Edgar Filing: TAIWAN SEMICONDUCTOR MANUFACTURING CO LTD

Taiwan Semiconductor Manufacturing Company Ltd.

Date: February 27, 2019

/s/ Lora Ho

Senior Vice President & Chief Financial Officer

Form 6-K

1934 Act Registration No. 1-14700

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16

OF THE SECURITIES EXCHANGE ACT OF 1934

For the month of February 2019

Taiwan Semiconductor Manufacturing Company Ltd.

(Translation of Registrant’s Name Into English)

No. 8, Li-Hsin Rd. 6,

Hsinchu Science Park,

Taiwan

(Address of Principal Executive Offices)

(Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.)

Form 20-F ☒ Form 40-F ☐

(Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.)

Yes ☐ No ☒

(If “Yes” is marked, indicated below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82: .)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

Consolidated Financial Statements for the

Years Ended December 31, 2018 and 2017 and

Independent Auditors’ Report

REPRESENTATION LETTER

The entities that are required to be included in the combined financial statements of Taiwan Semiconductor Manufacturing Company Limited as of and for the year ended December 31, 2018, under the Criteria Governing the Preparation of Affiliation Reports, Consolidated Business Reports and Consolidated Financial Statements of Affiliated Enterprises are the same as those included in the consolidated financial statements prepared in conformity with the International Financial Reporting Standard 10, “Consolidated Financial Statements.” In addition, the information required to be disclosed in the combined financial statements is included in the consolidated financial statements. Consequently, Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries do not prepare a separate set of combined financial statements.

Very truly yours,

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LIMITED

MARK LIU

Chairman

February 19, 2019

- 1 -

INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Shareholders

Taiwan Semiconductor Manufacturing Company Limited

Opinion

We have audited the accompanying consolidated financial statements of Taiwan Semiconductor Manufacturing Company Limited and subsidiaries (the “Company”), which comprise the consolidated balance sheets as of December 31, 2018 and 2017, 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 Company as of December 31, 2018 and 2017, 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 the 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 Company 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, 2018. 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.

- 2 -

Key audit matters for the Company’s consolidated financial statements for the year ended December 31, 2018 are stated as follows:

Estimate for sales returns and allowances

In consideration of business volume and market conditions, the Company provides a variety of business incentives to specific customers or products. The estimate for sales returns and allowance is based on historical experience and the varying contractual terms. Please refer to Notes 4, 5 and 26 to the consolidated financial statements for the details of the information about estimate for sales returns and allowances. Since the estimate for sales returns and allowances is subject to accounting judgment and estimation, and the result could also affect the net revenue in the consolidated financial statements, it has been identified as a key audit matter.

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

1.	Understood and tested the design and operating effectiveness of the key controls over estimate for sales returns and allowances;

2.	Understood and assessed the reasonableness of assumptions made and methodology used in estimating sales returns and allowances;

Sampled and inspected the sales contracts of main products by agreeing the contractual terms and performed an analysis to challenge the estimation on possibility that specific products could meet business incentives condition to verify the reasonableness of the accrual of the sales returns and allowances;

4.	Performed a retrospective review to comparatively analyze the historical accuracy of judgments with reference to actual sales returns and allowance paid.

Timing to commence depreciation of property, plant and equipment (PP&E)

The Company continues to invest in capital expenditures to develop and build capacity in leading-edge technologies to meet customers’ demand. Please refer to Notes 4, 5 and 17 to the consolidated financial statements for the details of the information and accounting policy about the depreciation of PP&E. According to IAS 16, depreciation of PP&E begins when the assets are available for use, and in the condition necessary for the assets to be capable of operating in the intended manner. Due to the significant capital expenditures of the Company, and the criteria to determine whether such assets are available for their intended use vary within categories of assets as well as involve subjective judgments, the validity of the timing to commence depreciation of PP&E could have a material impact on its financial performance. Consequently, the validity of the timing to commence depreciation of PP&E is identified as a key audit matter.

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

1.	Understood and tested the design and operating effectiveness of the key controls over the timing to commence depreciation of PP&E;

2.	Understood the criteria the assets are defined as available for their intended use and the corresponding accounting treatments;

- 3 -

3.	Sampled and reviewed the appropriateness of the timing for commencing depreciation after the assets met the criteria of available for use in current year;

4.	Performed an observation on the physical count of equipment under installation and construction in progress; sampled and inspected the supporting documentation to verify that the status of equipment under installation and construction in progress are not available for use;

5.	Sampled equipment under installation and construction in progress which met the criteria of available for use and were transferred in the subsequent period to evaluate the reasonableness of the timing for commencing depreciation;

6.	Sampled and reviewed the appropriateness of the equipment under installation and construction in progress which are not available for their intended use.

Other Matter

We have also audited the parent company only financial statements of Taiwan Semiconductor Manufacturing Company Limited as of and for the years ended December 31, 2018 and 2017 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 the 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 consolidated financial statements that are free from material misstatement, whether due to fraud or error.

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

Those charged with governance (including members of the Audit Committee) are responsible for overseeing the Company’s financial reporting process.

Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the auditing standards generally accepted in 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.

- 4 -

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:

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

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

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

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

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

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

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

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, 2018 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.

- 5 -

The engagement partners on the audit resulting in this independent auditors’ report are Mei Yen Chiang and Yu Feng Huang.

Deloitte & Touche

Taipei, Taiwan

Republic of China

February 19, 2019

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.

- 6 -

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(In Thousands of New Taiwan Dollars)


	December 31, 2018					December 31, 2017
ASSETS		Amount		%			Amount		%
CURRENT ASSETS
Cash and cash equivalents (Note 6)	$	577,814,601		28		$	553,391,696		28
Financial assets at fair value through profit or loss (Note 7)		3,504,590		—			569,751		—
Financial assets at fair value through other comprehensive income (Note 8)		99,561,740		5			—		—
Available-for-sale financial assets (Note 9)		—		—			93,374,153		5
Held-to-maturity financial assets (Note 10)		—		—			1,988,385		—
Financial assets at amortized cost (Note 11)		14,277,615		1			—		—
Hedging derivative financial assets (Note 13)		—		—			34,394		—
Hedging financial assets (Note 13)		23,497		—			—		—
Notes and accounts receivable, net (Note 14)		128,613,391		6			121,133,248		6
Receivables from related parties (Note 37)		584,412		—			1,184,124		—
Other receivables from related parties (Note 37)		65,028		—			171,058		—
Inventories (Notes 5, 15 and 41)		103,230,976		5			73,880,747		4
Other financial assets (Note 38)		18,597,448		1			7,253,114		—
Other current assets (Note 19)		5,406,423		—			4,222,440		—

Total current assets		951,679,721		46			857,203,110		43

NONCURRENT ASSETS
Financial assets at fair value through other comprehensive income (Notes 5 and 8)		3,910,681		—			—		—
Held-to-maturity financial assets (Note 10)		—		—			18,833,329		1
Financial assets at amortized cost (Note 11)		7,528,277		—			—		—
Financial assets carried at cost (Note 12)		—		—			4,874,257		—
Investments accounted for using equity method (Notes 5 and 16)		17,865,838		1			17,861,488		1
Property, plant and equipment (Notes 5 and 17)		1,072,050,279		51			1,062,542,322		53
Intangible assets (Notes 5 and 18)		17,002,137		1			14,175,140		1
Deferred income tax assets (Notes 5 and 31)		16,806,387		1			12,105,463		1
Refundable deposits		1,700,071		—			1,283,414		—
Other noncurrent assets (Note 19)		1,584,647		—			2,983,120		—

Total noncurrent assets		1,138,448,317		54			1,134,658,533		57

TOTAL	$	2,090,128,038		100		$	1,991,861,643		100

LIABILITIES AND EQUITY
CURRENT LIABILITIES
Short-term loans (Notes 20 and 34)	$	88,754,640		4		$	63,766,850		3
Financial liabilities at fair value through profit or loss (Note 7)		40,825		—			26,709		—
Hedging derivative financial liabilities (Note 13)		—		—			15,562		—
Hedging financial liabilities (Note 13)		155,832		—			—		—
Accounts payable		32,980,933		2			28,412,807		1
Payables to related parties (Note 37)		1,376,499		—			1,656,356		—
Salary and bonus payable		14,471,372		1			14,254,871		1
Accrued profit sharing bonus to employees and compensation to directors and supervisors (Notes 25 and 33)		23,981,154		1			23,419,135		1
Payables to contractors and equipment suppliers		43,133,659		2			55,723,774		3
Income tax payable (Notes 5 and 31)		38,987,053		2			33,479,311		2
Provisions (Notes 5 and 21)		—		—			13,961,787		1
Long-term liabilities - current portion (Note 22)		34,900,000		2			58,401,122		3
Accrued expenses and other current liabilities (Notes 5, 24, 26 and 34)		61,760,619		3			65,588,396		3

Total current liabilities		340,542,586		17			358,706,680		18

NONCURRENT LIABILITIES
Bonds payable (Notes 22 and 34)		56,900,000		3			91,800,000		5
Deferred income tax liabilities (Notes 5 and 31)		233,284		—			302,205		—
Net defined benefit liability (Notes 5 and 23)		9,651,405		—			8,850,704		1
Guarantee deposits (Notes 24 and 34)		3,353,378		—			7,586,790		—
Others		1,950,989		—			1,855,621		—

Total noncurrent liabilities		72,089,056		3			110,395,320		6

Total liabilities		412,631,642		20			469,102,000		24

EQUITY ATTRIBUTABLE TO SHAREHOLDERS OF THE PARENT
Capital stock (Note 25)		259,303,805		12			259,303,805		13

Capital surplus (Note 25)		56,315,932		3			56,309,536		3

Retained earnings (Note 25)
Appropriated as legal capital reserve		276,033,811		13			241,722,663		12
Appropriated as special capital reserve		26,907,527		1			—		—
Unappropriated earnings		1,073,706,503		52			991,639,347		49

		1,376,647,841		66			1,233,362,010		61

Others (Note 25)		(15,449,913	)	(1	)		(26,917,818	)	(1	)

Equity attributable to shareholders of the parent		1,676,817,665		80			1,522,057,533		76
NON - CONTROLLING INTERESTS		678,731		—			702,110		—

Total equity		1,677,496,396		80			1,522,759,643		76

TOTAL	$	2,090,128,038		100		$	1,991,861,643		100

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

- 7 -

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands of New Taiwan Dollars, Except Earnings Per Share)


	2018					2017
	Amount			%		Amount			%
NET REVENUE (Notes 5, 26, 37 and 45)	$	1,031,473,557			100	$	977,447,241			100
COST OF REVENUE (Notes 5, 15, 33, 37 and 41)		533,487,516			52		482,616,286			49

GROSS PROFIT BEFORE UNREALIZED GROSS PROFIT ON SALES TO ASSOCIATES		497,986,041			48		494,830,955			51
UNREALIZED GROSS PROFIT ON SALES TO ASSOCIATES		(111,788	)		—		(4,553	)		—

GROSS PROFIT		497,874,253			48		494,826,402			51

OPERATING EXPENSES (Notes 5, 33 and 37)
Research and development		85,895,569			8		80,732,463			8
General and administrative		20,265,883			2		21,196,717			2
Marketing		5,987,828			1		5,972,488			1

Total operating expenses		112,149,280			11		107,901,668			11

OTHER OPERATING INCOME AND EXPENSES, NET (Notes 17, 18, 27 and 33)		(2,101,449	)		—		(1,365,511	)		(1	)

INCOME FROM OPERATIONS (Note 45)		383,623,524			37		385,559,223			39

NON-OPERATING INCOME AND EXPENSES
Share of profits of associates		3,057,781			—		2,985,941			1
Other income (Note 28)		14,852,814			2		9,610,294			1
Foreign exchange gain (loss), net (Note 43)		2,438,171			—		(1,509,473	)		—
Finance costs (Note 29)		(3,051,223	)		—		(3,330,313	)		—
Other gains and losses, net (Note 30)		(3,410,804	)		—		2,817,358			—

Total non-operating income and expenses		13,886,739			2		10,573,807			2

INCOME BEFORE INCOME TAX		397,510,263			39		396,133,030			41
INCOME TAX EXPENSE (Notes 5 and 31)		46,325,857			5		52,986,182			6

NET INCOME		351,184,406			34		343,146,848			35

(Continued)

- 8 -

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands of New Taiwan Dollars, Except Earnings Per Share)


