SENAO — Annual Report 2017

Nov 3, 2017

Senao International Co., Ltd. and Subsidiaries

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

DECLARATION OF CONSOLIDATION OF FINANCIAL STATEMENTS OF AFFILIATES

The entities that are required to be included in the consolidated financial statements of affiliates in accordance with the “Criteria Governing Preparation of Affiliation Reports, Consolidated Business Reports and Consolidated Financial Statements of Affiliated Enterprises” for the year ended December 31, 2017 are all the same as those included in the consolidated financial statements of Senao International Co., Ltd. and its subsidiaries prepared in conformity with the International Financial Reporting Standard 10 “Consolidated Financial Statements”. Relevant information that should be disclosed in the consolidated financial statements of affiliates is included in the consolidated financial statements of Senao International Co., Ltd. and its subsidiaries. Hence, we do not prepare a separate set of consolidated financial statements of affiliates.

Very truly yours,

SENAO INTERNATIONAL CO., LTD.

By

LAI, CHING-LIN Chairman February 23, 2018

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INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Stockholders Senao International Co., Ltd.

Opinion

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

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

Basis for Opinion

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

Key Audit Matters

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

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

Sales Revenue Recognition from Dealers

Key audit matter:

The customers of the Group include the general public and dealers. Among all transactions, the amount of a single transaction with dealer is larger. The management takes many pressures under the market’s expectation and for the achievement of the operating performance. Under these circumstances, there’s a chance the management may inflate the sales revenue from dealers to reach their goal. Therefore, we assume this kind of revenue recognition exists fraud risk in accordance with the auditing standards. Consequently, the sales revenue recognition from dealers is considered to be a key audit matter.

For the accounting policy related to revenue recognition, please see Note 4-n.

Corresponding audit procedures:

We have tested the details of the sales revenue and verified the corresponding bill of sale and the customer's notes of receipt. Moreover, we examined the basic information of the dealers and the dealers’ receipt vouchers. We also compared and analyzed the gross profit rate, price and volume of the top ten customers over the past two years.

Valuation of Inventories

Key audit matter:

As described in Note 9, on December 31, 2017, the carrying amount of the Group’s inventories was $2,304,494 thousand, which represented 22% of the consolidated total assets. Because the amount of inventories is significant and the valuation of inventories involved material judgement and estimation of management. Consequently, valuation of inventories is considered to be a key audit matter.

For the accounting policy on inventory and the related material accounting judgement and estimation, please see Notes 4-f. and 5.

Corresponding audit procedures:

We have evaluated the appropriateness of the computation method used to calculate the loss on inventories, verified the basic assumptions used in computation by comparing the related supporting documents and recalculated the final numbers for reasonableness.

Other Matter

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

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

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

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

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

Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements

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

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

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

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

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

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

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

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

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

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

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

The engagement partners on the audit resulting in this independent auditors’ report are Mr. Dien Sheng Chang and Mr. Hung Peng Lin.

Deloitte & Touche Taipei, Taiwan Republic of China February 23, 2018

Notice to Readers

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

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

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SENAO INTERNATIONAL CO., LTD. AND SUBSIDIARIES

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

ASSETS CURRENT ASSETS Cash and cash equivalents (Note 6) Financial assets at fair value through profit or loss (Note 7) Notes receivable, net (Note 8) Trade receivables, net (Note 8) Trade receivables from related parties (Note 32) Other receivables (Note 8) Other receivables from related parties (Note 32) Inventories (Note 9) Other prepaid expenses (Note 32) Prepayments (Note 10) Other current assets (Notes 11 and 33) Total current assets NONCURRENT ASSETS Financial assets carried at cost (Note 12) Investments accounted for using equity method (Note 14) Property, plant and equipment (Notes 15 and 32) Goodwill (Note 16) Intangible assets (Notes 17 and 32) Deferred income tax assets (Note 26) Refundable deposits (Note 32) Other noncurrent assets (Note 33) Total noncurrent assets TOTAL LIABILITIES AND EQUITY CURRENT LIABILITIES Short-term loans (Notes 18 and 33) Financial liabilities at fair value through profit or loss (Note 7) Notes payable (Note 19) Notes payable to related parties (Note 32) Trade payables (Note 19) Trade payables to related parties (Note 32) Other payables (Note 20) Other payables to related parties (Note 32) Current tax liabilities (Note 26) Provisions (Note 21) Advance receipts (Notes 22 and 32) Other current liabilities Total current liabilities NONCURRENT LIABILITIES Deferred income tax liabilities (Note 26) Net defined benefit liabilities - noncurrent (Note 23) Guarantee deposits Total noncurrent liabilities Total liabilities EQUITY ATTRIBUTABLE TO STOCKHOLDERS OF THE PARENT Share capital - ordinary shares Capital surplus Retained earnings Legal reserve Unappropriated earnings Total retained earnings Other equity Treasury shares Total equity attributable to stockholders of the parent NONCONTROLLING INTERESTS Total equity TOTAL		2017 Amount % $ 2,320,253 23 - - 224,971 2 783,467 8 1,230,138 12 162,684 2 330,622 3 2,304,494 22 42,171 - 57,501 1 127,924 1 7,584,225 74 36,000 - 884,847 9 1,005,960 10 46,947 - 246,309 2 375,747 4 82,093 1 25,005 - 2,702,908 26 $ 10,287,133 100 $ - - 484 - 11,987 - 18 - 2,373,905 23 133,917 1 958,050 9 502,934 5 62,321 1 - - 91,841 1 68,487 1 4,203,944 41 38,245 - 94,319 1 27,802 - 160,366 1 4,364,310 42 2,582,527 25 703,314 7 1,331,759 13 1,609,507 16 2,941,266 29 1,110 - (328,076) (3) 5,900,141 58 22,682 - 5,922,823 58 $ 10,287,133 100		2016
				Amount % $ 2,195,323 21 217 - 137,352 1 677,613 6 1,703,506 16 137,751 1 474,364 5 2,273,562 22 53,781 1 74,214 1 34,279 - 7,761,962 74 36,000 - 862,288 8 1,002,035 10 55,569 - 278,333 3 372,228 4 88,152 1 14,332 - 2,708,937 26 $ 10,470,899 100 $ 68,000 1 - - 28,363 - 18 - 2,547,581 24 101,371 1 964,975 9 426,143 4 120,101 1 10,489 - 67,870 1 41,368 1 4,376,279 42 40,779 - 86,369 1 27,880 - 155,028 1 4,531,307 43 2,582,527 25 691,119 7 1,232,028 12 1,886,001 18 3,118,029 30 15,035 - (492,770) (5) 5,913,940 57 25,652 - 5,939,592 57 $ 10,470,899 100

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

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SENAO INTERNATIONAL CO., LTD. AND SUBSIDIARIES

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

OPERATING REVENUE (Note 32) Sales Less: Sales returns Sales discounts and allowances Net sales Service and repairs revenue Total operating revenue OPERATING COSTS (Notes 9, 25 and 32) Cost of goods sold Service and repairs costs Total operating costs GROSS PROFIT OPERATING EXPENSES (Notes 25 and 32) Selling and marketing expenses General and administrative expenses Total operating expenses OTHER INCOME AND EXPENSES (Note 25) INCOME FROM OPERATIONS NON-OPERATING INCOME AND EXPENSES (Note 32) Share of profit of associates accounted for using equity method Interest income Rental income Dividend income Other income Gains or losses on foreign currency exchange (Note 25) Valuation gain on financial assets at fair value through profit or loss (Note 7) Interest expense		2017 Amount % $ 33,410,225 93 311,148 1 829,178 2 32,269,899 90 3,468,035 10 35,737,934 100 30,518,590 85 877,377 3 31,395,967 88 4,341,967 12 3,239,103 9 399,042 1 3,638,145 10 (13,901) - 689,921 2 160,629 1 14,579 - 59,711 - 83 - 65,486 - (2,517) - - - (5,402) -		2016
				Amount % $ 31,873,422 93 580,391 2 508,451 1 30,784,580 90 3,306,168 10 34,090,748 100 28,796,330 85 732,417 2 29,528,747 87 4,562,001 13 3,378,975 10 354,125 1 3,733,100 11 (10,132) - 818,769 2 192,049 1 10,430 - 39,862 - 540 - 111,712 - 5,281 - 217 - (1,861) - (Continued)

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SENAO INTERNATIONAL CO., LTD. AND SUBSIDIARIES

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

Miscellaneous disbursements Valuation loss on financial liabilities at fair value through profit or loss (Note 7) Total non-operating income and expenses INCOME BEFORE INCOME TAX INCOME TAX EXPENSE (Note 26) NET INCOME TOTAL OTHER COMPREHENSIVE INCOME (LOSS) Items that will not be reclassified to profit or loss: Remeasurement of defined benefit plans (Note 23) Share of remeasurement of defined benefit plans of associates accounted for using equity method Income tax relating to items that will not be reclassified subsequently to profit or loss (Note 26) Items that may be reclassified subsequently to profit or loss: Exchange differences on translating the financial statements of foreign operations Share of the other comprehensive loss of associates accounted for using the equity method - exchange differences on translating the financial statements of foreign operations Total other comprehensive loss, net of income tax TOTAL COMPREHENSIVE INCOME NET PROFIT ATTRIBUTABLE TO: Owners of the Parent Noncontrolling interests		2017 Amount % $ (16,917) - (484) - 275,168 1 965,089 3 142,538 1 822,551 2 (10,564) - (505) - 1,796 - (9,273) - (11,009) - (2,916) - (13,925) - (23,198) - $ 799,353 2 $ 825,521 2 (2,970) - $ 822,551 2		2016
				Amount % $ (9,265) - - - 348,965 1 1,167,734 3 175,635 - 992,099 3 (23,499) - (454) - 3,995 - (19,958) - (52,802) - (1,275) - (54,077) - (74,035) - $ 918,064 3 $ 997,309 3 (5,210) - $ 992,099 3 (Continued)

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SENAO INTERNATIONAL CO., LTD. AND SUBSIDIARIES

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

COMPREHENSIVE INCOME ATTRIBUTABLE TO Owners of the Parent Noncontrolling interests EARNINGS PER SHARE (Note 27) Basic Diluted		2017 Amount % $ 802,323 2 (2,970) - $ 799,353 2 $ 3.30 $ 3.29		2016
				Amount % $ 923,274 3 (5,210) - $ 918,064 3 $ 4.02 $ 4.01
		$		$

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

(Concluded)

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SENAO INTERNATIONAL CO., LTD. AND SUBSIDIARIES

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

BALANCE, JANUARY 1, 2016 Appropriation of 2015 earnings Legal reserve Cash dividends - NT$3 per share Other changes in capital surplus Changes in capital surplus from investments in associates accounted for using the equity method Net income for the year ended December 31, 2016 Other comprehensive loss for the year ended December 31, 2016 Total comprehensive income (loss) for the year ended December 31, 2016 Share-based payment transactions BALANCE, DECEMBER 31, 2016 Appropriation of 2016 earnings Legal reserve Cash dividends - NT$4 per share Net income for the year ended December 31, 2017 Other comprehensive loss for the year ended December 31, 2017 Total comprehensive income (loss) for the year ended December 31, 2017 Share-based payment transactions BALANCE, DECEMBER 31, 2017		Equity Attributable to Stockholders of the Parent (Note 24)	Equity Attributable to Stockholders of the Parent (Note 24)	Noncontrolling Total Interests (Note 24) $ 5,722,124 $ 30,862 - - (744,758) - (744,758) - 71 - 997,309 (5,210) (74,035) - 923,274 (5,210) 13,229 - 5,913,940 25,652 - - (993,011) - (993,011) - 825,521 (2,970) (23,198) - 802,323 (2,970) 176,889 - $ 5,900,141 $ 22,682	Total Equity $ 5,752,986 - (744,758) (744,758) 71 992,099 (74,035) 918,064 13,229 5,939,592 - (993,011) (993,011) 822,551 (23,198) 799,353 176,889 $ 5,922,823
	Share Capital - Ordinary Shares Capital Surplus $ 2,582,527 $ 677,819 - - - - - - - 71 - - - - - - - 13,229 2,582,527 691,119 - - - - - - - - - - - - - 12,195 $ 2,582,527 $ 703,314	Retained Earnings Legal Reserve Unappropriated Earnings $ 1,151,693 $ 1,733,743 80,335 (80,335) - (744,758) 80,335 (825,093) - - - 997,309 - (19,958) - 977,351 - - 1,232,028 1,886,001 99,731 (99,731) - (993,011) 99,731 (1,092,742) - 825,521 - (9,273) - 816,248 - - $ 1,331,759 $ 1,609,507	Other Equity Exchange Differences on Translating Foreign Operations Treasury Shares $ 69,112 $ (492,770) - - - - - - - - - - (54,077) - (54,077) - - - 15,035 (492,770) - - - - - - - - (13,925) - (13,925) - - 164,694 $ 1,110 $ (328,076)

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

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SENAO INTERNATIONAL CO., LTD. AND SUBSIDIARIES

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

CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax Adjustments to reconcile income before income tax to net cash provided by operating activities: Depreciation expenses Amortization expenses Provision for doubtful accounts Valuation loss (gain) on financial assets and liabilities at fair value through profit or loss Interest expense Interest income Dividend income Compensation cost of share-based payment transactions Share of profit of associates accounted for using equity method Loss on disposal of property, plant and equipment Impairment loss recognized on non-financial assets Net gain on foreign currency exchange Changes in operating assets and liabilities: Decrease (increase) in: Financial assets held for trading Notes receivable Trade receivables Trade receivables from related parties Other receivables Other receivables from related parties Inventories Other prepaid expenses Prepayments Other current assets Increase (decrease) in: Notes payable Trade payables Trade payables to related parties Other payables Other payables to related parties Provisions Advance receipts Other current liabilities Net defined benefit liabilities - noncurrent Cash generated from operations Interest paid Income tax paid Net cash generated from operating activities	2017 $ 965,089 85,978 38,823 835 484 5,402 (14,579) (83) 12,689 (160,629) 5,279 8,622 (5,494) 217 (87,603) (106,705) 473,368 (23,477) 143,742 (30,932) 11,610 16,713 2,000 (16,376) (173,676) 32,546 (6,905) 76,791 (10,489) 23,971 27,119 (2,614) 1,291,716 (5,422) (205,347) 1,080,947	2016 $ 1,167,734 105,967 49,274 (388) (217) 1,861 (10,430) (540) 13,229 (192,049) 10,132 - (31,895) 148 20,337 3,431 (563,000) (28,916) (11,472) 135,380 (4,658) 79,169 (2,000) (1,695) 276,951 (33,248) (209,236) 14,782 (14,138) (121,157) 12,093 (2,856) 662,593 (1,841) (129,956) 530,796

