HTC — Interim / Quarterly Report 2016

Nov 11, 2016

HTC Corporation and Subsidiaries

Consolidated Financial Statements for the Nine Months Ended September 30, 2016 and 2015 and Independent Auditors’ Review Report

INDEPENDENT AUDITORS’ REVIEW REPORT

The Board of Directors and Stockholders HTC Corporation

We have reviewed the accompanying consolidated balance sheets of HTC Corporation and its subsidiaries (collectively, the “Company”) as of September 30, 2016 and 2015, and the related consolidated statements of comprehensive income for the three months ended September 30, 2016 and 2015, nine months ended September 30, 2016 and 2015, and changes in equity and cash flows for the nine months ended September 30, 2016 and 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to issue a report on these consolidated financial statements based on our reviews.

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

Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to in the first paragraph for them to be in conformity with the Regulations Governing the Preparation of Financial Reports by Securities Issuers and International Accounting Standard 34 “Interim Financial Reporting” endorsed by the Financial Supervisory Commission of the Republic of China.

October 25, 2016

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 applied in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to review such consolidated financial statements are those generally applied in the Republic of China.

For the convenience of readers, the independent auditors’ review report and the accompanying consolidated financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language independent accountants’ review 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 the Republic of China were not translated into English.

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HTC CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(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 30) Available-for-sale financial assets - current (Note 30) Debt investments with no active market - current (Note 30) Trade receivables, net (Notes 11 and 31) Other receivables (Note 11) Current tax assets Inventories (Note 12) Prepayments (Note 13) Non-current assets held for sale (Note 14) Other current financial assets (Notes 10 and 32) Other current assets Total current assets NON-CURRENT ASSETS Available-for-sale financial assets - non-current (Note 30) Financial assets measured at cost - non-current (Notes 9 and 30) Debt investments with no active market - non-current (Note 30) Investments accounted for using equity method (Note 16) Property, plant and equipment (Note 17) Investment properties, net (Note 18) Intangible assets (Note 19) Deferred tax assets Refundable deposits (Note 30) Long-term receivables (Note 11) Net defined benefit asset - non-current 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 30) Note and trade payables (Note 20) Other payables (Notes 21 and 31) Current tax liabilities Provisions - current (Note 22) Other current liabilities (Note 21) Total current liabilities NON-CURRENT LIABILITIES Deferred tax liabilities Guarantee deposits received (Note 30) Other non-current liabilities (Note 21) Total non-current liabilities Total liabilities EQUITY (Note 23) Share capital - ordinary shares Capital surplus Retained earnings Legal reserve Unappropriated earnings Other equity Treasury shares Total equity TOTAL		September 30, 2016 (Reviewed) Amount % $ 30,243,330 27 18,017 - 277,464 - 7,841 - 17,588,035 16 342,391 - 109,990 - 19,257,388 17 2,623,415 3 - - 4,105,821 4 66,876 - 74,640,568 67 92 - 3,221,504 3 8,625 - 521,370 - 12,300,145 11 1,560,744 1 4,145,869 4 8,808,502 8 1,466,192 1 749,433 1 90,435 - 4,150,193 4 37,023,104 33 $ 111,663,672 100 $ 167,137 - 29,433,794 26 18,737,270 17 145,466 - 4,883,012 4 2,849,280 3 56,215,959 50 65,971 - 23,362 - 392,037 1 481,370 1 56,697,329 51 8,228,499 7 15,606,473 14 18,297,655 16 13,984,261 13 (1,150,545) (1) - - 54,966,343 49 $ 111,663,672 100		December 31, 2015 (Audited) Amount % $ 35,346,799 27 95,493 - 303,289 - 8,266 - 18,518,948 14 466,791 1 212,033 - 19,123,637 15 4,400,968 4 3,768,277 3 4,100,290 3 94,611 - 86,439,402 67 75 - 3,396,151 3 - - 240,237 - 15,432,130 12 1,708,489 1 5,561,444 4 8,699,322 7 1,580,342 1 1,488,775 1 79,470 - 4,767,246 4 42,953,681 33 $ 129,393,083 100 $ 36,544 - 29,598,385 23 24,993,276 19 163,252 - 5,992,258 5 3,689,763 3 64,473,478 50 97,351 - 30,159 - - - 127,510 - 64,600,988 50 8,318,695 6 15,505,853 12 18,297,655 14 21,782,432 17 1,088,415 1 (200,955) - 64,792,095 50 $ 129,393,083 100		September 30, 2015 (Reviewed)
						Amount % $ 43,279,478 32 254,358 - - - 8,280 - 17,025,863 13 278,346 - 319,933 - 20,823,090 15 5,190,349 4 1,771,623 1 752,947 1 140,739 - 89,845,006 66 59 - 3,348,441 3 - - 227,157 - 17,901,257 13 1,785,175 1 6,065,893 5 8,318,264 6 1,600,231 1 1,471,773 1 123,038 - 5,572,199 4 46,413,487 34 $ 136,258,493 100 $ 250,246 - 29,747,168 22 26,180,345 19 146,414 - 7,303,576 5 3,324,058 3 66,951,807 49 96,330 - 25,987 - 414,019 1 536,336 1 67,488,143 50 8,282,722 6 15,311,375 11 18,297,655 13 25,206,761 19 1,872,792 1 (200,955) - 68,770,350 50 $ 136,258,493 100

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 (In Thousands of New Taiwan Dollars, Except Loss Per Share) (Reviewed, Not Audited)

OPERATING REVENUES (Notes 8, 24 and 31) OPERATING COST (Notes 12, 25 and 31) GROSS PROFIT OPERATING EXPENSES (Notes 25 and 31) Selling and marketing General and administrative Research and development Total operating expenses OPERATING LOSS NON-OPERATING INCOME AND EXPENSES Other income (Note 25) Other gains and losses (Notes 8, 13, 17 and 25) Financial 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 EXPENSE (BENEFIT) (Note 26) LOSS FOR THE PERIOD OTHER COMPREHENSIVE INCOME AND LOSS, NET OF INCOME TAX 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 Cash flow hedge Other comprehensive income and loss for the period, net of income tax TOTAL COMPREHENSIVE LOSS FOR THE PERIOD		For the Three Months EndedSeptember 30	For the Three Months EndedSeptember 30	For the Three Months EndedSeptember 30		For the Nine Months	EndedSeptember 30	EndedSeptember 30
		2016		2015		2016		2015
		Amount % $ 22,230,334 100 18,657,367 84 3,572,967 16 2,177,669 10 929,973 4 2,462,365 11 5,570,007 25 (1,997,040) (9) 140,983 1 84,157 - (134 ) - (16,573) - 208,433 1 (1,788,607 ) (8 ) 780 - (1,789,387) (8) (1,288,223 ) (6 ) 63,812 - - - (1,224,411) (6) $ (3,013,798) (14)		Amount % $ 21,402,111 100 17,546,616 82 3,855,495 18 3,947,647 18 1,229,801 6 3,621,552 17 8,799,000 41 (4,943,505) (23) 187,300 1 270,791 1 (300 ) - (2,180) - 455,611 2 (4,487,894 ) (21 ) (10,940) - (4,476,954) (21) 1,832,569 9 15 - (6,261) - 1,826,323 9 $ (2,650,631) (12)		Amount % $ 55,913,440 100 48,804,829 87 7,108,611 13 6,736,763 12 3,127,905 6 8,284,522 15 18,149,190 33 (11,040,579) (20) 536,618 1 3,318,417 6 (4,369 ) - (46,076) - 3,804,590 7 (7,235,989 ) (13 ) 228,727 - (7,464,716) (13) (2,221,614 ) (4 ) (65,684 ) - - - (2,287,298) (4) $ (9,752,014) (17)		Amount % $ 95,936,081 100 77,556,202 81 18,379,879 19 13,988,385 15 3,780,671 4 10,674,996 11 28,444,052 30 (10,064,173) (11) 439,105 - (2,253,688 ) (2 ) (4,642 ) - (8,229) - (1,827,454) (2) (11,891,627 ) (13 ) 259,515 - (12,151,142) (13) 622,355 1 (34 ) - - - 622,321 1 $ (11,528,821) (12) (Continued)

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HTC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In Thousands of New Taiwan Dollars, Except Loss Per Share) (Reviewed, Not Audited)

NET LOSS ATTRIBUTABLE TO: Owners of the parent TOTAL COMPREHENSIVE LOSS ATTRIBUTABLE TO: Owners of the parent LOSS PER SHARE (Note 27) Basic		For the Three Months EndedSeptember 30	For the Three Months EndedSeptember 30	For the Three Months EndedSeptember 30		For the Nine Months	EndedSeptember 30	EndedSeptember 30
		2016		2015		2016		2015
		Amount % $ (1,789,387) (8) $ (3,013,798) (14) $ (2.18)		Amount % $ (4,476,954) (21) $ (2,650,631) (12) $ (5.41)		Amount % $ (7,464,716) (13) $ (9,752,014) (17) $ (9.05)		Amount % $ (12,151,142) (13) $ (11,528,821) (12) $ (14.68)

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

(Concluded)

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HTC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (In Thousands of New Taiwan Dollars) (Reviewed, Not Audited)