	2018					2017
	Amount			%		Amount			%
OTHER COMPREHENSIVE INCOME (LOSS) (Notes 5, 23, 25 and 31)
Items that will not be reclassified subsequently to profit or loss:
Remeasurement of defined benefit obligation	$	(861,162	)		—	$	(254,681	)		—
Unrealized loss on investments in equity instruments at fair value through other comprehensive income		(3,309,089	)		—		—			—
Gain on hedging instruments		40,975			—		—			—
Share of other comprehensive loss of associates		(14,217	)		—		(20,853	)		—
Income tax benefit related to items that will not be reclassified subsequently		195,729			—		30,562			—

		(3,947,764	)		—		(244,972	)		—

Items that may be reclassified subsequently to profit or loss:
Exchange differences arising on translation of foreign operations		14,562,386			1		(28,259,627	)		(3	)
Changes in fair value of available-for-sale financial assets		—			—		(218,832	)		—
Cash flow hedges		—			—		4,683			—
Unrealized loss on investments in debt instruments at fair value through other comprehensive income		(870,906	)		—		—			—
Share of other comprehensive income (loss) of associates		93,260			—		(99,347	)		—
Income tax expense related to items that may be reclassified subsequently		—			—		(3,536	)		—

		13,784,740			1		(28,576,659	)		(3	)

Other comprehensive income (loss) for the year, net of income tax		9,836,976			1		(28,821,631	)		(3	)

TOTAL COMPREHENSIVE INCOME FOR THE YEAR	$	361,021,382			35	$	314,325,217			32

NET INCOME ATTRIBUTABLE TO:
Shareholders of the parent	$	351,130,884			34	$	343,111,476			35
Non-controlling interests		53,522			—		35,372			—

	$	351,184,406			34	$	343,146,848			35

(Continued)

- 9 -

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands of New Taiwan Dollars, Except Earnings Per Share)


	2018				2017
	Amount		%		Amount		%
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO:
Shareholders of the parent	$	360,965,015		35	$	314,294,993		32
Non-controlling interests		56,367		—		30,224		—

	$	361,021,382		35	$	314,325,217		32


	2018		2017
	Income Attributable to Shareholders of the Parent		Income Attributable to Shareholders of the Parent
EARNINGS PER SHARE (NT$, Note 32)
Basic earnings per share	$	13.54	$	13.23

Diluted earnings per share	$	13.54	$	13.23

(Concluded)

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

- 10 -

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In Thousands of New Taiwan Dollars, Except Dividends Per Share)


	Equity Attributable to Shareholders of the Parent
																	Others
																							Unrealized
																							Gain (Loss) on
																							Financial
																							Assets at Fair
	Capital																Foreign			Unrealized			Value Through			Cash					Unearned
	Stock - Common Stock						Retained Earnings										Currency			Gain (Loss) from			Other			Flow			Gain (Loss) on		Stock-Based
	Shares				Capital		Legal Capital		Special Capital		Unappropriated						Translation			Available-for-sale			Comprehensive			Hedges			Hedging		Employee									Non-controlling			Total
	(In Thousands)		Amount		Surplus		Reserve		Reserve		Earnings			Total			Reserve			Financial Assets			Income			Reserve			Instruments		Compensation			Total			Total			Interests			Equity
BALANCE, JANUARY 1, 2017		25,930,380	$	259,303,805	$	56,272,304	$	208,297,945	$	—	$	863,710,224		$	1,072,008,169		$	1,661,237		$	2,641		$	—		$	105		$	—	$	—		$	1,663,983		$	1,389,248,261		$	802,865		$	1,390,051,126
Appropriations of prior year’s earnings
Legal capital reserve		—		—		—		33,424,718		—		(33,424,718	)		—			—			—			—			—			—		—			—			—			—			—
Cash dividends to shareholders - NT$7 per share		—		—		—		—		—		(181,512,663	)		(181,512,663	)		—			—			—			—			—		—			—			(181,512,663	)		—			(181,512,663	)

Total		—		—		—		33,424,718		—		(214,937,381	)		(181,512,663	)		—			—			—			—			—		—			—			(181,512,663	)		—			(181,512,663	)

Net income in 2017		—		—		—		—		—		343,111,476			343,111,476			—			—			—			—			—		—			—			343,111,476			35,372			343,146,848
Other comprehensive income (loss) in 2017, net of income tax		—		—		—		—		—		(244,972	)		(244,972	)		(28,358,917	)		(216,715	)		—			4,121			—		—			(28,571,511	)		(28,816,483	)		(5,148	)		(28,821,631	)

Total comprehensive income (loss) in 2017		—		—		—		—		—		342,866,504			342,866,504			(28,358,917	)		(216,715	)		—			4,121			—		—			(28,571,511	)		314,294,993			30,224			314,325,217

Adjustments to share of changes in equities of associates		—		—		7,085		—		—		—			—			—			—			—			—			—		(10,290	)		(10,290	)		(3,205	)		—			(3,205	)
From share of changes in equities of subsidiaries		—		—		10,994		—		—		—			—			—			—			—			—			—		—			—			10,994			(10,994	)		—
Donation from shareholders		—		—		19,153		—		—		—			—			—			—			—			—			—		—			—			19,153			1,684			20,837
Decrease in non-controlling interests		—		—		—		—		—		—			—			—			—			—			—			—		—			—			—			(113,675	)		(113,675	)
Effect of disposal of subsidiary		—		—		—		—		—		—			—			—			—			—			—			—		—			—			—			(7,994	)		(7,994	)

BALANCE, DECEMBER 31, 2017		25,930,380		259,303,805		56,309,536		241,722,663		—		991,639,347			1,233,362,010			(26,697,680	)		(214,074	)		—			4,226			—		(10,290	)		(26,917,818	)		1,522,057,533			702,110			1,522,759,643
Effect of retrospective application		—		—		—		—		—		1,556,321			1,556,321			—			214,074			(524,915	)		(4,226	)		4,226		—			(310,841	)		1,245,480			342			1,245,822

ADJUSTED BALANCE, JANUARY 1, 2018		25,930,380		259,303,805		56,309,536		241,722,663		—		993,195,668			1,234,918,331			(26,697,680	)		—			(524,915	)		—			4,226		(10,290	)		(27,228,659	)		1,523,303,013			702,452			1,524,005,465

(Continued)

- 11 -

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In Thousands of New Taiwan Dollars, Except Dividends Per Share)


	Equity Attributable to Shareholders of the Parent
																		Others
																							Unrealized
																							Gain (Loss) on
																							Financial
																							Assets at Fair
	Capital																	Foreign			Unrealized		Value Through			Cash					Unearned
	Stock - Common Stock							Retained Earnings										Currency			Gain (Loss) from		Other			Flow		Gain (Loss) on			Stock-Based
	Shares				Capital			Legal Capital		Special Capital		Unappropriated						Translation			Available-for-sale		Comprehensive			Hedges		Hedging			Employee									Non-controlling			Total
	(In Thousands)		Amount		Surplus			Reserve		Reserve		Earnings			Total			Reserve			Financial Assets		Income			Reserve		Instruments			Compensation			Total			Total			Interests			Equity
Appropriations of prior year’s earnings
Legal capital reserve		—		—		—			34,311,148		—		(34,311,148	)		—			—			—		—			—		—			—			—			—			—			—
Special capital reserve		—		—		—			—		26,907,527		(26,907,527	)		—			—			—		—			—		—			—			—			—			—			—
Cash dividends to shareholders - NT$8 per share		—		—		—			—		—		(207,443,044	)		(207,443,044	)		—			—		—			—		—			—			—			(207,443,044	)		—			(207,443,044	)

Total		—		—		—			34,311,148		26,907,527		(268,661,719	)		(207,443,044	)		—			—		—			—		—			—			—			(207,443,044	)		—			(207,443,044	)

Net income in 2018		—		—		—			—		—		351,130,884			351,130,884			—			—		—			—		—			—			—			351,130,884			53,522			351,184,406
Other comprehensive income (loss) in 2018, net of income tax		—		—		—			—		—		(765,274	)		(765,274	)		14,655,333			—		(4,097,465	)		—		41,537			—			10,599,405			9,834,131			2,845			9,836,976

Total comprehensive income (loss) in 2018		—		—		—			—		—		350,365,610			350,365,610			14,655,333			—		(4,097,465	)		—		41,537			—			10,599,405			360,965,015			56,367			361,021,382

Disposal of investments in equity instruments at fair value through other comprehensive income		—		—		—			—		—		(1,193,056	)		(1,193,056	)		—			—		1,193,056			—		—			—			1,193,056			—			—			—
Basis adjustment for loss on hedging instruments		—		—		—			—		—		—			—			—			—		—			—		(22,162	)		—			(22,162	)		(22,162	)		—			(22,162	)
Adjustments to share of changes in equities of associates		—		—		(6,420	)		—		—		—			—			—			—		—			—		—			8,447			8,447			2,027			—			2,027
From share of changes in equities of subsidiaries		—		—		2,681			—		—		—			—			—			—		—			—		—			—			—			2,681			(2,681	)		—
Donation from shareholders		—		—		10,135			—		—		—			—			—			—		—			—		—			—			—			10,135			6			10,141
Decrease in non-controlling interests		—		—		—			—		—		—			—			—			—		—			—		—			—			—			—			(77,413	)		(77,413	)

BALANCE, DECEMBER 31, 2018		25,930,380	$	259,303,805	$	56,315,932		$	276,033,811	$	26,907,527	$	1,073,706,503		$	1,376,647,841		$	(12,042,347	)	$	—	$	(3,429,324	)	$	—	$	23,601		$	(1,843	)	$	(15,449,913	)	$	1,676,817,665		$	678,731		$	1,677,496,396


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

- 11 -

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of New Taiwan Dollars)


	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES
Income before income tax	$	397,510,263		$	396,133,030
Adjustments for:
Depreciation expense		288,124,897			255,795,962
Amortization expense		4,421,405			4,346,736
Reversal of expected credit losses on investments in debt instruments		(2,383	)		—
Finance costs		3,051,223			3,330,313
Share of profits of associates		(3,057,781	)		(2,985,941	)
Interest income		(14,694,456	)		(9,464,706	)
Loss on disposal or retirement of property, plant and equipment, net		1,005,644			1,097,908
Gain on disposal of intangible assets, net		(436	)		—
Impairment loss on property, plant and equipment		423,468			—
Impairment loss on intangible assets		—			13,520
Impairment loss on financial assets		—			29,603
Loss on financial instruments at fair value through profit or loss, net		358,156			—
Loss on disposal of investments in debt instruments at fair value through other comprehensive income, net		989,138			—
Gain on disposal of available-for-sale financial assets, net		—			(76,986	)
Gain on disposal of financial assets carried at cost, net		—			(12,809	)
Gain from disposal of subsidiaries		—			(17,343	)
Unrealized gross profit on sales to associates		111,788			4,553
Loss (gain) on foreign exchange, net		2,916,659			(9,118,580	)
Dividend income		(158,358	)		(145,588	)
Loss arising from fair value hedges, net		2,386			30,293
Changes in operating assets and liabilities:
Financial instruments at fair value through profit or loss		480,109			5,645,093
Notes and accounts receivable, net		(13,271,268	)		1,061,805
Receivables from related parties		599,712			(214,565	)
Other receivables from related parties		106,030			(13,873	)
Inventories		(29,369,975	)		(25,229,101	)
Other financial assets		(4,601,295	)		(502,306	)
Other current assets		(513,051	)		12,085
Other noncurrent assets		152,555			(1,276,130	)
Accounts payable		4,540,583			2,572,072
Payables to related parties		(279,857	)		394,182
Salary and bonus payable		216,501			582,054
Accrued profit sharing bonus to employees and compensation to directors and supervisors		562,019			525,129
Accrued expenses and other current liabilities		(20,226,384	)		30,435,424
Provisions		—			(4,057,900	)
Net defined benefit liability		(60,461	)		44,615

Cash generated from operations		619,336,831			648,938,549
Income taxes paid		(45,382,523	)		(63,620,382	)

Net cash generated by operating activities		573,954,308			585,318,167

(Continued)

- 12 -

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of New Taiwan Dollars)


