	$ 554,345	$	79,470
Current service cost	(8,751)	-		(8,751)
Net interest (expense) income	(8,301)	10,002		1,701
Recognized in profit or loss	(17,052)	10,002		(7,050)
Remeasurement
Return on plan assets	-	(6,014)		(6,014)
Actuarial loss - changes in demographic
assumptions	(20,172)	-		(20,172)
Actuarial loss - changes in financial
assumptions	(18,622)	-		(18,622)
Actuarial loss - experience adjustments	(9,173)	-		(9,173)
Recognized in other comprehensive income	(47,967)	(6,014)		(53,981)
Contributions from the employer	-	22,000		22,000
Benefits paid	6,075	(6,075)		-
Balance at December 31, 2016	(533,819)	574,258		40,439
Current service cost	(11,492)	-		(11,492)
Net interest (expense) income	(7,990)	8,765		775
Recognized in profit or loss	(19,482)	8,765		(10,717)
Remeasurement
Return on plan assets	-	(3,105)		(3,105)
Actuarial loss - changes in demographic
assumptions	(59,687)	-		(59,687)
Actuarial gain - changes in financial
assumptions	164	-		164
Actuarial gain - experience adjustments	29,499	-		29,499
Recognized in other comprehensive income	(30,024)	(3,105)		(33,129)
Contributions from the employer	-	21,526		21,526
Benefits paid	1,833	(1,833)		-
Balance at December 31, 2017	$ (581,492)	$ 599,611	$	18,119

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An analysis by function of the amounts recognized in profit or loss in respect of the defined benefit plans was as follows:

Operating costs Selling and marketing expenses General and administrative expenses Research and development expenses	For the Year Ended December 31
	2017 2016 $ 2,188 $ 1,566 957 671 1,435 854 6,137 3,959 $ 10,717 $ 7,050

Through the defined benefit plans under the Labor Standards Law, the Company is exposed to the following risks:

• a. Investment risk: The plan assets are invested in domestic/and foreign/equity and debt securities, bank deposits, etc. The investment is conducted at the discretion of the Bureau or under the mandated management. However, in accordance with relevant regulations, the return generated by plan assets should not be below the interest rate for a 2-year time deposit with local banks.

• b. Interest risk: A decrease in the government/corporate bond interest rate will increase the present value of the defined benefit obligation; however, this will be partially offset by an increase in the return on the plan’s debt investments.

• c. Salary risk: The present value of the defined benefit obligation is calculated by reference to the future salaries of plan participants. As such, an increase in the salary of the plan participants will increase the present value of the defined benefit obligation.

The actuarial valuations of the present value of the defined benefit obligation were carried out by qualified actuaries. The significant assumptions used for the purposes of the actuarial valuations were as follows:

Discount rates Expected rates of salary increase	December 31
	2017 2016 1.375%-1.500% 1.000%-1.500% 2.250%-4.000% 2.250%-4.000%

If possible reasonable change in each of the significant actuarial assumptions will occur and all other assumptions will remain constant, the present value of the defined benefit obligation would (increase) decrease as follows:

Discount rates 0.25% increase 0.25% decrease Expected rates of salary increase 0.25% increase 0.25% decrease		**December 31 **	**December 31 **
		2017 $ 20,801 $ (21,787) $ (20,965) $ 20,137	2016 $ 19,120 $ (20,030) $ (19,268) $ 18,504

The sensitivity analysis presented above may not be representative of the actual change in the present value of the defined benefit obligation as it is unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated.

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The expected contributions to the plan for the next year The average duration of the defined benefit obligation		**December 31 **	**December 31 **
		2017 $ 20,675 14.98 years	2016 $ 21,766 15.23 years

24. EQUITY

Share Capital

a. Ordinary shares

Number of shares authorized (in thousands of shares) Shares authorized Number of shares issued and fully paid (in thousands of shares) Shares issued		December 31	December 31
		2017 1,000,000 $ 10,000,000 820,826 $ 8,208,261	2016 1,000,000 $ 10,000,000 822,009 $ 8,220,087

In July 2016, HTC issued 2,657 thousand of restricted shares amounting to NT$26,570 thousand. For the year ended in 2016, HTC retired 1,358 thousand restricted shares for employees amounting to NT$13,578 thousand. In February and August 2016, HTC retired 4,110 thousand and 7,050 thousand treasury shares amounting to NT$41,100 thousand and NT$70,500 thousand, respectively. As a result, the amount of HTC’s outstanding ordinary shares as of December 31, 2016 decreased to NT$8,220,087 thousand, divided into 822,009 thousand ordinary shares at NT$10 par value. Every ordinary share carries one vote per share and a right to dividends.

For the year ended 2017, HTC retired 1,193 thousand restricted shares for employees amounting to NT$11,926 thousand. In October 2017, the employee stock options have been exercised by issuing 10 thousand shares amounting to NT$100 thousand. As a result, HTC’s issued and outstanding common stock as of December 31, 2017 decreased to NT$8,208,261 thousand, divided into 820,826 thousand ordinary shares at NT$10 par value. Every ordinary share carries one vote per share and a right to dividends.

80,000 thousand shares of HTC’s common shares authorized were reserved for the issuance of employee share options.

b. Global depositary receipts

In November 2003, HTC issued 14,400 thousand ordinary shares corresponding to 3,600 thousand units of Global Depositary Receipts (“GDRs”). For this GDR issuance, HTC’s shareholders, including Via Technologies, Inc., also issued 12,878.4 thousand ordinary shares, corresponding to 3,219.6 thousand GDR units. Thus, the entire offering consisted of 6,819.6 thousand GDR units. Taking into account the effect of stock dividends, the GDRs increased to 8,782.1 thousand units (36,060.5 thousand shares). The holders of these GDRs requested HTC to redeem the GDRs to get HTC’s ordinary shares. As of December 31, 2017, there were 5,793 thousand units of GDRs redeemed, representing 23,171.9 thousand ordinary shares, and the outstanding GDRs represented 12,888.6 thousand ordinary shares or 1.57% of HTC’s issued and outstanding ordinary shares.

• 53 -

Capital Surplus

May be used to offset a deficit, distributed as cash dividends, or transferred to share capital Arising from issuance of ordinary shares Arising from consolidation excess Arising from expired stock options May not be used for any purpose Arising from employee share options Arising from employee restricted shares		December 31	December 31
		2017 $ 14,659,563 23,288 186,052 572,369 110,219 $ 15,551,491	2016 $ 14,121,223 23,288 84,462 645,111 740,557 $ 15,614,641

The capital surplus arising from shares issued in excess of par (including share premium from issuance of ordinary shares, treasury share transactions, consolidation excess and expired stock options) and donations may be used to offset a deficit; in addition, when the Company has no deficit, such capital surplus may be distributed as cash dividends or transferred to share capital (limited to a certain percentage of the Company’s capital surplus and once a year).