BALANCE, JANUARY 1, 2015 Appropriation of 2014 earnings Legal reserve Cash dividends Net loss for the nine months ended September 30, 2015 Other comprehensive income and loss for the nine months ended September 30, 2015 Buy-back of treasury shares Retirement of treasury shares Share-based payments BALANCE, SEPTEMBER 30, 2015 BALANCE, JANUARY 1, 2016 Net loss for the nine months ended September 30, 2016 Other comprehensive income and loss for the nine months ended September 30, 2016 Buy-back of treasury shares Retirement of treasury shares Share-based payments BALANCE, SEPTEMBER 30, 2016		Share Capital Ordinary Shares Capital Surplus $ 8,349,521 $ 15,140,687 - - - - - - - - - - (69,140) (120,007) 2,341 290,695 $ 8,282,722 $ 15,311,375 $ 8,318,695 $ 15,505,853 - - - - - - (111,600) (192,769) 21,404 293,389 $ 8,228,499 $ 15,606,473		Retained Earnings Unappropriated Legal Reserve Earnings $ 18,149,350 $ 41,381,753 148,305 (148,305) - (314,636) - (12,151,142) - - - - - (3,560,909) - - $ 18,297,655 $ 25,206,761 $ 18,297,655 $ 21,782,432 - (7,464,716) - - - - - (333,455) - - $ 18,297,655 $ 13,984,261		Other Equity	Unearned Employee Benefit $ (398,570) - - - - - - 188,353 $ (210,217) $ (371,369) - - - - 48,338 $ (323,031)	Treasury Shares $ (3,750,056) - - - - (200,955) 3,750,056 - $ (200,955) $ (200,955) - - (436,869) 637,824 - $ -	Total Equity $ 80,333,373 - (314,636) (12,151,142) 622,321 (200,955) - 481,389 $ 68,770,350 $ 64,792,095 (7,464,716) (2,287,298) (436,869) - 363,131 $ 54,966,343
					Exchange Differences on Translating Foreign Operations $ 1,462,855 - - - 622,355 - - - $ 2,085,210 $ 1,473,417 - (2,221,614) - - - $ (748,197)	Unrealized Losses on Available-for- sale Financial Assets $ (2,167) - - - (34) - - - $ (2,201) $ (13,633) - (65,684) - - - $ (79,317)

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

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HTC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands of New Taiwan Dollars) (Reviewed, Not Audited)

CASH FLOWS FROM OPERATING ACTIVITIES Loss before income tax Adjustments for: Depreciation expenses Amortization expenses Bad debt expenses Finance costs Interests income Dividend income Compensation cost of employee share-based payments Share of the profit or loss of associates and joint venture Net gain on disposal of property, plant and equipment Transfer of properties, plants and equipment to expense 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 Increase in inventories Decrease in prepayments Decrease (increase) in other current assets Decrease in other non-current assets Decrease in note and trade payables Decrease in other payables (Decrease) increase in provisions (Decrease) increase in other current liabilities Increase in other non-current liabilities Cash used in operations Interest received Interest paid Income tax 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 Acquisition of associates Proceeds from disposal of investments accounted for using equity method Proceeds from disposal of non-current assets held for sale Payments for property, plant and equipment		For the Nine Months Ended September 30	For the Nine Months Ended September 30
		2016 $ (7,235,989) 1,417,405 1,269,074 400,049 4,369 (305,967) (138,761) 363,131 46,076 (3,198,367) - 2,518,889 208,069 1,230,864 133,609 (2,652,640) 1,777,553 27,735 574,424 (164,591) (6,202,945) (1,109,246) (840,483) 392,037 (11,485,705) 268,989 (4,369) (346,241) (11,567,326) (8,665) (136,616) (352,231) 182,578 6,060,000 (477,582)	2015 $ (11,891,627) 1,964,936 1,457,394 - 4,642 (303,048) (37,932) 481,389 8,229 (17,092) 8,339 4,370,426 236,008 12,114,421 304,121 (5,060,566) 1,435,757 (41,470) 1,871,611 (14,056,175) (5,994,053) 1,462,397 2,180,924 414,019 (9,087,350) 233,781 (4,642) (303,184) (9,161,395) - (645,449) - - - (728,320) (Continued)

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HTC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands of New Taiwan Dollars) (Reviewed, Not Audited)

Proceeds from disposal of property, plant and equipment Increase in refundable deposits Decrease in refundable deposits Payments for intangible assets Increase in other current financial assets Dividends received Net cash generated from (used in) investing activities CASH FLOWS FROM FINANCING ACTIVITIES Refund of guarantee deposits received Dividends paid to owners of the Company 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 PERIOD CASH AND CASH EQUIVALENTS, END OF PERIOD		For the Nine Months Ended September 30	For the Nine Months Ended September 30
		2016 $ 2,926,777 - 114,150 (75,146) (5,531) 83,844 8,311,578 (6,797) - (436,869) (443,666) (1,404,055) (5,103,469) 35,346,799 $ 30,243,330	2015 $ 312,597 (1,337,491) - (86,543) (417,993) 37,932 (2,865,267) (17,243) (314,636) (200,955) (532,834) 95,416 (12,464,080) 55,743,558 $ 43,279,478

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 NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise) (Reviewed, Not Audited)

1. ORGANIZATION AND OPERATIONS

HTC Corporation (“HTC”) was incorporated on May 15, 1997 under the Company Law of the Republic of China. HTC and its subsidiaries (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 Company.

2. APPROVAL OF FINANCIAL STATEMENTS

The consolidated financial statements were approved by the board of directors and authorized for issue on October 25, 2016.

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

• a. International Financial Reporting Standards (IFRS), International Accounting Standards (IAS), Interpretations of IFRS (IFRIC), and Interpretations of IAS (SIC) endorsed by the Financial Supervisory Commission (FSC) and applicable from 2017

Rule No. 1050026834 issued by the FSC endorsed the IFRS, IAS, IFRIC and SIC (collectively, the “IFRSs”) applicable starting January 1, 2017.

Effective Date New, Amended or Revised Standards and Interpretations Announced by IASB (Note 1) Annual Improvements to IFRSs 2010-2012 Cycle July 1, 2014 (Note 2) Annual Improvements to IFRSs 2011-2013 Cycle July 1, 2014 Annual Improvements to IFRSs 2012-2014 Cycle January 1, 2016 (Note 3) Amendments to IFRS 10, IFRS 12 and IAS 28 “Investment January 1, 2016 Entities: Applying the Consolidation Exception” Amendment to IFRS 11 “Accounting for Acquisitions of Interests January 1, 2016 in Joint Operations” IFRS 14 “Regulatory Deferral Accounts” January 1, 2016 Amendment to IAS 1 “Disclosure Initiative” January 1, 2016 Amendments to IAS 16 and IAS 38 “Clarification of Acceptable January 1, 2016 Methods of Depreciation and Amortization” Amendments to IAS 16 and IAS 41 “Agriculture: Bearer Plants” January 1, 2016 Amendment to IAS 19 “Defined Benefit Plans: Employee July 1, 2014 Contributions” (Continued)

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Effective Date New, Amended or Revised Standards and Interpretations Announced by IASB (Note 1)

Amendment to IAS 36 “Impairment of Assets: Recoverable	January 1, 2014
Amount Disclosures for Non-financial Assets”
Amendment to IAS 39 “Novation of Derivatives and Continuation	January 1, 2014
of Hedge Accounting”
IFRIC 21 “Levies”	January 1, 2014
		(Concluded)

• 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 2 applies to share-based payment transactions with grant date on or after July 1, 2014; the amendment to IFRS 3 applies to business combinations with acquisition date on or after July 1, 2014; the amendment to IFRS 13 is effective immediately; the remaining amendments are effective for annual periods beginning on or after July 1, 2014.

• Note 3: The amendment to IFRS 5 is applied prospectively to changes in a method of disposal that occur in annual periods beginning on or after January 1, 2016; the remaining amendments are effective for annual periods beginning on or after January 1, 2016.

As of the date the consolidated financial statements were authorized for issue, the Company assessed the application of the above from 2017, whenever applied, would not have any material impact on the Company’s accounting policies.

• b. New IFRSs in issue but not yet endorsed by FSC

The Company has not applied the following New IFRSs issued by the IASB but not yet endorsed by the FSC. As of the date the consolidated financial statements were authorized for issue, the FSC has not announced their effective dates. In addition, the FSC announced that the Company should apply IFRS 15 starting January 1, 2018.

New, Amended or Revised Standards and Interpretations 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” Amendments to IFRS 10 and IAS 28 “Sale or Contribution of Assets between an Investor and its Associate or Joint Venture” IFRS 15 “Revenue from Contracts with Customers” Amendment to IFRS 15 “Clarifications to IFRS 15” IFRS 16 “Leases” Amendment to IAS 7 “Disclosure Initiative” Amendments to IAS 12 “Recognition of Deferred Tax Assets for Unrealized Losses”

Effective Date Announced by IASB (Note)

January 1, 2018 January 1, 2018 January 1, 2018 January 1, 2018 To be determined by IASB January 1, 2018 January 1, 2018 January 1, 2019 January 1, 2017 January 1, 2017

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

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The initial application of the above New IFRSs, whenever applied, would not have any material impact on the Company’s accounting policies, except for the following:

• 1) IFRS 9 “Financial Instruments”

Recognition and measurement 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;

• b) For debt instruments, if they are held within a business model whose objective is achieved by both the collecting of contractual cash flows and the selling of 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 gain or loss 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 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 impairment of financial assets

IFRS 9 requires that impairment loss on financial assets is recognized by using the “Expected Credit Losses Model”. The credit 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.

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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 risk eligible for hedge accounting of non-financial items; (2) changing the way hedging 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 supersedes IAS 18 “Revenue”, IAS 11 “Construction Contracts” and a number of revenue-related interpretations from January 1, 2018.

When applying IFRS 15, an entity shall recognize 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 entity satisfies a performance obligation.

When IFRS 15 and related amendment are effective, an entity may elect to apply this Standard either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this Standard recognized at the date of initial application.

3) 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.

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.

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4. SIGNIFICANT ACCOUNTING POLICIES

Statement of Compliance

These interim consolidated financial statements have been prepared in accordance with the Regulations Governing the Preparation of Financial Reports by Securities Issuers and IAS 34 “Interim Financial Reporting” as endorsed by the FSC. Disclosure information included in these interim consolidated financial statements is less than the disclosure information required in a complete set of annual financial statements.

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.

Basis of Consolidation

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

Other Significant Accounting Policies

Except for the following, the accounting policies applied in these consolidated financial statements are consistent with those applied in the consolidated financial statements for the year ended December 31, 2015. For the summary of other significant accounting policies, please refer to the consolidated financial statements for the year ended December 31, 2015.

a. Retirement benefits

Pension cost for an interim period is calculated on a year-to-date basis by using the actuarially determined pension cost rate at the end of the prior financial year, adjusted for significant market fluctuations since that time and for significant plan amendments, settlements, or other significant one-off events.

