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Macronix Interim / Quarterly Report 2012

Jun 26, 2013

52013_rns_2013-06-26_172bc633-b148-42cf-bbaa-c3067a161e3a.pdf

Interim / Quarterly Report

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Macronix International Co., Ltd. and Subsidiaries

Consolidated Financial Statements for the Nine Months Ended September 30, 2012 and 2011

CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2012 AND 2011

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

ASSETS
CURRENT ASSETS
Cash and cash equivalents (Notes 4)
Financial assets at fair value through profit or loss - current (Notes 7 and 20)
Notes and accounts receivable, net (Notes 5)
Receivables from related parties, net (Notes 17)
Other receivables, net
Inventories (Notes 6)
Deferred income tax assets - current
Restricted assets - current (Note 18)
Other current assets (Note 19)
Total current assets
LONG-TERM INVESTMENTS (Notes 7, 8, 9 and 20)
Prepayments for investments
Financial assets at fair value through profit or loss - noncurrent
Available-for-sale financial assets - noncurrent
Financial assets carried at cost - noncurrent
Total long-term investments
PROPERTY, PLANT AND EQUIPMENT (Notes 10 and 18)
Cost
Land
Buildings and structures
Machinery equipment
Research and development equipment
Transportation equipment
Leasehold improvements
Miscellaneous equipment
Less: Accumulated depreciation
Construction in progress and prepayments for equipment
Net property, plant and equipment
INTANGIBLE ASSETS
Deferred charges, net
Software, net
Net intangible assets
OTHER ASSETS
Deferred income tax assets - noncurrent
Idle assets, net
Restricted assets - noncurrent (Note 18)
Other assets
Total other assets
TOTAL		 2012 2011
Amount
%
$ 19,303,525
30
10,728
-
3,194,061
5
1,378,424
2
189,568
-
7,033,697
11
371,674
-
44,514
-

557,689

1

32,083,880

49
29,295
-
-
-
932,684
2

104,501

-

1,066,480

2
598,076
1
22,126,753
34
77,021,136
118
6,059,590
9
31,256
-
25,009
-

1,127,708

2
106,989,528
164
77,288,665
118

1,507,448

2

31,208,311

48
55,863
-

298,919

-

354,782

-
134,070
-
280,734
1
165,248
-

76,089

-

656,141

1
$ 65,369,594
100		 Amount
%
$ 17,379,892
26
-
-
3,467,124
5
1,028,206
2
218,911
-
6,210,584
9
279,748
-
6,189
-

588,477

1

29,179,131

43
-
-
33,528
-
860,897
2

154,741

-

1,049,166

2
598,076
1
21,391,612
32
67,890,179
101
2,093,814
3
28,767
-
26,759
-

1,073,632

2
93,102,839
139
70,447,348
105

13,202,370

20

35,857,861

54
75,258
-

63,524

-

138,782

-
425,642
1
292,090
-
89,950
-

42,937

-

850,619

1
$ 67,075,559
100
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Short-term bank loans (Note 11)
Notes and accounts payable
Payables to related parties (Note 17)
Income tax payable
Accrued expenses
Accrued bonuses to employees, directors and supervisors (Notes 13)
Payables for equipment
Current portion of long-term bank loans (Notes 12, 18 and 20)
Other current liabilities
Total current liabilities
LONG-TERM LIABILITIES
Long-term bank loans, net of current portion (Notes 12, 18 and 20)
Long-term notes payable
Total long-term liabilities
OTHER LIABILITIES
Accrued pension cost
Others
Total other liabilities
Total liabilities
EQUITY ATTRIBUTABLE TO SHAREHOLDERS OF THE PARENT
(Notes 13, 14 and 15)
Capital stock, $10 par value
Authorized - 6,550,000 thousand shares
Issued - 3,521,369 thousand shares in 2012 and 3,382,456 thousand shares
in 2011
Capital surplus
Treasury stock transactions
Donation
Long-term investments
Employee stock options
Retained earnings
Legal capital reserve
Unappropriated earnings (accumulated deficit)
Other adjustments
Unrealized gains on financial instruments
Cumulative translation adjustments
Treasury stock (at cost) – 3,899 thousand shares in 2012 and 3,757 thousand
shares in 2011
Total equity attributable to shareholders of the parent
MINORITY INTERESTS
Total shareholders' equity
TOTAL		 2012 2011
Amount
%
$ 283,031
-
1,908,152
3
172,617
-
60,181
-
2,347,680
4
-
-
444,192
1
5,940,718
9

188,575

-

11,345,146

17
16,440,993
25

-

-

16,440,993

25
431,559
1

1,847

-

433,406

1

28,219,545

43
35,213,693
54
26,502
-
37
-
4,050
-
317,329
-
2,695,275
4
(1,441,298 )
(2)
491,412
1
(89,906 )
-

(142,365
)

-
37,074,729
57

75,320

-

37,150,049

57
$ 65,369,594
100		 Amount
%
$ 3,394,175
5
2,133,551
3
89,554
-
234,013
-
1,770,016
3
342,265
1
3,019,742
5
1,001,718
1

71,908

-

12,056,942

18
13,561,711
20

420

-

13,562,131

20
361,222
1

2,218

-

363,440

1

25,982,513

39
33,824,564
50
25,075
-
37
-
3,123
-
322,524
-
2,407,003
4
4,121,558
6
412,340
1
(16,318 )
-

(142,365
)

-
40,957,541
61

135,505

-

41,093,046

61
$ 67,075,559
100

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

  • 2 -

MACRONIX INTERNATIONAL CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (In Thousands of New Taiwan Dollars, Except Earnings (Loss) Per Share)

GROSS SALES
SALES RETURNS AND ALLOWANCES
NET SALES (Notes 17)
COST OF SALES (Notes 6 and 17)
GROSS PROFIT
OPERATING EXPENSES (Notes 17)
Sales and marketing
General and administrative
Research and development
Total operating expenses
INCOME (LOSS) FROM OPERATION
NON-OPERATING INCOME AND GAINS
Interest income (Note 20)
Dividend income
Gain on disposal of assets
Gain on disposal of financial instruments
Reversal of allowance for doubtful accounts
Valuation gain on financial assets (Notes 7)
Others (Notes 17)
Total non-operating income and gains
NON-OPERATING EXPENSES AND LOSSES
Interest expense (Notes 10 and 20)
Loss on disposal of assets
Foreign exchange losses, net
Valuation loss on financial assets (Notes 7)
Others
Total non-operating expenses and losses		 2012
Amount
%
$ 18,470,450

81,152
18,389,298
100

16,077,128
87

2,312,170
13
893,390
5
1,266,105
7

3,707,673
20

5,867,168
32

(3,554,998
)
(19
)
123,358
1
60,834
-
13,118
-
2,807
-
-
-
10,728
-

46,471

-

257,316

1
214,062
2
98,324
-
57,078
-
-
-

5,895

-

375,359

2		 2011




















Amount
%
$ 19,781,233

110,371
19,760,862
100

12,649,284
64

7,111,578
36
721,453
4
1,271,496
6

3,208,443
16

5,201,392
26

1,910,186
10
98,016
1
94,764
-
9,837
-
252
-
88,014
-
-
-

37,085

-

327,968

1
6,016
-
629
-
52,792
-
1,750
-

3,432

-

64,619

-

(Continued)

  • 3 -

MACRONIX INTERNATIONAL CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (In Thousands of New Taiwan Dollars, Except Earnings (Loss) Per Share)

INCOME (LOSS) BEFORE INCOME TAX
INCOME TAX EXPENSE
CONSOLIDATED NET INCOME (LOSS)
ATTRIBUTABLE TO:
Shareholders of the parent
Minority interests
CONSOLIDATED EARNINGS (LOSS) PER SHARE
(Note 16)
Basic
Diluted






Before
Income
Tax
$ (1.03
)

$ (1.03
)

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

(Concluded)

  • 4 -

MACRONIX INTERNATIONAL CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (In Thousands of New Taiwan Dollars)

CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) attributable to shareholders of the parent

Net loss attributable to minority interests
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation
Amortization
Provision (reversal of allowance) for doubtful accounts
Gain on disposal of financial instruments, net
Loss (gain) on disposal of assets, net
Valuation loss on financial assets, net
Deferred income taxes
Net changes in operating assets and liabilities:
Financial assets held for trading
Notes and accounts receivable
Receivables from related parties
Other receivables
Inventories
Other current assets
Long-term receivables
Notes and accounts payable
Payables to related parties
Income tax payable
Accrued expenses
Accrued bonuses to employees, directors and supervisors
Other current liabilities
Accrued pension cost

Net cash provided by operating activities

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of financial assets designated as at fair value
through profit or loss
Acquisition of available-for-sale financial assets
Proceeds from disposal of available-for-sale financial assets
Acquisition of financial assets carried at cost
Proceeds from return of capital by financial assets carried at cost
Acquisitions of property, plant and equipment
Proceeds from disposal of property, plant and equipment
Increase in intangible assets
Increase in restricted assets
Decrease in refundable deposits
Decrease (increase) in other assets

Net cash used in investing activities
 2012
$ (3,661,819)

(59,864)
5,757,369
134,179
49,533
(1,417)
85,206
-
47,454
(10,728)
(304,549)
(460,361)
(68,116)
(565,529)
(69,436)
(59,699)
(246,707)
90,373
(288,785)
158,497
(530,775)
102,819

71,325


168,970

39,258
(150,000)
150,229
(29,295)
48,795
(2,304,520)

18,840
(331,292)
(22,580)
1,896

(25,430
)


(2,604,099
)
 2011
$ 1,936,191
(108,099)
3,804,777
86,624
(88,014)
(252)
(9,208)
1,750
83,590
-
(969,857)
(381,427)
120,165
(2,224,449)
(67,084)
-
236,432
(3,580)
(430,953)
(196,038)
(806,951)
(32,349)

(3,364
)

947,904
-
(250,000)
250,252
-
42,000
(12,301,492)
21,369
(46,343)
(87,254)
916

6,468
(12,364,084
)

(Continued)

  • 5 -

MACRONIX INTERNATIONAL CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (In Thousands of New Taiwan Dollars)

CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term bank loans

Increase in long-term bank loans
Repayment of long-term bank loans
Increase (decrease) in guarantee deposits
Cash dividends
Proceeds from exercise of employee stock options
Increase in minority interests

Net cash provided by financing activities

EFFECT OF EXCHANGE RATE CHANGES

NET DECREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

CASH AND CASH EQUIVALENTS, END OF PERIOD

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
Interest paid (excluding capitalized interest)

Income tax paid

NON-CASH INVESTING AND FINANCING ACTIVITIES
Amounts reclassified from fixed assets to deferred assets

Current portion of long-term bank loans

INVESTING ACTIVITIES AFFECTING BOTH CASH AND
NON-CASH ITEMS
Acquisitions of property, plant and equipment

Net decrease (increase) in payables to contractors and equipment
suppliers

Cash paid
 2012
$ (1,517,457)

4,960,000
(184,621)
(1,562)
(1,286,981)
73,751

121


2,043,251


(31,694
)

(423,572)

19,727,097

$ 19,303,525

$ 219,714

$ 289,550

$ 25

$ 5,940,718

$ 1,872,879


431,641

$ 2,304,520
 2011
$ 588,095
12,350,000
(2,194,140)
229
(5,729,024)
188,156

1,071

5,204,387

39,228
(6,172,565)

23,552,457
$ 17,379,892
$ 5,012
$ 681,935
$ -
$ 1,001,718
$ 13,323,881

(1,022,389
)
$ 12,301,492

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

(Concluded)

  • 6 -

MACRONIX INTERNATIONAL CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (In Thousands of New Taiwan Dollars, Unless Specified Otherwise)

1. GENERAL

Macronix International Co., Ltd. (“MXIC”), a Republic of China (ROC) corporation, was incorporated in the Hsinchu Science Park (HSP), Taiwan on December 9, 1989. MXIC operates principally as a designer, manufacturer and supplier of integrated circuits and memory chips. MXIC also performs design, research and development, consultation, and trade of relevant products.

MXIC’s shares have been listed on the Taiwan Stock Exchange (TSE) since March 15, 1995. MXIC listed a portion of its shares on the NASDAQ Stock Market in the form of American Depositary Shares (ADSs) in May 1996 but delisted on October 29, 2007.

As of September 30, 2012 and 2011, MXIC and its subsidiaries had 5,545 and 5,356 employees, respectively.

2. SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements are presented in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, Financial Supervisory Commission Executive Yuan issued the regulation on November 15, 2007, and accounting principles generally accepted in the ROC. Except the accounting changes as note 3, all significant accounting policies are the same as consolidated financial statements in 2011.

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

The consolidated entities were as follows:

As of September 30, 2012, MXIC has direct and indirect majority ownership in the following subsidiaries: MXB Inc. (“MXB”), Run Hong Investment, Ltd. (“Run Hong”), Hui Ying Investment, Ltd. (“Hui Ying”), Magic Pixel Inc. (“MPI”), Mxtran Inc. (“Mxtran”), Infomax Communication Co., Ltd. (“INFOMAX”), MoDioTek Co., Ltd. (“MoDioTek”), MaxRise Inc. (“MaxRise”), Macronix America Inc. (“MXA”), Macronix (BVI) Co., Ltd. (“MXBVI”), Magic Pixel Inc. (“MPI Samoa”), Magic Pixel Holding Company Limited (“MPI HK”), Magic Pixel (Shen Zhen) Co., Ltd. (“MPI SZ”), 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. (“Infomax Samoa”), Infomax Holding Company Limited (“Infomax HK”), Infomax Communication (Suzhou) Co., Ltd. (“Infomax SU”), Mosatek Co., Ltd. (“Mosatek Samoa”), Mosatek (HK) Company Limited (“Mosatek HK”), Modiotek (Suzhou) Co., Ltd. (“Modiotek 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”).

  • 7 -

The following diagram presents the relationship and ownership percentage between MXIC and its consolidated subsidiaries as of September 30, 2012.

==> picture [470 x 212] intentionally omitted <==

----- Start of picture text -----

MXIC
50.00% 100% 100% 72.54% 88.15% 92.69% 70.88% 79.70% 100% 100%
MXB Run Hong Hui Ying MPI Mxtran INFOMAX MoDioTek MaxRise MXA MXBVI
4.84% 4.99% 4.99% 4.99% 4.99% 4.99%
100% 100% 100% 100% 100% 100% 100% 100% 100%
MPI Samoa Mxtran Samoa Infomax Samoa Mosatek Samoa NTTI MX Asia MPL MXE MXHK
100% 100% 100% 100%
100%
MPI HK Mxtran HK Infomax HK Mosatek HK
MXm
100% 100% 100% 100%
MPI SZ Maxtran Beijing Infomax SU Modiotek SU
----- End of picture text -----

The consolidated entities and the main operations of these subsidiaries were as follows:

Investor
Investees
Main Business
MXIC
MXB
Sales and marketing
MXIC
Run Hong
Investment company
MXIC
Hui Ying
Investment company
MXIC and Run Hong
MPI
Research, development, design, manufacturing and sales of
digital skill camera controller IC and flat panel display
controller IC
MXIC and Run Hong
Mxtran
Research, development, design, manufacturing and sale of
Combi-SIM IC
MXIC and Run Hong
INFOMAX
Research, development, design, manufacturing and sale of
baseband and analog chips
MXIC, Run Hong
and Hui Ying
MoDioTek
Research, development, design, manufacturing and sale of
mobile audio chips and solutions
MXIC and Run Hong
MaxRise
IC design, research, development, design, manufacturing
and sales of digital TV receivable chips
MXIC
MXA
Sales and marketing
MXIC
MXBVI
Investment company
MPI
MPI Samoa
Investment company
MPI Samoa
MPI HK
Investment company
MPI HK
MPI SU
Development, sales and design of application software,
system integration (except IC design). Sales of
application software and rendering of related technical
consultation and services
MPI HK
MPI SZ
Research, develop (except IC design) and sales of
application software and rendering of related technical
consultation and services
Mxtran
Mxtran Samoa
Investment company
Mxtran Samoa
Mxtran HK
Investment company
Mxtran HK
Maxtran Beijing
R&D on software and communication; sales of application;
Technical consultation; Technical services; Technical
training; Application software; Counseling on Business
management; Service of accounting and finance;
Hardware, software, and related products of computer;
Communication product; Electronic product;
Importation/Exportation for goods and technology;
Agent for Importation/Exportation
INFOMAX
Infomax Samoa
Investment company
Infomax Samoa
Infomax HK
Investment company		 Percentage of
Ownership at
September 30
2012
2011
Note
50.00%
50.00%
1
100.00%
100.00%
-
100.00%
100.00%
-
77.38%
35.65%
-
93.14%
93.14%
-
97.68%
97.68%
-
80.86%
80.86%
-
84.69%
84.69%
-
100.00%
100.00%
-
100.00%
100.00%
-
100.00%
100.00%
-
100.00%
100.00%
-
-
-
2
100.00%
100.00%
-
100.00%
100.00%
-
100.00%
100.00%
-
100.00%
100.00%
-
100.00%
100.00%
-
100.00%
100.00%
-

(Continued)

  • 8 -
Investor
Investees
Main Business
Infomax HK
Infomax SU
Research, develop, test software and sales of application
software and rendering of related technical consultation
and services
MoDioTek
Mosatek Samoa
Investment company
Mosatek Samoa
Mosatek HK
Investment company
Mosatek HK
Modiotek SU
Research, develop, design and sales of application software
and rendering of related technical consultation and
services
MXBVI
NTTI
IC design
MXBVI
MX Asia
Investment company
MXBVI
MPL
After-sale service
MXBVI
MXE
After-sale service
MXBVI
MXHK
Sales and marketing
MXHK
MXm
Design, development and testing of integrated circuit
system and software		 Percentage of
Ownership at
September 30
2012
2011
Note
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%
-

(Concluded)

  • Note 1: MXB is in the process of liquidation in 2011. As of September 30, 2012, the liquidation has not been completed and MXB’s revenue and expense before liquidation had been included in the consolidated financial statements of 2011.

  • Note 2: MPI SU had completed the liquidation in 2011 and its revenue and expenses before liquidation had been included in the consolidated financial statements.

MXIC together with its subsidiaries are hereinafter referred to collectively as the “Company.” Minority interests are presented as a separate component of shareholders’ equity.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of MXIC and all its direct and indirect subsidiaries and other investees over which MXIC has controlling interests. All significant intercompany balances and transactions have been eliminated upon consolidation.

3. ACCOUNTING CHANGES

Recognition and Measurement of Financial Instruments

On January 1, 2011, the Company prospectively adopted the newly revised Statement of Financial Accounting Standards (SFAS) No. 34, “Financial Instruments: Recognition and Measurement.” The main revisions include (1) finance lease receivables are now covered by SFAS No. 34; (2) the scope of the applicability of SFAS No. 34 to insurance contracts is amended; (3) loans and receivables originated by the Company are now covered by SFAS No. 34; (4) additional guidelines on impairment testing of financial assets carried at amortized cost when the debtor has financial difficulties and the terms of obligations have been modified; and (5) accounting treatment by a debtor for modifications in the terms of obligations. The adoption resulted in an increase of $34,271 thousand in net income and of $0.01 in basic EPS after income tax for the nine months ended September 30, 2011.

Operating Segments

On January 1, 2011, the Company adopted the newly issued SFAS No. 41, “Operating Segments.” This statement supersedes SFAS No. 20, “Segment Reporting.” The statement requires identification and disclosure of operating segments on the basis of how the Company’s chief operating decision maker regularly reviews information in order to allocate resources and assess performance. This newly issued SFAS No. 41 did not have significant effect on the Company’s disclosure of operating segments.

  • 9 -

4. CASH AND CASH EQUIVALENTS

Petty cash
Checking and savings accounts
Time deposits
Cash equivalents - repurchase agreements collateralized by bonds		 September 30 September 30


2012
$ 605

1,432,352
17,820,540

50,028

$ 19,303,525
 2011
$ 947
3,272,595
14,006,306

100,044
$ 17,379,892

5. NOTES AND ACCOUNTS RECEIVABLE

Notes receivable
Accounts receivable
Less:
Allowance for doubtful accounts
Allowance for sales returns and discounts
Movements of the allowance for doubtful accounts were as follows:
Balance, beginning of period
Reversal of provision for doubtful accounts
Translation adjustment
Balance, end of period		 September 30 September 30 September 30
2012
2011
$ 417
$ 6,935
3,207,456
3,529,350
18
55,789

13,794

13,372

3,193,644

3,460,189
$ 3,194,061
$ 3,467,124
Nine Months Ended September 30


2012
$ 18

-
-

$ 18
 2011
$ 139,397
(84,777)

1,169
$ 55,789

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

Balance, beginning of period
Provision (reversal of provision) for sales returns and discounts
Translation adjustment
Balance, end of period		 Nine Months Ended September 30 Nine Months Ended September 30 Nine Months Ended September 30
2012
$ 11,987
1,856

(49
)
$ 13,794		 2011
$ 14,455
(1,132)

49
$ 13,372
  • 10 -

6. INVENTORIES

Finished goods and merchandise
Work in process
Raw materials
Supplies and spare parts		 September 30 September 30


2012
$ 1,004,870

5,532,018
366,106
130,703

$ 7,033,697
 2011
$ 794,300
4,823,975
428,783

163,526
$ 6,210,584

The allowance for inventory losses as of September 30, 2012 and 2011 were $1,766,277 thousand and $771,813 thousand, respectively.

The cost of inventories recognized as cost of goods sold for the nine months ended September 30, 2012 and 2011 were $16,077,128 thousand and $12,649,284 thousand, respectively. The cost of goods sold for the nine months ended September 30, 2012 and 2011 included $1,088,493 thousand and $360,100 thousand write-downs of inventories, respectively.

7. FINANCIAL INSTRUMENTS AT FVTPL

Financial assets held for trading-current
Forward exchange contracts
Financial assets designated as at fair value through
profit or loss-noncurrent
Foreign publicly-traded convertible bonds		 September 30

2012
$ 10,728

$ -
 2011
$ -
$ 33,528

The company did not enter into any forward exchange contracts during the nine months ended September 30, 2011. The company entered into forward exchange contracts during the nine months ended September 30, 2012 to manage exposures due to exchange rate and interest rate fluctuations. The financial risk management objective of the Company is to minimize risks due to changes in fair value or cash flows.

Outstanding forward exchange contracts as of September 30, 2012 were as follows:

Contract Amount
Currency Maturity Date (In Thousands)
September 30, 2012
Sell JPY$/NT$ 2012.10 JPY2,000,000/NT$756,700
Sell US$/NT$ 2012.10 USD16,000/NT$479,724

Net gain on financial assets held for trading for the nine months ended September 30, 2012 was $12,119 thousand. Net loss on financial assets designated as at fair value through profit or loss for the nine months ended September 30, 2011 was $1,750 thousand.

  • 11 -

8. AVAILABLE-FOR-SALE FINANCIAL ASSETS

Publicly traded stocks
Foreign publicly traded stocks - US$6,227 thousand in 2012 and
US$6,930 thousand in 2011		 September 30 September 30


2012
$ 750,269

182,415

$ 932,684
 2011
$ 649,663

211,234
$ 860,897

9. FINANCIAL ASSETS CARRIED AT COST

Non-publicly traded stocks
Foreign non-publicly traded stocks - US$220 thousand in 2012 and
US$1,220 thousand in 2011		 September 30 September 30


2012
$ 98,056

6,445

$ 104,501
 2011
$ 117,556

37,185
$ 154,741

The above investments did not have quoted market prices in an active market and fair value could not be determined using established valuation techniques. Therefore, these equity securities were carried at cost.

