Macronix — Audit Report / Information 2016

Nov 16, 2016

Macronix International Co., Ltd. and Subsidiaries

Consolidated Financial Statements for the Years Ended December 31, 2016 and 2015 and Independent Auditors’ Report

DECLARATION OF CONSOLIDATION OF FINANCIAL STATEMENTS OF AFFILIATES

The entities that are required to be included in the combined financial statements of Macronix International Co., Ltd. as of and for the year ended December 31, 2016, under the “Criteria Governing Preparation of Affiliation Reports, Consolidated Business Reports and Consolidated Financial Statements of Affiliated Enterprises” are all the same as those included in the consolidated financial statements prepared in conformity with the International Financial Reporting Standards 10 “Consolidated Financial Statements”. In addition, the relevant information required to be disclosed in the combined financial statements has all been disclosed in the consolidated financial statements. Hence, we do not prepare a separate set of combined financial statements.

Very truly yours,

Macronix International Co., Ltd.

By

Miin Wu Chairman

March 6, 2017

• 1 -

INDEPENDENT AUDITORS’ REPORT

The Board of Directors and the Shareholders Macronix International Co., Ltd.

Opinion

We have audited the accompanying consolidated financial statements of Macronix International Co., Ltd. and its subsidiaries (the Group), which comprise the consolidated balance sheets as of December 31, 2016 and 2015, and the consolidated statements of comprehensive income, changes in equity and cash flows for the years then ended, and the notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 2016 and 2015, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with the Regulations Governing the Preparation of Financial Reports by Securities Issuers, and International Financial Reporting Standards (IFRS), International Accounting Standards (IAS), IFRIC Interpretations (IFRIC), and SIC Interpretations (SIC) endorsed and issued into effect by the Financial Supervisory Commission of the Republic of China.

Basis for Opinion

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

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements for the year ended December 31, 2016. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Key audit matters for the Company’s consolidated financial statements for the year ended December 31, 2016 are stated as follows:

Recognition of revenue

The Company operates principally as a supplier of memory chips. For the year ended December 31, 2016, the revenue recognized was NT$ 23,733,107 thousand, increasing by 16% compared with that of last year. Due to the market rebound of memory chips, the Company released certain sales orders by temporarily increasing the

• 2 -

credit line. Also, sales of ROM to a particular related party increased significantly this year. As such, this gives the rise of the potential risk of overstating sales. Besides, under the auditing standards generally accepted in the Republic of China, revenue recognition is generally presumed to be a risk due to fraud. We therefore considered that testing the existence or occurrence of sales is a key audit matter of current period.

Our audit procedures performed included, but not limited to, the following:

1. Evaluate the appropriateness of the Company’s accounting policies relating to revenue recognition;

2. Understand the internal controls over the approval of sales order and shipping and test the effectiveness of those internal controls;

3. Sample the sales documents to inspect sales details, including related transaction documents and cash collections in the audited period and the subsequent period;

4. Verify if any deviant occurred in those parties when the sales were recorded and cash was received;

5. Assess the significant sales return or sales discount taking place in the subsequent period.

Assessment of impairment of property, plant and equipment

As of December 31, 2016, the carrying amount of property, plant and equipment and intangible assets pertaining to memory-chip products were NT$15,500,459 thousand and NT$29,824 thousand, respectively, accounting for 44% of the total assets. As sales in the memory products market continued to slump in recent years, despite that the recovery began from the third quarter, the Company still reported an operating loss this year. According to IAS 36, when the property, plant and equipment shows signs of impairment, management shall assess whether the recoverable amount of the asset is lower than the book value. Management used the valuation model to assess the recoverable amount of the property, plant and equipment. In determining the future cash flow of memory products, the Company considered the sales growth rate and profit margin predicted by its future operating outlook and calculated the weighted average cost ratio as the discount rate. Since such assessment of impairment is subject to management’s judgment, and the assumptions about estimated discount rate and future expected cash flows depend on future economic or market trends, which cannot be certain, the impairment assessment has been identified as a key audit matter. Please refer to notes 4 (j), 5 (d), 14 and 15 to the financial statements for the details of accounting policy, accounting judgment, key sources of estimation uncertainty and the related information about the impairment of property, plant and equipment.

Our key audit procedures performed in respect of the above area included the following:

1. Understand the process and basis for the estimated growth rate and profit ratio of the Company used by the management.

2. Assess whether the future operating cash flow of the estimated operating cash flow is consistent with the future operating plan approved by the board of directors; assess whether the recent operating results, historical trends and industry profiles, etc., have been considered and updated timely when preparing the future sales growth rate and profit rate;

3. Consult with our financial specialists to and obtained their assistance in assessing whether the recoverable amount calculated by the management by using the valuation model and the weighted average cost of capital used, including assumptions about risk-free rate, volatility and risk premium are consistent with the status of the Company and the industry.

Other Matter

We have also audited the parent company only financial statements of Macronix International Co., Ltd. as of and for the years ended December 31, 2016 and 2015 on which we have issued an unmodified opinion.

• 3 -

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

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

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

Those charged with governance, including the audit committee, are responsible for overseeing the Group’s financial reporting process.

Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements

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

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

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

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

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

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

5. 4 -

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

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

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

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

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements for the year ended December 31, 2016 and are therefore the key audit matters. We describe these matters in our auditors’ report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The engagement partners on the audit resulting in this independent auditors’ report are Ming Hui Chen and Ching Pin Shih.

Deloitte & Touche Taipei, Taiwan Republic of China

March 6, 2017

Notice to Readers

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

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

• 5 -

MACRONIX INTERNATIONAL CO., LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2016 AND 2015 (In Thousands of New Taiwan Dollars)

ASSETS CURRENT ASSETS Cash and cash equivalents (Notes 4, 6 and 33) Notes receivable and trade receivables, net (Notes 4, 10, 33 and 35) Receivables from related parties, net (Notes 4, 33 and 34) Other receivables (Notes 10, 33 and 34) Inventories (Notes 4 and 11) Other current assets (Notes 16 and 18) Total current assets NON-CURRENT ASSETS Available-for-sale financial assets - non-current (Notes 4, 8 and 33) Financial assets measured at cost - non-current (Notes 4, 9 and 33) Investments accounted for using equity method (Notes 4 and 13) Property, plant and equipment (Notes 4, 5, 14 and 35) Intangible assets (Notes 4 and 15) Deferred tax assets (Notes 4, 5 and 27) Other financial assets - non-current (Notes 4, 17, 33 and 35) Other non-current assets (Notes 16 and 18) Total non-current assets TOTAL LIABILITIES AND EQUITY CURRENT LIABILITIES Short-term borrowings (Notes 19 and 33) Financial liabilities at fair value through profit or loss - current (Notes 4, 7 and 33) Notes payable and trade payables (Notes 20 and 33) Payables to related parties (Notes 31 and 34) Payables for purchase of equipment (Note 33) Other payables (Notes 21 and 33) Other payables to related parties (Notes 33 and 34) Current tax liabilities (Notes 4, 5 and 27) Provisions - current (Notes 4 and 22) Current portion of long-term borrowings (Notes 19, 33 and 35) Other current liabilities Total current liabilities NON-CURRENT LIABILITIES Long-term borrowings (Notes 19, 33 and 35) Net defined benefit liabilities (Notes 4 and 23) Other non-current liabilities Total non-current liabilities Total liabilities EQUITY ATTRIBUTABLE TO SHAREHOLDERS OF THE PARENT (Notes 4 and 24) Share Capital Ordinary shares Capital stock to be cancelled Total share capital Capital surplus Retained earnings Accumulated deficit Other equity Treasury shares Equity attributable to shareholders of the parent NON-CONTROLLING INTERESTS (Note 24) Total equity TOTAL		2016 Amount % $ 6,368,339 18 3,121,835 9 540,944 1 120,597 - 7,087,417 20 228,983 1 17,468,115 49 1,283,702 4 93,330 - - - 15,500,459 44 29,824 - 996,856 3 151,856 - 20,373 - 18,076,400 51 $ 35,544,515 100 $ 400,000 1 - - 2,592,144 7 1,139,684 3 168,692 1 1,177,767 3 - - 2,831 - 225,659 1 4,280,876 12 65,737 - 10,053,390 28 5,635,544 16 1,533,287 4 2,894 - 7,171,725 20 17,225,115 48 36,153,535 102 (7,654) - 36,145,881 102 340,713 1 (18,651,070) (53) 641,251 2 (159,061) - 18,317,714 52 1,686 - 18,319,400 52 $ 35,544,515 100		2015
				Amount % $ 5,592,548 15 2,885,039 8 397,074 1 105,333 - 9,334,284 25 210,862 - 18,525,140 49 1,199,468 3 93,951 - 12,345 - 16,596,123 44 109,017 - 909,230 3 153,511 1 28,877 - 19,102,522 51 $ 37,627,662 100 $ 1,540,028 4 717 - 1,724,139 5 27,131 - 206,227 1 1,300,335 3 355 - 183,212 1 180,202 - 4,683,784 12 66,308 - 9,912,438 26 7,861,990 21 1,420,235 4 4,159 - 9,286,384 25 19,198,822 51 36,178,489 96 (6,898) - 36,171,591 96 54,936 - (18,304,273) (49) 656,884 2 (159,061) - 18,420,077 49 8,763 - 18,428,840 49 $ 37,627,662 100

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

• 6 -

MACRONIX INTERNATIONAL CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 (In Thousands of New Taiwan Dollars, Except Loss Per Share)

NET OPERATING REVENUE (Notes 4, 25 and 34) OPERATING COSTS (Notes 11, 23, 26 and 34) GROSS PROFIT UNREALIZED GAIN ON TRANSACTIONS WITH ASSOCIATES REALIZED GAIN ON TRANSACTIONS WITH ASSOCIATES REALIZED GROSS PROFIT OPERATING EXPENSES (Notes 23, 26 and 34) Selling and marketing expenses General and administrative expenses Research and development expenses Total operating expenses LOSS FROM OPERATIONS NON-OPERATING INCOME AND EXPENSES Other income (Notes 4, 26 and 34) Other gains and losses (Notes 26 and 30) Finance costs (Notes 4 and 26) Share of loss of associates (Notes 4 and 13) Total non-operating income and expenses LOSS BEFORE INCOME TAX FROM CONTINUE OPERATIONS INCOME TAX (BENEFIT) EXPENSE (Notes 4 and 27) NET LOSS FOR THE YEAR		2016 Amount % $ 24,124,973 100 18,288,781 76 5,836,192 24 (72) - - - 5,836,120 24 1,045,130 5 1,272,565 5 3,876,048 16 6,193,743 26 (357,623) (2) 164,253 1 38,110 - (304,144) (1) (11,650) - (113,431) - (471,054) (2) (224,259) (1) (246,795) (1)		2015
				Amount % $ 20,927,770 100 18,415,880 88 2,511,890 12 - - 80 - 2,511,970 12 1,031,347 5 1,518,227 7 4,966,172 24 7,515,746 36 (5,003,776) (24) 1,139,090 5 11,342 - (301,219) (1) (26,320) - 822,893 4 (4,180,883) (20) 15,058 - (4,195,941) (20) (Continued)

• 7 -

MACRONIX INTERNATIONAL CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 (In Thousands of New Taiwan Dollars, Except Loss Per Share)

OTHER COMPREHENSIVE INCOME Items that will not be reclassified subsequently to profit or loss: Remeasurement of defined benefit plans Items that may be reclassified subsequently to profit or loss: Exchange differences on translating foreign operations (Note 24) Unrealized gain (loss) on available-for-sale financial assets (Note 24) Share of other comprehensive loss of associates accounted for using the equity method (Note 24) Other comprehensive loss for the year, net of income tax TOTAL COMPREHENSIVE LOSS FOR THE YEAR NET LOSS ATTRIBUTABLE TO: Shareholders of the parent Non-controlling interests TOTAL COMPREHENSIVE LOSS ATTRIBUTABLE TO: Shareholders of the parent Non-controlling interests LOSS PER SHARE (Note 28) Basic Diluted		2016 Amount % $ (103,784) - (58,274) - 85,406 - (343) - (76,995) - $ (323,790) (1) $ (243,013) (1) (3,782) - $ (246,795) (1) $ (318,879) (1) (4,911) - $ (323,790) (1) $ (0.07) $ (0.07)		2015
				Amount % $ (299,324) (2) 21,672 - (46,069) - (14) - (323,735) (2) $ (4,519,676) (22) $ (4,187,669) (20) (8,272) - $ (4,195,941) (20) $ (4,511,362) (22) (8,314) - $ (4,519,676) (22) $ (1.19) $ (1.19)

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

(Concluded)

• 8 -

MACRONIX INTERNATIONAL CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 (In Thousands of New Taiwan Dollars)

BALANCE AT JANUARY 1, 2015 Net loss for the year ended December 31, 2015 Other comprehensive income (loss) for the year ended December 31, 2015, net of income tax Total comprehensive income (loss) for the year ended December 31, 2015 Issue of restricted stock to employees Compensation cost of restricted stock for employees Retirement of restricted stock for employees Difference between purchase price and carrying amount arising from capital injection of subsidiaries Increase (decrease) in non-controlling interests BALANCE AT DECEMBER 31, 2015 Net loss for the year ended December 31, 2016 Other comprehensive income for the year ended December 31, 2016, net of income tax Total comprehensive income (loss) for the year ended December 31, 2016 Issue of restricted stock to employees Compensation cost of restricted stock for employees Retirement of restricted stock for employees Increase (decrease) in non-controlling interests BALANCE AT DECEMBER 31, 2016			Equity	Equity	Attributable toShareholders of the Parent	Attributable toShareholders of the Parent	Attributable toShareholders of the Parent		Total Non-controlling Interests $ 22,592,429 $ 13,101 (4,187,669 ) (8,272 ) (323,693) (42) (4,511,362) (8,314) - - 342,951 - - - (4,531 ) 4,531 590 (555) 18,420,077 8,763 (243,013 ) (3,782 ) (75,866) (1,129) (318,879) (4,911) - - 213,505 - - - 3,011 (2,166) $ 18,317,714 $ 1,686	Total Equity $ 22,605,530 (4,195,941 ) (323,735) (4,519,676) - 342,951 - - 35 18,428,840 (246,795 ) (76,995) (323,790) - 213,505 - 845 $ 18,319,400
			CapitalStock Share Capital Capital Stock to be Cancelled Capital Surplus $ 35,587,740 $ - $ 241,652 - - - - - - - - - 612,787 - (216,242 ) - - - (22,038 ) (6,898 ) 28,936 - - - - - 590 36,178,489 (6,898 ) 54,936 - - - - - - - - - - - 256,420 - - 636 (24,954 ) (756 ) 25,710 - - 3,011 $ 36,153,535 $ (7,654) $ 340,713		Retained Earnings Accumulated Deficit $ (13,812,749 ) (4,187,669 ) (299,324) (4,486,993) - - - (4,531 ) - (18,304,273 ) (243,013 ) (103,784) (346,797) - - - - $ (18,651,070)		Other Equity	Employee Unearned Compensation Treasury Shares $ (209,813 ) $ (159,061 ) - - - - - - (396,545 ) - 342,951 - - - - - - - (263,407 ) (159,061 ) - - - - - - (256,420 ) - 212,869 - - - - - $ (306,958) $ (159,061)
							Exchange Differences on Unrealized Translating (Loss) Gain from Foreign Operations Available-for-sale Financial Assets $ 27,223 $ 917,437 - - 21,700 (46,069) 21,700 (46,069) - - - - - - - - - - 48,923 871,368 - - (57,488) 85,406 (57,488) 85,406 - - - - - - - - $ (8,565) $ 956,774
		Share (Thousands) 3,558,774 - - - 61,278 - (2,203 ) - - 3,617,849 - - - - - (2,495 ) - 3,615,354

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

• 9 -

MACRONIX INTERNATIONAL CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 (In Thousands of New Taiwan Dollars)

