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 2013

 

 

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  x             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  x

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

 

 

 

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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 Ltd.
Date: February 26, 2013				By		/s/ Lora Ho
						Lora Ho
						Senior Vice President & Chief Financial Officer

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Taiwan Semiconductor Manufacturing Company Limited

Financial Statements for the

Years Ended December 31, 2012 and 2011 and

Independent Auditors’ Report

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INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Shareholders

Taiwan Semiconductor Manufacturing Company Limited

We have audited the accompanying balance sheets of Taiwan Semiconductor Manufacturing Company Limited as of December 31, 2012 and 2011, and the related statements of income, changes in shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the Rules Governing the Audit of Financial Statements by Certified Public Accountants and auditing standards generally accepted in the Republic of China. Those rules and standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Taiwan Semiconductor Manufacturing Company Limited as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, requirements of the Business Accounting Law and Guidelines Governing Business Accounting with respect to financial accounting standards, and accounting principles generally accepted in the Republic of China.

We have also audited, in accordance with the Rules Governing the Audit of Financial Statements by Certified Public Accountants and auditing standards generally accepted in the Republic of China, the consolidated financial statements of Taiwan Semiconductor Manufacturing Company Limited and subsidiaries as of and for the year ended December 31, 2012 and 2011 on which we have issued an unqualified opinion.

February 5, 2013

Notice to Readers

The accompanying financial statements are intended only to present the financial position, results of operations 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 financial statements are those generally accepted and applied in the Republic of China.

For the convenience of readers, the auditors’ report and the accompanying 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 auditors’ report and financial statements shall prevail.

 

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Taiwan Semiconductor Manufacturing Company Limited

BALANCE SHEETS

DECEMBER 31, 2012 AND 2011

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

 

 

 

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

 

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Taiwan Semiconductor Manufacturing Company Limited

STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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

 

 

		2012								2011
		Amount				%				Amount				%
GROSS SALES (Notes 2 and 24)		$	506,697,738							$	421,472,087
SALES RETURNS AND ALLOWANCES (Notes 2 and 8)			6,825,851								3,226,594
NET SALES			499,871,887				100				418,245,493				100
COST OF SALES (Notes 9, 18 and 24)			265,538,540				53				233,083,068				56
GROSS PROFIT BEFORE AFFILIATES ELIMINATION			234,333,347				47				185,162,425				44
REALIZED (UNREALIZED) GROSS PROFIT FROM AFFILIATES (Note 2)			(25,029	)			—				398,440				—
GROSS PROFIT			234,308,318				47				185,560,865				44
OPERATING EXPENSES (Notes 18 and 24)
Research and development			38,788,245				8				31,594,034				7
General and administrative			16,330,060				3				12,715,339				3
Marketing			2,388,243				—				2,345,729				1
Total operating expenses			57,506,548				11				46,655,102				11
INCOME FROM OPERATIONS			176,801,770				36				138,905,763				33
NON-OPERATING INCOME AND GAINS
Equity in earnings of equity method investees, net (Notes 2 and 10)			8,127,748				2				3,778,083				1
Settlement income (Note 26)			883,845				—				947,340				1
Interest income			867,227				—				697,196				—
Technical service income (Note 24)			497,638				—				408,153				—
Valuation gain on financial instruments, net (Notes 2, 5 and 23)			—				—				801,195				—
Others (Notes 2 and 24)			811,619				—				655,079				—
Total non-operating income and gains			11,188,077				2				7,287,046				2

 

(Continued)

 

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Taiwan Semiconductor Manufacturing Company Limited

STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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

 

 

		2012								2011
		Amount				%				Amount				%
NON-OPERATING EXPENSES AND LOSSES
Impairment loss of financial assets (Notes 2, 6 and 23)		$	2,677,529				1			$	—				—
Interest expense (Note 24)			945,114				—				445,887				—
Impairment loss on idle assets (Note 2)			418,330				—				—				—
Loss on disposal of property, plant and equipment (Notes 2 and 24)			146,647				—				202,901				—
Foreign exchange loss, net (Note 2)			—				—				673,085				—
Others (Note 2)			172,279				—				163,092				—
Total non-operating expenses and losses			4,359,899				1				1,484,965				—
INCOME BEFORE INCOME TAX			183,629,948				37				144,707,844				35
INCOME TAX EXPENSE (Notes 2 and 17)			17,471,146				4				10,506,565				3
NET INCOME		$	166,158,802				33			$	134,201,279				32
		2012								2011
		Before Income Tax				After Income Tax				Before Income Tax				After Income Tax
EARNINGS PER SHARE (NT$, Note 22)
Basic earnings per share		$	7.08			$	6.41			$	5.58			$	5.18
Diluted earnings per share		$	7.08			$	6.41			$	5.58			$	5.18

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

 

(Concluded)

 

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Taiwan Semiconductor Manufacturing Company Limited

STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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

 

 

																														Others
		Capital Stock - Common Stock												Retained Earnings																Cumulative Translation Adjustments				Net Loss Not Recognized as Pension Cost				Unrealized Gain/Loss on Financial Instruments				Treasury Stock				Total Shareholders’ Equity
		Shares (In Thousands)				Amount				Capital Surplus				Legal Capital Reserve				Special Capital Reserve				Unappropriated Earnings				Total
BALANCE, JANUARY 1, 2011			25,910,078			$	259,100,787			$	55,698,434			$	86,239,494			$	1,313,047			$	178,227,030			$	265,779,571			$	(6,543,163	)		$	—			$	109,289			$	—			$	574,144,918
Appropriations of prior year’s earnings
Legal capital reserve			—				—				—				16,160,501				—				(16,160,501	)			—				—				—				—				—				—
Special capital reserve			—				—				—				—				5,120,827				(5,120,827	)			—				—				—				—				—				—
Cash dividends to shareholders - NT$3.00 per share			—				—				—				—				—				(77,730,236	)			(77,730,236	)			—				—				—				—				(77,730,236	)
Net income in 2011			—				—				—				—				—				134,201,279				134,201,279				—				—				—				—				134,201,279
Adjustment arising from changes in percentage of ownership in equity method investees			—				—				59,898				—				—				—				—				—				—				—				—				59,898
Translation adjustments			—				—				—				—				—				—				—				(112,326	)			—				—				—				(112,326	)
Issuance of stock from exercising employee stock options			7,144				71,439				146,258				—				—				—				—				—				—				—				—				217,697
Net changes of valuation gain/loss on available-for-sale financial assets			—				—				—				—				—				—				—				—				—				(1,112,995	)			—				(1,112,995	)
Net change in shareholders’ equity from equity method investees			—				—				—				—				—				—				—				—				—				(165,851	)			—				(165,851	)
Acquisition of treasury stock - shareholders executed the appraisal right			—				—				—				—				—				—				—				—				—				—				(71,598	)			(71,598	)
Retirement of treasury stock			(1,000	)			(10,000	)			(2,139	)			—				—				(59,459	)			(59,459	)			—				—				—				71,598				—
Effect of spin-off			—				—				(56,094	)			—				—				—				—				222,120				—				(3,298	)			—				162,728
BALANCE, DECEMBER 31, 2011			25,916,222				259,162,226				55,846,357				102,399,995				6,433,874				213,357,286				322,191,155				(6,433,369	)			—				(1,172,855	)			—				629,593,514
Appropriations of prior year’s earnings
Legal capital reserve			—				—				—				13,420,128				—				(13,420,128	)			—				—				—				—				—				—
Special capital reserve			—				—				—				—				1,172,350				(1,172,350	)			—				—				—				—				—				—
Cash dividends to shareholders - NT$3.00 per share			—				—				—				—				—				(77,748,668	)			(77,748,668	)			—				—				—				—				(77,748,668	)
Net income in 2012			—				—				—				—				—				166,158,802				166,158,802				—				—				—				—				166,158,802
Adjustment arising from changes in percentage of ownership in equity method investees			—				—				131,095				—				—				—				—				—				—				—				—				131,095
Translation adjustments			—				—				—				—				—				—				—				(4,320,394	)			—				—				—				(4,320,394	)
Issuance of stock from exercising employee stock options			8,213				82,131				160,357				—				—				—				—				—				—				—				—				242,488
Net changes of valuation gain/loss on available-for-sale financial assets			—				—				—				—				—				—				—				—				—				1,998,347				—				1,998,347
Net change in shareholders’ equity from equity method investees			—				—				—				—				—				—				—				—				(5,299	)			7,147,829				—				7,142,530
BALANCE, DECEMBER 31, 2012			25,924,435			$	259,244,357			$	56,137,809			$	115,820,123			$	7,606,224			$	287,174,942			$	410,601,289			$	(10,753,763	)		$	(5,299	)		$	7,973,321			$	—			$	723,197,714

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

 

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Taiwan Semiconductor Manufacturing Company Limited

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of New Taiwan Dollars)

 

 

		2012				2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	166,158,802			$	134,201,279
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			124,399,879				102,925,423
Unrealized (realized) gross profit from affiliates			25,029				(398,440	)
Amortization of premium/discount of financial assets			2,281				9,860
Gain on disposal of available-for-sale financial assets			(110,634	)			(35,151	)
Loss on disposal of financial assets carried at cost			269				—
Equity in earnings of equity method investees, net			(8,127,748	)			(3,778,083	)
Cash dividends received from equity method investees			1,688,878				2,941,548
Loss on disposal of property, plant and equipment and other assets, net			125,488				99,884
Impairment loss of financial assets			2,677,529				—
Impairment loss on idle assets			418,330				—
Deferred income tax			2,618,657				(493,026	)
Changes in operating assets and liabilities:
Financial assets and liabilities at fair value through profit or loss			(17,625	)			(22,759	)
Receivables from related parties			(16,209,910	)			956,440
Notes and accounts receivable			4,167,955				2,356,519
Allowance for doubtful receivables			(11,083	)			(2,880	)
Allowance for sales returns and others			844,859				(2,453,565	)
Other receivables from related parties			(89,347	)			(38,049	)
Other financial assets			(53,251	)			138,196
Inventories			(12,442,994	)			2,775,646
Prepaid expenses and other current assets			(371,593	)			(382,852	)
Accounts payable			1,361,012				(1,805,422	)
Payables to related parties			(67,770	)			418,132
Income tax payable			4,548,602				3,538,928
Accrued profit sharing to employees and bonus to directors			2,130,887				(1,903,765	)
Accrued expenses and other current liabilities			3,556,824				(410,047	)
Accrued pension cost			65,378				96,880
Net cash provided by operating activities			277,288,704				238,734,696
CASH FLOWS FROM INVESTING ACTIVITIES
Cash contributed related to spin-off			—				(1,270,340	)
Acquisitions of:
Property, plant and equipment			(242,063,668	)			(202,757,541	)
Investments accounted for using equity method			(2,259,244	)			(7,390,883	)
Financial assets carried at cost			(1,093	)			—

 

(Continued)

 

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Taiwan Semiconductor Manufacturing Company Limited

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of New Taiwan Dollars)

 

 

		2012				2011
Proceeds from return of capital by investees		$	587,902			$	320,013
Proceeds from disposal or redemption of:
Available-for-sale financial assets			612,834				1,035,151
Held-to-maturity financial assets			700,000				4,789,000
Financial assets carried at cost			14,900				—
Property, plant and equipment and other assets			93,984				4,650,078
Increase in deferred charges			(1,743,043	)			(1,658,296	)
Decrease in refundable deposits			2,096,909				4,147,014
Decrease in other assets			17,600				27,600
Net cash used in investing activities			(241,942,919	)			(198,108,204	)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term loans			8,788,401				(4,982,109	)
Cash dividends			(77,748,668	)			(77,730,236	)
Proceeds from issuance of bonds			62,000,000				18,000,000
Repayment of bonds			(4,500,000	)			—
Decrease in guarantee deposits			(239,717	)			(308,855	)
Proceeds from exercise of employee stock options			242,488				217,697
Acquisition of treasury stock			—				(71,598	)
Net cash used in financing activities			(11,457,496	)			(64,875,101	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			23,888,289				(24,248,609	)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR			85,262,521				109,511,130
CASH AND CASH EQUIVALENTS, END OF YEAR		$	109,150,810			$	85,262,521
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid		$	670,165			$	369,085
Income tax paid		$	10,312,114			$	7,454,386
INVESTING ACTIVITIES AFFECTING BOTH CASH AND NON-CASH ITEMS
Acquisition of property, plant and equipment		$	255,108,068			$	195,932,728
Decrease (increase) in payables to contractors and equipment suppliers			(12,764,075	)			6,827,106
Increase in payables to related parties			(280,256	)			—
Nonmonetary exchange trade-out price			(69	)			(2,293	)
Cash paid		$	242,063,668			$	202,757,541

 

(Continued)

 

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Taiwan Semiconductor Manufacturing Company Limited

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of New Taiwan Dollars)

 

 

		2012				2011
Disposal of property, plant and equipment and other assets		$	91,641			$	3,370,165
Decrease in other receivables to related parties			2,412				1,124,206
Decrease in other financial assets			—				158,000
Nonmonetary exchange trade-out price			(69	)			(2,293	)
Cash received		$	93,984			$	4,650,078
Acquisition of deferred charges		$	2,184,901			$	1,658,296
Increase in accounts payable			(303,584	)			—
Increase in payables to related parties			(25,274	)			—
Increase in other long-term payables			(113,000	)			—
Cash paid		$	1,743,043			$	1,658,296
NON-CASH INVESTING AND FINANCING ACTIVITIES
Idle assets reclassified from property, plant and equipment		$	418,330			$	—
Current portion of other long-term payables (under accrued expenses and other current liabilities)		$	59,000			$	—
Current portion of bonds payable		$	—			$	4,500,000

SUPPLEMENTAL INFORMATION FOR SPIN-OFF BUSINESSES

In August 2011, the Company transferred the solid state lighting and solar businesses into its wholly-owned, newly incorporated subsidiaries, TSMC Solid State Lighting Ltd. (TSMC SSL) and TSMC Solar Ltd. (TSMC Solar), respectively. The relevant information about spin-off was as follows:

 

		TSMC SSL				TSMC Solar				Total
Acquired investments accounted for using equity method		$	2,270,000			$	11,180,000			$	13,450,000
Non-cash items transferred
Current assets			36,050				18,807				54,857
Long-term investments			2,872				7,912,710				7,915,582
Property, plant and equipment			1,929,563				2,372,214				4,301,777
Other assets			234,696				201,677				436,373
Current liabilities			(292,728	)			(337,439	)			(630,167	)
Other liabilities			(36,272	)			(25,218	)			(61,490	)
Capital surplus			—				(56,094	)			(56,094	)
Unrealized gain/loss on financial instruments			—				(3,298	)			(3,298	)
Cumulative translation adjustments			256				221,864				222,120
			(1,874,437	)			(10,305,223	)			(12,179,660	)
Cash contributed related to spin-off		$	395,563			$	874,777			$	1,270,340

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

 

(Concluded)

 

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Taiwan Semiconductor Manufacturing Company Limited

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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

 

 

1.

GENERAL

Taiwan Semiconductor Manufacturing Company Limited (the “Company” or “TSMC”), a Republic of China (R.O.C.) corporation, was incorporated on February 21, 1987. The Company 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. Beginning in 2010, the Company also engages in the researching, developing, designing, manufacturing and selling of solid state lighting devices and related applications products and systems, and renewable energy and efficiency related technologies and products. In August 2011, the Company transferred its solid state lighting and solar businesses into its wholly-owned, newly incorporated subsidiaries, TSMC SSL and TSMC Solar, respectively.

On September 5, 1994, its 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).

As of December 31, 2012 and 2011, the Company had 33,341 and 30,113 employees, respectively.

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The financial statements are presented in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, Business Accounting Law, Guidelines Governing Business Accounting, and accounting principles generally accepted in the R.O.C.