	2018			2017
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of:
Financial instruments at fair value through profit or loss - debt instruments	$	(310,478	)	$	—
Financial assets at fair value through other comprehensive income		(96,412,786	)		—
Available-for-sale financial assets		—			(100,510,905	)
Held-to-maturity financial assets		—			(1,997,076	)
Financial assets at amortized cost		(2,294,098	)		—
Financial assets carried at cost		—			(1,313,124	)
Property, plant and equipment		(315,581,881	)		(330,588,188	)
Intangible assets		(7,100,306	)		(4,480,588	)
Land use right		—			(819,694	)
Proceeds from disposal or redemption of:
Financial instruments at fair value through profit or loss — debt instruments		487,216			—
Financial assets at fair value through other comprehensive income		86,639,322			—
Available-for-sale financial assets		—			69,480,675
Held-to-maturity financial assets		—			17,980,640
Financial assets at amortized cost		2,032,442			—
Financial assets carried at cost		—			58,237
Property, plant and equipment		181,450			326,232
Intangible assets		492			—
Proceeds from return of capital of investments in equity instruments at fair value through other comprehensive income		127,878			—
Proceeds from return of capital of financial assets carried at cost		—			14,828
Derecognition of hedging derivative financial instruments		—			33,008
Derecognition of hedging financial instruments		250,538			—
Interest received		14,660,388			9,526,253
Proceeds from government grants - property, plant and equipment		—			2,629,747
Proceeds from government grants - land use right and others		—			1,811
Cash outflow from disposal of subsidiary		—			(4,080	)
Other dividends received		158,358			145,588
Dividends received from investments accounted for using equity method		3,262,910			4,245,772
Refundable deposits paid		(2,227,541	)		(1,326,983	)
Refundable deposits refunded		1,857,188			432,944

Net cash used in investing activities		(314,268,908	)		(336,164,903	)

(Continued)

- 13 -

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of New Taiwan Dollars)


	2018			2017
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in short-term loans	$	23,922,975		$	10,394,290
Repayment of bonds		(58,024,900	)		(38,100,000	)
Repayment of long-term bank loans		—			(31,460	)
Interest paid		(3,233,331	)		(3,482,703	)
Guarantee deposits received		1,668,887			950,928
Guarantee deposits refunded		(1,948,106	)		(3,823,183	)
Cash dividends		(207,443,044	)		(181,512,663	)
Donation from shareholders		10,141			20,837
Decrease in non-controlling interests		(77,413	)		(113,675	)

Net cash used in financing activities		(245,124,791	)		(215,697,629	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		9,862,296			(21,317,772	)

NET INCREASE IN CASH AND CASH EQUIVALENTS		24,422,905			12,137,863
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		553,391,696			541,253,833

CASH AND CASH EQUIVALENTS, END OF YEAR	$	577,814,601		$	553,391,696

(Concluded)

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

- 14 -

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

(Amounts in Thousands of New Taiwan Dollars, Unless Specified Otherwise)

1.	GENERAL

Taiwan Semiconductor Manufacturing Company Limited (TSMC), a Republic of China (R.O.C.) corporation, was incorporated on February 21, 1987. TSMC is a dedicated foundry in the semiconductor industry which engages mainly in the manufacturing, selling, packaging, testing and computer-aided design of integrated circuits and other semiconductor devices and the manufacturing of masks.

On September 5, 1994, TSMC’s shares were listed on the Taiwan Stock Exchange (TWSE). On October 8, 1997, TSMC listed some of its shares of stock on the New York Stock Exchange (NYSE) in the form of American Depositary Shares (ADSs).

The address of its registered office and principal place of business is No. 8, Li-Hsin Rd. 6, Hsinchu Science Park, Taiwan. The principal operating activities of TSMC’s subsidiaries are described in Note 4.

2.	THE AUTHORIZATION OF FINANCIAL STATEMENTS

The accompanying consolidated financial statements were approved and authorized for issue by the Board of Directors on February 19, 2019.

3.	APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS

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), IFRIC Interpretations (IFRIC), and SIC Interpretations (SIC) (collectively, “IFRSs”) endorsed and issued into effect by the Financial Supervisory Commission (FSC)

Except for the following, 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 a significant effect on TSMC and its subsidiaries’ (collectively as the “Company”) accounting policies:

IFRS 9 “Financial Instruments” and related amendment

IFRS 9 supersedes IAS 39 “Financial Instruments: Recognition and Measurement”, with consequential amendments to IFRS 7 “Financial Instruments: Disclosures” and other standards. IFRS 9 sets out the requirements for classification, measurement and impairment of financial assets and hedge accounting. Please refer to Note 4 for information relating to the relevant accounting policies.

Classification, measurement and impairment of financial assets and financial liabilities

The Company elects not to restate prior reporting period when applying the requirements for the classification, measurement and impairment of financial assets and financial liabilities under IFRS 9 with the cumulative effect of the initial application recognized at the date of initial application.

- 15 -

The impact on measurement categories, carrying amount and related reconciliation for each class of the Company’s financial assets and financial liabilities when retrospectively applying IFRS 9 on January 1, 2018 is detailed below:


	Measurement Category		Carrying Amount
	IAS 39	IFRS 9	IAS 39		IFRS 9		Note
Financial Assets
Cash and cash equivalents	Loans and receivables	Amortized cost	$	553,391,696	$	553,391,696		(1	)
Derivatives	Held for trading	Mandatorily at fair value through profit or loss (FVTPL)		569,751		569,751
	Hedging instruments	Hedging instruments		34,394		34,394
Equity securities	Available-for-sale	Fair value through other comprehensive income (FVTOCI)		7,422,311		8,389,438		(2	)
Debt securities	Available-for-sale	Mandatorily at FVTPL		—		779,489		(3	)
		FVTOCI		90,826,099		90,046,610		(3	)
	Held-to-maturity	Amortized cost		20,821,714		20,813,462		(4	)
Notes and accounts receivable (including related parties), other receivables and refundable deposits	Loans and receivables	Amortized cost		131,024,958		131,269,731		(1	)
Financial Liabilities
Derivatives	Held for trading	Held for trading		26,709		26,709
	Hedging instruments	Hedging instruments		15,562		15,562
Short-term loans, accounts payable (including related parties), payables to contractors and equipment suppliers, accrued expenses and other current liabilities, bonds payable and guarantee deposits	Amortized cost	Amortized cost		340,501,266		340,501,266


Financial Assets	Carrying Amount as of December 31, 2017 (IAS 39)		Reclassifi- cations		Remea- surements			Carrying Amount as of January 1, 2018 (IFRS 9)		Retained Earnings Effect on January 1, 2018			Other Equity Effect on January 1, 2018			Note
FVTPL	$	569,751	$	—	$	—		$	569,751	$	—		$	—
- Debt instruments
Add: From available for sale		—		779,489		—			779,489		(10,085	)		10,085			(3	)

		569,751		779,489		—			1,349,240		(10,085	)		10,085

FVTOCI		—		—		—			—		—			—
- Equity instruments
Add: From available for sale		—		7,422,311		967,127			8,389,438		1,294,528			(325,858	)		(2	)
- Debt instruments
Add: From available for sale		—		90,046,610		—			90,046,610		(30,658	)		30,658			(3	)

		—		97,468,921		967,127			98,436,048		1,263,870			(295,200	)

Amortized cost		—		—		—			—		—			—
Add: From held to maturity		—		20,821,714		(8,252	)		20,813,462		(8,252	)		—			(4	)
Add: From loans and receivables		—		684,416,654		244,773			684,661,427		244,773			—			(1	)

		—		705,238,368		236,521			705,474,889		236,521			—

Hedging instruments		34,394		—		—			34,394		—			—

Total	$	604,145	$	803,486,778	$	1,203,648		$	805,294,571	$	1,490,306		$	(285,115	)

Carrying

Amount as of

December 31,
2017

(IAS 39)

Adjustments
Arising from

Initial
Application

Carrying

Amount as of

January 1, 2018

(IFRS 9)

Retained

Earnings

Effect on

January 1,

2018

Other
Equity

Effect on

January 1,

2018

Note

Investments accounted for using equity method

17,861,488

8,259

17,869,747

33,985

(25,726

)

- 16 -

(1)

Cash and cash equivalents, notes and accounts receivable (including related parties), other receivables and refundable deposits that were classified as loans and receivables under IAS 39 are now classified at amortized cost with assessment of future 12-month or lifetime expected credit loss under IFRS 9. As a result of retrospective application, the adjustments would result in a decrease in loss of allowance for accounts receivable of NT$244,773 thousand and an increase in retained earnings of NT$244,773 thousand on January 1, 2018.

(2)

As equity investments that were previously classified as available-for-sale financial assets under IAS 39 are not held for trading, the Company elected to designate all of these investments as at FVTOCI under IFRS 9. As a result, the related other equity-unrealized gain or loss on available-for-sale financial assets of NT$228,304 thousand is reclassified to increase other equity—unrealized gain or loss on financial assets at FVTOCI.

As equity investments previously measured at cost under IAS 39 are remeasured at fair value under IFRS 9, the adjustments would result in an increase in financial assets at FVTOCI of NT$967,127 thousand, an increase in other equity-unrealized gain or loss on financial assets at FVTOCI of NT$968,670 thousand and a decrease in non-controlling interests of NT$1,543 thousand on January 1, 2018.

For those equity investments previously classified as available-for-sale financial assets (including measured at cost financial assets) under IAS 39, the impairment losses that the Company had recognized have been accumulated in retained earnings. Since these investments were designated as at FVTOCI under IFRS 9 and no impairment assessment is required, the adjustments would result in a decrease in other equity—unrealized gain or loss on financial assets at FVTOCI of NT$1,294,528 thousand and an increase in retained earnings of NT$1,294,528 thousand on January 1, 2018.

(3)

Debt investments were previously classified as available-for-sale financial assets under IAS 39. Under IFRS 9, except for debt instruments of NT$779,489 thousand whose contractual cash flows are not solely payments of principal and interest on the principal outstanding and therefore are classified as at FVTPL with the related other equity-unrealized gain or loss on available-for-sale financial assets of NT$10,085 thousand being consequently reclassified to decrease retained earnings, the remaining debt investments are classified as at FVTOCI with assessment of future 12-month expected credit loss because these investments are held within a business model whose objective is both to collect the contractual cash flows and sell the financial assets. The related other equity-unrealized gain or loss on available-for-sale financial assets of NT$434,403 thousand is reclassified to decrease other equity-unrealized gain or loss on financial assets at FVTOCI. As a result of retrospective application of future 12-month expected credit loss, the adjustments would result in an increase in other equity—unrealized gain or loss on financial assets at FVTOCI of NT$30,658 thousand and a decrease in retained earnings of NT$30,658 thousand on January 1, 2018.

(4)

Debt investments previously classified as held-to-maturity financial assets and measured at amortized cost under IAS 39 are classified as measured at amortized cost with assessment of future 12-month expected credit loss under IFRS 9 because the contractual cash flows are solely payments of principal and interest on the principal outstanding and these investments are held within a business model whose objective is to collect the contractual cash flows. As a result of retrospective application of future 12-month expected credit loss, the adjustments would result in an increase in loss allowance of NT$8,252 thousand and a decrease in retained earnings of NT$8,252 thousand on January 1, 2018.

- 17 -

(5)

With the retrospective adoption of IFRS 9 by associates accounted for using equity method, the corresponding adjustments made by the Company would result in an increase in investments accounted for using equity method of NT$8,259 thousand, a decrease in other equity- unrealized gain or loss on financial assets at FVTOCI of NT$23,616 thousand, a decrease in other equity- unrealized gain or loss on available-for-sale financial assets of NT$2,110 thousand and an increase in retained earnings of NT$33,985 thousand on January 1, 2018.

Hedge accounting

The Company prospectively applies the requirements for hedge accounting upon initial application of IFRS 9. In addition, due to the amendments to the Regulations Governing the Preparation of Financial Reports by Securities Issuers, all derivative and non-derivative financial assets and financial liabilities which are designated as hedging instruments are presented as financial assets and financial liabilities for hedging starting 2018.

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

IFRS 15 establishes principles for recognizing revenue that apply to all contracts with customers, and will supersede IAS 18, “Revenue,” IAS 11, “Construction Contracts,” and a number of revenue-related interpretations. Please refer to Note 4 for information relating to the relevant accounting policies.

The Company elected only to retrospectively apply IFRS 15 to contracts that were not completed on January 1, 2018 and elected not to restate prior reporting period with the cumulative effect of the initial application recognized at the date of initial application.

The impact on assets, liabilities and equity when retrospectively applying IFRS 15 on January 1, 2018 is detailed below:


	Carrying Amount as of December 31, 2017 (IAS 18 and Revenue-related Interpretations)		Adjustments Arising from Initial Application			Carrying Amount as of January 1, 2018 (IFRS 15)		Note
Inventories	$	73,880,747	$	(19,745	)	$	73,861,002		(1	)
Contract assets		—		34,177			34,177		(1	)
Investments accounted for using equity method		17,861,488		19,483			17,880,971		(1	)

Total effect on assets			$	33,915

Provisions - current		13,961,787	$	(13,961,787	)		—		(2	)
Accrued expenses and other current liabilities		65,588,396		13,961,787			79,550,183		(2	)

Total effect on liabilities			$	—

Retained earnings		1,233,362,010	$	32,030			1,233,394,040		(1	)
Non-controlling interests		702,110		1,885			703,995		(1	)

Total effect on equity			$	33,915

- 18 -

(1)

Prior to the application of IFRS 15, the Company recognizes revenue based on the accounting treatment of the sales of goods. Under IFRS 15, certain subsidiaries and associates accounted for using equity method will change to recognize revenue over time because customers are deemed to have control over the products when the products are manufactured. As a result, the Company will recognize contract assets (classified under other current assets) and adjust related assets and equity accordingly.