In February and August 2016, the retirement of treasury shares caused a decrease of NT$70,715 thousand and NT$120,988 thousand in additional paid-in capital - issuance of ordinary shares, NT$117 thousand and NT$199 thousand in capital surplus - consolidation excess and NT$177 thousand and NT$573 thousand in capital surplus - expired stock options, respectively. The excess of the carrying value of treasury shares retired over the sum of its par value and premium from issuance of ordinary share was offset against unappropriated earnings, totaling NT$88,846 thousand and NT$244,609 thousand, respectively.

For details of capital surplus - employee share options and employee restricted shares, please see Note 30.

Retained Earnings and Dividend Policy

Under HTC’s Articles of Incorporation, HTC should make appropriations from its net income in the following order:

• a. To pay taxes.

• b. To cover accumulated losses, if any.

• c. To appropriate 10% legal reserve unless the total legal reserve accumulated has already reached the amount of HTC’s authorized capital.

• d. To recognize or reverse special reserve return earnings.

• e. The Board of Directors shall propose allocation ratios for any remainder profit after withholding the amounts under subparagraphs a. to d. above plus any unappropriated retained earnings of previous years based on the dividend policy set forth in the Article and propose such allocation ratio at the shareholders’ meeting.

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As part of a high-technology industry, HTC considers its operating environment, industry developments, and long-term interests of shareholders as well as its programs to maintain operating efficiency and meet its capital expenditure budget and financial goals when determining the stock or cash dividends to be paid. HTC’s dividend policy stipulates that at least 50% of total dividends may be distributed as cash dividends.

In accordance with the amendments to the Company Act in May 2015, the recipients of dividends and bonuses are limited to shareholders and do not include employees. HTC has amended the policy of its earnings distribution as stipulated in its Articles of Incorporation in order to comply with the aforementioned law amendments with an approval from the resolution of the shareholders’ meeting, and stipulated an additional policy of employees’ compensation on June 24, 2016. For information about the accrual basis of the employees’ compensation and remuneration to directors and supervisors and the actual appropriations, see employee benefits expense section as stated in Note 26.

Appropriation of earnings to legal reserve shall be made until the legal reserve equals the HTC’s capital. Legal reserve may be used to offset deficit. If HTC has no accumulated deficit and the legal reserve has exceeded 25% of its issued and outstanding capital stock, the excess may be transferred to capital stock or distributed in cash.

The appropriation of profit or loss for 2016 and 2015 had been resolved in the shareholders’ meeting on June 15, 2017 and June 24, 2016, respectively.

The loss off-setting for 2017 had been proposed by HTC’s board of directors on March 25, 2018. The loss off-setting for 2017 are subject to the resolution of the shareholders’ meeting to be held on June 26, 2017.

Information on the earnings appropriation proposed by the HTC’s Board of Directors and approved by the HTC’s shareholders is available on the Market Observation Post System website of the Taiwan Stock Exchange.

Other Equity

Exchange differences on translating foreign operations Unrealized loss on available-for-sale financial assets Unearned employee benefit		December 31	December 31
		2017 $ (2,183,148) (35,690) (49,590) $ (2,268,428)	2016 $ (781,298) (167,082) (253,922) $ (1,202,302)

• a. Exchange differences on translating foreign operations

Exchange differences relating to the translation of the results and net assets of the Company’s foreign operations from their functional currencies to the Company’s presentation currency (New Taiwan dollars) were recognized directly in other comprehensive income and accumulated in the foreign currency translation reserve. Exchange differences previously accumulated in the foreign currency translation reserve were reclassified to profit or loss on the disposal of the foreign operation.

• b. Unrealized gains or losses on available-for-sale financial assets

Unrealized gains or losses on available-for-sale financial assets represents the cumulative gains and losses arising on the revaluation of AFS financial assets that have been recognized in other comprehensive income, net of amounts reclassified to profit or loss when those assets have been disposed of or are determined to be impaired.

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c. Unearned employee benefit

In the meeting of shareholders on June 2, 2015 and June 19, 2014, the shareholders approved a restricted stock plan for employees. See Note 30 for the information of restricted shares issued.

Balance, beginning of the year Issuance of shares Adjustment of turnover rate Share-based payment expenses recognized Balance, end of the year	**For the Year Ended **	**For the Year Ended **	**December 31 **
		2017 $ (253,922) - 104,517 99,815 $ (49,590)	2016 $ (371,369) (158,471) (5,667) 281,585 $ (253,922)

Treasury Shares

On August 24, 2015, the HTC’s Board of Directors passed a resolution to buy back 50,000 thousand common shares from the open market. The repurchase period was between August 25, 2015 and October 24, 2015, and the repurchase price ranged from NT$35 to NT$60 per share. If the HTC’s share price was lower than this price range, HTC might continue to buy back its shares. HTC had bought back 4,110 thousand shares for NT$200,955 thousand during the repurchase period, which were retired by the HTC’s Board of Directors on February 29, 2016, and such retired shares had been properly deregistered subsequently.

On May 14, 2016, the HTC’s Board of Directors passed a resolution to buy back 40,000 thousand common shares from the open market. The repurchase period was between May 16, 2016 and July 15, 2016, and the repurchase price ranged from NT$47 to NT$70 per share. If the HTC’s share price was lower than this price range, HTC might continue to buy back its shares. HTC had bought back 7,050 thousand shares for NT$436,869 thousand during the repurchase period which were retired by the HTC’s Board of Directors on August 2, 2016, and such retired share had been properly deregistered subsequently. The related information on the treasury share transactions were as follows:

(In Thousands of Shares)

	Number of
	Shares,	Addition	Reduction	Number of
	Beginning of	During the	During the	Shares, End of
Reason to Reacquire	the Year	Year	Year	the Year
For 2016
To maintain the Company’s
credibility and shareholders’
interest	4,110	7,050	11,160	-

Based on the Securities and Exchange Act of the ROC, the number of reacquired shares should not exceed 10% of a company’s issued and outstanding shares, and the total purchase amount should not exceed the sum of the retained earnings, additional paid-in capital in excess of par and realized capital surplus.

Under the Securities and Exchange Act, HTC shall neither pledge treasury shares nor exercise shareholders’ rights on these shares, such as rights to dividends and to vote.

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25. OPERATING REVENUES

Sale of goods Other operating income	For the Year Ended December 31	For the Year Ended December 31	For the Year Ended December 31
		2017 $ 59,593,708 2,526,106 $ 62,119,814	2016 $ 75,763,805 2,397,353 $ 78,161,158

Some sales denominated in foreign currencies were hedged for cash flow risk. Accordingly, the Company transferred NT$(4,389) thousand and NT$(40,299) thousand of the gain or loss on the hedging instrument that was determined to be the effective portion of the hedge to sales of goods for the years ended in 2017 and 2016, respectively.