For the convenience of readers, the accompanying 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 financial statements shall prevail.

Significant accounting policies are summarized as follows:

Foreign-currency Transactions

Foreign-currency transactions other than derivative contracts are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occur. Exchange gains or losses derived from foreign-currency transactions or monetary assets and liabilities denominated in foreign currencies are recognized in earnings.

At the balance sheet date, monetary assets and liabilities denominated in foreign currencies are revalued at prevailing exchange rates with the resulting gains or losses recognized in earnings.

Use of Estimates

The preparation of financial statements in conformity with the aforementioned guidelines, law and principles requires management to make reasonable assumptions and estimates of matters that are inherently uncertain. The actual results may differ from management’s estimates.

 

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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 balance sheet date. Current liabilities are obligations incurred for trading purposes and obligations expected to be settled within one year from the balance sheet date. Assets and liabilities that are not classified as current are noncurrent assets and liabilities, respectively.

Cash Equivalents

Repurchase agreements collateralized by corporate bonds, short-term commercial paper and government bonds acquired with maturities of less than three months from the date of purchase are classified as cash equivalents. The carrying amount approximates fair value due to their short term nature.

Financial Assets/Liabilities at Fair Value Through Profit or Loss

Derivatives that do not meet the criteria for hedge accounting are initially recognized at fair value, with transaction costs expensed as incurred. The derivatives are remeasured at fair value subsequently with changes in fair value recognized in earnings. A regular way purchase or sale of financial assets is accounted for using settlement date accounting.

Fair value is estimated using valuation techniques incorporating estimates and assumptions that are consistent with prevailing market conditions. When the fair value is positive, the derivative is recognized as a financial asset; when the fair value is negative, the derivative is recognized as a financial liability.

Available-for-sale Financial Assets

Available-for-sale financial assets are initially recognized at fair value plus transaction costs that are directly attributable to the acquisition. Changes in fair value from subsequent remeasurement are reported as a separate component of shareholders’ equity. The corresponding accumulated gains or losses are recognized in earnings when the financial asset is derecognized from the balance sheet. A regular way purchase or sale of financial assets is accounted for using settlement date accounting.

The fair value of overseas publicly traded stock is determined using the closing prices at the end of the year.

If there is objective evidence which indicates that a financial asset is impaired, a loss is recognized. For equity securities, if the fair value subsequently increases, the increase in value is recorded in shareholders’ equity.

Held-to-maturity Financial Assets

Debt securities for which the Company has a positive intention and ability to hold to maturity are categorized as held-to-maturity financial assets and are carried at amortized cost. Those financial assets are initially recognized at fair value plus transaction costs that are directly attributable to the acquisition. Gains or losses are recognized at the time of derecognition, impairment or amortization. A regular way purchase or sale of financial assets is accounted for using settlement date accounting.

If there is objective evidence which indicates that a financial asset is impaired, a loss is recognized. If, in a subsequent period, the amount of the impairment loss decreases and the decrease is clearly attributable to an event which occurred after the impairment loss was recognized, the previously recognized impairment loss is reversed to the extent of the decrease. The reversal may not result in a carrying amount that exceeds the amortized cost that would have been determined as if no impairment loss had been recognized.

 

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Financial Assets Carried at Cost

Investments for which the Company does not exercise significant influence and that do not have a quoted market price in an active market and whose fair value cannot be reliably measured, such as non-publicly traded stocks and mutual funds, are carried at their original cost. The costs of non-publicly traded stocks and mutual funds are determined using the weighted-average method. If there is objective evidence which indicates that a financial asset is impaired, a loss is recognized. A subsequent reversal of such impairment loss is not allowed.

Cash dividends are recognized as investment income upon resolution of shareholders of an investee. Stock dividends are recorded as an increase in the number of shares held and do not affect investment income. The cost per share is recalculated based on the new total number of shares.

Allowance for Doubtful Receivables

An allowance for doubtful receivables is provided based on a review of the collectability of receivables. The Company assesses the collectability of receivables by performing the account aging analysis and examining current trends in the credit quality of its customers.

The Company’s provision was originally set at 1% of the amount of outstanding receivables. On January 1, 2011, the Company adopted the third revision of Statement of Financial Accounting Standards (SFAS) No. 34, “Financial Instruments: Recognition and Measurement (SFAS No. 34).” One of the main revisions is that the impairment of receivables originated by the Company is subject to the provisions of SFAS No. 34. Accordingly, the Company evaluates for indication of impairment of accounts receivable based on an individual and collective basis at the end of each reporting period. When objective evidence indicates that the estimated future cash flow of accounts receivable decreases as a result of one or more events that occurred after the initial recognition of the accounts receivable, such accounts receivable are deemed to be impaired.

Because of the Company’s short average collection period, the amount of the impairment loss recognized is the difference between the carrying amount of accounts receivable and estimated future cash flows without considering the discounting effect. Changes in the carrying amount of the allowance account are recognized as bad debt expense which is recorded in the operating expenses - general and administrative. When accounts receivable are considered uncollectable, the amount is written off against the allowance account.

Inventories

Inventories are recorded at standard cost and adjusted to approximate weighted-average cost on the balance sheet date.

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

Investments Accounted for Using Equity Method

Investments in companies wherein the Company exercises significant influence over the operating and financial policy decisions are accounted for using the equity method. The Company’s share of the net income or net loss of an investee is recognized in the “equity in earnings/losses of equity method investees, net” account. The cost of an investment shall be analyzed and the cost of investment in excess of the fair value of identifiable net assets acquired, representing goodwill, shall not be amortized. If the fair value of identifiable net assets acquired exceeds the cost of investment, the excess shall be proportionately allocated as reductions to fair values of non-current assets (except for financial assets other than investments accounted for using the equity method and deferred income tax assets). When an indication of impairment is identified, the carrying amount of the investment is reduced, with the related impairment loss recognized in earnings.

 

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When the Company subscribes for additional investee’s shares at a percentage different from its existing ownership percentage, the resulting carrying amount of the investment in the investee differs from the amount of the Company’s share of the investee’s equity. The Company records such a difference as an adjustment to long-term investments with the corresponding amount charged or credited to capital surplus. Cash dividends received from an investee shall reduce the carrying amount of the investment. Stock dividends are recorded as an increase in the number of shares held and do not affect investment income.

Gains or losses on sales from the Company to equity method investees are deferred in proportion to the Company’s ownership percentages in the investees until such gains or losses are realized through transactions with third parties. The entire amount of the gains or losses on sales to investees over which the Company has a controlling interest is deferred until such gains or losses are realized through subsequent sales of the related products to third parties. Gains or losses on sales from equity method investees to the Company are deferred in proportion to the Company’s ownership percentages in the investees until they are realized through transactions with third parties. Gains or losses on sales between equity method investees over each of which the Company has control are deferred in proportion to the Company’s weighted-average ownership percentage in the investee which records gains or losses. In transactions between equity method investees over either or both of which the Company has no control, gains or losses on sales are deferred in proportion to the multiplication of the Company’s weighted-average ownership percentages in the investees. Such gains or losses are deferred until they are realized through transactions with third parties.

If an investee’s functional currency is a foreign currency, differences will result from the translation of the investee’s financial statements into the reporting currency of the Company. Such differences are charged or credited to cumulative translation adjustments, a separate component of shareholders’ equity.

Property, Plant and Equipment, Assets Leased to Others and Idle Assets

Property, plant and equipment and assets leased to others are stated at cost less accumulated depreciation. When an indication of impairment is identified, any excess of the carrying amount of an asset over its recoverable amount is recognized as a loss. If the recoverable amount increases in a subsequent period, the amount previously recognized as impairment would be reversed and recognized as a gain. However, the adjusted amount may not exceed the carrying amount that would have been determined, net of depreciation, as if no impairment loss had been recognized. Significant additions, renewals and betterments incurred during the construction period are capitalized. Maintenance and repairs are expensed as incurred.

Depreciation is computed using the straight-line method over the following estimated service lives: buildings - 10 to 20 years; machinery and equipment - 5 years; and office equipment - 3 to 5 years.

Upon sale or disposal of property, plant and equipment and assets leased to others, the related cost and accumulated depreciation are deducted from the corresponding accounts, with any gain or loss recorded as non-operating gains or losses in the year of sale or disposal.

When property, plant and equipment are determined to be idle or useless, they are transferred to idle assets at the lower of the net realizable value or carrying amount. Depreciation on the idle assets is provided continuously, and the idle assets are tested for impairment on a periodical basis.

 

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Intangible Assets

Goodwill represents the excess of the consideration paid for acquisition over the fair value of identifiable net assets acquired. Goodwill is no longer amortized and instead is tested for impairment annually, or more frequently if events or changes in circumstances suggest that the carrying amount may not be recoverable. If an event occurs or circumstances change which indicate that the fair value of goodwill is more likely than not below its carrying amount, an impairment loss is recognized. A subsequent reversal of such impairment loss is not allowed.

Deferred charges consist of technology license fees, software and system design costs and patent and others. The amounts are amortized over the following periods: Technology license fees - the estimated life of the technology or the term of the technology transfer contract; software and system design costs - 3 years; patent and others - the economic life or contract period. When an indication of impairment is identified, any excess of the carrying amount of an asset over its recoverable amount is recognized as a loss. If the recoverable amount increases in a subsequent period, the previously recognized impairment loss would be reversed and recognized as a gain. However, the adjusted amount may not exceed the carrying amount that would have been determined, net of amortization, as if no impairment loss had been recognized.

Expenditures related to research activities and those related to development activities that do not meet the criteria for capitalization are charged to expense when incurred.

Pension Costs

For employees who participate in defined contribution pension plans, pension costs are recorded based on the actual contributions made to employees’ individual pension accounts during their service periods. For employees who participate in defined benefit pension plans, pension costs are recorded based on actuarial calculations.

Income Tax

The Company applies an inter-period allocation for its income tax whereby deferred income tax assets and liabilities are recognized for the tax effects of temporary differences and unused tax credits. Valuation allowances are provided to the extent, if any, that it is more likely than not that deferred income tax assets will not be realized. A deferred tax asset or liability is classified as current or noncurrent in accordance with the classification of its related asset or liability. However, if a deferred tax asset or liability does not relate to an asset or liability in the financial statements, then it is classified as either current or noncurrent based on the expected length of time before it is realized or settled.

Any tax credits arising from purchases of machinery and equipment, research and development expenditures and personnel training expenditures are recognized using the flow-through method.

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

Income tax on unappropriated earnings at a rate of 10% is expensed in the year of shareholder approval which is the year subsequent to the year the earnings are generated.

Stock-based Compensation

Employee stock options that were granted or modified in the period from January 1, 2004 to December 31, 2007 are accounted for by the interpretations issued by the Accounting Research and Development Foundation of the Republic of China. The Company adopted the intrinsic value method and any compensation cost determined using this method is recognized in earnings over the employee vesting period. Employee stock option plans that were granted or modified after December 31, 2007 are accounted for using fair value method in accordance with SFAS No. 39, “Accounting for Share-based Payment.” The Company did not grant or modify any employee stock options since January 1, 2008.

 

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Treasury Stock

Treasury stock represents the outstanding shares that the Company buys back from market, which is stated at cost and shown as a deduction in shareholders’ equity. When the Company retires treasury stock, the treasury stock account is reduced and the common stock as well as the capital surplus - additional paid-in capital are reversed on a pro rata basis. When the book value of the treasury stock exceeds the sum of the par value and additional paid-in capital, the difference is charged to capital surplus - treasury stock transactions and to retained earnings for any remaining amount. While disposing of the treasury stock, the treasury stock shall be reversed, and if the disposal value is greater than the book value, the amount in excess of the book value shall be credited to additional paid-in capital - treasury stock.

Revenue Recognition and Allowance for Sales Returns and Others

The Company recognizes revenue when evidence of an arrangement exists, the rewards of ownership and significant risk of the goods has been transferred to the buyer, price is fixed or determinable, and collectability is reasonably assured. Provisions for estimated sales returns and other allowances are recorded in the year the related revenue is recognized, based on historical experience, management’s judgment, and any known factors that would significantly affect the allowance.

Sales prices are determined using fair value taking into account related sales discounts agreed to by the Company and its customers. Sales agreements typically provide that payment is due 30 days from invoice date for a majority of the customers and 30 to 45 days after the end of the month in which sales occur for some customers. Since the receivables from sales are collectible within one year and such transactions are frequent, fair value of the receivables is equivalent to the nominal amount of the cash to be received.

Spin-off

For the Company’s organization realignment, when the Company contributes net assets, including cash, to the newly formed subsidiaries in exchange for all of the shares of those subsidiaries, the net assets transferred are reflected at their net book value without recognizing any gain or loss.

 

3.	ACCOUNTING CHANGES

On January 1, 2011, the Company prospectively adopted the newly revised SFAS No. 34, “Financial Instruments: Recognition and Measurement.” The main revisions include (1) finance lease receivables are now covered by SFAS No. 34; (2) the scope of the applicability of SFAS No. 34 to insurance contracts is amended; (3) loans and receivables originated by the Company are now covered by SFAS No. 34; (4) additional guidelines on impairment testing of financial assets carried at amortized cost when the debtor has financial difficulties and the terms of obligations have been modified; and (5) accounting treatment by a debtor for modifications in the terms of obligations. This accounting change did not have a significant effect on the Company’s financial statements as of and for the year ended December 31, 2011.

On January 1, 2011, the Company adopted the newly issued SFAS No. 41, “Operating Segments.” The statement requires identification and disclosure of operating segments on the basis of how the Company’s chief operating decision maker regularly reviews information in order to allocate resources and assess performance. This statement supersedes SFAS No. 20, “Segment Reporting” and it only changes the disclosure of segment reporting due to the adoption. The Company has conformed to the disclosure requirement and provided the operating segments disclosure in the consolidated financial statements.

 

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4.	CASH AND CASH EQUIVALENTS

 

		December 31
		2012				2011
Cash and deposits in banks		$	105,873,048			$	81,467,607
Repurchase agreements collateralized by corporate bonds			2,660,042				—
Repurchase agreements collateralized by short-term commercial paper			349,341				—
Repurchase agreements collateralized by government bonds			268,379				3,794,914
		$	109,150,810			$	85,262,521

 

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

 

		December 31
		2012				2011
Trading financial assets
Forward exchange contracts		$	37,877			$	14,925
Cross currency swap contracts			947				—
		$	38,824			$	14,925
Trading financial liabilities
Forward exchange contracts		$	3,572			$	—
Cross currency swap contracts			2,702				—
		$	6,274			$	—

The Company entered into derivative contracts during the years ended December 31, 2012 and 2011 to manage exposures due to fluctuations of foreign exchange rates. The derivative contracts entered into by the Company did not meet the criteria for hedge accounting. Therefore, the Company did not apply hedge accounting treatment for its derivative contracts.

Outstanding forward exchange contracts consisted of the following:

 

		Maturity Date		Contract Amount (In Thousands)
December 31, 2012
Sell NT$ /Buy EUR		January 2013		NT$9,417,062/EUR246,000
December 31, 2011
Sell EUR/Buy NT$		January 2012		EUR38,600/NT$1,528,206

 

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Outstanding cross currency swap contracts consisted of the following:

 

Maturity Date		Contract Amount (In Thousands)		Range of Interest Rates Paid		Range of Interest Rates Received
December 31, 2012
January 2013		US$275,000/NT$7,986,190		0.14%-0.17%			—

For the years ended December 31, 2012 and 2011, a net loss on derivative financial instruments was NT$152,814 thousand and a net gain on derivative financial instruments was NT$801,195 thousand, respectively.

 

6.	AVAILABLE-FOR-SALE FINANCIAL ASSETS

Available-for-sale financial assets held by the Company are overseas publicly traded stock. For the year ended December 31, 2012, the Company recognized an impairment loss on available-for-sale financial assets of NT$2,677,529 thousand due to the significant decline in fair value.