CASH FLOWS FROM OPERATING ACTIVITIES Loss before income tax Adjustments for: Depreciation expense Amortization expense Impairment loss recognized on trade receivables Finance costs Interest income Dividend income Compensation cost of employee restricted shares Share of loss of associates Gain on disposal of property, plant and equipment Gain on disposal of investments Impairment loss recognized on non-financial assets Unrealized (realized) gain on the transactions with associates (Gain) loss on foreign currency exchange Changes in operating assets and liabilities Decrease in financial assets held for trading Increase in notes receivable and trade receivables (Increase) decrease in receivables from related parties (Increase) decrease in other receivables Decrease in inventories (Increase) decrease in other current assets Decrease in financial liabilities held for trading Increase (decrease) in notes payable and trade payables Increase (decrease) in payables to related parties Decrease in other payables Increase in other payables to related parties Increase in provisions Decrease in other current liabilities Increase in net defined benefit liabilities Cash generated from operations Interest received Dividend received Interest paid Income tax paid Net cash generated from operating activities CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from return of capital by financial assets measured at cost Payments for property, plant and equipment Proceeds from disposal of property, plant and equipment Increase in refundable deposits Decrease in refundable deposits	2016 $ (471,054) 1,956,199 85,477 17,460 304,144 (19,900) (97,030) 213,505 11,650 (5,710) - 12,869 72 (193,631) - (237,651) (158,384) (15,552) 2,246,867 (18,113) (717) 862,109 1,222,952 (113,673) 137 46,764 (492) 9,268 5,657,566 20,203 97,030 (309,605) (43,748) 5,421,446 - (923,158) 6,166 (1,729) 394	2015 $ (4,180,883) 5,722,078 178,988 - 301,219 (29,641) (113,853) 342,951 26,320 (7,241) (7,491) 99,009 (80) 73,965 95 (234,677) 80,887 54,468 317,429 17,741 (6,396) (248,220) (35,048) (387,551) 256 29,108 (8,042) 4,403 1,989,794 30,081 113,496 (298,774) (131,314) 1,703,283 28,209 (1,461,518) 9,726 (15,926) 17,857 (Continued)

• 10 -

MACRONIX INTERNATIONAL CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 (In Thousands of New Taiwan Dollars)

Payments for intangible assets Decrease in other financial assets Decrease (increase) in other non-current assets Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from short-term borrowings Repayments of short-term borrowings Proceeds from long-term borrowings Repayments of long-term borrowings Proceeds from guarantee deposits received Refund of guarantee deposits received Decrease in other non-current liabilities Increase in non-controlling interests Net cash used in financing activities EFFECT OF EXCHANGE RATE CHANGES ON THE BALANCE OF CASH AND CASH EQUIVALENT SHELD IN FOREIGN CURRENCIES NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR	2016 $ (19,287) 2,033 8,504 (927,077) 3,360,037 (4,483,826) 4,692,375 (7,324,840) 150 (226) (673) 1,125 (3,755,878) 37,300 775,791 5,592,548 $ 6,368,339	2015 $ (49,804) 28,383 (1,883) (1,444,956) 8,458,175 (9,077,706) 11,924,309 (13,600,644) 46 (13,214) (604) 35 (2,309,603) 7,623 (2,043,653) 7,636,201 $ 5,592,548

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

(Concluded)

• 11 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise)

MACRONIX INTERNATIONAL CO., LTD. AND SUBSIDIARIES

1. GENERAL INFORMATION

Macronix International Co., Ltd. (the Company) was incorporated in the Republic of China (ROC) on December 9, 1989 and commenced business in December 1989. The Company operates principally as a designer, manufacturer and supplier of integrated circuits and memory chips. The Company also performs design, research and development, consultation and trade of relevant products.

The Company’s shares have been listed on the Taiwan Stock Exchange (TSE) since March 15, 1995.

The consolidated financial statements are presented in the Company’s functional currency, New Taiwan dollars.

Suffering from the negative impact of the global economy, recovery was soft and overall demand was weak. As of December 31, 2016, the Company accumulated deficit was $18,651,070 thousand, but the Company considers that it will not affect its operation. The Company implements plans to improve the operating results and financial condition; the plans include the following:

• a. Develop the market aggressively: The Company is a leading manufacturer of non-volatile memory integrated components. Its products are widely applied in areas including consumer electronics products, communications, computers, automotive electronics, internet communications, and more, with a market share assuming a leading position in the world memory market. To satisfy the constantly increasing market demands for internet of things and intelligent wearable devices, the current demand for the automotive communication market, and in response to the aerospace defense market’s strict requirement for high reliability, the Company successfully developed the world’s first high-efficiency products. After years of comprehensive development in areas such as I/A/I (Industrial/automotive/ infrastructure), the Company had laid the groundwork for areas thereof to become the main drivers for growth this year. It is exactly this commitment to the highest product quality and long-term reliable production that has won the trust of customers around the world.

• b. Improve the technology to reduce production costs: The NOR Flash process will advance from the 55 nm to 48 nm this year; in SLC NAND Flash, the 36 nm products are already in mass production, and the Company is pushing quickly towards the 19 nm as to promote its advance in the process technology to reduce product cost.

• c. Implement the cost-controlling strategy: The Company implements strict control on costs and expenses; streamlining human resource policy is one of the strategies for cost control.

• d. Improve financial liquidity by stock clearance: Drop down the amount of inventory by adjusting the policy of inventory control. By doing so, it will improve the operational performance and generate sufficient net cash inflow.

Through the implementation of the above plans, the management believes that the Company has improved its performance. Further, the Group prepares the consolidated financial statements as of and for the year ended December 31, 2016, as the implication of its operation on the basis of going concern.

• 12 -

2. APPROVAL OF FINANCIAL STATEMENTS

The consolidated financial statements were approved by the Company’s Board of Directors and authorized for issue on March 6, 2017.

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

• a. Amendments to the Regulations Governing the Preparation of Financial Reports by Securities Issuers and the International Financial Reporting Standards (IFRS), International Accounting Standards (IAS), Interpretations of IFRS (IFRIC), and Interpretations of IAS (SIC) endorsed by the FSC for application starting from 2017.

Rule No. 1050050021 and Rule No. 1050026834 issued by the FSC stipulated that starting January 1, 2017, the Group should apply the amendments to the Regulations Governing the Preparation of Financial Reports by Securities Issuers and the IFRS, IAS, IFRIC and SIC (collectively, the IFRSs) issued by the IASB and endorsed by the FSC for application starting from 2017.

New, Amended or Revised Standards and Interpretations (the New IFRSs) Annual Improvements to IFRSs 2010-2012 Cycle Annual Improvements to IFRSs 2011-2013 Cycle Annual Improvements to IFRSs 2012-2014 Cycle Amendments to IFRS 10, IFRS 12 and IAS 28 “'Investment Entities: Applying the Consolidation Exception” Amendment to IFRS 11 “Accounting for Acquisitions of Interests in Joint Operations” IFRS 14 “Regulatory Deferral Accounts” Amendment to IAS 1 “Disclosure Initiative” Amendments to IAS 16 and IAS 38 “Clarification of Acceptable Methods of Depreciation and Amortization” Amendments to IAS 16 and IAS 41 “Agriculture: Bearer Plants” Amendment to IAS 19 “Defined Benefit Plans: Employee Contributions” Amendment to IAS 36 “Impairment of Assets: Recoverable Amount Disclosures for Non-financial Assets” Amendment to IAS 39 “Novation of Derivatives and Continuation of Hedge Accounting” IFRIC 21 “Levies”

Effective Date Announced by IASB (Note 1)

July 1, 2014 (Note 2) July 1, 2014 January 1, 2016 (Note 3) January 1, 2016 January 1, 2016 January 1, 2016 January 1, 2016 January 1, 2016 January 1, 2016 July 1, 2014 January 1, 2014 January 1, 2014 January 1, 2014

• Note 1: Unless stated otherwise, the above New or amended 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.

• 13 -

The initial application in 2017 of the above IFRSs and related amendments to the Regulations Governing the Preparation of Financial Reports by Securities Issuers would not have any material impact on the Group’s accounting policies, except for the following:

1) Amendment to IAS 36 “Recoverable Amount Disclosures for Non-financial Assets”

The amendment clarifies that the recoverable amount of an asset or a cash-generating unit is disclosed only when an impairment loss on the asset has been recognized or reversed during the period. Furthermore, if the recoverable amount of an item of property, plant and equipment for which impairment loss has been recognized or reversed is fair value less costs of disposal, the Group is required to disclose the fair value hierarchy. If the fair value measurements are categorized within Level 2 or Level 3, the valuation technique and key assumptions used to measure the fair value are disclosed. The discount rate used is disclosed if such fair value less costs of disposal is measured by using present value technique. The amendment will be applied retrospectively.

2) Annual Improvements to IFRSs: 2010-2012 Cycle

Several standards, including IFRS 2 “Share-based Payment”, IFRS 3 “Business Combinations” and IFRS 8 “Operating Segments”, were amended in this annual improvement.

The amended IFRS 2 changes the definitions of “vesting condition” and “market condition” and adds definitions for “performance condition” and “service condition”. The amendment clarifies that a performance target can be based on the operations (i.e. a non-market condition) of the Group or another entity in the same group or the market price of the equity instruments of the Group or another entity in the same group (i.e. a market condition); that a performance target can relate either to the performance of the Group as a whole or to some part of it (e.g. a division); and that the period for achieving a performance condition must not extend beyond the end of the related service period. In addition, a share market index target is not a performance condition because it not only reflects the performance of the Group, but also of other entities outside the Group. The share-based payment arrangements with market conditions, non-market conditions or non-vesting conditions will be accounted for differently, and the aforementioned amendment will be applied prospectively to those share-based payments granted on or after January 1, 2017.

IFRS 3 was amended to clarify that contingent consideration should be measured at fair value, irrespective of whether the contingent consideration is a financial instrument within the scope of IFRS 9 or IAS 39. Changes in fair value should be recognized in profit or loss. The amendment will be applied prospectively to business combination with acquisition date on or after January 1, 2017.

The amended IFRS 8 requires the Group to disclose the judgments made by management in applying the aggregation criteria to operating segments, including a description of the operating segments aggregated and the economic indicators assessed in determining whether the operating segments have “similar economic characteristics”. The amendment also clarifies that a reconciliation of the total of the reportable segments’ assets to the entity’s assets should only be provided if the segments’ assets are regularly provided to the chief operating decision-maker. The judgements made in applying aggregation criteria should be disclosed retrospectively upon initial application of the amendment in 2017.

When the amended IFRS 13 becomes effective in 2017, the short-term receivables and payables with no stated interest rate will be measured at their invoice amounts without discounting, if the effect of not discounting is immaterial.

• 14 -

IAS 24 was amended to clarify that a management entity providing key management personnel services to the Group is a related party of the Group. Consequently, the Group is required to disclose as related party transactions the amounts incurred for the service paid or payable to the management entity for the provision of key management personnel services. However, disclosure of the components of such compensation is not required.

• 3) Annual Improvements to IFRSs: 2011-2013 Cycle

Several standards, including IFRS 3, IFRS 13 and IAS 40 “Investment Property”, were amended in this annual improvement.

The scope in IFRS 13 of the portfolio exception for measuring the fair value of a group of financial assets and financial liabilities on a net basis was amended to clarify that it includes all contracts that are within the scope of, and accounted for in accordance with, IAS 39 or IFRS 9, even those contracts do not meet the definitions of financial assets or financial liabilities within IAS 32.

IAS 40 was amended to clarify that IAS 40 and IFRS 3 are not mutually exclusive and application of both standards may be required to determine whether the investment property acquired is acquisition of an asset or a business combination. The amendment will be applied prospectively to acquisitions of investment property on or after January 1, 2017.

• 4) Amendments to IAS 16 and IAS 38 “Clarification of Acceptable Methods of Depreciation and Amortization”

The entity should use appropriate depreciation and amortization method to reflect the pattern in which the future economic benefits of the property, plant and equipment and intangible asset are expected to be consumed by the entity.

The amended IAS 16 “Property, Plant and Equipment” stipulates that a depreciation method that is based on revenue that is generated by an activity that includes the use of an asset is not appropriate. The amended standard does not provide any exception from this requirement.

The amended IAS 38 “Intangible Assets” clarifies there is a rebuttable presumption that an amortization method that is based on revenue that is generated by an activity that includes the use of an intangible asset is not appropriate. This presumption can be overcome only in the following limited circumstances:

• a) In which the intangible asset is expressed as a measure of revenue (for example, the contract that specifies the entity’s use of the intangible asset will expire upon achievement of a revenue threshold); or

• b) When it can be demonstrated that revenue and the consumption of the economic benefits of the intangible asset are highly correlated.

• 5) Annual Improvements to IFRSs: 2012-2014 Cycle

Several standards including IFRS 5 “Non-current assets held for sale and discontinued operations”, IFRS 7, IAS 19 and IAS 34 were amended in this annual improvement. IFRS 5 was amended to clarify that reclassification between non-current assets (or disposal group) “held for sale” and non-current assets “held for distribution to owners” does not constitute a change to a plan of sale or distribution. Therefore, previous accounting treatment is not reversed. The amendment also explains that assets that no longer meet the criteria for “held for distribution to owners” and do not meet the criteria for “held for sale” should be treated in the same way as assets that cease to be classified as held for sale. The amendment will be applied prospectively to transactions that occur on or after January 1, 2017.

• 15 -

IAS 19 was amended to clarify that the depth of the market for high quality corporate bonds used to estimate discount rate for post-employment benefits should be assessed by the market of the corporate bonds denominated in the same currency as the benefits to be paid, i.e. assessed at currency level (instead of country or regional level). The amendment will be applied from January 1, 2016, and any adjustment arising from the initial application of the amendment will be recognized in net defined benefit liabilities, deferred tax asset and retained earnings.

• 6) Amendments to IFRS 10, IFRS 12 and IAS 28 “'Investment Entities: Applying the Consolidation Exception”

The amendments clarified that when the Group (non-investment entity) applies the equity method to an associate or a joint venture that is an investment entity, the Group may retain the fair value measurements that the associate or joint venture used for its subsidiaries. Prior to the amendments, the associate or joint venture measures its interest in subsidiaries at fair value but the fair value is unwound, and instead, those subsidiaries are consolidated in the associate’s or joint venture’s result in order to be equity-accounted by the Group. When the amendments become effective, the Group will elect to retain the measurement applied by the associate or joint venture to its interest in subsidiaries.

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

The amendments include additions of several accounting items and requirements for disclosures of impairment of non-financial assets as a consequence of the IFRSs endorsed by the FSC for application starting from 2017. In addition, as a result of the post implementation review of IFRSs in Taiwan, the amendments also include emphasis on certain recognition and measurement considerations and add requirements for disclosures of related party transactions and goodwill.

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

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

The disclosures of related party transactions and impairment of goodwill will be enhanced when the above amendments are retrospectively applied in 2017.

Except for the above impacts, as of the date the consolidated financial statements were authorized for issue, the Group continues assessing other possible impacts that application of the aforementioned amendments and the related amendments to the Regulations Governing the Preparation of Financial Reports by Securities Issuers will have on the Group’s financial position and financial performance, and will disclose these other impacts when the assessment is completed.

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

The Group has not applied the following IFRSs issued by the IASB but not yet endorsed by the FSC.

• 16 -

The FSC announced that IFRS 9 and IFRS 15 will take effect starting January 1, 2018. As of the date the consolidated financial statements were authorized for issue, the FSC has not announced the effective dates of other new IFRSs.

New IFRSs Annual Improvements to IFRSs 2014-2016 Cycle Amendment to IFRS 2 “Classification and Measurement of Share-based Payment Transactions” Amendments to IFRS 4“Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts” IFRS 9 “Financial Instruments” Amendments to IFRS 9 and IFRS 7 “Mandatory Effective Date of IFRS 9 and Transition Disclosures” 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” Amendments to IFRS 15 “Clarifications to IFRS15 Revenue from Contracts with Customers” IFRS 16 “Leases” Amendment to IAS 7 “Disclosure Initiative” Amendments to IAS 12 “Recognition of Deferred Tax Assets for Unrealized Losses” Amendments to IAS 40 “Transfers of investment property” IFRIC 22 “Foreign Currency Transactions and Advance Consideration”

Effective Date Announced by IASB (Note 1)

Note 2 January 1, 2018 January 1, 2018 January 1, 2018 January 1, 2018 To be determined by IASB January 1, 2018 January 1, 2018 January 1, 2019 January 1, 2017 January 1, 2017 January 1, 2018 January 1, 2018

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

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

• 1) IFRS 9 “Financial Instruments”

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 Group’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;

• 17 -

• 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 the above, all other financial assets are measured at fair value through profit or loss. However, the Group 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.

Impairment of financial assets

IFRS 9 requires impairment loss on financial assets to be 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 Group 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.