(2)	Prior to the application of IFRS 15, the Company recognized the estimation of sales returns and allowance as provisions. Under IFRS 15, the Company recognizes such estimation as refund liability (classified under accrued expenses and other current liabilities).

The following table shows the amount affected in the current period by the application of IFRS 15 as compared to IAS 18:

Impact on Assets, Liabilities and Equity


	December 31, 2018
Decrease in inventories	$	(29,610	)
Increase in contract assets		52,470
Increase in investments accounted for using equity method		15,163

Total effect on assets	$	38,023

Decrease in provisions - current	$	(22,672,634	)
Increase in accrued expenses and other current liabilities		22,671,587
Increase in income tax payable		4,781

Total effect on liabilities	$	3,734

Increase in retained earnings	$	31,791
Increase in non-controlling interests		2,498

Total effect on equity	$	34,289

Impact on Total Comprehensive Income


	Year Ended December 31, 2018
Increase in net revenue	$	53,517
Increase in cost of revenue		(29,610	)
Increase in share of the profit or loss of associates		15,163
Increase in income tax expense		(4,781	)

Increase in net income for the year	$	34,289

Increase in net income/total comprehensive income attributable to:
Shareholders of the parent	$	31,791
Non-controlling interests		2,498

	$	34,289

- 19 -

3) Please refer to Note 34 for the disclosure of amendment to IAS 7 “Disclosure Initiative”

Amendments to the Regulations Governing the Preparation of Financial Reports by Securities Issuers for application starting from 2019 and the IFRSs issued by IASB and endorsed by FSC with effective date starting 2019


New, Amended or Revised Standards and Interpretations (the “New IFRSs”)		Effective Date Announced by IASB (Note 1)
Annual Improvements to IFRSs 2015-2017 Cycle		January 1, 2019

Amendments to IFRS 9 “Prepayment Features with Negative Compensation”		January 1, 2019 (Note 2)

IFRS 16 “Leases”		January 1, 2019

Amendments to IAS 19 “Plan Amendment, Curtailment or Settlement”		January 1, 2019 (Note 3)

Amendments to IAS 28 “Long-term Interests in Associates and Joint Ventures”		January 1, 2019

IFRIC 23 “Uncertainty over Income Tax Treatments”		January 1, 2019

Note 1:

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

Note 2:

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

Note 3:

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

Except for the following items, the Company believes that the adoption of aforementioned standards or interpretations will not have a significant effect on the Company’s accounting policies.

IFRS 16 “Leases”

IFRS 16 sets out the accounting standards for leases that will supersede IAS 17 “Leases”, IFRIC 4 “Determining whether an Arrangement contains a Lease”, and a number of related interpretations.

Definition of a lease

Upon initial application of IFRS 16, the Company will apply the guidance of IFRS 16 in determining whether contracts are, or contain, a lease only to contracts entered into (or changed) on or after January 1, 2019. Contracts identified as containing a lease under IAS 17 and IFRIC 4 will not be reassessed and will be accounted for in accordance with the transitional provisions under IFRS 16.

The Company as lessee

Upon initial application of IFRS 16, except for payments for low-value asset and short-term leases which will be recognized as expenses on a straight-line basis, the Company will recognize right-of-use assets and lease liabilities for all leases on the consolidated balance sheets. On the consolidated statements of comprehensive income, the Company will present the depreciation expense charged on right-of-use assets separately from the interest expense accrued on lease liabilities and computed using the effective interest method. On the consolidated statements of cash flows, cash payments for both the principal portion and the interest portion of lease liabilities are classified within financing activities.

- 20 -

Upon initial application of IFRS 16, the Company will apply IFRS 16 retrospectively with the cumulative effect of the initial application recognized at the date of initial application but will not restate comparative information.

Leases agreements classified as operating leases under IAS 17, except for leases of low-value asset and short-term leases, will be measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate on January 1, 2019. Right-of-use assets are measured at an amount equal to the lease liabilities, adjusted by the amount of any prepaid or accrued lease payments. Right-of-use assets are subject to impairment testing under IAS 36.

The Company will apply the following practical expedients to measure right-of-use assets and lease liabilities on January 1, 2019 :

The Company will apply a single discount rate to a portfolio of leases with reasonably similar characteristics to measure lease liabilities.

The Company will account for those leases for which the lease term ends on or before December 31, 2019 as short-term leases.

Except for lease payment, the Company will exclude incremental costs of obtaining the lease from the measurement of right-of-use assets on January 1, 2019.

The Company will determine lease terms (e.g. lease periods) based on the projected status on January 1, 2019, to measure lease liabilities.

The weighted average lessee’s incremental borrowing rate used by the Company to calculate lease liabilities recognized on January 1, 2019 is 1.46%. The reconciliation between the lease liabilities recognized and the future minimum lease payments of non-cancellable operating lease on December 31, 2018 is presented as follows:


The future minimum lease payments of non-cancellable operating lease on December 31, 2018	$	20,849,585
Less: Recognition exemption for short-term leases		(3,189,821	)

Undiscounted gross amounts on January 1, 2019	$	17,659,764

Discounted using the incremental borrowing rate on January 1, 2019	$	16,465,599
Add: Adjustments as a result of a different treatment of extension and purchase options		3,438,016

Lease liabilities recognized on January 1, 2019	$	19,903,615

The Company as lessor

Except for sublease transactions, the Company will not make any adjustments for leases in which it is a lessor, and will account for those leases under IFRS 16 starting from January 1, 2019. On the basis of the remaining contractual terms and conditions on January 1, 2019, all of the Company’s subleases will be classified as operating leases.

- 21 -

Impact on assets, liabilities and equity on January 1, 2019


	Carrying Amount as of December 31, 2018		Adjustments Arising from Initial Application			Adjusted Carrying Amount as of January 1, 2019
Other current assets	$	5,406,423	$	(118,242	)	$	5,288,181
Right-of-use assets		—		20,082,875			20,082,875
Other noncurrent assets		1,584,647		(77,171	)		1,507,476

Total effect on assets			$	19,887,462

Accrued expenses and other current liabilities		61,760,619	$	2,627,334			64,387,953
Lease liabilities—noncurrent		—		17,269,317			17,269,317
Other noncurrent liabilities		1,950,989		(9,189	)		1,941,800

Total effect on liabilities			$	19,887,462

Total effect on equity			$	—

The IFRSs issued by IASB but not yet endorsed and issued into effect by FSC


New, Revised or Amended Standards and Interpretations		Effective Date Issued by IASB
Amendments to IFRS 3 “Definition of a Business”		January 1, 2020 (Note 1)

Amendments to IFRS 10 and IAS 28 “Sale or Contribution of Assets between an Investor and its Associate or Joint Venture”		To be determined by IASB

Amendments to IAS 1 and IAS 8 “Definition of Material”		January 1, 2020 (Note 2)

Note 1:

The Company shall apply these amendments to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2020 and to asset acquisitions that occur on or after the beginning of that period.

Note 2:

The Company shall apply these amendments prospectively for annual reporting periods beginning on or after January 1, 2020.

As of the date the accompanying consolidated financial statements were issued, the Company continues in evaluating the impact on its financial position and financial performance as a result of the initial adoption of the aforementioned standards or interpretations. The related impact will be disclosed when the Company completes the evaluation.

4.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

- 22 -

Statement of Compliance

The accompanying consolidated financial statements have been prepared in conformity with the Regulations Governing the Preparation of Financial Reports by Securities Issuers and the IFRSs endorsed by the FSC with the effective dates (collectively, “Taiwan-IFRSs”).

Basis of Preparation

The accompanying consolidated financial statements have been prepared on the historical cost basis except for financial instruments that are measured at fair values, as explained in the accounting policies below. Historical cost is generally based on the fair value of the consideration given in exchange for the assets.

Basis of Consolidation

The basis for the consolidated financial statements

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

Income and expenses of subsidiaries acquired or disposed of are included in the consolidated statement of comprehensive income from the effective date of acquisition and up to the effective date of disposal, as appropriate. Total comprehensive income of subsidiaries is attributed to the shareholders of the parent and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.

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

All intra-group transactions, balances, income and expenses are eliminated in full on consolidation.

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

When the Company loses control of a subsidiary, a gain or loss is recognized in profit or loss and is calculated as the difference between:

the aggregate of the fair value of consideration received and the fair value of any retained interest at the date when control is lost; and

the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiary and any non-controlling interest.

The Company shall account for all amounts recognized in other comprehensive income in relation to the subsidiary on the same basis as would be required if the Company had directly disposed of the related assets and liabilities.

The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the cost on initial recognition of an investment in an associate.

- 23 -

The subsidiaries in the consolidated financial statements

The detail information of the subsidiaries at the end of reporting period was as follows:


			Establishment	Percentage of Ownership
Name of Investor	Name of Investee	Main Businesses and Products	and Operating Location	December 31, 2018			December 31, 2017			Note
TSMC	TSMC North America	Selling and marketing of integrated circuits and other semiconductor devices	San Jose, California, U.S.A.		100	%		100	%	—
	TSMC Europe B.V. (TSMC Europe)	Customer service and supporting activities	Amsterdam, the Netherlands		100	%		100	%	a)
	TSMC Japan Limited (TSMC Japan)	Customer service and supporting activities	Yokohama, Japan		100	%		100	%	a)
	TSMC Korea Limited (TSMC Korea)	Customer service and supporting activities	Seoul, Korea		100	%		100	%	a)
	TSMC Partners, Ltd. (TSMC Partners)	Investing in companies involved in the design, manufacture, and other related business in the semiconductor industry and other investment activities	Tortola, British Virgin Islands		100	%		100	%	a)
	TSMC Global, Ltd. (TSMC Global)	Investment activities	Tortola, British Virgin Islands		100	%		100	%	—
	TSMC China Company Limited (TSMC China)	Manufacturing, selling, testing and computer-aided design of integrated circuits and other semiconductor devices	Shanghai, China		100	%		100	%	—
	TSMC Nanjing Company Limited (TSMC Nanjing)	Manufacturing, selling, testing and computer-aided design of integrated circuits and other semiconductor devices	Nanjing, China		100	%		100	%	b)
	VisEra Technologies Company Ltd. (VisEra Tech)	Engaged in manufacturing electronic spare parts and in researching, developing, designing, manufacturing, selling, packaging and testing of color filter	Hsin-Chu, Taiwan		87	%		87	%	—
	VentureTech Alliance Fund II, L.P. (VTAF II)	Investing in new start-up technology companies	Cayman Islands		98	%		98	%	a)
	VentureTech Alliance Fund III, L.P. (VTAF III)	Investing in new start-up technology companies	Cayman Islands		98	%		98	%	a)
	TSMC Solar Europe GmbH	Selling of solar related products and providing customer service	Hamburg, Germany		100	%		100	%	a) , c)
TSMC Partners	TSMC Development, Inc. (TSMC Development)	Investing in companies involved in the manufacturing related business in the semiconductor industry	Delaware, U.S.A.		100	%		100	%	—
	TSMC Technology, Inc. (TSMC Technology)	Engineering support activities	Delaware, U.S.A.		100	%		100	%	a)
	TSMC Design Technology Canada Inc. (TSMC Canada)	Engineering support activities	Ontario, Canada		100	%		100	%	a)
	InveStar Semiconductor Development Fund, Inc. (ISDF)	Investing in new start-up technology companies	Cayman Islands		97	%		97	%	a) , c)
	InveStar Semiconductor Development Fund, Inc. (II) LDC. (ISDF II)	Investing in new start-up technology companies	Cayman Islands		97	%		97	%	a) , c)
TSMC Development	WaferTech, LLC (WaferTech)	Manufacturing, selling and testing of integrated circuits and other semiconductor devices	Washington, U.S.A.		100	%		100	%	—
VTAF III	Growth Fund Limited (Growth Fund)	Investing in new start-up technology companies	Cayman Islands		100	%		100	%	a)

Note a:

This is an immaterial subsidiary for which the consolidated financial statements are not audited by the Company’s independent auditors.

Note b:

Under the investment agreement entered into with the municipal government of Nanjing, China, the Company will make an investment in Nanjing in the amount of approximately US$3 billion to establish a subsidiary operating a 300mm wafer fab with the capacity of 20,000 12-inch wafers per month, and a design service center.

Note c:

The subsidiary is under liquidation procedures.