 

7.	HELD-TO-MATURITY FINANCIAL ASSETS

 

		December 31
		2012				2011
Corporate bonds		$	701,146			$	1,403,427
Current portion			(701,146	)			(701,136	)
		$	—			$	702,291

 

8.	ALLOWANCES FOR DOUBTFUL RECEIVABLES, SALES RETURNS AND OTHERS

Movements of the allowance for doubtful receivables were as follows:

 

		Years Ended December 31
		2012				2011
Balance, beginning of year		$	485,120			$	488,000
Write-off			(11,083	)			(2,880	)
Balance, end of year		$	474,037			$	485,120

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

 

		Years Ended December 31
		2012				2011
Balance, beginning of year		$	4,887,879			$	7,341,444
Provision			6,825,851				3,226,594
Write-off			(5,980,992	)			(5,680,159	)
Balance, end of year		$	5,732,738			$	4,887,879

 

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9.	INVENTORIES

 

		December 31
		2012				2011
Finished goods		$	5,936,018			$	3,250,637
Work in process			24,442,123				16,971,209
Raw materials			3,666,048				1,593,393
Supplies and spare parts			1,252,202				1,038,158
		$	35,296,391			$	22,853,397

Write-down of inventories to net realizable value in the amount of NT$1,341,041 thousand was included in the cost of sales for the year ended December 31, 2012. The reserve for inventory write-downs in the amount of NT$74,861 thousand was reversed in the cost of sales for the year ended December 31, 2011 when the related inventory items were scrapped or sold.

 

10.	INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD

 

		December 31
		2012								2011
		Carrying Amount				% of Ownership				Carrying Amount				% of Ownership
TSMC Global Ltd. (TSMC Global)		$	49,954,386				100			$	44,071,845				100
TSMC Partners, Ltd. (TSMC Partners)			38,635,129				100				34,986,964				100
TSMC China Company Limited (TSMC China)			17,828,683				100				13,542,181				100
Vanguard International Semiconductor Corporation (VIS)			9,462,038				40				8,988,007				39
Systems on Silicon Manufacturing Company Pte Ltd. (SSMC)			6,710,956				39				6,289,429				39
TSMC Solar			6,031,369				99				10,153,244				100
TSMC North America			3,209,288				100				2,981,639				100
TSMC SSL			2,411,212				95				1,746,893				100
Xintec Inc. (Xintec)			1,550,313				40				1,606,694				40
Global UniChip Corporation (GUC)			1,222,972				35				1,157,188				35
VentureTech Alliance Fund III, L.P. (VTAF III)			1,047,285				50				1,311,044				53
VentureTech Alliance Fund II, L.P. (VTAF II)			563,056				98				762,135				98
TSMC Europe B.V. (TSMC Europe)			235,761				100				205,171				100
Emerging Alliance Fund, L.P. (Emerging Alliance)			167,359				99				213,235				99
TSMC Japan Limited (TSMC Japan)			142,412				100				161,601				100
TSMC Guang Neng Investment, Ltd. (TSMC GN)			65,007				100				—				—
TSMC Korea Limited (TSMC Korea)			26,935				100				23,448				100
		$	139,264,161							$	128,200,718

In the second half year of 2011, the Company continually increased its investment in TSMC China for the amount of NT$6,759,300 thousand, and the Company has received the approval from the Investment Commission of Ministry of Economic Affairs.

 

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To foster a stronger sense of corporate entrepreneurship and facilitate business specializations in order to strengthen overall profitability and operational efficiency, the Company transferred its solid state lighting and solar businesses into its wholly-owned, newly incorporated subsidiaries, TSMC SSL and TSMC Solar, in August 2011. Furthermore, the Company adjusted its investment structure by transferring TSMC Lighting North America, Inc. (TSMC Lighting NA) to TSMC SSL and transferring Motech Industries Inc. (Motech), TSMC Solar Europe B.V. (TSMC Solar Europe), TSMC Solar North America, Inc. (TSMC Solar NA) and part of VTAF III to TSMC Solar. As of August 1, 2011, the net book values of the Company’s certain assets, liabilities and shareholders’ equity, including cash, contributed to TSMC SSL and TSMC Solar in exchange for all the shares of TSMC SSL and TSMC Solar amounted to NT$2,270,000 thousand and NT$11,180,000 thousand, respectively.

In January 2012, the Company invested NT$100,000 thousand and established a wholly-owned subsidiary, TSMC GN, which engages mainly in investment activities. In February 2012, the Company participated directly or through TSMC GN in the issuance of new shares by TSMC SSL and TSMC Solar for cash. As of December 31, 2012, the Company’s percentages of ownership in TSMC SSL and TSMC Solar were 95% and 99%, respectively.

For the years ended December 31, 2012 and 2011, equity in earnings of equity method investees was a net gain of NT$8,127,748 thousand and NT$3,778,083 thousand, respectively.

As of December 31, 2012 and 2011, the quoted market price of publicly traded stocks in unrestricted investments accounted for using the equity method (VIS and GUC) were NT$17,350,833 thousand and NT$11,273,200 thousand, respectively.

Movements of the difference between the cost of investments and the Company’s share in investees’ net assets allocated to depreciable assets were as follows:

 

		Years Ended December 31
		2012				2011
Balance, beginning of year		$	275,584			$	2,504,496
Amortizations			(172,492	)			(721,482	)
Effect of spin-off			—				(1,507,430	)
Balance, end of year		$	103,092			$	275,584

Movements of the difference allocated to goodwill were as follows:

 

		Years Ended December 31
		2012				2011
Balance, beginning of year		$	1,061,885			$	1,415,565
Effect of spin-off			—				(353,680	)
Balance, end of year		$	1,061,885			$	1,061,885

 

11.	FINANCIAL ASSETS CARRIED AT COST

 

		December 31
		2012				2011
Non-publicly traded stocks		$	338,584			$	338,584
Mutual funds			145,175				159,251
		$	483,759			$	497,835

 

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12.	PROPERTY, PLANT AND EQUIPMENT

 

		Year Ended December 31, 2012
		Balance, Beginning of Year				Additions				Disposals				Reclassification				Balance, End of Year
Cost
Buildings		$	149,495,478			$	23,886,199			$	(25,671	)		$	(11,074	)		$	173,344,932
Machinery and equipment			984,978,666				219,868,105				(1,649,440	)			(436,234	)			1,202,761,097
Office equipment			13,824,434				3,348,864				(489,814	)			—				16,683,484
			1,148,298,578			$	247,103,168			$	(2,164,925	)		$	(447,308	)			1,392,789,513
Accumulated depreciation
Buildings			90,274,267			$	9,428,212			$	(24,403	)		$	(164	)			99,677,912
Machinery and equipment			704,885,017				111,325,894				(1,607,195	)			(28,814	)			814,574,902
Office equipment			9,581,513				1,617,053				(489,814	)			—				10,708,752
			804,740,797			$	122,371,159			$	(2,121,412	)		$	(28,978	)			924,961,566
Advance payments and construction in progress			110,815,752			$	8,004,900			$	(45,305	)		$	—				118,775,347
		$	454,373,533															$	586,603,294

 

		Year Ended December 31, 2011
		Balance, Beginning of Year				Additions				Disposals				Reclassification				Effect of Spin-off				Balance, End of Year
Cost
Buildings		$	128,646,942			$	22,343,302			$	(36,929	)		$	(388	)		$	(1,457,449	)		$	149,495,478
Machinery and equipment			852,733,592				135,641,295				(2,079,115	)			(17,225	)			(1,299,881	)			984,978,666
Office equipment			11,730,537				2,495,001				(362,032	)			—				(39,072	)			13,824,434
			993,111,071			$	160,479,598			$	(2,478,076	)		$	(17,613	)		$	(2,796,402	)			1,148,298,578
Accumulated depreciation
Buildings			81,347,877			$	8,966,377			$	(14,293	)		$	(55	)		$	(25,639	)			90,274,267
Machinery and equipment			616,495,207				90,613,430				(2,025,728	)			(5,569	)			(192,323	)			704,885,017
Office equipment			8,762,361				1,184,310				(362,031	)			—				(3,127	)			9,581,513
			706,605,445			$	100,764,117			$	(2,402,052	)		$	(5,624	)		$	(221,089	)			804,740,797
Advance payments and construction in progress			80,348,673			$	35,453,130			$	(3,259,587	)		$	—			$	(1,726,464	)			110,815,752
		$	366,854,299																			$	454,373,533

No interest was capitalized during the years ended December 31, 2012 and 2011.

 

13.	DEFERRED CHARGES, NET

 

		Year Ended December 31, 2012
		Balance, Beginning of Year				Additions				Amortization				Reclassification				Balance, End of Year
Technology license fees		$	1,617,310			$	—			$	(390,723	)		$	—			$	1,226,587
Software and system design costs			2,316,571				1,772,958				(1,117,478	)			(57,438	)			2,914,613
Patent and others			785,363				411,943				(513,863	)			57,438				740,881
		$	4,719,244			$	2,184,901			$	(2,022,064	)		$	—			$	4,882,081

 

		Year Ended December 31, 2011
		Balance, Beginning of Year				Additions				Amortization				Disposals				Effect of Spin-off				Balance, End of Year
Technology license fees		$	2,277,832			$	10,308			$	(670,830	)		$	—			$	—			$	1,617,310
Software and system design costs			2,075,935				1,324,958				(1,064,884	)			(46	)			(19,392	)			2,316,571
Patent and others			1,102,660				323,030				(416,630	)			—				(223,697	)			785,363
		$	5,456,427			$	1,658,296			$	(2,152,344	)		$	(46	)		$	(243,089	)		$	4,719,244

 

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14.	SHORT-TERM LOANS

 

		December 31
		2012				2011
Unsecured loans:
US$1,195,500 thousand, due in January 2013, and annual interest at 0.39%-0.58% in 2012; US$856,000 thousand, due by February 2012, and annual interest at 0.45%-1.00% in 2011		$	34,714,929			$	25,926,528

 

15.	BONDS PAYABLE

 

		December 31
		2012				2011
Domestic unsecured bonds:
Issued in September 2011 and repayable in September 2016, 1.40% interest payable annually		$	10,500,000			$	10,500,000
Issued in September 2011 and repayable in September 2018, 1.63% interest payable annually			7,500,000				7,500,000
Issued in January 2012 and repayable in January 2017, 1.29% interest payable annually			10,000,000				—
Issued in January 2012 and repayable in January 2019, 1.46% interest payable annually			7,000,000				—
Issued in August 2012 and repayable in August 2017, 1.28% interest payable annually			9,900,000				—
Issued in August 2012 and repayable in August 2019, 1.40% interest payable annually			9,000,000				—
Issued in September 2012 and repayable in September 2017, 1.28% interest payable annually			12,700,000				—
Issued in September 2012 and repayable in September 2019, 1.39% interest payable annually			9,000,000				—
Issued in October 2012 and repayable in October 2022, 1.53% interest payable annually			4,400,000				—
Issued in January 2002 and repayable in January 2012, 3.00% interest payable annually			—				4,500,000
			80,000,000				22,500,000
Current portion			—				(4,500,000	)
		$	80,000,000			$	18,000,000

With the approval from the Financial Supervisory Commission, the Company issued domestic unsecured bonds in the amount of NT$23,600,000 thousand in January 2013 and is expected to issue domestic unsecured bonds in the amount of NT$21,400,000 thousand in February 2013.

The provision of a loan guarantee to TSMC Global, a subsidiary of TSMC, for its issuance of unsecured corporate bonds for an amount not to exceed US$1,500,000 thousand had been approved in the meeting of the Board of Directors of TSMC held on February 5, 2013.

 

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16.	PENSION PLANS

The pension mechanism under the Labor Pension Act (the “Act”) is deemed a defined contribution plan. Pursuant to the Act, the Company has made monthly contributions equal to 6% of each employee’s monthly salary to employees’ pension accounts and recognized pension costs of NT$1,205,642 thousand and NT$1,119,717 thousand for the years ended December 31, 2012 and 2011, respectively.

The Company has a defined benefit plan under the Labor Standards Law that provides 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 a pension fund (the Fund), which is administered by the Labor Pension Fund Supervisory Committee (the Committee) and deposited in the Committee’s name in the Bank of Taiwan.

Due to the spin-off (Note 27), the Company transferred the pension fund and the accrued pension cost in the amount of NT$46,884 thousand and NT$60,583 thousand, respectively, to TSMC SSL and TSMC Solar in August 2011.

Pension information on the defined benefit plan is summarized as follows:

 

a.

Components of net periodic pension cost for the year

 

		2012				2011
Service cost		$	125,895			$	131,975
Interest cost			156,773				164,372
Projected return on plan assets			(61,664	)			(67,051	)
Amortization			62,694				73,306
Net periodic pension cost		$	283,698			$	302,602

 

b.

Reconciliation of funded status of the plans and accrued pension cost at December 31, 2012 and 2011

 

		2012				2011
Benefit obligation
Vested benefit obligation		$	375,523			$	280,629
Nonvested benefit obligation			5,971,564				5,356,405
Accumulated benefit obligation			6,347,087				5,637,034
Additional benefits based on future salaries			3,584,608				3,389,649
Projected benefit obligation			9,931,695				9,026,683
Fair value of plan assets			(3,264,786	)			(3,039,871	)
Funded status			6,666,909				5,986,812
Unrecognized net transition obligation			(65,429	)			(73,599	)
Prior service cost			138,133				145,259
Unrecognized net loss			(2,813,337	)			(2,197,574	)
Accrued pension cost		$	3,926,276			$	3,860,898
Vested benefit		$	420,158			$	312,213

 

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		2012				2011
c.      Actuarial assumptions at December 31, 2012 and 2011
Discount rate used in determining present values			1.75	%			1.75	%
Future salary increase rate			3.00	%			3.00	%
Expected rate of return on plan assets			2.00	%			2.00	%
d.      Contributions to the Fund for the year		$	214,782			$	209,260
e.      Payments from the Fund for the year		$	26,119			$	7,339

 

17.	INCOME TAX

 

a.

A reconciliation of income tax expense based on “income before income tax” at the statutory rates and income tax currently payable was as follows:

 

		Years Ended December 31
		2012				2011
Income tax expense based on “income before income tax” at statutory rate (17%)		$	31,217,091			$	24,600,334
Tax effect of the following:
Tax-exempt income			(8,360,834	)			(13,231,821	)
Temporary and permanent differences			(2,852,308	)			(1,429,188	)
Additional income tax under the Alternative Minimum Tax Act			—				286,827
Additional tax at 10% on unappropriated earnings			4,186,013				6,259,344
Income tax credits used			(9,580,742	)			(6,259,344	)
Income tax currently payable		$	14,609,220			$	10,226,152

 

b.

Income tax expense consisted of the following:

 

		Years Ended December 31
		2012				2011
Income tax currently payable		$	14,609,220			$	10,226,152
Income tax adjustments on prior years			48,609				464,078
Other income tax adjustments			194,660				309,361
Net change in deferred income tax assets
Investment tax credits			7,067,886				1,795,254
Temporary differences			81,752				27,284
Valuation allowance			(4,530,981	)			(2,314,671	)
Effect of spin-off			—				(893	)
Income tax expense		$	17,471,146			$	10,506,565

 

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c.

Deferred income tax assets consisted of the following:

 

		December 31
		2012				2011
Current deferred income tax assets
Investment tax credits		$	6,179,000			$	4,892,158
Temporary differences
Allowance for sales returns and others			687,929				488,788
Unrealized loss on inventories			359,823				—
Unrealized loss on financial instruments, net			224,694				308,929
Others			277,018				89,669
		$	7,728,464			$	5,779,544
Noncurrent deferred income tax assets
Investment tax credits		$	6,933,074			$	15,287,802
Temporary differences
Depreciation			819,231				2,044,680
Others			299,752				227,433
Valuation allowance			(5,807,110	)			(10,338,091	)
		$	2,244,947			$	7,221,824

Effective in May 2010, the Article 5 of the Income Tax Law of the Republic of China was amended, in which the income tax rate of profit-seeking enterprises would be reduced from 20% to 17%. The last amended income tax rate of 17% is retroactively applied on January 1, 2010.