Transition

Financial instruments that have been derecognized prior to the effective date of IFRS 9 cannot be reversed to apply IFRS 9 when it becomes effective. Under IFRS 9, the requirements for classification, measurement and impairment of financial assets are applied retrospectively with the difference between the previous carrying amount and the carrying amount at the date of initial application recognized in the current period and restatement of prior periods is not required. The requirements for general hedge accounting shall be applied prospectively and the accounting for hedging options shall be applied retrospectively.

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

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

When applying IFRS 15, 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;

• 18 -

• 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 Group 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 Group 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 Group 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 Group as lessor.

When IFRS 16 becomes effective, the Group 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.

• 4) Annual Improvements to IFRSs 2014-2016 Cycle

Several standards, including IFRS 12 “Disclosure of Interests in Other Entities” and IAS 28 “Investments in Associates and Joint Ventures,” were amended in this annual improvement.

The amendment to IFRS 12 clarified that when an entity’s interest in a subsidiary, a joint venture or an associate is classified as held for sale or is included in a disposal group that is classified as held for sale, the entity is not required to disclose summarized financial information of that subsidiary, joint venture or associate in accordance with IFRS 12. However, all other requirements in IFRS 12 apply to interests in entities classified as held for sale in accordance with IFRS 5.

Furthermore, the amendment to IAS 28 clarified that when the Group (non-investment entity) applies the equity method to account for investment in an associate or a joint venture that is an investment entity, the Group may elect to retain the fair value of the investment in subsidiaries of the investment entity associate or joint venture. The election should be made separately for each investment entity associate or joint venture, at the later of the date (a) the investment entity associate or joint venture is initially recognized, (b) the associate or joint venture becomes an investment entity, or (c) the investment entity associate or joint venture first becomes a parent.

The Group shall apply the aforementioned amendments retrospectively.

• 19 -

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

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

The Group shall apply IFRIC 22 either retrospectively or prospectively to all assets, expenses and income in the scope of the Interpretation initially recognized on or after (a) the beginning of the reporting period in which the entity first applies IFRIC 22, or (b) the beginning of a prior reporting period presented as comparative information in the financial statements of the reporting period in which the entity first applies IFRIC 22.

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

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

• a. Statement of compliance

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

• b. Basis of preparation

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

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

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

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

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

• c. Classification of current and non-current assets and liabilities

Current assets include:

• 1) Assets held primarily for the purpose of trading;

• 2) Assets expected to be realized within 12 months after the reporting period; and

• 3) Cash and cash equivalents unless the asset is restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period.

• 20 -

Current liabilities include:

• 1) Liabilities held primarily for the purpose of trading;

• 2) Liabilities due to be settled within 12 months after the reporting period, even if an agreement to refinance, or to reschedule payments, on a long-term basis is completed after the reporting period and before the consolidated financial statements are authorized for issue; and

• 3) Liabilities for which the Group does not have an unconditional right to defer settlement for at least 12 months after the reporting period. Terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification.

Assets and liabilities that are not classified as current are classified as non-current.

• d. Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and the entities controlled by the Company (i.e. its subsidiaries).

Income and expenses of subsidiaries acquired or disposed of during the period are included in the consolidated statement of profit or loss and other comprehensive income from the effective date of acquisition up to the effective date of disposal, as appropriate.

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

All intra-group transactions, balances, income and expenses are eliminated in full upon consolidation. Total comprehensive income of subsidiaries is attributed to the owners of the Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.

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

See Note 12 and Table 5 for the detailed information of subsidiaries (including the percentage of ownership and main business).

e. Foreign currencies

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

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

• 21 -

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

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

For the purpose of presenting consolidated financial statements, the functional currencies of the Company and the Group entities (including subsidiaries and associates that use currency different from the currency of the Company) are translated into the presentation currency - the New Taiwan dollar as follows: Assets and liabilities are translated at the exchange rates prevailing at the end of the reporting period; income and expense items are translated at the average exchange rates for the period. The resulting currency translation differences are recognized in other comprehensive income (attributed to the owners of the Company and non-controlling interests as appropriate).

f. Inventories

Inventories consist of raw materials, supplies, spare parts, finished goods, merchandise and work-in-process and are stated at the lower of cost or net realizable value. Inventory write-downs are made by item, except where it may be appropriate to group similar or related items. Net realizable value is the estimated selling price of inventories less all estimated costs of completion and costs necessary to make the sale. Inventories are recorded at standard cost and adjusted to approximate weighted - average cost on the balance sheet date.

g. Investments in associates

An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor a joint venture.

The Group uses the equity method to account for its investments in associates.

Under the equity method, an investment in an associate is initially recognized at cost and adjusted thereafter to recognize the Group’s share of the profit or loss and other comprehensive income of the associate. The Group also recognizes the changes in the Group’s share of equity of associates attributable to the Group.

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

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

• 22 -

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

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

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

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

• h. Property, plant, and equipment

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

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

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

• i. Intangible assets

• 1) Intangible assets acquired separately

Intangible assets with finite useful lives that are acquired separately are initially measured at cost and subsequently measured at cost less accumulated amortization and accumulated impairment loss. Amortization is recognized on a straight-line basis. The estimated useful life, residual value, and amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimates accounted for on a prospective basis. Intangible assets with indefinite useful lives that are acquired separately are measured at cost less accumulated impairment loss.

• 2) Internally-generated intangible assets - research and development expenditure

Expenditure on research activities is recognized as an expense in the period in which it is incurred.

• 23 -

An internally-generated intangible asset arising from the development phase of an internal project is recognized if, and only if, all of the following have been demonstrated:

• a) The technical feasibility of completing the intangible asset so that it will be available for use or sale;

• b) The intention to complete the intangible asset and use or sell it;

• c) The ability to use or sell the intangible asset;

• d) How the intangible asset will generate probable future economic benefits;

• e) The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and

• f) The ability to measure reliably the expenditure attributable to the intangible asset during its development.

The amount initially recognized for internally-generated intangible assets is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria listed above. Subsequent to initial recognition, they are measured on the same basis as intangible assets that are acquired separately.

• 3) Derecognition of intangible assets

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

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

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

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

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

When an impairment loss is subsequently reversed, the carrying amount of the asset or cash-generating unit is increased to the revised estimate of its recoverable amount, but only to the extent of the carrying amount that would have been determined had no impairment loss been recognized for the asset or cash-generating unit in prior years. A reversal of an impairment loss is recognized in profit or loss.

• k. Financial instruments

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

• 24 -

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

1) Financial assets

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

• a) Measurement category

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

• i Financial assets at fair value through profit or loss

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

Financial assets at fair value through profit or loss are stated at fair value, with any gains or losses arising on remeasurement recognized in profit or loss. The net gain or loss recognized in profit or loss does not incorporate any dividend or interest earned on the financial asset. Fair value is determined in the manner described in Note 33.

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

ii Available-for-sale financial assets

Available-for-sale financial assets are non-derivatives that are either designated as available-for-sale or are not classified as loans and receivables, held-to-maturity investments or financial assets at fair value through profit or loss.

Available-for-sale financial assets are measured at fair value. Changes in the carrying amounts of available-for-sale monetary financial assets relating to changes in foreign currency exchange rates, interest income calculated using the effective interest method and dividends on available-for-sale equity investments are recognized in profit or loss. Other changes in the carrying amount of available-for-sale financial assets are recognized in other comprehensive income and will be reclassified to profit or loss when the investment is disposed of or is determined to be impaired.

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

• 25 -

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

iii Loans and receivables

Loans and receivables (including trade receivables, cash and cash equivalent, other receivables and long-term receivables) are measured at amortized cost using the effective interest method, less any impairment, except for short-term receivables when the effect of discounting is immaterial.

Cash equivalent includes time deposits which are highly liquid, readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. These cash equivalents are held for the purpose of meeting short-term cash commitments.

b) Impairment of financial assets

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

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

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

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

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

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

• 26 -

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

In respect of available-for-sale equity securities, impairment loss previously recognized in profit or loss is not reversed through profit or loss. Any increase in fair value subsequent to an impairment loss is recognized in other comprehensive income.

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

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

c) Derecognition of financial assets

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

If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognizes its retained interest in the asset and any associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognize the financial asset and also recognizes a collateralized borrowing for the proceeds received.

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

2) Equity instruments

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

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

• 3) Financial liabilities

• a) Subsequent measurement

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

• 27 -

• i Financial liabilities at fair value through profit or loss

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

Financial liabilities held for trading are stated at fair value, with any gain or loss arising on remeasurement recognized in profit or loss. The net gain or loss recognized in profit or loss does not incorporate any interest or dividend paid on the financial liability. Fair value is determined in the manner described in Note 33.

• b) Derecognition of financial liabilities

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

• 4) Derivative financial instruments

The Group enters into foreign exchange forward contracts to manage its exposure to foreign exchange rate risks, including foreign exchange forward contracts.

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

• l. Provisions

Provisions are measured at the best estimate of the discounted cash flows of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation.

• m. Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable. Revenue is reduced for estimated customer returns, rebates and other similar allowances. Allowance for sales returns and liability for returns are recognized at the time of sale based on the seller’s reliable estimate of future returns and based on past experience and other relevant factors.

1) Sale of goods

Revenue from the sale of goods is recognized when all the following conditions are satisfied:

• a) The Group has transferred to the buyer the significant risks and rewards of ownership of the goods;

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

• c) The amount of revenue can be measured reliably;

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

• 28 -

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

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

• 2) Rendering of services

Service income is recognized when services are provided.

Revenue from a contract to provide services is recognized by reference to the stage of completion of the contract. The stage of completion of the contract is determined by the contractual rates as labor hours and direct expenses are incurred.

3) Royalties

Royalty revenue is recognized on an accrual basis in accordance with the substance of the relevant agreement provided that it is probable that the economic benefits will flow to the Group and the amount of revenue can be measured reliably. Royalty arrangements that are based on production, sales and other measures are recognized by reference to the underlying arrangement.

• 4) Dividend and interest income

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

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

n. Leasing

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

1) The Group as lessor

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

2) The Group as lessee

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

• 3) Leasehold land for own use

When a lease includes both land and building elements, the Group assesses the classification of each element separately as a finance or an operating lease based on the assessment as to whether substantially all the risks and rewards incidental to ownership of each element have been transferred to the Group. The minimum lease payments are allocated between the land and the building elements in proportion to the relative fair values of the leasehold interests in the land element and building element of the lease at the inception of the lease.

• 29 -

If the allocation of the lease payments can be made reliably, each element is accounted for separately in accordance with its lease classification. When the lease payments cannot be allocated reliably between the land and building elements, the entire lease is generally classified as a finance lease unless it is clear that both elements are operating leases, in which case the entire lease is classified as an operating lease.

o. Borrowing costs

Borrowing costs directly attributable to an acquisition, construction or production of qualifying assets are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.

Other than stated above, all other borrowing costs are recognized in profit or loss in the period in which they are incurred.

p. Employee benefits

1) Short-term employee benefits

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

2) Retirement benefits

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

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

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

• 3) Other long-term employee benefits

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

• 4) Termination benefits

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

• 30 -

q. Share-based payment arrangements

The fair value at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s best estimates of the number of shares or options that are expected to ultimately vest, with a corresponding increase in capital surplus - employee share options or other equity - unearned employee benefit. It is recognized as an expense in full at the grant date if vesting immediately.

When restricted shares for employees are issued, other equity - unearned employee benefits are recognized on the grant date, with a corresponding increase in capital surplus - restricted shares for employees.

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

• r. Treasury stock

The parent company’s stock held by subsidiaries is reclassified to treasury stock from investment accounted for using equity method and recognized with the original investment cost. Cash dividends earned by subsidiaries are write-off with investment income and adjust capital surplus-treasury stock transaction.

s. Taxation

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

1) Current tax

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

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

• 2) Deferred tax

Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities and the corresponding tax bases used in the computation of taxable profit.

Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences, unused loss carry forward and unused tax credits for purchases of machinery, equipment and technology, research and development expenditures and personnel training expenditures to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized.

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

• 31 -

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

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

• 3) Current and deferred taxes for the year

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

5. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY

In the application of the Group’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 year in which the estimate is revised if the revision affects only that period or in the period of the revision and future years if the revision affects both current and future years.

• a. Estimated impairment of trade receivables

When there is objective evidence of impairment loss, the Group takes into consideration the estimation of future cash flows. The amount of the impairment loss is measured as the difference between an asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. Where the actual future cash flows are less than expected, a material impairment loss may arise.

b. Write-down of inventory

The net realizable value of inventory is the estimated selling price in the ordinary course of business less the estimated costs of completion and disposal. The estimation of net realizable value was based on current market conditions and the historical experience with product sales of a similar nature. Changes in market conditions may have a material impact on the estimation of the net realizable value.

c. Useful lives of property, plant and equipment

As described in Note 4 (h), the Group reviews the estimated useful lives of property, plant and equipment at the end of each reporting period. Based on the valuation report released in October, 2015 provided by China Credit Information Service, Ltd., the actual useful lives of certain items of property, plant and equipment have exceeded their estimated useful lives. Due to the consideration of physical depletion, functional depletion and economic depletion, the management determined that the useful lives of machinery equipment and R&D equipment, facility equipment and main buildings

• 32 -

should be extended from 6 years to 11 years, 6 years to 15 years and 21 years to 31 years, respectively, beginning January 1, 2016.

The financial effect of this reassessment, assuming the assets are held until the end of their extended useful lives, is the decrease in the consolidated depreciation expense for the years ended December 31, 2016, 2017 and 2018, by the following amounts:

Year ended 2016 $ 3,775,234 Year ended 2017 2,558,159 Year ended 2018 240,530

d. Impairment of property, plant and equipment

The Group reviews the impairment of property, plant and equipment at the end of each reporting period. The impairment of equipment in relation to the production of memory chips was based on the recoverable amounts of those assets, which is the higher of their fair value less costs of disposal and their value in use. Any changes in the market prices or future cash flows will affect the recoverable amounts of those assets and may lead to recognition of additional impairment losses or reversal of impairment losses.

e. Income taxes

As of December 31, 2016 and 2015, the carrying amount of deferred tax assets in relation to unused losses carryforward were NT$996,856 thousand and NT$909,230 thousand, respectively. As of December 31, 2016 and 2015, no deferred tax asset have been recognized in relation to unused deductible temporary differences, losses carryforward, and investment tax credits amounted to NT$5,481,788 thousand and NT5,303,043 thousand, respectively, due to the unpredictability of future profit streams. The realizability of the deferred tax asset mainly depends on whether sufficient future profits or taxable temporary differences will be available. In cases where the actual future profits generated are less than expected, a material reversal of deferred tax assets may arise, which would be recognized in profit or loss for the period in which such a reversal takes place.

f. Recognition and measurement of defined benefit plans

The net defined benefit liabilities and the resulting defined benefit costs under defined benefit pension plans are calculated using the projected unit credit method. Actuarial assumptions comprise the discount rates, rates of employee turnover, and future salary increase, etc. Changes in economic circumstances and market conditions will affect these assumptions and may have a material impact on the amount of the expenses and the liabilities.

6. CASH AND CASH EQUIVALENTS

Cash on hand Checking accounts and demand deposits Cash equivalent Time deposits		December 31	December 31
		2016 $ 256 3,986,055 2,382,028 $ 6,368,339	2015 $ 264 3,018,567 2,573,717 $ 5,592,548

• 33 -

7. FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS

Financial liabilities at FVTPL-current Financial liabilities held for trading Derivative financial liabilities (not under hedge accounting) Foreign exchange forward contracts		December	31
		2016 $ -	2015 $ 717

At the end of the reporting period, outstanding foreign exchange forward contracts not under hedge accounting were as follows:

					Contract Amount
			Currency	Maturity Date	(In Thousands)
December	31,	2015
Sell			USD/NTD	2016.01	USD11,000/NTD360,937

The Group entered into foreign exchange forward contracts to manage exposures to exchange rate fluctuations of foreign currency denominated assets and liabilities.