(Continued)

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SENAO INTERNATIONAL CO., LTD. AND SUBSIDIARIES

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

CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property, plant and equipment Proceeds from disposal of property, plant and equipment Decrease in refundable deposits Acquisition of intangible assets Proceeds from disposal of intangible assets Acquisition of time deposits with maturities of more than three months Proceeds from disposal of time deposits with maturities of more than three months Increase in other noncurrent assets Interest received Dividends received Net cash generated from (used in) investing activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from short-term loans Repayment of short-term loans Decrease in guarantee deposits Cash dividends paid Treasury shares transferred to employees Net cash used in financing activities EFFECTS OF EXCHANGE RATE CHANGES ON THE BALANCE OF CASH HELD IN FOREIGN CURRENCIES NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR CASH AND CASH EQUIVALENTS, END OF THE YEAR	2017 $ (95,653) 338 6,059 (6,854) - (233,921) 137,454 (10,673) 13,895 132,715 (56,640) 6,556,500 (6,624,500) (78) (993,011) 164,200 (896,889) (2,488) 124,930 2,195,323 $ 2,320,253	2016 $ (89,052) 4,191 10,828 (26,859) 230 (143,594) 156,843 (7,618) 8,812 216,067 129,848 1,365,000 (1,297,000) (657) (744,758) - (677,415) (6,663) (23,434) 2,218,757 $ 2,195,323

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

(Concluded)

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SENAO INTERNATIONAL CO., LTD. AND SUBSIDIARIES

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

1. GENERAL

Senao International Co., Ltd. (“Senao”; Senao and subsidiaries are hereinafter collectively referred to as “the Group”) was incorporated in the Republic of China (“ROC”) on May 18, 1979. On January 12, 2001, Senao received approval from the Securities and Futures Commission (the “SFC”) for a domestic initial public offering and its common stocks were listed and traded on the Taiwan Stock Exchange (the “TWSE”) on May 24, 2001. In need of organizational rebuilding and professional operation of all kinds of businesses, Senao has spun off the wireless communication business segment, including its assets and liabilities and incorporated Senao Networks, Inc. pursuant to the Business Mergers and Acquisitions Act. The spin-off date was October 1, 2006.

After rebuilding the organization, Senao mainly sells cell phones and the peripheral products, and provides the related repairs and maintenance services.

Chunghwa Telecom Co., Ltd. (“Chunghwa”) acquired 31.33% of the shares of Senao on January 15, 2007. Chunghwa has a substantial control over Senao, and it is the ultimate parent entity of Senao. As of December 31, 2017, Senao’s employees exercised the employee share options issued before 2007; in addition, Senao transferred to employees in 2017 the treasury shares which Senao bought back in 2015. Therefore, Chunghwa’s ownership interest in Senao decreased from 31.33% to 28.53%.

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

2. APPROVAL OF FINANCIAL STATEMENTS

The consolidated financial statements were approved by the Board of Directors on February 23, 2018.

3. APPLICATION OF NEW AND REVISED STANDARDS AND INTERPRETATIONS

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

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

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• b. The Regulations Governing the Preparation of Financial Reports by Securities Issuers and the International Financial Reporting Standards (IFRS), International Accounting Standards (IAS), Interpretations of IFRS (IFRIC), and Interpretations of IAS (SIC) (collectively, the “IFRSs”) endorsed by the FSC for application starting from 2018

Effective Date New, Revised or Amended Standards and Interpretations Issued by IASB (Note 1) Annual Improvements to IFRSs 2014-2016 Cycle Note 2 Amendments to IFRS 2 “Classification and Measurement of January 1, 2018 Share-based Payment Transactions” Amendments to IFRS 4 “Applying IFRS 9 Financial Instruments with January 1, 2018 IFRS 4 Insurance Contracts” IFRS 9 “Financial Instruments” January 1, 2018 Amendments to IFRS 9 and IFRS 7 “Mandatory Effective Date of January 1, 2018 IFRS 9 and Transition Disclosures” IFRS 15 “Revenue from Contracts with Customers” January 1, 2018 Amendments to IFRS 15 “Clarifications to IFRS 15 Revenue from January 1, 2018 Contracts with Customers” Amendment to IAS 7 “Disclosure Initiative” January 1, 2017 Amendments to IAS 12 “Recognition of Deferred Tax Assets for January 1, 2017 Unrealized Losses” Amendments to IAS 40 “Transfers of Investment Property” January 1, 2018 IFRIC 22 “Foreign Currency Transactions and Advance January 1, 2018 Consideration”

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

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

After assessment, the issuance and related amendments to the Regulations Governing the Preparation of Financial Reports by Securities Issuers will not have material impacts on consolidated financial statements.

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

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

Effective Date Issued by IASB (Note 1)

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

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

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

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

Except for the following item, the application of the above new, revised or amended standards and interpretations will not have material impact on the consolidated financial statements:

IFRS 16 “Leases”

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

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

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

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

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

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Statement of compliance

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

b. Basis of preparation

The consolidated financial statements have been prepared on the historical cost basis except for financial instruments which are measured at fair value and net defined benefit liabilities which are measured at the present value of the defined benefit obligation less the fair value of plan assets.

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

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

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

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

• c. Classification of current and noncurrent assets and liabilities

Current assets include assets held primarily for the purpose of trading, assets expected to be realized within 12 months after the reporting period and cash and cash equivalents unless the asset is restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. Current liabilities include liabilities held primarily for the purpose of trading, liabilities due to be settled within 12 months after the reporting period and liabilities for which the Group does not have an unconditional right to defer settlement for at least 12 months after the reporting period.

Assets and liabilities that are not classified as current are classified as noncurrent.

• d. Basis of consolidation

• 1) The consolidated financial statements incorporate the financial statements of Senao and the entities controlled by Senao (i.e. its subsidiaries). Adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by Senao. All intra-group transactions, balances, income and expenses are eliminated in full upon consolidation. Total comprehensive income of subsidiaries is attributed to the owners of Senao and to the noncontrolling interests even if this results in the noncontrolling interests having a deficit balance.

• 2) See Note 13, Tables 5 and 6 for detailed information on subsidiaries (including percentages of ownership and main businesses).

• e. Foreign currencies

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

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

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

Non-monetary items that are measured at historical cost in a foreign currency are translated using the exchange rate at the date of the transaction, which will not be recalculated.

For the purpose of presenting consolidated financial statements, the functional currencies of the Group entities (including subsidiaries and associates in other countries that use currencies which are different from the currency of Senao) are translated into the New Taiwan dollars on the balance sheet date as follows: Assets and liabilities are translated at the exchange rates prevailing at the end of the reporting period; and income and expense items are translated at the average exchange rates for the period. The resulting currency translation differences are recognized in other comprehensive income.

• 16 -

f. Inventories

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

• g. Investments in associates

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

The Group uses the equity method to account for its investments in associates. Under the equity method, investments in an associate are initially recognized at cost and adjusted thereafter to recognize the Group’s share of the profit or loss and other comprehensive income of the associate. The Group also recognizes the changes in the Group’s share of the equity of associates.

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

The Group evaluates the carrying amount of investments on the balance sheet date to see if there is objective evidence showing the investments were impaired and impairment loss, if any, is recognized in loss for the period.

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

• h. Property, plant and equipment

Property, plant and equipment are stated at cost and subsequently measured at cost less accumulated depreciation.

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

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

• i. Goodwill

Goodwill arising from the acquisition of a business is carried at cost as established at the date of acquisition of the business less accumulated impairment loss.

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

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

• j. Intangible assets

• 1) Intangible assets acquired separately

Intangible assets with finite useful lives that are acquired separately are initially measured at cost and subsequently measured at cost less accumulated amortization. Amortization is recognized on a straight-line basis. The estimated useful lives, residual values, and amortization methods are reviewed at the end of each reporting period, with the effect of any changes in the estimates accounted for on a prospective basis. The estimated useful lives of the intangible assets are set to zero except when the Group expects to dispose of the assets before the end of the useful life.

• 2) Intangible assets acquired in a business combination

Intangible assets acquired in a business combination and recognized separately from goodwill are initially recognized at their fair value at the acquisition date. Subsequent to initial recognition, they are measured on the same basis as intangible assets that are acquired separately.

• 3) Derecognition of intangible assets

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

• k. Impairment of property, plant and equipment and intangible assets other than goodwill

At the end of each reporting period, the Group reviews the carrying amounts of its property, plant and equipment and intangible assets, excluding goodwill, to determine whether there is any indication that those assets have suffered any impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. If the recoverable amount is less than the carrying amounts, the difference will be recognized in profit or loss as impairment loss. When an impairment loss is subsequently reversed, the carrying amount of the corresponding asset is increased to the revised estimate of its recoverable amount, but only to the extent of the carrying amount that would have been determined had no impairment loss been recognized on the asset in prior years.

• l. Financial instruments

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

• 18 -

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

1) Financial assets

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

a) Measurement categories

i. Available-for-sale financial assets

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

Available-for-sale equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are measured at cost less impairment losses at the end of each reporting period and presented in a separate line item as financial assets carried at cost.

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

ii. Loans and receivables

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

Cash equivalents include commercial paper and time deposits with original maturities within 3 months from the date of acquisition, which are highly liquid, readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. These cash equivalents are held for the purpose of meeting short-term cash commitments.

• b) Impairment of financial assets

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

For financial assets carried at amortized cost, such as trade receivables and other receivables, such assets are assessed for impairment on a collective basis even if they were assessed not to be impaired individually.

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

• 19 -

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

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

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

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

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

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

• c) Derecognition of financial assets

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

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

2) Financial liabilities

The Group only derecognizes a financial liability when the obligation is canceled, expired or fulfilled. The difference between the carrying amount of a financial liability derecognized and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognized in profit or loss.

• 3) Derivative financial instruments

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

• 20 -

Derivatives are initially recognized at fair value at the date the derivative contracts are entered into and are subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is recognized in profit or loss immediately. When the fair value of a derivative financial instrument is positive, the derivative is recognized as a financial asset at fair value through profit or loss; when the fair value of a derivative financial instrument is negative, the derivative is recognized as a financial liability at fair value through profit or loss.

• m. Provisions

Post-sales service provisions, which arise from sales contracts, are measured at the best estimate of the discounted cash flows of the consideration required to settle the present obligation at the end of the reporting period, taking into account the history of post-sales service and recognized when the revenues from related products are recognized.

• n. Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable.

• 1) Sale of goods

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

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

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

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

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

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

The sale of goods that results in awarded credits for customers under the Group’s award scheme is accounted for as a multiple element revenue transaction, and the fair value of the consideration received or receivable is allocated between the goods supplied and the awarded credits granted. The consideration allocated to the awarded credits is measured by reference to their fair value, i.e. the amount for which the awarded credits could be sold separately. Such consideration is not recognized as revenue at the time of the initial sale transaction but is deferred and recognized as revenue when the awarded credits are redeemed and the Group’s obligations have been fulfilled.

• 2) Rendering of services

Service income is recognized when services are provided.

• 3) Dividend and interest income

Dividend income from investments is recognized when a shareholder’s right to receive payment has been established.

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

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o. Leasing

1) The Group as lessor

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

• 2) The Group as lessee

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

p. Employee benefits

• 1) Short-term employee benefits

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

2) Retirement benefits

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

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

Net defined benefit liabilities represent the actual deficit in the Group’s defined benefit plans.

• q. Share-based payment arrangements - employee share options

The equity-settled share-based payments is measured at the fair value at the grant date.

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

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

• r. Taxation

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

• 22 -

1) Current tax

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

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

2) Deferred tax

Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities and the corresponding tax bases used in the computation of taxable profit. If a temporary difference arises from the initial recognition (other than in a business combination) of assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit, the resulting deferred tax asset or liability is not recognized. In addition, a deferred tax liability is not recognized on taxable temporary differences arising from the initial recognition of goodwill.

Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized.

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

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

Deferred tax liabilities and assets are measured at the tax rates that are expected to apply in the period in which the liabilities are settled or the assets are realized.

• 3) Current and deferred taxes for the year

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

5. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY

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

• 23 -

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

The main assumptions and estimated uncertainties are as follows:

Valuation of inventories

Inventories are measured at lower of cost or net realizable value. The management uses the estimated selling price in the ordinary course of business less the estimated costs of marketing as the net realizable value. The bases of the inventory obsolescence loss are the duration of products-purchasing and the related turnover. The management determines and estimates the net realizable value based on market conditions as of reporting date and historical experience with product sales. Changes in market conditions may have a material impact on the estimation of the net realizable value.

6. CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS
Cash on hand and petty cash Checking accounts and demand deposits Cash equivalents Commercial paper Time deposits		December 31
		2017 $ 181,010 1,025,754 898,329 215,160 $ 2,320,253	2016 $ 168,765 1,031,171 715,040 280,347 $ 2,195,323

The annual yield rates of bank deposits, commercial paper and time deposits as of balance sheet dates were as follows:

Bank deposits Commercial paper Time deposits	December 31
	2017 2016 0.005%-0.35% 0.005%-0.35% 0.39%-0.40% 0.42% 3.70%-4.05% 1.10%-3.30%

7. FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS

Financial assets held for trading Derivative financial assets Forward exchange contracts Financial liabilities held for trading Derivative financial liabilities Forward exchange contracts		December	31
		2017 $ - $ 484	2016 $ 217 $ -

• 24 -

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

Notional Amount Currency Maturity Date (In Thousands) December 31, 2017 Forward exchange contracts - buy NTD/USD 2018.01.02-2018.01.16 NT$125,481/US$4,190 December 31, 2016 Forward exchange contracts - buy NTD/USD 2017.01.10-2017.01.13 NT$54,629/US$1,700

The Group entered into forward exchange contracts to hedge the exchange rate risk arising from assets and liabilities denominated in foreign currencies.

8. NOTES RECEIVABLE, TRADE RECEIVABLES AND OTHER RECEIVABLES

Notes receivable Notes receivable Less: Allowance for doubtful notes receivable Trade receivables Trade receivables Less: Allowance for doubtful trade receivables Other receivables Manufacturers allowance receivable Receivables from China Unicom Others		December 31	December 31
		2017 $ 225,902 (931) $ 224,971 $ 804,324 (20,857) $ 783,467 $ 67,158 10,391 85,135 $ 162,684	2016 $ 138,299 (947) $ 137,352 $ 697,619 (20,006) $ 677,613 $ 105,265 20,053 12,433 $ 137,751

a. Notes receivable

The average credit terms range from 30 to 45 days. When determining the recoverability, the Group considered any changes in credit quality from the original credit date to the balance sheet date. If the notes receivable were not collectible as of due date, a 100% allowance for doubtful notes receivable is provided.

• 25 -

The aging of receivable was as follows:

Non-overdue More than 61 days		December 31	December 31
		2017 $ 224,971 931 $ 225,902	2016 $ 137,352 947 $ 138,299

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

The Group did not have overdue notes receivables that did not provide allowance as of the balance sheet date.

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

Balance on January 1 Deduct: Reversal of amounts written off during the year as uncollectible Balance on December 31	For the Year Ended December 31	For the Year Ended December 31	For the Year Ended December 31
		2017 $ 947 16 $ 931	2016 $ 947 - $ 947

b. Trade receivables

The average credit terms of sales of goods ranges from 30 to 90 days. When there is evidence of impairment, the Group individually evaluates each trade receivable’s impairment amount. When there is no evidence of impairment, the trade receivables will be classified into groups by their credit risk. Then the Group individually evaluated each group’s impairment amount. When a debtor has an overdue receivable, allowance for impairment loss is estimated based on the rates of the uncollected trade receivables from the past three years. The aging of receivables was as follows:

Non-overdue 1-60 days 61-90 days More than 91 days		**December 31 **	**December 31 **
		2017 $ 777,977 273 21 26,053 $ 804,324	2016 $ 661,479 9,668 - 26,472 $ 697,619

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

The aging of receivables that were past due but not impaired was as follows:

More than 360 days		**December **	**31 **
		2017 $ 5,203	2016 $ 6,277

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At the balance sheet dates, the receivables that were past due but not impaired were considered recoverable by the management of the Group. Because the credit qualities did not have a material change and the corresponding collateral were acquired.

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

Individually Assessed for Impairment Collectively Assessed for Impairment Balance on January 1, 2016 $ 20,219 $ 175 Deduct: Reversal of amounts written off during the year as uncollectible 331 57 Balance on December 31, 2016 $ 19,888 $ 118 Balance on January 1, 2017 $ 19,888 $ 118 Add: Provision (reversal) for doubtful accounts 939 (88) Balance on December 31, 2017 $ 20,827 $ 30	Total $ 20,394 388 $ 20,006 $ 20,006 851 $ 20,857

c. Other receivables

When there is evidence of impairment, the Group individually evaluates each other receivable’s impairment amount. When there is no evidence of impairment, other receivables will be classified into groups by their credit risk. Then the Group individually evaluates each group’s impairment amount. When a debtor has an overdue receivable, allowance for impairment loss is estimated based on the rates of the uncollected other receivables in the past three years.

The Group did not have overdue other receivables that did not provide allowance as of the balance sheet date.

9. INVENTORIES

Merchandise

	December 31	December 31
	2017 $ 2,304,494	2016 $ 2,273,562

The cost of inventories recognized as cost of goods sold for the years ended December 31, 2017 and 2016 was $30,518,590 thousand and $28,796,330 thousand, respectively. The cost of goods sold included inventory write-downs of $462 thousand and $271 thousand, respectively.

10. PREPAYMENTS

Overpaid tax Prepaid purchases Other prepayments		December	31
		2017 $ 6,628 1,888 48,985 $ 57,501	2016 $ 16,330 3,991 53,893 $ 74,214

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11. OTHER CURRENT ASSETS

OTHER CURRENT ASSETS
Time deposits with maturities of more than three months Restricted bank deposit		**December 31 **
		2017 $ 127,924 - $ 127,924	2016 $ 32,279 2,000 $ 34,279

a. The annual yield rates of time deposits with maturities of more than three months were as follows:

Time deposits with maturities of more than three months Restricted bank deposit	December 31
	2017 2016 0.50%-4.15% 0.50% - 0.08%

b. For information about other current assets pledged as collateral, please see Note 33.

12. FINANCIAL ASSETS CARRIED AT COST

FINANCIAL ASSETS CARRIED AT COST
Domestic non-listed stocks		December	31
		2017 $ 36,000	2016 $ 36,000

The above non-listed stocks are classified as available-for-sale financial assets based on financial assets categories.

Since the fair value of such non-listed stocks investments cannot be reliably measured due to the fact that the range of reasonable fair value estimates was so significant and the probability of estimates cannot be reasonably estimated, the above non-listed stocks investments owned by the Group are measured at cost less any impairment loss at the balance sheet date.

13. SUBSIDIARIES

Subsidiaries included in the consolidated financial statements were as follows:

Name of Investor Name of Investee Nature of Activities Senao International Co., Ltd. Senao International (Samoa) Holding Ltd. (“Senao Samoa”) International investment Youth Co., Ltd. (“Youth”) Sale of information and communication technologies products Aval Technologies Co., Ltd. (“Aval”) Sale of information and communication technologies products Senyoung Insurance Agent Co., Ltd. (“Senyoung”) Property and liability insurance agency Senao International (Samoa) Holding Ltd. (Senao Samoa) Senao International HK Limited (“Senao HK”) International investment

Percentage ofOwnership December 31 2017 2016 Remark 100.00 100.00 - 89.48 89.48 - 100.00 100.00 - 100.00 - a 100.00 100.00 -

(Continued)

• 28 -

Name of Investor Name of Investee Nature of Activities Youth Co., Ltd. ISPOT Co., Ltd. (“ISPOT”) Sale of information and communication technologies products Youyi Co., Ltd. (“Youyi”) Maintenance of information and communication technologies products Senao International HK Limited (Senao HK) Senao Trading (Fujian) Co., Ltd. (“STF”) Sale of information and communication technologies products Senao International Trading (Shanghai) Co., Ltd. (“SITS”) Sale of information and communication technologies products Senao International Trading (Shanghai) Co., Ltd. (“SEITS”) Maintenance of information and communication technologies products Senao International Trading (Jiangsu) Co., Ltd. (“SITJ”) Sale of information and communication technologies products

Percentage ofOwnership December 31 2017 2016 Remark 100.00 100.00 - 100.00 100.00 - 100.00 100.00 - 100.00 100.00 - 100.00 100.00 b 100.00 100.00 - (Concluded)

Remarks:

• a. Senao established Senyoung on September 27, 2017 with $10,000 thousand and completed the establishment registration on November 22, 2017.

• b. SEITS was approved to end and dissolve its business on March 15, 2017. The liquidation of SEITS is still in process.

14. INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD

Investments in associates Material associate Senao Networks, Inc. (“SNI”) Associate that is not individually material HopeTech Technologies Limited (“HopeTech”) a. Material associate SNI		December 31
	2017 2016 $ 862,116 $ 838,830 22,731 23,458 $ 884,847 $ 862,288 Proportion of Ownership and Voting Rights
	**December 31 **
	2017 2016 33.79% 33.79%

Refer to Table 5 “Names, locations, and other information of investees in which the company exercises significant influence (excluding investment in mainland China)” for the nature of activities, principal places of business and countries of incorporation of the associates.

The investments were accounted for using the equity method, and the share of profit or loss and other comprehensive income of those investments for the years ended December 31, 2017 and 2016 were based on the associate’s financial statements which have been audited for the same period.

• 29 -

Fair values (Level 1) of investments in associates with available published price quotations are summarized as follows:

SNI		December 31	December 31
		2017 $ 2,130,406	2016 $ 2,536,592

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

SNI and its subsidiaries

December 31 2017 2016 Current assets $ 5,102,675 $4,331,809 Noncurrent assets 1,432,656 878,886 Current liabilities (3,872,898) (2,602,582) Noncurrent liabilities (19,450) (24,548) Equity 2,642,983 2,583,565 Noncontrolling interests (91,798) (101,106) $ 2,551,185 $ 2,482,459 Proportion of the Group’s ownership 33.79% 33.79% Equity attributable to the Group $ 862,116 $ 838,892 Unrealized gain or loss with associates - (62) Carrying amount $ 862,116 $ 838,830 For the Year Ended December 31 2017 2016 Operating revenue $ 8,461,979 $ 6,636,546 Profit from continuing operations $ 492,158 $ 578,721 Profit from discontinued operations - - Net profit for the year 492,158 578,721 Other comprehensive loss (8,629) (5,114) Total comprehensive income for the year $ 483,529 $ 573,607 b. Aggregate information of associates that are not individually material For the Year Ended December 31 2017 2016 The Group’s share of: Profit (loss) from continuing operations $ (495) $ 3,265 Other comprehensive income (loss) - - Total comprehensive income (loss) for the year $ (495) $ 3,265		December 31	December 31	December 31
	2017 2016 $ 5,102,675 $4,331,809 1,432,656 878,886 (3,872,898) (2,602,582) (19,450) (24,548) 2,642,983 2,583,565 (91,798) (101,106) $ 2,551,185 $ 2,482,459 33.79% 33.79% $ 862,116 $ 838,892 - (62) $ 862,116 $ 838,830 For the Year Ended December 31
			2017 $ (495) - $ (495)	2016 $ 3,265 - $ 3,265

• 30 -

15. PROPERTY, PLANT AND EQUIPMENT

Cost Balance on January 1, 2016 Additions Disposals Reclassification Effect of foreign currency exchange differences Balance on December 31, 2016 Accumulated depreciation Balance on January 1, 2016 Depreciation expenses Disposals Reclassification Effect of foreign currency exchange differences Balance on December 31, 2016 Carrying amounts on December 31, 2016 Cost Balance on January 1, 2017 Additions Disposals Effect of foreign currency exchange differences Balance on December 31, 2017 Accumulated depreciation Balance on January 1, 2017 Depreciation expenses Disposals Effect of foreign currency exchange differences Balance on December 31, 2017 Carrying amounts on December 31, 2017	Land $ 319,284 - - - - $ 319,284 $ - - - - - $ - $ 319,284 $ 319,284 - - - $ 319,284 $ - - - - $ - $ 319,284	Buildings $ 813,344 4,819 - - - $ 818,163 $ 266,527 25,290 - - - $ 291,817 $ 526,346 $ 818,163 610 - - $ 818,773 $ 291,817 25,269 - - $ 317,086 $ 501,687	Machinery and Equipment $ 41,795 1,170 (177 ) - - $ 42,788 $ 23,090 4,600 (122 ) - - $ 27,568 $ 15,220 $ 42,788 23,162 - - $ 65,950 $ 27,568 5,938 - - $ 33,506 $ 32,444	Computer Telecommuni- cations Equipment $ 338,814 32,432 (42,764 ) 157 (2,286) $ 326,353 $ 288,445 19,950 (37,384 ) 3 (1,433) $ 269,581 $ 56,772 $ 326,353 48,084 (24,989 ) (174) $ 349,274 $ 269,581 21,223 (24,290 ) (88) $ 266,426 $ 82,848	Transportation Equipment $ 32 - (11 ) - (3) $ 18 $ 21 3 (8 ) - (2) $ 14 $ 4 $ 18 - (17 ) (1) $ - $ 14 1 (15 ) - $ - $ -	Office Equipment $ 103,765 15,929 (3,954 ) (157 ) (285) $ 115,298 $ 69,313 10,731 (3,453 ) (3 ) (142) $ 76,446 $ 38,852 $ 115,298 5,827 (7,904 ) (40) $ 113,181 $ 76,446 11,916 (7,294 ) (17) $ 81,051 $ 32,130	Leasehold Improvements $ 395,226 34,267 (57,825 ) - (3,096) $ 368,572 $ 333,412 45,920 (49,472 ) - (2,862) $ 326,998 $ 41,574 $ 368,572 17,384 (21,491 ) (408) $ 364,057 $ 326,998 21,285 (20,267 ) (385) $ 327,631 $ 36,426	Other Equipment $ 30,390 435 (559 ) - - $ 30,266 $ 27,337 (527 ) (528 ) - 1 $ 26,283 $ 3,983 $ 30,266 586 (22,490 ) - $ 8,362 $ 26,283 346 (19,408 ) - $ 7,221 $ 1,141	Total $ 2,042,650 89,052 (105,290 ) - (5,670) $ 2,020,742 $ 1,008,145 105,967 (90,967 ) - (4,438) $ 1,018,707 $ 1,002,035 $ 2,020,742 95,653 (76,891 ) (623) $ 2,038,881 $ 1,018,707 85,978 (71,274 ) (490) $ 1,032,921 $ 1,005,960

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

Buildings Main buildings 50-55 years Mechatronic construction 15 years Decoration construction 3-5 years Machinery and equipment 5-8 years Computer telecommunications equipment 3-8 years Transportation equipment 4 years Office equipment 3-6 years Leasehold improvements 3-5 years Other equipment 4-6 years

16. GOODWILL

GOODWILL
Cost The beginning and ending balance Accumulated impairment losses Balance on January 1 Impairment losses recognized Balance on December 31 Carrying amount on December 31	For the Year Ended December 31
		2017 $ 55,569 $ - 8,622 $ 8,622 $ 46,947	2016 $ 55,569 $ - - $ - $ 55,569

• 31 -

The Group acquired Youth and its subsidiaries on September 2, 2015 and recognized goodwill relating to Youth’s expected benefit from its business value of Apple.