Foreign Currencies

The financial statements of each individual consolidated entity were expressed in the currency which reflected its primary economic environment (functional currency). The functional currency of TSMC and presentation currency of the consolidated financial statements are both New Taiwan Dollars (NT$). In preparing the consolidated financial statements, the operating results and financial positions of each consolidated entity are translated into NT$.

In preparing the financial statements of each individual consolidated entity, transactions in currencies other than the entity’s functional currency (foreign currencies) are recognized at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Such exchange differences are recognized in profit or loss in the year in which they arise. Non-monetary items measured at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Exchange differences arising on the retranslation of non-monetary items are

- 24 -

included in profit or loss for the year except for exchange differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognized directly in other comprehensive income, in which case, the exchange differences are also recognized directly in other comprehensive income. Non-monetary items that are measured in terms of historical cost in foreign currencies are not retranslated.

For the purposes of presenting consolidated financial statements, the assets and liabilities of the Company’s foreign operations are translated into NT$ using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for the period. Exchange differences arising, if any, are recognized in other comprehensive income and accumulated in equity (attributed to non-controlling interests as appropriate).

Classification of Current and Noncurrent Assets and Liabilities

Current assets are assets held for trading purposes and assets expected to be converted to cash, sold or consumed within one year from the end of the reporting period. Current liabilities are obligations incurred for trading purposes and obligations expected to be settled within one year from the end of the reporting period. Assets and liabilities that are not classified as current are noncurrent assets and liabilities, respectively.

Cash Equivalents

Cash equivalents, for the purpose of meeting short-term cash commitments, consist of highly liquid time deposits and investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

Financial Instruments

Financial assets and liabilities shall be recognized when the Company becomes a party to the contractual provisions of the instruments.

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

Financial Assets

The classification of financial assets depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. Regular way purchases or sales of financial assets are recognized and derecognized on a trade date or settlement date basis for which financial assets were classified in the same way, respectively. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace.

Category of financial assets and measurement

2018

Financial assets are classified into the following categories: financial assets at FVTPL, investments in debt instruments and equity instruments at FVTOCI, and financial assets at amortized cost.

- 25 -

Financial asset at FVTPL

For certain financial assets which include debt instruments that do not meet the criteria of amortized cost or FVTOCI, it is mandatorily required to measure them at FVTPL. Any gain or loss arising from remeasurement is recognized in profit or loss. The net gain or loss recognized in profit or loss incorporates any interest earned on the financial asset.

Investments in debt instruments at FVTOCI

Debt instruments with contractual terms specifying that cash flows are solely payments of principal and interest on the principal amount outstanding, together with objective of collecting contractual cash flows and selling the financial assets, are measured at FVTOCI.

Interest income calculated using the effective interest method, foreign exchange gains and losses and impairment gains or losses on investments in debt instruments at FVTOCI are recognized in profit or loss. Other changes in the carrying amount of these debt instruments are recognized in other comprehensive income and will be reclassified to profit or loss when these debt instruments are disposed.

Investments in equity instruments at FVTOCI

On initial recognition, the Company may irrevocably designate investments in equity investments that is not held for trading as at FVTOCI.

Investments in equity instruments at FVTOCI are subsequently measured at fair value with gains and losses arising from changes in fair value recognized in other comprehensive income and accumulated in other equity.

Dividends on these investments in equity instruments at FVTOCI are recognized in profit or loss when the Company’s right to receive the dividends is established, unless the Company’s rights clearly represent a recovery of part of the cost of the investment.

Measured at amortized cost

Cash and cash equivalents, debt instrument investments, notes and accounts receivable (including related parties), other receivables and refundable deposits are measured at amortized cost.

Debt instruments with contractual terms specifying that cash flows are solely payments of principal and interest on the principal amount outstanding, together with objective of holding financial assets in order to collect contractual cash flows, are measured at amortized cost.

Subsequent to initial recognition, financial assets measured at amortized cost are measured at amortized cost, which equals to carrying amount determined by the effective interest method less any impairment loss.

2017

Financial assets are classified into the following specified categories: Financial assets at FVTPL, available-for-sale financial assets, held-to-maturity financial assets and loans and receivables.

Financial asset at FVTPL

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

- 26 -

Financial assets at fair value through profit or loss are stated at fair value, with any gains or losses arising on remeasurement recognized in profit or loss.

Available-for-sale financial assets

Available-for-sale financial assets are non-derivative financial assets that are either designated as available-for-sale or are not classified as (a) loans and receivables, (b) held-to-maturity financial assets or (c) financial assets at fair value through profit or loss.

Available-for-sale financial assets are measured at fair value. Interest income from available-for-sale monetary financial assets and dividends on available-for-sale equity investments are recognized in profit or loss. Other changes in the carrying amount of available-for-sale financial assets are recognized in other comprehensive income. When the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously recognized in other comprehensive income is reclassified to profit or loss.

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

Available-for-sale equity instruments 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 any identified impairment losses at the end of each reporting period. Such equity instruments are subsequently remeasured at fair value when their fair value can be reliably measured, and the difference between the carrying amount and fair value is recognized in profit or loss or other comprehensive income.

Held-to-maturity financial assets

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity dates that the Company has the positive intent and ability to hold to maturity. Subsequent to initial recognition, held-to-maturity financial assets are measured at amortized cost using the effective interest method less any impairment.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables including cash and cash equivalents, notes and accounts receivable and other receivables are measured at amortized cost using the effective interest method, less any impairment, except for those loans and receivables with immaterial discounted effect.

Impairment of financial assets

2018

At the end of each reporting period, a loss allowance for expected credit loss is recognized for financial assets at amortized cost (including accounts receivable) and for investments in debt instruments that are measured at FVTOCI.

The loss allowance for accounts receivable is measured at an amount equal to lifetime expected credit losses. For financial assets at amortized cost and investments in debt instruments that are measured at FVTOCI, when the credit risk on the financial instrument has not increased significantly since initial recognition, a loss allowance is recognized at an amount equal to expected credit loss resulting from possible default events of a financial instrument within 12 months after the reporting date. If, on the other hand, there has been a significant increase in credit risk since initial recognition, a loss allowance is recognized at an amount equal to expected credit loss resulting from all possible default events over the expected life of a financial instrument.

- 27 -

The Company recognizes an impairment loss in profit or loss for all financial instruments with a corresponding adjustment to their carrying amount through a loss allowance account, except for investments in debt instruments that are measured at FVTOCI, for which the loss allowance is recognized in other comprehensive income and does not reduce the carrying amount of the financial asset.

2017

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

For financial assets carried at amortized cost, such as trade receivables, assets that are assessed not to be impaired individually are, in addition, assessed for impairment on a collective basis. The Company assesses the collectability of receivables by performing the account aging analysis and examining current trends in the credit quality of its customers.

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

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

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 year.

In respect of available-for-sale equity instruments, impairment losses previously recognized in profit or loss are not reversed through profit or loss. Any increase in fair value subsequent to the recognition of an impairment loss is recognized in other comprehensive income and accumulated under the heading of unrealized gains or losses from available-for-sale financial assets.

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

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

Derecognition of financial assets

2018

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

- 28 -

On derecognition of a financial asset at amortized cost in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable is recognized in profit or loss. On derecognition of an investment in a debt instrument at FVTOCI, 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. However, on derecognition of an investment in an equity instrument at FVTOCI, the cumulative gain or loss that had been recognized in other comprehensive income is transferred directly to retained earnings, without recycling through profit or loss.

2017

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

Financial Liabilities and Equity Instruments

Classification as debt or equity

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

Equity instruments

An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Company are recognized at the proceeds received, net of direct issue costs.

Financial liabilities

Financial liabilities are subsequently measured either at amortized cost using effective interest method or at FVTPL.

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

Financial liabilities at fair value through profit or loss are stated at fair value, with any gains or losses arising on remeasurement recognized in profit or loss.

Financial liabilities other than those held for trading purposes and designated as at FVTPL are subsequently measured at amortized cost at the end of each reporting period.

Derecognition of financial liabilities

The Company derecognizes financial liabilities when, and only when, the Company’s obligations are discharged, cancelled or they expire. The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable is recognized in profit or loss.

- 29 -

Derivative Financial Instruments

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

Financial Instruments Designated as at Fair Value through Profit or Loss

A financial instrument may be designated as at FVTPL upon initial recognition. The financial instrument forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Company’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis.

Hedge Accounting

Fair value hedge

The Company designates certain hedging instruments, such as interest rate futures contracts, to partially hedge against the price risk caused by changes in interest rates in the Company’s investments in fixed income securities as fair value hedge. Changes in the fair value of hedging instrument that are designated and qualify as fair value hedges are recognized in profit or loss immediately, together with any changes in the fair value of the hedged asset that are attributable to the hedged risk.

Cash flow hedge

The Company designates certain hedging instruments, such as forward exchange contracts and foreign currency deposits, to partially hedge its foreign exchange rate risks associated with certain highly probable forecast transactions (capital expenditures). The effective portion of changes in the fair value of hedging instruments is recognized in other comprehensive income. When the forecast transactions actually take place, the associated gains or losses that were recognized in other comprehensive income are removed from equity and included in the initial cost of the hedged items. The gains or losses from hedging instruments relating to the ineffective portion are recognized immediately in profit or loss.

2018

The Company prospectively discontinues hedge accounting only when the hedging relationship ceases to meet the qualifying criteria; for instance when the hedging instrument expires or is sold, terminated or exercised.

2017

Hedge accounting was discontinued prospectively when the Company revoked the designated hedging relationship, when the hedging instrument expired or was sold, terminated, or exercised; or no longer met the criteria for hedge accounting.

Inventories

Inventories are stated at the lower of cost or net realizable value. Inventories are recorded at standard cost and adjusted to approximate weighted-average cost at the end of the reporting period. Net realizable value represents the estimated selling price of inventories less all estimated costs of completion and costs necessary to make the sale.

- 30 -

Investments Accounted for Using Equity Method

Investments accounted for using the equity method are investments in associates.

An associate is an entity over which the Company has significant influence and that is neither a subsidiary nor a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

The operating results and assets and liabilities of associates are incorporated in these consolidated financial statements using the equity method of accounting. Under the equity method, an investment in an associate is initially recognized in the consolidated statement of financial position at cost and adjusted thereafter to recognize the Company’s share of profit or loss and other comprehensive income of the associate as well as the distribution received. The Company also recognizes its share in the changes in the equities of associates.

Any excess of the cost of acquisition over the Company’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities of an associate recognized at the date of acquisition is recognized as goodwill, which is included within the carrying amount of the investment. Any excess of the Company’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognized immediately in profit or loss.

When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount. Any impairment loss recognized forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognized to the extent that the recoverable amount of the investment subsequently increases.

The Company discontinues the use of the equity method from the date when the Company ceases to have significant influence over an associate. When the Company retains an interest in the former associate, the Company measures the retained interest at fair value at that date. The difference between the carrying amount of the associate at the date the equity method was discontinued, and the fair value of any retained interest and any proceeds from disposing of a part interest in the associate is included in the determination of the gain or loss on disposal of the associate. In addition, the Company shall account for all amounts recognized in other comprehensive income in relation to that associate on the same basis as would be required if the associate had directly disposed of the related assets or liabilities. If the Company’s ownership interest in an associate is reduced as a result of disposal, but the investment continues to be an associate, the Company should reclassify to profit or loss only a proportionate amount of the gain or loss previously recognized in other comprehensive income.

When the Company subscribes to additional shares in an associate at a percentage different from its existing ownership percentage, the resulting carrying amount of the investment differs from the amount of the Company’s proportionate interest in the net assets of the associate. The Company records such a difference as an adjustment to investments with the corresponding amount charged or credited to capital surplus. If the Company’s ownership interest is reduced due to the additional subscription to the shares of associate by other investors, the proportionate amount of the gains or losses previously recognized in other comprehensive income in relation to that associate shall be reclassified to profit or loss on the same basis as would be required if the associate had directly disposed of the related assets or liabilities.

When a consolidated entity transacts with an associate, profits and losses resulting from the transactions with the associate are recognized in the Company’s consolidated financial statements only to the extent of interests in the associate that are not owned by the Company.

- 31 -

Property, Plant and Equipment

Property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment. Costs include any incremental costs that are directly attributable to the construction or acquisition of the item of property, plant and equipment.

Property, plant and equipment in the course of construction for production, supply or administrative purposes are carried at cost, less any recognized impairment loss. Such assets are classified to the appropriate categories of property, plant and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other identical categories of property, plant and equipment, commences when the assets are available for their intended use.