8. AVAILABLE-FOR-SALE FINANCIAL ASSETS

Non-current Domestic investments Listed shares Foreign investments Listed shares		December 31	December 31
		2016 $ 909,258 374,444 $ 1,283,702	2015 $ 900,710 298,758 $ 1,199,468

9. FINANCIAL ASSETS MEASURED AT COST

Non-current Domestic unlisted common shares Overseas unlisted common shares Classified according to financial asset measurement categories Available-for-sale financial assets		**December 31 **	**December 31 **
		2016 $ 58,500 34,830 $ 93,330 $ 93,330	2015 $ 58,500 35,451 $ 93,951 $ 93,951

• 34 -

Management believed that the above unlisted equity investments held by the Group, whose fair value cannot be reliably measured, because the range of reasonable fair value estimates was so significant. Therefore, they were measured at cost less impairment at the end of the reporting period.

10. NOTES RECEIVABLE, TRADE RECEIVABLES AND OTHER RECEIVABLES

Notes receivable and Trade receivables Notes receivable Trade receivables Less: Allowance for impairment loss Other receivables Tax receivable Others		December 31	December 31
		2016 $ 542 3,138,753 (17,460) $ 3,121,835 $ 112,369 8,228 $ 120,597	2015 $ 243 2,885,067 (271) $ 2,885,039 $ 93,660 11,673 $ 105,333

a. Notes Receivable and Trade Receivables

The average credit period of sales of goods was 60 days. In determining the recoverability of a trade receivable, the Group evaluates each customer’s credibility and financial position and 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.

Before trading with any new customer, the Group assesses the potential customer’s credit quality and defines credit limits using internal credit scoring system.

For the trade receivables balances that were past due at the end of the reporting period, the Group did not recognize an allowance for impairment loss, because there was no significant change in credit quality and the amounts were still considered recoverable.

The aging of notes receivable and trade receivables was as follows:

Neither past due nor impaired Past due but not impaired Within 60 days 61-120 days Over 121 days		December 31	December 31
		2016 $ 3,064,828 42,064 11,855 3,088 $ 3,121,835	2015 $ 2,862,213 22,109 70 647 $ 2,885,039

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

As of December 31, 2016, the Group did not hold collateral for most of the receivables.

• 35 -

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

Individually Assessed for Impairment Collectively Assessed for Impairment Balance at January 1 and December 31, 2015 $ 271 $ - Add: Impairment losses recognized on receivables 17,460 - Less: Amounts written off during the year as uncollectable (271) - Balance at December 31, 2016 $ 17,460 $ -	Total $ 271 17,460 (271) $ 17,460

The Group recognized impairment loss on trade receivables amounting to $16,812 thousand as of December 31, 2016. These amounts mainly related to customers that were in severe financial difficulties. The Group did not hold any collateral over these balances.

The carrying amount of trade receivables pledged as collateral for borrowings was disclosed in Note 35.

b. Other receivables

No allowance for impairment loss of other receivables was recognized since the other receivables of the Group were not past due and the Group assessed that there was no uncertainty of recoverability.

11. INVENTORIES

Finished goods and merchandise Work in progress Raw materials		**December 31 **	**December 31 **
		2016 $ 950,104 5,781,372 355,941 $ 7,087,417	2015 $ 1,321,168 7,618,542 394,574 $ 9,334,284

Write-down of inventories to net realizable value and reversal of inventory write-downs resulting from the increase in net realizable value were included in the cost of goods sold as below. Previous write-downs were reversed as a result of stock clearance.

Inventory losses (reversal of inventory write-downs)		December 31	December 31
		2016 $ (1,117,930)	2015 $ 525,576

12. SUBSIDIARIES

Subsidiary included in the consolidated financial statements

As of December 31, 2016, the Company has direct and indirect majority ownership in the following subsidiaries: Run Hong Investment, Ltd. (Run Hong), Hui Ying Investment, Ltd. (Hui Ying), Mxtran Inc. (Mxtran), Infomax Communication Co., Ltd. (INFOMAX), Macronix America Inc. (MXA), Macronix (BVI) Co., Ltd. (MXBVI), Mxtran Holding (Samoa) Co., Ltd. (Mxtran Samoa), Mxtran (H.K.) Holding Co., Limited (Mxtran HK), Maxtran Technology Co., Ltd. (Maxtran Beijing), Infomax Holding Co., Ltd.

• 36 -

(Infomax Samoa), Infomax Holding Company Limited (Infomax HK), Infomax Communication (Suzhou) Co., Ltd. (Infomax SU), New Trend Technology Inc. (NTTI), Macronix (Asia) Limited (MX Asia), Macronix Pte. Ltd. (MPL), Macronix Europe NV. (MXE), Macronix (Hong Kong) Co., Ltd. (MXHK) and Macronix Microelectronics (Suzhou) Co., Ltd. (MXm).

Investor Investee Nature of Activities The Company Run Hong Investment company The Company Hui Ying Investment company The Company and Run Hong Mxtran Combi-SIM IC and the related service The Company and Run Hong INFOMAX Baseband chip, analog baseband chip, and power management chip The Company MXA Sales and marketing The Company MXBVI Investment holding company Mxtran Mxtran Samoa Investment holding company Mxtran Samoa Mxtran HK Investment holding company Mxtran HK Maxtran Beijing Technical support of Combi-SIM IC INFOMAX Infomax Samoa Investment holding company Infomax Samoa Infomax HK Investment holding company Infomax HK Infomax SU Software, rendering and technical service MXBVI NTTI IC design MXBVI MX Asia Investment holding company MXBVI MPL After-sales service MXBVI MXE After-sales service MXBVI MXHK Sales and marketing MXHK MXm Development of integrated circuit system and software	% ofOwnership
	**December 31 **
	2016 2015 100.00 100.00 100.00 100.00 94.84 94.84 99.02 99.02 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

13. INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD

Investments in associates

Associates MoDioTek Co., Ltd. (MoDioTek) Principal Place Name of Associate Nature of Activities of Business MoDioTek Wi-Fi video transmission IC and smart security systems Hsinchu City		**December **	**31 **
		2016 2015 $ - $ 12,345 % of Ownership
		**December 31 **
		2016 2015 23.39 23.39

The associate is accounted for using the equity method.

Summarized financial information in respect of MoDioTek is set out below. The summarized financial information below represents amounts shown in the associates’ financial statements prepared in accordance with IFRSs adjusted by the Group for equity accounting purposes.

Current assets Non-current assets Current liabilities Equity		**December **	**31 **
		2016 $ 38,181 3,495 (59,098) $ (17,422)	2015 $ 76,161 6,937 (30,627) $ 52,471 (Continued)

• 37 -

Proportion of the Group's ownership Equity attributable to the Group Realized gain or loss with associates Carrying amount Operating revenue Net loss for the year Other comprehensive loss Total comprehensive income for the year		**December **	**31 **
	2016 23.39% $ - - $ - For the Year Ended		2015 23.39% $ 12,273 72 $ 12,345 (Concluded) December 31
		2016 $ 32,193 $ (69,623) (270) $ (69,893)	2015 $ 74,212 $ (112,527) (61) $ (112,588)

The investments accounted for by the equity method and the share of profit or loss and other comprehensive income of those investments for the years ended December 31, 2016 and 2015 was based on the associates’ financial statements audited by the auditors for the same years.

14. PROPERTY, PLANT AND EQUIPMENT

Cost Freehold land Buildings Machinery equipment Research and development equipment Transportation equipment Leasehold improvements Miscellaneous equipment Advance payments and construction in progress Accumulated depreciation and impairment Freehold land Buildings Machinery equipment Research and development equipment Transportation equipment Leasehold improvements Miscellaneous equipment Carrying amount at December 31, 2016				Years Ended Decem	ber 31, 2016
		Balance, Beginning of Year $ 1,320,487 23,709,538 82,541,070 5,168,722 30,285 43,850 1,163,014 1,425,924 115,402,890 407,984 19,142,362 74,541,409 3,575,569 25,177 30,126 1,084,140 98,806,767 $ 16,596,123	Additions $ - - - 3,684 - 14 3,875 878,996 $ 886,569 $ - 350,532 1,297,680 250,876 3,222 6,020 47,869 $ 1,956,199	Disposals E $ - 11,324 173,199 5,453 5,152 - 17,681 - $ 212,809 $ - 11,324 173,169 5,106 5,152 - 17,602 $ 212,353	ffect of Foreign Currency Exchange Differences $ (12,654 ) (21,678 ) - (3,123 ) (143 ) (2,324 ) (6,587 ) 40 $ (46,469) $ (7,146 ) (4,192 ) - (2,131 ) (128 ) (1,780 ) (5,514) $ (20,891)	Reclassification Balance, End of Year $ (133 ) $ 1,307,700 711,350 24,387,886 394,067 82,761,938 807,797 5,971,627 - 24,990 - 41,540 6,120 1,148,741 (1,919,334) 385,626 $ (133) 116,030,048 $ (133 ) 400,705 - 19,477,378 153,965 75,819,885 (153,248 ) 3,665,960 - 23,119 - 34,366 (717) 1,108,176 $ (133) 100,529,589 $ 15,500,459

• 38 -

Cost Freehold land Buildings Machinery equipment Research and development equipment Transportation equipment Leasehold improvements Miscellaneous equipment Advance payments and construction in progress Accumulated depreciation and impairment Freehold land Buildings Machinery equipment Research and development equipment Transportation equipment Leasehold improvements Miscellaneous equipment Carrying amount at December 31, 2015				Years Ended Decem	ber 31, 2015
		Balance, Beginning of Year $ 1,294,628 23,088,007 80,734,087 6,322,265 30,323 41,247 1,198,945 1,804,262 114,513,764 393,380 17,930,640 70,414,495 3,520,962 22,073 26,909 1,076,947 93,385,406 $ 21,128,358	Additions $ - - - 5,505 - 1,973 8,065 1,171,631 $ 1,187,174 $ - 1,225,705 3,755,625 666,137 3,603 5,582 65,426 $ 5,722,078	Disposals E $ - 13,082 234,072 7,412 900 2,419 52,153 - $ 310,038 $ - 13,082 232,481 7,232 465 2,419 51,874 $ 307,553	ffect of Foreign Currency Exchange Differences $ 25,859 (5,812 ) - (832 ) (38 ) (181 ) (1,358 ) (86) $ 17,552 $ 14,604 (901 ) - (528 ) (34 ) 54 (797) $ 12,398	Reclassification Balance, End of Year $ - $ 1,320,487 640,425 23,709,538 2,041,055 82,541,070 (1,150,804 ) 5,168,722 900 30,285 3,230 43,850 9,515 1,163,014 (1,549,883) 1,425,924 $ (5,562) 115,402,890 $ - 407,984 - 19,142,362 603,770 74,541,409 (603,770 ) 3,575,569 - 25,177 - 30,126 (5,562) 1,084,140 $ (5,562) 98,806,767 $ 16,596,123

The carrying amount of the freehold land in the U.S.A. which is unutilized by the Group as of December 31, 2016 and 2015 were US$9,579 thousand, respectively.

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

Buildings Main buildings 21-40 years Electronic equipment 11-20 years Facility equipment 6-15 years Landscape engineering 20 years Machinery equipment 4-11 years Research and development equipment 5-11 years Transportation equipment 5-6 years Leasehold improvements 3-16 years Miscellaneous equipment 2-16 years

Property, plant and equipment pledged as collateral for bank borrowings were set out in Note 35.

• 39 -

15. INTANGIBLE ASSETS

Cost Software Licenses Others Accumulated amortization and Impairment Software Licenses Others Carrying amounts at December 31, 2016				Years Ended Decem	ber 31, 2016
		Balance, Beginning of Year $ 309,702 58,407 18,691 386,800 232,616 31,926 13,241 277,783 $ 109,017	Additions $ 12,773 6,000 514 $ 19,287 $ 64,077 15,683 5,717 $ 85,477	Disposals $ 153,771 53,668 3,381 $ 210,820 $ 153,771 53,668 3,381 $ 210,820	Impairment Effect of Foreign Currency Exchange Differences $ - $ (1,928 ) - - - (4) $ - $ (1,932) $ 906 $ (1,794 ) 11,963 - - (4) $ 12,869 $ (1,798)	Balance, End of Year $ 166,776 10,739 15,820 193,335 142,034 5,904 15,573 163,511 $ 29,824

Cost Software Licenses Mask Others Accumulated amortization and Impairment Software Licenses Mask Others Carrying amounts at December 31, 2015			Years E	nded December 31, 2	015
	Balance, Beginning of Year $ 643,272 58,913 - 18,459 720,644 455,190 16,629 - 10,482 482,301 $ 238,343	Additions $ 27,257 18,340 2,535 1,672 $ 49,804 $ 138,129 34,143 2,535 4,181 $ 178,988	Disposals $ 365,105 117,855 2,535 1,440 $ 486,935 $ 365,105 117,855 2,535 1,440 $ 486,935	Impairment $ - - - - $ - $ - 99,009 - - $ 99,009	Effect of Foreign Currency Exchange Differences $ (1,284 ) - - - $ (1,284) $ (1,160 ) - - 18 $ (1,142)	Reclassification $ 5,562 99,009 - - $ 104,571 $ 5,562 - - - $ 5,562	Balance, End of Year $ 309,702 58,407 - 18,691 386,800 232,616 31,926 - 13,241 277,783 $ 109,017

Intangible assets were amortized on a straight-line basis over the estimated useful lives as follows:

Software	1-6	years
Licenses	1-3	years
Mask	1-3	years
Others	1-3	years

16. PREPAYMENTS FOR LEASE

Current asset (included in other current assets) Non-current asset (included in other non-current assets)		**December **	**31 **
		2016 $ 522 20,373 $ 20,895	2015 $ 572 22,877 $ 23,449

Prepaid lease payments include land use rights are located in Mainland China. The Group has obtained the land use right certificates.

• 40 -

17. OTHER FINANCIAL ASSETS

Non-current Restricted time deposits (Note 35) Refundable deposits Long-term receivables		December 31	December 31
		2016 $ 138,861 11,645 1,350 $ 151,856	2015 $ 139,970 11,435 2,106 $ 153,511

18. OTHER ASSETS

Current Prepayments Offset against business tax payable Prepayments for lease Others Non-current Prepayments for lease Prepayments		December 31	December 31
		2016 $ 197,561 30,900 522 - $ 228,983 $ 20,373 - $ 20,373	2015 $ 179,177 31,092 572 21 $ 210,862 $ 22,877 6,000 $ 28,877

19. BORROWINGS

• a. Short-term borrowings

Unsecured borrowings Import loans Unsecured borrowings Interest rate		December 31
		2016 2015 $ - $ 540,028 400,000 1,000,000 $ 400,000 $ 1,540,028 1.55% 1.24%-2.02%

• 41 -

b. Long-term borrowings

Secured borrowings Loans from financial institution Unsecured borrowings Loans from financial institution Less: Current portion Less: Arrangement fee Long-term borrowings Interest rate Repayment Terms Secured syndicated loan denominated in NT$ From June 2015 to June 2018. Unsecured bank borrowing denominated in NT$ From September 2015 to March 2017. Secured bank borrowing denominated in NT$ From December 2015 to December 2017. Secured bank borrowing denominated in NT$ From September 2015 to September 2018. Unsecured bank borrowing denominated in NT$ From March 2016 to January 2018. Secured bank borrowing denominated in NT$ From October 2013 to October 2018. Secured bank borrowing denominated in NT$ From December 2013 to December 2018. Secured bank borrowing denominated in NT$ From January 2015 to January 2020. Secured bank borrowing denominated in NT$ From September 2015 to September 2017. Secured bank borrowing denominated in NT$ From July 2014 to July 2017. Unsecured bank borrowing denominated in NT$ From September 2014 to September 2017. Secured bank borrowing denominated in JPY From March 2014 to March 2019. Secured bank borrowing denominated in NT$ From August 2015 to February 2018. Unsecured borrowing denominated in NT$ Pay off in December 2016.			December 31
			2016 2015 $ 8,611,118 $ 10,671,943 1,326,667 1,913,333 9,937,785 12,585,276 4,280,876 4,683,784 21,365 39,502 $ 5,635,544 $ 7,861,990 1.52%-2.81% 1.73%-2.91% **December 31 **
		$	2016 2015 6,120,000 $ 7,267,500 800,000 1,000,000 800,000 800,000 470,000 650,000 460,000 - 400,000 600,000 330,425 490,240 204,669 251,900 100,000 220,000 80,000 200,000 66,667 133,333 64,024 91,508 42,000 78,000 - 240,000 (Continued)

• 42 -

Repayment Terms Secured bank borrowing denominated in NT$ Pay off in April 2016. Unsecured bank borrowing denominated in NT$ Pay off in March 2016. Less: Current portion Arrangement fee Total long-term borrowings		**December 31 **	**December 31 **
		2016 $ - - 4,280,876 21,365 $ 5,635,544	2015 $ 22,795 540,000 4,683,784 39,502 $ 7,861,990 (Concluded)

To repay the vested liabilities, the Company has entered into a 3-year syndicated loan agreement with 15 financial institutions including Taiwan Cooperative Bank in June 2015. The total amount of 7.65 billion of the syndicated loan has been fully used as of December 31, 2016.