• b. Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax. Interim period income taxes are assessed on an annual basis and calculated by applying to an interim period’s pre-tax income the tax rate that would be applicable to expected total annual earnings.

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.

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a. Accrued marketing and advertising expenses

The Company recognizes sale of goods as the conditions are met. 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 September 30, 2016, December 31, 2015 and September 30, 2015, the carrying amounts of accrued marketing and advertising expenses were NT$10,563,351 thousand, NT$15,124,052 thousand and NT$15,570,968 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 September 30, 2016, December 31, 2015 and September 30, 2015, the carrying amounts of allowances for doubtful debts were NT$3,412,869 thousand, NT$3,016,914 thousand and NT$3,016,922 thousand, respectively.

• 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 was NT$2,919,890 thousand for the nine months ended September 30, 2015. (Included the impairment loss of prepayments and property, plant and equipment with the amount of NT$2,395,643 thousand and NT$524,247 thousand, 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 September 30, 2016, December 31, 2015 and September 30, 2015, the carrying amounts of inventories were NT$19,257,388 thousand, NT$19,123,637 thousand and NT$20,823,090 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.

• 13 -

As of September 30, 2016, December 31, 2015 and September 30, 2015, the carrying amounts of deferred tax assets were NT$8,808,502 thousand, NT$8,699,322 thousand and NT$8,318,264 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 September 30, 2016, December 31, 2015 and September 30, 2015, the carrying amounts of warranty provision were NT$4,367,872 thousand, NT$5,314,365 thousand and NT$6,679,563 thousand, respectively.

6. CASH AND CASH EQUIVALENTS

		September 30,	September 30,	December 31,	December 31,	September 30,	September 30,
			2016		2015		2015
	Cash on hand	$	1,807	$	2,122	$	2,026
	Checking accounts and demand deposits		20,643,846		31,819,080		34,215,391
	Time deposits (with original maturities less than
	three months)		9,597,677		3,525,597		9,062,061
		$	30,243,330	$	35,346,799	$	43,279,478
	FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS
		September 30,		December 31,		September 30,
			2016		2015		2015
	Financial assets held for trading
	Derivatives financial assets (not under hedge
	accounting)
	Foreign exchange contracts	$	18,017	$	95,493		$ 254,358
	Financial liabilities held for trading
	Derivatives financial liabilities (not under hedge
	accounting)
	Foreign exchange contracts	$	167,137	$	36,544		$ 250,246

7. FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS

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:

• 14 -

Forward Exchange Contracts

				Notional Amount	Notional Amount
	Buy/Sell	Currency	Maturity Date	(In Thousands)
September 30, 2016
Foreign exchange contracts	Sell	GBP/USD	2016.10.07-2016.10.19	GBP	4,000
Foreign exchange contracts	Sell	JPY/USD	2016.10.21-2016.11.09	JPY	635,623
Foreign exchange contracts	Sell	USD/TWD	2016.10.07-2016.10.14	USD	30,000
Foreign exchange contracts	Buy	USD/TWD	2016.10.05-2016.11.25	USD	562,362
Foreign exchange contracts	Buy	SGD/USD	2016.10.26-2016.11.18	SGD	234,023
Foreign exchange contracts	Buy	AUD/USD	2016.10.26-2016.11.18	AUD	7,600
Foreign exchange contracts	Buy	EUR/TWD	2016.10.07	EUR	15,000
Foreign exchange contracts	Buy	CAD/USD	2016.10.26	CAD	4,500
Foreign exchange contracts	Buy	RMB/USD	2016.10.14-2016.11.18	RMB	989,526
December 31, 2015
Foreign exchange contracts	Sell	SGD/USD	2016.01.29	SGD	5,336
Foreign exchange contracts	Sell	JPY/USD	2016.01.08-2016.01.27	JPY	454,000
Foreign exchange contracts	Sell	GBP/USD	2016.01.29-2016.03.16	GBP	11,500
Foreign exchange contracts	Buy	RMB/USD	2016.01.05-2016.01.27	RMB	374,500
Foreign exchange contracts	Buy	USD/NTD	2016.01.22-2016.03.29	USD	194,700
Foreign exchange contracts	Buy	SGD/USD	2016.01.29-2016.03.30	SGD	200,722
September 30, 2015
Foreign exchange contracts	Sell	SGD/USD	2015.12.29	SGD	5,336
Foreign exchange contracts	Sell	JPY/USD	2015.10.07-2015.10.21	JPY 1,337,330
Foreign exchange contracts	Sell	GBP/USD	2015.10.30-2015.11.27	GBP	10,800
Foreign exchange contracts	Sell	USD/TWD	2015.10.06-2015.10.30	USD	86,500
Foreign exchange contracts	Buy	RMB/USD	2015.10.08-2015.10.28	RMB	301,000
Foreign exchange contracts	Buy	RMB/TWD	2015.10.26	RMB	45,000
Foreign exchange contracts	Buy	USD/NTD	2015.10.13-2015.12.31	USD	404,300
Foreign exchange contracts	Buy	SGD/USD	2015.10.30-2015.11.27	SGD	195,787

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 Three Months Ended September 30 2016 2015 $ - $ 7,840 - 19 $ - $ 7,859	For the Three Months Ended September 30 2016 2015 $ - $ 7,840 - 19 $ - $ 7,859	For the Nine Months Ended September 30	For the Nine Months Ended September 30	For the Nine Months Ended September 30
		2016 $ - - $ -		2016 $ (40,299) 2,056 $ (38,243)	2015 $ 22,604 1,258 $ 23,862

• 15 -

9. FINANCIAL ASSETS MEASURED AT COST

	September 30,	September 30,	December 31,	December 31,	September 30,	September 30,
		2016		2015		2015
Domestic unlisted equity investment	$	643,961	$	643,961	$	643,961
Overseas unlisted equity investment		1,914,242		2,054,310		2,058,007
Overseas unlisted mutual funds		663,301		697,880		646,473
	$	3,221,504	$	3,396,151	$	3,348,441
Classified according to financial asset
measurement categories
Available-for-sale financial assets	$	3,221,504	$	3,396,151	$	3,348,441

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 at the end of reporting period.

10. OTHER CURRENT FINANCIAL ASSETS

	September 30,	December 31,	September 30,	September 30,
	2016	2015		2015
Time deposits with original maturities more than
three months	$ 4,105,821	$ 4,100,290	$	752,947

For details of pledged other current financial assets, please refer to Note 32.

11. TRADE RECEIVABLES AND OTHER RECEIVABLES

September 30, 2016 Trade receivables Trade receivables $ 20,300,893 Trade receivables - related parties 11 Less: Allowances for impairment loss (2,712,869) $ 17,588,035 Other receivables Receivables from disposal of investments $ 1,238,832 VAT refund receivables 235,361 Interest receivables 225,409 Others 92,222 Less: Allowances for impairment loss (700,000) $ 1,091,824	December 31, 2015 September 30, 2015 $ 21,534,175 $ 20,042,279 1,687 506 (3,016,914) (3,016,922) $ 18,518,948 $ 17,025,863 $ 1,305,943 $ 1,308,297 273,024 91,377 188,431 172,038 188,168 178,407 - - $ 1,955,566 $ 1,750,119

(Continued)

• 16 -

September 30, 2016 Current - other receivables $ 342,391 Non-current - other receivables 749,433 $ 1,091,824	December 31, 2015 September 30, 2015 $ 466,791 $ 278,346 1,488,775 1,471,773 $ 1,955,566 $ 1,750,119 (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.

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

Age of trade receivables

	September 30,	December 31,	September 30,
	2016	2015	2015
1-90 days	$ 1,728,582	$ 1,129,769	$ 1,945,618
91-180 days	91,521	95,996	466,210
Over 181 days	2,373,004	2,840,451	2,502,035
	$ 4,193,107	$ 4,066,216	$ 4,913,863

The above aging schedule was based on the past due date.

Age of impaired trade receivables

	September	30,	December	31,	September 30,
	2016		2015		2015
1-90 days	$ 1,480,238		$ 1,049,302		$ 1,772,385
91-180 days		-		-	124,556
Over 181 days		-		-	-
	$ 1,480,238		$ 1,049,302		$ 1,896,941

• 17 -

The above aging of trade receivables after deducting the allowance for impairment loss were presented based on the past due date.

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

Balance, beginning of period Less: Impairment loss reversed Less: Amounts written off during the period as uncollectible (Less) add: Effect of foreign currency exchange differences Balance, end of period		For the Nine Months Ended September 30	For the Nine Months Ended September 30
		2016 $ 3,016,914 (299,951) (4,025) (69) $ 2,712,869	2015 $ 3,054,782 - (38,038) 178 $ 3,016,922

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 period Add: Impairment loss recognized Balance, end of period INVENTORIES September 30, 2016 Finished goods $ 3,330,420 Work-in-process 1,772,726 Semi-finished goods 2,651,738 Raw materials 11,007,745 Inventory in transit 494,759 $ 19,257,388			For the Nine Months Ended September 30
		2016 2015 $ - $ - 700,000 - $ 700,000 $ - December 31, 2015 September 30, 2015 $ 4,060,279 $ 3,929,617 460,282 1,135,476 3,073,114 3,493,149 10,930,317 11,563,845 599,645 701,003 $ 19,123,637 $ 20,823,090

12. INVENTORIES

The cost of inventories recognized as cost of goods sold for the nine months ended September 30, 2016 and 2015 included inventory write-downs of NT$2,518,889 thousand and NT$1,450,536 thousand, respectively.

• 18 -

13. PREPAYMENTS

September 30, 2016 Royalty $ 5,182,403 Net input VAT 784,809 Land use right 110,116 Prepayments to suppliers 79,969 Prepaid equipment 67,038 Others 549,273 $ 6,773,608 Current $ 2,623,415 Non-current 4,150,193 $ 6,773,608	December 31, 2015 September 30, 2015 $ 6,978,900 $ 7,756,783 1,082,836 1,702,270 120,153 140,349 251,374 382,222 98,702 104,489 636,249 676,435 $ 9,168,214 $ 10,762,548 $ 4,400,968 $ 5,190,349 4,767,246 5,572,199 $ 9,168,214 $ 10,762,548

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 35.