Depreciation is recognized so as to write off the cost of the assets less their residual values over their useful lives, and it is computed using the straight-line method over the following estimated useful lives: land improvements—20 years; buildings—10 to 20 years; machinery and equipment—2 to 5 years; and office equipment—3 to 5 years. The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimates accounted for on a prospective basis. Land is not depreciated.

An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the assets. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in profit or loss.

Leases

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

The Company as lessor

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

The Company as lessee

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

Intangible Assets

Goodwill

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

Other intangible assets

Other separately acquired intangible assets with finite useful lives are carried at cost less accumulated amortization and accumulated impairment losses. Amortization is recognized using the straight-line method over the following estimated useful lives: Technology license fees—the estimated life of the technology or the term of the technology transfer contract; software and system design costs—3 years or contract period; patent and others—the economic life or contract period. The estimated useful life and amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.

- 32 -

Impairment of Tangible and Intangible Assets

Goodwill

Goodwill is not amortized and instead is tested for impairment annually, or more frequently when there is an indication that the cash generating unit may be impaired. For the purpose of impairment testing, goodwill is allocated to each of the Company’s cash-generating units or groups of cash-generating units that are expected to benefit from the synergies of the combination. If the recoverable amount of a cash-generating unit is less than its carrying amount, the difference is allocated first to reduce the carrying amount of any goodwill allocated to such cash generating unit and then to the other assets of the cash generating unit pro rata based on the carrying amount of each asset in the cash generating unit. Any impairment loss for goodwill is recognized directly in profit or loss. An impairment loss recognized for goodwill is not reversed in subsequent periods.

Other tangible and intangible assets

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

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, the carrying amount of the asset or cash-generating unit is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss.

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

Provision

Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that the Company will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.

- 33 -

Guarantee Deposit

Guarantee deposit mainly consists of cash received under deposit agreements with customers to ensure they have access to the Company’s specified capacity; and as guarantee of accounts receivable to ensure payment from customers. Cash received from customers is recorded as guarantee deposit upon receipt. Guarantee deposits are refunded to customers when terms and conditions set forth in the deposit agreements have been satisfied.

Revenue Recognition

2018

The Company recognizes revenue when performance obligations are satisfied. The performance obligations are satisfied when customers obtain control of the promised goods which is generally when the goods are delivered to the customers’ specified locations.

Revenue from sale of goods is measured at the fair value of the consideration received or receivable. Revenue is reduced for estimated customer returns, rebates and other similar allowances. Estimated sales returns and other allowances is generally made and adjusted based on historical experience and the consideration of varying contractual terms to recognize refund liabilities, which is classified under accrued expenses and other current liabilities.

In principle, payment term granted to customers is due 30 days from the invoice date or 30 days from the end of the month of when the invoice is issued. Due to the short term nature of the receivables from sale of goods with the immaterial discounted effect, the Company measures them at the original invoice amounts without discounting.

2017

Revenue is measured at the fair value of the consideration received or receivable. Revenue is reduced for estimated customer returns, rebates and other similar allowances.

Sale of goods

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

•

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

•

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

•

The amount of revenue can be measured reliably;

•

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

•

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

- 34 -

Dividend and interest income

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

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

Employee Benefits

Short-term employee benefits

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

Retirement benefits

For defined contribution retirement benefit plans, payments to the benefit plan are recognized as an expense when the employees have rendered service entitling them to the contribution. For defined benefit retirement benefit plans, the cost of providing benefit is recognized based on actuarial calculations.

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

Net defined benefit liability represents the actual deficit in the Company’s defined benefit plan.

Taxation

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

Current tax

Income tax on unappropriated earnings (excluding earnings from foreign consolidated subsidiaries) is expensed in the year the shareholders approved the appropriation of earnings which is the year subsequent to the year the earnings are generated.

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

Deferred tax

Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences, net operating loss carryforwards and tax credits for research and development expenses to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized.

- 35 -

Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries and associates, except where the Company is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments 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 deferred tax asset to be recovered. The deferred tax assets which originally not recognized is also reviewed at the end of each reporting period and recognized to the extent that it is probable that sufficient taxable profits will be available to allow all or part of the deferred tax asset to be recovered.

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

Current and deferred tax for the year

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

Government Grants

Government grants are not recognized until there is reasonable assurance that the Company will comply with the conditions attaching to them and that the grants will be received.

Government grants whose primary condition is that the Company should purchase, construct or otherwise acquire noncurrent assets (mainly including land use right and depreciable assets) are recognized as a deduction from the carrying amount of the related assets and recognized as a reduced depreciation or amortization charge in profit or loss over the contract period or useful lives of the related assets. Government grants that are receivables as compensation for expenses already incurred are deducted from incurred expenses in the period in which they become receivables.

5.	CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION AND UNCERTAINTY

In the application of the aforementioned Company’s accounting policies, the Company 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 to be relevant. Actual results may differ from these estimates.

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

- 36 -

Revenue Recognition

The Company recognizes revenue when the conditions described in Note 4 are satisfied. The Company also records estimated future returns and other allowances in the same period the related revenue is recorded. Estimated sales returns and other allowances is generally made and adjusted based on historical experience and the consideration of varying contractual terms, and the Company periodically reviews the adequacy of the estimation used.

Timing to commence depreciation of property, plant and equipment

As described in Note 4, depreciation of property, plant and equipment begins when the assets are available for use, and in the condition necessary for the assets to be capable of operating in the intended manner. The criteria to determine whether assets are available for their intended use vary within categories of assets as well as involve subjective judgments, thus validity of the timing to commence depreciation of property, plant and equipment could have a material impact on the Company’s financial performance.

Impairment of Tangible and Intangible Assets Other than Goodwill

In the process of evaluating the potential impairment of tangible and intangible assets other than goodwill, the Company is required to make subjective judgments in determining the independent cash flows, useful lives, expected future revenue and expenses related to the specific asset groups with the consideration of the nature of semiconductor industry. Any changes in these estimates based on changed economic conditions or business strategies could result in significant impairment charges or reversal in future years.

Impairment of Goodwill

The assessment of impairment of goodwill requires the Company to make subjective judgment to determine the identified cash-generating units, allocate the goodwill to relevant cash-generating units and estimate the recoverable amount of relevant cash-generating units.

Impairment Assessment on Investment Using Equity Method

The Company assesses the impairment of investments accounted for using the equity method whenever triggering events or changes in circumstances indicate that an investment may be impaired and carrying value may not be recoverable. The Company measures the impairment based on a projected future cash flow of the investees, including the underlying assumptions of sales growth rate and capacity utilization rate formulated by such investees’ internal management team. The Company also takes into account market conditions and the relevant industry trends to ensure the reasonableness of such assumptions.

Realization of Deferred Income Tax Assets

Deferred tax assets are recognized to the extent that it is probable that future taxable profits will be available against which those deferred tax assets can be utilized. Assessment of the realization of the deferred tax assets requires subjective judgment and estimate, including the future revenue growth and profitability, tax holidays, the amount of tax credits can be utilized and feasible tax planning strategies. Any changes in the global economic environment, the industry trends and relevant laws and regulations could result in significant adjustments to the deferred tax assets.

Fair Value Measurement of Non-publicly Traded Equity Investments

The fair value measurement for non-publicly traded equity investments is determined by the estimated fair value under appropriate valuation methods primarily based on investees’ financial positions, operation results and recent financing activities, the market transaction prices of similar investments, market conditions and the required discount factors. As such, the estimated fair value may be different from the actual disposal price in the future. The Company assesses the fair value quarterly based on market

- 37 -

conditions to ensure the appropriateness of fair value measurement of non-publicly traded equity investments.

Valuation of Inventory

Inventories are stated at the lower of cost or net realizable value, and the Company uses judgment and estimate to determine the net realizable value of inventory at the end of each reporting period.

The Company estimates the net realizable value of inventory for obsolescence and unmarketable items at the end of reporting period and then writes down the cost of inventories to net realizable value. The net realizable value of the inventory is mainly determined based on assumptions of future demand within a specific time horizon.

Recognition and Measurement of Defined Benefit Plans

Net defined benefit liability and the resulting defined benefit costs under defined benefit pension plans are calculated using the Projected Unit Credit Method. Actuarial assumptions comprise the discount rate, rate of employee turnover, and future salary increase rate. Changes in economic circumstances and market conditions will affect these assumptions and may have a material impact on the amount of the expense and the liability.

6.	CASH AND CASH EQUIVALENTS


	December 31, 2018		December 31, 2017
Cash and deposits in banks	$	575,825,502	$	551,919,770
Repurchase agreements collateralized by corporate bonds		1,229,600		—
Commercial paper		759,499		695,901
Agency bonds		—		776,025

	$	577,814,601	$	553,391,696

Deposits in banks consisted of highly liquid time deposits that were readily convertible to known amounts of cash and were subject to an insignificant risk of changes in value.

7.	FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS


	December 31, 2018		December 31, 2017
Financial assets
Mandatorily measured at FVTPL
Agency mortgage-backed securities	$	3,419,287	$	—
Forward exchange contracts		85,303		—

		3,504,590		—
Held for trading
Forward exchange contracts		—		569,751

	$	3,504,590	$	569,751

Financial liabilities
Held for trading
Forward exchange contracts	$	40,825	$	26,709

- 38 -

The Company entered into derivative contracts to manage exposures due to fluctuations of foreign exchange rates. These derivative contracts did not meet the criteria for hedge accounting. Therefore, the Company did not apply hedge accounting treatment for these derivative contracts.

Outstanding forward exchange contracts consisted of the following:


		Contract Amount
	Maturity Date	(In Thousands)
December 31, 2018
Sell NT$/Buy EUR	January 2019 to March 2019		NT$18,545,854/EUR527,000
Sell NT$/Buy JPY	January 2019 to March 2019		NT$4,757,858/JPY17,200,000
Sell US$/Buy EUR	January 2019		US$495/EUR434
Sell US$/Buy JPY	January 2019		US$175,591/JPY19,389,014
Sell US$/Buy RMB	January 2019		US$318,000/RMB2,188,747
Sell US$/Buy NT$	January 2019 to February 2019		US$127,000/NT$3,908,635
Sell RMB/Buy US$	January 2019		RMB667,539/US$97,000
December 31, 2017

Sell NT$/Buy EUR	January 2018 to February 2018		NT$6,002,786/EUR169,000
Sell NT$/Buy JPY	February 2018		NT$996,294/JPY3,800,000
Sell US$/Buy JPY	January 2018		US$2,191/JPY246,724
Sell US$/Buy RMB	January 2018		US$558,000/RMB3,679,575
Sell US$/Buy NT$	January 2018 to February 2018		US$1,661,500/NT$49,673,320
Sell RMB /Buy EUR	January 2018		RMB38,967/EUR4,994
Sell RMB/Buy JPY	January 2018		RMB409,744/JPY7,062,536
Sell RMB/Buy GBP	January 2018		RMB3,637/GBP413

Investments in debt instruments at FVTOCI were classified as available-for-sale financial assets under IAS 39. Refer to Notes 3 and 9 for information relating to their reclassification and comparative information for 2017.

8.	FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME-2018


	December 31, 2018
Investments in debt instruments at FVTOCI
Corporate bonds	$	40,753,582
Agency bonds/Agency mortgage-backed securities		31,288,762
Asset-backed securities		15,670,295
Government bonds		11,151,359
Commercial paper		107,590

		98,971,588

Investments in equity instruments at FVTOCI
Non-publicly traded equity investments		3,910,681
Publicly traded stocks		590,152

		4,500,833

	$	103,472,421


		(Continued	)

- 39 -


	December 31, 2018
Current	$	99,561,740
Noncurrent		3,910,681

	$	103,472,421


		(Concluded	)

These investments in equity instruments are held for medium to long-term purposes and therefore are accounted for as FVTOCI.

For the year ended December 31, 2018, the Company sold shares of stocks for NT$840,605 thousand mainly because the strategic purpose no longer exists and the non-publicly traded investee has been merged. The related other equity-unrealized gain or loss on financial assets at FVTOCI of NT$1,193,056 thousand was transferred to decrease retained earnings.

For dividends from equity investments designated as at FVTOCI recognized during the year ended December 31, 2018, please refer to Note 28. All the dividends are from investments held at the end of the reporting period.

As of December 31, 2018, the cumulative loss allowance for expected credit loss of NT$29,723 thousand is recognized under investments in debt instruments at FVTOCI. Refer to Note 36 for information relating to their credit risk management and expected credit loss.

Investments in equity and debt instruments at FVTOCI were classified as available-for-sale financial assets and cost methods (only for equity instruments) under IAS 39. Refer to Notes 3, 9 and 12 (only for equity instruments) for information relating to their reclassification and comparative information for 2017.