The Group had provided notes used as refundable guarantees for borrowings that will be cancelled upon termination of the guarantee.

In addition, the Group’s interest bearing floating rate borrowing was reset every one to three months.

The loan agreement requires the maintenance of current ratio, debt ratio, and times interest earned based on semi-annual and annual consolidated financial statements. The Group’s financial ratios during the first half of 2016 conform to the required ratios, except for the times interest earned. According to the loan contract, it will be considered as a breach of the contract when the borrower does not conform to any of the required financial ratios two times consecutively. Because there was only one inconformity occurred in the year, the Company will not be considered as breaching the contract. For the year ended December 31, 2016, the Group had met the financial ratio covenants.

The details of assets pledged as collaterals for long-term loans were set in Note 35.

20. NOTES PAYABLE AND TRADE PAYABLES

Notes payable Trade payables		December 31	December 31
		2016 $ 939 2,591,205 $ 2,592,144	2015 $ 4,815 1,719,324 $ 1,724,139

The Group has financial risk management policies in place to ensure that all payables are paid within the pre-agreed credit terms.

• 43 -

21. OTHER PAYABLES

Payable for bonus Payable for maintenance and repair Payable for Insurance premium Others		December 31	December 31
		2016 $ 252,140 187,436 63,138 675,053 $ 1,177,767	2015 $ 264,690 189,336 156,560 689,749 $ 1,300,335

22. PROVISIONS

Current Employee benefits (a) Customer returns and rebates (b) Balance at January 1, 2016 Additional provisions recognized Reversing un-usage balances/usage Net exchange differences Balance at December 31, 2016	Employee Benefits $ 79,009 83,313 (73,063) (607) $ 88,652		**December 31 **	**December 31 **
		2016 $ 88,652 137,007 $ 225,659 Customer Returns and Rebates $ 101,193 310,722 (273,577) (1,331) $ 137,007		2015 $ 79,009 101,193 $ 180,202 Total $ 180,202 394,035 (346,640) (1,938) $ 225,659

• a. The provision for employee benefits represents vested long service leave entitlements accrued.

• b. The provision of customer returns and rebates was based on historical experience, management’s judgments and other known reasons estimated product returns and rebates may occur in the year. The provision was recognized as a reduction of operating income in the years of the related goods sold.

23. RETIREMENT BENEFIT PLANS

a. Defined contribution plans

The Company, Mxtran and INFOMAX of the Group adopted a pension plan under the Labor Pension Act (the LPA), which is a state-managed defined contribution plan. Under on the LPA, an entity makes monthly contributions to employees’ individual pension accounts at 6% of monthly salaries and wages.

The employees of the Group’s subsidiary in China are members of a state-managed retirement benefit plan operated by the government of China. The subsidiary is required to contribute a specified percentage of payroll costs to the retirement benefit scheme to fund the benefits. The only obligation of the Group with respect to the retirement benefit plan is to make the specified contributions.

• 44 -

b. Defined benefit plans

The defined benefit plan adopted by the Company in accordance with the Labor Standards Law is operated by the government. Pension benefits are calculated on the basis of the length of service and average monthly salaries of the 6 months before retirement. The Company contributes amounts equal to 2% of total monthly salaries and wages to a pension fund administered by the pension fund monitoring committee. Pension contributions are deposited in the Bank of Taiwan in the committee’s name. Before the end of each year, the Group assesses the balance in the pension fund. If the amount of the balance in the pension fund is inadequate to pay retirement benefits for employees who conform to retirement requirements in the next year, the Group is required to fund the difference in one appropriation that should be made before the end of March of the next year. The pension fund is managed by the Bureau of Labor Funds, Ministry of Labor (the Bureau); the Group has no right to influence the investment policy and strategy.

The amounts included in the consolidated balance sheets in respect of the Group’s defined benefit plans were as follows:

Present value of defined benefit obligation Fair value of plan assets Net defined benefit liability		December 31	December 31
		2016 $ 1,881,728 (757,075) $ 1,124,653	2015 $ 1,799,856 (790,797) $ 1,009,059

Movements in net defined benefit liability were as follows:

Present Value of Defined Benefit Obligation Fair Value of the Plan Assets Balance at January 1, 2015 $ 1,576,706 $ 839,728 Service cost Current service cost 7,301 - Net interest expense 35,389 - Return on plan assets - 19,176 Recognized in profit or loss 42,690 19,176 Remeasurement Return on plan assets - (6,563) Actuarial loss - experience adjustments 193,303 - Actuarial loss - change in financial assumptions 80,955 - Recognized in other comprehensive income 274,258 (6,563) Contributions from the employer - 32,254 Benefits paid (93,798) (93,798) Balance at December 31, 2015 1,799,856 790,797 Service cost Current service cost 7,158 - Net interest expense 34,037 - Return on plan assets - 15,181 Recognized in profit or loss 41,195 15,181

Net Defined Benefit Liability (Assets) $ 736,978 7,301 35,389 (19,176) 23,514 6,563 193,303 80,955 280,821 (32,254) - 1,009,059 7,158 34,037 (15,181) 26,014 (Continued)

• 45 -

Present Value of Defined Benefit Obligation Fair Value of the Plan Assets Remeasurement Return on plan assets $ - $ (9,273) Actuarial loss - experience adjustments 17,490 - Actuarial loss - change in financial assumptions 92,919 - Recognized in other comprehensive income 110,409 (9,273) Contributions from the employer - 30,102 Benefits paid (69,732) (69,732) Balance at December 31, 2016 $ 1,881,728 $ 757,075

Net Defined Benefit Liability (Assets) $ 9,273 17,490 92,919 119,682 (30,102) - $ 1,124,653 (Concluded)

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

plans is as follows:
Operating costs Selling and marketing expenses General and administration expenses Research and development expenses	For the Year Ended December 31
		2016 $ 14,158 1,287 4,646 5,923 $ 26,014	2015 $ 13,214 1,235 4,073 4,992 $ 23,514

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

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

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

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

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

Discount rate Expected rate of salary increase Expected return on plan assets increase	December 31
	2016 2015 1.50% 1.90% 3.00% 3.00% 1.50% 1.90%

• 46 -

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

Discount rate 0.50% increase 0.50% decrease Expected rate of salary increase 0.50% increase 0.50% decrease	**For the Year Ended **	**For the Year Ended **	**December 31 **
		2016 $ (115,193) $ 125,344 $ 122,856 $ (114,144)	2015 $ (80,955) $ 164,001 $ 161,783 $ (80,162)

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

The expected contributions to the plan for the next year The average duration of the defined benefit obligation		**December 31 **	**December 31 **
		2016 $ 31,033 12.9 years	2015 $ 33,222 13 years

The Company maintains a separate executive pension plan and the net periodic pension costs were $12,355 thousand and $17,178 thousand for the years ended December 31, 2016 and 2015, respectively.

Movements in net defined benefit liability were as follows:

Movements in net defined benefit liability were as follows:
	Present Value
	of Defined
	Benefit
	Obligation
Balance at January 1, 2015	$ 379,871
Service cost
Current service cost	10,227
Net interest expense	6,951
Recognized in profit or loss	17,178
Remeasurement
Actuarial loss - experience adjustments	16,704
Actuarial loss - changes in financial assumptions	1,570
Recognized in other comprehensive income	18,274
Benefits paid	(4,147)
Balance at December 31, 2015	411,176
Service cost
Current service cost	6,318
Net interest expense	6,037
Recognized in profit or loss	12,355
Remeasurement
Actuarial loss - experience adjustments	(17,726)
Actuarial loss - changes in financial assumptions	1,828
Recognized in other comprehensive income	(15,898)
Benefits paid	-
Balance at December 31, 2016	$ 407,633

• 47 -

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

General and administration expenses	**For the Year Ended December 31 **	**For the Year Ended December 31 **	**For the Year Ended December 31 **
		2016 $ 12,355	2015 $ 17,178

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

Discount rate Expected rate of salary increase Expected return on plan assets increase	December 31
	2016 2015 1.50% 1.90% - - 1.50% 1.90%

24. EQUITY

• a. Share capital

Ordinary shares

Numbers of shares authorized (in thousands) Share authorized Numbers of shares issued and fully paid (in thousands) Shares issued		December 31	December 31
		2016 6,550,000 $ 65,500,000 3,615,354 $ 36,153,535	2015 6,550,000 $ 65,500,000 3,617,849 $ 36,178,489

Fully paid ordinary shares, which have a par value of $10, carry one vote per share and carry a right to dividends.

On March 6, 2017, the Company’s board of directors approved the reduction of capital for improving the financial structure. The amount of reduction would be $18,651,070 thousand (1,865,107 thousand shares), and the percentage of reduction would be approximately 51% of the share capital. After the reduction, the paid-in capital would be $18,069,567 thousand (1,806,957 thousand shares). The proposal is subject to the resolution in the shareholders’ meeting expected to be held on May 26, 2017, and becomes effective after approval of the FSC.

A total of 864,704 thousand shares and 650,000 thousand shares of the Company’s authorized shares were reserved for the issuance of convertible bonds and employee share options.

• 48 -

b. Capital surplus

May be used to offset a deficit, distributed as cash dividends, or transferred to share capital (1) Issuance of common shares Donations Treasury share transactions May be used to offset a deficit only Changes in percentage of ownership interest in subsidiaries (2) Treasury share transactions May not be used for any purpose Employee restricted shares		December 31	December 31
		2016 $ 186,269 37 6,422 $ 192,728 $ 4,262 20,080 $ 24,342 $ 123,643	2015 $ 285,217 37 6,422 $ 291,676 $ 1,251 20,080 $ 21,331 $ (258,071)

• 1) Such capital surplus 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 paid-in capital and once a year).

• 2) Such capital surplus arises from changes in capital surplus of subsidiaries accounted for by using the equity method.

• c. Retained earnings and dividend policy

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 shareholders held their regular meeting on June 18, 2015 and, in that meeting, had resolved amendments to the Company’s Articles of Incorporation (the Articles), particularly the amendment to the policy on dividend distribution. In accordance with the Order No. 1040247800 issued by the Ministry of Economic Affairs, amendments to the Company’s Articles of Incorporation had been proposed by the Company’s board of directors on March 6, 2017 and are subject to the resolution of the shareholders in their meeting to be held on May 26, 2017. Due to the net loss for the years ended December 31, 2016 and 2015, there was no accrual for bonus to employees and remuneration to directors.

The Company’s Articles of Incorporation amended on June 18, 2015 stipulate that any profit should be used first to cover income tax and accumulated deficit and then make appropriation for legal reserve with 10% of the remaining amount (until the amount of the legal reserve equals the amount of the Company’s paid-in capital) after which the rest can be appropriated to special reserve in accordance with the law. The remaining amount will be distributed in the following order:

• 1) Employees’ bonus - 15%;

• 2) Directors’ remuneration - 2%;

• 3) Shareholders’ dividends - any remaining amount will be added to the undistributed earnings from previous years.

• 49 -

The Company is classified as capital intensive industry. In accordance with the long-term financial program of the company, the above shareholders’ dividends can retain as undistributed earnings, and distribute in future, as determined by the shareholders at Annual General Meeting.

Distributions take the form of cash dividend as the first choice. Nevertheless, it still depends on the Company’s financial, sales or operating condition. The Company’s Articles of Incorporation provide that no more than 50% of the current year’s total amount of distributable earnings can be distributed in the form of stock dividend.

Appropriation of earnings to legal reserve shall be made until the legal reserve equals the Company’s paid-in 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 paid-in capital, the excess may be transferred to capital or distributed in cash.

Except for non-ROC resident shareholders, all shareholders receiving the dividends are allowed a tax credit equal to their proportionate share of the income tax paid by the Company.

Information on the employees’ compensation and remuneration to directors and supervisors for 2017 and 2016 resolved by the Company’s board of directors in 2016, and on the bonus to employees and remuneration to directors and supervisors for 2015 resolved by the Company’s shareholders’ meeting in 2016 is available on the Market Observation Post System website of the Taiwan Stock Exchange.

• d. Others equity items

• 1) Exchange differences on translating the financial statements of foreign operations

Balance at January 1 Exchange differences arising on translating the financial statements of foreign operations Balance at December 31 Unrealized gain (loss) on available-for-sale financial assets Balance at January 1 Unrealized gain (loss) arising on revaluation of available-for-sale financial assets Balance at December 31	For the Year Ended	For the Year Ended	December 31
	2016 $ 48,923 (57,488) $ (8,565) For the Year Ended		2015 $ 27,223 21,700 $ 48,923 December 31
		2016 $ 871,368 85,406 $ 956,774	2015 $ 917,437 (46,069) $ 871,368

2) Unrealized gain (loss) on available-for-sale financial assets

• 50 -

3) Employee unearned benefit

In the meeting of shareholders on June 18, 2014 and June 16, 2016, the shareholders approved a restricted share plan for employees. Refer to Note 29 for the information of restricted shares issued.

Balance at January 1 Granted Share-based payment expenses recognized Adjustment for change of turnover rate Balance at December 31	For the Year Ended	For the Year Ended	December 31
		2016 $ (263,407) (256,420) 213,653 (784) $ (306,958)	2015 $ (209,813) (376,167) 332,487 (9,914) $ (263,407)

e. Non-controlling interests

Balance at January 1 Attributable to non-controlling interests: Share of loss for the year Exchange difference arising on translation of foreign entities Non-controlling interest relating to outstanding vested share options held by the employees of subsidiaries Non-controlling interest arising from acquisition at a percentage different from its earlier ownership percentage of subsidiaries (Note 30) Balance at December 31	For the Year Ended December 31	For the Year Ended December 31	For the Year Ended December 31
		2016 $ 8,763 (3,782) (1,129) (2,166) - $ 1,686	2015 $ 13,101 (8,272) (42) (555) 4,531 $ 8,763

• f. Treasury shares

By the years ended of December 31, 2016 and 2015, the Company’s shares held by its subsidiaries were as follows:

		Number of
		Shares Held	Carrying
	Name of Subsidiary	(In Thousands)	Amount	Market Price
December	31, 2016
Hui Ying		3,899	$ 159,061	$	18,054
December	31, 2015
Hui Ying		3,899	$ 159,061	$	18,639

The company’s shares held by subsidiaries are regarded as treasury shares; shareholder’s rights are retained, except the rights to participate in any share issuance for cash and to vote.

• 51 -

25. REVENUE

Revenue from the sale of goods Royalty income and others	For the Year Ended December 31	For the Year Ended December 31	For the Year Ended December 31
		2016 $ 24,106,626 18,347 $ 24,124,973	2015 $ 20,905,341 22,429 $ 20,927,770

The analysis of the Group’s revenue and main products was disclosed in Note 39.