Under the Article 10 of the Statute for Industrial Innovation (SII), effective in May 2010, a profit-seeking enterprise may deduct up to 15% of its research and development expenditures from its income tax payable for the year in which these expenditures are incurred, but this deduction should not exceed 30% of the income tax payable for that year. This incentive is retroactive to January 1, 2010 and effective until December 31, 2019.

Under the Income Basic Tax Act amended in August 2012, the standard deduction and the tax rate of Alternative Minimum Tax were amended from NT$1,000 thousand to be NT$500 thousand and from 10% to 12%, respectively. The amended Income Basic Tax Act is effective on January 1, 2013.

The Company has evaluated the impact from above amendments and adjusted the deferred tax assets with the resulting differences recorded as income tax expense for the year ended December 31, 2012. In addition, the Company evaluated the effect of Alternative Minimum Tax and the applicable year of the profits generated from projects exempt from income tax for a five-year period. As the Company plans to apply the tax-exempt income in later years, income tax payable is anticipated to increase and the Company will utilize available investment tax credits as an offset against income taxes. Since more investment tax credits can be utilized, valuation allowance has been adjusted down accordingly.

 

d.

Integrated income tax information:

The balance of the imputation credit account as of December 31, 2012 and 2011 was NT$8,130,060 thousand and NT$4,003,228 thousand, respectively.

The estimated and actual creditable ratios for distribution of earnings of 2012 and 2011 were 7.92% and 6.69%, respectively.

The imputation credit allocated to shareholders is based on its balance as of the date of the dividend distribution. The estimated creditable ratio may change when the actual distribution of the imputation credit is made.

 

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e.

All earnings generated prior to December 31, 1997 have been appropriated.

 

f.

As of December 31, 2012, investment tax credits consisted of the following:

 

Law/Statute		Item		Total Creditable Amount				Remaining Creditable Amount				Expiry Year
Statute for Upgrading Industries		Purchase of machinery and equipment		$	6,503,176			$	916,499				2013
					7,006,655				7,006,655				2014
					482,351				482,351				2015
				$	13,992,182			$	8,405,505
Statute for Upgrading Industries		Research and development expenditures		$	1,148,374			$	—				2012
					4,706,569				4,706,569				2013
				$	5,854,943			$	4,706,569
Statute for Upgrading Industries		Personnel training expenditures		$	17,391			$	—				2012
Statute for Industrial Innovation		Research and development expenditures		$	2,828,300			$	—				2012

 

g.

The profits generated from the following projects are exempt from income tax for a five-year period:

 

		Tax-exemption Period
Construction and expansion of 2004		2008 to 2012
Construction and expansion of 2005		2010 to 2014
Construction and expansion of 2006		2011 to 2015

 

h.

The tax authorities have examined income tax returns of the Company through 2009. All investment tax credit adjustments assessed by the tax authorities have been recognized accordingly.

 

18.	LABOR COST, DEPRECIATION AND AMORTIZATION

 

		Year Ended December 31, 2012
		Classified as Cost of Sales				Classified as Operating Expenses				Total
Labor cost
Salary and bonus		$	27,681,298			$	19,198,385			$	46,879,683
Labor and health insurance			1,509,487				920,024				2,429,511
Pension			946,117				543,174				1,489,291
Meal			678,279				293,917				972,196
Welfare			259,656				153,907				413,563
Others			36,051				57,676				93,727
		$	31,110,888			$	21,167,083			$	52,277,971
Depreciation		$	111,929,312			$	10,441,847			$	122,371,159
Amortization		$	1,273,689			$	748,375			$	2,022,064

 

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		Year Ended December 31, 2011
		Classified as Cost of Sales				Classified as Operating Expenses				Total
Labor cost
Salary and bonus		$	23,511,116			$	16,780,285			$	40,291,401
Labor and health insurance			1,225,757				713,298				1,939,055
Pension			899,039				523,178				1,422,217
Meal			640,257				273,002				913,259
Welfare			230,762				137,019				367,781
Others			294,010				143,151				437,161
		$	26,800,941			$	18,569,933			$	45,370,874
Depreciation		$	93,898,048			$	6,858,236			$	100,756,284
Amortization		$	1,407,787			$	744,557			$	2,152,344

 

19.	SHAREHOLDERS’ EQUITY

As of December 31, 2012, 1,091,468 thousand ADSs of the Company were traded on the NYSE. The number of common shares represented by the ADSs was 5,457,339 thousand (one ADS represents five common shares).

Capital surplus can be used to offset a deficit under the Company Law. However, the capital surplus generated from donations and the excess of the issuance price over the par value of capital stock (including the stock issued for new capital, mergers, convertible bonds and the surplus from treasury stock transactions) may be appropriated as stock dividends, which are limited to a certain percentage of the Company’s paid-in capital. In addition, the capital surplus from long-term investments may not be used for any purpose. However, according to the revised Company Law, effective January 2012, the aforementioned capital surplus generated from donations and the excess of the issuance price over the par value of capital stock can also be used to distribute cash in proportion to original shareholders’ holding.

Capital surplus consisted of the following:

 

		December 31
		2012				2011
Additional paid-in capital		$	23,934,607			$	23,774,250
From merger			22,804,510				22,804,510
From convertible bonds			8,892,847				8,892,847
From long-term investments			505,790				374,695
Donations			55				55
		$	56,137,809			$	55,846,357

The Company’s Articles of Incorporation provide that, when allocating the net profits for each fiscal year, the Company shall first offset its losses in previous years and then set aside the following items accordingly:

 

a.

Legal capital reserve at 10% of the profits left over, until the accumulated legal capital reserve equals the Company’s paid-in capital;

 

b.

Special capital reserve in accordance with relevant laws or regulations or as requested by the authorities in charge;

 

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c.

Bonus to directors and profit sharing to employees of the Company of not more than 0.3% and not less than 1% of the remainder, respectively. Directors who also serve as executive officers of the Company are not entitled to receive the bonus to directors. The Company may issue profit sharing to employees in stock of an affiliated company meeting the conditions set by the Board of Directors or, by the person duly authorized by the Board of Directors;

 

d.

Any balance left over shall be allocated according to the resolution of the shareholders’ meeting.

The Company’s Articles of Incorporation also provide that profits of the Company may be distributed by way of cash dividend and/or stock dividend. However, distribution of profits shall be made preferably by way of cash dividend. Distribution of profits may also be made by way of stock dividend; provided that the ratio for stock dividend shall not exceed 50% of the total distribution.

Any appropriations of the profits are subject to shareholders’ approval in the following year.

The Company accrued profit sharing to employees based on certain percentage of net income during the year, which amounted to NT$11,115,240 thousand and NT$8,990,026 thousand for the years ended December 31 2012 and 2011, respectively. Bonuses to directors were expensed based on estimated amount of payment. If the actual amounts subsequently resolved by the shareholders differ from the estimated amounts, the differences are recorded in the year of shareholders’ resolution as a change in accounting estimate. If profit sharing is resolved to be distributed to employees in stock, the number of shares is determined by dividing the amount of profit sharing by the closing price (after considering the effect of dividends) of the shares on the day preceding the shareholders’ meeting.

The Company no longer has supervisors since January 1, 2007. The required duties of supervisors are being fulfilled by the Audit Committee.

According to the revised Company Law, effective January 2012, the appropriation for legal capital reserve shall be made until the reserve equals the Company’s paid-in capital. The reserve may be used to offset a deficit, or be distributed as dividends in cash or stocks for the portion in excess of 25% of the paid-in capital if the Company incurs no loss.

A special capital reserve equivalent to the net debit balance of the other components of shareholders’ equity (for example, cumulative translation adjustments, unrealized loss on financial instruments and net loss not recognized as pension cost, but excluding treasury stock) shall be made from unappropriated earnings pursuant to existing regulations promulgated by the Securities and Futures Bureau (SFB). Any special reserve appropriated may be reversed to the extent that the net debit balance reverses.

The appropriations of earnings for 2011 and 2010 had been approved in the shareholders’ meetings held on June 12, 2012 and June 9, 2011, respectively. The appropriations and dividends per share were as follows:

 

		Appropriation of Earnings								Dividends Per  Share (NT$)
		For Fiscal Year 2011				For Fiscal Year 2010				For Fiscal Year 2011				For Fiscal Year 2010
Legal capital reserve		$	13,420,128			$	16,160,501
Special capital reserve			1,172,350				5,120,827
Cash dividends to shareholders			77,748,668				77,730,236			$	3.00			$	3.00
		$	92,341,146			$	99,011,564

 

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The Company’s profit sharing to employees and bonus to directors in the amounts of NT$8,990,026 thousand and NT$62,324 thousand in cash for 2011, respectively, and profit sharing to employees and bonus to directors in the amounts of NT$10,908,338 thousand and NT$51,131 thousand in cash for 2010, respectively, had been approved in the shareholders’ meeting held on June 12, 2012 and June 9, 2011, respectively. The resolved amounts of the profit sharing to employees and bonus to directors were consistent with the resolutions of meeting of the Board of Directors held on February 14, 2012 and February 15, 2011 and same amount had been charged against earnings of 2011 and 2010, respectively.

The appropriations of earnings for 2012 had been resolved in the meeting of the Board of Directors held on February 5, 2013. The appropriations and dividends per share were as follows:

 

		Appropriation of Earnings				Dividends Per Share (NT$)
		For Fiscal Year 2012				For Fiscal Year 2012
Legal capital reserve		$	16,615,880
Special capital reserve			(4,820,483	)
Cash dividends to shareholders			77,773,307			$	3.00
		$	89,568,704

The Board of Directors also resolved to appropriate profit sharing to employees and bonus to directors in the amounts of NT$11,115,240 thousand and NT$71,351 thousand in cash for 2012, respectively. There is no significant difference between the aforementioned resolved amounts and the amounts charged against earnings of 2012.

The appropriations of earnings, profit sharing to employees and bonus to directors for 2012 are to be resolved in the shareholders’ meeting held on June 11, 2013 (expected).

The information about the appropriations of profit sharing to employees and bonus to directors is available at the Market Observation Post System website.

Under the Integrated Income Tax System that became effective on January 1, 1998, R.O.C. resident shareholders are allowed a tax credit for their proportionate share of the income tax paid by the Company on earnings generated since January 1, 1998.

 

20.	STOCK-BASED COMPENSATION PLANS

The Company’s Employee Stock Option Plans, consisting of the 2004 Plan, 2003 Plan and 2002 Plan, were approved by the SFB on January 6, 2005, October 29, 2003 and June 25, 2002, respectively. The maximum number of options authorized to be granted under the 2004 Plan, 2003 Plan and 2002 Plan was 11,000 thousand, 120,000 thousand and 100,000 thousand, respectively, with each option eligible to subscribe for one common share when exercised. The options may be granted to qualified employees of the Company or any of its domestic or foreign subsidiaries, in which the Company’s shareholding with voting rights, directly or indirectly, is more than fifty percent (50%). The options of all the plans are valid for ten years and exercisable at certain percentages subsequent to the second anniversary of the grant date. Under the terms of the plans, the options are granted at an exercise price equal to the closing price of the Company’s common shares listed on the TWSE on the grant date.

Options of the plans that had never been granted or had been granted but subsequently canceled had expired as of December 31, 2012.

 

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Information about outstanding options for the years ended December 31, 2012 and 2011 was as follows:

 

		Number of Options (In Thousands)				Weighted- average Exercise Price (NT$)
Year ended December 31, 2012
Balance, beginning of year			14,293			$	31.4
Options exercised			(8,213	)			29.5
Options canceled			(135	)			34.6
Balance, end of year			5,945				34.6
Year ended December 31, 2011
Balance, beginning of year			21,437			$	31.4
Options exercised			(7,144	)			30.5
Balance, end of year			14,293				32.1

The number of outstanding options and exercise prices have been adjusted to reflect the distribution of earnings in accordance with the plans.

As of December 31, 2012, information about outstanding options was as follows:

 

		Options Outstanding
Range of Exercise Price (NT$)		Number of Options (In Thousands)				Weighted-average Remaining Contractual Life (Years)				Weighted-average Exercise Price (NT$)
$20.2-$28.3			3,362				0.4			$	25.9
38.0-50.1			2,583				2.0				45.8
			5,945				1.1				34.6

As of December 31, 2012, all of the above outstanding options were exercisable.

No compensation cost was recognized under the intrinsic value method for the years ended December 31, 2012 and 2011. Had the Company used the fair value based method to evaluate the options using the Black-Scholes model, the valuation assumptions at the various grant dates and pro forma results of the Company for the years ended December 31, 2012 and 2011 would have been as follows:

 

Valuation assumptions:
Expected dividend yield		1.00%-3.44%
Expected volatility		43.77%-46.15%
Risk free interest rate		3.07%-3.85%
Expected life		5 years

 

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		Years Ended December 31
		2012				2011
Net income:
Net income as reported		$	166,158,802			$	134,201,279
Pro forma net income			165,986,009				134,146,490
Earnings per share (EPS) - after income tax (NT$):
Basic EPS as reported		$	6.41			$	5.18
Pro forma basic EPS			6.40				5.18
Diluted EPS as reported			6.41				5.18
Pro forma diluted EPS			6.40				5.17

 

21.	TREASURY STOCK

 

(Shares in Thousands)

Purpose of Treasury Stock

Number of Shares, Beginning of Year

Addition

Retirement

Number of Shares, End of Year

Year ended December 31, 2011

Shareholders executed the appraisal right

—

1,000

(1,000

)

—

In August 2011, at the option of the shareholders of the Company, certain shareholders requested the Company to buy back their shares pursuant to the Company Law, which shares were subsequently retired in November 2011.

 

22.	EARNINGS PER SHARE

EPS is computed as follows:

 

		Amounts (Numerator)								Number of Shares (Denominator) (In Thousands)				EPS (NT$)
		Before Income Tax				After Income Tax								Before Income Tax				After Income Tax
Year ended December 31, 2012
Basic EPS
Earnings available to common shareholders		$	183,629,948			$	166,158,802				25,920,735			$	7.08			$	6.41
Effect of dilutive potential common shares			—				—				7,201
Diluted EPS
Earnings available to common shareholders (including effect of dilutive potential common shares)		$	183,629,948			$	166,158,802				25,927,936			$	7.08			$	6.41
Year ended December 31, 2011
Basic EPS
Earnings available to common shareholders		$	144,707,844			$	134,201,279				25,914,076			$	5.58			$	5.18
Effect of dilutive potential common shares			—				—				10,606
Diluted EPS
Earnings available to common shareholders (including effect of dilutive potential common shares)		$	144,707,844			$	134,201,279				25,924,682			$	5.58			$	5.18

 

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If the Company may settle the obligation by cash, by issuing shares, or in combination of both cash and shares, profit sharing to employees which will be settled in shares should be included in the weighted average number of shares outstanding in calculation of diluted EPS, if the shares have a dilutive effect. The number of shares is estimated by dividing the amount of profit sharing to employees in stock by the closing price (after considering the dilutive effect of dividends) of the common shares on the balance sheet date. Such dilutive effect of the potential shares needs to be included in the calculation of diluted EPS until the shares of profit sharing to employees are resolved in the shareholders’ meeting in the following year.

 

23.	DISCLOSURES FOR FINANCIAL INSTRUMENTS

 

a.