26. NET LOSS FROM CONTINUING OPERATIONS AND OTHER COMPREHENSIVE INCOME AND LOSS

a. Other income

Interest income Bank deposits Other receivables Other Dividends Others	For the Year Ended	For the Year Ended	December 31
		2017 $ 256,064 - 27,510 283,574 47,284 342,245 $ 673,103	2016 $ 224,331 39,041 119,178 382,550 138,761 121,767 $ 643,078

b. Other gains and losses

Net foreign exchange gain Gain on disposal of investments Ineffective portion of cash flow hedge (Note 8) Net gain on disposal of non-current assets held for sale (Note 14) Net (loss) gain arising from financial instruments classified as held for trading Net (loss) gain on disposal of property, plant and equipment (Note 17) Impairment loss Other loss	For the Year Ended December 31	For the Year Ended December 31	For the Year Ended December 31
		2017 $ 448,977 24,305 3,538 - (9,985) (80,397) (444,972) (27,317) $ (85,851)	2016 $ 335,783 - 2,056 2,091,594 10,222 1,104,787 (12,595) (83,229) $ 3,448,618

Gain or loss on financial assets and liabilities held for trading was derived from forward exchange transactions. The Company entered into forward exchange transactions to manage exposures related to exchange rate fluctuations of foreign currency denominated assets and liabilities.

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c. Impairment (reversal gain) loss on financial assets

Trade receivables (included in operating expense) Other receivables (included in operating expense) Financial assets measured at cost - non-current (included in other gains and losses) d. Depreciation and amortization Property, plant and equipment Investment properties Intangible assets An analysis of depreciation - by function Operating costs Operating expenses Other loss An analysis of amortization - by function Operating costs Operating expenses e. Employee benefits expense Short-term benefits Post-employment benefits (Note 23) Defined contribution plans Defined benefit plans Share-based payments (Note 30) Equity-settled share-based payments Total employee benefits expense An analysis of employee benefits expense - by function Operating costs Operating expenses	For the Year Ended December 31	For the Year Ended December 31	For the Year Ended December 31
	2017 2016 $ (362,870) $ (299,951) - 1,475,130 109,779 - $ (253,091) $ 1,175,179 For the Year Ended December 31
	2017 2016 $ 1,000,545 $ 1,708,402 5,936 43,920 1,386,637 1,639,516 $ 2,393,118 $ 3,391,838 $ 284,026 $ 743,267 716,519 965,135 5,936 43,920 $ 1,006,481 $ 1,752,322 $ 1,498 $ 2,958 1,385,139 1,636,558 $ 1,386,637 $ 1,639,516 For the Year Ended December 31
		2017 $ 11,264,101 420,872 10,717 431,589 128,811 $ 11,824,501 $ 2,558,357 9,266,144 $ 11,824,501	2016 $ 11,548,402 463,504 7,050 470,554 431,996 $ 12,450,952 $ 2,977,269 9,473,683 $ 12,450,952

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In compliance with the Company Act as amended in May 2015, the shareholders held their meeting and resolved amendments to HTC’s Articles of Incorporation on June 24, 2016; the amendments stipulate distribution of employees’ compensation and remuneration to directors and supervisors at the rates no less than 4% and no higher than 0.25%, respectively, of net profit before income tax, employees’ compensation, and remuneration to directors and supervisors. No employee’s compensation and remuneration to directors and supervisors were estimated as the Company reported net losses for the years ended December 31, 2017 and 2016.

If there is a change in the proposed amounts after the annual consolidated financial statements were authorized for issue, the differences are recorded as a change in accounting estimate in the subsequent year.

For any further information of the employees’ compensation and remuneration to directors and supervisors approved in the meeting of board of directors in 2018 and 2017, see disclosures in the “Market Observation Post System”.

• f. Impairment loss on non-financial assets

Inventories (included in operating costs) Property, plant and equipment (included in other gains and losses)	For the Year Ended December 31	For the Year Ended December 31	For the Year Ended December 31
		2017 $ 5,713,443 335,193 $ 6,048,636	2016 $ 2,041,858 12,595 $ 2,054,453

g. Gain or loss on foreign currency exchange

Foreign exchange gain Foreign exchange loss Valuation (loss) gain arising from financial instruments classified as held for trading Ineffective portion of cash flow hedge	For the Year Ended December 31	For the Year Ended December 31	For the Year Ended December 31
		2017 $ 5,231,847 (4,782,870) (9,985) 3,538 $ 442,530	2016 $ 5,475,486 (5,139,703) 10,222 2,056 $ 348,061

27. INCOME TAXES RELATING TO CONTINUING OPERATIONS

• a. Income tax benefit recognized in profit or loss

Current tax In respect of the current year Land value increment Adjustments for previous years Deferred tax In respect of the current year Income tax benefit recognized in profit or loss	For the Year Ended	For the Year Ended	December 31
		2017 $ 156,432 - (115,345) 41,087 (79,563) $ (38,476)	2016 $ 261,887 226,333 (192,678) 295,542 (319,387) $ (23,845)

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A reconciliation of accounting loss and income tax benefit and the applicable tax rate were as follows:

Loss before income tax Income tax benefit calculated at 17% Effect of expenses that were not deductible in determining taxable profit Effect of temporary differences Effect of loss carryforward Effect of income that is exempt from taxation Land Value Increment Effect of different tax rates of subsidiaries operating in other jurisdictions Adjustments for previous years’ tax Income tax benefit recognized in profit or loss	For the Year Ended December 31	For the Year Ended December 31	For the Year Ended December 31
		2017 $ (16,958,835) $ (2,883,002) 141,195 1,014,610 1,691,131 - - 112,935 (115,345) $ (38,476)	2016 $ (10,583,948) $ (1,799,271) 93,130 1,850,755 228,270 (611,933) 226,333 181,549 (192,678) $ (23,845)

In February 2018, it was announced by the President that the Income Tax Act in the ROC was amended and, starting from 2018, the corporate income tax rate will be adjusted from 17% to 20%. In addition, the rate of the corporate surtax applicable to 2018 unappropriated earnings will be reduced from 10% to 5%.

b. Income tax benefit recognized in other comprehensive income

Deferred tax Recognized in current year Remeasurement on defined benefit plan (tax benefit)	For the Year Ended December 31	For the Year Ended December 31	For the Year Ended December 31
		2017 $ (4,014)	2016 $ (6,532)

c. Current tax assets and liabilities

Current tax assets Tax refund receivable Current tax liabilities Income tax payable		December 31	December 31
		2017 $ 131,901 $ 253,240	2016 $ 184,817 $ 155,651

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d. Deferred tax balances

Movements of deferred tax assets and deferred tax liabilities for the years ended December 31, 2017 and 2016 were as follows:

Deferred tax assets Temporary differences Unrealized royalties Unrealized marketing expenses Unrealized warranty expense Allowance for loss on decline in value of inventory Unrealized profit Unrealized salary and welfare Unrealized contingent losses on purchase orders Others Loss carryforwards Deferred tax liabilities Temporary differences Financial instruments at FVTPL Defined benefit plans Others Deferred tax assets Temporary differences Unrealized royalties Unrealized marketing expenses Unrealized warranty expense Allowance for loss on decline in value of inventory Unrealized profit Unrealized salary and welfare Unrealized contingent losses on purchase orders Others Loss carryforwards Deferred tax liabilities Temporary differences Financial instruments at FVTPL Defined benefit plans Others		2017
		Opening Balance Recognized in Profit or Loss Recognized in Other Comprehensive Income $ 370,916 $ 33,942 $ - 858,920 (396,963 ) - 364,585 (50,879 ) - 449,998 111,526 - 151,256 (108,502 ) - 93,746 (36,405 ) - 44,802 24,952 - 400,395 (83,347 ) - 6,223,258 554,274 - $ 8,957,876 $ 48,598 $ - $ 1,227 $ (1,227 ) $ - 4,678 1,272 (4,014 ) 75,389 (31,010) - $ 81,294 $ (30,965) $ (4,014 ) 2016	Translation Adjustment $ - (5,302 ) (1,009 ) (1,375 ) - (4,816 ) - 327 (3,651) $ (15,826) $ - - 832 $ 832	Closing Balance $ 404,858 456,655 312,697 560,149 42,754 52,525 69,754 317,375 6,773,881 $ 8,990,648 $ - 1,936 45,211 $ 47,147
		Opening Balance Recognized in Profit or Loss Recognized in Other Comprehensive Income $ 675,764 $ (304,848 ) $ - 1,323,293 (449,046 ) - 625,919 (257,367 ) - 411,036 44,459 - 258,976 (107,720 ) - 133,091 (33,485 ) - 81,350 (36,548 ) - 554,563 (152,611 ) - 4,635,330 1,611,691 - $ 8,699,322 $ 314,525 $ - $ 7,074 $ (5,847 ) $ - 9,440 1,770 (6,532 ) 80,837 (785) - $ 97,351 $ (4,862) $ (6,532)	Translation Adjustment $ - (15,327 ) (3,967 ) (5,497 ) - (5,860 ) - (1,557 ) (23,763) $ (55,971) $ - - (4,663) $ (4,663)	Closing Balance $ 370,916 858,920 364,585 449,998 151,256 93,746 44,802 400,395 6,223,258 $ 8,957,876 $ 1,227 4,678 75,389 $ 81,294

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• e. Amounts of deductible temporary differences, unused carryforward and unused tax credits for which deferred tax assets have not been recognized

Loss carryforward Deductible temporary differences		December 31	December 31
		2017 $ 49,484,247 $ 21,422,629	2016 $ 35,056,888 $ 14,239,006

• f. Information about unused loss carry-forward and tax-exemption

Loss carryforwards as of December 31, 2017 comprised of:

	Remaining Carrying Expiry Year $ 2,198,532 2018 778,886 2019 1,156,287 2020 1,061,080 2021 1,018,934 2022 6,979,331 2023 9,428,974 2024 21,829,694 2025 22,320,838 2026 17,997,384 2027 267,527 2028-2032 $ 85,037,467

Under the Statute for Upgrading Industries, HTC was granted for corporate income tax exemption as follows:

Item Exempt from Corporate Income Tax Sales of wireless and smartphone which has 3.5G and GPS function	Expiry Year
	2015.01.01-2018.09.30

• g. The aggregate amount of temporary difference associated with investments for which deferred tax assets (liabilities) have not been recognized

As of December 31, 2017 and 2016, the taxable temporary differences associated with investment in subsidiaries for which no deferred tax assets have been recognized were NT$4,347,613 thousand and NT$497,194 thousand, respectively.

• h. Integrated income tax

The imputation credit account (“ICA”) information as of December 31, 2017 and 2016, was as follows:

(Accumulated deficits) unappropriated earnings generated on and after January 1, 1998 Balance of ICA		December 31	December 31
		2017 $ (6,093,403) $ 8,197,639	2016 $ 10,841,425 $ 8,196,519

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Creditable ratio for distribution of earnings	**For the Year Ended December 31 **
	2017 (Expected) 2016 Note 34.87%

Note: Since the amended Income Tax Act announced in February 2018 abolished the imputation tax system, no creditable ratio for distribution of earnings in and after 2018 is expected.

• i. Income tax assessments

HTC’s tax returns through 2015 had been assessed by the tax authorities. HTC disagreed with the tax authorities’ assessment of its 2015 tax return and applied for a re-examination. Nevertheless, to be conservative, HTC had accrued for the additional income tax assessed by the tax authorities.

The income tax returns of Yoda Co., Ltd., Communication Global Certification Inc., HTC Investment Corporation and HTC I Investment Corporation for the years through 2015 have been examined and approved by the tax authorities.

28. LOSS PER SHARE

Unit: NT$ Per Share

Basic loss per share	For the Year Ended December 31	For the Year Ended December 31	For the Year Ended December 31
		2017 $ (20.58)	2016 $ (12.81)

The loss and weighted average number of ordinary shares outstanding for the computation of loss per share were as follows:

Net Loss for the Years

Loss for the year attributable to owners of the parent	For the Year Ended December 31	For the Year Ended December 31	For the Year Ended December 31
		2017 $ (16,905,713)	2016 $ (10,560,103)

Shares

Weighted average number of ordinary shares in computation of basic loss per share	Unit: In Thousands of Shares **For the Year Ended December 31 **	Unit: In Thousands of Shares **For the Year Ended December 31 **	Unit: In Thousands of Shares **For the Year Ended December 31 **
		2017 821,593	2016 824,084

Since part of the exercise price of the employee share options issued by the Company exceeded the average market price of the shares for the years ended December 31, 2017 and 2016, respectively, as loss per share, they were anti-dilutive and excluded from the computation of diluted earnings per share.

• 63 -

29. BUSINESS COMBINATIONS

a. Subsidiaries acquired

			Proportion of
			Voting Equity
		Date of	Interests	Consideration
	Principal Activity	Acquisition	Acquired (%)	Transferred
VRChat. Inc. and its	Development of virtual	August 2, 2017	53.16	$ 118,756
subsidiary	reality devices

VRChat. Inc. and its subsidiary were acquired in August 2017 by the Company to diversify the range of virtual reality development. The Company acquired 53.16% equity interest in VRChat, Inc. by investing US$3,649 thousand in cash and the convertible bonds amounted to US$275 thousand converted to preferred shares. VRChat, Inc. and its subsidiary were incorporated in consolidated financial statement by its acquisition of control.

b. Considerations transferred

	VRChat. Inc.	VRChat. Inc.
Convertible bonds converted to preferred shares	$	8,322
Cash		110,434
	$	118,756

• c. Assets acquired and liabilities assumed at the date of acquisition

	VRChat. Inc.	VRChat. Inc.
Current assets
Cash and cash equivalents	$	116,408
Other receivables		9,457
Current liabilities
Other payables		(32,619)
	$	93,246

• d. Non-controlling interests

The non-controlling interest (46.84% ownership interest in VRChat. Inc.) recognized at the acquisition date was measured by reference to the percentage of net assets.