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

• a. Other income

Dividend income Interest income Intellectual property rights income Others	**For the Year Ended December 31 **	**For the Year Ended December 31 **	**For the Year Ended December 31 **
		2016 $ 97,030 19,900 - 47,323 $ 164,253	2015 $ 113,853 29,641 951,300 44,296 $ 1,139,090

• b. Other gains and losses

Net foreign exchange gains Net gain (loss) arising on financial assets at FVTPL Gain on disposal of investments Impairment losses Others	**For the Year Ended **	**For the Year Ended **	**December 31 **
		2016 $ 35,353 31,809 - (12,869) (16,183) $ 38,110	2015 $ 127,560 (8,376) 7,491 (99,009) (16,324) $ 11,342

c. Finance costs

Interest on loans Others interest expense Less: Amounts included in the cost of qualifying assets	For the Year Ended	For the Year Ended	December 31
		2016 $ 302,381 3,989 2,226 $ 304,144	2015 $ 308,768 10 7,559 $ 301,219

• 52 -

Information about capitalized interest was as follows:

Capitalized interest Capitalization rate d. Depreciation and amortization Property, plant and equipment Intangible assets An analysis of depreciation by function Operating costs Operating expenses An analysis of amortization by function Operating costs Selling and marking expenses General and administration expenses Research and development expenses e. Employee benefits expense Post-employment benefits (Note 23) Defined contribution plans Defined benefit plans Share-based payments Equity-settled Other employee benefits Total employee benefits expense An analysis of employee benefits expense by function Operating costs Operating expenses	For the Year Ended December 31	For the Year Ended December 31	For the Year Ended December 31
	2016 2015 $ 2,226 $ 7,559 1.08% 1.66% For the Year Ended December 31
	2016 2015 $ 1,956,199 $ 5,722,078 85,477 178,988 $ 2,041,676 $ 5,901,066 $ 1,543,863 $ 4,936,331 412,336 785,747 $ 1,956,199 $ 5,722,078 $ 50,190 $ 105,456 539 594 8,961 24,066 25,787 48,872 $ 85,477 $ 178,988 For the Year Ended December 31
		2016 $ 244,680 38,369 283,049 213,505 5,413,729 $ 5,910,283 $ 2,588,863 3,321,420 $ 5,910,283	2015 $ 246,468 40,692 287,160 342,951 5,610,637 $ 6,240,748 $ 2,735,290 3,505,458 $ 6,240,748

• 53 -

27. INCOME TAXES RELATING TO CONTINUING OPERATIONS

a. Major components of income tax expense (benefit) recognized in profit or loss

Current tax In respect of the current year Adjustments for prior years Deferred tax In respect of the current year Income tax (benefit) expense recognized in profit or loss	**For the Year Ended **	**For the Year Ended **	**December 31 **
		2016 $ 8,606 (145,239) (87,626) $ (224,259)	2015 $ 12,109 1 2,948 $ 15,058

A reconciliation of accounting loss and income tax expenses were as follows:

Loss before tax from continuing operations Income tax expense calculated at the statutory rate Nondeductible expenses in determining taxable income Unrecognized deductible temporary differences Unrecognized loss carryforwards Adjustments for prior years’ tax Income tax (benefit) expense recognized in profit or loss	For the Year Ended December 31	For the Year Ended December 31	For the Year Ended December 31
		2016 $ (471,054) $ (113,687) 37,308 (566,667) 564,026 (145,239) $ (224,259)	2015 $ (4,180,883) $ (785,684) 16,930 250,516 533,295 1 $ 15,058

The applicable tax rate used above is the corporate tax rate of 17% payable by the Group in the ROC, while the applicable tax rate used by subsidiaries in China is 25%. Tax rates used by other group entities operating in other jurisdictions are based on the tax laws in those jurisdictions.

• b. Current tax assets and liabilities

Current tax assets Tax refund receivable Current tax liabilities Income tax payable		December 31	December 31
		2016 $ 3,656 $ -	2015 $ 7,985 $ 183,212

c. Deferred tax assets and liabilities

The Group offset certain deferred tax assets and deferred tax liabilities which met the offset criteria.

• 54 -

The movements of deferred tax assets and deferred tax liabilities were as follows:

For the year ended December 31, 2016

Deferred tax assets Temporary differences Unrealized expense and losses Loss carryforwards For the year ended December 31, 2015 Deferred tax assets Temporary differences Unrealized expense and losses Write-down of inventories Loss carryforwards	Opening Balance Recognized in Profit or Loss Closing Balance $ 3,618 $ 400 $ 4,018 3,618 400 4,018 905,612 87,226 992,838 $ 909,230 $ 87,626 $ 996,856 Opening Balance Recognized in Profit or Loss Closing Balance $ 5,806 $ (2,188) $ 3,618 760 (760) - 6,566 (2,948) 3,618 905,612 - 905,612 $ 912,178 $ (2,948) $ 909,230

d. Deductible temporary differences, unused loss carryforwards and unused investment credits for which no deferred assets have been recognized in the consolidated balance sheets

Loss carryforwards Expire in 2016 Expire in 2017 Expire in 2018 Expire in 2019 Expire in 2020 Expire in 2021 Expire in 2022 Expire in 2023 Expire in 2024 Expire in 2025 Expire in 2026 Investment credits Investment credits for stockholder Deductible temporary differences		December 31	December 31
		2016 $ - 200,436 278,215 826,960 230,345 293,819 389,967 5,746,539 6,547,124 2,923,522 3,747,496 $ 21,184,423 $ 29,698 $ 11,031,691	2015 $ 66,581 200,436 278,215 826,960 230,345 293,819 386,532 4,637,750 6,791,874 3,049,282 - $ 16,761,794 $ 160,890 $ 14,271,687

• 55 -

The unrecognized investment credit will expire in 2017.

• e. Information about unused investment credits, unused loss carry-forwards and tax-exemption

As of December 31, 2016, investment credits comprised of:

Law and Statutes Tax Credit Source Statute for Upgrading Industries Investment credits for stockholder	Remaining Creditable Amount Expiry Year $ 29,698 2017

Loss carryforwards as of December 31, 2016 comprised of:

Unused Amount $ 34,074 47,297 140,583 39,159 49,949 897,914 1,138,130 1,113,011 496,999 637,074 $ 4,594,190 Integrated income tax Accumulated deficit Generated before January 1, 1998 Generated on and after January 1, 1998 Shareholder-imputed credits accounts		Expiry Year 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 **December 31 **	Expiry Year 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 **December 31 **
		2016 $ - (18,651,070) $ (18,651,070) $ 473,568	2015 $ - (18,304,273) $ (18,304,273) $ 421,581

• f. Integrated income tax

No tax creditable ratios were calculated for accumulated deficit of 2016 and 2015.

• g. Income tax assessments

The Company’s tax returns through 2014 have been assessed by the tax authorities.

• 56 -

28. LOSS PER SHARE

LOSS PER SHARE
Basic and diluted loss per share	Unit: NT$ Per Share For the Year Ended December 31
		2016 $ (0.07)	2015 $ (1.19)

The loss and weighted average number of ordinary shares outstanding in the computation of loss per share from continuing operations were as follows:

Net Loss for the Year

Loss for the year attributable to owners of the Company

**For the Year Ended December 31 **	**For the Year Ended December 31 **	**For the Year Ended December 31 **
	2016 $ (243,013)	2015 $ (4,187,669)

Weighted average number of ordinary shares outstanding (in thousand shares):

Weighted average number of ordinary shares in computation of basic and diluted loss per share	**For the Year Ended December 31 **	**For the Year Ended December 31 **	**For the Year Ended December 31 **
		2016 3,554,296	2015 3,522,495

As disclosed in Note 29 to the financial statements in determining whether the share-based payments are potential ordinary shares. The aforementioned stock options were anti - dilutive and excluded from the computation of diluted loss per share for the year ended December 31, 2016 and 2015.

29. SHARE-BASED PAYMENT ARRANGEMENTS

• a. Employee share option plan

Mxtran

Approved by the Board of Directors of Mxtran on August 12, 2011, Mxtran was authorized to issue employee stock options for 2,344 thousand units. Each stock option may subscribe for one new share of common stock of Mxtran. The options are valid for six years and exercisable at certain percentages after the second anniversary from the grant date. For any subsequent changes in Mxtran’s capital surplus, the exercise price is adjusted accordingly.

Information on employee share options was as follows:

Balance at January 1 Options cancelled Balance at December 31	For the Year Ended December 31	For the Year Ended December 31
	2016 Number of Options (In Thousands) Weighted- average Exercise Price (NT$) 1,181 $ 10.00 (493) - 688 10.00	2015
		Number of Options (In Thousands) Weighted- average Exercise Price (NT$) 1,309 $ 10.00 (128) - 1,181 10.00

• 57 -

As of December 31, 2016, information about Mxtran’s outstanding and exercisable option was as follows:

Range of Exercise Price (NT$) $ 10.00	Options Issued on or After August 12, 2011 and Outstanding Number Outstanding Options (Thousand) Remaining Contractual Life (In Years) Exercise Price (NT$/Per Share) 688 0.61 $ 10.00	Options Exercisable
		Number Exercisable Options (Thousand) Exercise Price (NT$/Per Share) 688 $ 10.00

Options granted were priced using the Black-Scholes pricing model and the inputs to the model were as follows:

Grant-date share price (NT$)	$	3.23
Exercise price (NT$)		10.00
Expected volatility		44.82%
Expected life (years)		4.25 years
Expected dividend yield		-
Risk-free interest rate		1.11%

For the years ended December 31, 2016 and 2015, the compensation cost recognized both were NT$0. As of December 31, 2016 and 2015, the estimated percentages of forfeiture due to termination of employment over the remaining vesting period were 52.76% and 10.28%, respectively.

INFOMAX

Approved by the Board of Directors of INFOMAX on January 26, 2011, INFOMAX was authorized to issue employee stock options 1,346 thousand units. Each stock option may subscribe for one new share of common stock of INFOMAX. The options for the earlier of six years to the grant dates or two months to the date of application for share listing on the TSE or Taipei Exchange. The options granted are exercisable at certain percentages after the second anniversary from the grant date. For any subsequent changes in INFOMAX’s capital surplus, the exercise price is adjusted accordingly.

INFOMAX made capital deduction and increased its share capital by 109,797 thousand shares and 100,000 thousand shares on December 1, 2012 and April 3, 2013, respectively. Each stock option has subscribed for 0.3 common stock share and the exercise price was subject to adjustments for any change of capital structure.

Information on employee share option was as follows:

Balance at January 1 Options cancelled Balance at December 31	For the Year Ended December 31	For the Year Ended December 31
	2016 Number of Options (In Thousands) Weighted- average Exercise Price (NT$) 5,121 $ 31.87 (5,121) - - -	2015
		Number of Options (In Thousands) Weighted- average Exercise Price (NT$) 7,116 $ 31.87 (1,995) - 5,121 31.87

• 58 -

Options granted were priced using the Black-Scholes pricing model and the inputs to the model were as follows:

Grant-date share price (NT$)	$	5.17
Exercise price (NT$)		10.00
Expected volatility		37.82%
Expected life (years)		4.25 years
Expected dividend yield		-
Risk-free interest rate		0.91%

For the years ended December 31, 2016 and 2015, the compensation cost recognized both were NT$0. As of December 31, 2015, the estimated percentages of forfeiture due to termination of employment over the remaining vesting period was 3%.

• b. Restricted Stock Plan for employees

Information on Stock Plan for employees was as below:

		The Board of
		Directors			Issued
Approved	Grant Shares	Grant Shares			Shares
Date	(Thousand)	(Thousand)	Grant Date	Issued Date	(Thousand)	Fair	Value
2014/06/18	123,251	38,365	2014/08/28	2014/12/25	37,301	$	7.76
		62,213	2015/03/16	2015/07/22	61,279		6.82
2016/06/16	123,535	58,971	2016/10/25	2017/01/03	57,476		4.73

To meet the vesting conditions, an employee has to meet performance and other conditions over the vesting period, as follows:

• 1) Remain employed by the Company within one year after the grant date; and has a current year’s performance rating of “successful” (or higher) - 40% of restricted shares will be vested;

• 2) Remain employed by the Company within two years after the grant date; and has a current year’s performance rating of “successful” (or higher) - 30% of restricted shares will be vested;

• 3) Remain employed by the Company within three years after grant date; and has a current year’s performance rating of “successful” (or higher) - 30% of restricted shares will be vested.

In addition to the vesting conditions, the limitations are as follows:

• 1) Employees, except for inheritance, should not sell, transfer, pledge, donate or in any other way dispose of the shares.

• 2) The shares should be held in stock trust.

• 3) Except for the above two paragraphs, other rights of restricted stock plan for employees, including but not limited to, dividends, bonuses, the distribution rights of legal reserve and capital surplus, share options of cash capital and voting rights of shareholders, etc. are the same as the Group’s issued ordinary shares.

• 4) The dividends of restricted stock plan for employees are not restricted by existing conditions.

When employees do not reach the vesting conditions of restricted stock plan for employees during the year, the Company will recover and cancel the shares.

• 59 -

Information on restricted stock plan for employees was as follows:

Balance at January 1 Granted (Note 1) Vested Forfeited (Note 2 and 3) Balance at December 31	Number of Shares (In Thousands)	Number of Shares (In Thousands)	Number of Shares (In Thousands)
	**For the Year Ended **		**December 31 **
		2016 81,407 58,971 (34,213) (2,572) 103,593	2015 37,301 62,213 (14,280) (3,827) 81,407

Note 1: The number of granted shares in this year is not equal to the actual issued shares.

• Note 2: The forfeited shares in this period were consisted of 766 thousand shares not yet cancelled and 1,806 thousand shares already cancelled.

• Note 3: The forfeited shares in this period were consisted of 690 thousand shares not yet cancelled, 2,203 thousand shares already cancelled, and 934 thousand shares representing the difference between granted and issued on March 16, 2015.

For the years ended December 31, 2016 and 2015, the compensation cost recognized were NT$213,505 thousand and NT$342,951 thousand, respectively.

30. EQUITY TRANSACTIONS WITH NONCONTROLLING INTERESTS

On April 30, 2015, the Group subscribed for additional new shares of Mxtran at a percentage different from its existing ownership percentage, raising its continuing interest from 94.15% to 94.84%.

The above transactions were accounted for as equity transactions since the Group did not cease to have control over the subsidiary.

Cash consideration paid The proportionate share of the carrying amount of the net assets of the subsidiary Difference arising from equity transactions Line items adjusted for equity transaction Accumulated deficits	Mxtran $ (89,995) 85,464 $ (4,531) $ (4,531)

31. OPERATING LEASE ARRANGEMENTS

• a. The Group as lessee

Operating leases relate to leases of land, offices, employee dormitories and office equipment with lease terms between 1 and 50 years. The Group does not have a bargain purchase option to acquire the leased land, offices, employee dormitories and office equipment at the expiration of the lease periods.

• 60 -

The future minimum lease payments of non-cancellable operating lease commitments were as follows:

Not later than 1 year 1 - 5 years Later than 5 years		December 31	December 31
		2016 $ 90,998 317,109 850,651 $ 1,258,758	2015 $ 65,630 219,824 551,786 $ 837,240

The lease payments recognized in profit or loss for the current year were as follows:

Minimum lease payment	**For the Year Ended **	**For the Year Ended **	**December 31 **
		2016 $ 131,812	2015 $ 107,084

• b. The Group as lessor

Operating leases relate to the building owned by the Group with lease terms between 2 to 5 years. All operating lease contracts contain market review clauses in the event that the lessee exercises its option to renew. The lessee does not have a bargain purchase option to acquire the property at the expiration of the lease period.

The future minimum lease revenue from non-cancellable operating leases was as follows:

Not later than 1 year 1 - 5 years		**December **	**31 **
		2016 $ 1,219 580 $ 1,799	2015 $ 3,720 1,030 $ 4,750

32. CAPITAL MANAGEMENT

The Group manages its capital to ensure that the Group will be able to operate under the premises of going concerns and growth while maximizing the return to shareholders through the optimization of the debt and equity balance.

The Group’s strategy for managing the capital structure is to lay out the plan of product development and expand the market share considering the growth and the magnitude of industry and further developing an integral plan founded on the required capacity, capital outlay, and magnitude of assets in long-term development. Ultimately, considering the risk factors such as the fluctuation of the industry cycle and the life cycle of products, the Group determines the optimal capital structure by estimating the profitability of products, operating profit ratio, and cash flow based on the competitiveness of products.

The management of the Group periodically examines the capital structure and contemplates on the potential costs and risks involved while exerting different financial tools. In general, the Group implements prudent strategy of risk management.

• 61 -

33. FINANCIAL INSTRUMENTS

• a. Fair value of financial instruments that are not measured at fair value

The management considers that the carrying amounts of financial assets and financial liabilities recognized in the consolidated financial statements approximate their fair values or their fair values cannot be reliably measured.

• b. Fair value of financial instruments that are measured at fair value on a recurring basis

• 1) Fair value hierarchy

December 31, 2016 Available-for-sale financial assets Securities listed in ROC Securities listed in other countries December 31, 2015 Available-for-sale financial assets Securities listed in ROC Securities listed in other countries Financial liabilities at FVTPL Derivative financial instruments	Level 1 $ 909,258 374,444 $ 1,283,702 Level 1 $ 900,710 298,758 $ 1,199,468 $ -	Level 2 $ - - $ - Level 2 $ - - $ - $ 717	Level 3 $ - - $ - Level 3 $ - - $ - $ -	Total $ 909,258 374,444
				$ 1,283,702
				Total $ 900,710 298,758
				$ 1,199,468
				$ 717

There were no transfers between Level 1 and Level 2 for the years ended December 31, 2016 and 2015, respectively.