9.	AVAILABLE-FOR-SALE FINANCIAL ASSETS-2017


	December 31, 2017
Corporate bonds	$	40,165,148
Agency bonds/Agency mortgage-backed securities		29,235,388
Asset-backed securities		13,459,545
Government bonds		7,817,723
Publicly traded stocks		2,548,054
Commercial paper		148,295

	$	93,374,153

- 40 -

10.

HELD-TO-MATURITY FINANCIAL ASSETS-2017


	December 31, 2017
Corporate bonds	$	19,338,764
Structured product		1,482,950

	$	20,821,714

Current portion	$	1,988,385
Noncurrent portion		18,833,329

	$	20,821,714

11.

FINANCIAL ASSETS AT AMORTIZED COST-2018


	December 31, 2018
Corporate bonds	$	19,519,941
Commercial paper		2,294,098
Less: Allowance for impairment loss		(8,147	)

	$	21,805,892

Current portion	$	14,277,615
Noncurrent portion		7,528,277

	$	21,805,892

Financial assets at amortized cost were classified as held-to-maturity financial assets under IAS 39. Refer to Notes 3 and 10 for information relating to their reclassification and comparative information for 2017. Refer to Note 36 for information relating to credit risk management and expected credit loss for financial assets at amortized cost.

12.

FINANCIAL ASSETS CARRIED AT COST-2017

The Company’s investment classified as financial assets carried at cost primarily consists of non-publicly traded equity investments. Since there is a wide range of estimated fair values of the Company’s investments in non-publicly traded equity investments, the Company concludes that the fair value cannot be reliably measured and therefore should be measured at the cost less any impairment.

The stock of Aquantia was listed in November 2017. Accordingly, the Company reclassified the aforementioned investment from financial assets carried at cost to available-for-sale financial assets.

- 41 -

13.

HEDGING FINANCIAL INSTRUMENTS

2018


	December 31, 2018
Financial assets- current
Cash flow hedges
Forward exchange contracts	$	23,497

Financial liabilities- current
Fair value hedges
Interest rate futures contracts	$	153,891
Cash flow hedges
Forward exchange contracts		1,941

	$	155,832

Fair value hedge

The Company entered into interest rate futures contracts, which are used to partially hedge against the price risk caused by changes in interest rates in the Company’s investments in fixed income securities. The hedge ratio is adjusted in response to the changes in the financial market and capped at 100%.

On the basis of economic relationships, the Company expects that the value of the interest rate futures contracts and the value of the hedged financial assets will change in opposite directions in response to movements in interest rates.

The main source of hedge ineffectiveness in these hedging relationships is the credit risk of the hedged financial assets, which is not reflected in the fair value of the interest rate future contracts. No other sources of ineffectiveness emerged from these hedging relationships. Amount of hedge ineffectiveness recognized in profit or loss is classified under other gains and losses.

The following tables summarize the information relating to the hedges of interest rate risk as of December 31, 2018.

Hedging Instruments

Contract
Amount

(US$ in
Thousands)

Maturity

US treasury bonds interest rate futures contracts

US$330,300

March 2019

Hedged Items

Asset Carrying
Amount as of
December 31,
2018

Asset
Accumulated

Amount of Fair
Value Hedge
Adjustments

Financial assets at FVTOCI

23,229,530

(13,508

)

- 42 -

The effect for the year ended December 31, 2018 is detailed below:


Hedging Instruments/Hedged Items	Increase (Decrease) in Value Used for Calculating Hedge Ineffectiveness
Hedging Instruments
US treasury bonds interest rate futures contracts	$	11,460
Hedged Items
Financial assets at FVTOCI		(13,846	)

	$	(2,386	)

Cash flow hedge

The Company entered into forward exchange contracts and foreign currency deposits to partially hedge foreign exchange rate risks associated with certain highly probable forecast transactions (capital expenditures). The hedge ratio is adjusted in response to the changes in the financial market and capped at 100%. The forward exchange contracts have maturities of 12 months or less.

On the basis of economic relationships, the Company expects that the value of forward exchange contracts and foreign currency deposits and the value of hedged transactions will change in opposite directions in response to movements in foreign exchange rates.

The main source of hedge ineffectiveness in these hedging relationships is driven by the effect of the counterparty’s own credit risk on the fair value of forward exchange contracts and foreign currency deposits. No other sources of ineffectiveness emerged from these hedging relationships. For the year ended December 31, 2018, refer to Note 25(d) for gain or loss arising from changes in the fair value of hedging instruments and the amount transferred to initial carrying amount of hedged items.

The following tables summarize the information relating to the hedges for foreign currency risk as of December 31, 2018.

Hedging Instruments

Contract Amount

(in Thousands)

Maturity

Balance in

Other Equity
(Continuing
Hedges)

Forward exchange contracts

NT$ 3,917,657

/EUR 112,000

February 2019 to
April 2019

23,601

- 43 -

The effect for the year ended December 31, 2018 is detailed below:


Hedged Items	Increase (Decrease) in Value Used for Calculating Hedge Ineffectiveness
Hedging Instruments
Forward exchange contracts	$	34,563
Foreign currency deposits		6,412

	$	40,975

Hedged Items
Forecast transaction (capital expenditures)	$	(40,975	)

2017

The Company’s hedging policies for 2017 are the same as those mentioned previously in 2018, the instruments employed are as follows:


	December 31, 2017
Financial assets- current
Fair value hedges
Interest rate futures contracts	$	27,016
Cash flow hedges
Forward exchange contracts		7,378

	$	34,394

Financial liabilities- current
Cash flow hedges
Forward exchange contracts	$	15,562

The outstanding interest rate futures contracts consisted of the following:


Maturity Period	Contract Amount (US$ in Thousands)
December 31, 2017
March 2018	US$	169,400

The Company entered into forward exchange contracts to partially hedge foreign exchange rate risks associated with certain highly probable forecast transactions (capital expenditures). These contracts have maturities of 12 months or less.

- 44 -

Outstanding forward exchange contracts consisted of the following:


			Contract Amount
	Maturity Date		(In Thousands)
December 31, 2017
Sell NT$/Buy EUR		February 2018 to May 2018	NT$	2,649,104/EUR75,000

14.

NOTES AND ACCOUNTS RECEIVABLE, NET


	December 31, 2018			December 31, 2017
At amortized cost
Notes and accounts receivable	$	125,025,575		$	121,604,989
Less: Loss allowance		(7,253	)		(471,741	)

		125,018,322			121,133,248
At FVTOCI		3,595,069			—

	$	128,613,391		$	121,133,248

The Company signed a contract with the bank to sell certain accounts receivable without recourse and transaction cost required. These accounts receivable are classified as at FVTOCI because they are held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets.

2018

In principle, the payment term granted to customers is due 30 days from the invoice date or 30 days from the end of the month when the invoice is issued. Aside from recognizing impairment losses on credit-impaired accounts receivable, the Company recognizes loss allowance based on the expected credit loss ratio of customers by different risk levels. Such risk levels are determined with factors of historical loss ratios and customers’ financial conditions, competitiveness and business outlook. For accounts receivable past due over 90 days without collaterals or guarantees, the Company recognizes loss allowance at full amount.

Aging analysis of notes and accounts receivable, net


	December 31, 2018
Not past due	$	113,126,484
Past due
Past due within 30 days		15,006,461
Past due 31-60 days		472,833
Past due 61-120 days		4,654
Past due over 121 days		2,959

	$	128,613,391

- 45 -

Movements of the loss allowance for accounts receivable


Balance at January 1, 2018 (IAS 39)	$	471,741
Effect of retrospective application of IFRS 9		(244,773	)

Balance at January 1, 2018 (IFRS 9)		226,968
Provision (Reversal)		(219,714	)
Effect of exchange rate changes		(1	)

Balance at December 31, 2018	$	7,253

For the year ended December 31, 2018, the decrease in loss allowance was mainly due to the variations from accounts receivable balance of different risk levels.

2017

In principle, the payment term granted to customers is due 30 days from the invoice date or 30 days from the end of the month of when the invoice is issued. The allowance for doubtful receivables is assessed by reference to the collectability of receivables by performing the account aging analysis, historical experience and current financial condition of customers.

Except for those impaired, for the rest of the notes and accounts receivable, the account aging analysis at the end of the reporting period is summarized in the following table. There was no impairment concern for the accounts receivable that were past due without recognizing a specific allowance for doubtful receivables since there was no significant change in the credit quality of its customers after the assessment and the Company has obtained guarantee against certain receivables.

Aging analysis of notes and accounts receivable, net


	December 31, 2017
Neither past due nor impaired	$	105,295,219
Past due but not impaired
Past due within 30 days		13,984,125
Past due 31-60 days		929,672
Past due 61-120 days		582,821
Past due over 121 days		341,411

	$	121,133,248

Movements of the allowance for doubtful receivables


	Individually Assessed for Impairment			Collectively Assessed for Impairment			Total
Balance at January 1, 2017	$	1,848		$	478,270		$	480,118
Reversal/Write-off		(1,848	)		(6,305	)		(8,153	)
Effect of exchange rate changes		—			(224	)		(224	)

Balance at December 31, 2017	$	—		$	471,741		$	471,741

- 46 -

15.

INVENTORIES


	December 31, 2018		December 31, 2017
Finished goods	$	11,329,802	$	9,923,338
Work in process		72,071,861		53,362,160
Raw materials		15,233,877		7,143,806
Supplies and spare parts		4,595,436		3,451,443

	$	103,230,976	$	73,880,747

Write-down of inventories to net realizable value (excluding computer virus outbreak losses) and reversal of write-down of inventories resulting from the increase in net realizable value in the amount of NT$1,259,472 thousand and NT$840,861 thousand, respectively, were included in the cost of revenue for the years ended December 31, 2018 and 2017. Please refer to computer virus outbreak losses in Note 41.

16.

INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD

Associates consisted of the following:


		Place of		Carrying Amount				% of Ownership and Voting Rights Held by the Company
Name of Associate	Principal Activities	Incorporation and Operation		December 31, 2018		December 31, 2017		December 31, 2018			December 31, 2017
Vanguard International Semiconductor Corporation (VIS)	Manufacturing, selling, packaging, testing and computer-aided design of integrated circuits and other semiconductor devices and the manufacturing and design service of masks		Hsinchu, Taiwan	$	9,006,126	$	8,568,344		28	%		28	%
Systems on Silicon Manufacturing Company Pte Ltd. (SSMC)	Manufacturing and selling of integrated circuits and other semiconductor devices		Singapore		5,772,815		5,677,640		39	%		39	%
Xintec Inc. (Xintec)	Wafer level chip size packaging and wafer level post passivation interconnection service		Taoyuan, Taiwan		1,764,607		2,292,100		41	%		41	%
Global Unichip Corporation (GUC)	Researching, developing, manufacturing, testing and marketing of integrated circuits		Hsinchu, Taiwan		1,299,423		1,300,194		35	%		35	%
Mutual-Pak	Manufacturing of electronic parts, wholesaling and retailing of electronic materials, and researching, developing and testing of RFID		New Taipei, Taiwan		22,867		23,210		39	%		39	%

				$	17,865,838	$	17,861,488

Starting December 2017, the Company no longer had the majority of voting power and control over Mutual-Pak. As a result, Mutual-Pak is no longer consolidated and is accounted for using the equity method.

As of December 31, 2018 and 2017, no investments in associates are individually material to the Company. Please refer to the consolidated statements of comprehensive income for recognition of share of both profit (loss) and other comprehensive income (loss) of associates that are not individually material.

The market prices of the investments accounted for using the equity method in publicly traded stocks calculated by the closing price at the end of the reporting period are summarized as follows. The closing price represents the quoted price in active markets, the level 1 fair value measurement.

- 47 -


Name of Associate	December 31, 2018		December 31, 2017
VIS	$	27,621,298	$	30,638,751

GUC	$	9,617,699	$	11,905,404

Xintec	$	3,783,585	$	9,180,759

17.