• e. Goodwill recognized on acquisition

	VRChat. Inc.	VRChat. Inc.
Consideration transferred	$	118,756
Plus: Non-controlling interests (46.84% in VRChat. Inc.)		43,676
Less: Fair value of identifiable net assets acquired		(93,246)
Goodwill recognized on acquisition	$	69,186

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The goodwill recognized in the acquisition of VRChat. Inc. and its subsidiary mainly represents the control premium included in the cost of the combination. In addition, the consideration paid for the combination effectively included amounts attributed to the benefits of expected synergies, revenue growth, future market development and the assembled workforce of VRChat. Inc. and its subsidiary. These benefits are not recognized separately from goodwill because they do not meet the recognition criteria for identifiable intangible assets.

• f. Net cash inflow on acquisition of subsidiaries

	VRChat. Inc.	VRChat. Inc.
Consideration paid in cash	$	(110,434)
Less: Cash and cash equivalent balances acquired		116,408
	$	5,974

g. Impact of acquisitions on the results of the Group

The results of the acquirees since the acquisition date included in the consolidated statements of comprehensive income were as follows:

	VRChat. Inc.
Revenue	$ -
Loss	$ (31,268)

Had these business combinations been in effect at the beginning of the annual reporting period, the Company’s revenue from continuing operations would have been NT$62,119,814 thousand, and the loss from continuing operations would have been (NT$16,947,067) thousand for the year ended December 31, 2017. This pro-forma information is for illustrative purposes only and is not necessarily an indication of revenue and results of operations of the Group that actually would have been achieved had the acquisition been completed on August 2, 2017, nor is it intended to be a projection of future results.

30. SHARE-BASED PAYMENT ARRANGEMENTS

Employee Share Option Plan of the Company

Qualified employees of HTC and its subsidiaries were granted 15,000 thousand options in November 2013. Each option entitles the holder to subscribe for one common share of HTC. The options granted are valid for 7 years and exercisable at certain percentages after the second anniversary from the grant date.

Qualified employees of HTC and its subsidiaries were granted 19,000 thousand options in October 2014. Each option entitles the holder to subscribe for one common share of HTC. The options granted are valid for 10 years and exercisable at certain percentages after the second anniversary from the grant date.

Qualified employees of HTC and its subsidiaries were granted 1,000 thousand options in August 2015. Each option entitles the holder to subscribe for one ordinary share of HTC. The options granted are valid for 10 years and exercisable at certain percentages after the second anniversary from the grant date.

The exercise price equals to the closing price of HTC’s ordinary shares on the grant date. For any subsequent changes in the HTC’s ordinary shares, the exercise price is adjusted accordingly.

• 65 -

Information on employee share options was as follows:

Balance at January 1 Options exercised Options forfeited Balance at December 31 Options exercisable, end of the year	For the Year Ended December 31	For the Year Ended December 31
	2017 Number of Options (In Thousands) Weighted- average Exercise Price (NT$) 20,072 $ 136.65 (10) (3,994) 16,068 137.45 15,792	2016
		Number of Options (In Thousands) Weighted- average Exercise Price (NT$) 24,964 $ 137.20 - (4,892) 20,072 136.65 14,658

Information about outstanding options as of the reporting date was as follows:

Range of exercise price (NT$) Weighted-average remaining contractual life (years)	December 31
	2017 2016 $54.5-$149 $54.5-$149 5.24 years 6.30 years

Options granted in August 2015, October 2014 and November 2013 were priced using the trinomial option pricing model and the inputs to the model were as follows:

	August 2015	October 2014	November 2013
Grant-date share price (NT$)	$54.50	$134.50	$149.00
Exercise price (NT$)	$54.50	$134.50	$149.00
Expected volatility	39.26%	33.46%	45.83%
Expected life (years)	10 years	10 years	7 years
Expected dividend yield	4.04%	4.40%	5.00%
Risk-free interest rate	1.3965%	1.7021%	1.63%

Expected volatility was based on the historical share price volatility over the past 1 year. The Company assumed that employees would exercise their options after the vesting date when the share price was 1.63 times the exercise price.

Employee Restricted Shares

In the shareholder meeting on June 19, 2014 and June 2, 2015, the shareholders approved a restricted stock plan for employees with 5,000 thousand and 7,500 thousand shares amounting to NT$50,000 thousand and NT$75,000 thousand, respectively. In 2014 and 2015, HTC’s board of directors passed a resolution to issue 5,000 thousand shares and 7,500 thousand shares, respectively.

The restrictions on the rights of the employees who acquire the restricted shares but have not met the vesting conditions are as follows:

• a. The employees cannot sell, pledge, transfer, donate or in any other way dispose of these shares.

• b. The employees holding these shares are entitled to receive cash and dividends in share.

• c. The employees holding these shares have no voting rights.

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If an employee fails to meet the vesting conditions, HTC will recall or buy back and cancel the restricted shares. For the years ended December 31, 2016 and 2017, HTC retired 1,358 thousand and 1,193 thousand restricted shares for employees amounting to NT$13,578 thousand and NT$11,926 thousand, respectively. As a result, the numbers of the HTC’s issued and outstanding employee restricted shares as of December 31, 2017 was 3,209 thousand shares. The related information was as follows:

Grant-date	July 18, 2016	December 23, 2015	August 10, 2015	November 2, 2014
Grant-date fair value (NT$)	$96.90	$76.20	$57.50	$134.50
Exercise price	Gratuitous	Gratuitous	Gratuitous	Gratuitous
Numbers of shares	2,657	4,006	400	4,600
(thousand shares)
Vesting period (years)	1-4 years	1-3 years	1-3 years	1-3 years

Compensation Cost of Share-based Payment Arrangements

Compensation cost of share-based payment arrangement recognized was NT$128,811 thousand and NT$431,996 thousand for the years ended December 31, 2017 and 2016, respectively.

31. CAPITAL RISK MANAGEMENT

The Company manages its capital to ensure its ability to continue as a going concern while maximizing the returns to shareholders. The Company periodically reviews its capital structure by taking into consideration macroeconomic conditions, prevailing interest rate, and adequacy of cash flows generated from operations; as the situation would allow, the Company pays dividends, issues new shares, repurchases shares, issues new debt, and redeems debt.

The Company is not subject to any externally imposed capital requirements.

32. FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments That Are Not Measured at Fair Value

Financial instruments not carried at fair value held by the Company include financial assets measured at cost and debt investments with no active market. The management considers that the carrying amounts of financial assets and financial liabilities not carried at fair value approximate their fair value or the fair value are not measured reliably.