Fair values of financial instruments were as follows:

 

		December 31
		2012								2011
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
Assets
Financial assets at fair value through profit or loss		$	38,824			$	38,824			$	14,925			$	14,925
Available-for-sale financial assets			1,845,052				1,845,052				2,617,134				2,617,134
Held-to-maturity financial assets			701,146				708,973				1,403,427				1,426,474
Financial assets carried at cost			483,759				—				497,835				—
Liabilities
Financial liabilities at fair value through profit or loss			6,274				6,274				—				—
Bonds payable (including current portion)			80,000,000				80,343,413				22,500,000				22,597,115
Other long-term payables (including current portion)			113,000				113,000				—				—

 

b.

Methods and assumptions used in the estimation of fair values of financial instruments

 

1)

The aforementioned financial instruments do not include cash and cash equivalents, receivables, other financial assets, refundable deposits, short-term loans, payables and guarantee deposits. The carrying amounts of these financial instruments approximate their fair values due to their short maturities.

 

2)

Except for derivatives, available-for-sale and held-to-maturity financial assets were based on their quoted market prices.

 

3)

The fair values of those derivatives are determined using valuation techniques incorporating estimates and assumptions that were consistent with prevailing market conditions.

 

4)

Financial assets carried at cost have no quoted prices in an active market and entail an unreasonably high cost to obtain verifiable fair values. Therefore, no fair value is presented.

 

5)

Fair value of bonds payable was based on their quoted market price.

 

6)

Fair value of other long-term payables was based on the present value of expected cash flows, which approximates their carrying amount.

 

c.

Valuation gains/losses arising from changes in fair value of derivatives contracts determined using valuation techniques were recognized as net gains of NT$32,550 thousand and NT$14,925 thousand for the years ended December 31, 2012 and 2011, respectively.

 

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d.

As of December 31, 2012 and 2011, financial assets exposed to fair value interest rate risk were NT$739,970 thousand and NT$1,418,352 thousand, respectively, financial liabilities exposed to fair value interest rate risk were NT$114,721,203 thousand and NT$48,426,528 thousand, respectively.

 

e.

Movements of the unrealized gains or losses on financial instruments for the years ended December 31, 2012 and 2011 were as follows:

 

		Year Ended December 31, 2012
		From Available- for-sale Financial Assets				Equity- method Investments				Total
Balance, beginning of year		$	(1,508,301	)		$	335,446			$	(1,172,855	)
Recognized directly in shareholders’ equity			(132,176	)			7,147,829				7,015,653
Removed from shareholders’ equity and recognized in earnings			2,130,523				—				2,130,523
Balance, end of year		$	490,046			$	7,483,275			$	7,973,321

 

		Year Ended December 31, 2011
		From Available- for-sale Financial Assets				Equity- method Investments				Total
Balance, beginning of year		$	(395,306	)		$	504,595			$	109,289
Recognized directly in shareholders’ equity			(1,077,844	)			(165,851	)			(1,243,695	)
Removed from shareholders’ equity and recognized in earnings			(35,151	)			—				(35,151	)
Effect of spin-off			—				(3,298	)			(3,298	)
Balance, end of year		$	(1,508,301	)		$	335,446			$	(1,172,855	)

 

f.

Information about financial risks

 

1)

Market risk. The derivative financial instruments categorized as financial assets/liabilities at fair value through profit or loss are mainly used to hedge the market exchange rate fluctuations of foreign-currency assets and liabilities; therefore, the market exchange rate risk of derivatives will be offset by the foreign exchange risk of these hedged items. Available-for-sale financial assets and held-to-maturity financial assets held by the Company are mainly fixed-interest-rate debt securities and overseas publicly traded stock; therefore, the fluctuations in market interest rates and market prices will result in changes in fair values of these debt securities and the fluctuations in market prices will result in changes in fair values of overseas publicly traded stock.

 

2)

Credit risk. Credit risk represents the potential loss that would be incurred by the Company if the counter-parties or third-parties breached contracts. Financial instruments with positive fair values at the balance sheet date are evaluated for credit risk. The Company evaluated whether the financial instruments for any possible counter-parties or third-parties are reputable financial institutions, business enterprises, and government agencies and accordingly, the Company believed that the Company’s exposure to credit risk was not significant.

 

3)

Liquidity risk. The Company has sufficient operating capital and bank facilities to meet cash needs upon settlement of derivative financial instruments and bonds payable. Therefore, the liquidity risk is low.

 

4)

Cash flow interest rate risk. The Company mainly invests in fixed-interest-rate debt securities. Therefore, cash flows are not expected to fluctuate significantly due to changes in market interest rates.

 

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24.	RELATED PARTY TRANSACTIONS

The Company engages in business transactions with the following related parties:

 

a.

Subsidiaries

TSMC China

TSMC Solar

TSMC Europe

TSMC Global

TSMC Japan

TSMC North America

 

b.

Investees

Xintec (holding a controlling financial interest)

VIS (accounted for using the equity method)

GUC (accounted for using the equity method)

SSMC (accounted for using the equity method)

 

c.

Indirect subsidiaries

TSMC Design Technology Canada, Inc. (TSMC Canada)

TSMC Technology, Inc. (TSMC Technology)

WaferTech, LLC (WaferTech)

 

d.

Indirect investees

VisEra Technology Company, Ltd. (VisEra) (accounted for using the equity method)

 

e.

Others

Related parties over which the Company has control or exercises significant influence but with which the Company had no material transactions.

Transactions with the aforementioned parties, other than those disclosed in other notes, are summarized as follows:

 

		2012								2011
		Amount				%				Amount				%
For the year
Sales
TSMC North America		$	326,768,469				64			$	234,902,043				56
Others			4,567,656				1				3,882,801				1
		$	331,336,125				65			$	238,784,844				57

 

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		2012								2011
		Amount				%				Amount				%
Purchases
TSMC China		$	15,708,447				26			$	10,392,189				21
WaferTech			8,026,114				14				7,305,879				15
VIS			4,475,674				8				5,577,762				12
SSMC			3,638,633				6				3,949,176				8
Others			—				—				124,673				—
		$	31,848,868				54			$	27,349,679				56
Manufacturing expenses
Xintec (outsourcing and rent)		$	180,768				—			$	260,250				—
VisEra (outsourcing)			14,586				—				14,588				—
VIS (rent)			—				—				5,902				—
Others			230				—				—				—
		$	195,584				—			$	280,740				—
Research and development expenses
TSMC Technology (primarily consulting fee)		$	713,323				2			$	534,804				2
TSMC Canada (primarily consulting fee)			206,894				1				192,616				1
TSMC Europe (primarily consulting fee)			49,763				—				45,489				—
VIS (rent)			—				—				1,984				—
Others			18,373				—				30,605				—
		$	988,353				3			$	805,498				3
Marketing expenses - commission
TSMC Europe		$	345,906				14			$	357,582				15
TSMC Japan			277,374				12				284,644				12
TSMC China			72,373				3				64,907				3
Others			20,643				1				22,049				1
		$	716,296				30			$	729,182				31
Sales of property, plant and equipment and other assets
TSMC China		$	46,941				51			$	2,885,847				86
VIS			14,531				16				36,008				1
VisEra			9,000				10				—				—
Others			10				—				73,133				2
		$	70,482				77			$	2,994,988				89
Purchases of property, plant and equipment and other assets
TSMC China		$	216,084				—			$	70,491				—
GUC			47,051				—				1,812				—
TSMC Solar			14,448				—				—				—
VIS			—				—				45,473				—
Others			1,224				—				—				—
		$	278,807				—			$	117,776				—

 

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		2012								2011
		Amount				%				Amount				%
Non-operating income and gains
VIS (primarily technical service income)		$	261,780				2			$	227,024				3
SSMC (primarily technical service income)			221,210				2				193,781				3
TSMC China (primarily technical service income and gains on disposal of property, plant and equipment)			984				—				96,050				1
Others			14,746				—				11,211				—
		$	498,720				4			$	528,066				7
Non-operating expenses and losses
TSMC China (losses on disposal of property, plant and equipment)		$	18,699				—			$	—				—
Xintec (settlement loss)			—				—				19,686				1
Others			132				—				—				—
		$	18,831				—			$	19,686				1
As of December 31
Receivables
TSMC North America		$	40,748,905				99			$	24,661,104				99
Others			238,539				1				116,430				1
		$	40,987,444				100			$	24,777,534				100
Other receivables
VIS		$	122,893				45			$	87,507				46
TSMC North America			88,827				32				23,887				13
SSMC			56,799				21				34,260				18
TSMC China			2,686				1				23,688				13
WaferTech			1,594				1				14,196				8
Others			2,164				—				4,490				2
		$	274,963				100			$	188,028				100
Payables
TSMC China		$	1,616,342				50			$	946,826				32
WaferTech			580,064				18				420,459				14
VIS			364,790				11				987,937				33
SSMC			351,389				11				336,037				11
Others			317,757				10				301,323				10
		$	3,230,342				100			$	2,992,582				100
Deferred credits (other assets)
TSMC China		$	17,271				2			$	(1,493	)			—
VIS			(7,806	)			(1	)			—				—
VisEra			948				—				—				—
Others			8				—				—				—
		$	10,421				1			$	(1,493	)			—

 

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The sales prices and payment terms to related parties were not significantly different from those of sales to third parties. For other related party transactions, prices and terms were determined in accordance with mutual agreements.

The Company leased certain buildings, facilities, and machinery and equipment from Xintec. The lease terms and prices were determined in accordance with mutual agreements. The rental expense was paid monthly and the related expenses were classified under manufacturing expenses. The lease expired in June 2011.

The Company leased certain office space and facilities from VIS. The lease terms and prices were determined in accordance with mutual agreements. The rental expense was paid monthly and the related expenses were classified under research and development expenses and manufacturing expenses. The lease expired in April 2011.

The Company deferred the disposal gains/losses (classified under other assets and deferred credits) derived from sales of property, plant and equipment and other assets to TSMC China, VIS, VisEra and others, and then recognized such gains/losses (classified under non-operating gains and losses) over the depreciable lives of the disposed assets.

The Company borrowed funds from related parties (classified under other payables to related parties). Additional disclosures consisted of the following:

 

		Year Ended December 31, 2012
Financing Name		Maximum Balance (In Thousands)				Ending Balance				Interest Rate				Interest Expense				Interest Payable
TSMC Global		$	5,807,600			$	—				0.3911	%		$	4,870			$	—
		(US$	200,000	)

 

		Year Ended December 31, 2011
Financing Name		Maximum Balance (In Thousands)				Ending Balance				Interest Rate				Interest Expense				Interest Payable
TSMC Global		$	24,684,000			$	—				0.3544	%		$	22,293			$	—
		(US$	850,000	)

Compensation of directors and management personnel:

 

		Years Ended December 31
		2012				2011
Salaries, incentives and special compensation		$	757,984			$	654,972
Bonus			538,077				445,681
		$	1,296,061			$	1,100,653

The information about the compensation of directors and management personnel is available in the annual report for the shareholders’ meeting. Total compensation expense for the year ended December 31, 2012 includes estimated profit sharing to employees and bonus to directors of the Company that relate to 2012 but will be paid in the following year. The actual amount will be finalized and approved upon the resolution of the shareholders’ meeting in 2013. The total compensation for the year ended December 31, 2011 included the bonuses appropriated from earnings of 2011 which was approved by the shareholders’ meeting held in 2012.

 

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25.	SIGNIFICANT LONG-TERM LEASES

The Company leases several parcels of land from the Science Park Administration. These operating leases expire on various dates from March 2013 to July 2032 and can be renewed upon expiration.

As of December 31, 2012, future lease payments were as follows:

 

Year		Amount
2013		$	485,963
2014			468,143
2015			457,694
2016			447,531
2017			409,829
2018 and thereafter			3,655,825
		$	5,924,985

 

26.	SIGNIFICANT COMMITMENTS AND CONTINGENCIES

Significant commitments and contingencies of the Company as of December 31, 2012, excluding those disclosed in other notes, were as follows:

 

a.

Under a technical cooperation agreement with Industrial Technology Research Institute, the R.O.C. Government or its designee approved by the Company can use up to 35% of the Company’s capacity if the Company’s outstanding commitments to its customers are not prejudiced. The term of this agreement is for five years beginning from January 1, 1987 and is automatically renewed for successive periods of five years unless otherwise terminated by either party with one year prior notice.

 

b.

Under a Shareholders Agreement entered into with Philips and EDB Investments Pte Ltd. on March 30, 1999, the parties formed a joint venture company, SSMC, which is an integrated circuit foundry in Singapore. The Company’s equity interest in SSMC was 32%. Nevertheless, Philips parted with its semiconductor company which was renamed as NXP B.V. in September 2006. The Company and NXP B.V. purchased all the SSMC shares owned by EDB Investments Pte Ltd. pro rata according to the Shareholders Agreement on November 15, 2006. After the purchase, the Company and NXP B.V. currently own approximately 39% and 61% of the SSMC shares respectively. The Company and Philips (now NXP B.V.) are required, in the aggregate, to purchase at least 70% of SSMC’s capacity, but the Company alone is not required to purchase more than 28% of the capacity. If any party defaults on the commitment and the capacity utilization of SSMC fall below a specific percentage of its capacity, the defaulting party is required to compensate SSMC for all related unavoidable costs.

 

c.

In August 2006, TSMC filed a lawsuit against Semiconductor Manufacturing International Corporation, SMIC (Shanghai) and SMIC Americas (aggregately referred to as “SMIC”) in the Superior Court of California for Alameda County for breach of a 2005 agreement that settled an earlier trade secret misappropriation and patent infringement litigation between the parties, as well as for trade secret misappropriation, seeking injunctive relief and monetary damages. In September 2006, SMIC filed a cross-complaint against TSMC in the same court alleging breach of settlement agreement, implied covenant of good faith and fair dealing. SMIC also filed a civil action against TSMC in November 2006 with the Beijing People’s High Court alleging defamation and breach of good faith. On June 10, 2009, the Beijing People’s High Court ruled in favor of TSMC and dismissed SMIC’s lawsuit. On November 4, 2009, after a two-month trial, a jury in the California action found SMIC to have both breached the 2005 settlement agreement and misappropriated TSMC’s trade secrets. TSMC has subsequently settled both lawsuits with SMIC. Pursuant to the new settlement agreement, the parties have agreed to the entry of a stipulated judgment in favor of TSMC in the California action, and to the dismissal of SMIC’s appeal against the Beijing High Court’s finding in favor of TSMC. Under the new settlement agreement and the related stipulated judgment, SMIC has agreed to make cash payments by installments to TSMC totaling US$200 million, which are in addition to the US$135 million previously paid to TSMC under the 2005 settlement agreement, and, conditional upon relevant government regulatory approvals, to issue to TSMC a total of 1,789,493,218 common shares of Semiconductor Manufacturing International Corporation and a three-year warrant to purchase 695,914,030 common shares (subject to adjustment) of Semiconductor Manufacturing International Corporation at HK$1.30 per share (subject to adjustment). TSMC has acquired the above mentioned common shares in July 2010, which are recorded within available for sale financial assets, and obtained the subsequent cash settlement income in accordance with the agreement.

 

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d.

In June 2010, Keranos, LLC. filed a lawsuit in the U.S. District Court for the Eastern District of Texas alleging that TSMC, TSMC North America, and several other leading technology companies infringe three expired U.S. patents. In response, TSMC, TSMC North America, and several co-defendants in the Texas case filed a lawsuit against Keranos in the U.S. District Court for the Northern District of California in November 2010, seeking a judgment declaring that they did not infringe the asserted patents, and that those patents are invalid. These two litigations have been consolidated into a single case in the U.S. District Court for the Eastern District of Texas. The outcome cannot be determined at this time.

 

e.

In December 2010, Ziptronix, Inc. filed a complaint in the U.S. District Court for the Northern District of California accusing TSMC, TSMC North America and one other company of allegedly infringing several U.S. patents. The outcome cannot be determined at this time.