PROPERTY, PLANT AND EQUIPMENT


	Land and Land Improvements			Buildings			Machinery and Equipment			Office Equipment			Equipment under Installation and Construction in Progress			Total
Cost
Balance at January 1, 2018	$	3,983,243		$	379,134,613		$	2,487,752,265		$	42,391,516		$	167,353,490		$	3,080,615,127
Additions (Deductions)		—			40,396,404			247,042,281			6,773,376			5,812,340			300,024,401
Disposals or retirements		—			(410,891	)		(5,972,482	)		(790,793	)		—			(7,174,166	)
Effect of exchange rate changes		28,110			(405,841	)		(61,937	)		8,180			(254,841	)		(686,329	)

Balance at December 31, 2018	$	4,011,353		$	418,714,285		$	2,728,760,127		$	48,382,279		$	172,910,989		$	3,372,779,033

Accumulated depreciation and impairment
Balance at January 1, 2018	$	510,498		$	194,446,521		$	1,795,448,842		$	27,666,944		$	—		$	2,018,072,805
Additions		20,900			24,293,366			258,195,315			5,615,316			—			288,124,897
Disposals or retirements		—			(398,955	)		(4,773,589	)		(789,993	)		—			(5,962,537	)
Impairment		—			—			423,468			—			—			423,468
Effect of exchange rate changes		19,177			33,210			(15,128	)		32,862			—			70,121

Balance at December 31, 2018	$	550,575		$	218,374,142		$	2,049,278,908		$	32,525,129		$	—		$	2,300,728,754

Carrying amounts at December 31, 2018	$	3,460,778		$	200,340,143		$	679,481,219		$	15,857,150		$	172,910,989		$	1,072,050,279

Cost
Balance at January 1, 2017	$	4,049,292		$	304,404,474		$	2,042,867,744		$	34,729,640		$	387,199,675		$	2,773,250,825
Additions (Deductions)		—			75,594,667			458,605,807			8,195,896			(219,902,510	)		322,493,860
Disposals or retirements		—			(36,957	)		(9,552,995	)		(377,798	)		—			(9,967,750	)
Reclassification		—			—			8,791			1,507			—			10,298
Effect of disposal of subsidiary		—			—			(51,216	)		(14,750	)		(518	)		(66,484	)
Effect of exchange rate changes		(66,049	)		(827,571	)		(4,125,866	)		(142,979	)		56,843			(5,105,622	)

Balance at December 31, 2017	$	3,983,243		$	379,134,613		$	2,487,752,265		$	42,391,516		$	167,353,490		$	3,080,615,127

Accumulated depreciation and impairment
Balance at January 1, 2017	$	524,845		$	174,349,077		$	1,577,377,509		$	23,221,707		$	—		$	1,775,473,138
Additions		27,790			20,844,584			229,985,588			4,938,000			—			255,795,962
Disposals or retirements		—			(28,816	)		(8,114,327	)		(377,470	)		—			(8,520,613	)
Reclassification		—			—			8,195			1,466			—			9,661
Effect of disposal of subsidiary		—			—			(42,830	)		(13,838	)		—			(56,668	)
Effect of exchange rate changes		(42,137	)		(718,324	)		(3,765,293	)		(102,921	)		—			(4,628,675	)

Balance at December 31, 2017	$	510,498		$	194,446,521		$	1,795,448,842		$	27,666,944		$	—		$	2,018,072,805

Carrying amounts at December 31, 2017	$	3,472,745		$	184,688,092		$	692,303,423		$	14,724,572		$	167,353,490		$	1,062,542,322

The significant part of the Company’s buildings includes main plants, mechanical and electrical power equipment and clean rooms, and the related depreciation is calculated using the estimated useful lives of 20 years, 10 years and 10 years, respectively.

For the year ended December 31, 2018, the Company recognized an impairment loss of NT$423,468 thousand for certain machinery and equipment that was assessed to have no future use, and the recoverable amount of certain machinery and equipment was nil. Such impairment loss was recognized in other operating income and expenses.

- 48 -

18.

INTANGIBLE ASSETS


	Goodwill			Technology License Fees			Software and System Design Costs			Patent and Others			Total
Cost
Balance at January 1, 2018	$	5,648,702		$	10,443,257		$	25,186,218		$	5,716,146		$	46,994,323
Additions		—			533,669			4,601,885			1,969,439			7,104,993
Disposals or retirements		—			—			(186,671	)		(31,183	)		(217,854	)
Effect of exchange rate changes		146,786			(2,468	)		(6,949	)		2,122			139,491

Balance at December 31, 2018	$	5,795,488		$	10,974,458		$	29,594,483		$	7,656,524		$	54,020,953

Accumulated amortization and impairment
Balance at January 1, 2018	$	—		$	7,694,857		$	20,376,693		$	4,747,633		$	32,819,183
Additions		—			1,063,616			2,835,265			522,524			4,421,405
Disposals or retirements		—			—			(186,615	)		(31,183	)		(217,798	)
Effect of exchange rate changes		—			(2,468	)		(1,845	)		339			(3,974	)

Balance at December 31, 2018	$	—		$	8,756,005		$	23,023,498		$	5,239,313		$	37,018,816

Carrying amounts at December 31, 2018	$	5,795,488		$	2,218,453		$	6,570,985		$	2,417,211		$	17,002,137

Cost
Balance at January 1, 2017	$	6,007,975		$	9,546,007		$	22,243,595		$	5,386,435		$	43,184,012
Additions		—			897,861			3,021,085			349,265			4,268,211
Retirements		—			—			(75,237	)		—			(75,237	)
Reclassification		—			—			7,662			(17,960	)		(10,298	)
Effect of disposal of subsidiary		(13,499	)		—			(7,662	)		—			(21,161	)
Effect of exchange rate changes		(345,774	)		(611	)		(3,225	)		(1,594	)		(351,204	)

Balance at December 31, 2017	$	5,648,702		$	10,443,257		$	25,186,218		$	5,716,146		$	46,994,323

Accumulated amortization and impairment
Balance at January 1, 2017	$	—		$	6,147,200		$	18,144,428		$	4,277,538		$	28,569,166
Additions		—			1,548,263			2,310,742			487,731			4,346,736
Retirements		—			—			(75,237	)		—			(75,237	)
Reclassification		—			—			7,409			(17,070	)		(9,661	)
Impairment		13,520			—			—			—			13,520
Effect of disposal of subsidiary		(13,499	)		—			(7,554	)		—			(21,053	)
Effect of exchange rate changes		(21	)		(606	)		(3,095	)		(566	)		(4,288	)

Balance at December 31, 2017	$	—		$	7,694,857		$	20,376,693		$	4,747,633		$	32,819,183

Carrying amounts at December 31, 2017	$	5,648,702		$	2,748,400		$	4,809,525		$	968,513		$	14,175,140

The Company’s goodwill has been tested for impairment at the end of the annual reporting period and the recoverable amount is determined based on the value in use. The value in use was calculated based on the cash flow forecast from the financial budgets covering the future five-year period, and the Company used annual discount rates of 9.0% and 8.5% in its test of impairment as of December 31, 2018 and 2017, respectively, to reflect the relevant specific risk in the cash-generating unit.

For the year ended December 31, 2018, the Company did not recognize any impairment loss on goodwill. For the year ended December 31, 2017, the Company assessed goodwill impairment and recognized an impairment loss of NT$13,520 thousand related to a subsidiary since the operating result of this cash generating unit was not as expected and the recoverable amount of goodwill was nil. Such impairment loss was recognized in other operating income and expenses.

- 49 -

19.

OTHER ASSETS


	December 31, 2018		December 31, 2017
Tax receivable	$	3,780,293	$	4,021,602
Prepaid expenses		1,298,710		1,559,963
Others		1,912,067		1,623,995

	$6,991,070		$7,205,560

Current portion	$	5,406,423	$	4,222,440
Noncurrent portion		1,584,647		2,983,120

	$6,991,070		$7,205,560

20.

SHORT-TERM LOANS


	December 31, 2018		December 31, 2017
Unsecured loans
Amount	$	88,754,640	$	63,766,850

Original loan content
US$ (in thousands)	$	2,610,000	$	2,150,000
EUR (in thousands)		242,000		—
Annual interest rate		0.01%-3.22%		1.54%-1.82%
Maturity date		Due by January 2019		Due by February 2018

21.

PROVISIONS

The Company’s current provisions were provisions for sales returns and allowances.


	Sales Returns and Allowances
Year Ended December 31, 2017
Balance, beginning of year	$	18,037,789
Provision		44,833,557
Payment		(48,884,704	)
Effect of exchange rate changes		(24,855	)

Balance, end of year	$	13,961,787

Provisions for sales returns and allowances are estimated based on historical experience and the consideration of varying contractual terms, and are recognized as a reduction of revenue in the same year of the related product sales.

Starting from 2018, the Company recognizes the estimation of sales returns and allowance as refund liability (classified under accrued expenses and other current liabilities) upon initial application of IFRS 15.

- 50 -

22.

BONDS PAYABLE


	December 31, 2018			December 31, 2017
Domestic unsecured bonds	$	91,800,000		$	116,100,000
Overseas unsecured bonds		—			34,107,850

	91,800,000			150,207,850
Less: Discounts on bonds payable		—			(6,728	)
Less: Current portion		(34,900,000	)		(58,401,122	)

	$56,900,000			$91,800,000

The major terms of domestic unsecured bonds are as follows:


Issuance	Tranche	Issuance Period	Total Amount		Coupon Rate	Repayment and Interest Payment
100-1	B	September 2011 to September 2018	$	7,500,000	1.63%	Bullet repayment; interest payable annually
100-2	A	January 2012 to January 2017		10,000,000	1.29%	The same as above
	B	January 2012 to January 2019	7,000,000		1.46%	The same as above
101-1	A	August 2012 to August 2017		9,900,000	1.28%	The same as above
	B	August 2012 to August 2019	9,000,000		1.40%	The same as above
101-2	A	September 2012 to September 2017		12,700,000	1.28%	The same as above
	B	September 2012 to September 2019	9,000,000		1.39%	The same as above
101-3	—	October 2012 to October 2022		4,400,000	1.53%	The same as above
101-4	A	January 2013 to January 2018		10,600,000	1.23%	The same as above
	B	January 2013 to January 2020	10,000,000		1.35%	The same as above
	C	January 2013 to January 2023	3,000,000		1.49%	The same as above
102-1	A	February 2013 to February 2018		6,200,000	1.23%	The same as above
	B	February 2013 to February 2020	11,600,000		1.38%	The same as above
	C	February 2013 to February 2023	3,600,000		1.50%	The same as above
102-2	A	July 2013 to July 2020		10,200,000	1.50%	The same as above
	B	July 2013 to July 2023	3,500,000		1.70%	The same as above
102-3	A	August 2013 to August 2017		4,000,000	1.34%	The same as above
	B	August 2013 to August 2019	8,500,000		1.52%	The same as above

(Continued)

- 51 -

Issuance

Tranche

Issuance Period

Total Amount

Coupon
Rate

Repayment and Interest Payment

102-4

September 2013 to September 2017

1,500,000

1.45%

Bullet repayment; interest payable annually

102-4

September 2013 to March 2019

1,400,000

1.60%

Bullet repayment; interest payable annually (interest for the six months prior to maturity will accrue on the basis of actual days and be repayable at maturity)

September 2013 to March 2021

2,600,000

1.85%

The same as above

September 2013 to March 2023

5,400,000

2.05%

The same as above

September 2013 to September 2023

2,600,000

2.10%

Bullet repayment; interest payable annually

(Concluded)

The major terms of overseas unsecured bonds are as follows:

Issuance Period

Total Amount
(US$

in Thousands)

Coupon Rate

Repayment and Interest Payment

April 2013 to April 2018

US$1,150,000

1.625%

Bullet repayment; interest payable semi-annually

23.

RETIREMENT BENEFIT PLANS

Defined contribution plans

The plan under the R.O.C. Labor Pension Act (the “Act”) is deemed a defined contribution plan. Pursuant to the Act, TSMC, Mutual-Pak and VisEra Tech have made monthly contributions equal to 6% of each employee’s monthly salary to employees’ pension accounts. Furthermore, TSMC North America, TSMC China, TSMC Nanjing, TSMC Europe, TSMC Canada, TSMC Technology and TSMC Solar Europe GmbH also make monthly contributions at certain percentages of the basic salary of their employees. Accordingly, the Company recognized expenses of NT$2,568,945 thousand and NT$2,369,940 thousand for the years ended December 31, 2018 and 2017, respectively.

- 52 -

Defined benefit plans

TSMC has defined benefit plans under the R.O.C. Labor Standards Law that provide benefits based on an employee’s length of service and average monthly salary for the six-month period prior to retirement. The Company contributes an amount equal to 2% of salaries paid each month to their respective pension funds (the Funds), which are administered by the Labor Pension Fund Supervisory Committee (the Committee) and deposited in the Committee’s name in the Bank of Taiwan. Before the end of each year, the Company assesses the balance in the Funds. If the amount of the balance in the Funds is inadequate to pay retirement benefits for employees who conform to retirement requirements in the next year, the Company is required to fund the difference in one appropriation that should be made before the end of March of the next year. The Funds are operated and managed by the government’s designated authorities; as such, the Company does not have any right to intervene in the investments of the Funds.

Amounts recognized in respect of these defined benefit plans were as follows:


	Years Ended December 31
	2018		2017
Current service cost	$	137,758	$	145,026