The Group considered the smallest identifiable asset group as a single cash generating unit by classification of businesses.

The recoverable amount of the Group was determined based on a value in use calculation that used the cash flow projections in the financial budgets approved by management covering a 5-year period. The key assumptions and their related calculation methods used in the recoverable amount calculation were as follows:

• a. Operating revenue growth rate

The Group calculated the recoverable amount according to the actual selling situation and the average price from the past few years and considered the impact of the high value-added product and wrapping services. Eventually, the Group estimated the future operating revenue based on the operating strategies and the market developing situation in the future.

b. Expected gross profit rate

The Group adjusted the expected gross profit rate based on the average gross profit before the budget period considering the improvement on expected efficiency. In addition to the improvement on expected efficiency, the expected gross profit rate reflected the experience from the past. The management used different products, services and channels of distribution as the bases of estimated profit gross rate.

c. Discount rate

The Group calculated the recoverable amount on the basis of the Weighted Average Cost of Capital (WACC). The discount rates used by the Group were as follows:

						December	31
					2017			2016
Discount rate					14.80%		14.60%
After the abovementioned estimations, the Group recognized $8,622 thousand as goodwill impairment
loss for the year ended December	31, 2017. No impairment incurred for					the year ended	December 31,
2016.
INTANGIBLE ASSETS
	Computer		Licenses and
		Software	Franchises		Trademark			Total
Cost
Balance on January 1, 2016	$ 125,288		$	206,000	$	53,000	$	384,288
Additions		23,554		-		3,305		26,859
Disposals		(5,136)		-		-		(5,136)
Effect of foreign currency
exchange differences		(227)		-		-		(227)
Balance on December 31, 2016	$ 143,479		$	206,000	$	56,305	$	405,784
							(Continued)

17. INTANGIBLE ASSETS

• 32 -

Accumulated amortization Balance on January 1, 2016 Amortization expenses Disposals Effect of foreign currency exchange differences Balance on December 31, 2016 Carrying amounts on December 31, 2016 Cost Balance on January 1, 2017 Additions Effect of foreign currency exchange differences Balance on December 31, 2017 Accumulated amortization Balance on January 1, 2017 Amortization expenses Effect of foreign currency exchange differences Balance on December 31, 2017 Carrying amounts on December 31, 2017	Computer Software Licenses and Franchises Trademark $ 79,369 $ 2,575 $ 1,293 33,686 10,300 5,288 (4,906) - - (149) - (5) $ 108,000 $ 12,875 $ 6,576 $ 35,479 $ 193,125 $ 49,729 $ 143,479 $ 206,000 $ 56,305 6,854 - - (5) - (44) $ 150,328 $ 206,000 $ 56,261 $ 108,000 $ 12,875 $ 6,576 23,030 10,300 5,493 2 - 4 $ 131,032 $ 23,175 $ 12,073 $ 19,296 $ 182,825 $ 44,188	Total $ 83,237 49,274 (4,906) (154) $ 127,451 $ 278,333 $ 405,784 6,854 (49) $ 412,589 $ 127,451 38,823 6 $ 166,280 $ 246,309 (Concluded)

Intangible assets are depreciated on a straight-line basis over their estimated useful lives as follows:

Computer software 1-3 years Licenses and franchises 20 years Trademark 10-11 years

18. SHORT-TERM LOANS

SHORT-TERM LOANS
Unsecured loans Secured loans (Note 33)		**December **	**31 **
		2017 $ - - $ -	2016 $ 48,000 20,000 $ 68,000

• 33 -

The annual interest rates of loans were as follows:

Unsecured loans Secured loans	December 31
	2017 2016 - 1.95%-1.97% - 1.98%

19. NOTES PAYABLE AND TRADE PAYABLES

NOTES PAYABLE AND TRADE PAYABLES
Notes payable Operating Trade payables Operating		**December 31 **
		2017 $ 11,987 $ 2,373,905	2016 $ 28,363 $ 2,547,581

a. Notes payable

Notes payable were mainly from the payment for the rent of the offices and the business places.

b. Trade payables

The average credit period is one month. The Group has set up financial risk management policies in place to ensure that all payables will be paid within the pre-agreed credit terms.

20. OTHER PAYABLES

OTHER PAYABLES
Payables for bonuses Accrued marketing compensation Payables for salaries Accrued compensation to employees and remuneration to directors and supervisors Others		December 31
		2017 $ 281,852 198,194 186,964 51,551 239,489 $ 958,050	2016 $ 191,038 197,501 186,818 62,281 327,337 $ 964,975

21. PROVISIONS

PROVISIONS
Post-sales service		**December **	**31 **
		2017 $ -	2016 $ 10,489

• 34 -

22. ADVANCE RECEIPTS

ADVANCE RECEIPTS
Advance sales receipts Customer loyalty programs Other advance receipts		December	31
		2017 $ 32,734 17,700 41,407 $ 91,841	2016 $ 35,305 20,221 12,344 $ 67,870

23. RETIREMENT BENEFIT PLANS

a. Defined contribution plans

Senao, Youth, ISPOT, Youyi, Aval and Senyoung within the Group adopted a pension plan under the Labor Pension Act (the “LPA”), which is a state-managed defined contribution plan. Under the LPA, an entity makes monthly contributions to employees’ individual pension accounts at 6% of monthly salaries and wages.

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

Senao Samoa did not set up a pension plan.

Senao HK has a defined contribution pension plan. Senao HK did not have any regular employee as of December 31, 2017, therefore, Senao HK did not recognize any pension cost.

b. Defined benefit plans

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

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

Present value of funded defined benefit obligation Fair value of plan assets Funded status - deficit Net defined benefit liabilities		December 31	December 31
		2017 $ 255,121 (160,802) 94,319 $ 94,319	2016 $ 252,781 (166,412) 86,369 $ 86,369

• 35 -

Movements in net defined benefit liabilities (assets) were as follows:

	Present Value		Net Defined	Net Defined
	of Funded			Benefit
	Defined Benefit	Fair Value of	Liabilities
	Obligation	Plan Assets		(Assets)
Balance on January 1, 2016	$ 230,980	$ (165,254)	$	65,726
Service cost
Current service cost	1,298	-		1,298
Net interest expense (income)	4,567	(3,307)		1,260
Recognized in profit or loss	5,865	(3,307)		2,558
Remeasurement
Return on plan assets (excluding amounts
included in net interest)	-	1,741		1,741
Actuarial loss - changes in demographic
assumptions	4,374	-		4,374
Actuarial loss - changes in financial
assumptions	14,988	-		14,988
Actuarial loss - experience adjustments	2,396	-		2,396
Recognized in other comprehensive income	21,758	1,741		23,499
Contributions from the employer	-	(5,414)		(5,414)
Benefits paid	(5,822)	5,822		-
Balance on December 31, 2016	$ 252,781	$ (166,412)	$	86,369
Balance on January 1, 2017	$ 252,781	$ (166,412)	$	86,369
Service cost
Current service cost	1,324	-		1,324
Net interest expense (income)	3,791	(2,535)		1,256
Recognized in profit or loss	5,115	(2,535)		2,580
Remeasurement
Return on plan assets (excluding amounts
included in net interest)	-	1,152		1,152
Actuarial loss - changes in demographic
assumptions	13,205	-		13,205
Actuarial gain - experience adjustments	(3,793)	-		(3,793)
Recognized in other comprehensive income	9,412	1,152		10,564
Contributions from the employer	-	(5,194)		(5,194)
Benefits paid	(12,187)	12,187		-
Balance on December 31, 2017	$ 255,121	$ (160,802)	$	94,319

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

Operating costs Selling and marketing expenses General and administrative expenses	For the Year Ended December 31	For the Year Ended December 31	For the Year Ended December 31
		2017 $ 242 1,924 414 $ 2,580	2016 $ 242 1,980 336 $ 2,558

• 36 -

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

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

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

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

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

Discount rates Expected rates of salary increase	Measurement Date
	December 31
	2017 2016 1.5% 1.5% 2.0% 2.0%

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

Discount rates 0.25% increase 0.25% decrease Expected rates of salary increase 0.25% increase 0.25% decrease		December	31
		2017 $ (7,829) $ 8,192 $ 8,017 $ (7,702)	2016 $ (7,730) $ 8,100 $ 7,923 $ (7,600)

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

Expected contributions to the plans for the next year Average duration of the defined benefit obligation		December	31
		2017 $ 5,100 12.5 years	2016 $ 5,197 12.5 years

• 37 -

24. EQUITY

• a. Share capital

Ordinary shares

Ordinary shares
Number of shares authorized (in thousands) Shares authorized Number of shares issued and fully paid (in thousands) Shares issued Share premium		**December 31 **
		2017 450,000 $ 4,500,000 258,253 $ 2,582,527 346,007 $ 2,928,534	2016 450,000 $ 4,500,000 258,253 $ 2,582,527 346,007 $ 2,928,534

The issued ordinary shares with a par value at $10 are entitled the right to vote and receive dividends.

The number of employee stock warrants retained in the authorized shares is 20,000 shares (in thousands), which can be issued separately.

b. Capital surplus

The adjustments to capital surplus for the years ended December 31, 2017 and 2016 were as follows:

Balance on January 1, 2016 Share-based payment transactions Change in capital surplus from investments in associates accounted for using equity method Balance on December 31, 2016 Balance on January 1, 2017 Share-based payment transactions Balance on December 31, 2017	Share Premium Compensation Costs Related to Share-based Payment Movements of Capital Surplus for Associates Accounted for Using Equity Method Movements of Capital Surplus due to Transcations of Treasury Shares $ 346,007 $ 198,428 $ 131,690 $ 1,694 - 13,229 - - - - 71 - $ 346,007 $ 211,657 $ 131,761 $ 1,694 $ 346,007 $ 211,657 $ 131,761 $ 1,694 - 3,991 - 8,204 $ 346,007 $ 215,648 $ 131,761 $ 9,898	Total $ 677,819 13,229 71
		$ 691,119
		$ 691,119 12,195
		$ 703,314

Capital surplus from share premium and the premium from disposal of treasury shares may be utilized to offset deficits; furthermore, when Senao has no deficit, it may be distributed in cash or capitalized, which however is limited to a certain percentage of Senao’s paid-in capital.

The capital surplus from movements of investments in associates accounted for using equity method and those generated by reclassifying the employee stock options to treasury shares under the share-based payment may only be utilized to offset deficits.

The capital surplus from share-based payment transactions can not be utilized in any conditions.

• 38 -

c. Retained earnings and dividends policy

In accordance with the amendments to the Company Act in May 2015, the recipients of dividends and bonuses are limited to shareholders and do not include employees. The shareholders held their regular meeting on June 27, 2016 and, in that meeting, resolved amendments to Senao’s Articles of Incorporation (the “Articles”), particularly the amendment to the policy on dividend distribution and the addition of the policy on the distribution of employees’ and directors’ compensation.

Under the dividends policy as set forth in the amended Articles, where Senao made a profit in a fiscal year, the profit shall be first utilized for paying taxes, offsetting losses of previous years, setting aside as a legal reserve 10% of the remaining profit, setting aside or reversing a special reserve in accordance with the laws and regulations, and then any remaining profit together with any undistributed retained earnings shall be used by Senao’s board of directors as the basis for proposing a distribution plan, which should be resolved in the shareholders’ meeting for the distribution of dividends and bonuses to shareholders. For the policies on the distribution of employees’ compensation and remuneration of directors and supervisors after the amendment, refer to Employees’ compensation and remuneration of directors and supervisors in Note 25-d.

In order to meet “the balanced dividend policy” to conform with Senao’s current operating environment and the goal of sustainability, the policy on the distribution of dividends emphasizes the need for Senao’s stability and growth. No less than 30% of the distributable remaining earnings shall be distributed as stockholders’ dividends, of which cash dividends to be distributed shall not be less than 10% of the total amount of dividends to be distributed.

An appropriation of earnings to a legal reserve shall be made until the legal reserve equals Senao’s paid-in capital. The legal reserve may be used to offset deficits. If Senao has no deficit and the legal reserve has exceeded 25% of Senao’s paid-in capital, the excess may be transferred to capital or distributed in cash.

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

The appropriations of earnings for 2016 and 2015 approved in the shareholders’ meetings on June 14, 2017 and June 27, 2016, respectively, were as follows:

Legal reserve Cash dividends	Appropriation of Earnings For Fiscal Year 2016 For Fiscal Year 2015 $ 99,731 $ 80,335 993,011 744,758	Dividends Per Share (NT$)
		For Fiscal Year 2016 For Fiscal Year 2015 $4.0 $3.0

The appropriation of earnings for 2017 had been proposed by Senao’s board of directors on February 23, 2018. The appropriation and dividends per share were as follows:

	Appropriation	Appropriation	Dividends Per
	of	Earnings	Share (NT$)
Legal reserve	$	82,552
Cash dividends		817,683	$3.25

The appropriation of earnings for 2017 is subject to the resolution of the shareholders’ meeting to be held on June 14, 2018. Information of the appropriation of Senao’s earnings proposed by the board of directors and approved by the stockholders is available at the Market Observation Post System website.