Fair Value of Financial Instruments That Are Measured at Fair Value on a Recurring Basis

• a. Fair value hierarchy

December 31, 2017

Financial assets at FVTPL Derivative financial instruments Available-for-sale financial assets Domestic listed stocks - equity investments Overseas listed stocks - equity investments	Level 1 $ - $ 91 312,106 $312,197	Level 2 $ 65,199 $ - - $ -	Level 3 $ - $ - - $ -	Total $ 65,199 $ 91 312,106 $312,197 (Continued)

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Financial liabilities at FVTPL Derivative financial instruments December 31, 2016 Financial assets at FVTPL Derivative financial instruments Available-for-sale financial assets Domestic listed stocks - equity investments Overseas listed stocks - equity investments Financial liabilities at FVTPL Derivative financial instruments	Level 1 $ - Level 1 $ - $ 86 199,344 $ 199,430 $ -	Level 2 $ 75,184 Level 2 $ 143,642 $ - - $ - $ 133,420	Level 3 $ - Level 3 $ - $ - - $ - $ -	Total $ 75,184 (Concluded) Total $ 143,642 $ 86 199,344 $ 199,430 $ 133,420

There were no transfers between Levels 1 and 2 for the years ended December 31, 2017 and 2016.

b. Valuation techniques and inputs applied for the purpose of measuring Level 2 fair value measurement

Financial Instruments Derivatives - foreign currency contracts	Valuation Techniques and Inputs
	Discounted cash flow: Future cash flows are estimated based on observable forward exchange rates at the end of the reporting period and contract forward rates, discounted at a rate that reflects the credit risk of various counterparties.

Categories of Financial Instruments

Financial assets FVTPL Held for trading (Note 1) Loans and receivables (Note 2) Available-for-sale financial assets (Note 3) Financial liabilities FVTPL Held for trading Amortized cost (Note 4)	December 31
	2017 2016 $ 196,941 $ 143,642 27,211,199 53,495,584 3,367,695 3,563,166 75,184 133,420 26,389,180 45,052,834

Note 1: The balances included financial assets held for trading and financial assets measured at cost held for trading.

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• Note 2: The balances included loans and receivables measured at amortized cost, which comprise cash and cash equivalents, debt investments with no active market, other financial assets, trade receivables, other receivables and refundable deposits.

• Note 3: The balances included available-for-sale financial assets and the carrying amount of available-for-sale financial assets measured at cost.

• Note 4: The balances included financial liabilities measured at amortized cost, which comprise note and trade payables, other payables, agency receipts and guarantee deposits received.

Financial Risk Management Objectives and Policies

The Company’s financial instruments mainly include equity and debt investments, trade receivables, other receivables, trade payables and other payables. The Company’s Corporate Treasury function provides services to the business, coordinates access to domestic and international financial markets, monitors and manages the financial risks relating to the operations of the Company through internal risk reports which analyze the exposures by degree and magnitude of risks. These risks include market risk, credit risk and liquidity risk.

The Company sought to minimize the effects of these risks by using derivative financial instruments and non-derivative financial instruments to hedge risk exposures. The use of financial derivatives was governed by the Company’s policies approved by the board of directors, which provide written principles on foreign exchange risk, interest rate risk, credit risk, the use of financial derivatives and non-derivative financial instruments, and the investment of excess liquidity. Compliance with policies was reviewed by the internal auditors on a continuous basis. The Company did not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes.

The Corporate Treasury function reports quarterly to the Company’s supervisory and board of directors for monitoring risks and policies implemented to mitigate risk exposures.

• a. Market risk

The Company’s activities exposed it primarily to the financial risks of changes in foreign currency exchange rates. The Company entered into a variety of derivative financial instruments to manage its exposure to foreign currency risk.

There had been no change to the Company’s exposure to market risks or the manner in which these risks were managed and measured.

Foreign currency risk

The Company undertook transactions denominated in foreign currencies; consequently, exposures to exchange rate fluctuations arose. Exchange rate exposures were managed within approved policy parameters utilizing forward foreign exchange contracts.

The carrying amounts of the Company’s foreign currency denominated monetary assets and monetary liabilities and of the derivatives exposing to foreign currency risk at the end of the reporting period are set out in Note 37.

Sensitivity analysis

The Company was mainly exposed to the currency United Stated dollars (USD), currency Euro (EUR), currency Renminbi (RMB) and currency Japanese yen (JPY).

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The following table details the Company’s sensitivity to a 1% increase and decrease in the New Taiwan dollars (“NTD”, the functional currency) against the relevant foreign currencies. The sensitivity analysis included only outstanding foreign currency denominated monetary items and foreign currency forward contracts designated as cash flow hedges. A positive number below indicates an increase in pre-tax profit (loss) or equity associated with the NTD strengthens 1% against the relevant currency. For a 1% weakening of the NTD against the relevant currency, there would be an equal and opposite impact on pre-tax profit (loss) or equity, and the balances below would be negative.

	Profit or Loss	Profit or Loss	Equity
For the year ended December 31, 2017
USD	$	30,978	$ (136,557)
EUR		2,751	(5,429)
RMB		(8,819)	(99,138)
JPY		(1,356)	(1,376)
For the year ended December 31, 2016
USD		44,739	(166,009)
EUR		975	(19,292)
RMB		(26,064)	(114,465)
JPY		11,035	(1,284)

b. Credit risk

Credit risk refers to the risk that counterparty will default on its contractual obligations resulting in financial loss to the Company. As at the end of reporting period, the Company’s maximum exposure to credit risk which will cause a financial loss to the Company due to failure of counterparties to discharge an obligation and financial guarantees provided by the Company could arise from the carrying amount of the respective recognized financial assets as stated in the balance sheets. The Company does not issue any financial guarantee involving credit risk.

The Company adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral, where appropriate, as a means of mitigating the risk of financial loss from defaults.

The credit risk information of trade receivables is disclosed in the Note 11.

• c. Liquidity risk

The Company manages liquidity risk to ensure that the Company possesses sufficient financial flexibility by maintaining adequate reserves of cash and cash equivalents and reserve financing facilities, and also monitor liquidity risk of shortage of funds by the maturity date of financial instruments and financial assets.

• 1) Liquidity risk tables for non-derivative financial liabilities

The following table details the Company’s remaining contractual maturity for its non-derivative financial liabilities with agreed repayment periods. The tables had been drawn up based on the undiscounted cash flows of financial liabilities from the earliest date on which the Company can be required to pay.

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December 31, 2017

Non-derivative financial liabilities Note and trade payables Other payables Other current liabilities Guarantee deposits received December 31, 2016 Non-derivative financial liabilities Note and trade payables Other payables Other current liabilities Guarantee deposits received	Less Than 3 Months $ 7,127,952 6,885,512 132,387 - $ 14,145,851 Less Than 3 Months $ 10,641,728 10,341,957 371,910 - $ 21,355,595	3 Months to 1 Year $ 7,441,270 4,796,378 - - $ 12,237,648 3 Months to 1 Year $ 15,606,000 8,006,777 62,356 - $ 23,675,133	Over 1 Year $ - - - 5,681 $ 5,681 Over 1 Year $ - - - 22,106 $ 22,106

• 2) Liquidity risk tables for derivative financial instruments

The following table detailed the Company’s liquidity analysis for its derivative financial instruments. The table was based on the undiscounted contractual net cash inflows and outflows on derivative instruments that settle on a net basis, and the undiscounted gross inflows and outflows on those derivatives that require gross settlement.