Prepayments to suppliers were primarily for discount purposes and were classified as current or non-current in accordance with their nature.

In June 2015, the Company determined that the recoverable amount of partial prepayments was less than its carrying amount, and thus recognized an impairment loss of NT$2,395,643 thousand.

14. NON-CURRENT ASSETS HELD FOR SALE

	September	30,	December 31,	September 30,
	2016		2015	2015
Land and buildings held for sale	$	-	$ 3,768,277	$ 1,771,623

On December 29, 2015, 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 to the acquirer in February 2016. For the details of gains and losses for disposal, please refer to Note 25.

• 19 -

15. SUBSIDIARIES

a. Subsidiary included in consolidated financial statements

The consolidated entities as of September 30, 2016, December 31, 2015 and September 30, 2015 were as follows:

Investor Investee Main Businesses HTC Corporation H.T.C. (B.V.I.) Corp. International holding company and general investing activities HTC Corporation 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. 〃 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 September 30, 2016 December 31, 2015 September 30, 2015 Remark 100.00 100.00 100.00 - 100.00 100.00 100.00 - 100.00 100.00 100.00 - 100.00 100.00 100.00 - 1.00 1.00 1.00 - 100.00 100.00 100.00 - 0.01 0.01 0.01 - 100.00 100.00 100.00 - 100.00 100.00 100.00 - 100.00 100.00 100.00 - 100.00 - - 1) 100.00 100.00 100.00 - 100.00 100.00 100.00 - 99.99 99.99 99.99 - 99.00 99.00 99.00 - 100.00 100.00 100.00 - 99.00 99.00 99.00 - 100.00 100.00 100.00 - 100.00 100.00 100.00 - 100.00 100.00 100.00 - 99.99 99.99 99.99 - 100.00 100.00 100.00 - 100.00 100.00 100.00 - 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 - 1.00 1.00 1.00 - (Continued)

• 20 -

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 Netherlands B.V. 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. Marketing, repair and after-sales services 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 Inc. HTC America Inc. Sale of smart mobile devices 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

% of Ownership September 30, 2016 December 31, 2015 September 30, 2015 Remark 100.00 100.00 100.00 - 1.00 1.00 1.00 - 0.67 0.67 0.67 - 1.00 1.00 1.00 - 1.00 1.00 1.00 - 100.00 100.00 100.00 - 99.99 99.99 99.99 - 100.00 100.00 100.00 - 100.00 100.00 100.00 - 100.00 100.00 100.00 - 99.33 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 - 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 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 - 100.00 100.00 100.00 - 100.00 100.00 100.00 - 100.00 100.00 - 2) (Concluded)

Remark:

• 1) HTC VIVE Investment (B.V.I) Corp. was incorporated in September 2016.

• 2) HTC VIVE TECH Corp. was incorporated in December 2015.

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

• 21 -

16. INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD

	September 30,	September 30,	December 31,	December 31,	September 30,	September 30,
		2016		2015		2015
Investment in associates	$	521,370	$	31,925	$	16,561
Investment in joint venture		-		208,312		210,596
	$	521,370	$	240,237	$	227,157
Investments in Associates
	September 30,		December 31,		September 30,
		2016		2015		2015
Unlisted equity investment
East West Artist	$	22,020	$	31,925	$	16,561
Steel Wool Games, Inc.		154,357		-		-
Surgical Theater, LLC		344,993		-		-
	$	521,370	$	31,925	$	16,561

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

	September 30,	December 31,	September 30,
Name of Associates	2016	2015	2015
East West Artist	25.00%	25.00%	12.50%
Steel Wool Games, Inc.	49.00%	11.25%	-
Surgical Theater, LLC	21.09%	12.30%	-

The Company acquired 12.5% equity interest in East West Artist for US$500 thousand in December 2014, and additional 12.5% equity interest for US$500 thousand in December 2015, with a total 25% equity interest held by the equity method.

In July 2015, the Company acquired 11.25% equity interest in Steel Wool Games, Inc. for US$300 thousand and recognized as financial assets measured at cost - non-current. In June 2016, the equity interest had risen to 49% with an additional investment of US$5,000 thousand. The management considers that the Company does exercise significant influence over Steel Wool Games, Inc. and it is 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 recognized as financial assets measured at cost - non-current. In August 2016, the equity interest had risen to 21.09% with additional investment of US$6,000 thousand and classified as equity method.

• 22 -

Aggregate information of associates that are not individually material:

The Company’s share of: Loss from continuing operations Other comprehensive income Total comprehensive income for the period	For the Three Months Ended September 30 2016 2015 $ (16,725) $ - - - $ (16,725) $ -	For the Three Months Ended September 30 2016 2015 $ (16,725) $ - - - $ (16,725) $ -	For the Nine Months Ended September 30	For the Nine Months Ended September 30	For the Nine Months Ended September 30
		2016 $ (16,725) - $ (16,725)		2016 $ (20,343) - $ (20,343)	2015 $ - - $ -

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 reviewed. Management believes there is no material impact on the equity method accounting or the calculation of the share of profit or loss and other comprehensive income, as the financial statement have not been reviewed.

Investments in Joint Venture

	September	September	30,	December 31,	September 30,
		2016		2015	2015
Unlisted equity investment
Huada Digital Corporation	$		-	$ 208,312	$ 210,596

At the end of the reporting period, the proportion of ownership and voting rights in jointly controlled entities held by the Company were as follows:

	September 30,	December 31,	September 30,
Name of Joint Venture	2016	2015	2015
Huada Digital Corporation	-	50.00%	50.00%

The Company set up a subsidiary Huada, whose main business is software services, in December 2009. In October 2011, Chunghwa Telecom Co., Ltd. invested in Huada. In March 2012, Huada held a stockholders’ 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 this investment by the equity method. The dissolution of liquidation was approved in the Huada’s shareholders’ meeting in March 2016 and the date of dissolution was set on March 31, 2016, the liquidation process was completed on July 31, 2016.

Aggregate information of joint venture that are not individually material:

The Company’s share of: Gain (Loss) from continuing operations Other comprehensive income Total comprehensive loss for the period	For the Three Months Ended September 30 2016 2015 $ 152 $ (2,180) - - $ 152 $ (2,180)	For the Three Months Ended September 30 2016 2015 $ 152 $ (2,180) - - $ 152 $ (2,180)	For the Nine Months Ended September 30	For the Nine Months Ended September 30	For the Nine Months Ended September 30
		2016 $ 152 - $ 152		2016 $ (25,733) - $ (25,733)	2015 $ (8,229) - $ (8,229)

• 23 -

Investments in joint venture 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 reviewed. Management believes there is no material impact on the equity method accounting or the calculation of the share of profit or loss and other comprehensive income, as the financial statements have not been reviewed.

17. PROPERTY, PLANT AND EQUIPMENT

September 30, 2016 Carrying amounts Land $ 4,678,087 Buildings 5,537,828 Property in construction - Machinery and equipment 1,441,998 Other equipment 642,232	December 31, 2015 September 30, 2015 $ 6,470,507 $ 5,853,905 5,771,213 8,469,503 - 2,635 2,320,672 2,640,385 869,738 934,829

$ 12,300,145 $ 15,432,130 $ 17,901,257

Movement of property, plant and equipment for the nine months ended September 30, 2016 and 2015 were as follows:

Cost Balance, beginning of period Additions Disposals Reclassification Effect of foreign currency exchange differences Balance, end of period Accumulated depreciation Balance, beginning of period Depreciation expenses Disposals Reclassification Effect of foreign currency exchange differences Balance, end of period Accumulated impairment Balance, beginning of period Impairment loss Balance, end of period Net book value, end of period			2016
		Land $ 6,470,507 - (1,771,623) 6,587 (27,384) 4,678,087 - - - - - - - - - $ 4,678,087	Buildings Property under Construction Machinery and Equipment $ 7,361,368 $ - $ 13,754,405 258,408 - 113,691 - - (25,635 ) (201,433 ) - (11,100 ) (99,551) - (208,754) 7,318,792 - 13,622,607 1,590,155 - 10,912,770 201,507 - 937,454 - - (19,714 ) - - (6,443 ) (10,698) - (164,421) 1,780,964 - 11,659,646 - - 520,963 - - - - - 520,963 $ 5,537,828 $ - $ 1,441,998	Other Equipment $ 2,507,338 84,086 (197,471 ) (1,173 ) (73,743) 2,319,037 1,634,316 243,640 (155,011 ) (547 ) (48,877) 1,673,521 3,284 - 3,284 $ 642,232	Total $ 30,093,618 456,185 (1,994,729 ) (207,119 ) (409,432) 27,938,523 14,137,241 1,382,601 (174,725 ) (6,990 ) (223,996) 15,114,131 524,247 - 524,247 $ 12,300,145

• 24 -

Cost Balance, beginning of period Additions Disposals Transfer to expense Reclassification Effect of foreign currency exchange differences Balance, end of period Accumulated depreciation Balance, beginning of period Depreciation expenses Disposals Transfer to expense Reclassification Effect of foreign currency exchange differences Balance, end of period Accumulated impairment Balance, beginning of period Impairment losses recognized Balance, end of period Net book value, end of period			2015
		Land $ 7,622,683 - - - (1,771,623 ) 2,845 5,853,905 - - - - - - - - - - $ 5,853,905	Buildings Property under Construction Machinery and Equipment $ 12,508,315 $ 1,089 $ 15,181,539 111,026 1,470 280,730 - - (1,729,072 ) - - (8,577 ) (1,877,434 ) - - (8,846) 76 65,780 10,733,061 2,635 13,790,400 2,143,586 - 10,743,814 309,864 - 1,319,872 - - (1,482,031 ) - - (238 ) (189,336 ) - - (556) - 47,635 2,263,558 - 10,629,052 - - - - - 520,963 - - 520,963 $ 8,469,503 $ 2,635 $ 2,640,385	Other Equipment $ 2,656,990 336,041 (173,247 ) - (120,162 ) 37,445 2,737,067 1,647,660 334,706 (124,783 ) - (81,848 ) 23,219 1,798,954 - 3,284 3,284 $ 934,829	Total $ 37,970,616 729,267 (1,902,319 ) (8,577 ) (3,769,219 ) 97,300 33,117,068 14,535,060 1,964,442 (1,606,814 ) (238 ) (271,184 ) 70,298 14,691,564 - 524,247 524,247 $ 17,901,257

In order to reduce the cost and raise 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.