 

f.

The Company joined the Customer Co-Investment Program of ASML Holding N.V. (ASML) and entered into the investment agreement in August 2012. The agreement includes an investment of EUR837,816 thousand by TSMC Global to acquire 5% of ASML’s equity with a lock-up period of 2.5 years. TSMC Global has acquired the aforementioned equity in October 2012. Both parties also signed the research and development funding agreement and the Company will provide EUR277,000 thousand to ASML’s research and development programs from 2013 to 2017.

 

27.	SPIN-OFF BUSINESS INFORMATION

To foster a stronger sense of corporate entrepreneurship and facilitate business specializations in order to strengthen overall profitability and operational efficiency, the Company transferred its solid state lighting and solar businesses into its wholly-owned, newly incorporated subsidiaries, TSMC SSL and TSMC Solar, on August 1, 2011. As of August 1, 2011, the net book values transferred to TSMC SSL and TSMC Solar amounted to NT$2,270,000 thousand and NT$11,180,000 thousand, respectively.

The book values of transferred assets and liabilities were as follows:

 

		TSMC SSL				TSMC Solar				Total
Current assets		$	431,613			$	893,584			$	1,325,197
Long-term investments			2,872				7,912,710				7,915,582
Property, plant and equipment			1,929,563				2,372,214				4,301,777
Other assets			234,696				201,677				436,373
Current liabilities			(292,728	)			(337,439	)			(630,167	)
Other liabilities			(36,272	)			(25,218	)			(61,490	)
Capital surplus			—				(56,094	)			(56,094	)
Unrealized gain/loss on financial instruments			—				(3,298	)			(3,298	)
Cumulative translation adjustments			256				221,864				222,120
		$	2,270,000			$	11,180,000			$	13,450,000

 

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

The significant financial assets and liabilities denominated in foreign currencies were as follows:

 

		December 31
		2012								2011
		Foreign Currencies (In Thousands)				Exchange Rate (Note)				Foreign Currencies (In Thousands)				Exchange Rate (Note)
Financial assets
Monetary items
USD		$	2,255,391				29.038			$	1,566,212				30.288
EUR			117,136				38.39				124,425				39.27
JPY			35,290,837				0.3352				33,073,336				0.3897
Non-monetary items
HKD			492,014				3.75				671,060				3.90
Investments accounted for using equity method
USD			3,445,339				29.038				2,983,866				30.288
EUR			6,141				38.39				5,225				39.27
JPY			424,858				0.3352				414,680				0.3897
RMB			3,838,265				4.66				2,823,953				4.81
Financial liabilities
Monetary items
USD			2,171,316				29.038				1,626,129				30.288
EUR			245,237				38.39				106,931				39.27
JPY			43,052,403				0.3352				34,942,421				0.3897

 

Note:

Exchange rate represents the number of N.T. dollars for which one foreign currency could be exchanged.

 

29.	ADDITIONAL DISCLOSURES

Following are the additional disclosures required by the SFB for the Company and its investees:

 

a.

Financings provided: Please see Table 1 attached;

 

b.

Endorsement/guarantee provided: None;

 

c.

Marketable securities held: Please see Table 2 attached;

 

d.

Marketable securities acquired and disposed of at costs or prices of at least NT$100 million or 20% of the paid-in capital: Please see Table 3 attached;

 

e.

Acquisition of individual real estate properties at costs of at least NT$100 million or 20% of the paid-in capital: Please see Table 4 attached;

 

f.

Disposal of individual real estate properties at prices of at least NT$100 million or 20% of the paid-in capital: None;

 

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g.

Total purchases from or sales to related parties of at least NT$100 million or 20% of the paid-in capital: Please see Table 5 attached;

 

h.

Receivables from related parties amounting to at least NT$100 million or 20% of the paid-in capital: Please see Table 6 attached;

 

i.

Names, locations, and related information of investees over which the Company exercises significant influence: Please see Table 7 attached;

 

j.

Information about derivatives of investees over which the Company has a controlling interest:

Do not meet the criteria for hedge accounting

 

1)

TSMC China

TSMC China entered into forward exchange contracts during the year ended December 31, 2012 to manage exposures due to foreign exchange rate fluctuations. Outstanding forward exchange contracts as of December 31, 2012 consisted of the following:

 

				Contract Amount
		Maturity Date		(In Thousands)
Sell US$/Buy RMB		January 2013			US$20,000/RMB124,735

For the year ended December 31, 2012, net losses arising from forward exchange contracts of TSMC China amounted to NT$5,068 thousand.

 

2)

Xintec

Xintec entered into forward exchange contracts during the year ended December 31, 2012 to manage exposures due to foreign exchange rate fluctuations. Outstanding forward exchange contracts as of December 31, 2012 consisted of the following:

 

				Contract Amount
		Maturity Date		(In Thousands)
Sell US$/Buy NT$		January 2013 to March 2013			US$13,700/NT$398,239

For the year ended December 31, 2012, net gains arising from forward exchange contracts of Xintec amounted to NT$19,339 thousand.

 

3)

TSMC Partners

TSMC Partners entered into forward exchange contracts during the year ended December 31, 2012 to manage exposures due to foreign exchange rate fluctuations. No forward exchange contract was outstanding as of December 31, 2012.

For the year ended December 31, 2012, net losses arising from forward exchange contracts of TSMC Partners amounted to NT$62,282 thousand.

 

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4)

TSMC Solar

TSMC Solar entered into derivative contracts during the year ended December 31, 2012 to manage exposures due to foreign exchange rate fluctuations. Outstanding forward exchange contracts as of December 31, 2012 consisted of the following:

 

				Contract Amount
		Maturity Date		(In Thousands)
Sell NT$/Buy US$		January 2013			NT$457,394/US$15,800
Sell NT$/Buy JPY		January 2013			NT$22,055/JPY65,000

Outstanding cross currency swap contracts as of December 31, 2012 consisted of the following:

 

Maturity Date

Contract Amount (In Thousands)

Range of Interest Rates Paid

Range of Interest Rates Received

January 2013

NT$

1,025,039/US$35,280

—

0.06

%

For the year ended December 31, 2012, net losses arising from derivative financial instruments of TSMC Solar amounted to NT$37,824 thousand.

 

5)

TSMC SSL

TSMC SSL entered into derivative contracts during the year ended December 31, 2012 to manage exposures due to foreign exchange rate fluctuations. Outstanding forward exchange contracts as of December 31, 2012 consisted of the following:

 

						Contract Amount
		Maturity Date				(In Thousands)
Sell NT$/Buy US$			January 2013			NT$	133,009/US$4,600
Sell NT$/Buy JPY			January 2013			NT$	22,055/JPY65,000

Outstanding cross currency swap contracts as of December 31, 2012 consisted of the following:

 

Maturity Date

Contract Amount (In Thousands)

Range of Interest Rates Paid

Range of Interest Rates Received

January 2013

NT$

58,100/US$2,000

—

0.06

%

For the year ended December 31, 2012, net losses arising from derivative financial instruments of TSMC SSL amounted to NT$13,882 thousand.

Meet the criteria for hedge accounting

 

1)

Xintec

Xintec monitors and manages the financial risk through the analysis of business environment and evaluation of entity’s financial risks. Further, Xintec seeks to reduce the effects of future cash flow related interest rate exposures by primarily using derivative financial instruments.

 

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Xintec is exposed to interest rate risk because its long-term bank loans bear floating interest rates. Accordingly, Xintec enters into interest rate swap contract to hedge such a cash flow interest rate risk. The interest rate swap contract of Xintec was due in August 2012.

For the year ended December 31, 2012, the adjustment to shareholder’s equity amounted to a net gain of NT$5 thousand for the above Xintec’s interest rate swap contract. The amount removed from shareholder’s equity and recognized as a loss amounted to NT$227 thousand.

 

2)

TSMC Global

TSMC Global monitors and manages the financial risk through the analysis of business environment and evaluation of entity’s financial risks. Further, TSMC Global seeks to reduce the effects of future cash flow related exchange rate exposures by primarily using derivative financial instruments.

TSMC Global entered into forward exchange contracts to hedge cash flow risk arising from foreign exchange rate fluctuations of an expected equity transaction. The forward exchange contracts of TSMC Global were due in October 2012.

For the year ended December 31, 2012, the adjustment to shareholder’s equity amounted to a net gain of NT$8,833 thousand for the above TSMC Global’s forward exchange contracts.

 

k.

Information on investment in Mainland China

 

1)

The name of the investee in Mainland China, the main businesses and products, its issued capital, method of investment, information on inflow or outflow of capital, percentage of ownership, equity in the net gain or net loss, ending balance, amount received as dividends from the investee, and the limitation on investee: Please see Table 8 attached.

 

2)

Significant direct or indirect transactions with the investee, its prices and terms of payment, unrealized gain or loss, and other related information which is helpful to understand the impact of investment in Mainland China on financial reports: Please see Note 24.

 

30.	OPERATING SEGMENTS INFORMATION

The Company has provided the operating segments disclosure in the consolidated financial statements.

 

31.	THE AUTHORIZATION OF FINANCIAL STATEMENTS

The financial statements were approved by the Board of Directors and authorized for issue on February 5, 2013.

 

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TABLE 1

Taiwan Semiconductor Manufacturing Company Limited and Investees

FINANCINGS PROVIDED

FOR THE YEAR ENDED DECEMBER 31, 2012

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

 

 

No.		Financing Company		Counter- party		Financial Statement Account		Maximum Balance for  the Period (US$ in Thousands) (Note 4)				Ending Balance (US$ in Thousands) (Note 4)				Amount Actually Drawn (US$ in Thousands)				Interest Rate		Nature for Financing		Transaction				Reason for		Allowance for Bad				Collateral								Financing Limits for Each Borrowing				Financing Company’s Total Financing Amount Limits
																								Amounts				Financing		Debt				Item				Value				Company				(Note 3)
1		TSMC Partners		TSMC China		Other receivables from related parties		$ (US$	7,259,500 250,000	)		$ (US$	3,774,940 130,000	)		$ (US$	3,774,940 130,000	)		0.25%-0.26%		The need for short-term financing		$	—			Purchase equipment		$	—				—			$	—			$	38,635,609 (Note 1	)		$	38,635,609
				TSMC Solar		Other receivables from related parties		(US$	1,161,520 40,000	)			—				—			—		The need for short-term financing			—			Operating capital			—				—				—				15,454,244 (Note 1	)			38,635,609
				TSMC SSL		Other receivables from related parties		(US$	871,140 30,000	)			—				—			—		The need for short-term financing			—			Operating capital			—				—				—				15,454,244 (Note 1	)			38,635,609
2		TSMC Development		TSMC Solar		Other receivables from related parties		(US$	2,323,040 80,000	)		(US$	2,323,040 80,000	)		(US$	1,495,457 51,500	)		0.21%-0.23%		The need for short-term financing			—			Operating capital			—				—				—				5,322,907 (Notes 1 and 5	)			13,307,266 (Note 5	)
				TSMC SSL		Other receivables from related parties		(US$	2,613,420 90,000	)		(US$	2,613,420 90,000	)		(US$	203,266 7,000	)		0.24%		The need for short-term financing			—			Operating capital			—				—				—				5,322,907 (Notes 1 and 5	)			13,307,266 (Note 5	)
3		TSMC Global		TSMC		Other receivables from related parties		(US$	5,807,600 200,000	)			—				—			—		The need for short-term financing			—			Support the parent company’s short-term operation requirement			—				—				—				49,954,386 (Note 2	)			49,954,386

 

Note 1:

The total amount for lending to a company for funding for a short-term period shall not exceed ten percent (10%) of the net worth of TSMC Partners and TSMC Development, respectively. In addition, the total amount lendable to any one borrower shall be no more than thirty percent (30%) of the borrower’s net worth. TSMC or offshore subsidiaries whose voting shares are 100% owned, directly or indirectly, by TSMC are not subject to the above restrictions. The restriction of thirty percent (30%) of the borrower’s net worth will not apply to subsidiaries whose voting shares are 90% or more owned, directly or indirectly, by TSMC. However, financing limits for those subsidiaries shall be no more than forty percent (40%) of the lender’s net worth.

Note 2:

The total amount for lending to a company for funding for a short-term period shall not exceed ten percent (10%) of the net worth of TSMC Global. In addition, the total amount lendable to any one borrower shall be no more than thirty percent (30%) of the borrower’s net worth. TSMC or offshore subsidiaries whose voting shares are 100% owned, directly or indirectly, by TSMC are not subject to the above restrictions.

Note 3:

The total amount available for lending purpose shall not exceed the net worth of TSMC Partners, TSMC Development and TSMC Global, respectively.

Note 4:

The maximum balance for the period and ending balance represents the amounts approved by Board of Directors.

Note 5:

The amount was determined based on the audited financial statements in accordance with local accounting principles.

 

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TABLE 2

Taiwan Semiconductor Manufacturing Company Limited and Investees

MARKETABLE SECURITIES HELD

DECEMBER 31, 2012

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

 

 

								December 31, 2012
Held Company Name		Marketable Securities Type and Name		Relationship with the Company		Financial Statement Account		Shares/Units (In  Thousands)				Carrying Value (Foreign Currencies in Thousands)				Percentage of Ownership (%)				Market Value or Net Asset Value (Foreign Currencies in Thousands)				Note
TSMC		Corporate bond
		Nan Ya Plastics Corporation		—		Held-to-maturity financial assets			—			$	549,881				N/A			$	557,900
		China Steel Corporation		—		”			—				151,265				N/A				151,073
		Stock
		Semiconductor Manufacturing International Corporation		—		Available-for-sale financial assets			1,277,958				1,845,502				4				1,845,052
		TSMC Global		Subsidiary		Investments accounted for using equity method			1				49,954,386				100				49,954,386
		TSMC Partners		Subsidiary		”			988,268				38,635,129				100				38,635,609
		VIS		Investee accounted for using equity method		”			628,223				9,462,038				40				12,658,703
		SSMC		Investee accounted for using equity method		”			314				6,710,956				39				6,496,972
		TSMC Solar		Subsidiary		”			1,118,000				6,031,369				99				6,008,087
		TSMC North America		Subsidiary		”			11,000				3,209,288				100				3,209,288
		TSMC SSL		Subsidiary		”			430,400				2,411,212				95				2,411,212
		Xintec		Investee with a controlling financial interest		”			94,950				1,550,313				40				1,550,313
		GUC		Investee accounted for using equity method		”			46,688				1,222,972				35				4,692,130
		TSMC Europe		Subsidiary		”			—				235,761				100				253,761
		TSMC Japan		Subsidiary		”			6				142,412				100				142,412
		TSMC Korea		Subsidiary		”			80				26,935				100				26,935
		United Industrial Gases Co., Ltd.		—		Financial assets carried at cost			19,300				193,584				10				390,210
		Shin-Etsu Handotai Taiwan Co., Ltd.		—		”			10,500				105,000				7				341,742
		W.K. Technology Fund IV		—		”			4,000				40,000				2				34,221
		Fund
		Horizon Ventures Fund		—		Financial assets carried at cost			—				89,916				12				89,916
		Crimson Asia Capital		—		”			—				55,259				1				55,259
		Capital
		TSMC China		Subsidiary		Investments accounted for using equity method			—				17,828,683				100				17,886,314
		VTAF III		Subsidiary		”			—				1,047,285				50				1,025,275
		VTAF II		Subsidiary		”			—				563,056				98				556,869
		Emerging Alliance		Subsidiary		”			—				167,359				99				167,359
		TSMC GN		Subsidiary		”			—				65,007				100				65,007
TSMC Solar		Stock
		Motech		Investee accounted for using equity method		Investments accounted for using equity method			87,480				2,998,413				20				2,761,393
		TSMC Solar Europe		Subsidiary		”			—				175,016				100				175,016
		TSMC Solar NA		Subsidiary		”			1				44,037				100				44,037
		Capital
		VTAF III		Investee accounted for using equity method		Investments accounted for using equity method			—				1,322,024				49				1,322,024