• 39 -

d. Treasury shares

Treasury shares
	Shares at the			Shares at the
	Beginning of			End of the
	the Year (In	Addition (In	Reduction (In	Year (In
	Thousands of	Thousands of	Thousands of	Thousands of
Purpose of Buy-Back	Shares)	Shares)	Shares)	Shares)
2016
Buy back shares pursuant to an
employee share scheme	10,000	-	-	10,000
2017
Buy back shares pursuant to an
employee share scheme	10,000	-	3,342	6,658

The Securities and Exchange Act limits the proportion of the buy-back shares to the outstanding shares; the buy-back shares should not be more than 10% of the total issued shares and the total amount of the buy-back shares should not exceed the retained earnings plus the share premium and the realized paid-in capital.

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

The board of directors of Senao resolved the transfer of the treasury shares to the qualified employees in May 2017 and November 2017. Senao estimated and recognized the compensation costs, which will be recognized as salary expenses, and “capital surplus - employee stock option” both in the amount of $8,698 thousand as calculated according to the stock option appraisal model on the grant date. After transferring those treasury stocks, the amount was reclassified to the capital surplus - treasury transaction. As of December 31, 2017, the number of shares transferred to the employees was 3,342 (in thousands) and the amount of which was $164,200 thousand. The difference between $164,200 thousand and the carrying amount of $164,694 thousand was $494 thousand, which was substracted from“capital surplus - treasury transaction”

The abovementioned treasury shares tranferred to the employees used the Black-Scholes Model for the appraisal. The parameters which the model adopted were as follows:

Exercise price (per share) Market price on the given day (per share) Expected price volatility Risk-free interest rate Expected dividend rate Expected duration Weighted average fair value of the stock option in the current period (per share)	The Day the Options Were Given
	May 23, 2017 November 17, 2017 $49.28 $49.28 $53.60 $51.00 12.35% 9.94% 0.59% 0.59% 0.00% 0.00% 0.02 year 0.04 year $4.3258 $1.7482

The expected price volatility was based on the three months’ daily history stock price volatility from the grant date.

• 40 -

e. Noncontrolling interests

Noncontrolling interests
Beginning balance Shares attributed to noncontrolling interests Net loss of the year Ending balance	For the Year Ended December 31
		2017 $ 25,652 (2,970) $ 22,682	2016 $ 30,862 (5,210) $ 25,652

25. NET INCOME

Net income consists of the following items:

a. Other income and expenses

Loss on disposal of property, plant and equipment Impairment loss on goodwill b. Depreciation and amortization expenses Property, plant and equipment Intangible assets An analysis of depreciation by function Operating costs Operating expenses An analysis of amortization by function Selling and marketing expenses General and administrative expenses	**For the Year Ended **	**For the Year Ended **	**December 31 **
	2017 $ 5,279 8,622 $ 13,901 For the Year Ended		2016 $ 10,132 - $ 10,132 December 31
		2017 $ 85,978 38,823 $ 124,801 $ 5,454 80,524 $ 85,978 $ 15,793 23,030 $ 38,823	2016 $ 105,967 49,274 $ 155,241 $ 4,329 101,638 $ 105,967 $ 16,162 33,112 $ 49,274

• 41 -

c. Employee benefits expense

Post-employment benefits Defined contribution plans Defined benefit plans (Note 23) Termination benefits Share-based payment Equity-settled share-based payment Other employee benefits Total employee benefits expense An analysis of employee benefits expense by function Operating costs Operating expenses	For the Year Ended December 31	For the Year Ended December 31	For the Year Ended December 31
		2017 $ 107,436 2,580 110,016 6,129 12,689 2,315,512 $ 2,444,346 $ 229,709 2,214,637 $ 2,444,346	2016 $ 104,937 2,558 107,495 10,234 13,229 2,296,818 $ 2,427,776 $ 227,432 2,200,344 $ 2,427,776

• d. Employees’ compensation and remuneration of directors and supervisors

Senao accrued employees’ compensation and remuneration of directors and supervisors at rates of no less than 3% and no higher than 3%, respectively, of net profit before income tax, employees’ compensation, and remuneration of directors and supervisors.

If there is a change in the amounts after the annual consolidated financial statements are authorized for issue, the differences are recorded as a change in the accounting estimate and will be recognized in the following year.

The employees’ compensation and remuneration of directors and supervisors for the years ended December 31, 2017 and 2016, which have been approved by Senao’s board of directors on February 23, 2018 and March 2, 2017, respectively, were as follows:

Employees’ compensation Remuneration of directors and supervisors	For the Year Ended December 31	For the Year Ended December 31
	2017 Cash $ 35,841 15,360	2016
		Cash $ 43,574 18,674

There is no difference between the actual amounts of employees’ compensation and remuneration of directors and supervisors paid and the amounts recognized in the consolidated financial statements for the years ended December 31, 2016 and 2015.

Information on the employees’ compensation and remuneration of directors and supervisors resolved by Senao’s board of directors in 2018 and 2017 is available at the Market Observation Post System website of the Taiwan Stock Exchange.

• 42 -

• e. Gains or losses on foreign currency exchange

Gains or losses on foreign currency exchange
Foreign exchange gains Foreign exchange losses	For the Year Ended December 31
		2017 $ 26,797 (29,314) $ (2,517)	2016 $ 35,643 (30,362) $ 5,281

26. INCOME TAX

• a. Major components of tax expense recognized in profit or loss

Current tax In respect of the current year Income tax on unappropriated earnings Adjustments for prior years Deferred tax In respect of the current year Adjustments for prior years Income tax expense recognized in profit or loss	**For the Year Ended **	**For the Year Ended **	December 31
		2017 $ 142,598 47 4,150 (4,035) (222) $ 142,538	2016 $ 179,939 - 9,473 (13,777) - $ 175,635

A reconciliation of accounting profit and income tax expense is as follows:

Income before income tax Income tax expense calculated at the statutory rate Nondeductible expenses in determining taxable income Tax-exempt income Investment gain not recognized in income Deferred tax effect of earnings of subsidiaries Income tax on unappropriated earnings Unrecognized deductible temporary differences Unrecognized loss carryforwards Effect of different tax rates of group entities operating in other jurisdictions Adjustments for prior years’ tax Income tax expense recognized in profit or loss	For the Year Ended December 31	For the Year Ended December 31	For the Year Ended December 31
		2017 $ 965,089 $ 164,065 676 (14) (20,985) (11,701) 47 (309) 9,837 (3,006) 3,928 $ 142,538	2016 $ 1,167,734 $ 198,515 620 (92) (23,306) (16,630) - (1,246) 11,636 (3,335) 9,473 $ 175,635

The applicable corporate income tax rate used by the Group entities in the ROC is 17%, while the applicable tax rate used by subsidiaries in China is 25%. Senao Samoa was exempted from income tax and Senao HK did not have any tax to recognize through December 31, 2017.

• 43 -

In January 2018, it was announced that the Income Tax Act in the ROC was amended and, starting from 2018, the corporate income tax rate will be adjusted from 17% to 20%. In addition, the rate of the corporate surtax applicable to 2018 unappropriated earnings will be reduced from 10% to 5%. Deferred tax assets and deferred tax liabilities recognized as at December 31, 2017 are expected to be adjusted and would increase by $66,308 thousand and $6,749 thousand, respectively, in 2018.

As the status of the 2018 appropriation of earnings is uncertain, the potential income tax consequences of the 2017 unappropriated earnings are not reliably determinable.

• b. Income tax recognized in other comprehensive income

Income tax recognized in other comprehensive income
Deferred tax Remeasurement on defined benefit plan	For the Year Ended December 31
		2017 $ (1,796)	2016 $ (3,995)

c. Current tax liabilities

Income tax payable		December 31	December 31
		2017 $ 62,321	2016 $ 120,101

• d. Deferred tax assets and liabilities

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

For the year ended December 31, 2017

Deferred tax assets Temporary differences Investment loss on subsidiaries Defined benefit obligation Payables for annual leave Valuation loss on inventory Unrealized sales discounts and allowances Unearned reward point revenues Property, plant and equipment FVTPL financial liabilities Provisions Unrealized foreign exchange loss Others Loss carryforwards

Opening Balance Recognized in Profit or Loss Recognized in Other Comprehensive Income Closing Balance $ 319,027 $ 6,734 $ - $ 325,761 14,012 (445) 1,796 15,363 8,583 341 - 8,924 6,449 (3,331) - 3,118 6,471 (1,616) - 4,855 3,438 (429) - 3,009 1,850 (88) - 1,762 - 82 - 82 1,783 (1,783) - - 89 (89) - - 1,206 14 - 1,220 362,908 (610) 1,796 364,094 9,320 2,333 - 11,653 $ 372,228 $ 1,723 $ 1,796 $ 375,747 (Continued)

• 44 -

Deferred tax liabilities Temporary differences Intangible assets Unrealized foreign exchange gain FVTPL financial assets	Opening Balance Recognized in Profit or Loss Recognized in Other Comprehensive Income Closing Balance $ 40,742 $ (2,631) $ - $ 38,111 - 134 - 134 37 (37) - - $ 40,779 $ (2,534) $ - $ 38,245 (Concluded)

For the year ended December 31, 2016

Deferred tax assets Temporary differences Investment loss on subsidiaries Defined benefit obligation Payables for annual leave Valuation loss on inventory Unrealized sales discounts and allowances Unearned reward point revenues Property, plant and equipment Provisions Unrealized foreign exchange loss Others Loss carryforwards Deferred tax liabilities Temporary differences Intangible assets FVTPL financial assets

Opening Balance Recognized in Profit or Loss Recognized in Other Comprehensive Income Closing Balance $ 311,436 $ 7,591 $ - $ 319,027 10,503 (486) 3,995 14,012 8,157 426 - 8,583 8,676 (2,227) - 6,449 1,915 4,556 - 6,471 5,243 (1,805) - 3,438 2,027 (177) - 1,850 4,187 (2,404) - 1,783 1,800 (1,711) - 89 1,538 (332) - 1,206 355,482 3,431 3,995 362,908 1,593 7,727 - 9,320 $ 357,075 $ 11,158 $ 3,995 $ 372,228 $ 43,373 $ (2,631) $ - $ 40,742 25 12 - 37 $ 43,398 $ (2,619) $ - $ 40,779

• 45 -

• e. Deductible temporary differences and unused loss carryforwards for which no deferred tax assets have been recognized in the consolidated balance sheets

Loss carryforwards Expire in 2018 Expire in 2019 Expire in 2020 Expire in 2021 Expire in 2022 Expire in 2023 Expire in 2025 Expire in 2027 Deductible temporary differences		December 31	December 31
		2017 $ 126,423 137,604 41,369 9,325 10,933 - 13,103 2,553 $ 341,310 $ 2,107	2016 $ 126,423 137,604 41,469 12,795 1,422 571 13,682 - $ 333,966 $ 2,449

• f. Information about unused loss carryforwards

Loss carryforwards as of December 31, 2017 comprised:

Unused Amount	Expiry Year
$ 126,423	2018
137,604	2019
41,369	2020
9,325	2021
12,414	2022
571	2023
1,366	2024
13,682	2025
7,136	2026
3,073	2027
$ 352,963

• g. Integrated income tax

Unappropriated earnings Generated before January 1, 1998 Generated on and after January 1, 1998 Shareholder-imputed credits account		December 31	December 31
		2017 $ - 1,609,507 $ 1,609,507 $ 301,906	2016 $ - 1,886,001 $ 1,886,001 $ 366,629

Senao’s creditable ratio for distribution of earnings was 26.26% in 2016. Since the amended Income Tax Act announced in January 2018 abolished the imputation tax system, no creditable ratio for distribution of earnings in 2018 is expected.

• 46 -

h. Income tax assessments

The tax returns of Senao through 2015, except 2014, have been assessed by the tax authorities. Income tax returns of Youth, Youyi and Aval have been assessed by the tax authorities through 2015. Income tax returns of ISPOT have been assessed by the tax authorities through 2016.

27. EARNINGS PER SHARE

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

Net Profit for the Year

Net Profit for the Year
For the Year Ended 2017 Profit for the period attributable to owners of Senao $ 825,521 Weighted Average Number of Ordinary Shares Outstanding (In Thousand Shares)	For the Year Ended	December 31
		2016 $ 997,309

Weighted average number of ordinary shares in the computation of basic earnings per share Effect of potentially dilutive ordinary shares: Employee compensation Weighted average number of ordinary shares used in the computation of diluted earnings per share	For the Year Ended December 31	For the Year Ended December 31	For the Year Ended December 31
		2017 250,056 491 250,547	2016 248,253 529 248,782

Senao may settle the employee compensation in shares or cash, Senao shall presume the entire amount of the compensation will be settled in shares, and the resulting potential shares are included in the weighted average number of shares outstanding used in the computation of diluted earnings per share, as the effect is dilutive. Such dilutive effect of the potential shares is included in the computation of diluted earnings per share until the number of shares to be distributed to employees is resolved in the following year.

Since the exercise price of the options issued by Senao as of December 31, 2017 and December 31, 2016 exceeded the average market price of the shares during 2017 and 2016, respectively, they were anti-dilutive and excluded from the computation of diluted earnings per share.

28. SHARE-BASED PAYMENT ARRANGEMENTS

	Resolution Date by
Effective Date for Plan	SENAO’s Board of	Stock Options Units	Exercise Price
Registration	Directors	(Thousand)	(NT$)
2012.05.28	2013.04.29	10,000	$70.70
			(Original price $93.00)

• 47 -

Each option is eligible to subscribe for one common share when exercisable. The options are granted at an exercise price equal to the closing price of Senao’s ordinary shares listed on the TWSE being the higher of closing price or par value. Senao’s plan has exercise price adjustment formula in case of changes in ordinary shares equity (including cash capital increase, new share issue through capitalization of earnings and capital surplus, merger, spin-off and new share issue for Global Depositary Shares, and so on) or distribution of cash dividends. The options of Senao’s plan are valid for six years and the graded vesting schedule provides 50% of options granted will vest two years after the grant date and another two tranches of 25% each will vest three and four years after the grant date respectively.