• 2) Valuation techniques and inputs applied for the purpose of measuring Level 2 fair value measurement

Financial Instruments Valuation Techniques and Inputs Derivatives - foreign currency Future cash flows are estimated based on observable forward forward contracts exchange rates at the end of the reporting period and contract forward rates.

• 62 -

• c. Categories of financial instruments

Financial assets Loans and receivables (i) Available-for-sale financial assets (ii) Financial liabilities Fair value through profit or loss (FVTPL) Held for trading Measured at amortized cost (iii)	December 31
	2016 2015 $ 10,303,571 $ 9,133,505 1,377,032 1,293,419 - 717 15,394,707 17,343,989

• i) The balances included loans and receivables measured at amortized cost, which comprise cash and cash equivalents, notes receivable and trade receivables (including receivables from related parties), other receivables and other financial assets.

• ii) The balances included the carrying amount of available-for-sale financial assets measured at cost.

• iii) The balances included financial liabilities measured at amortized cost, which comprise short-term loans, notes payable and trade payables (including payables to related parties), other payables (including other payables to related parties), payable for purchase of equipment and long-term loans (including current portion).

• d. Financial risk management objectives and policies

The Group manages its exposure to risks relating to the operations through market risk, credit risk, and liquidity risk with the objective to reduce the potentially adverse effects the market uncertainties may have on its financial performance.

The plans for material treasury activities are reviewed by management in accordance with procedures required by relevant regulations or internal controls. During the implementation of such plans, the Group must comply with certain treasury procedures that provide guiding principles for overall financial risk management.

1) Market risk

The Group’s activities exposed it primarily to the financial risks of changes in foreign currency exchange rates (see (a) below), interest rates (see (b) below), and other price risk (see (c) below).

• a) Foreign currency risk

The Group had foreign currency sales and purchases, which exposed the Group to foreign currency risk. Exchange rate exposures were managed within approved policy parameters utilizing forward foreign exchange contracts.

Sensitivity analysis

The Group was mainly exposed to the USD and JPY.

Sensitivity analysis of rate is for the transactions in currencies other than the entity’s functional currency (foreign currencies) which are recognized at the rates of exchange prevailing at the end of each reporting period.

• 63 -

The following table details the Group’s sensitivity to a 3% and 10% increase in New Taiwan dollars (the functional currency) against the relevant foreign currencies, respectively. The sensitivity rates used are 3% and 10% when reporting foreign currency risk internally to key management personnel.

Pre-tax loss increase		Currency USD Impact For the Year Ended December 31 2016 2015 $ 46,395 $ 24,536		Currency JPY Impact	Currency JPY Impact
				For the Year Ended December 31
		2016 $ 46,395		2016 $ 64,580	2015 $ 31,716

b) Interest rate risk

The Group was exposed to interest rate risk because entities in the Group borrowed funds at both fixed and floating interest rates. The risk is managed by the Group by maintaining an appropriate mix of fixed and floating rate borrowings.

The carrying amounts of the Group’s financial assets and financial liabilities with exposure to interest rates at the end of the reporting period were as follows:

Fair value interest rate risk Financial assets Financial liabilities Cash flow interest rate risk Financial assets Financial liabilities Sensitivity analysis	**December 31 **
	2016 2015 $ 2,483,341 $ 2,636,746 400,000 1,027,786 4,023,604 3,095,509 9,937,785 13,097,518

Sensitivity analysis of interest is calculated based on the financial liabilities exposed to cash flow interest rate risk at the end of each reporting period.

If interest rates had been 50 basis points higher/lower, the Group’s pre-tax loss for the years ended December 31, 2016 and 2015 would increase/decrease by $49,689 thousand and $65,488 thousand, respectively.

c) Other price risk

The Group was exposed to equity price risk through its investments in listed equity securities. Equity investments are held for strategic rather than trading purposes. The Group does not actively trade these investments.

Sensitivity analysis

Sensitivity analysis of equity price is calculated based on the fair values of available-for-sale investments at the end of each reporting period.

If equity prices had been 10% higher/lower, equity for the years ended December 31, 2016 and 2015 would have increase/decrease by $128,370 thousand and $119,947 thousand, respectively, as a result of the changes in fair value of available-for-sale investments.

• 64 -

2) Credit risk

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group’s exposure to credit risk mainly arises from trade receivables - operating, bank deposits, and other financial instruments. Credit risk is managed separately for business related and financial related exposures.

Business related credit risk

In order to maintain the credit quality of trade receivables, the Group has established procedures to monitor and limit exposure to credit risk on trade receivables.

Credit evaluation is performed in the consideration of the relevant factors which may affects the customer’s paying ability such as financial condition, external and internal credit scoring, historical experience, and economic conditions. The Group holds some of the credit enhancements such as prepayments and collateral to mitigate its credit risks.

Trade receivables consisted of a large number of customers, spread across diverse industries and geographical areas. Ongoing credit evaluation is performed on the financial condition of trade receivables and, where appropriate, credit guarantee insurance cover is purchased.

As of December 31, 2016 and 2015, the Group’s ten largest customers both accounted for 48% of total trade receivables (including receivables from related parties). The Group believed the concentration of credit risk was relatively insignificant for the remaining trade receivables.

Financial credit risk

The Group’s exposure to financial credit risk which pertained to bank deposits and other financial instruments were evaluated and monitored by Corporate Treasury function. The Group only deals with creditworthy counterparties and banks so that no significant credit risk was identified.

• 3) Liquidity risk

The objective of liquidity risk management is to ensure the Group has sufficient liquidity to fund its business requirements of cash and cash equivalents and the unused of financing facilities associated with existing operations.

The Group relies on bank borrowings as a significant source of liquidity. As of December 31, 2016 and 2015, the Group had available unutilized overdraft and short-term bank loan facilities of approximately $3,097,404 thousand and $2,504,580 thousand, respectively.

Liquidity and interest rate risk tables for non-derivative financial liabilities

The Group’s remaining contractual maturity for its non-derivative financial liabilities had been drawn up based on the undiscounted cash flows (included principal and interest) of financial liabilities from the earliest date on which the Group can be required to pay. Specifically, bank loans with a repayment on demand clause were included in the earliest time band regardless of the probability of the banks choosing to exercise their rights. The maturity dates for other non-derivative financial liabilities were based on the agreed repayment dates.

To the extent that interest flows are floating rate, the undiscounted amount was derived from the expected borrowing interest rate at the end of the reporting period.

• 65 -

December 31, 2016

On Demand or Less than 1 Year Non-derivative financial liabilities Non-interest bearing $ 5,078,287 Variable interest rate liabilities 4,472,702 Fixed interest rate liabilities 400,034 $ 9,951,023 December 31, 2015 On Demand or Less than 1 Year Non-derivative financial liabilities Non-interest bearing $ 3,258,187 Variable interest rate liabilities 5,458,910 Fixed interest rate liabilities 1,029,375 $ 9,746,472	1-3 Years $ - 5,679,701 - $ 5,679,701 1-3 Years $ - 8,002,062 - $ 8,002,062	3-5 Years $ - 15,744 - $ 15,744 3-5 Years $ - 86,192 - $ 86,192	5+ Years $ - - - $ - 5+ Years $ - - - $ -	Total $ 5,078,287 10,168,147 400,034
				$ 15,646,468
				Total $ 3,258,187 13,547,164 1,029,375
				$ 17,834,726

The amounts included above for variable interest rate instruments for both non-derivative financial assets and liabilities was subject to change if changes in variable interest rates were to differ from those estimates of interest rates determined at the end of the reporting period.

Liquidity and interest risk rate tables for derivative financial liabilities

The following table detailed the Group’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. When the amount payable or receivable is not fixed, the amount disclosed has been determined by reference to the projected interest rates as illustrated by the yield curves at the end of the reporting period.

December 31, 2015

	On Demand or	On Demand or
		Less than			3	Months to
		1 Month	1-3	Months		1 Year		1-5 Years			5+ Years
Gross settled
Foreign exchange forward contracts
Inflows	$	360,937	$	-	$	-	$		-	$		-
Outflows		361,654		-		-			-			-

e. Transfers of financial assets

According to the contract of discounted trade receivables, if the trade receivables are not paid at maturity, the bank has the right to request the Group to pay the unsettled balance. As the Group has not transferred the significant risks and rewards relating to these trade receivables, it continues to recognize the full carrying amount of the receivables and has recognized the cash received on the transfer as a secured borrowing. As of December 31, 2016, the carrying amount of the trade receivables that has been transferred but not been derecognized amounted to $729,891 thousand. As the Group has not transferred the ownership of any of the trade receivables to the bank for cash proceeds, no corresponding liability has been recognized.

• 66 -

34. TRANSACTIONS WITH RELATED PARTIES

Balances and transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the Group and other related parties are disclosed below.

• a. Operating revenues

For the Year Ended December 31 Line Items Related Parties Categories 2016 2015 Sales Key management personnel $ 4,846,104 $ 3,056,579 Others 2,691 1,680 Associates 1,698 3,066 $ 4,850,493 $ 3,061,325 Sales prices for the related parties were not comparable to those for external customers as the Group was the sole provider of these customers. The sales terms for the related parties were between 30 to 60 days after monthly closing, similar to those with external customers. Purchases For the Year Ended December 31 Related Parties Categories 2016 2015 Key management personnel $ 1,217,272 $ 40,092	For the Year Ended December 31	For the Year Ended December 31	For the Year Ended December 31
		2016 $ 1,217,272	2015 $ 40,092

Sales prices for the related parties were not comparable to those for external customers as the Group was the sole provider of these customers. The sales terms for the related parties were between 30 to 60 days after monthly closing, similar to those with external customers.

• b. Purchases

Materials purchased from related parties were for manufacturing process. The payment term was 30 days after monthly closing after acceptance of materials, similar to those with external vendors.

• c. Trade receivables from related parties

Line Items Related Parties Categories Receivables from related Key management personnel parties, net Others Associates Other receivables Associates Others The Group is its major management authority		December 31	December 31
		2016 $ 540,738 185 21 $ 540,944 $ 303 97 - $ 400	2015 $ 396,937 44 93 $ 397,074 $ 327 32 2,388 $ 2,747

The outstanding trade receivables from related parties are unsecured. For the years ended December 31, 2016 and 2015, no impairment loss was recognized for trade receivables from related parties.

• 67 -

• d. Payables to related parties

Line Items Related Parties Categories Payables to related parties Key management personnel The Group is its major management authority Other payables to related Associates parties		December 31	December 31
		2016 $ 1,082,381 57,303 $ 1,139,684 $ -	2015 $ 15,574 11,557 $ 27,131 $ 355

The outstanding trade payables from related parties are unsecured and will be settled in cash.

• e. Other transactions with related parties

Line Items Related Parties Categories Manufacturing expense The Group is its major management authority Operating expense Others Key management personnel Associates Software and pattern revenue The Group is its major management authority Associates Key management personnel Rental revenue Associates	**For the Year Ended **	**For the Year Ended **	**December 31 **
		2016 $ 145,811 $ 11,765 2,430 303 $ 14,498 $ 1,951 719 4 $ 2,674 $ 4,309	2015 $ 190,551 $ 22,200 4,359 1,536 $ 28,095 $ 2,643 1,479 - $ 4,122 $ 6,427

The manufacturing expense of related parties were comparable to those with other vendors. The payment term was 75 days after monthly closing.

The Group leases offices to associates (rentals are classified under other gains and losses). The amount of lease payment was based on the office space leased by each related party and was collected on a monthly basis.

Under certain contracts, the Group authorized the above related parties to use the Group’s pattern and software. The specifically negotiated terms were not comparable to those with external customers.

• 68 -

• f. Compensation of key management personnel

Short-term benefits Post-employment benefits Share-based payments Other long-term employee benefits	For the Year Ended	For the Year Ended	December 31
		2016 $ 137,251 12,463 11,660 195 $ 161,569	2015 $ 127,553 17,286 32,099 387 $ 177,325

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

35. ASSETS PLEDGED AS COLLATERAL OR FOR SECURITY

The following assets were provided as collateral for bank borrowings, the tariff of imported raw materials guarantees, natural gas agreement, land lease agreement or the deposit for hiring foreign workers:

Property, plant and equipment, net Trade receivables Pledge deposits (classified as other financial assets - non-current)		December 31	December 31
		2016 $ 11,226,873 729,891 138,861 $ 12,095,625	2015 $ 12,527,602 781,982 139,970 $ 13,449,554

36. SIGNIFICANT CONTINGENT LIABILITIES AND UNRECOGNIZED COMMITMENTS

In addition to those disclosed in other notes, significant commitments and contingencies of the Group as of December 31, 2016 and 2015 were as follows:

• a. Unrecognized commitments are as follows:

Acquisition of property, plant and equipment		December 31	December 31
		2016 $ 686,864	2015 $ 339,954

• b. The Group entered into the phase-change memory technology development agreement with the IBM in January 2010, and the agreement is renewed every three years. Under the agreement, both parties have to share the related expenditures of the technology development. The term of the second agreement was from January 2013 to January 2016. As of December 31, 2016, the Group had made all the payment for the second agreement. In addition, the Group entered into another phase-change memory technology agreement with the IBM in January 2016, and the term of the agreement is from January 2016 to January 2019. As of December 31, 2016, the unrecognized commitment was US$5,450 thousand.

• 69 -

37. SIGNIFICANT ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCIES

The Group entities’ significant financial assets and liabilities denominated in foreign currencies aggregated by the foreign currencies other than functional currencies and the related exchange rates between foreign currencies and respective functional currencies were as follows:

December 31, 2016

Foreign Exchange Currencies Rate Financial assets Monetary items JPY $ 6,847,403 0.2756 USD 81,540 32.25 Financial liabilities Monetary items JPY 4,504,143 0.2756 USD 33,586 32.25 December 31, 2015 Foreign Exchange Currencies Rate Financial assets Monetary items JPY $ 1,841,746 0.2727 USD 79,343 32.825 Financial liabilities Monetary items JPY 678,724 0.2727 USD 43,352 32.825	Carrying Amount $ 1,887,144 2,629,665 $ 4,516,809 $ 1,241,342 1,083,149 $ 2,324,491 Carrying Amount $ 502,244 2,604,434 $ 3,106,678 $ 185,088 1,423,029 $ 1,608,117

For the years ended December 31, 2016 and 2015, realized and unrealized net foreign exchange gains were $35,353 thousand and $127,560 thousand, respectively. It is impractical to disclose net foreign exchange gains by each significant foreign currency due to the variety of the foreign currency transactions and functional currencies of the group entities.