(Continued)

 

- 43 -

---

								December 31, 2012
Held Company Name		Marketable Securities Type and Name		Relationship with the Company		Financial Statement Account		Shares/Units (In  Thousands)				Carrying Value (Foreign Currencies in Thousands)				Percentage of Ownership (%)				Market Value or Net Asset Value (Foreign Currencies in Thousands)				Note
TSMC SSL		Stock
		TSMC Lighting NA		Subsidiary		Investments accounted for using equity method			1			$	2,864				100			$	2,864
TSMC GN		Stock
		TSMC Solar		Investee accounted for using equity method		Investments accounted for using equity method			4,294				23,076				—				23,076
		TSMC SSL		Investee accounted for using equity method		”			3,420				19,157				1				19,157
TSMC Partners		Stock
		TSMC Development, Inc. (TSMC Development)		Subsidiary		Investments accounted for using equity method			—			US$	604,367				100			US$	604,367
		VisEra Holding Company		Investee accounted for using equity method		”			43,000			US$	104,540				49			US$	104,540
		TSMC Technology		Subsidiary		”			—			US$	11,721				100			US$	11,721
		InveStar Semiconductor Development Fund, Inc. (II) LDC. (ISDF II)		Subsidiary		”			14,153			US$	10,479				97			US$	10,479
		InveStar Semiconductor Development Fund, Inc. (ISDF)		Subsidiary		”			787			US$	7,805				97			US$	7,805
		TSMC Canada		Subsidiary		”			2,300			US$	4,589				100			US$	4,589
		Mcube Inc.		Investee accounted for using equity method		”			6,333				—				25				—
		Fund
		Shanghai Walden Venture Capital Enterprise		—		Financial assets carried at cost			—			US$	5,000				6			US$	5,000
TSMC North America		Stock
		Spansion Inc.		—		Available-for-sale financial assets			270			US$	3,753				—			US$	3,753
TSMC Development		Stock
		WaferTech		Subsidiary		Investments accounted for using equity method			293,637			US$	262,053				100			US$	262,053
Emerging Alliance		Common stock
		Audience, Inc.		—		Available-for-sale financial assets			32			US$	335				—			US$	335
		Global Investment Holding Inc.		—		Financial assets carried at cost			11,124			US$	3,065				6			US$	3,065
		RichWave Technology Corp.		—		”			4,074			US$	1,545				10			US$	1,545
		Preferred stock
		Next IO, Inc.		—		Financial assets carried at cost			8			US$	500				—			US$	500
		QST Holdings, LLC		—		”			—			US$	142				4			US$	142
		Capital
		VentureTech Alliance Holdings, LLC (VTA Holdings)		Subsidiary		Investments accounted for using equity method			—				—				7				—
VTAF II		Common stock
		Audience, Inc.		—		Available-for-sale financial assets			203			US$	2,107				1			US$	2,107
		Sentelic		—		Financial assets carried at cost			1,806			US$	2,607				9			US$	2,607
		Aether Systems, Inc.		—		”			1,800			US$	1,701				23			US$	1,701
		RichWave Technology Corp.		—		”			1,267			US$	1,036				3			US$	1,036

(Continued)

 

- 44 -

---

								December 31, 2012
Held Company Name		Marketable Securities Type and Name		Relationship with the Company		Financial Statement Account		Shares/Units (In  Thousands)				Carrying Value (Foreign Currencies in Thousands)				Percentage of Ownership (%)				Market Value or Net Asset Value (Foreign Currencies in Thousands)				Note
VTAF II		Preferred stock
		5V Technologies, Inc.		—		Financial assets carried at cost			2,890			US$	2,168				4			US$	2,168
		Aquantia		—		”			4,556			US$	4,316				2			US$	4,316
		Cresta Technology Corporation		—		”			92			US$	28				—			US$	28
		Impinj, Inc.		—		”			711			US$	1,100				—			US$	1,100
		Next IO, Inc.		—		”			179			US$	1,219				1			US$	1,219
		QST Holdings, LLC		—		”			—			US$	593				13			US$	593
		Capital
		VTA Holdings		Subsidiary		Investments accounted for using equity method			—				—				31				—
VTAF III		Common stock
		Mutual-Pak Technology Co., Ltd.		Subsidiary		Investments accounted for using equity method			15,643			US$	2,120				58			US$	2,120
		InvenSense, Inc.		—		Available-for-sale financial assets			93			US$	1,037				—			US$	1,037
		Accton Wireless Broadband Corp.		—		Financial assets carried at cost			2,249			US$	315				6			US$	315
		Preferred stock
		BridgeLux, Inc.		—		Financial assets carried at cost			7,522			US$	9,379				3			US$	9,379
		GTBF, Inc.		—		”			1,154			US$	1,500				N/A			US$	1,500
		LiquidLeds Lighting Corp.		—		”			1,600			US$	800				11			US$	800
		Neoconix, Inc.		—		”			4,147			US$	4,841				4			US$	4,841
		Powervation, Ltd.		—		”			509			US$	7,938				16			US$	7,938
		Stion Corp.		—		”			8,152			US$	45,467				15			US$	45,467
		Tilera, Inc.		—		”			3,890			US$	3,025				2			US$	3,025
		Validity Sensors, Inc.		—		”			11,192			US$	4,197				4			US$	4,197
		Capital
		Growth Fund Limited (Growth Fund)		Subsidiary		Investments accounted for using equity method			—			US$	368				100			US$	368
		VTA Holdings		Subsidiary		”			—				—				62				—
ISDF		Common stock
		Integrated Memory Logic, Inc.		—		Available-for-sale financial assets			1,402			US$	4,322				2			US$	4,322
		Memsic, Inc.		—		”			1,286			US$	4,294				5			US$	4,294
		Preferred stock
		Sonics, Inc.		—		Financial assets carried at cost			230			US$	497				2			US$	497
ISDF II		Common stock
		Memsic, Inc.		—		Available-for-sale financial assets			1,072			US$	3,581				4			US$	3,581
		Alchip Technologies Limited		—		Financial assets carried at cost			7,520			US$	3,664				14			US$	3,664
		Sonics, Inc.		—		”			278			US$	10				3			US$	10
		Goyatek Technology, Corp.		—		”			745			US$	163				6			US$	163
		Auden Technology MFG. Co., Ltd.		—		”			1,035			US$	220				3			US$	220
		Preferred stock
		Sonics, Inc.		—		Financial assets carried at cost			264			US$	455				3			US$	455

(Continued)

 

- 45 -

---

								December 31, 2012
Held Company Name		Marketable Securities Type and Name		Relationship with the Company		Financial Statement Account		Shares/Units (In  Thousands)				Carrying Value (Foreign Currencies in Thousands)				Percentage of Ownership (%)				Market Value or Net Asset Value (Foreign Currencies in Thousands)				Note
Xintec		Capital
		Compositech Ltd.		—		Financial assets carried at cost			587			$	—				3			$	—
TSMC Solar Europe		Stock
		TSMC Solar Europe GmbH		Subsidiary		Investments accounted for using equity method			—			EUR	4,469				100			EUR	4,469
TSMC Global		Stock
		ASML		—		Available-for-sale financial assets			20,993			US$	1,334,501				5			US$	1,334,501
		Money market fund
		Ssga Cash Mgmt Global Offshore		—		Available-for-sale financial assets			50			US$	50				N/A			US$	50
		Corporate bond
		Aust + Nz Banking Group		—		Held-to-maturity financial assets			20,000			US$	19,999				N/A			US$	20,033
		Commonwealth Bank of Australia		—		”			25,000			US$	25,000				N/A			US$	25,006
		Commonwealth Bank of Australia		—		”			25,000			US$	25,000				N/A			US$	25,043
		Deutsche Bank AG London		—		”			20,000			US$	19,999				N/A			US$	20,007
		JP Morgan Chase + Co.		—		”			35,000			US$	35,006				N/A			US$	34,956
		Westpac Banking Corp.		—		”			25,000			US$	25,000				N/A			US$	25,013

(Concluded)

 

- 46 -

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TABLE 3

Taiwan Semiconductor Manufacturing Company Limited and Investees

MARKETABLE SECURITIES ACQUIRED AND DISPOSED OF AT COSTS OR PRICES OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL

FOR THE YEAR ENDED DECEMBER 31, 2012

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

 

 

Company Name		Marketable Securities Type and Name		Financial Statement Account		Counter- party		Nature of Relationship		Beginning Balance								Acquisition								Disposal																Ending Balance (Note)
										Shares/ Units (In Thousands)				Amount (Foreign Currencies in Thousands)				Shares/ Units (In Thousands)				Amount (Foreign Currencies in Thousands)				Shares/ Units (In Thousands)				Amount (Foreign Currencies in Thousands)				Carrying Value (Foreign Currencies in Thousands)				Gain/Loss on Disposal (Foreign Currencies in Thousands)				Shares/ Units (In Thousands)				Amount (Foreign Currencies in Thousands)
TSMC		Corporate bond
		Nan Ya Plastics Corporation		Held-to-maturity financial assets		—		—			—			$	1,099,629				—			$	—				—			$	550,000			$	550,000			$	—				—			$	549,881
		China Steel Corporation		”		—		—			—				303,798				—				—				—				150,000				150,000				—				—				151,265
		Stock
		Semiconductor Manufacturing International Corporation		Available-for-sale financial assets		—		—			1,789,493				2,617,134				—				—				511,535				612,834				502,200				110,634				1,277,958				1,845,052
		TSMC SSL		Investments accounted for using equity method		—		Subsidiary			227,000				1,746,893				203,400				2,034,000				—				—				—				—				430,400				2,411,212
		Capital
		TSMC GN		Investments accounted for using equity method		—		Subsidiary			—				—				—				100,000				—				—				—				—				—				65,007
TSMC Partners		Corporate bond
		General Elec Cap Corp. Mtn		Held-to-maturity financial assets		—		—			—			US$	20,012				—				—				—			US$	20,000			US$	20,000				—				—				—
		General Elec Cap Corp. Mtn		”		—		—			—			US$	20,059				—				—				—			US$	20,000			US$	20,000				—				—				—
VTAF II		Preferred stock
		Power Analog Microelectronics		Financial assets carried at cost		—		—			7,330			US$	3,482				—				—				7,330			US$	3,345			US$	3,482			US$	(137	)			—				—
VTAF III		Stock
		InvenSense, Inc.		Available-for-sale financial assets		—		—			796			US$	7,932				—				—				703			US$	7,460			US$	861			US$	6,599				93			US$	1,037
TSMC Global		Stock
		ASML		Available-for-sale financial assets		—		—			—				—				20,993			US$	1,085,474				—				—				—				—				20,993			US$	1,334,501
		Government bond
		Societe De Financement De Lec		Held-to-maturity financial assets		—		—			15,000			US$	15,000				—				—				15,000			US$	15,000			US$	15,000				—				—				—
		Corporate bond
		Nationwide Building Society-UK Government Guarantee		Held-to-maturity financial assets		—		—			8,000			US$	8,000				—				—				8,000			US$	8,000			US$	8,000				—				—				—
		Westpac Banking Corp. 12/12 Frn		”		—		—			5,000			US$	5,000				—				—				5,000			US$	5,000			US$	5,000				—				—				—
ISDF		Common stock
		Integrated Memory Logic, Inc.		Available-for-sale financial assets		—		—			2,161			US$	6,289				127				—				886			US$	3,152			US$	207			US$	2,945				1,402			US$	4,322
TSMC Solar Europe		Stock
		TSMC Solar Europe GmbH		Investments accounted for using equity method		—		Subsidiary			—			EUR	5,103				—			EUR	2,500				—				—				—				—				—			EUR	4,469

 

Note:

The ending balance includes the amortization of premium/discount on bonds investments, translation adjustments, equity in earnings/losses of equity method investees and other adjustments to long-term investments accounted for using equity method.

 

- 47 -

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TABLE 4

Taiwan Semiconductor Manufacturing Company Limited and Investees

ACQUISITION OF INDIVIDUAL REAL ESTATE PROPERTIES AT COSTS OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL FOR THE YEAR ENDED DECEMBER 31, 2012

(Amounts in Thousands of New Taiwan Dollars)

 

 

Company Name

Types of Property

Transaction Date

Transaction Amount

Payment Term

Counter-party

Nature of Relationships

Prior Transaction of Related Counter-party

Price Reference

Purpose of Acquisition

Other Terms

Owner

Relationships

Transfer Date

Amount

TSMC

Fab

February 7, 2012 to December 27, 2012

$

249,912

By the construction progress

MandarTech Interiors Inc.

—

N/A

N/A

N/A

N/A

Public bidding

Manufacturing purpose

None

Fab

February 7, 2012 to December 27, 2012

219,807

By the construction progress

I Domain Industrial Co., Ltd.

—

N/A

N/A

N/A

N/A

Public bidding

Manufacturing purpose

None

Fab

February 13, 2012 to December 28, 2012

5,015,656

By the construction progress

Da Cin Construction Co., Ltd.

—

N/A

N/A

N/A

N/A

Public bidding

Manufacturing purpose

None

Fab

February 13, 2012 to December 27, 2012

1,766,332

By the construction progress

Fu Tsu Construction Co., Ltd.

—

N/A

N/A

N/A

N/A

Public bidding

Manufacturing purpose

None

Fab

March 19, 2012 to December 27, 2012

2,958,930

By the construction progress

China Steel Structure Co., Ltd.

—

N/A

N/A

N/A

N/A

Public bidding

Manufacturing purpose

None

Fab

March 19, 2012 to July 27, 2012

185,115

By the construction progress

Toko Steel Structure Corporation

—

N/A

N/A

N/A

N/A

Public bidding

Manufacturing purpose

None

Fab

May 28, 2012 to November 27, 2012

320,705

By the construction progress

Tasa Construction Corporation

—

N/A

N/A

N/A

N/A

Public bidding

Manufacturing purpose

None

Fab

August 28, 2012 to December 26, 2012

131,678

By the construction progress

Shiny G&M Associated Co., Ltd.

—

N/A

N/A

N/A

N/A

Public bidding

Manufacturing purpose

None

Land

November 21, 2012

963,600

By the contract

Miaoli County Government

—

N/A

N/A

N/A

N/A

Public bidding

Manufacturing purpose

None

 

- 48 -

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TABLE 5

Taiwan Semiconductor Manufacturing Company Limited and Investees

TOTAL PURCHASES FROM OR SALES TO RELATED PARTIES OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL

FOR THE YEAR ENDED DECEMBER 31, 2012

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

 

 

Company Name		Related Party		Nature of Relationships		Transaction Details												Abnormal Transaction								Notes/Accounts Payable or Receivable								Note
						Purchases/ Sales		Amount (US$ in  Thousands)				% to Total				Payment Terms		Unit Price (Note)				Payment  Terms (Note)				Ending Balance (US$ in  Thousands)				% to Total
TSMC		TSMC North America		Subsidiary		Sales		$	326,768,469				64			Net 30 days after invoice date			—				—			$	40,748,905				72
		GUC		Investee accounted for using equity method		Sales			4,370,617				1			Net 30 days after monthly closing			—				—				238,380				—
		VIS		Investee accounted for using equity method		Sales			177,331				—			Net 30 days after monthly closing			—				—				—				—
		TSMC China		Subsidiary		Purchases			15,708,447				26			Net 30 days after monthly closing			—				—				(1,616,342	)			10
		WaferTech		Indirect subsidiary		Purchases			8,026,114				14			Net 30 days after monthly closing			—				—				(580,064	)			3
		VIS		Investee accounted for using equity method		Purchases			4,475,674				8			Net 30 days after monthly closing			—				—				(364,790	)			2
		SSMC		Investee accounted for using equity method		Purchases			3,638,633				6			Net 30 days after monthly closing			—				—				(351,389	)			2
TSMC North America		GUC		Investee accounted for using equity method by TSMC		Sales		(US$	509,890 17,238	)			—			Net 30 days after invoice date			—				—			(US$	35,032 1,206	)			—
		Mcube Inc.		Investee accounted for using equity method by TSMC		Sales		(US$	249,375 8,431	)			—			Net 60 days after invoice date			—				—			(US$	80,212 2,762	)			—
Xintec		OmniVision		Parent company of director (represented for Xintec)		Sales			1,261,163				40			Net 30 days after monthly closing			—				—				215,403				50

 

Note:

The sales prices and payment terms to related parties were not significantly different from those of sales to third parties. For other related party transactions, prices and terms were determined in accordance with mutual agreements.