The compensation costs of stock options granted on May 7, 2013 were $3,991 thousand and $13,229 thousand for the years ended December 31, 2017 and 2016, respectively.

Senao modified the plan terms of the outstanding stock options in July 2017 and the exercise price changed from $76.10 to $70.70 per share. The modification did not cause any incremental fair value granted.

Senao modified the plan terms of the outstanding stock options in July 2016 and the exercise price changed from $81.40 to $76.10 per share. The modification did not cause any incremental fair value grant.

Information about Senao’s outstanding stock options for the years ended December 31, 2017 and 2016 was as follows:

Balance on January 1 Options exercised Options forfeited Balance on December 31 Option exercisable at end of the year	**For the Year Ended December 31 **	**For the Year Ended December 31 **
	2017 Granted on May 7, 2013 Number of Options (Thousand) Weighted- average Exercise Price (NT$) 6,587 $ 76.10 - - (661) - 5,926 70.70 5,926 70.70	2016
		Granted on May 7, 2013
		Number of Options (Thousand) Weighted- average Exercise Price (NT$) 7,787 $ 81.40 - - (1,200) - 6,587 76.10 4,947 76.10

As of December 31, 2017, information about employee stock options outstanding was as follows:

Options Outstanding Weighted Range of Exercise Price (NT$) Number of Options (Thousand) Average Remaining Contractual Life (Years) Weighted Average Exercise Price (NT$) $70.70 5,926 1.35 $70.70	Options Exercisable
	Number of Options (Thousand) Weighted Average Exercise Price (NT$) 5,926 $70.70

• 48 -

As of December 31, 2016, information about employee stock options outstanding was as follows:

Options Outstanding Weighted Range of Exercise Price (NT$) Number of Options (Thousand) Average Remaining Contractual Life (Years) Weighted Average Exercise Price (NT$) $76.10 6,587 2.35 $76.10	Options Exercisable
	Number of Options (Thousand) Weighted Average Exercise Price (NT$) 4,947 $76.10

Senao used the Black-Scholes model to evaluate the options’ fair value on the grant-date. The Black-Scholes model and the related information and the fair value of the options were as follows:

	Stock Options
	Granted on
	May 7, 2013
Exercise price (NT$)	$93.00
Grant-date share price (NT$)	$93.00
Risk-free interest rate	0.91%
Expected dividend rate	0.00%
Expected life	4.375 years
Expected volatility	36.22%
Weighted average fair value of grants (NT$)	$28.72

Expected volatility was based on the historical share price volatility of Senao over the period equal to the expected life of Senao’s plan.

29. OPERATING LEASE ARRANGEMENTS

• a. The Group as lessee

Operating leases relate to leases of offices and places of business with lease terms between 1 and 10 years.

The lease payments recognized in current expense were as follows:

	2017 $ 429,429	2016 $ 454,456

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

Not later than 1 year Later than 1 year and not later than 5 years Later than 5 years		December 31	December 31
		2017 $ 358,270 527,423 6,047 $ 891,740	2016 $ 347,044 474,755 9,482 $ 831,281

• 49 -

b. The Group as lessor

Operating leases relate to leasing of Senao’s buildings. If there were no notification about terminations, the operating leases will extend automatically. The lessees do not have bargain purchase options to acquire the properties at the expiry of the lease periods.

The future minimum lease payments of non-cancellable operating leases are as follows:

Not later than 1 year Later than 1 year and not later than 5 years		December	31
		2017 $ 35,700 5,279 $ 40,979	2016 $ 41,847 8,787 $ 50,634

30. CAPITAL MANAGEMENT

The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns while maximizing the return to stakeholders through the optimization of the debt and equity balance.

31. FINANCIAL INSTRUMENTS

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

The carrying amounts of the Group’s financial assets and liabilities not measured at fair value approximate their fair values.

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

• 1) Fair value hierarchy

December 31, 2017

Financial liabilities at FVTPL Derivatives December 31, 2016 Financial assets at FVTPL Derivatives	Level 1 $ - Level 1 $ -	Level 2 $ 484 Level 2 $ 217	Level 3 $ - Level 3 $ -	Total $ 484
				Total $ 217

• 50 -

• 2) Valuation techniques and inputs applied for Level 2 fair value measurement

The fair value of derivative financial instruments, including financial assets and financial liabilities, are calculated based on the forward exchange rate on maturity date of each individual forward exchange contract. Exchange rates used are provided by financial institution’s quoting system. The estimates and assumptions the Group used for measurement are consistent with other market participants.

• c. Categories of financial instruments

Financial assets Measured at FVTPL Held for trading Loans and receivables (1) Available-for-sale financial assets (2) Financial liabilities Measured at FVTPL Held for trading Amortized cost (3)	December 31
	2017 2016 $ - $ 217 5,263,042 5,450,002 36,000 36,000 484 - 3,488,246 3,724,194

• 1) The balances include loans and receivables measured at amortized cost, which comprise cash and cash equivalents, notes receivable, trade receivables, other receivables, other current assets, refundable deposits and partial other noncurrent assets.

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

• 3) The balances include financial liabilities measured at amortized cost, which comprise short-term loans, notes payable, trade payables, partial other payables and guarantee deposits.

• d. Financial risk management objectives and policies

The Group’s major financial instruments include receivables and payables. The Group’s Finance Department provides services to the business, coordinates access to domestic and international financial markets, monitors and manages the financial risks relating to the operations of the Group through internal risk reports which analyze exposures by degree and magnitude of risks. These risks include market risk (including foreign currency risk and interest rate risk), credit risk and liquidity risk.

The Group sought to minimize the effects of these risks by using derivative financial instruments to hedge risk exposures. The use of financial derivatives was governed by the Group’s policies approved by the board of directors, whose purpose was to effectively manage the risks caused by changes in foreign currency rates and interest rates. Compliance with policies and exposure limits was reviewed by the internal auditors on a continuous basis. The Group did not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes.

The Group’s Finance Department reports quarterly to the Group’s board of directors, which assesses if the report is consistent with the established operating strategies and risk standards.

• 51 -

1) Market risk

The Group’s activities exposed it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. The Group entered into foreign exchange forward contracts to manage its exposure to foreign currency risk.

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

a) Foreign currency risk

The carrying amounts of the Group’s foreign currency denominated monetary assets and monetary liabilities (including those eliminated on consolidation) at the end of the reporting period are set out in Notes 7 and 35.

Sensitivity analysis

The Group was mainly exposed to the fluctuations of USD.

The following table details the Group’s sensitivity to a 5% increase and decrease in the New Taiwan dollars (i.e. the functional currency) against the relevant foreign currencies. The sensitivity rate used when reporting foreign currency risk internally to key management personnel and representing management’s assessment of the reasonably possible change in foreign exchange rates is 5%. The sensitivity analysis included only outstanding foreign currency denominated monetary items and foreign exchange forward contracts, and adjusts their translation at the end of the reporting period for a 5% change in foreign currency rates. The number below indicates the movement in pre-tax profit associated with the New Taiwan dollar strengthening 5% against the relevant currency. For a 5% weakening of the New Taiwan dollars against the relevant currency, the pre-tax profit and the balances below would be an equal and negative change.

negative change.
Profit or loss	USD Impact
	For the Year Ended December 31
	2017 2016 $ (1,281) $ (2,853)

The abovementioned table was mainly attributable to the exposure outstanding on USD bank deposits, receivables, payables and foreign exchange forward contracts. For details, please see Notes 7 and 35.

b) Interest rate risk

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

Fair value interest rate risk Financial assets Cash flow interest rate risk Financial assets Financial liabilities	December 31
	2017 2016 $ 1,243,113 $ 1,029,366 983,428 990,356 - 68,000

• 52 -

Sensitivity analysis

The sensitivity analysis below was determined based on the Group’s exposure to interest rates for non-derivative instruments at the end of the reporting period. A 25 basis point increase or decrease was used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the reasonably possible change in interest rates.

If interest rates had been 25 basis points higher/lower and all other variables were held constant, the Group’s pre-tax profit for the years ended December 31, 2017 and 2016 would decrease/increase by $2,459 thousand and $2,306 thousand, respectively, which was mainly attributable to the Group’s exposure to interest rates on its demand deposits and floating-rate borrowings.

2) Credit risk

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. As at the end of the reporting period, the Group’s maximum exposure to credit risk, which would cause a financial loss to the Group due to the failure of counterparties to discharge an obligation and financial guarantees provided by the Group, could arise from the carrying amount of the respective recognized financial assets as stated in the balance sheets.

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

The Group’s main credit risk concentrated on the Group’s major clients. The receivables from the major clients composed 56% and 69% of the total trade receivables as of December 31, 2017 and 2016, respectively. Because the clients have good credit records, no material default risk was assessed; material credit risk did not exist.

3) Liquidity risk

The Group manages liquidity risk by monitoring and maintaining a level of cash and cash equivalents deemed adequate to finance the Group’s operations and mitigate the effects of fluctuations in cash flows.

a) Liquidity and interest rate risk table

The following table details the Group’s remaining contractual maturity for its non-derivative financial liabilities with agreed repayment periods. The table has been drawn up based on the undiscounted cash flows of financial liabilities.

December 31, 2017

Weighted Average Effective Interest Rate (%) On Demand or Less than 1 Month Non-derivative financial liabilities Non-interest bearing - $ 3,460,444	1-3 Months $ -	3 Months to 1 Year $ -	1-5 Years $ 27,802

• 53 -

December 31, 2016

December 31, 2016
Weighted Average Effective Interest Rate (%) On Demand or Less than 1 Month Non-derivative financial liabilities Non-interest bearing - $ 3,628,314 Floating interest rate instruments 1.95%-1.98% 8,292 $ 3,636,606	1-3 Months $ - 30,541 $ 30,541	3 Months to 1 Year $ - 30,275 $ 30,275	1-5 Years $ 27,880 -
			$ 27,880

The following table detailed the Group’s liquidity analysis for its derivative financial instruments. The table was based on the undiscounted gross inflows and outflows on those derivatives that require gross settlement.

December 31, 2017

On Demand or Less than 1 Month 1-3 Months 3 Months to 1 Year Gross settled Foreign exchange forward contracts Inflows $ 124,997 $ - $ - Outflows 125,481 - - $ (484) $ - $ - December 31, 2016 On Demand or Less than 1 Month 1-3 Months 3 Months to 1 Year Gross settled Foreign exchange forward contracts Inflows $ 54,846 $ - $ - Outflows 54,629 - - $ 217 $ - $ -	1-5 Years $ - - $ - 1-5 Years $ - - $ -

• 54 -

b) Financing facilities

Financing facilities
Unsecured bank loan facility Amount used Amount unused Secured bank loan facility Amount used Amount unused		December 31
		2017 $ - 3,740,000 $ 3,740,000 $ - 40,000 $ 40,000	2016 $ 48,000 4,382,000 $ 4,430,000 $ 20,000 - $ 20,000

32. TRANSACTIONS WITH RELATED PARTIES

• a. The Group engages in business transactions with the following related parties:

Company Relationship

Chunghwa Telecom Co., Ltd. (“Chunghwa Telecom”) Ultimate parent entity Fellow subsidiary CHYP Multimedia Marketing & Communications Chunghwa Telecom’s subsidiary Co., Ltd. CHIEF Telecom Inc. Chunghwa Telecom’s subsidiary Chunghwa System Integration Co., Ltd. Chunghwa Telecom’s subsidiary Spring House Entertainment Tech. Inc. Chunghwa Telecom’s subsidiary Light Era Development Co., Ltd. Chunghwa Telecom’s subsidiary Smartfun Digital Co., Ltd. Chunghwa Telecom’s subsidiary Associate HopeTech Technologies Limited Senao Samoa’s investee using the equity

Senao Samoa’s investee using the equity method Senao’s investee using the equity method Senao Networks’s subsidiary

Senao Networks, Inc. EnGenius Tech. Co., Ltd.

Other related party Senao Technical and Cultural Foundation

Senao Technical and Cultural Foundation A nonprofit organization of which the funds donated by SENAO exceeds one third of its total funds E-Life Mall Co., Ltd. Substantial related party Engenius Technologies Co., Ltd. Substantial related party International Integrated System, Inc. Chunghwa Telecom’s investee using the equity method Chunghwa Benefit One Co., Ltd. Chunghwa Telecom’s joint venture

• b. Balances and transactions between Senao and subsidiaries have been eliminated on consolidation and not disclosed in this note. For the information on endorsements and guarantees Senao made for its subsidiaries, please see attached Table 1. Terms of each transaction between the parent company and subsidiaries are made separately. Details of transactions between the Group and other related parties are disclosed below.

• 55 -

1) Operating revenues

Line Item Related Party Category Sales Ultimate parent entity Fellow subsidiaries Associates Other related parties Service Ultimate parent entity Fellow subsidiaries Associates Repairs and maintenance Ultimate parent entity Other related parties Purchases of goods Related Party Category Ultimate parent entity Fellow subsidiaries Associates Operating expenses Line Item Related Party Category Selling and marketing Ultimate parent entity Fellow subsidiaries Associates General and administrative Ultimate parent entity Other related parties	For the Year Ended December 31	For the Year Ended December 31	For the Year Ended December 31
	2017 2016 $ 8,145,828 $ 8,757,575 1,684 429 1,423 1,847 36,541 35,192 $ 8,185,476 $ 8,795,043 $ 2,374,779 $ 2,296,684 1,874 597 62,527 - $ 2,439,180 $ 2,297,281 $ 143 $ 89,912 404 61 $ 547 $ 89,973 **For the Year Ended December 31 **
	2017 2016 $ 1,420,740 $ 541,530 23,501 - 29,474 250,176 $ 1,473,715 $ 791,706 For the Year Ended December 31
		2017 $ 263,817 286 3,613 $ 267,716 $ 2,604 17,238 $ 19,842	2016 $ 294,020 398 4,028 $ 298,446 $ 2,311 16,628 $ 18,939

• 2) Purchases of goods

• 3) Operating expenses

Selling and marketing expenses were mainly the marketing expense - commission on goods sold by the ultimate parent entity for Senao, and the rentals for counters rented from the ultimate parent entity. The rental rates were determined by the general market price and paid monthly.