10. PROPERTY, PLANT AND EQUIPMENT

Cost:
Land
Buildings and structures
Machinery equipment
Research and development
equipment
Transportation equipment
Leasehold improvements
Miscellaneous equipment
Construction in progress and
prepayments for
equipment
Accumulated depreciation:
Buildings and structures
Machinery equipment
Research and development
equipment
Transportation equipment
Leasehold improvements
Miscellaneous equipment		 Nine Months Ended Septrmber 30, 2012 Nine Months Ended Septrmber 30, 2012





Balance,
Beginning of
Period
$ 598,076

21,717,424
75,224,281
2,381,513
28,192
26,553
1,096,751

6,097,550

107,170,340

14,287,420

55,390,754
1,326,924
19,501
21,709

917,325


71,963,633

$ 35,206,707		 Additions
$ -

422,916
2,334,626
3,638,801
10,070
87
56,481

(4,590,102
)

$ 1,872,879

$ 914,087

4,198,011
567,490
2,611
2,113

73,057

$ 5,757,369
 Disposals
Reclassification
$ -
$ -

(4,431 )
-
(442,808 )
(94,963 )
(54,905 )
94,963
(6,935 )
-
(1,538 )
-
(22,364 )
(27 )

-

-

$ (532,981
)
$ (27
)

$ (4,431 )
$ -

(341,024 )
(3,423 )
(53,797 )
3,423
(6,442 )
-
(1,538 )
-

(21,703
)

2

$ (428,935
)
$ 2
 Translation
Adjustment
$ -

(9,156 )
-
(782 )
(71 )
(93 )
(3,133 )

-

$ (13,235
)

$ 583
-
385
67
552

1,813

$ 3,400

 Balance, End
of Period
$ 598,076
22,126,753
77,021,136
6,059,590
31,256
25,009
1,127,708

1,507,448
108,496,976
15,196,493
59,251,164
1,836,809
15,603
21,732

966,864

77,288,665
$ 31,208,311
  • 12 -
Cost:
Land
Buildings and structures
Machinery equipment
Research and development
equipment
Transportation equipment
Leased assets
Leasehold improvement
Miscellaneous equipment
Construction in progress and
prepayments for
equipment
Accumulated depreciation:
Buildings and structures
Machinery equipment
Research and development
equipment
Transportation equipment
Leased assets
Leasehold improvement
Miscellaneous equipment		 **Nine Months Ended ** September 30, 2011





Balance,
Beginning of
Year
$ 598,076

20,665,899
60,817,179
1,891,926
30,882
75,000
26,826
1,019,247

8,216,363


93,266,398

13,198,719

51,579,362
1,249,220
19,258
30,292
21,185

861,767


66,929,511

$ 26,336,887		 Additions
Disposals
$ -
$ -

735,417
(
26,629 )
7,174,475
(
185,208 )
337,330
( 46,092)

-
(
2,218 )
-
-
910
( 2,127)
89,742
(
38,905 )


4,986,007

-
$ 13,323,881
($ 301,179
)

$ 823,599
( $ 26,629 )

2,756,856
(
173,701 )
148,213
(
45,943 )

2,244
(
2,218 )
9,375
-
1,392
(
2,112 )

72,473
(
38,415
)
$ 3,804,777
($ 289,018
)
 Reclassification
$ -

-
83,733
(
90,750 )
-
-
-
(
547 )
-

($ 7,564)

$ -

76,049
(
81,966 )
-
-
-
2,962

($ 2,955)
 Translation
Adjustment
$ -

16,925
-
1,400
103
-
1,150
4,095

-

$ 23,673

$ 758
-
538
92
-
901

2,744

$ 5,033

 Balance, End
of Year
$ 598,076
21,391,612
67,890,179
2,093,814
28,767
75,000
26,759
1,073,632

13,202,370
106,305,209
13,996,447
54,238,566
1,270,062
19,376
39,667
21,366

901,531

70,447,348
$ 35,857,861

Information on interest capitalization is summarized as follows:

Total interests
Capitalized interests
Capitalization rate
11. SHORT-TERM BANK LOANS		 Nine Months Ended September 30
2012
2011
$ 243,454
$ 99,239
29,392
93,223
1.52%
1.44%
Letter of credit loan: US$3,698 thousand and JPY462,500
thousand, with interest rates ranged 0.82%-1.30% in 2012 and
US$71,046 thousand and JPY3,091,050 thousand, with interest
rates ranged 0.52%-2.25% in 2011.
LONG-TERM BANK LOANS
Repayable semi-annually from December 2012 to December 2015,
with annual floating interest which ranged 1.54%-1.57% in 2012
and 1.29%-1.53% in 2011		 September 30
2012
2011
$ 283,031
$ 3,394,175
September 30
2012
2011
$ 15,470,000
$ 9,400,000
(Continued)

12. LONG-TERM BANK LOANS

  • 13 -
Repayable semi-annually from March 2013 to September 2014, with
annual floating interest which ranged 1.81%-1.84% in 2012 and at
1.80% in 2011
Repayable according to an agreed loan payment term to maturity
date, with annual floating interest which ranged 1.54%-1.57% in
2012 and 1.35%-1.52% in 2011
Repayment of principal is 10% per quarter for three quarters from
December 2012 and 70% in September 2013, with annual floating
interest at 1.68% in 2012
Repayable according to loan payment term to agreed maturity date,
with annual floating interest at 1.83% in 2012 and 1.80% in 2011
Repayable quarterly from March 2013 to September 2014, with
annual floating interest at 1.65% in 2012 and 2011
Repayable quarterly from June 2013 to March 2015, with annual
floating interest at 1.62% in 2012
Repayable monthly from May 2003 to April 2016, with annual
floating interest at 1.84% in 2012 and ranged 1.62%-2.12% in
2011
Repayable quarterly from September 2014 to September 2015, with
annual floating interest which ranged 1.88%-2.00% in 2012 and at
2.00% in 2011
Repayable semi-annually from March 2012 to September 2014, with
annual floating interest which ranged 1.81%-1.84% in 2012 and at
1.80% in 2011
Less: Current portion		 September 30 September 30



2012
$ 1,600,000

1,500,000
1,000,000
800,000
500,000
400,000
245,044
600,000

266,667

22,381,711

5,940,718

$ 16,440,993
 2011
$ 1,600,000
1,500,000
-
800,000
500,000
-
313,429
50,000

400,000
14,563,429

1,001,718
$ 13,561,711
(Concluded)

For expansion of production capability and for long-term operation needs, MXIC made a Syndicated Loan of $18 billion for 5 years, with Taiwan Cooperative Commercial Bank and other 14 financial organizations in September 2010. The line of credit has been used $16.97 billion as of September 30, 2012.

The loan agreement requires the maintenance of certain financial ratios based on semi-annual and annual consolidated financial statements.

The details of long-term loans pledged as collateral are shown in Note 18.

13. SHAREHOLDERS’ EQUITY

Capital Surplus

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

The capital surplus from long-term investments may not be used for any purpose.

Retained Earnings Distribution and Dividends Policy

MXIC’s Articles of Incorporation provide that any profit after annual closing should be used first to cover

  • 14 -

income tax and accumulated deficit. Then appropriate for legal reserve 10% of the remaining amount (until the amount of the legal reserve equals the amount of MXIC’s capital stock) and appropriate for (or reverse) special reserve in accordance with law. Appropriation for remuneration to directors and supervisors should be made at 2% of the remaining amount. Any remaining amount will be added to the undistributed earnings from previous years and distributed in the following manner: (a) shareholders’ dividends - 85%; (b) employees’ bonus - 15%. Employees’ bonus will be distributed in the same form as the distribution of dividends to shareholders on a proportionate basis.

Distributions, except for the remuneration to directors and supervisors, may be made in the form of cash dividend or stock dividend, as determined by the shareholders at an Annual General Meeting. Both the shareholders’ bonus and employees’ bonus take the form of cash dividend as the first choice. Nevertheless, it still depends on MXIC’s financial, sales or operating condition. MXIC’s Articles of Incorporation provide that no more than 50% of the current year’s total amount of distributable earnings can be made in the form of stock dividend. Furthermore, with the approval of the shareholders at such meetings, the dividend and bonus may be held wholly or partially as retained earnings for distribution in future years.

Employees eligible to receive stock dividends may include employees of affiliated companies if they meet the criteria set by the board of directors.

Due to the net loss for the nine months ended September 30, 2012, there was no accrual for bonus to employees and remuneration to directors and supervisors. For the nine months ended September 30, 2011, the accrued bonus to employees was $307,424 thousand, and the accrued remuneration to directors and supervisors was $34,841 thousand. The bonus to employees represented 16% of net income. The remuneration to directors and supervisors was 1.8% of net income. Material differences between such estimated amounts and the amounts proposed by the board of directors in the following year are adjusted for in the current year. If the actual amounts subsequently resolved by the shareholders differ from the proposed amounts, the differences are recorded in the year of shareholders’ resolution as a change in accounting estimate. If a share bonus is resolved to be distributed to employees, the number of shares is determined by dividing the amount of the share bonus by the closing price (after considering the effect of cash and stock dividends) of the shares of the day immediately preceding the shareholders’ meeting.

MXIC no longer has supervisors since June 10, 2009. The required duties of supervisors are being fulfilled by the audit committee.

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

Under the Integrated Income Tax System that became effective on January 1, 1998, ROC resident shareholders are allowed a tax credit from their proportionate share in the income tax paid by MXIC on earnings generated since January 1, 1998.

The appropriations of earnings for 2011 and 2010 had been approved in the shareholders’ meeting on June 6, 2012 and June 10, 2011, respectively. The appropriations and dividends per share were as follows:

Legal capital reserve
Cash dividends
Stock dividends		 Appropriation of Earnings
For
Year 2010
$ 776,491
5,735,395
-
$ 6,511,886		 Dividends Per Share
(NT$)


For
Year 2011
$ 288,272

1,288,408

1,288,408

$ 2,865,088
 For
For
Year 2011
Year 2010
$0.38
$1.70
0.38
-
  • 15 -

The above appropriation of stock dividends of $1,288,408 thousand from 2011 earnings to paid-in capital will be adjusted when the outstanding shares at the ex-dividend date are increased due to exercise of stock options by the MXIC’s employees. The shareholders had authorized the chairman to adjust the cash and stock dividend per share when the outstanding shares at the ex-dividend date are increased. The above appropriation of stock dividends was approved by the Securities and Futures Bureau of Financial Supervisory Commission, Executive Yuan on June 19, 2012. The ex-dividend date was designated on July 18, 2012 by the chairman.

The bonus to employees and the remuneration to directors and supervisors for 2011 and 2010 were approved in the shareholders’ meetings on June 6, 2012 and June 10, 2011, respectively. The appropriations were as follows:

Amounts approved in shareholders’
meeting
Amounts recognized in respective
financial statements		 For Year 2011
Remuneration
to Directors
Bonus to
and
Employees
Supervisors
$ 454,732
$ 51,889

477,847

52,928
$ (23,115
)
$ (1,039
)		 For Year 2010




Remuneration
to Directors
Bonus to
and
Employees
Supervisors
$ 1,012,129
$ 139,768
1,008,689

140,527
$ 3,440
$ (759
)

The differences between the approved amounts of the bonus to employees and the remuneration to directors and supervisors and the accrual amounts reflected in the financial statements for the years ended December 31, 2011 and 2010 which were primarily due to changes in estimates (numbers of the outstanding shares and income tax expense) had been adjusted in profit and loss for the nine months ended September 30, 2012 and 2011, respectively.

Information about the appropriations of earnings is available on the Market Observation Post System website of the Taiwan Stock Exchange.

14. EMPLOYEE STOCK OPTION PLANS

MXIC

MXIC has three employee stock option plans (“2004 Plan”, “2005 Plan” and “2007 Plan”) approved by the R.O.C. Securities and Futures Bureau (SFB) to grant options up to 200,000 thousand units, 200,000 thousand units, and 120,000 thousand units, respectively. Each stock option may subscribe for one new share of common stock of MXIC. The options are valid for six years subsequent to the grant dates and vested at certain percentages subsequent to the second anniversary of the grant date. The options were granted at the exercise price equal to the higher of closing price of MXIC’s common shares listed on the TSE or MXIC’s net asset value per common share on the grant date. As stipulated in the plans, the exercise price and quantity are subject to adjustments for any changes in capital structure or cash dividends.

As of September 30, 2012, there were 227 thousand of employee stock options exercised for which 227 thousand common shares were issued but not yet officially registered with the Ministry of Economic Affairs, ROC.

  • 16 -

Information with respect to MXIC’s stock option plans was as follows:

Unit: Option Numbers in Thousand and NT$ Per Share

Nine months ended September
30, 2012
Balance, beginning of period
Options granted
Options exercised
Options cancelled
Balance, end of period
Nine months ended September
30, 2011
Balance, beginning of period
Options exercised
Options cancelled
Balance, end of period		 2007 Plan
Number of
Outstanding
Weighted-
Stock
average
Option
Exercise
Rights
Price
49,794
$9.50
1,556
8.80
(7,780)
9.48

(1,281
)
8.84
42,289
8.80
2007 Plan
Number of
Outstanding
Weighted-
Stock
average
Option
Exercise
Rights
Price
68,334
$10.50
(15,154)
10.47

(813
)
9.90
52,367
9.50		 2005 Plan
Number of
Outstanding
Weighted-
Stock
average
Option
Exercise
Rights
Price
37
$4.00
-
-
-
-

(37
)
4.00

-
-
2005 Plan
Number of
Outstanding
Weighted-
Stock
average
Option
Exercise
Rights
Price
19,521
$5.90
(8,553)
5.90
(10,931
)
4.20

37
4.00		 2004 Plan
Number of
Outstanding
Weighted-
Stock
average
Option
Exercise
Rights
Price
40
$7.78
(11)
7.60

(29
)
7.85

-
-

The number and exercise prices of outstanding options had been adjusted to reflect the stock dividends and the cancellation of common stock.