December 31, 2017

Net settled Foreign exchange contracts Gross settled Foreign exchange contracts Inflows Outflows	Less Than 3 Months $ 36,842 $ 14,373,269 (14,386,102) $ (12,833)	3 Months to 1 Year $ - $ - - $ -	Over 1 Year $ - $ - - $ -

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December 31, 2016

Net settled Foreign exchange contracts Gross settled Foreign exchange contracts Inflows Outflows	Less Than 3 Months $ 73,323 $ 15,227,772 (15,250,504) $ (22,732)	3 Months to 1 Year $ - $ - - $ -	Over 1 Year $ - $ - - $ -

3) Bank credit limit

Unsecured bank general credit limit Amount used Amount unused		December 31	December 31
		2017 $ 294,870 18,315,345 $ 18,610,215	2016 $ 710,857 22,227,369 $ 22,938,226

Amount used was included guarantee for customs duties and for patent litigation.

33. RELATED-PARTY TRANSACTIONS

Balance, transactions, revenue and expenses between HTC and its subsidiaries, which are related parties of HTC, have been eliminated on consolidation and are not disclosed in this note. Besides as disclosed elsewhere in other notes, details of transactions between the Company and other related parties are disclosed below.

The Names and Relationships of Related-parties

Related-party Relationship with the Company VIA Technologies Inc. Its chairman in substance is HTC’s director VIA Labs, Inc. Its chairman in substance is HTC’s director Way Chih Investment Co., Ltd. HTC’s supervisor HTC Education Foundation Its chairman in substance is HTC’s director TVBS Media Inc. Same director as HTC’s Hung-Mao Investment Co., Ltd. Its significant shareholder in substance is HTC’s chairwoman Nan Ya Plastics Corporation Its director in substance and HTC’s chairwoman are relatives and other relatives Atrust Computer Corporation Its general manager in substance is HTC’s director Employees’ Welfare Committee Employees’ Welfare Committee of HTC Huada Digital Corporation Joint Venture VIA Technologies (China) Co., Ltd. The chairman of its parent company in substance is HTC’s director

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Operating Sales

Joint venture Employees’ Welfare Committee Other related parties	For the Year Ended	For the Year Ended	December 31
		2017 $ - - 83,165 $ 83,165	2016 $ 28,955 937 102,003 $ 131,895

The following balances of trade receivables from related parties were outstanding at the end of the reporting period:

Other related parties		December 31	December 31
		2017 $ 22,400	2016 $ 15,720

The selling prices for products sold to related parties were lower than those sold to third parties, except some related parties have no comparison with those sold to third parties. No guarantees had been asked for trade receivables from related parties. Trade receivables from related parties are assessed without bad debt risk hence no bad debt expense had been recognized for the years ended December 31, 2017 and 2016.

Purchase

Other related parties	For the Year Ended	For the Year Ended	December 31
		2017 $ 3,360	2016 $ 1,866

The following balances of trade payables from related parties were outstanding at the end of the reporting period:

Other related parties		December 31	December 31
		2017 $ 960	2016 $ 1,866

Purchase prices for related parties and third parties were similar. The outstanding balance of trade payables to related parties are unsecured and will be settled in cash.

Compensation of Key Management Personnel

Short-term benefits Post-employment benefits Termination benefits Share-based payments	**For the Year Ended **	**For the Year Ended **	**December 31 **
		2017 $ 210,480 2,669 - 13,952 $ 227,101	2016 $ 378,456 2,709 17,583 75,366 $ 474,114

The remuneration of directors and key executives was determined by the remuneration committee on the basis of the performance of individuals and market trends.

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Rental Expenses

VIA Technologies (China) Co., Ltd. Other related parties	For the Year Ended	For the Year Ended	December 31
		2017 $ 24,087 4,708 $ 28,795	2016 $ 9,178 - $ -

The Company leased offices, staff dormitory and meeting rooms owned by VIA Technologies (China) Co., Ltd. and a related party under an operating lease agreement, respectively. The rental payment is determined at the prevailing rates in the surrounding area.

Property, Plant and Equipment Acquired

Other related parties	Price	Price
	For the Year Ended		December 31
		2017 $ -	2016 $ 81

Other Related-party Transactions

Other related parties provide selling and marketing service to the Company. The selling and marketing service expenses were NT$6,000 thousand and NT$6,427 thousand for the years ended December 31, 2017 and 2016, respectively.

34. PLEDGED ASSETS

As of December 31, 2017 and 2016, the time of deposits amounting to NT$149,810 thousand and NT$113,528 thousand and were classified as other current financial assets were provided respectively as collateral for rental deposits and litigation.

35. COMMITMENTS, CONTINGENCIES AND SIGNIFICANT CONTRACTS

• a. In April 2008, IPCom GMBH & CO., KG (“IPCom”) filed a multi-claim lawsuit against the Company with the District Court of Mannheim, Germany, alleging that the Company infringed IPCom’s patents. In November 2008, the Company filed declaratory judgment action for non-infringement and invalidity against three of IPCom’s patents with the Washington Court, District of Columbia.

In October 2010, IPCom filed a new complaint against the Company alleging patent infringement of patent owned by IPCom in District Court of Dusseldorf, Germany.

In June 2011, IPCom filed a new complaint against the Company alleging patent infringement of patent owned by IPCom with the High Court in London, the United Kingdom. In September 2011, the Company filed declaratory judgment action for non-infringement and invalidity in Milan, Italy. Legal proceedings in above-mentioned Courts in Germany and the United Kingdom are still ongoing. The Company implemented the alternative solution since 2012. The Company evaluated the lawsuits and considered the risk of patents-in-suits are low. Also, preliminary injunction and summary judgment against the alternative solution of the Company are very unlikely.

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In March 2012, Washington Court granted on the Company’s summary judgment motion and ruled on non-infringement of two of patents-in-suit. As for the third patents-in-suit, the Washington Court has granted a stay on case pending appeal decision. In January 2014, the Court of Appeal for the Federal Circuit affirmed the Washington Court’s decision.

In February 2017, the Court of appeal of the United Kingdom found the alternative solution of the Company did not infringed and only some old products without the alternative solution infringed the United Kingdom part of European patent No. 1841268 (EP ‘268 patent). The EP ‘268 patent was held to be valid by European Patent Office on July 18, 2017. The next hearing has not been scheduled by the Courts yet.

As of the date that the Board of Directors approved and authorized for issuing consolidated financial statements, there had been no critical Court decision been made, except for the above.