General and administrative expenses were mainly donations to related parties.

• 56 -

4) Non-operating transactions

Line Item Related Party Category Non-operating income Ultimate parent entity Associates Other related parties	For the Year Ended December 31	For the Year Ended December 31	For the Year Ended December 31
		2017 $ 588 31,491 2 $ 32,081	2016 $ 111 34,587 12 $ 34,710

Non-operating income mainly came from the rentals for Hwa Ya’s plants paid to Senao by Senao Networks. The rentals were collected monthly or quarterly.

• 5) Receivables from related parties

Line Item Related Party Category Accounts receivable from Ultimate parent entity related parties Fellow subsidiaries Associates Other related parties		December 31	December 31
		2017 $ 1,211,732 443 11,929 6,034 $ 1,230,138	2016 $ 1,698,367 332 - 4,807 $ 1,703,506

The outstanding trade receivables from related parties are unsecured. For the years ended December 31, 2017 and 2016, no bad debt expense was recognized for trade receivables from related parties.

• 6) Other receivables from related parties

Line Item Related Party Category Other receivables from Ultimate parent entity related parties Fellow subsidiaries		December 31	December 31
		2017 $ 330,597 25 $ 330,622	2016 $ 474,364 - $ 474,364

Other receivables were mainly balances of sales proceeds of goods sold by the ultimate parent entity for Senao.

• 7) Other prepaid expenses

Line Item Related Party Category Prepaid rents Ultimate parent entity Associates		December 31	December 31
		2017 $ 231 300 $ 531	2016 $ 352 300 $ 652

• 57 -

8) Refundable deposits

Refundable deposits
Line Item Related Party Category Refundable deposits Ultimate parent entity		December 31
		2017 $ 2,768	2016 $ 3,122

9) Notes payable to related parties

Line Item Related Party Category Notes payable to related parties Ultimate parent entity		December 31	December 31
		2017 $ 18	2016 $ 18

10) Trade payables to related parties

Trade payables to related parties
Line Item Related Party Category Trade payables to related Ultimate parent entity parties Associates		December 31
		2017 $ 133,917 - $ 133,917	2016 $ 87,438 13,933 $ 101,371

The trade payables to related parties were unsecured.

11) Other payables to related parties

Line Item Related Party Category Other payables to related Ultimate parent entity parties Fellow subsidiaries Associates Other related parties		December 31	December 31
		2017 $ 497,183 25 1,386 4,340 $ 502,934	2016 $ 420,665 - 1,290 4,188 $ 426,143

Proceeds of goods sold by the ultimate parent entity for Senao and the collection of monthly fees and bills. The associates paid daily subsistence allowance in Hwa Ya’s plants for Senao. The transactions with other related parties were donations to related parties.

12) Advance receipts

Line Item Related Party Category Other advance receipts Associates		December 31	December 31
		2017 $ 2,730	2016 $ 2,730

• 58 -

13) Acquisitions of property, plant and equipment and intangible assets

Related Party Category Ultimate parent entity Fellow subsidiaries Associates Other related parties	Purchase Price	Purchase Price	Purchase Price
	**For the Year Ended December 31 **
		2017 $ - 7,619 22,629 46 $ 30,294	2016 $ 7,498 7,619 200 - $ 15,317

Senao purchased office equipment and computer software from the ultimate parent entity, computer software from the fellow subsidiary, and machinery and equipment from associate - SNI.

• c. Compensation of key management personnel

The remuneration of directors and members of key management personnel for the years ended December 31, 2017 and 2016 was as follows:

Short-term employee benefits Share-based payment Post-employment benefits	For the Year Ended December 31	For the Year Ended December 31	For the Year Ended December 31
		2017 $ 59,721 731 709 $ 61,161	2016 $ 74,053 933 709 $ 75,695

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

33. ASSETS PLEDGED AS COLLATERAL OR FOR SECURITY

The following assets were provided as collateral for borrowings from banks and suppliers and the import of goods:

Restricted bank deposits - current Restricted bank deposits - noncurrent		**December **	**31 **
		2017 $ - 1,700 $ 1,700	2016 $ 2,000 1,700 $ 3,700

34. SIGNIFICANT CONTINGENT LIABILITIES AND UNRECOGNIZED COMMITMENTS

In addition to those disclosed in other notes, significant commitments of the Group as of December 31, 2017 and 2016 were as follows:

The Group applied for post-release duty payment to the customs. As of December 31, 2017 and 2016, the bank guarantees for the application were both $50,000 thousand.

• 59 -

35. SIGNIFICANT ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCIES

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

December 31, 2017

		Foreign		Carrying	Carrying
	Currencies		Exchange Rate	Amount
Financial assets
Monetary items
USD	$	216	29.848 (USD:NTD)	$	6,449
USD		1,326	6.5062 (USD:RMB)		39,591
Non-monetary items
Investments accounted for using the equity
method
USD		762	29.848 (USD:NTD)		22,731
Financial liabilities
Monetary items
USD		4,874	29.848 (USD:NTD)		145,480
December 31, 2016
		Foreign		Carrying
	Currencies		Exchange Rate	Amount
Financial assets
Monetary items
USD	$	897	32.279 (USD:NTD)	$	28,958
USD		1,321	6.9429 (USD:RMB)		42,647
Non-monetary items
Investments accounted for using the equity
method
USD		782	32.279 (USD:NTD)		25,243
Financial liabilities
Monetary items
USD		2,150	32.279 (USD:NTD)		69,409

• 60 -

The significant unrealized foreign exchange gains (losses) were as follows:

Foreign Currencies USD USD	For the Year Ended December 31	For the Year Ended December 31
	2017 Exchange Rate Net Foreign Exchange Gains (Losses) 29.848 (USD:NTD) $ 786 6.5062 (USD:RMB) (625) $ 161	2016
		Exchange Rate Net Foreign Exchange Gains (Losses) 32.279 (USD:NTD) $ (524) 6.9429 (USD:RMB) 317 $ (207)

36. ADDITIONAL DISCLOSURES

• a. Information about significant transactions and investees:

• 1) Financing provided to others: None

• 2) Endorsements/guarantees provided: Please see Table 1

• 3) Marketable securities held (excluding investments in subsidiaries and associates): Please see Table 2

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

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

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

• 7) Total purchases from or sales to related parties amounting to at least NT$100 million or 20% of the paid-in capital: Please see Table 3

• 8) Receivables from related parties amounting to at least NT$100 million or 20% of the paid-in capital: Please see Table 4

• 9) Names, locations, and other information of investees in which the company exercises significant influence (excluding investment in mainland China): Please see Table 5

• 10) Trading in derivative instruments: Please see Note 7

• b. Information on investments in mainland China

• 1) Information on any investee company in mainland China, showing the name, principal business activities, paid-in capital, method of investment, inward and outward remittance of funds, ownership percentage, net income of investees, investment income or loss, carrying amount of the investment at the end of the period, repatriations of investment income, and limit on the amount of investment in the mainland China area: Please see Table 6

• 61 -

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

  • a) The amount and percentage of purchases and the balance and percentage of the related payables at the end of the period: None.

  • b) The amount and percentage of sales and the balance and percentage of the related receivables at the end of the period: None.

  • c) The amount of property transactions and the amount of the resultant gains or losses: None.

  • d) The balance of negotiable instrument endorsements or guarantees or pledges of collateral at the end of the period and the purposes: None.

  • e) The highest balance, the end of period balance, the interest rate range, and total current period interest with respect to financing of funds: None.

  • f) Other transactions that have a material effect on the profit or loss for the period or on the financial position: None.

• c. Intercompany relationships and significant intercompany transactions: Please see Table 7

37. SEGMENT INFORMATION

The Group’s reportable segments were sales department and other departments.

Sales department - selling information and communication products and the peripheral products in Taiwan.

Other departments - other unreported operating activities and departments. These departments provide services to support the sales department. Also, the sales made by the subsidiaries was part of other departments.

• a. Segment revenues and results

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

For the year ended December 31, 2017 Revenue from external customers Segment income Share of profit of associates accounted for using the equity method Rental income Interest income Dividend income Valuation loss on financial liabilities at fair value through profit or loss	Sales $ 33,477,759 $ 1,415,726	Others $ 2,260,175 $ (264,293)	Total $ 35,737,934 1,151,433 160,629 59,711 14,579 83 (484) (Continued)

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Exchange losses Loss on disposal of property, plant and equipment Interest expense Goodwill impairment loss Central administration costs and directors’ salaries Profit before tax For the year ended December 31, 2016 Revenue from external customers Segment income Share of profit of associates accounted for using the equity method Rental income Interest income Dividend income Interest expense Valuation gain on financial assets at fair value through profit or loss Exchange gain Loss on disposal of property, plant and equipment Central administration costs and directors’ salaries Profit before tax	Sales $ 33,241,839 $ 1,196,587	Others $ 848,909 $ 88,886	Total $ (2,517) (5,279) (5,402) (8,622) (399,042) $ 965,089 $ 34,090,748 1,285,473 192,049 39,862 10,430 540 (1,861) 217 5,281 (10,132) (354,125) $ 1,167,734 (Concluded)

The segment revenues reported above all came from transactions with external customers. There were no intersegment sales in 2017 and 2016.

Segment profit represented the profit before tax earned by each segment without share of profit of associates accounted for using the equity method, rental income, interest income, dividend income, gains or losses on financial assets (liabilities) at fair value through profit or loss, exchange gains or losses, losses on disposal of property, plant and equipment, interest expense, goodwill impairment loss and central administration costs and directors’ salaries. This was the measure reported to the chief operating decision maker for the purpose of resource allocation and assessment of segment performance.

• b. Segment total assets and liabilities

The measures of segment total assets and liabilities are not reported to the chief operating decision maker. Therefore, the information is not disclosed.

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• c. Revenue from major products and services

The following is an analysis of the Group’s revenue by its products and services.

Sales revenue Service revenue Repairs and maintenance revenue	**For the Year Ended December 31 **	**For the Year Ended December 31 **	**For the Year Ended December 31 **
		2017 $ 32,269,899 2,607,315 860,720 $ 35,737,934	2016 $ 30,784,580 2,360,448 945,720 $ 34,090,748

d. Geographical information

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

The Group’s revenue from external customers by location of operations and information about its noncurrent assets by location of assets are detailed below.

The Group’s revenue from external customers by location of operations was as follows:

Taiwan China	Revenue from External Customers	Revenue from External Customers	Revenue from External Customers
	For the Year Ended December 31
		2017 $ 35,503,584 234,350 $ 35,737,934	2016 $ 33,733,664 357,084 $ 34,090,748

The Group’s information about its noncurrent assets by location of assets was as follows:

Taiwan China		Noncurrent Assets	Noncurrent Assets
		December 31
		2017 $ 1,316,379 7,842 $ 1,324,221	2016 $ 1,339,637 10,632 $ 1,350,269

Noncurrent assets exclude financial instruments, investments using the equity method and deferred tax assets.

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• e. Information about major customers

Major customer’s contributions to the Group’s revenue were as follows:

Customer from channel business department	**For the Year Ended December 31 **	**For the Year Ended December 31 **	**For the Year Ended December 31 **
		2017 $ 10,520,750	2016 $ 11,144,171

For the years ended December 31, 2017 and 2016, except the abovementioned major customer, the Group did not have any other single customer who contributed 10% or more of the total revenues.

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TABLE 1

SENAO INTERNATIONAL CO., LTD. AND SUBSIDIARIES

ENDORSEMENTS/GUARANTEES PROVIDED YEAR ENDED DECEMBER 31, 2017 (Amounts in Thousands of New Taiwan Dollars)

No. (Note 1)	Endorsement/ Guarantee Provider	Guaranteed Party	Guaranteed Party	Limits on Endorsement/ Guarantee Amount Provided to Each Guaranteed Party (Note 3)	Maximum Balance for the Period (Note 4)	Ending Balance (Note 4)	Actual Borrowing Amount	Amount of Endorsement/ Guarantee Collateralized by Properties	Ratio of Accumulated Endorsement/ Guarantee to Net Equity Per Latest Financial Statements	Maximum Endorsement/ Guarantee Amount Allowable (Note 3)	Endorsement/ Guarantee Given by Parent on Behalf of Subsidiaries (Note 5)	Endorsement/ Guarantee Given by Subsidiaries on Behalf of Parent (Note 5)	Endorsement/ Guarantee Given on Behalf of Companies in Mainland China (Note 5)	Note
		Name	Nature of Relationship (Note 2)
0	Senao International Co., Ltd.	Youth Co., Ltd. ISPOT Co., Ltd. Aval Technologies Co., Ltd.	b c b	$ 590,014 590,014 590,014	$ 200,000 150,000 300,000	$ 200,000 150,000 300,000	$ - 150,000 300,000	$ - - -	3.39 2.54 5.08	$ 2,950,071 2,950,071 2,950,071	Yes Yes Yes	- - -	- - -	- - -

Note 1: Significant transactions between the parent and its subsidiaries or among subsidiaries are numbered as follows:

• a. “0” for the parent.

• b. Subsidiaries are numbered from “1”.

Note 2: Relationships between the endorsement/guarantee provider and the guaranteed party:

• a. Trading partner.

• b. Majority owned subsidiary.

• c. The parent and subsidiary owns over 50% ownership of the investee company.

• d. A subsidiary jointly owned by the parent and the parent’s directly-owned subsidiary.

• e. Guaranteed by the parent according to the construction contract.

• f. An investee company. The guarantees were provided based on the parent’s proportionate share in the investee company.