The above items of property, plant and equipment were 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 were 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 nine months ended September 30, 2016 and 2015.

• 25 -

18. INVESTMENT PROPERTIES, NET

Movement of investment properties, net for the nine months ended September 30, 2016 and 2015 were as follows:

Cost Balance, beginning of period Transferred from property, plant and equipment Effect of foreign currency exchange differences Balance, end of period Accumulated depreciation Balance, beginning of period Transferred from property, plant and equipment Depreciation expense Effect of foreign currency exchange differences Balance, end of period Net book value, end of period	2016 $ 1,992,798 - (133,674) 1,859,124 284,309 - 34,804 (20,733) 298,380 $ 1,560,744	2015 $ - 1,997,596 68,584 2,066,180 - 271,184 494 9,327 281,005 $ 1,785,175

The investment properties were 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

In October 2015, the determination of fair value was performed by qualified professional valuers, and the fair value was measured by using Level 3 inputs. The valuation was arrived at by reference to cost method. The significant unobservable inputs used include residue ratio. The evaluated fair value was NT$1,818,471 thousand (RMB 387,362 thousand) with an assessment by qualified professional valuers as no significant changes so as to the date of the balance sheet.

19. INTANGIBLE ASSETS

	September 30,	December 31,	September 30,
	2016	2015	2015
Carrying amounts
Patents	$ 3,742,031	$ 4,986,922	$ 5,418,219
Other intangible assets	403,838	574,522	647,674
	$ 4,145,869	$ 5,561,444	$ 6,065,893

• 26 -

Movements of intangible assets for the nine months ended September 30, 2016 and 2015 were as follows:

Cost Balance, beginning of period Additions Effect of foreign currency exchange differences Balance, end of period Accumulated amortization Balance, beginning of period Amortization expenses Effect of foreign currency exchange differences Balance, end of period Accumulated impairment Balance, beginning of period Effect of foreign currency exchange differences Balance, end of period Net book value, end of period Cost Balance, beginning of period Additions Effect of foreign currency exchange differences Balance, end of period Accumulated amortization Balance, beginning of period Amortization expenses Effect of foreign currency exchange differences Balance, end of period			2016	2016
		Patents $ 12,434,890 - (509,701) 11,925,189 7,336,883 1,027,177 (291,987) 8,072,073 111,085 - 111,085 $ 3,742,031	Goodwill Other Intangible Assets $ 697,203 $ 1,785,537 - 75,146 (26,873) (34,321) 670,330 1,826,362 - 1,031,158 - 241,897 - (21,145) - 1,251,910 697,203 179,857 (26,873) (9,243) 670,330 170,614 $ - $ 403,838 2015		Total $ 14,917,630 75,146 (570,895) 14,421,881 8,368,041 1,269,074 (313,132) 9,323,983 988,145 (36,116) 952,029 $ 4,145,869
		Patents $ 12,018,040 - 434,700 12,452,740 5,488,220 1,224,556 210,660 6,923,436	Goodwill $ 887,037 - 15,761 902,798 - - - -	Other Intangible Assets $ 1,951,324 86,543 20,577 2,058,444 988,470 232,838 9,282 1,230,590	Total $ 14,856,401 86,543 471,038 15,413,982 6,476,690 1,457,394 219,942 8,154,026 (Continued)

• 27 -

Accumulated impairment Balance, beginning of period Effect of foreign currency exchange differences Balance, end of period Net book value, end of period			2015	2015
		Patents $ 111,085 - 111,085 $ 5,418,219	Goodwill $ 887,037 15,761 902,798 $ -	Other Intangible Assets $ 172,298 7,882 180,180 $ 647,674	Total $ 1,170,420 23,643 1,194,063 $ 6,065,893 (Concluded)

The Company owns patents of graphics technologies. As of September 30, 2016, December 31, 2015 and September 30, 2015, the carrying amounts of such patents were NT$3,724,356 thousand, NT$4,855,981 thousand and NT$5,175,234 thousand, respectively. The patents will be fully amortized over their remaining economic lives.

20. NOTE AND TRADE PAYABLES

September 30, 2016 Notes payable $ 655 Trade payables 29,433,139 $ 29,433,794	December 31, 2015 September 30, 2015 $ 555 $ 1,271 29,597,830 29,745,897 $ 29,598,385 $ 29,747,168

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.

21. OTHER LIABILITIES

September 30, 2016 Other payables Accrued expenses $ 18,626,365 Payables for purchase of equipment 110,905 $ 18,737,270 Other liabilities Advance receipts $ 2,750,591 Agency receipts 342,046 Others 148,680 $ 3,241,317	December 31, 2015 September 30, 2015 $ 24,829,310 $ 25,943,865 163,966 236,480 $ 24,993,276 $ 26,180,345 $ 3,173,548 $ 3,192,865 323,700 387,085 192,515 158,127 $ 3,689,763 $ 3,738,077

(Continued)

• 28 -

September 30, 2016 Current - other liabilities $ 2,849,280 Non-current - other liabilities 392,037 $ 3,241,317 Accrued Expenses September 30, 2016 Marketing $ 10,563,351 Materials and molding expenses 2,672,550 Salaries and bonuses 2,158,433 Services 1,261,575 Import, export and freight 580,522 Insurance 117,624 Repairs, maintenance and sundry purchase 113,063 Others 1,159,247 $ 18,626,365	December 31, 2015 September 30, 2015 $ 3,689,763 $ 3,324,058 - 414,019 $ 3,689,763 $ 3,738,077 (Concluded) December 31, 2015 September 30, 2015 $ 15,124,052 $ 15,570,968 3,162,071 2,846,359 3,344,721 3,745,830 1,188,218 1,607,229 781,548 734,410 303,294 - 131,479 181,179 793,927 1,257,890 $ 24,829,310 $ 25,943,865

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 Movement of provisions for the nine months ended Balance, beginning of period Provisions recognized (reversed) Usage Effect of foreign currency exchange differences Balance, end of period	September 30, 2016 December 31, 2015 September 30, 2015 $ 4,367,872 $ 5,314,365 $ 6,679,563 515,140 677,893 624,013 $ 4,883,012 $ 5,992,258 $ 7,303,576 September 30, 2016 and 2015 were as follows: 2016	September 30, 2016 December 31, 2015 September 30, 2015 $ 4,367,872 $ 5,314,365 $ 6,679,563 515,140 677,893 624,013 $ 4,883,012 $ 5,992,258 $ 7,303,576 September 30, 2016 and 2015 were as follows: 2016	September 30, 2016 December 31, 2015 September 30, 2015 $ 4,367,872 $ 5,314,365 $ 6,679,563 515,140 677,893 624,013 $ 4,883,012 $ 5,992,258 $ 7,303,576 September 30, 2016 and 2015 were as follows: 2016
		Warranty Provision Provisions for Contingent Loss on Purchase Orders $ 5,314,365 $ 677,893 2,990,552 (129,306) (3,901,078) (33,447) (35,967) - $ 4,367,872 $ 515,140	Total $ 5,992,258 3,784,845 (4,858,124) (35,967) $ 4,883,012

• 29 -

Balance, beginning of period Provisions recognized Amount utilized during the period Effect of foreign currency exchange differences Balance, end of period		2015
		Warranty Provision Provisions for Contingent Loss on Purchase Orders $ 5,208,111 $ 633,068 9,436,483 116,917 (7,984,580) (125,972) 19,549 - $ 6,679,563 $ 624,013	Total $ 5,841,179 9,553,400 (8,110,552) 19,549 $ 7,303,576

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. EQUITY

Share Capital

• a. Ordinary shares

September 30, 2016 Numbers of shares authorized (in thousands of shares) 1,000,000 Shares authorized $ 10,000,000 Number of shares issued and fully paid (in thousands of shares) 822,850 Shares issued $ 8,228,499	December 31, 2015 September 30, 2015 1,000,000 1,000,000 $ 10,000,000 $ 10,000,000 831,870 828,272 $ 8,318,695 $ 8,282,722

In March 2015, the Company retired 6,914 thousand treasury shares amounting to NT$69,140 thousand. In August 2015, the Company issued 400 thousand restricted shares for employees amounting to NT$4,000 thousand. In April and July 2015, the Company retired 49 thousand and 117 thousand restricted shares for employees amounting to NT$492 thousand and NT$1,167 thousand, respectively. As a result, the amount of the Company’s outstanding ordinary shares as of September 30, 2015 decreased to NT$8,282,722 thousand, divided into 828,272 thousand ordinary shares at NT$10 par value. Every ordinary share carries one vote per share and a right to dividends.

In July 2016, the Company issued 2,657 thousand of restricted shares amounting to NT$26,570 thousand. In February, May and August 2016, the Company retired 118 thousand, 223 thousand and 176 thousand restricted shares for employees amounting to NT$1,180 thousand, NT$2,224 thousand and NT$1,762 thousand, respectively. In February and August 2016, the Company 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 the Company’s outstanding ordinary shares as of September 30, 2016 decreased to NT$8,228,499 thousand, divided into 822,850 thousand ordinary shares at NT$10 par value. Every ordinary share carries one vote per share and a right to dividends.