As of September 30, 2012, information about MXIC’s outstanding and exercisable option was as follows:

Exercise
Price
(NT$/Per
Share)
$ 8.80		 Options Issued on or After January 1, 2004
and Outstanding
Number
Outstanding
(Thousand)
Remaining
Contractual
Life (In Years)
Exercise Price
(NT$/Per
Share)
42,289
1.24
$ 8.80		 Options Exercisable
Number
Exercisable
(Thousand)
Exercise Price
(NT$/Per
Share)
42,289
$ 8.80

MoDioTek

Approved by the Board of Directors of MoDioTek on April 2, 2007, December 3, 2007, August 18, 2008 and December 11, 2008, MoDioTek was authorized to issue employee stock options for 1,500 thousand units, 579 thousand units, 671 thousand units and 40 thousand units, respectively. Each stock option may subscribe for one new share of new common stock of MoDioTek. The options are valid for six years subsequent to second anniversary of the grant date or the early of the first anniversary of the grant date or date of application for share listing on the TSE or GreTai Securities Market. As stipulated in the plans, the exercise price and quantity are subject to adjustments for any changes of capital structure or cash dividends.

  • 17 -

Information with respect to MoDioTek’s stock option plan is as follows:

Balance, beginning of period
Options cancelled
Balance, end of period		 Nine Months Ended September 30 Nine Months Ended September 30
2012
Number of
Outstanding
Stock Option
Rights
(Thousand)
Weighted-
average
Exercise Prices
(NT$/Per
Share)
2,040
$10.35

(51
)
10.38
1,989
10.35		 2011
Number of
Outstanding
Stock Option
Rights
(Thousand)
Weighted-
average
Exercise Prices
(NT$/Per
Share)
2,289
$10.35
(150
)
10.35
2,139
10.35

As of September 30, 2012, information about MoDioTek outstanding and exercisable option was as follows:

Exercise
Price
(NT$/Per
Share)
$10.00
10.00
11.40
11.40		 Options Issued on or After January 1, 2004 and
Outstanding
Number
Outstanding
(Thousand)
Remaining
Contractual
Life (In Years)
Exercise Price
(NT$/Per
Share)
1,096
0.50
$10.00
396
1.17
10.00
477
1.88
11.40

20
2.20
11.40
1,989		 Options Exercisable
Number
Exercisable
(Thousand)
Exercise Price
(NT$/Per
Share)
1,096
$10.00
396
10.00
477
11.40

20
11.40
1,989

Mxtran

Approved by the Board of Directors of Mxtran on April 2, 2007, December 21, 2007 and August 12, 2011, Mxtran was authorized to issue employee stock options for 600 thousand units, 625.6 thousand units and 2,344 thousand units, respectively. Each stock option may subscribe for one new share of new common stock of Mxtran. The options are valid for six years subsequent to the grant dates and vested at certain percentages subsequent to the second anniversary of the grant date. As stipulated in the plans, the exercise price and quantity are subject to adjustments for any changes of capital structure or cash dividends.

Mxtran cancelled and increased its share capital by 12,000 thousand shares and 20,000 thousand shares on March 5, 2009 and March 9, 2009, respectively. Each stock option has subscribed for 0.4 common stock share and the exercise price was subject to adjustments for any change of capital structure.

  • 18 -

Information with respect to Mxtran’s stock option plan is as follows:

Balance, beginning of period
Options granted
Options cancelled
Balance, end of period		 Nine Months Ended September 30 Nine Months Ended September 30
2012
Number of
Outstanding
Stock Option
Rights
(Thousand)
Weighted-
average
Exercise Prices
(NT$/Per
Share)
2,664
$10.31
-
-
(336
)
10.31
2,328
10.31		 2011
Number of
Outstanding
Stock Option
Rights
(Thousand)
Weighted-
average
Exercise Prices
(NT$/Per
Share)
1,078
$12.32
2,344
10.00
(189
)
12.32
3,233
10.64

As of September 30, 2012, information about Mxtran’s outstanding and exercisable option was as follows:

Options Issued on or After January 1, 2004 and

Options Issued on or After January 1, 2004 and
Exercise
Price
(NT$/Per
Share)
$12.07
12.55
10.00		 Outstanding
Number
Outstanding
(Thousand)
Weighted-
average
Remaining
Contractual
Life (In Years)
Weighted-
average
Exercise Price
(NT$/Per
Share)
144
0.52
$12.07
164
1.23
12.55
2,020
4.86
10.00
2,328		 Options Exercisable
Number
Exercisable
(Thousand)
Weighted-
average
Exercise Price
(NT$/Per
Share)
144
$12.07
164
12.55

-
10.00

308

Options granted during the nine months ended September 30, 2012 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 Expected dividend yield Risk-free interest rate 1.11%

For the nine months ended September 30, 2012 and 2011, the compensation cost recognized was $162 thousand and $181 thousand, respectively. As of September 30, 2012, the estimated percentage of forfeiture due to termination of employment over the remaining vesting period was 6%.

INFOMAX

Approved by the Board of Directors of INFOMAX on April 2, 2007, November 16, 2007, December 21, 2007, April 2, 2010 and January 26, 2011, INFOMAX was authorized to issue employee stock options for 2,577 thousand units, 423 thousand units, 1,910 thousand units, 8,654 thousand units and 1,346 thousand units, respectively. Each stock option may subscribe for one new share of new common stock of INFOMAX. The options authorized on April 2, 2007, November 16, 2007 and December 21, 2007 are valid for six years, eight years and eight years, respectively, subsequent to the grant dates. The options authorized on April 2, 2010 and January 26, 2011 are valid in the early of six years to the grant dates or two months to the date of application for share listing on the TSE or Gre-Tai Securities Market. As stipulated

  • 19 -

in the plans, the exercise price and quantity are subject to adjustments for any changes of capital structure or cash dividends.

Information with respect to INFOMAX’s stock option plan is as follows:

Balance, beginning of period
Options granted
Options cancelled
Balance, end of period		 Nine Months Ended September 30 Nine Months Ended September 30
2012
Number of
Outstanding
Stock Option
Rights
(Thousand)
Weighted-
average
Exercise Prices
(NT$/Per
Share)
10,943
$ 10.00
-
-
(1,039
)
10.00
9,904
10.00		 2011
Number of
Outstanding
Stock Option
Rights
(Thousand)
Weighted-
average
Exercise Prices
(NT$/Per
Share)
12,294
$ 10.00
1,346
10.00
(2,286
)
10.00
11,354
10.00

As of September 30, 2012, information about INFOMAX’s outstanding and exercisable option was as follows:

Options Issued on or After January 1, 2004 and

Options Issued on or After January 1, 2004 and
Exercise
Price
(NT$/Per
Share)
$10.00
10.00
10.00		 Outstanding
Number
Outstanding
(Thousand)
Weighted-
average
Remaining
Contractual
Life (In Years)
Weighted-
average
Exercise Price
(NT$/Per
Share)
1,780
0.51
$ 10.00
1,189
3.23
10.00
6,935
3.61
10.00
9,904		 Options Exercisable
Number
Exercisable
(Thousand)
Weighted-
average
Exercise Price
(NT$/Per
Share)
1,780
$ 10.00
1,189
10.00
3,069
10.00
6,038

Options granted during the nine months ended September 30, 2012 and 2011 were priced using the Black-Scholes pricing model and the inputs to the model were as follows:

Grant-date share price (NT$)
Exercise price (NT$)
Expected volatility
Expected life (years)
Expected dividend yield
Risk-free interest rate		 Nine Months Ended September 30
2012
2011
$5.17
$5.17
10.00
10.00
37.82%
37.82%
4.25
4.25
-
-
0.91%
0.91%

For the nine months ended September 30, 2012 and 2011, compensation costs recognized were $473,706 thousand and $1,434 thousand, respectively. As of September 30, 2012 and 2011, the estimated percentage of forfeiture due to termination of employment over the remaining vesting period were both 3%.

  • 20 -

MaxRise

Approved by the Board of Directors of MaxRise on January 12, 2007, April 18, 2007, November 16, 2007, December 21, 2007, August 14, 2008, April 15, 2009, May 5, 2010, and January 3, 2011, MaxRise was authorized to issue employee stock options for 1,160 thousand units, 230 thousand units, 110 thousand units, 1,350 thousand units, 780 thousand units, 225 thousand units, 863 thousand units and 2,007 thousand units, respectively. Each stock option may subscribe for one new share of new common stock of MaxRise. The options are valid for six years subsequent to the grant dates and vested at certain percentages subsequent to the second anniversary of the grant date. As stipulated in the plans, the exercise price and quantity are subject to adjustments for any changes of capital structure or cash dividends

Information with respect to MaxRise’s stock option plan is as follows:

Balance, beginning of period
Options granted
Options cancelled
Balance, end of period		 Nine Months Ended September 30 Nine Months Ended September 30
2012
Number of
Outstanding
Stock Option
Rights
(Thousand)
Weighted-
average
Exercise Prices
(NT$/Per
Share)
3,034
$ 10.70
-
-
(3,034
)
10.70

-
-		 2011
Number of
Outstanding
Stock Option
Rights
(Thousand)
Weighted-
average
Exercise Prices
(NT$/Per
Share)
1,455
$ 12.60
2,007
10.00
(198
)
12.54
3,264
10.58

The weighted-average exercise prices of outstanding options had been adjusted to reflect the capital reduction making up for losses.

Options granted during the nine months ended September 30, 2012 and 2011 were priced using the Black-Scholes pricing model and the inputs to the model were as follows:

Grant-date share price (NT$)
Exercise price (NT$)
Expected volatility
Expected life (years)
Expected dividend yield
Risk-free interest rate		 Nine Months Ended September 30
2012
2011
$1.55-$2.58
$1.55-$2.58
10.00
10.00
32.48%-34.84%
32.48%-34.84%
4.25
4.25
-
-
0.84%-0.96%
0.84%-0.96%

The compensation costs during the nine months ended September 30, 2012 and 2011 were minor; thus, they were not recognized.

MPI

Approved by the Board of Directors of MPI on June 20, 2007 and May 1, 2012, MPI was authorized to issue employee stock options for 2,400 thousand units and 841 thousand units. Each stock option may subscribe for one new share of new common stock of MPI. The options are valid for six years subsequent to the grant date and vested at certain percentages subsequent to the second anniversary of the grant date. As stipulated in the plans, the exercise price and quantity are subject to adjustments for any changes of capital structure or cash dividends.

  • 21 -

Information with respect to MPI’s stock option plan is as follows:

Balance, beginning of period
Options granted
Options cancelled
Balance, end of period		 Nine Months Ended September 30 Nine Months Ended September 30
2012
Number of
Outstanding
Stock Option
Rights
(Thousand)
Weighted-
average
Exercise Prices
(NT$/Per
Share)
167
$ 47.30
841
10.00

(61
)
47.30

947
47.30		 2011
Number of
Outstanding
Stock Option
Rights
(Thousand)
Weighted-
average
Exercise Prices
(NT$/Per
Share)
979
$ 47.30
-
-
(812
)
47.30

167
47.30

As of September 30, 2012, information about MPI’s outstanding and exercisable option was as follows:

Options Issued on or After January 1, 2004 and

Options Issued on or After January 1, 2004 and
Exercise
Price
(NT$/Per
Share)
$67.30
10.00		 Outstanding
Number
Outstanding
(Thousand)
Weighted-
average
Remaining
Contractual
Life (In Years)
Weighted-
average
Exercise Price
(NT$/Per
Share)
149
0.73
$67.30

798
5.58
10.00

947		 Options Exercisable
Number
Exercisable
(Thousand)
Weighted-
average
Exercise Price
(NT$/Per
Share)
149
$67.30

-
10.00

149

Options granted during the nine months ended September 30, 2012 were priced using the Black-Scholes pricing model and the inputs to the model were as follows:

Grant-date share price (NT$) $
6.93
Exercise price (NT$) 10.00
Expected volatility 48.23%
Expected life (years) 4.25
Expected dividend yield -
Risk-free interest rate 1%

The compensation cost during the nine months ended September 30, 2012 was minor; thus, it was not recognized.