• b. In December 2015, Koninklijke Philips N.V. (Philips) filed a lawsuit against the Company in the District Court of Mannheim, Germany, alleging infringement of certain Philips patents. In October 2016, the Mannheim Court found that certain smartphone products sold by Company in Germany infringed the German part of European patent No. 0888687 (EP ‘687 patent), which relates to device user interface, and granted an injunction against the Company. However, Philips has not enforced the injunction. In July 2017, the German Federal Patent Court found that EP ‘687 patent is invalid. The litigations between the Company and Philips are ongoing. In order to protect the interests of the Company, and its customers, the Company has appealed the Court’s decision.

As of the date that the Board of Directors approved and authorized for issuing consolidated financial statements, the appeals Court has not issued a ruling with respect to the EP ‘687 patent.

In October 2017, the court of appeal of the United Kingdom dismissed HTC’s appeal allegation that the rights we obtain by virtue of a covenant between Philips and Qualcomm extend to Philips’ patents covering HSPA technology. As such, the covenant does not provide HTC with a defense against the patent actions in suit relating to this technology. The technical hearings of the three patents in suit will now proceed as follows: EP (UK) 1440525 is scheduled for April 2018 whilst EP (UK) 1685659 and EP (UK) 1623511 are both scheduled for June 2018.

• c. On the basis of its past experience and consultations with its legal counsel, the Company has measured the possible effects of the contingent lawsuits on its business and financial condition.

36. SIGNIFICANT EVENTS AFTER REPORTING PERIOD

On September 21 2017, the Company signed a business cooperation agreement with Google Inc. (Google). The agreement supports the Company’s continued use of its brand, enabling a more streamlined product portfolio, greater operational efficiency and financial flexibility. The part of employees and assets of the Company will transfer to Google and Google will receive a non-exclusive license for the HTC intellectual property. The transaction amounted to US$1,100,000 thousand and completed on January 30, 2018.

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37. SIGNIFICANT ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCIES

The following information was aggregated by the foreign currencies other than functional currencies of the Company entities and the exchange rates between foreign currencies and respective functional currencies were disclosed. The significant assets and liabilities denominated in foreign currencies were as follows:

Financial assets Monetary items USD EUR JPY RMB Non-monetary items USD RMB Investments accounted for by the equity method USD RMB Financial liabilities Monetary items USD EUR JPY RMB	**December 31 **	**December 31 **
	2017 Foreign Currencies Exchange Rate $ 1,156,853 29.84 63,262 35.66 5,825,499 0.2649 1,188,839 4.58 85,590 29.84 1,536 4.58 13,460 29.84 2,513 4.58 793,530 29.84 66,494 35.66 4,922,152 0.2649 179,398 4.58	2016
		Foreign Currencies Exchange Rate $ 1,914,574 32.27 101,434 33.91 2,711,104 0.2756 1,208,051 4.62 84,259 32.27 167 4.62 16,111 32.27 2,500 4.62 1,445,356 32.27 93,533 33.91 6,745,333 0.2756 212,669 4.62

For the years ended December 31, 2017 and 2016, realized and unrealized net foreign exchange gains were NT$442,530 thousand and NT$348,061 thousand, respectively. It is impractical to disclose net foreign exchange gains or losses by each significant foreign currency due to the variety of the foreign currency transactions and functional currencies of the group entities.

38. SIGNIFICANT CONTRACTS

The Company specializes in the research, design, manufacture and sale of smart mobile devices. To enhance the quality of its products and manufacturing technologies, the Company has patent agreements, as follows:

Contractor Term Description Apple, Inc. January 1, 2015 - December 31, 2017 The scope of this license covers both the current and future patents held by the parties as agreed upon and specifically set forth in the agreement, with payment based on the agreement. (Continued)

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Contractor Qualcomm Incorporated. Nokia Corporation InterDigital Technology Corporation Koninklijke Philips Electronics N.V. MOTOROLA, Inc. Siemens Aktiengesellschaft IV International Licensing Netherlands, B.V.	Term December 20, 2000 to the following dates: a. If the Company materially breaches any agreement terms and fails to take remedial action within 30 days after Qualcomm’s issuance of a written notice, the Company will be prohibited from using Qualcomm’s property or patents. b. Any time when the Company is not using any of Qualcomm’s intellectual property, the Company may terminate this agreement upon 60 days’ prior written notice to Qualcomm. January 1, 2014 - December 31, 2018 December 31, 2003 to the expiry dates of these patents stated in the agreement. January 5, 2004 to the expiry dates of these patents stated in the agreement. December 23, 2003 to the latest of the following dates: a. Expiry dates of patents stated in the agreement. b. Any time when the Company is not using any of Motorola’s intellectual properties. July 2004 to the expiry dates of these patents stated in the agreement. November 2010 - June 2020	**Description **
		Authorization to use CDMA technology to manufacture and sell units, royalty payment based on agreement. Patent and technology collaboration; payment for use of implementation patents based on agreement. Authorization to use TDMA and CDMA technologies; royalty payment based on agreement. GSM/DCS 1800/1900 patent license; royalty payment based on agreement. TDMA, NARROWBAND CDMA, WIDEBAND CDMA or TD/CDMA standards patent license or technology; royalty payment based on agreement. Authorization to use GSM, GPRS or EDGE patent license or technology; royalty payment based on agreement. Authorization to use wireless technology; royalty payment based on agreement. (Continued)

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Contractor Google Inc.	Term September 21, 2017 - January 30, 2018	Description
		Certain HTC employees who are already working with Google Inc. to develop Pixel smartphones will join Google Inc. HTC will receive US$1.1 billion in cash from Google Inc. as part of the transaction. Separately, Google Inc. will receive a non-exclusive license for HTC intellectual property. (Concluded)

39. SEGMENT INFORMATION

The Company’s operations are mainly in the research, design, manufacture and sale of smart mobile devices and the operating revenue is more than 90 percent of the total revenue.

Operating segment financial information was as follows:

Geographical Areas

The locations of the Company’s non-current assets (other than financial instruments, deferred tax assets and post-employment benefit assets) as of December 31, 2017 and 2016 were as follows:

Taiwan Country Z Others		December 31	December 31
		2017 $ 12,146,237 157,576 3,044,438 $ 15,348,251	2016 $ 13,565,322 159,072 6,442,335 $ 20,166,729

The countries that accounted for 10 percent or more of consolidated total revenues for the years ended December 31, 2017 and 2016 were as follows:

Taiwan Country Z Others	For the Year Ended December 31	For the Year Ended December 31	For the Year Ended December 31
		2017 $ 7,053,499 27,951,150 27,115,165 $ 62,119,814	2016 $ 10,087,044 32,476,961 35,597,153 $ 78,161,158

Major Customer

External customer which accounted for 10 percent or more of the Company’s total revenues for the years ended December 31, 2017 and 2016 was as follows:

Customer A	**For the Year Ended December 31 **	**For the Year Ended December 31 **	**For the Year Ended December 31 **
		2017 $ 28,107,186	2016 $ 16,374,256

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