• 30 -

80,000 thousand shares of the Company’s 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 stockholders, 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 September 30, 2016, there were 5,753 thousand units of GDRs redeemed, representing 23,012 thousand ordinary shares, and the outstanding GDRs represented 13,048 thousand ordinary shares or 1.59% of HTC’s outstanding ordinary shares.

Capital Surplus

September 30, 2016 May be used to offset a deficit, distributed as cash dividends, or transferred to share capital Arising from issuance of ordinary shares $ 14,121,223 Arising from consolidation excess 23,288 Arising from expired stock options 93,697 May not be used for any purpose Arising from employee share options 641,787 Arising from employee restricted shares 726,478 $ 15,606,473	December 31, 2015 September 30, 2015 $ 14,312,926 $ 14,312,926 23,604 23,604 35,825 35,825 544,087 524,154 589,411 414,866 $ 15,505,853 $ 15,311,375

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 March 2015, the retirement of treasury shares caused decreases of NT$119,511 thousand in additional paid-in capital - issuance of ordinary shares, NT$197 thousand in capital surplus - consolidation excess and NT$299 thousand in capital surplus - expired stock options, respectively. The difference the carrying value of treasury shares retired in excess of the sum of its par value and premium from issuance of ordinary share was offset against unappropriated earnings amounting to NT$3,560,909 thousand.

In February and August 2016, the retirement of treasury shares caused decreases 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 difference the carrying value of treasury shares retired in excess of the sum of its par value and premium from issuance of ordinary share was offset against unappropriated earnings amounting to NT$88,846 thousand and NT$244,609 thousand, respectively.

For details of capital surplus - employee share options and employee restricted shares, please refer to Note 28.

• 31 -

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 1 to 4 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.

As part of a high-technology industry and as a growing enterprise, HTC considers its operating environment, industry developments, and long-term interests of stockholders as well as its programs to maintain operating efficiency and meet its capital expenditure budget and financial goals in 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. The Company has amended the policy of distributed retained earnings from the Articles according to laws and regulations 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, please refer to employee benefits expense in Note 25,e.

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

The loss off-setting for 2015 had been resolved in the shareholders’ meeting on June 24, 2016, and the appropriations of 2014 had been approved in the shareholders’ meeting on June 2, 2015. The appropriations and dividends per share were as follows:

Legal reserve Cash dividends	Appropriation of Earnings (The Loss Off-setting) For 2015 For 2014 $ - $ 148,305 - 314,636	Dividends Per Share (NT$)
		For 2015 For 2014 $ - $ - - 0.38

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

• 32 -

Other Equity

	September 30,	September 30,	December 31,	September 30,
		2016	2015	2015
Exchange differences on translating foreign
operations	$	(748,197)	$ 1,473,417	$ 2,085,210
Unrealized loss on available-for-sale financial
assets		(79,317)	(13,633)	(2,201)
Unearned employee benefit		(323,031)	(371,369)	(210,217)
	$	(1,150,545)	$ 1,088,415	$ 1,872,792

• 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 loss 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.

• 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. Refer to Note 28 for the information of restricted shares issued.

Balance, beginning of period Issuance of shares Share-based payment expenses recognized Balance, end of period		For the Nine Months Ended September 30	For the Nine Months Ended September 30
		2016 $ (371,369) (158,471) 206,809 $ (323,031)	2015 $ (398,570) (19,352) 207,705 $ (210,217)

Treasury Shares

On August 24, 2015, HTC’s board of directors passed a resolution to buy back 50,000 thousand company 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 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 retired by HTC’s board of directors on February 29, 2016, and had cancelled the registration of retired shares.

• 33 -

On May 14, 2016, HTC’s board of directors passed a resolution to buy back 40,000 thousand company 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 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 retired by HTC’s board of directors on August 2, 2016, and had cancelled the registration of retired shares.

HTC had repurchased company shares from the open market for transferring to employees and some of them had not been transferred before the expiry time. The Board of Directors approved the retirement of 6,914 thousand treasury shares in March 2015, and had cancelled the registration of retired shares. 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	Period	Period		Period		Period
For the nine months ended
September 30, 2016
To maintain the Company’s
credibility and stockholders’
interest	4,110	7,050		11,160			-
For the nine months ended
September 30, 2015
To transfer shares to the
Company’s employees	6,914		-	6,914			-
To maintain the Company’s
credibility and stockholders’
interest	-	4,110			-	4,110
	6,914	4,110		6,914		4,110

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.

24. OPERATING REVENUES

Sale of goods Other operating income		For the Three Months Ended September 30 2016 2015 $ 21,081,373 $ 21,127,895 1,148,961 274,216 $ 22,230,334 $ 21,402,111		For the Nine Months Ended September 30	For the Nine Months Ended September 30
		2016 $ 21,081,373 1,148,961 $ 22,230,334		2016 $ 53,702,865 2,210,575 $ 55,913,440	2015 $ 94,743,947 1,192,134 $ 95,936,081

• 34 -

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

a. Other income

Interest income Bank deposits Other receivables Other Dividends Others Other gains and losses Gain on disposal of non-current assets held for sale (Note 14) Net gain (loss) on the disposal of property, plant and equipment (Note 17) Net foreign exchange gain Net (loss) gain arising on financial instruments classified as held for trading Ineffective portion of cash flow hedge Impairment loss Other loss		For the Three Months Ended September 30 2016 2015 $ 53,497 $ 61,086 - 18,730 26,283 17,565 79,780 97,381 32,284 37,932 28,919 51,987 $ 140,983 $ 187,300 For the Three Months Ended September 30 2016 2015 $ - $ - 3,629 (46) 243,600 306,160 (149,120) 4,112 - 19 - - (13,952) (39,454) $ 84,157 $ 270,791		For the Nine Months Ended September 30	For the Nine Months Ended September 30
				2016 2015 $ 168,270 $ 214,965 39,041 56,160 98,656 31,923 305,967 303,048 138,761 37,932 91,890 98,125 $ 536,618 $ 439,105 For the Nine Months Ended September 30
		2016 $ - 3,629 243,600 (149,120) - - (13,952) $ 84,157		2016 $ 2,091,594 1,106,773 337,443 (149,120) 2,056 - (70,329) $ 3,318,417	2015 $ - 17,092 684,449 4,112 1,258 (2,919,890) (40,709) $ (2,253,688)

• b. Other gains and losses

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.

• c. Impairment loss (reversal gain) on financial assets

Trade receivables Other receivables	For the Three Months Ended September 30 2016 2015 $ - $ - 400,000 - $ 400,000 $ -	For the Three Months Ended September 30 2016 2015 $ - $ - 400,000 - $ 400,000 $ -	For the Nine Months Ended September 30	For the Nine Months Ended September 30	For the Nine Months Ended September 30
		2016 $ - 400,000 $ 400,000		2016 $ (299,951) 700,000 $ 400,049	2015 $ - - $ -

• 35 -

d. Depreciation and amortization

Property, plant and equipment Investment properties Intangible assets An analysis of depreciation - by function Operating costs Operating expenses Other losses An analysis of amortization - by function Operating costs Operating expenses		For the Three Months Ended September 30 2016 2015 $ 396,974 $ 583,666 10,793 494 377,248 492,655 $ 785,015 $ 1,076,815 $ 266,712 $ 301,122 130,262 282,544 10,793 494 $ 407,767 $ 584,160 $ 724 $ 3,522 376,524 489,133 $ 377,248 $ 492,655		For the Nine Months Ended September 30	For the Nine Months Ended September 30
		2016 $ 396,974 10,793 377,248 $ 785,015 $ 266,712 130,262 10,793 $ 407,767 $ 724 376,524 $ 377,248		2016 $ 1,382,601 34,804 1,269,074 $ 2,686,479 $ 788,280 594,321 34,804 $ 1,417,405 $ 2,251 1,266,823 $ 1,269,074	2015 $ 1,964,442 494 1,457,394 $ 3,422,330 $ 1,069,232 895,210 494 $ 1,964,936 $ 5,765 1,451,629 $ 1,457,394

• e. Employee benefits expense

Short-term benefits Post-employment benefits Defined contribution plans Defined benefit plans Share-based payments (Note 28) Equity-settled share-based payments Total employee benefits expense An analysis of employee benefits expense - by function Operating costs Operating expenses		For the Three Months Ended September 30 2016 2015 $ 2,586,986 $ 3,672,889 109,326 158,314 1,815 1,450 111,141 159,764 129,356 163,761 $ 2,827,483 $ 3,996,414 $ 745,152 $ 821,576 2,082,331 3,174,838 $ 2,827,483 $ 3,996,414		For the Nine Months Ended September 30	For the Nine Months Ended September 30
		2016 $ 2,586,986 109,326 1,815 111,141 129,356 $ 2,827,483 $ 745,152 2,082,331 $ 2,827,483		2016 $ 8,549,511 353,413 5,439 358,852 363,131 $ 9,271,494 $ 2,195,746 7,075,748 $ 9,271,494	2015 $ 11,277,977 495,291 4,028 499,319 481,389 $ 12,258,685 $ 2,997,920 9,260,765 $ 12,258,685

• 36 -

In compliance with the Company Act as amended in May 2015, the shareholders held their meeting and resolved amendments to HTC’s Articles 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 bonus were estimated as the Company reported net losses for the nine months ended September 30, 2016 and 2015.

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.

The employees’ compensation for 2015 and the employees’ bonus for 2014 had been approved in the shareholders’ meeting on June 24, 2016 and June 2, 2015, respectively.

Employees’ compensation/ bonus	For the Year Ended December 31	For the Year Ended December 31
	2015 Cash Dividends Share Dividends $ - $ -	2014
		Cash Dividends Share Dividends $ 88,334 $ -

There was no difference between the amounts of the employees’ compensation and bonus approved in the shareholders’ meeting on June 24, 2016 and June 2, 2015, and the amounts recognized in the financial statements for the years ended December 31, 2015 and 2014, respectively.