Had the Company used the fair value based method to evaluate the options, using the Black-Scholes model, the assumptions and pro forma results of the Company for the nine months ended September 30, 2012 and 2011 would have been as follows:

  • 22 -
MXIC
Assumptions:
Risk-free interest rate
Expected life (in years)
Expected volatility
Expected dividend yield
MoDioTek
Assumptions:
Risk-free interest rate
Expected life (in years)
Expected volatility
Expected dividend yield
Mxtran
Assumptions:
Risk-free interest rate
Expected life (in years)
Expected volatility
Expected dividend yield
INFOMAX
Assumptions:
Risk-free interest rate
Expected life (in years)
Expected volatility
Expected dividend yield
MaxRise
Assumptions:
Risk-free interest rate
Expected life (in years)
Expected volatility
Expected dividend yield
MPI
Assumptions:
Risk-free interest rate
Expected life (in years)
Expected volatility
Expected dividend yield		 Nine Months Ended September 30
2012
2011
1.55%-2.54%
1.55%-2.54%
4.38
4.38
51.16%-57.50%
51.16%-57.50%
-
-
1.90%-2.68%
1.90%-2.68%
6
6
-
-
-
-
1.90%-2.68%
1.90%-2.68%
6
6
-
-
-
-
0.91%-2.68%
0.91%-2.68%
6-8
6-8
-
-
-
-
0.84%-0.96%
0.84%-0.96%
6
6
-
-
-
-
2.20%-2.68%
2.20%-2.68%
6
6
-
-
-
-
(Continued)
  • 23 -
Consolidated net income attributable to shareholders of the parent:
Net income (loss) as reported
Pro forma net income (loss)
Consolidated earnings (loss) per share (EPS - LPS) - after income tax
(NT$):
Basic EPS (LPS) as reported
Pro forma basic EPS (LPS)
Diluted EPS (LPS) as reported
Pro forma diluted EPS (LPS)
15. TREASURY STOCK		 Nine Months Ended September 30 Nine Months Ended September 30 Nine Months Ended September 30

2012
$ (3,661,819
)

$ (3,661,819
)

$(1.04
)
$(1.04
)
$(1.04
)
$(1.04
)		 2011
$ 1,936,191
$ 1,921,283
$0.55
$0.55
$0.54
$0.54
(Concluded)
Purpose of Treasury Stock
Number of
Shares,
Beginning of
Period
Nine months ended September 30, 2012
MXIC’s shares held by its subsidiaries (Note)

3,757

Nine months ended September 30, 2011
MXIC’s shares held by its subsidiaries

3,757
 Addition
During the
Period
Number of
Shares, End of
Period
142

3,899
-

3,757

Note: The number of shares held by a subsidiary had been adjusted for the nine months ended September 30, 2012 to reflect the distribution of stock dividends.

As of September 30, 2012 and 2011, the information about MXIC’s issued shares held by the subsidiary was as follows:

Shares Original
Company (Thousands) Carrying Value Market Value
September 30, 2012
Hui Ying Investment, Ltd. 3,899 $ 142,365 $ 38,175
September 30, 2011
Hui Ying Investment, Ltd. 3,757 $ 142,365 $ 41,136

The subsidiary holding MXIC’s issued shares retain shareholders’ rights and privileges on these shares, except for the right to participate in MXIC’s issuance of capital stock for cash and the right of vote.

  • 24 -

16. CONSOLIDATED EARNINGS (LOSS) PER SHARE (EPS/LPS)

Nine months ended September 30, 2012
Consolidated basic LPS
Loss for the period attributable to
common shareholders of the parent
Nine months ended September 30, 2011
Consolidated basic EPS
Income for the period attributable to
common shareholders of the parent
Effect of dilutive potential common stock
Employee stock option
Bonus to employees
Consolidated diluted EPS
Income attributable to common
shareholders of the parent plus effect
of potential dilutive common stock		 Number of
Amounts (Numerator)
Shares
Before
After
(Denominator)
Income Tax
Income Tax
(In Thousands)
$ (3,623,787)
$ (3,661,819)
3,516,121
$ 2,250,740
$ 1,936,191
3,502,197
-
-
32,494

-

-

29,521
$ 2,250,740
$ 1,936,191
3,564,212		 EPS (LPS)(NT$) EPS (LPS)(NT$)


Before
Income
Tax
$ (1.03
)

$ 0.64

$ 0.63
 After
Income
Tax
$ (1.04
)
$ 0.55
$ 0.54



Before
Income Tax
$ (3,623,787)

$ 2,250,740

-

-

$ 2,250,740

The ARDF issued Interpretation 2007-052 that requires companies to recognize bonuses paid to employees, directors and supervisors as compensation expenses beginning January 1, 2008. These bonuses were previously recorded as appropriations from earnings. If the Company may settle the bonus to employees by cash or shares, the Company should presume that the entire amount of the bonus will be settled in shares and the resulting potential shares should be included in the weighted average number of shares outstanding used in the calculation of diluted EPS, if the shares have a dilutive effect. The number of shares is estimated by dividing the entire amount of the bonus by the closing price of the shares at the balance sheet date. Such dilutive effect of the potential shares should be included in the calculation of diluted EPS until the shareholders resolve the number of shares to be distributed to employees at their meeting in the following year. The bonus to employees, which had no dilutive effect on the basic loss per share of the Company, was not included in the calculation of diluted loss per share for the nine months ended September 30, 2012.

As disclosed in Note 14 to the financial statements, the Company uses treasury stock method, according to SFAS No. 24 “Earnings per Share”, to determine whether the employee stock options are potential ordinary stocks. The aforementioned stock options were not included in the calculation of diluted loss per share because they were antidilutive for the nine months ended September 30, 2012.

The weighted-average number of shares outstanding for EPS calculation has been retroactively adjusted for the issuance of stock dividends (see Note 13). The adjustment caused the basic EPS and diluted EPS after income tax for the nine months ended September 30, 2011 decreased from NT$0.57 to NT$0.55 and from NT$0.56 to NT$0.54, respectively.

17. RELATED PARTY TRANSACTIONS

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

  • 25 -

  • a. Related parties and their relationships associated with the Company:

Related Parties Relationship
MXIC serves as member of its board of directors
Same chairman with MXIC
Its subsidiary, Shun Ying Investment, is represented in
MXIC’s board of directors
Related parties over which the Company has control or
exercises significant influence but with which the
Company had no material transactions.
Ardentec Corporation (“Ardentec”)
Macronix Education Foundation (“MXIC
Education”)
MegaChips Corporation (“MegaChips”)
Others

  • b. Significant transactions with related parties:

  • 1) Sales to related parties were as follows:

Related Parties
MegaChips
Others		 Nine Months Ended September 30 Nine Months Ended September 30 Nine Months Ended September 30
2012
Amount
% of
Net Sales
$ 5,554,643
30
1,334

-
$ 5,555,977
30		 2011




Amount
% of
Net Sales
$ 5,411,333
27

1,067

-
$ 5,412,400
27

Sales prices to related parties are not comparable with those with external customers as the Company is the sole provider for them. The sales term to the related parties is between 30 to 60 days after monthly closing, similar to those with external customers.

  • 2) Purchases from related parties were as follows:
Related Parties
MegaChips
Others		 Nine Months Ended September 30 Nine Months Ended September 30 Nine Months Ended September 30
2012
Amount
% of Net
Purchase
$ 137,778
3
-

-
$ 137,778

3		 2011




Amount
% of Net
Purchase
$ 699
-

275

-
$ 974

-

The terms of purchases from related parties were similar to those from third parties. The payment term is 60 days after monthly closing.

  • 3) Subcontract processing charges from related parties were as follows:
Related Parties
Ardentec		 Nine Months Ended September 30 Nine Months Ended September 30 Nine Months Ended September 30
2012
Amount
%
$ 296,638

2		 2011
Amount
%
$ 269,268

2

The subcontract processing charges of Ardentec are comparable to those with other vendors. The

  • 26 -

payment term is 75 days after monthly closing.

4) Operating expense

Related Parties
MXIC Education
Ardentec
Others		 Nine Months Ended September 30 Nine Months Ended September 30 Nine Months Ended September 30
2012
Amount
%
$ 18,750
-
640
-

42

-
$ 19,432

-		 2011
Amount
%
$ 19,500
-
2,811
-

102

-
$ 22,413

-
  • 5) Joint development revenue
Related Parties
MegaChips
6) Software, pattern and other revenue
Related Parties
Ardentec		 Nine Months Ended Nine Months Ended September 30 September 30
2012
Amount
%
$ 5,769

-		 2011
Amount
%
$ 11,474

-
Nine Months Ended
September 30, 2012
Amount
$ 974
 %
2

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

  • 7) Accounts receivable
Related Parties
MegaChips
Others
Less: Allowance for doubtful
accounts		 September 30 September 30 September 30
2012
Amount
%
$1,378,385
100
39

-
1,378,424
100
-

-
$1,378,424
100		 2011








Amount
%
$1,028,206
100

-

-
1,028,206
100

-

-
$1,028,206
100
  • 27 -

8) Accounts payable

Related Parties
Ardentec
MegaChips		 September September 30
2012
Amount
%
$ 106,358
62

66,259
38
$ 172,617
100		 2011




Amount
%
$ 88,855
96

699

4
$ 89,554
100

18. PLEDGED ASSETS

The Company pledged its assets for gas purchase agreement, land lease agreement with the Hsinchu Science Park Administration, domestic sales guarantee with the Taipei Customs Office, cargo clearance automation guarantee and long-term bank loans. Assets pledged as collaterals were as follows:

Pledged time deposits - current (showed as restricted assets - current)
Property, plant and equipment, net
Pledged time deposits - noncurrent (showed as restricted assets -
noncurrent)		 September 30 September 30



2012
$ 44,514

18,662,169
165,248

$ 18,871,931
 2011
$ 6,189
9,093,308

89,950
$ 9,189,447

19. SIGNIFICANT COMMITMENTS AND CONTINGENCIE

Significant commitments and contingencies of the Company as of September 30, 2012, excluding those disclosed in other notes, were as follows:

  • a. MXIC had significant equipment contracts totaling approximately $1,567,860 thousand. As of September 30, 2012, MXIC has paid $588,762 thousand of this amount pursuant to these contracts. Future irrevocable payment in total is $979,098 thousand. Unused letters of credit amounted to $20,808 thousand.

  • b. The land on which MXIC is located is being leased from the Hsinchu Science Park Administration under renewable operating lease agreements. The lease term is from 1994 to 2031. Future minimum annual rentals under the leases are as follows:

Year
4thquarter, 2012

2013
2014
2015
2016
2017 and after

 Amount
$ 18,920
75,677
70,956
46,423
17,481

206,804
$ 436,261
  • 28 -

The offices on which MXA, MXE, Mxtran, MaxRise and MPI are located were leased under renewable operating leases. These leases will expire in 2011 to 2015.

Future minimum annual rentals under the operating leases are as follows:

Year
4thquarter, 2012

2013
2014
2015

 Amount
$ 4,676
2,512
2,328

1,223
$ 10,739

  • c. MXIC entered into a technology development and foundry service agreement with E Company in June 2006, the term for the agreement is five and seven years, respectively, from the commencement date. MXIC had paid off the entire technology development fees on December 31, 2007.

  • d. MXIC entered into the Phase-Change Memory technology agreement with IBM Company in January 2010, and the term of the agreement is from January 2010 to January 2013. Under the agreement, both parties have to share in the related expenditures of the technology development. As of September 30, 2012, MXIC had paid US$8,976 thousand.

  • e. MXIC entered into the Patents Cross-License Agreement with J Company in December 2009, and the term of the agreement is from December 2009 to December 2015. Under the agreement, MXIC has to pay the royalty of the Patents Cross-License Agreement.