• 70 -

38. SEPARATELY DISCLOSED ITEMS

Information about significant transactions and (b) information on investees:

• a. Financing provided to others: None

• b. Endorsements/guarantees provided: None

• c. Marketable securities held (excluding investment in subsidiaries, associates and joint ventures): Table 1 (attached)

• d. Marketable securities acquired and disposed at costs or prices at least NT$300 million or 20% of the paid-in capital: None

• e. Acquisition of individual real estate at costs of at least NT $300 million or 20% of the paid-in capital: None

• f. Disposal of individual real estate at prices of at least NT$300 million or 20% of the paid-in capital: None

• g. Total purchases from or sales to related parties amounting to at least NT$100 million or 20% of the paid-in capital: Table 2 (attached)

• h. Receivables from related parties amounting to at least NT$100 million or 20% of the paid-in capital: Table 3 (attached)

• i. Trading in derivative instruments: Please see Note 7

• j. Intercompany relationships and significant intercompany transactions: Table 4 (attached)

• k. Information on investees: Table 5 (attached)

• l. Information on investments in mainland China

• 1) Information on any investee company in mainland China, showing the name, principal business activities, paid-in capital, method of investment, inward and outward remittance of funds, investment gains or losses, carrying amount of the investment at the end of the period, repatriations of investment gains or losses, and limit on the amount of investment in the mainland China area: Table 6 (attached)

• 2) Any of the significant transactions with investee companies in mainland China, either directly or indirectly through a third area, and their prices, payment terms, and unrealized gains or losses: Table 4 (attached)

39. SEGMENT INFORMATION

Information reported to the chief operating decision maker for the purposes of resource allocation and assessment of segment performance focuses on the types of goods or services delivered or provided. Specifically, the Group’s reportable segments under IFRS 8: “Operating Segment” was as follows:

Memory products and wafer fabrication

IC design

• 71 -

The Group’s reportable segments were separated according to the nature of its business activities. There was no material differences between the accounting policies of the reportable segment and the accounting policies described in Note 4.

a. Segment revenues and results

The following was an analysis of the Group’s revenue and results from continuing operations by reportable segment.

b.	Segment Net Operating Revenue For the Year Ended December 31 2016 2015 Memory products and wafer fabrication $ 24,095,973 $ 20,909,766 IC design 29,000 18,004 Total $ 24,124,973 $ 20,927,770 Other income Other gains and losses Finance costs Share of loss of associates Loss before tax (continuing operations) Segment total assets and liabilities Segment assets Memory products and wafer fabrication IC design Consolidated total assets Segment liabilities Memory products and wafer fabrication IC design Consolidated total liabilities		Segment Net Operating Revenue	Segment Net Operating Revenue	Segment Net Operating Revenue	Segment Loss from Operations and Net Loss For the Year Ended December 31 2016 2015 $ (120,447) $ (4,600,530) (237,176) (403,246) (357,623) (5,003,776) 164,253 1,139,090 38,110 11,342 (304,144) (301,219) (11,650) (26,320) $ (471,054) $ (4,180,883) December 31	Segment Loss from Operations and Net Loss For the Year Ended December 31 2016 2015 $ (120,447) $ (4,600,530) (237,176) (403,246) (357,623) (5,003,776) 164,253 1,139,090 38,110 11,342 (304,144) (301,219) (11,650) (26,320) $ (471,054) $ (4,180,883) December 31	Segment Loss from Operations and Net Loss For the Year Ended December 31 2016 2015 $ (120,447) $ (4,600,530) (237,176) (403,246) (357,623) (5,003,776) 164,253 1,139,090 38,110 11,342 (304,144) (301,219) (11,650) (26,320) $ (471,054) $ (4,180,883) December 31
			For the Year Ended December 31				For the Year Ended December 31
				2015 $ 20,909,766 18,004 $ 20,927,770			2016 2015 $ (120,447) $ (4,600,530) (237,176) (403,246) (357,623) (5,003,776) 164,253 1,139,090 38,110 11,342 (304,144) (301,219) (11,650) (26,320) $ (471,054) $ (4,180,883) December 31
						$	2016 35,438,701 105,814 35,544,515 17,171,507 53,608 17,225,155	2015 $ 37,280,467 347,195 $ 37,627,662 $ 19,143,129 55,693 $ 19,198,822
						$
						$
						$

• 72 -

c. Geographical information

The Group operates in two principal geographical areas - Taiwan and China.

The Group’s net operating revenue from external customers by location of operations and information about its non-current assets by location of assets are detailed below.

Taiwan China Others		Revenue from External Customers Year Ended December 31 2016 2015 $ 19,092,274 $ 16,496,844 4,141,254 3,665,366 891,445 765,560 $ 24,124,973 $ 20,927,770		Non-current Assets	Non-current Assets
				December 31
		2016 $ 19,092,274 4,141,254 891,445 $ 24,124,973		2016 $ 15,013,177 224,083 313,396 $ 15,550,656	2015 $ 16,141,543 271,036 321,438 $ 16,734,017

Non-current assets exclude financial instruments and deferred tax assets.

• d. Information about major customers

Single customers contributed 10% or more to the Group’s revenue were as follows:

Customer A	For the Year Ended December 31	For the Year Ended December 31	For the Year Ended December 31
		2016 $ 4,846,104	2015 $ 3,056,579

Note: Revenue from Memory products and wafer fabrication.

• 73 -

TABLE 1

MACRONIX INTERNATIONAL CO., LTD. AND SUBSIDIARY

MARKETABLE SECURITIES HELD DECEMBER 31, 2016

(In Thousands of New Taiwan Dollars, Unless Stated Otherwise)

Holding Company Name	Type and Name of Marketable Securities	Relationship with the Holding Company	Financial Statement Account		December 31, 2016	December 31, 2016		Note
				Shares/Units (In Thousands)	Carrying Amount	Percentage of Ownership	Fair Value (Note 3)
The Company MXBVI Hui Ying	Stock Ardentec Corporation United Industrial Gases Co., Ltd. Aetas Technology Inc. Zowie Technology Co., Ltd. Quality Test System Inc. Honbond Venture Capital Co., Ltd. Stock Chipbond Technology Corporation Key ASIC Bhd Tower Semiconductor Ltd. Global Strategic Investment Fund (Cayman) Global Strategic Investment Fund (Samoa) Stock Macronix International Co., Ltd. Raio Technology Co., Ltd.	The Company serves as member of its board of directors None None None None None None None None None None The Company None	Available-for-sale financial assets - non-current Financial assets measured at cost - non-current Financial assets measured at cost - non-current Financial assets measured at cost - non-current Financial assets measured at cost - non-current Financial assets measured at cost - non-current Available-for-sale financial assets - non-current Available-for-sale financial assets - non-current Available-for-sale financial assets - non-current Financial assets measured at cost - non-current Financial assets measured at cost - non-current Available-for-sale financial assets - non-current Financial assets measured at cost - non-current	35,951,871 6,671,877 145,850 20,426 4,538,333 1,803,526 1,088,319 26,924,500 584,893 490,000 1,739,783 3,899,382 1,018,159	$ 859,250 58,500 - - - - 50,008 15,485 358,959 - 34,830 18,054 -	7.40% 3.06% 0.29% 0.18% 14.64% 15.00% 0.17% 3.20% 0.63% 2.52% 4.90% 0.11% 10.33%	$ 859,250 158,781 - - - - 50,008 15,485 358,959 16,036 28,393 18,054 24,770	Note 1 Note 2 - Note 2 - - Note 1 Note 1 Note 1 Note 2 Note 2 Note 1 Note 2

Note 1: The market value was based on the closing price as of December 31, 2016.

Note 2: The calculation is based upon the most recent financial statements available to the Company.

Note 3: Active Market is market value; and no Market is net value, which calculated by closing rate.

• 74 -

TABLE 2

MACRONIX INTERNATIONAL CO., LTD. AND SUBSIDIARY

TOTAL PURCHASES FROM OR SALES TO RELATED PARTIES AMOUNTING TO AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL FOR THE YEAR ENDED DECEMBER 31, 2016

(In Thousands of New Taiwan Dollars, Unless Stated Otherwise)

Buyer	Related Party	Relationship		Transaction Details	Transaction Details	Transaction Details	Abnormal Transaction	Abnormal Transaction	Notes/Accounts Receivable (Payable)	Notes/Accounts Receivable (Payable)	Note
			Purchase/ Sale	Amount	% to Total	Payment Terms	Unit Price	Payment Term	Ending Balance	% to Total
The Company MXHK MXA	MegaChips Corporation MXHK MXA MegaChips Corporation The Company The Company	Its subsidiary, Shun Ying Investment, is represented in MXIC’s board of directors Indirect subsidiary Subsidiary Its subsidiary, Shun Ying Investment, is represented in MXIC’s board of directors Indirect subsidiary Subsidiary	Sales Sales Sales Purchase Purchase Purchase	$ 4,846,104 3,870,476 789,479 1,217,272 US$ 120,478 US$ 24,553	20 16 3 22 100 100	30 days after monthly closing 45 days after monthly closing Net 60 days 30 days after monthly closing 45 days after monthly closing Net 60 days	Note 34 Note 34 Note 34 Note 34 No material difference No material difference	Note 34 Note 34 Note 34 Note 34 No material difference No material difference	$ 540,738 758,125 80,680 1,082,381 US$ 23,512 US$ 2,447	14 19 2 29 100 100	- - - - - -

• 75 -

TABLE 3

MACRONIX INTERNATIONAL CO., LTD. AND SUBSIDIARY

RECEIVABLES FROM RELATED PARTIES AMOUNTING TO AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL DECEMBER 31, 2016

(In Thousands of New Taiwan Dollars, Unless Stated Otherwise)

Company Name	Related Party	Relationship	Ending Balance	Turnover Rate	Overdue	Overdue	Amounts Received in Subsequent Period	Allowance for Impairment Loss
					Amount	**Action Taken **
The Company	MegaChips Corporation MXHK MXA	Its subsidiary, Shun Ying Investment, is represented in MXIC’s board of directors Indirect subsidiary Subsidiary	$ 540,738 758,125 80,680	10.34 times 6.05 times 11.62 times	$ - - -	- - -	JPY 1,807,073 thousand US$ 13,449 thousand US$ 1,741 thousand	$ - - -

• 76 -

TABLE 4

MACRONIX INTERNATIONAL CO., LTD. AND SUBSIDIARY

INTERCOMPANY RELATIONSHIPS AND SIGNIFICANT TRANSACTIONS FOR THE YEAR ENDED DECEMBER 31, 2016 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise)

Investee Company	Counterparty	Relationship (Note 1)	Transaction Details	Transaction Details
			Financial Statement Accounts	Amount	Payment Terms	% to Total Revenues or Assets
MXIC	MXHK	2	Sales	$ 3,870,476	Note 2	16
			Notes receivable and trade receivables	758,125		2
	MXE	2	Operatingexpenses	128,615		1
			Otherpayables	33,933		-
	MXA	1	Sales	789,479	Note 2	3
			Operatingexpenses	154,608		1
			Notes receivable and trade receivables	80,680		-
			Otherpayables	65,356		-
	MX Asia	2	Operatingexpenses	101,233		-
			Otherpayables	25,548		-
MXHK	MXm	1	Operatingexpenses	223,545		1

Note 1: 1. Transaction was between the parent company and subsidiaries.

1. Transaction was between the parent company and indirect subsidiaries.

Note 2: The sale price referred to the product price to end customer.

Note 3: The transaction terms with related parties were 30 to 60 days after monthly closing and were similar to those with third parties.

• 77 -

TABLE 5

MACRONIX INTERNATIONAL CO., LTD. AND SUBSIDIARY

INFORMATION ON INVESTEES FOR THE YEAR ENDED DECEMBER 31, 2016 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise)

Investor Company	Investee Company	Location	Main Businesses and Products	Original Investment Amount	Original Investment Amount	**Balance **	as of December 31, 2016	as of December 31, 2016	Net Income (Loss) of the Investee (Note 3)	Share of Profit (Loss)	Note
				December 31, 2016 (Note 1)	December 31, 2015 (Note 1)	Shares	%	Carrying Amount (Note 2)
The Company MXBVI Run Hong Hui Ying INFOMAX Infomax Samoa Mxtran Mxtran Samoa	MXA MXBVI Hui Ying Run Hong INFOMAX Mxtran MoDioTek NTTI MXE MPL MXHK MX Asia INFOMAX Mxtran MoDioTek MoDioTek Infomax Samoa Infomax HK Mxtran Samoa Mxtran HK	San Jose, California, U.S.A. Tortola, British Virgin Islands Taipei, Taiwan Taipei, Taiwan Hsinchu, Taiwan Hsinchu, Taiwan Hsinchu, Taiwan San Jose, California, U.S.A. Belgium Singapore Hong Kong Cayman Island Hsinchu, Taiwan Hsinchu, Taiwan Hsinchu, Taiwan Hsinchu, Taiwan Samoa Hong Kong Samoa Hong Kong	Sales and marketing Investment holding company Investment Investment Baseband chip, analog baseband chip, and power management chip Combi-SIM IC and the related service Wi-Fi video transmission IC and smart security systems IC design After-sales service After-sales service Sales and marketing Investment holding company Baseband chip, analog baseband chip, and power management chip Combi-SIM IC and the related service Wi-Fi video transmission IC and smart security systems Wi-Fi video transmission IC and smart security systems Investment holding company Investment holding company Investment holding company Investment holding company	$ 2,640 6,977,791 500,000 984,432 1,502,711 697,374 59,944 866,796 2,106 3,291 378,427 23,035 27,423 34,271 4,241 4,241 306,036 97,521 35,979 23,880	$ 2,640 6,977,791 500,000 984,432 1,502,711 697,374 59,944 858,641 2,106 3,291 378,427 23,035 27,423 34,271 4,241 4,241 292,997 97,521 35,979 23,880	100,000 212,048,000 - - 150,271,240 69,627,323 5,994,371 26,350,000 999 174,000 89,700,000 700,000 2,742,506 3,393,200 403,245 403,245 9,870,000 23,352,500 1,170,000 6,152,000	100.00 100.00 100.00 100.00 97.25 90.43 20.61 100.00 100.00 100.00 100.00 100.00 1.77 4.41 1.39 1.39 100.00 100.00 100.00 100.00	$ 104,045 1,706,950 23,642 14,456 31,532 17,558 - 312,230 97,749 17,323 507,499 55,284 574 856 - - 4,859 2,384 1,115 478	$ (57,172 ) 61,549 391 (5,913 ) (204,459 ) (34,461 ) (69,623 ) (8,016 ) 7,737 860 41,554 4,300 (204,459 ) (34,461 ) (69,623 ) (69,623 ) (17,301 ) (3,959 ) (15 ) (15 )	$ (57,172 ) 61,549 391 (5,913 ) (198,836 ) (31,163 ) (10,512 ) Note 4 Note 4 Note 4 Note 4 Note 4 Note 4 Note 4 Note 4 Note 4 Note 4 Note 4 Note 4 Note 4

Note 1: The foreign currency amount was converted into New Taiwan dollars at the historical exchange rate.

Note 2: The foreign currency amount was based on audited financial statements for the same reporting period; the amount was converted into New Taiwan dollars at the exchange rate on December 31, 2016

Note 3: The foreign currency amount was based on audited financial statements for the same reporting period; the amount was summed up with the conversion into New Taiwan dollars at the average monthly exchange rate for the year ended December 31, 2016.

Note 4: Under relevant regulations, no disclosure of investment gain (loss) is needed.

• 78 -

TABLE 6

MACRONIX INTERNATIONAL CO., LTD. AND SUBSIDIARY

INFORMATION ON INVESTMENT IN MAINLAND CHINA FOR THE YEAR ENDED DECEMBER 31, 2016 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise)

Investee Company	Main Businesses and Products	Main Businesses and Products	Paid-in Capital (Note 3)	Method of Investment	Accumulated Outward Remittance for Investment from Taiwan as of January 1, 2016 (Note 3)	Accumulated Outward Remittance for Investment from Taiwan as of January 1, 2016 (Note 3)	Remittance of Funds	Remittance of Funds	Accumulated Outward Remittance for Investment from Taiwan as of December 31, 2016 (Note 3)	Net Income (Loss) of the Investee	% Ownership for Direct or Indirect Investment (Note 4)	Investment Gain (Loss) (Note 5)	Carrying Amount as of December 31, 2016 (Note 6)	Accumulated Repatriation of Investment Income as of December 31, 2016
							Outward (Note 3)	Inward
MXm Infomax SU Maxtran Beijing	Development of integrated circuit system and software Software, rendering and technical service Technical support of Combi-SIM IC		$ 296,160 82,415 23,435	(Note 1) (Note 2) (Note 2)		$ 296,160 82,415 23,435	$ - - -	$ - - -	$ 296,160 82,415 23,435	$ 18,847 (3,845 ) (15 )	100.00 99.02 94.84	$ 18,847 (3,808 ) (14)	$ 351,215 1,667 7	$ - - -
Accumulated Outward Remittance for Investment in Mainland China as of December 31, 2016		Investment Amount Authorized by the Investment Commission, MOEA				Upper Limit on the Amounts of Investment Stipulated by Investment Commission, MOEA
$ 402,010 (Note 3)		$ 402,010 (Note 3)				$ 10,990,628

Note 1: The Company invested in a company located in Mainland China indirectly through the existing company in the third country.

Note 2: The Company invested in a company located in Mainland China indirectly through the investing company in the third country.

Note 3: The foreign currency amount was converted into New Taiwan dollars at the historical exchange rate.

Note 4: The percentage of ownership is based on the total holding percentage owned by the Company and its subsidiaries.

Note 5: The foreign currency amount was based on audited financial statements for the same reporting period; the amount was summed up with the conversion into New Taiwan dollars at the average monthly exchange rate for the year ended December 31, 2016.

Note 6: The foreign currency amount was based on audited financial statements for the same reporting period; the amount was converted into New Taiwan dollars at the exchange rate on December 31, 2016.

• 79 -