Any further information of the employees’ compensation and remuneration to directors and supervisors approved in the meeting of shareholders in 2016 and employee’s bonus and remuneration to directors and supervisors approved in the meeting of shareholders in 2015, please refer to 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) Prepayments (included in other gains and losses)		For the Three Months Ended September 30 2016 2015 $ 1,494,817 $ 1,078,724 - - - - $ 1,494,817 $ 1,078,724		For the Nine Months Ended September 30	For the Nine Months Ended September 30
		2016 $ 1,494,817 - - $ 1,494,817		2016 $ 2,518,889 - - $ 2,518,889	2015 $ 1,450,536 524,247 2,395,643 $ 4,370,426

• 37 -

g. Gain or loss on foreign currency exchange

Foreign exchange gain Foreign exchange loss Valuation (loss) gain arising on financial assets classified as held for trading Ineffective portion of cash flow hedge		For the Three Months Ended September 30		For the Nine Months Ended September 30	For the Nine Months Ended September 30
		2016 2015 $ 1,625,209 $ 5,056,974 (1,381,609) (4,750,814) (149,120) 4,112 - 19 $ 94,480 $ 310,291		2016 $ 4,334,367 (3,996,924) (149,120) 2,056 $ 190,379	2015 $ 8,499,361 (7,814,912) 4,112 1,258 $ 689,819

26. INCOME TAXES RELATING TO CONTINUING OPERATIONS

a. Income tax expense recognized in profit or loss

Current tax In respect of the current period Land value increment tax Adjustments for prior periods Deferred tax In respect of the current period Income tax expense (benefit) recognized in profit or loss	For the Three Months Ended September 30	For the Three Months Ended September 30	For the Three Months Ended September 30	For the Nine Months Ended September 30 2016 2015 $ 204,165 $ 214,693 226,333 - - (21,421) 430,498 193,272 (201,771) 66,243 $ 228,727 $ 259,515	For the Nine Months Ended September 30 2016 2015 $ 204,165 $ 214,693 226,333 - - (21,421) 430,498 193,272 (201,771) 66,243 $ 228,727 $ 259,515	For the Nine Months Ended September 30 2016 2015 $ 204,165 $ 214,693 226,333 - - (21,421) 430,498 193,272 (201,771) 66,243 $ 228,727 $ 259,515
		2016 $ 64,992 - - 64,992 (64,212) $ 780	2015 $ 27,526 - (15,764) 11,762 (22,702) $ (10,940)		2016 $ 204,165 226,333 - 430,498 (201,771) $ 228,727	2015 $ 214,693 - (21,421) 193,272 66,243 $ 259,515

b. Integrated income tax

The imputation credit account (“ICA”) information as of September 30, 2016, December 31, 2015 and September 30, 2015, were as follows:

September 30, 2016 Unappropriated earnings generated on and after January 1, 1998 $ 13,984,261 Balance of ICA $ 8,196,056	December 31, 2015 September 30, 2015 $ 21,782,432 $ 25,206,761 $ 8,196,056 $ 8,187,498

Under the Income Tax Law, for distribution of earnings generated after January 1, 1998, the imputation credits allocated to ROC resident shareholders of HTC was calculated based on the creditable ratio as of the date of dividend distribution. The actual imputation credits allocated to shareholders of HTC was based on balance of the ICA as of the date of dividend distribution. Therefore, the expected creditable ratio for the earnings may differ from the actual creditable ratio to be used in allocating imputation credits to the shareholders.

• 38 -

c. Income tax assessments

HTC’s tax returns through 2014 had been assessed by the tax authorities. HTC disagreed with the tax authorities’ assessment of its 2014 and 2013 tax return and applied for a re-examination. Nevertheless, to be conservative, HTC had accrued for the income tax assessed by the tax authorities.

The income tax returns of Communication Global Certification Inc., HTC Investment Corporation, HTC I Investment Corporation and Yoda Co., Ltd. for the years through 2014 have been examined and approved by the tax authorities.

27. LOSS PER SHARE

Unit: NT$ Per Share

Basic loss per share	For the Three Months Ended September 30 2016 2015 $ (2.18) $ (5.41)	For the Three Months Ended September 30 2016 2015 $ (2.18) $ (5.41)	For the Nine Months Ended September 30	For the Nine Months Ended September 30	For the Nine Months Ended September 30
		2016 $ (2.18)		2016 $ (9.05)	2015 $ (14.68)

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

Net Loss for the Period

Loss for the period attributable to owners of the parent Shares Weighted average number of ordinary shares in computation of basic loss per share		For the Three Months Ended September 30 2016 2015 $ (1,789,387) $ (4,476,954) For the Three Months Ended September 30 2016 2015 822,407 826,956	For the Three Months Ended September 30 2016 2015 $ (1,789,387) $ (4,476,954) For the Three Months Ended September 30 2016 2015 822,407 826,956		For the Nine Months Ended September 30	For the Nine Months Ended September 30	For the Nine Months Ended September 30
					2016 2015 $ (7,464,716) $ (12,151,142) Unit: In Thousands of Shares For the Nine Months Ended September 30
			2016 822,407			2016 824,744	2015 827,654

Since the exercise price of the employee share options issued by the Company exceeded the average market price of the shares during July 1, 2016 to September 30, 2016 and during January 1, 2016 to September 30, 2016, they were anti-dilutive and excluded from the computation of diluted earnings per share.

• 39 -

28. 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 ordinary 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 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.

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.

Information on employee share options was as follows:

Balance, beginning of period Options granted Options forfeited Balance, end of period Options exercisable, end of period Weighted-average fair value of options granted per unit (NT$)	**For the Nine Months **	Ended September 30
	2016 Number of Options (In Thousands) Weighted- average Exercise Price (NT$) 24,964 $ 137.20 - (3,153) 21,811 136.79 5,122 149.00 $ -	2015
		Number of Options (In Thousands) Weighted- average Exercise Price (NT$) 31,908 $ 140.37 1,000 54.50 (6,896) 26,012 137.22 - $ 15.00

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

	September 30,	December 31,	September 30,
	2016	2015	2015
Range of exercise price (NT$)	$54.5-$149	$54.5-$149	$54.5-$149
Weighted-average remaining contractual life
(years)	6.56 years	7.30 years	7.54 years

• 40 -

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 a total amount of $50,000 thousand and $75,000 thousand, consisting of 5,000 thousand and 7,500 thousand shares. 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.

If an employee fails to meet the vesting conditions, the Company will recall or buy back and cancel the restricted shares. In April, July, October 2015, and February, May, August 2016, the Company retired 49 thousand, 117 thousand, 409 thousand, and 118 thousand, 223 thousand, 176 thousand restricted shares for employees amounting to NT$492 thousand, NT$1,167 thousand, NT$4,087 thousand, and NT$1,180 thousand, NT$2,224 thousand, NT$1,762 thousand, respectively. As a result, the numbers of the Company’s outstanding employee restricted shares as of September 30, 2016 was 9,324 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
(thousand shares)	2,657	4,006	400	4,600
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 were NT$363,131 thousand and NT$481,389 thousand for the nine months ended September 30, 2016 and 2015, respectively.

• 41 -

29. 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.

30. 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

September 30, 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 December 31, 2015 Financial assets at FVTPL Derivative financial instruments	Level 1 $ - $ 92 277,464 $ 277,556 $ - Level 1 $ -	Level 2 $ 18,017 $ - - $ - $ 167,137 Level 2 $ 95,493	Level 3 $ - $ - - $ - $ - Level 3 $ -	Total $ 18,017 $ 92 277,464 $ 277,556 $ 167,137 Total $ 95,493 (Continued)

• 42 -

Available-for-sale financial assets Domestic listed stocks - equity investments Overseas listed stocks - equity investments Financial liabilities at FVTPL Derivative financial instruments September 30, 2015 Financial assets at FVTPL Derivative financial instruments Available-for-sale financial assets Domestic listed stocks - equity investments Financial liabilities at FVTPL Derivative financial instruments	Level 1 $ 75 303,289 $ 303,364 $ - Level 1 $ - $ 59 $ -	Level 2 $ - - $ - $ 36,544 Level 2 $ 254,358 $ - $ 250,246	Level 3 $ - - $ - $ - Level 3 $ - $ - $ -	Total $ 75 303,289 $ 303,364 $ 36,544 (Concluded) Total $ 254,358 $ 59 $ 250,246

There were no transfers between Levels 1 and 2 for the nine months ended September 30, 2016 and 2015.

• 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

	September 30,	September 30,	December 31,	December 31,	September 30,	September 30,
		2016		2015		2015
Financial assets
FVTPL
Held for trading	$	18,017	$	95,493	$	254,358
Loans and receivables (Note 1)		54,511,668		61,510,211		64,416,918
Available-for-sale financial assets (Note 2)		3,499,060		3,699,515		3,348,500
Financial liabilities
FVTPL
Held for trading		167,137		36,544		250,246
Amortized cost (Note 3)		48,536,472		54,945,520		56,340,585

• 43 -

• Note 1: The balances included loans and receivables measured at amortized cost, which comprise cash and cash equivalents, debt investments with no active market - current, other current financial assets, trade receivables, other receivables, refundable deposits and debt investments with no active market - non-current.

• Note 2: The balances included available-for-sale financial assets and the carrying amount of available-for-sale financial assets measured at cost.

• Note 3: The balances included financial liabilities measured at amortized cost, which comprise note, trade payables, other payables, agency receipts and guarantee deposits received.

Financial Risk Management Objectives and Policies

The Company’s major financial instruments 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 and exposure limits 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 34.

• 44 -

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”).

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 nine months ended September 30, 2016
USD	$	26,055	$ (157,677)
EUR		(12,996)	(19,145)
RMB		(20,845)	(132,049)
JPY		(1,240)	(1,425)
For the nine months ended September 30, 2015
USD		(15,312)	(167,110)
EUR		(16,133)	(19,327)
RMB		(60,130)	(136,056)
JPY		(1,191)	(1,141)

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 are 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.

• 45 -

• 1) Liquidity risk rate 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.