  • f. According to Share Purchase Agreement and Amendment between Tower and MXBVI in December 2000 and November 2006, Tower established a prepaid account with a credit balance in favor of MXBVI. The credit balance of the prepaid account will be increased when MXBVI’s contracted purchase price of Tower’s shares exceeds market price. Such Tower prepayments can be used for MXBVI’s future purchase of wafers, conversion to Tower’s shares and payment for royalty. When the prepayments were used by the Company for purchase of wafers from Tower, the Company classified certain amount of the prepayments as part of accounts receivable (converted wafer credit) from Tower and to be paid by Tower on or before December 31, 2009. As of September 30, 2012, the total amount of accounts receivable from Tower prepayments was US$7,420 thousand (classified as other current assets) with full allowance for doubtful receivables. However, MXBVI entered into the payment term agreement with Tower in December 2009, and the term of the agreement is payment by Tower in eight installments from December 2009 to September 2011. As of December 31, 2011, Tower has paid off the eight installments.

  • g. Based on the resolution at the shareholders’ general meeting in June 2012, MaxRise resolved its merger with INFOMAX through share swap. It is expected that 1.353 shares of MaxRise will be exchanged for 1 share of INFOMAX, which is on the basis of INFOMAX’s reduced paid-in capital of $502,208 thousand divided into 50,203 thousand shares, and INFOMAX will continue to exist. As of October 23, 2012, the business combination was still in progress.

  • 29 -

20. DISCLOSURES FOR FINANCIAL INSTRUMENTS

  • a. Fair values of financial instruments were as follows:
Non-derivative financial instruments
Assets
Financial assets at fair value
through profit or loss -
noncurrent
Available-for-sale financial assets
- noncurrent
Financial assets carried at cost -
noncurrent
Liabilities
Long-term bank loans (including
current portion)
Derivative financial instruments
Assets
Financial assets at fair value
through profit or loss - current		 September 30 September 30
2012
Carrying
Amount
Fair Value
$ -
$ -
932,684
932,684
104,501
-
22,381,711
22,381,711
10,728
10,728		 2011
Carrying
Amount
Fair Value
$ 33,528
$ 33,528
860,897
860,897
154,741
-
14,563,429
14,563,429
-
-

  • b. Methods and assumptions for the fair values of financial instruments

  • 1) The above financial instruments do not include cash and cash equivalents, notes and accounts receivable (including related parties), other receivables, pledged time deposits, short-term bank loans and notes and accounts payable (including related parties). The carrying amounts of these instruments reported in the balance sheets approximate their fair values.

  • 2) Available-for-sale financial assets have quoted market prices in an active market; the quoted market prices are reviewed as fair values.

  • 3) Financial assets carried at cost are investments in unquoted shares, which have no quoted prices in an active market and entail an unreasonably high cost to obtain verifiable fair values. Therefore, no fair value is presented.

  • 4) Fair value of long-term bank loans is estimated using discounted cash flow analysis, based on the Company’s current incremental borrowing rates for borrowings with similar characteristics (e.g. similar maturity dates). The fair values of long-term bank loans with floating interest rates are equivalent to their carrying values.

  • 5) Fair values of derivatives are based on their quoted prices in an active market. For those derivatives with no quoted market prices, their fair values are determined using valuation techniques incorporating estimates and assumptions consistent with those generally used by other market participants to price financial instruments.

  • 30 -

  • c. As of September 30, 2012 and 2011, financial assets (liabilities) exposed to fair value interest rate risk and cash flow interest rate risks were as follows:

Fair value interest rate risk
Financial assets
Financial liabilities
Cash flow interest rate risk
Financial assets
Financial liabilities		 September 30
2012
2011
$ 17,784,388
$ 13,490,755
(283,031)
(3,394,175)
1,753,915
3,984,328
(22,381,711)
(14,563,429)
  • d. Interest income and expense on financial assets and liabilities, excluding those at fair value through profit and loss, for the nine months ended September 30, 2012 and 2011 were as follows:
Total interest income
Total interest expenses (including capitalized amount)		 Nine Months Ended September 30
2012
2011
$ 123,358
$ 98,016
243,454
99,239

  • e. Valuation gain arising from change in fair value of financial instruments determined using valuation techniques was $10,728 thousand for the nine months ended September 30, 2012.

  • f. Unrealized Valuation Gain (Loss) on Financial Instruments

Components of unrealized gain (loss) on financial instruments were summarized as follows:

Available-for-
sale Financial
Assets
Recognized by
the Company’s
Ownership
Percentages in
the Investees
Period ended September 30, 2012
Balance, beginning of period
$ 385,366
$ 46,729

Recorded as a separate component of
shareholders’ equity

53,104

6,213

Balance, end of period
$ 438,470
$ 52,942

Period ended September 30, 2011
Balance, beginning of period
$ 763,403
$ 275,029

Recorded as a separate component of
shareholders’ equity
(405,405
)
(220,687
)

Balance, end of period
$ 357,998
$ 54,342
 Total
$ 432,095
59,317
$ 491,412
$1,038,432
(626,092
)
$ 412,340

  • g. Financial risks

  • 1) Market price risk. The financial instruments held by the Company are exposed to interest rate, foreign exchange rate and price risks.

  • 31 -

  • 2) Credit risk. The Company is exposed to credit risk in the event of non-performance of the counter parties to forward contracts on maturity. Contracts with positive fair values at the balance sheet date are evaluated for credit risk. In order to manage this risk, the Company conducts transactions only with financial institutions with good credit ratings. As a result, no material losses resulting from counter party defaults are anticipated. Credit risk represents the positive net settlement amount of those contracts with positive fair value on the balance sheet date. The positive net settlement amount represents the loss that would be incurred by the Company if the counter-parties breached the contracts. The banks, which are the counter parties to the foregoing derivative financial instruments, are reputable financial institutions. Management believes its exposure related to the potential default by those counter-parties is low.

  • 3) Liquidity risk. Investment in financial assets carried at cost do not have an active market, thus, the liquidity risk of those investment is material. The Company’s investment in debt instruments are traded in active markets and can be disposed of quickly at close to their fair values. The Company has sufficient operating capital to meet cash demand.

  • 4) Cash flow risk of interest rate. As of September 30, 2012, most long-term bank loans have floating interest rates, which are affected by changes in market interest rates.

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

As of September 30, 2012 and 2011, the information for material foreign financial assets and liabilities were as follows.

Financial assets
Monetary items
JPY
KRW
USD
RMB
HKD
EUR
SGD
Non-monetary items
USD
Financial liabilities
Monetary items
JPY
USD
RMB
HKD
EUR
SGD		 September 30 September 30
2012
Foreign
Currencies
Exchange Rate
$ 4,934,487
0.38
211,113
0.0262
134,082
29.30
5,446
4.62
3,310
3.78
2,174
37.89
374
23.92
8,782
29.30
1,212,946
0.38
67,888
29.30
4,573
4.62
796
3.78
705
37.89
102
23.92		 2011
Foreign
Currencies
Exchange Rate
$ 4,615,965
0.40
72,459
0.0258
156,130
30.48
9,903
4.80
5,432
3.91
38,352
41.23
336
23.51
15,347
30.48
5,804,759
0.40
128,263
30.48
1,747
4.80
9
3.91
35,826
41.23
18
23.51
  • 32 -

22. SUMMARY OF SIGNIFICANT RELATED PARTY TRANSACTIONS

The following is a summary of significant related party transactions:

Transaction Subject Transaction
Object		 Relation
(Note 1)		 Transaction Summary Transaction Summary Transaction Summary
Account Amount Term of
Transaction
(Note 6)		 % to Total
Assets or
Total
Revenue
Nine months ended
September 30,2012
MXIC MXHK 2 Sales $1,870,512 Note 2 10%
Notes and accounts
receivable		 475,267 -
MXE 2 Operatingexpenses 51,260 1%
Accountspayable 11,206 -
MXA 1 Sales 486,849 Note 2 3%
Operatingexpenses 128,223 2%
Notes and accounts
receivable		 81,917 -
Accountspayable 45,714 -
Mxtran 1 Sales 634 Note 3 -
Rental revenue 4,209 Note 4 -
Other revenue (software,
mold,etc.)		 1,008 Note 5 -
Notes and accounts
receivable		 566 -
Other receivables 308 -
MoDioTek 1 Sales 123 Note3 -
Rental revenue 4,194 Note 4 -
Other revenue (software,
mold,etc.)		 676 Note 5 -
Notes and accounts
receivable		 94 -
Other receivables 238 -
MX Asia 2 Operatingexpenses 104,505 2%
Accountspayable 14,279 -
MPL 2 Operatingexpenses 18,946 -
Accountspayable 4,101 -
INFOMAX 1 Rental revenue 4,511 Note 4 -
Other revenue (software,
mold,etc.)		 224 Note 5 -
Notes and accounts
receivable		 725 -
Other receivables 27 -
MaxRise 1 Rental revenue 1,754 Note 4 -
MPI 1 Sales 231 Note 3 -
Rental revenue 3,275 Note 4 -
Other revenue (software,
mold,etc.)		 182 Note 5 -
Notes and accounts
receivable		 51 -
Other receivables 61 -
Nine months ended
September 30,2011
MXIC MXHK 2 Sales 2,467,871 Note 2 12%
Operatingexpenses 22,793 -
Notes and accounts
receivable		 610,040 1%
MXE 2 Operatingexpenses 31,781 -
Accountspayable 7,831 -
  • 33 -
Transaction Subject Transaction
Object		 Relation
(Note 1)		 Transaction Summary Transaction Summary Transaction Summary
Account Amount Term of
Transaction
(Note 6)		 % to Total
Assets or
Total
Revenue
MXA 1 Sales 453,059 Note2 2%
Operatingexpenses 122,153 -
Notes and accounts
receivable		 52,501 -
Accountspayable 33,578 -
Mxtran 1 Sales 434 Note3 -
Rental revenue 2,668 Note 4 -
Other revenue (software,
mold,etc.)		 1,174 Note 5 -
Notes and accounts
receivable		 721 -
Other receivables 597 -
MoDioTek 1 Sales 397 Note 3 -
Rental revenue 4,258 Note 4 -
Other revenue (software,
mold,etc.)		 1,052 Note 5 -
Notes and accounts
receivable		 389 -
Other receivables 127 -
MX Asia 2 Operatingexpenses 94,475 -
Accountspayable 14,110 -
MPL 2 Operatingexpenses 17,032 -
Accountspayable 4,053 -
INFOMAX 1 Rental revenue 3,737 Note 4 -
Other revenue (software,
mold,etc.)		 280 Note 5 -
Notes and accounts
receivable		 581 -
MaxRise 1 Rental revenue 1,956 Note 4 -
MPI 1 Rental revenue 3,278 Note 4 -
Other revenue (software,
mold,etc.)		 237 Note 5 -
Other receivables 61 -

(Concluded)

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

  • Transaction was between the parent company and indirect subsidiaries.

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

  • Note 3: The sale price referred to cost plus mark up.

  • Note 4: MXIC leased office to related parties and collected rental revenue according to the floor space per month.

  • Note 5: MXIC had signed contract with related parties. The related transaction term was negotiated bilaterally, so there was no comparable basis.

  • Note 6: The transaction terms with related parties were 30 to 60 days after monthly closing and were similar to those with third parties.