• Note 3: The total amount of endorsement or guarantee that the parent is allowed to provide is up to 50% of the net equity of the parent. The limits on endorsement or guarantee amount provided to each guaranteed party is up to 10% of the net equity of the parent.

Note 4: The maximum balance for the period and the ending balance are quota approved by the board of directors.

Note 5: The following circumstances represent “Y”:

• a. Endorsement/Guarantee given by parent on behalf of subsidiaries.

• b. Endorsement/Guarantee given by subsidiaries on behalf of parent.

• c. Endorsement/Guarantee given on behalf of companies in mainland China.

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TABLE 2

SENAO INTERNATIONAL CO., LTD. AND SUBSIDIARIES

MARKETABLE SECURITIES HELD (DO NOT INCLUDE SUBSIDIARY AND RELATED PARTY) DECEMBER 31, 2017

(Amounts in Thousands of New Taiwan Dollars)

Holding Company Name	Marketable Securities Type and Name	Relationship with the Company	Financial Statement Account	December 31, 2017	December 31, 2017	December 31, 2017	December 31, 2017	Note
				Shares (Thousands/ Thousand Units)	Carrying Value (Note)	Percentage of Ownership	Fair Value
Senao International Co., Ltd.	Stocks N.T.U. Innovation Incubation Corporation Dian Zuan Integrating Marketing Co., Ltd.	- -	Financial assets carried at cost Financial assets carried at cost	1,200 2,400	$ 12,000 24,000	9.41 6.69	$ - -	- -

Note: The related information about subsidiaries and associates are referred to in Tables 5 and 6.

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TABLE 3

SENAO INTERNATIONAL CO., LTD. AND SUBSIDIARIES

TOTAL PURCHASES FROM OR SALES TO RELATED PARTIES AMOUNTING TO AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL YEAR ENDED DECEMBER 31, 2017

(Amounts in Thousands of New Taiwan Dollars)

Company Name	Related Party	Nature of Relationship		Transaction Details	Transaction Details		Abnormal Transaction (Notes 2)	Abnormal Transaction (Notes 2)	Notes/Accounts Payable or Receivable	Notes/Accounts Payable or Receivable
			Purchase/ Sales (Note 1)	Amount	% to Total	Payment Terms	Units Price	Payment Terms	Ending Balance	% to Total
Senao International Co., Ltd.	Chunghwa Telecom Co., Ltd. Aval Technologies Co., Ltd.	Ultimate parent entity Subsidiary	Sales Purchase Purchase	$ 10,491,376 1,420,740 114,719	29 5 -	30-90 days 30 days 30 days	- - -	- - -	$ 1,210,974 (133,101) -	54 (5) -

Note 1: The sales from Chunghwa Telecom Co., Ltd. include sales revenue, service revenue and repairs and maintenance revenue.

Note 2: The related transaction terms are determined separately.

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TABLE 4

SENAO INTERNATIONAL CO., LTD. AND SUBSIDIARIES

RECEIVABLES FROM RELATED PARTIES AMOUNTING TO AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL DECEMBER 31, 2017

(Amounts in Thousands of New Taiwan Dollars)

Company Name	Related Party	Nature of Relationship	Ending Balance	Turnover Rate (Note 1)	Overdue	Overdue	Amounts Received in Subsequent Period	Allowance for Bad Debts
					Amounts	Action Taken
Senao International Co., Ltd.	Chunghwa Telecom Co., Ltd.	Ultimate parent entity	$ 1,541,571 (Note 1)	7.22 (Note 2)	$ -	-	$ 771,680	$ -

Note 1: The receivables from related parties included $330,597 thousand which is the amount of products sold by Chunghwa Telecom Co., Ltd. for Senao, but not yet collected.

Note 2: The computation of the turnover of average receivables balance had already subtracted the receivables from Chunghwa Telecom Co., Ltd. for products sold for Senao.

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TABLE 5

SENAO INTERNATIONAL CO., LTD. AND SUBSIDIARIES

NAMES, LOCATIONS, AND OTHER INFORMATION OF INVESTEES IN WHICH THE COMPANY EXERCISES SIGNIFICANT INFLUENCE (EXCLUDING INVESTMENT IN MAINLAND CHINA) YEAR ENDED DECEMBER 31, 2017

(Amounts in Thousands of New Taiwan Dollars)

Investor Company	Investee Company	Location	Main Businesses and Products	Original Investment Amount	Original Investment Amount	Balance as of December 31, 2017	Balance as of December 31, 2017	Balance as of December 31, 2017	Net Income (Loss) of the Investee	Recognized Gain (Loss)	Note
				December 31, 2017	December 31, 2016	Shares (Thousands)	Percentage of Ownership (%)	Carrying Value
Senao International Co., Ltd. Senao International (Samoa) Holding Ltd. Youth Co., Ltd.	Senao Networks, Inc. Senao International (Samoa) Holding Ltd. Youth Co., Ltd. Aval Technologies Co., Ltd. Senyoung Insurance Agent Co., Ltd. Senao International HK Limited HopeTech Technologies Limited ISPOT Co., Ltd. Youyi Co., Ltd.	Taiwan Samoa Islands Taiwan Taiwan Taiwan Hong Kong Hong Kong Taiwan Taiwan	Telecommunication facilities manufacturing and sales International investment Sale of information and communication technologies products Sale of information and communication technologies products Property and liability insurance agency International investment Sale of information and communication technologies products Sale of information and communication technologies products Maintenance of information and communication technologies products	$ 202,758 2,416,645 (US$ 81,175) 335,450 60,000 10,000 2,393,646 (US$ 80,440) 21,177 (US$ 675) 53,021 21,354	$ 202,758 2,416,645 (US$ 81,175) 335,450 60,000 - 2,393,646 (US$ 80,440) 21,177 (US$ 675) 53,021 6,920	16,579 81,175 13,780 6,000 1,000 80,440 5,240 - -	33.79 100.00 89.48 100.00 100.00 100.00 45.00 100.00 100.00	$ 862,116 506,275 (US$ 16,962) 239,869 65,831 9,516 468,862 (US$ 15,708) 22,731 (US$ 762) 19,214 15,744	$ 471,335 (41,392) (US$ -1,360) (15,817) 5,311 (484) (40,944) (US$ -1,345) (1,101) (US$ -36) (4,901) (1,272)	$ 159,339 (39,607) (US$ -1,305) (33,883) 5,311 (484) (40,944) (US$ -1,345) (495) (US$ -16) (5,371) (1,475)	Note 1 Notes 1, 2 and 7 Notes 1, 3 and 7 Notes 1 and 7 Notes 1, 4 and 7 Notes 1 and 7 Note 1 Notes 1, 5 and 7 Notes 1, 6 and 7

Note 1: Calculated by the same period of audited financial statements.

Note 2: An investment loss of $41,392 thousand and reversal of unrealized transaction profit of $1,785 thousand of last period.

Note 3: An investment loss of $14,153 thousand included amortization of premium of $11,108 thousand, and impairment loss on goodwill of $8,622 thousand.

Note 4: Senao established Senyoung Insurance Agent Co., Ltd. by $10,000 thousand on September 27, 2017. The registration was set up on November 22, 2017.

Note 5: An investment loss of $4,901 thousand included amortization of premium of $470 thousand.

Note 6: An investment loss of $1,272 thousand included amortization of premium of $203 thousand.

Note 7: The amount was eliminated upon consolidation.

Note 8: Information on investees in China, please see Table 6.

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TABLE 6

SENAO INTERNATIONAL CO., LTD. AND SUBSIDIARIES

INVESTMENT IN MAINLAND CHINA YEAR ENDED DECEMBER 31, 2017 (Amounts in Thousands of New Taiwan Dollars)

Investee	Main Businesses and Products	Main Businesses and Products	Total Amount of Paid-in Capital	Investment Type (Note 1)	Accumulated Outflow of Investment from Taiwan as of January 1, 2017	Investment Flows	Investment Flows	Accumulated Outflow of Investment from Taiwan as of December 31, 2017	Net Income (Loss) of the Investee	% Ownership of Direct or Indirect Investment	Investment Gain (Loss) (Notes 2 and 4)	Carrying Value as of December 31, 2017 (Notes 2 and 4)	Accumulated Inward Remittance of Earnings as of December 31, 2017	Note
						Outflow	Inflow
Senao Trading (Fujian) Co., Ltd. Senao International Trading (Shanghai) Co., Ltd. Senao International Trading (Shanghai) Co., Ltd. (Note 5) Senao International Trading (Jiangsu) Co., Ltd.	Sale of information and communication technologies products Sale of information and communication technologies products Maintenance of information and communication technologies products Sale of information and communication technologies products		$ 1,073,170 (US$ 36,000) 955,838 (US$ 32,000) 87,540 (US$ 3,000) 263,736 (US$ 9,000)	b b b b	$ 1,073,170 (US$ 36,000) 955,838 (US$ 32,000) 87,540 (US$ 3,000) 263,736 (US$ 9,000)	$ - - - -	$ - - - -	$ 1,073,170 (US$ 36,000) 955,838 (US$ 32,000) 87,540 (US$ 3,000) 263,736 (US$ 9,000)	$ 1,976 (US$ 65) (40,607) (US$ -1,334) (5,026) (US$ -165) 2,852 (US$ 94)	100 100 100 100	$ 1,976 (US$ 65) (40,607) (US$ -1,334) (5,026) (US$ -165) 2,852 (US$ 94)	$ 192,707 (US$ 6,456) 116,606 (US$ 3,907) 67,277 (US$ 2,254) 89,389 (US$ 2,995)	$ - - - -	- - - -
Accumulated Investment in Mainland China as of December 31, 2017	Investment Amounts Authorized by Investment Commission, MOEA	Upper Limit on Investment Stipulated by Investment Commission, MOEA (Note 3)
$2,380,284 (US$80,000)	$2,380,284 (US$80,000)	$3,553,694

Note 1: Investments are divided into three categories as follows:

a. Direct investment.

b. Investments through a holding company, which means Senao International (Samoa) Holding Ltd. here, registered in a third region.

c. Others.

Note 2: Calculated by the same period of audited financial statements.

Note 3: We calculated the upper limit on investment in accordance with the “Regulations Governing Permission for Investment or Technical Cooperation in the Mainland Area”. Note 4: The amount was eliminated upon consolidation.

Note 5: The English name is the same as the above entity; however, the Chinese name included in the respective Articles of Incorporations is different from the above entity name.

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TABLE 7

SENAO INTERNATIONAL CO., LTD. AND SUBSIDIARIES

INTERCOMPANY RELATIONSHIPS AND SIGNIFICANT TRANSACTIONS YEAR ENDED DECEMBER 31, 2017

(Amounts in Thousands of New Taiwan Dollars)

No. (Note 1)	Company Name	Counterparty	Relationship (Note 2)		Transactions	Details
				Financial Statement Accounts	Amount (Note 3)	Payment Terms (Note 4)	% of Total Sales or Assets (Note 5)
0	Senao International Co., Ltd.	Aval Technologies Co., Ltd. Youth Co., Ltd. ISPOT Co., Ltd. Youyi Co., Ltd. Senyoung Insurance Agent Co., Ltd.	a a a a a	Sales revenue Cost of goods sold Trade receivables from related parties Other receivables from related parties Rent revenue Sales revenue Cost of goods sold Property, plant and equipment Trade receivables from related parties Trade payables from related parties Other receivables from related parties Rent revenue Sales revenue Cost of goods sold Property, plant and equipment Trade receivables from related parties Other receivables from related parties Sales revenue Repairs and maintenance revenue Maintenance costs Other payables to related parties Rent revenue Other receivables from related parties	$ 31,956 114,720 10,757 71 542 54,874 51,702 675 38,963 496 30 488 7,057 15,389 422 317 17 6 50 59 21 34 36	- - - - - - - - - - - - - - - - - - - - - - -	- - - - - - - - - - - - - - - - - - - - - - -
1	Youth Co., Ltd.	ISPOT Co., Ltd. Youyi Co., Ltd. Aval Technologies Co., Ltd.	c c c	Sales revenue Cost of goods sold Trade receivables from related parties Trade payables to related parties Other receivables from related parties Rent revenue Sales revenue Other receivables from related parties Rent revenue Sales revenue Cost of goods sold Trade payables to related parties Rent revenue	5,875 25,096 2,663 2,270 12,919 72 166 4,484 1,714 144 68,240 13,132 21	- - - - - - - - - - - - -	- - - - - - - - - - - - -

(Continued)

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No. (Note 1)	Company Name	Counterparty	Relationship (Note 2)		**Transactions **	Details
				Financial Statement Accounts	Amount (Note 3)	Payment Terms (Note 4)	% of Total Sales or Assets (Note 5)
2	ISPOT Co., Ltd.	Youyi Co., Ltd. Aval Technologies Co., Ltd.	c c	Sales revenue Sales revenue Cost of goods sold Trade receivables from related parties Trade payables from related parties	$ 30 623 63,677 33 24,746	- - - - -	- - - - -

Note 1: Significant transactions between Senao and its subsidiaries or among subsidiaries are numbered as follows:

• a. “0” for the parent.

• b. Subsidiaries are numbered from “1”.

• Note 2: Related party transactions are divided into three categories as follows (there is no need for repeated disclosure between the entities, i.e., if the parent company discloses a transaction with a subsidiary, the subsidiary does not have to disclose the same information in the financial statements. Also, if a subsidiary discloses a transaction with another subsidiary, the other subsidiary does not have to disclose the same information in the financial statements):

• a. The parent to subsidiaries.

• b. Subsidiaries to the parent.

• c. Subsidiaries to subsidiaries.

Note 3: The amount was eliminated upon consolidation.

Note 4: The transaction terms related to the related parties are determined by both sides.

• Note 5: For assets and liabilities, amount is shown as a percentage to consolidated total assets as of December 31, 2017, while revenues, costs and expenses are shown as a percentage to consolidated revenues for the year ended December 31, 2017.

(Concluded)

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