September 30, 2016

Non-derivative financial liabilities Note and trade payables Other payables Other current liabilities Guarantee deposits received December 31, 2015 Non-derivative financial liabilities Note and trade payables Other payables Other current liabilities Guarantee deposits received September 30, 2015 Non-derivative financial liabilities Note and trade payables Other payables Other current liabilities Guarantee deposits received	Less Than 3 Months $ 13,876,891 9,771,889 279,690 - $ 23,928,470 Less Than 3 Months $ 11,276,426 11,682,250 111,498 - $ 23,070,174 Less Than 3 Months $ 10,964,695 11,856,879 264,315 - $ 23,085,889	3 Months to 1 Year $ 15,556,903 8,965,381 62,356 - $ 24,584,640 3 Months to 1 Year $ 18,321,959 13,311,026 212,202 - $ 31,845,187 3 Months to 1 Year $ 18,782,473 14,323,466 122,770 - $ 33,228,709	Over 1 Year $ - - - 23,362 $ 23,362 Over 1 Year $ - - - 30,159 $ 30,159 Over 1 Year $ - - - 25,987 $ 25,987

• 46 -

• 2) Liquidity risk rate 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.

September 30, 2016

Net settled Foreign exchange contracts Gross settled Foreign exchange contracts Inflows Outflows December 31, 2015 Gross settled Foreign exchange contracts Inflows Outflows September 30, 2015 Net settled Foreign exchange contracts Gross settled Foreign exchange contracts Inflows Outflows	Less Than 3 Months $ (23,771) $ 14,256,300 (14,338,878) $ (82,578) Less Than 3 Months $ 6,658,903 (6,611,069) $ 47,834 Less Than 3 Months $ (20,542) $ 8,106,687 (7,994,273) $ 112,414	3 Months to 1 Year $ - $ - - $ - 3 Months to 1 Year $ 7,187,186 (7,158,069) $ 29,117 3 Months to 1 Year $ - $ 12,674,548 (12,742,159) $ (67,611)	Over 1 Year $ - $ - - $ - Over 1 Year $ - - $ - Over 1 Year $ - $ - - $ -

• 47 -

3) Bank credit limit

September 30, 2016 Unsecured bank general credit limit Amount used $ 984,028 Amount unused 20,456,736 $ 21,440,764	December 31, 2015 September 30, 2015 $ 2,053,485 $ 1,811,330 30,314,067 41,092,785 $ 32,367,552 $ 42,904,115

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

31. 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.

Operating Sales

Joint venture Other related parties - Employees’ Welfare Committee Other related parties - other related parties’ chairperson or its significant stockholder, is HTC’s chairperson	For the Three Months Ended September 30	For the Three Months Ended September 30	For the Three Months Ended September 30	For the Nine Months Ended September 30 2016 2015 $ 28,955 $ 9,971 817 20,720 8,097 5,152 $ 37,869 $ 35,843	For the Nine Months Ended September 30 2016 2015 $ 28,955 $ 9,971 817 20,720 8,097 5,152 $ 37,869 $ 35,843	For the Nine Months Ended September 30 2016 2015 $ 28,955 $ 9,971 817 20,720 8,097 5,152 $ 37,869 $ 35,843
		2016 $ - 360 1,831 $ 2,191	2015 $ - 221 1,067 $ 1,288		2016 $ 28,955 817 8,097 $ 37,869	2015 $ 9,971 20,720 5,152 $ 35,843

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

	September	September	30,	December 31,	December 31,	September	September	30,
		2016			2015		2015
Joint venture	$		-	$	541	$	506
Other related parties - other related parties’
chairperson or its significant stockholder, is
HTC’s chairperson		11			1,146			-
	$	11		$	1,687	$	506

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 given or received for trade receivables from related parties. No bad debt expense had been recognized for the nine months ended September 30, 2016 and 2015 for the amounts owed by related parties.

• 48 -

Compensation of Key Management Personnel

Short-term benefits Post-employment benefits Termination benefits Share-based payments	For the Three Months Ended September 30 2016 2015 $ 30,621 $ 36,171 306 276 - - 25,780 44,183 $ 56,707 $ 80,630	For the Three Months Ended September 30 2016 2015 $ 30,621 $ 36,171 306 276 - - 25,780 44,183 $ 56,707 $ 80,630	For the Nine Months Ended September 30	For the Nine Months Ended September 30	For the Nine Months Ended September 30
		2016 $ 30,621 306 - 25,780 $ 56,707		2016 $ 191,911 961 17,583 65,008 $ 275,463	2015 $ 143,376 1,428 - 131,106 $ 275,910

The remuneration of directors and key executives was determined by the remuneration committee having regard to the performance of individuals and market trends.

Property, Plant and Equipment Acquired

Other related parties - other related parties’ chairperson or its significant stockholder, is HTC’s chairperson	Price	Price	Price	Price	Price
	For the Three Months Ended September 30 2016 2015 $ - $ 1,275		For the Nine Months Ended September 30
		2016 $ -		2016 $ -	2015 $ 2,695

Other Related-party Transactions

• a. The Company leased staff dormitory owned by a related party under an operating lease agreement. The rental payment is determined at the prevailing rates in the surrounding area. The Company recognized and paid rental expenses amounting to NT$3,285 thousand for the nine months ended September 30, 2015.

• b. Other related parties provide selling and marketing service to the Company. The selling and marketing service expenses was NT$6,397 thousand and NT$10,300 thousand for the nine months ended September 30, 2016 and 2015. The unpaid amount was NT$1,092 thousand as of September 30, 2015.

32. PLEDGED ASSETS

As of September 30, 2016, December 31, 2015 and September 30, 2015, the time of deposits amounting to NT$97,830 thousand, NT$623 thousand and NT$642 thousand and were classified as other current financial assets were provided respectively as collateral for litigation and rental deposits.

• 49 -

33. 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 evaluated the lawsuits and considered the risk of patents-in-suits are low. Also, preliminary injunction and summary judgment against the Company are very unlikely.

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.

As of the date that the board of directors approved and authorized for issuing consolidated financial statements, there had been no critical hearing nor had a court decision been made, except for the above.

• b. In July 2014, US patent holding company Acacia Research Corporation (“Acacia”) has enforced its 6 AMR-WB standard essential patent portfolio against Deutsche Telekom and Vodafone separately in Germany through its subsidiary Saint Lawrence Communications GmbH (“SLC”).

In March 2015, SLC got granted 4 injunctions against Deutsche Telekom by the Mannheim court. For the 1st injunction, Deutsche Telekom had successfully stayed the enforcement by posting a counter bond in late March 2015. For the 2nd to 4th injunctions, SLC has not enforced them against Deutsche Telekom yet. The way SLC enforced this 6-patent portfolio is subject to the anti-competition review by European Commission.

The litigations between SLC and Deutsche Telekom in Manheim and Vodafone in Dusseldorf are still ongoing. In order to protect the interest of the carrier customers, the Company has officially intervened these 2 disputes in the court procedure. In addition, the Company also sued Acacia for a declaratory judgment action in United States.

As of the date that the board of directors approved and authorized for issuing consolidated financial statements, there had been no critical hearing nor had a court decision been made, except for the above.

• c. In April 2015, NTT DOCOMO (“NTT”) has filed a lawsuit against the Company in the District Court of Mannheim, Germany, alleging that the Company infringed three LTE and one UMTS standard essential patents owned by NTT. In January and February 2016, the Mannheim Court has found that the Company smartphone sold in Germany infringes one UMTS and one LTE Germany parts of European patents owned by NTT, and granted an injunction against the Company in the first decision. The litigation between the Company and NTT are still ongoing. In order to protect the interests of the Company, customers and consumers, the Company appealed the above-mentioned decisions immediately.

As of the date that the board of directors approved and authorized for issuing consolidated financial statements, there had been no critical hearing nor had a court decision been made, except for the above.

• 50 -

• d. In December 2015, Koninklijke Philips N.V. (“Philips”) filed a lawsuit against the Company in the District Court of Mannheim, Germany, alleging that the Company infringed four patents relating to portable/mobile device features and four patents relating to telecommunication standards. 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. 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 decisions.

As of the date that the board of directors approved and authorized for issuing consolidated financial statements, there had been no critical hearing nor had a court decision been made, except for the above.

• e. 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.

34. 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 Investments accounted for by the equity method USD Financial liabilities Monetary items USD EUR JPY RMB	September 30, 2016 Foreign Currencies Exchange Rate $ 1,905,132 31.36 110,617 35.08 2,883,335 0.3108 1,339,968 4.70 82,184 31.36 16,624 31.36 1,458,724 31.36 54,577 35.08 2,434,974 0.3108 228,996 4.70	December 31, 2015 Foreign Currencies Exchange Rate $ 1,806,236 33.06 131,664 36.13 2,592,347 0.2747 827,354 5.03 83,243 33.06 966 33.06 1,291,619 33.06 102,841 36.13 2,538,893 0.2747 375,856 5.03	September 30, 2015
			Foreign Currencies Exchange Rate $ 1,844,621 33.12 150,978 37.19 3,536,156 0.2760 1,330,841 5.22 81,903 33.12 500 33.12 1,405,682 33.12 97,262 37.19 3,490,376 0.2760 432,599 5.22

For the nine months ended September 30, 2016 and 2015, realized and unrealized net foreign exchange gain were NT$190,379 thousand and NT$689,819 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.

• 51 -

35. 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 Apple, Inc. Qualcomm Incorporated. Nokia Corporation InterDigital Technology Corporation Koninklijke Philips Electronics N.V.	Term January 1, 2015 - December 31, 2017 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, 2003 - December 31, 2016 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.	**Description **
		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. Authorization to use CDMA technology to manufacture and sell units, royalty payment based on agreement. Authorization to use wireless technology, like GSM; 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. (Continued)

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Contractor MOTOROLA, Inc. Siemens Aktiengesellschaft IV International Licensing Netherlands, B.V. Telefonaktiebolaget LM Ericsson (PUBL)	Term 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 December 31, 2014 - December 31, 2016	**Description **
		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. Authorization to use GSM and wireless technology; royalty payment based on agreement. (Concluded)

36. SEGMENT INFORMATION

The Company is organized and managed as a single reportable business segment. 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.

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