  • 34 -

23. OPERATING SEGMENT FINANCIAL INFORMATION

Pursuant to SFAS No. 41, “Operating Segments,” the Company determined its operating segments based on business activities as follows:

Memory products and wafer fabrication IC design

The Company determined its operating segments based on business activities. There was no material inconsistency between the accounting policies used by operating segments and the accounting policies described in Note 2.

a. Segment revenues and results

Segment Revenue
Nine Months Ended September 30
2012
2011
Memory products and wafer
fabrication
$ 18,327,092
$ 19,692,414
IC design

62,206

68,448

Continued operating department
$ 18,389,298
$ 19,760,862
Interest income
Gain (loss) on disposal of property,
plant and equipment
Gain on disposal of financial
instruments
Foreign exchange loss, net
Valuation gain (loss) on financial
instruments
Interest expense
Others

Income (loss) before income tax
(continuing operation
department)
Segment assets and liabilities
Segment assets
Memory products and wafer fabrication

IC design

Total segment assets
 Segment Revenue Segment Revenue Segment Revenue Segment Profit
Nine Months Ended September 30
2012
2011
$ (3,015,518)
$ 2,515,742

(539,480
)

(605,556
)
(3,554,998)
1,910,186
123,358
98,016
(85,206)
9,208
-
252
(57,078)
(52,792)
11,916
(1,750)
(214,062)
(6,016)

103,029

216,431
$ (3,673,041
)
$ 2,173,535
September 30		 Segment Profit
Nine Months Ended September 30
2012
2011
$ (3,015,518)
$ 2,515,742

(539,480
)

(605,556
)
(3,554,998)
1,910,186
123,358
98,016
(85,206)
9,208
-
252
(57,078)
(52,792)
11,916
(1,750)
(214,062)
(6,016)

103,029

216,431
$ (3,673,041
)
$ 2,173,535
September 30		 Segment Profit
Nine Months Ended September 30
2012
2011
$ (3,015,518)
$ 2,515,742

(539,480
)

(605,556
)
(3,554,998)
1,910,186
123,358
98,016
(85,206)
9,208
-
252
(57,078)
(52,792)
11,916
(1,750)
(214,062)
(6,016)

103,029

216,431
$ (3,673,041
)
$ 2,173,535
September 30
Nine Months Ended September 30
2011
$ 19,692,414

68,448

$ 19,760,862



 2012
2011
$ (3,015,518)
$ 2,515,742

(539,480
)

(605,556
)
(3,554,998)
1,910,186
123,358
98,016
(85,206)
9,208
-
252
(57,078)
(52,792)
11,916
(1,750)
(214,062)
(6,016)

103,029

216,431
$ (3,673,041
)
$ 2,173,535
September 30


$ 2012
64,501,996

867,598

65,369,594
 2011
$ 65,690,842

1,384,717
$ 67,075,559
$

b. Segment assets and liabilities

  • 35 -

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

Under Rule No. 0990004943 issued by the Financial Supervisory Commission (FSC) on February 2, 2010, the Company’s pre-disclosure information on the adoption of International Financial Reporting Standards (IFRSs) was as follows:

  • a. On May 14, 2009, the FSC announced the roadmap of IFRSs adoption for ROC companies. Accordingly, starting 2013, companies with shares listed on the TWSE or traded on the Taiwan GreTai Securities Market or Emerging Stock Market should prepare the consolidated financial statements in accordance with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, IFRSs, International Accounting Standards (IASs), interpretations as well as related guidance issued by the FSC. To comply with the amendments, the Company established a taskforce headed by the assistant general manager to monitor and execute the IFRSs adoption plan. The important plan items, responsible divisions and plan progress are listed as follows.
Plan Item
Responsible Division
1) Establish the IFRSs taskforce
Finance center
2) Set up a work plan for IFRSs adoption
Finance center
3) Complete the identification of GAAP
differences and impact
Finance center
4) Complete the identification of consolidated
entities under IFRSs
Finance center
5) Complete the evaluation of impact on the
Company as a result of the exemptions and
adoptions under IFRS 1, “First-time Adoption
of International Financial Account Standards”
Finance center
6) Complete evaluation of the IT systems
Finance center and
information
technology center
7) Complete modification to the relevant internal
controls
Finance center
8) Determine IFRSs accounting policies
Finance center
9) Determine options and exemptions with IFRS
1, “First-time Adoption of International
Financial Accounting Standards”
Finance center
10) Complete the preparation of opening date
balance sheet under IFRSs
Finance center
11) Prepare comparative financial information
under IFRSs for 2012
Finance center
12) Complete modification to the relevant internal
controls
Finance center and
auditing office		 Plan Progress
Finished
Finished
Finished
Finished
Finished
Finished
Finished
Finished
Finished
Finished
In progress according to
the plan
In progress according to
the plan

  • 36 -

  • b. Exemptions from IFRS 1

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

  • 1) Business combinations. The Company elected not to apply IFRS 3, “Business Combinations,” retrospectively to business combinations that occurred before the date of transition to IFRSs. Therefore, the amount of goodwill and related assets and liabilities included in business combination and the non-controlling interest generated from business combinations reported in the balance sheet as of January 1, 2012 remain the same as those reported under ROC GAAP as of December 31, 2011.

  • 2) Share-based payment. The Company elected to take the optional exemption from applying IFRS 2, “Share-based Payment,” retrospectively for the shared-based payment transactions granted and vested before the date of transition to IFRSs.

  • 3) Employee benefits. The Company elected to recognize all unrecognized cumulative actuarial gains and losses in retained earnings at the date of transition to IFRSs.

  • c. Based on the Company’s assessment, the significant differences between the Company’s current accounting policies under ROC GAAP and the ones under IFRSs are stated as follows:

  • 1) Reconciliation of consolidated balance sheet as of January 1, 2012

ROC GAAP Amount
$ 19,727,097
2,889,463
918,063
121,452
6,468,003
133,299
23,005

474,848

30,755,230
39,357
879,392
154,491

1,073,240

35,206,707


172,068
-
419,899
290,125		 Effect of Transit ion to IFRSs
Presentation
Difference
$ -
11,987
-
-
-
(133,299 )
-

543

(120,769
)
-
-
-


(5,117,177 )


(23,593
)
5,407,302
133,299
(290,125 )		 IFRSs
Amount
Item
Note
$ 19,727,097
Cash and cash equivalents
2,901,450
Notes and accounts
receivable, net
a)
918,063
Receivables from related
parties, net
121,452
Other receivables, net
6,468,003
Inventories
-
Deferred income tax
assets - current
b)
23,005
Prepayments

475,391
Other current assets
c)

30,634,461
Total current assets
39,357
Financial assets at fair
value through profit or
loss - noncurrent
879,392
Available-for-sale
financial assets -
noncurrent
154,491

Financial assets carried at
cost - noncurrent
1,073,240

Total noncurrent assets
30,089,530

Net property, plant and
equipment
d), f)

148,475
Intangible assets
c), e)
5,407,302
Prepayments for
equipment
f)
553,198
Deferred income tax
assets - noncurrent
b)
-
-
d)






Recognition
and
Measurement
Difference
$ -

-
-
-
-
-
-

-


-

-
-
-


-


-



-

-
-
-
Item
Current assets
Cash and cash equivalents

Notes and accounts
receivable, net
Receivables from related
parties, net
Other receivables, net
Inventories
Deferred income tax
assets - current
Restricted assets - current
Other current assets

Total current assets

Financial assets at fair
value through profit or
loss - noncurrent
Available-for-sale
financial assets -
noncurrent
Financial assets carried at
cost - noncurrent

Total long-term
investments

Net property, plant and
equipment

Net intangible assets

Deferred income tax
assets - noncurrent
Idle assets, net





(Continued)

  • 37 -
ROC GAAP Amount
$ 42,389
164,177


916,590
$ 68,123,835
$ 1,800,488
2,154,754
82,244
348,966
2,189,183
530,775
875,833
85,504
1,527,718


9,595,465

16,078,719
360,234

3,661

363,895

26,038,079
33,847,486
349,925
2,407,003
5,085,609
432,095
(29,881 )

(142,365
)
41,949,872


135,884

42,085,756
$ 68,123,835		 Effect of Transit ion to IFRSs
Presentation
Difference
$ 23,050
-


5,273,526
$ 11,987
$ -
-
-
-
-
-
-
11,987
-


11,987

-
-

-

-

11,987
-
-
-
-
-
-

-
-


-

-
$ 11,987		 IFRSs
Amount
Item
Note
$ 65,439
Other noncurrent assets
c), e)
164,177

Other noncurrent assets

6,190,116
$ 68,135,822
Total
Current liabilities
$ 1,800,488
Short-term bank loans
2,154,754
Notes and accounts
payable
82,244
Payables to related parties
348,966
Income tax payable
2,189,183
Other payables
530,775
Accrued bonuses to
employees, directors
and supervisors
875,833
Payables for equipment
161,458
Other current liabilities
a), h)
1,527,718

Current portion of
long-term bank loans

9,671,419

16,078,719
Noncurrent liabilities
622,566
Accrued pension cost
i)

3,661
Other noncurrent liabilities

626,227

26,376,365
Total liabilities
33,847,486
Common stock
346,489
Capital surplus
g)
2,407,003
Legal capital reserve
4,776,572
Unappropriated earnings
h), i), j)
432,095
Other equity
(30,048 )
Cumulative translation
adjustments
h)

(159,061
)
Treasury stock
j)
41,620,536

Total equity attributable to
shareholders of the
parent

138,921
Non-controlling interest
g), h), i)

41,759,457
Total shareholders’ equity
$ 68,135,822
Total















Recognition
and
Measurement
Difference
$ -

-



-

$ -

$ -

-
-
-
-
-
-
63,967
-



63,967


-

262,332

-


262,332


326,299

-
(3,436 )
-
(309,037 )
-
(167 )

(16,696
)

(329,336 )



3,037


(326,299
)

$ -
Item
Other assets

Restricted assets -
noncurrent

Total other assets

Total

Current liabilities
Short-term bank loans

Notes and accounts
payable
Payables to related parties
Income tax payable
Accrued expenses
Accrued bonuses to
employees, directors
and supervisors
Payables for equipment
Other current liabilities
Current portion of
long-term bank loans

Total current liabilities

Total long-term liabilities

Accrued pension cost
Others

Total other liabilities

Total liabilities

Shareholders' equity
Capital stock
Capital surplus
Legal capital reserve
Unappropriated earnings
Unrealized gains on
financial instruments
Cumulative translation
adjustments
Treasury stock

Total equity attributable to
shareholders of the
parent

Minority interests

Total shareholders' equity

Total














(Concluded)

  • 2) Reconciliation of consolidated balance sheet as of September 30, 2012
ROC GAAP Amount
$ 19,303,525
10,728
3,194,061
1,378,424
189,568
7,033,697
371,674
44,514

557,689

32,083,880
29,295
932,684		 Effect of Transit ion to IFRSs
Presentation
Difference
$ -
-
13,794
-
-
-
(371,674 )
-

523

(357,357
)
-
-		 IFRSs
Amount
Item
Note
$ 19,303,525
Cash and cash equivalents
10,728
Financial assets at fair
value through profit or
loss - current
3,207,855
Notes and accounts
receivable, net
a)
1,378,424
Receivables from related
parties, net
189,568
Other receivables
7,033,697
Inventories
-
Deferred income tax
assets - current
b)
44,514
Prepayments

558,212
Prepayments
c)

31,726,523
Total current assets
29,295
Prepayments for
investments
932,684
Available-for-sale
financial assets -
noncurrent


Recognition
and
Measurement
Difference
$ -

-
-
-
-
-
-
-

-


-

-
-
Item
Current assets
Cash and cash equivalents

Financial assets at fair
value through profit or
loss - current
Notes and accounts
receivable, net
Receivables from related
parties, net
Other receivables, net
Inventories
Deferred income tax
assets - current
Restricted assets - current
Other current assets

Total current assets

Prepayments for
investments
Available-for-sale
financial assets -
noncurrent

(Continued)

  • 38 -
ROC GAAP Amount
104,501

1,066,480

$ 31,208,311


354,782
-
134,070
280,734
76,089
165,248


656,141
$ 65,369,594
$ 283,031
1,908,152
172,617
60,181
2,347,680
444,192
188,575
5,940,718


11,345,146

16,440,993
431,559
1,847


433,406

28,219,545
35,213,693
347,918
2,695,275
(1,441,298 )
491,412
(89,906 )

(142,365
)
37,074,729

75,320

37,150,049
$ 65,369,594		 Effect of Transit ion to IFRSs
Presentation
Difference
-

-

$ (579,599 )


(9,241
)
860,333
371,674
(280,734 )
8,718
-


959,991
$ 13,794
$ -
-
-
-
-
-
13,794
-


13,794

-
-
-


-

13,794
-
-
-
-
-
-

-
-

-

-
$ 13,794		 IFRSs
Amount
Item
Note
104,501

Financial assets carried at
cost - noncurrent
1,066,480

Total noncurrent assets
$ 30,628,712

Property, plant and
equipment
d), f)

345,541
Intangible assets
c), e)
860,333
Prepayments for equipment
f)
505,744
Deferred income tax assets -
noncurrent
b)
-
-
d)
84,807
Other noncurrent assets
c), e)
165,248

Restricted assets -
noncurrent

1,616,132
$ 65,383,388
Total
Current liabilities
$ 283,031
Short-term bank loans
1,908,152
Notes and accounts
payable
172,617
Payables to related parties
60,181
Income tax payable
2,347,680
Other payables
444,192
Payables for equipment
273,115
Other current liabilities
a), h)
5,940,718

Current portion of
long-term bank loans

11,429,686

16,440,993
Noncurrent liabilities
688,257
Accrued pension cost
i)
1,847

Other noncurrent
liabilities

690,104

28,560,783
Total liabilities
35,213,693
Common stock
343,868
Capital surplus
g)
2,695,275
Legal capital reserve
(1,751,632 )
Unappropriated earnings
h), i), j)
491,412
Other equity
(89,923 )
Cumulative translation
adjustments
h)

(159,061
)
Treasury stock
j)
36,743,632
Total equity attributable to
shareholders of the
parent

78,973
Non-controlling interest
g), h), i)

36,822,605
Total shareholders’ equity
$ 65,383,388
Total


















Recognition
and
Measurement
Difference
-


-


$ -




-

-
-
-
-
-



-

$ -

$ -

-
-
-
-
-
70,746
-



70,746


-

256,698
-



256,698


327,444

-
(4,050 )
-
(310,334 )
-
(17 )

(16,696
)

(331,097 )

3,653


(327,444
)

$ -
Item
Financial assets carried at
cost - noncurrent

Total long-term
investments

Net property, plant and
equipment


Net intangible assets

Prepayments for equipment
Deferred income tax assets -
noncurrent
Idle assets, net
Other assets
Restricted assets -
noncurrent

Total other assets

Total

Current liabilities
Short-term bank loans

Notes and accounts
payable
Payables to related parties
Income tax payable
Accrued expenses
Payables for equipment
Other current liabilities
Current portion of
long-term bank loans

Total current liabilities

Total long-term liabilities

Accrued pension cost
Others

Total other liabilities

Total liabilities

Shareholders' equity
Capital stock
Capital surplus
Legal capital reserve
Unappropriated earnings
Unrealized gains on
financial instruments
Cumulative translation
adjustments
Treasury stock

Total equity attributable to
shareholders of the
parent
Minority interests

Total shareholders' equity

Total

















(Concluded)

  • 3) Reconciliation of consolidated statement of comprehensive income for the nine months ended September 30, 2012
ROC GAAP Amount
$ 18,389,298

16,077,128

2,312,170
893,390
1,266,105
3,707,673


5,867,168

(3,554,998
)		 Effect of Transit ion to IFRSs
Presentation
Difference
$ -

-

-
-
-
-


-

-		 IFRSs
Amount
Item
Note
$ 18,389,298
Net sales

16,076,057
Cost of sales
h), i)

2,313,241
Gross profit
892,104
Sales and marketing
h), i)
1,268,166
General and
administrative
h), i)
3,709,266

Research and
development
h), i)

5,869,536
Total operating expenses

(3,556,295
)
Loss from operations
(Continued)





Recognition
and
Measurement
Difference
$ -


(1,071
)


1,071

(1,286 )
2,061
1,593



2,368


(1,297
)
Item
Net sales

Cost of sales

Gross profit

Operating expenses
Sales and marketing
General and
administrative
Research and
development

Total operating expenses

Loss from operations




  • 39 -
ROC GAAP Amount
$ 123,358
60,834
13,118
2,807
10,728

46,471

257,316
214,062
98,324
57,078

5,895

375,359
(3,673,041 )

48,642
$ (3,721,683
)		 Effect of Transit ion to IFRSs
Presentation
Difference
$ -
-
-
-
-

-
-

-
-
-

-

-
-

-
$ -		 IFRSs
Amount
Item
Note
Non-operating income and
gains
$ 123,358
Interest income
60,834
Dividend income
13,118
Gain on disposal of assets,
net
2,807
Gain on disposal of
financial instruments
10,728
Valuation gain on
financial assets

46,471
Others

257,316
Total non-operating
income and gains
214,062
Interest expense
98,324
Loss on disposal of assets
57,078
Foreign exchange losses

5,895
Others

375,359
Total non-operating
expenses and losses
(3,674,338 )
Loss before income tax

48,642
Income tax expense
$ (3,722,980
)
Consolidated net loss
(59,994 )
Exchange differences on
translating foreign
operations

59,317
Net valuation gain on
available-for-sale
financial assets

(677
)
Other comprehensive
income for the period, net
of tax effect
$ (3,723,657
)
Total comprehensive loss for
the period
(Concluded)






Recognition
and
Measurement
Difference
$ -

-
-
-
-

-

-


-
-
-

-


-

(1,297 )

-

$ (1,297
)
Item
Non-operating income and
gains
Interest income

Dividend income
Gain on disposal of assets
Gain on disposal of
financial instruments
Valuation gain on
financial assets
Others

Total non-operating
income and gains

Non-operating expenses and
losses
Interest expense
Loss on disposal of assets
Foreign exchange losses,
net
Others

Total non-operating
expenses and losses

Loss before income tax
Income tax expense

Consolidated net loss








  • 4) Special reserve at the date of transition to IFRSs

In accordance with the order VI-1010012865 issued by the FSC on April 6, 2012, at the first-time adoption of IFRSs, an entity shall appropriate to special reserve an amount equal to IFRS-adoption adjustments to retained earnings when an entity elects to use exemptions specified in IFRS 1 and resets unrealized revaluation increment and cumulative translation differences under stockholders’ equity to zero by reclassifying them to retained earnings. However, if the IFRS-adoption adjustments to retained earnings are less than the amount of unrealized revaluation increment and cumulative translation differences reclassified to retained earnings, the amount appropriated to special reserve is limited to the IFRS-adoption credit adjustments to retained earnings. The special reserve shall be reversed proportionate to the subsequent usage, disposal or reclassification of the related assets. The Company’s total IFRS-adoption adjustments at the first-time adoption of IFRSs resulted in a decrease of retained earnings; therefore, no special reserve was appropriated.

  • 5) Notes to the reconciliation of the significant differences:

From the Company’s assessment, the significant differences between the Company’s current accounting policies under ROC GAAP and under IFRSs are stated as follows:

  • a) Allowance for sales returns and others

Under ROC GAAP, provisions for estimated sales returns and others are recognized as a reduction in revenue in the period the related revenue is recognized based on historical experience. Allowance for sales returns and others is recorded as a deduction in accounts receivable. Under IFRSs, the allowance for sales returns and others is a present obligation

  • 40 -

with uncertain timing and an amount that arises from past events; it is therefore reclassified as provisions (classified under current liabilities) accordingly.

As of September 30, 2012 and January 1, 2012, the amounts reclassified from allowance for sales returns and others to provisions were $13,794 thousand and $11,987 thousand, respectively.

  • b) Classifications of deferred income tax asset/liability and valuation allowance

Under ROC GAAP, valuation allowance is provided to the extent, if any, that it is more likely than not that deferred income tax assets will not be realized. Under IFRSs, deferred tax assets are only recognized to the extent that it is probable that there will be sufficient taxable profits and the valuation allowance account is no longer used.

In addition, under ROC GAAP, a deferred tax asset or liability is classified as current or noncurrent in accordance with the classification of its related asset or liability. However, if a deferred income tax asset or liability does not relate to an asset or liability in the financial statements, it is classified as either current or noncurrent based on the expected length of time before it is realized or settled. Under IFRSs, a deferred tax asset or liability is classified as noncurrent asset or liability.

As of September 30, 2012 and January 1, 2012, the amounts reclassified from deferred income tax assets - current to deferred income tax assets - noncurrent were $371,674 thousand and $133,299 thousand, respectively.

  • c) Reclassification of burgage

Under ROC GAAP, held burgage is classified under intangible assets. Under IFRSs, burgage is reclassified as lease prepayments in accordance with IAS No 17, “Leases”.

As of September 30, 2012, the amounts reclassified to lease prepayments - current (classified under other current assets) and lease prepayments - noncurrent (classified under other noncurrent assets) were $523 thousand and $22,607 thousand, respectively. As of January 1, 2012, the amounts reclassified to lease prepayments - current and lease prepayments - noncurrent were $543 thousand and $23,920 thousand, respectively.

  • d) Reclassification of idle assets

Under ROC GAAP, idle assets are classified under other assets. After the adoption of IFRSs, idle assets are reclassified under property, plant and equipment in accordance with IAS No 16, “Property, Plant and Equipment”.

As of September 30, 2012 and January 1, 2012, the amounts reclassified from idle assets to property, plant and equipment were $280,734 thousand and $290,125 thousand, respectively.

  • e) Reclassification of deferred assets

Under ROC GAAP, deferred assets are classified under other assets. Under IFRSs, deferred assets are reclassified under intangible assets.

As of September 30, 2012 and January 1, 2012, the amounts reclassified from deferred assets to intangible assets were $13,889 thousand and $870 thousand, respectively.

  • f) Presentation of prepayments for equipment

Under ROC GAAP, prepayments for obtaining equipment are classified as prepayments for

  • 41 -

equipment under property, plant and equipment. After the adoption of IFRSs, prepayments for obtaining equipment are reclassified as prepaid items under noncurrent assets.

As of September 30, 2012 and January 1, 2012, the amounts reclassified from prepayments for equipment to prepaid items were $860,333 thousand and $5,407,302 thousand, respectively.

  • g) Capital surplus of subsidiaries - employee stock options

Under ROC GAAP, employee stock options granted by a subsidiary are recognized by the parent company according to its ownership percentage as capital surplus - employee stock options under the equity attributable to shareholders of the parent in the consolidated financial statements. Under IFRSs, the equity not attributable, directly or indirectly, to a parent is non-controlling interest.

As of September 30, 2012 and January 1, 2012, the amounts reclassified to non-controlling interest were $4,050 thousand and $3,436 thousand, respectively.

  • h) Employee benefits - short-term accumulating compensated absences

Short-term accumulating compensated absences are not specifically addressed under ROC GAAP and usually recognized as salary expense while distributed. Under IFRSs, accumulating compensated absences are recognized as salary expense when the employees render services that increase their entitlement to future compensated absences.

At the transition to IFRSs, the Company elected to recognize all the resulting accounting difference of compensated absences in retained earnings. As of September 30, 2012 and January 1, 2012, other current liabilities were increased by $70,746 thousand and $63,967 thousand, respectively; non-controlling interests were decreased by $628 thousand and $630 thousand, respectively; cumulative translation adjustments were decreased by $17 thousand and $167 thousand, respectively. For the nine months ended September 30, 2012, the adjustments of cost of sales and operating expenses were increased by $2,027 thousand and $4,903 thousand, respectively

  • i) Employee benefits - corridor approach

Under ROC GAAP, unrecognized net transition obligation from first-adoption of SFAS No. 18, “Accounting for Pensions”, should be amortized over the expected average remaining service lives of the employees who are still in service and expected to receive pension benefits using the straight-line method and recorded in net pension cost. Transition to IFRSs, the Company is not subject to the transition requirements of IAS 19 “Employee Benefits.” Thus, unrecognized net transition obligation should be recognized immediately to unappropriated earnings.

Under ROC GAAP, actuarial gains and losses are accounted for under the corridor approach which resulted in the deferral of gains and losses. When using the corridor approach, actuarial gains and losses should be amortized over the expected average remaining working lives of the participating employees and be recognized directly to retained earnings. At the transition to IFRSs, the Company decided to adopt the corridor approach continuously in accordance with IAS No. 19, “Employee Benefits,” and its accounting policy.

At the transition date, the Company performed actuarial valuation under IAS No. 19, “Employee Benefits,” and recognized the valuation difference directly to retained earnings under the requirement of IFRS 1, “First-time Adoption of International Financial Reporting Standards.” As of September 30, 2012 and January 1, 2012, accrued pension cost was adjusted for an increase of $256,698 thousand and $262,332 thousand, respectively; non-controlling interest was adjusted for an increase of $231 thousand on both dates. Pension cost for the nine

  • 42 -

months ended September 30, 2012 was also adjusted for a decrease in cost of sales of $3,098 thousand and a decrease in operating expenses of $2,535 thousand, respectively.

  • j) Treasury stock transactions

Under ROC GAAP, the Company’s stocks held by subsidiaries were accounted for as treasury stock. For its first-time adoption of SFAS No. 30, ”Accounting for Treasury Stocks,” the recorded cost of the stock is based on its carrying amount as of January 1, 2002, which may not equal to its acquisition cost.

At the transition to IFRSs, treasury stock is stated at cost and shown as a deduction in shareholders’ equity. The Company is not subject to the transition requirement; thus, the amounts of the related accounts in the statements of changes in shareholders’ equity should be adjusted retrospectively.

As of September 30, 2012 and January 1, 2012, the book value of treasury stock was increased by $16,696 thousand on both dates.

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

25. APPROVAL OF FINANCIAL STATEMENTS

These financial statements were approved by the Company’s management on October 23, 2012.

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