 

- 49 -

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TABLE 6

Taiwan Semiconductor Manufacturing Company Limited and Investees

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

DECEMBER 31, 2012

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

 

 

Company Name		Related Party		Nature of Relationships		Ending  Balance (US$ in Thousands)				Turnover Days (Note 1)		Overdue								Amounts Received in Subsequent Period				Allowance for Bad Debts
												Amount				Action Taken
TSMC		TSMC North America		Subsidiary		$	40,837,732			37		$	15,905,710				—			$	17,191,890			$	—
		GUC		Investee accounted for using equity method			238,380			15			—				—				—				—
		VIS		Investee accounted for using equity method			122,893			(Note 2)			—				—				—				—
TSMC Partners		TSMC China		The same parent company			3,793,421			(Note 2)			—				—				—				—
						(US$	130,636	)
TSMC Development		TSMC Solar		The same parent company			1,496,194			(Note 2)			—				—				—				—
						(US$	51,525	)
		TSMC SSL		The same parent company			203,277			(Note 2)			—				—				—				—
						(US$	7,000	)
Xintec		OmniVision		Parent company of director (represented for Xintec)			215,403			66			—				—				—				—
TSMC Technology		TSMC		Parent company			117,283			(Note 2)			—				—				—				—
						(US$	4,039	)
WaferTech		TSMC		Parent company			580,064			16			—				—				—				—
						(US$	19,976	)

 

Note 1:

The calculation of turnover days excludes other receivables from related parties.

Note 2:

The ending balance is primarily consisted of other receivables, which is not applicable for the calculation of turnover days.

 

- 50 -

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TABLE 7

Taiwan Semiconductor Manufacturing Company Limited and Investees

NAMES, LOCATIONS, AND RELATED INFORMATION OF INVESTEES OVER WHICH THE COMPANY EXERCISES SIGNIFICANT INFLUENCE

DECEMBER 31, 2012

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

 

 

Investor Company		Investee Company		Location		Main Businesses and Products		Original Investment Amount								Balance as of December 31, 2012												Net Income (Losses) of the Investee (Foreign Currencies in Thousands)				Equity in the Earnings (Losses) (Note 1) (Foreign Currencies in Thousands)				Note
								December 31, 2012 (Foreign Currencies in Thousands)				December 31, 2011 (Foreign Currencies in Thousands)				Shares (In Thousands)				Percentage of Ownership				Carrying Value (Foreign Currencies in Thousands)
TSMC		TSMC Global		Tortola, British Virgin Islands		Investment activities		$	42,327,245			$	42,327,245				1				100			$	49,954,386			$	469,933			$	469,933			Subsidiary
		TSMC Partners		Tortola, British Virgin Islands		Investing in companies involved in the design, manufacture, and other related business in the semiconductor industry			31,456,130				31,456,130				988,268				100				38,635,129				5,088,931				5,088,451			Subsidiary
		TSMC China		Shanghai, China		Manufacturing and selling of integrated circuits at the order of and pursuant to product design specifications provided by customers			18,939,667				18,939,667				—				100				17,828,683				4,757,121				4,740,524			Subsidiary
		VIS		Hsin-Chu, Taiwan		Research, design, development, manufacture, packaging, testing and sale of memory integrated circuits, LSI, VLSI and related parts			13,232,288				13,232,288				628,223				40				9,462,038				2,329,808				770,379			Investee accounted for using equity method
		SSMC		Singapore		Fabrication and supply of integrated circuits			5,120,028				5,120,028				314				39				6,710,956				4,721,908				1,831,634			Investee accounted for using equity method
		TSMC Solar		Tai-Chung, Taiwan		Engaged in researching, developing, designing, manufacturing and selling renewable energy and saving related technologies and products			11,180,000				11,180,000				1,118,000				99				6,031,369				(4,037,825	)			(4,044,944	)		Subsidiary
		TSMC North America		San Jose, California, U.S.A.		Selling and marketing of integrated circuits and semiconductor devices			333,718				333,718				11,000				100				3,209,288				312,232				312,232			Subsidiary
		TSMC SSL		Hsin-Chu, Taiwan		Engaged in researching, developing, designing, manufacturing and selling solid state lighting devices and related applications products and systems			4,304,000				2,270,000				430,400				95				2,411,212				(1,466,733	)			(1,397,589	)		Subsidiary
		Xintec		Taoyuan, Taiwan		Wafer level chip size packaging service			1,357,890				1,357,890				94,950				40				1,550,313				(91,177	)			(49,604	)		Investee with a controlling financial interest
		GUC		Hsin-Chu, Taiwan		Researching, developing, manufacturing, testing and marketing of integrated circuits			386,568				386,568				46,688				35				1,222,972				612,369				209,312			Investee accounted for using equity method
		VTAF III		Cayman Islands		Investing in new start-up technology companies			1,896,914				2,074,155				—				50				1,047,285				(177,152	)			122,852			Subsidiary
		VTAF II		Cayman Islands		Investing in new start-up technology companies			704,447				949,267				—				98				563,056				62,349				61,102			Subsidiary
		TSMC Europe		Amsterdam, the Netherlands		Marketing and engineering supporting activities			15,749				15,749				—				100				235,761				34,931				34,931			Subsidiary
		Emerging Alliance		Cayman Islands		Investing in new start-up technology companies			852,258				892,855				—				99				167,359				(2,940	)			(2,925	)		Subsidiary
		TSMC Japan		Yokohama, Japan		Marketing activities			83,760				83,760				6				100				142,412				3,786				3,786			Subsidiary
		TSMC GN		Taipei, Taiwan		Investment activities			100,000				—				—				100				65,007				(24,928	)			(24,928	)		Subsidiary
		TSMC Korea		Seoul, Korea		Customer service and technical supporting activities			13,656				13,656				80				100				26,935				2,602				2,602			Subsidiary
TSMC Solar		Motech		Taipei, Taiwan		Manufacturing and sales of solar cells, crystalline silicon solar cell, and test and measurement instruments and design and construction of solar power systems			6,228,661				6,228,661				87,480				20				2,998,413				(5,037,203	)			Note 2			Investee accounted for using equity method
		VTAF III		Cayman Islands		Investing in new start-up technology companies			1,801,918				1,795,131				—				49				1,322,024				(177,152	)			Note 2			Investee accounted for using equity method
		TSMC Solar Europe		Amsterdam, the Netherlands		Investing in solar related business			504,107				411,032				—				100				175,016				(119,668	)			Note 2			Subsidiary
		TSMC Solar NA		Delaware, U.S.A.		Selling and marketing of solar related products			205,772				147,686				1				100				44,037				(65,268	)			Note 2			Subsidiary

 

(Continued)

 

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Investor Company		Investee Company		Location		Main Businesses and Products		Original Investment Amount								Balance as of December 31, 2012												Net Income (Losses) of the Investee (Foreign Currencies in Thousands)				Equity in the Earnings (Losses) (Note 1) (Foreign Currencies in Thousands)				Note
								December 31, 2012 (Foreign Currencies in Thousands)				December 31, 2011 (Foreign Currencies in Thousands)				Shares (In Thousands)				Percentage of Ownership				Carrying Value (Foreign Currencies in Thousands)
TSMC SSL		TSMC Lighting NA		Delaware, U.S.A.		Selling and marketing of solid state lighting related products		$	3,133			$	3,133				1				100			$	2,864			$	(7	)			Note 2			Subsidiary
TSMC Partners		TSMC Development		Delaware, U.S.A.		Investment activities		US$	0.001			US$	0.001				—				100			US$	604,367			US$	144,333				Note 2			Subsidiary
		VisEra Holding Company		Cayman Islands		Investing in companies involved in the design, manufacturing, and other related businesses in the semiconductor industry		US$	43,000			US$	43,000				43,000				49			US$	104,540			US$	30,091				Note 2			Investee accounted for using equity method
		TSMC Technology		Delaware, U.S.A.		Engineering support activities		US$	0.001			US$	0.001				—				100			US$	11,721			US$	1,106				Note 2			Subsidiary
		ISDF II		Cayman Islands		Investing in new start-up technology companies		US$	14,153			US$	14,153				14,153				97			US$	10,479			US$	(121	)			Note 2			Subsidiary
		ISDF		Cayman Islands		Investing in new start-up technology companies		US$	787			US$	787				787				97			US$	7,805			US$	2,493				Note 2			Subsidiary
		TSMC Canada		Ontario, Canada		Engineering support activities		US$	2,300			US$	2,300				2,300				100			US$	4,589			US$	422				Note 2			Subsidiary
		Mcube Inc.		Delaware, U.S.A.		Research, development, and sale of micro-semiconductor device		US$	1,800			US$	1,800				6,333				25				—			US$	(12,599	)			Note 2			Investee accounted for using equity method
TSMC Development		WaferTech		Washington, U.S.A.		Manufacturing, selling, testing and computer-aided designing of integrated circuits and other semiconductor devices		US$	280,000			US$	280,000				293,637				100			US$	262,053			US$	142,551				Note 2			Subsidiary
VTAF III		Mutual-Pak Technology Co., Ltd.		Taipei, Taiwan		Manufacturing and selling of electronic parts and researching, developing, and testing of RFID		US$	5,212			US$	3,937				15,643				58			US$	2,120			US$	(1,422	)			Note 2			Subsidiary
		Growth Fund		Cayman Islands		Investing in new start-up technology companies		US$	1,830			US$	1,830				—				100			US$	368			US$	(141	)			Note 2			Subsidiary
		VTA Holdings		Delaware, U.S.A.		Investing in new start-up technology companies			—				—				—				62				—				—				Note 2			Subsidiary
VTAF II		VTA Holdings		Delaware, U.S.A.		Investing in new start-up technology companies			—				—				—				31				—				—				Note 2			Subsidiary
Emerging Alliance		VTA Holdings		Delaware, U.S.A.		Investing in new start-up technology companies			—				—				—				7				—				—				Note 2			Subsidiary
TSMC Solar Europe		TSMC Solar Europe GmbH		Hamburg, Germany		Selling of solar related products and providing customer service		EUR	12,400			EUR	9,900				—				100			EUR	4,469			EUR	(3,133	)			Note 2			Subsidiary
TSMC GN		TSMC Solar		Tai-Chung, Taiwan		Engaged in researching, developing, designing, manufacturing and selling renewable energy and saving related technologies and products		$	42,945			$	—				4,294				—			$	23,076			$	(4,037,825	)			Note 2			Investee accounted for using equity method
		TSMC SSL		Hsin-Chu, Taiwan		Engaged in researching, developing, designing, manufacturing and selling solid state lighting devices and related applications products and systems			34,266				—				3,420				1				19,157				(1,466,733	)			Note 2			Investee accounted for using equity method

 

Note 1:

Equity in earnings/losses of investees includes the effect of unrealized gross profit from affiliates.

Note 2:

The equity in the earnings/losses of the investee company is not reflected herein as such amount is already included in the equity in the earnings/losses of the investor company.

 

(Concluded)

 

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TABLE 8

Taiwan Semiconductor Manufacturing Company Limited and Investees

INFORMATION ON INVESTMENT IN MAINLAND CHINA

FOR THE YEAR ENDED DECEMBER 31, 2012

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

 

 

Investee Company		Main Businesses and Products		Total Amount of Paid-in Capital (Foreign Currencies in Thousands)				Method of Investment		Accumulated Outflow of Investment from Taiwan as of January 1, 2012 (US$ in Thousands)				Investment Flows								Accumulated Outflow of Investment from Taiwan as of December 31, 2012 (US$ in Thousands)				Percentage of Ownership				Equity in the Earnings (Losses)				Carrying Value as of December 31, 2012 (US$ in Thousands)				Accumulated Inward Remittance of Earnings as of December 31, 2012
														Outflow				Inflow
TSMC China		Manufacturing and selling of integrated circuits at the order of and pursuant to product design specifications provided by customers		$ (RMB	18,939,667 4,502,080	)		(Note 1)		$ (US$	18,939,667 596,000	)		$	—			$	—			$ (US$	18,939,667 596,000	)			100	%		$	4,740,524 (Note 3	)		$	17,828,683			$	—
Shanghai Walden Venture Capital Enterprise		Investing in new start-up technology companies		(US$	2,324,062 78,791	)		(Note 2)		(US$	147,485 5,000	)			—				—			(US$	147,485 5,000	)			6	%			(Note 4	)		(US$	145,190 5,000	)			—

 

Accumulated Investment in Mainland China as of December 31, 2012 (US$ in Thousands)				Investment Amounts Authorized by Investment Commission, MOEA (US$ in Thousands)				Upper Limit on  Investment (US$ in Thousands)
$  (US$	19,087,152 601,000)			$ (US$	19,087,152 601,000	)		$ (US$	19,087,152 601,000	)

 

Note 1:

TSMC directly invested US$596,000 thousand in TSMC China.

Note 2:

TSMC indirectly invested in China company through third region, TSMC Partners.

Note 3:

Amount was recognized based on the audited financial statements.

Note 4:

TSMC Partners invested in financial assets carried at cost, equity in the earnings from which was not recognized.

 

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		Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries   Consolidated Financial Statements for the Years Ended December 31, 2012 and 2011 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, 2012, 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 Statement of Financial Accounting Standards No. 7, “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
By		/s/ Morris Chang
		MORRIS CHANG
		Chairman
February 5, 2013

 

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INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Shareholders

Taiwan Semiconductor Manufacturing Company Limited

We have audited the accompanying consolidated balance sheets of Taiwan Semiconductor Manufacturing Company Limited and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the Rules Governing the Audit of Financial Statements by Certified Public Accountants and auditing standards generally accepted in the Republic of China. Those rules and standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Taiwan Semiconductor Manufacturing Company Limited and subsidiaries as of December 31, 2012 and 2011, and the results of their consolidated operations and their consolidated cash flows for the years then ended in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers and accounting principles generally accepted in the Republic of China.

February 5, 2013

Notice to Readers

The accompanying consolidated financial statements are intended only to present the consolidated financial position, results of operations 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 accepted and applied in the Republic of China.

For the convenience of readers, the 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 auditors’ report and consolidated financial statements shall prevail.

 

- 2 -

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Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2012 AND 2011

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

 

 

 

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

 

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Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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

 

 

		2012								2011
		Amount				%				Amount				%
GROSS SALES (Notes 2 and 27)		$	513,435,603							$	430,490,500
SALES RETURNS AND ALLOWANCES (Notes 2 and 8)			7,187,023								3,409,855
NET SALES (Note 34)			506,248,580				100				427,080,645				100
COST OF SALES (Notes 9, 21 and 27)			262,628,681				52				232,937,388				55
GROSS PROFIT BEFORE AFFILIATES ELIMINATION			243,619,899				48				194,143,257				45
UNREALIZED GROSS PROFIT FROM AFFILIATES (Note 2)			(25,029	)			—				(74,029	)			—
GROSS PROFIT			243,594,870				48				194,069,228				45
OPERATING EXPENSES (Notes 21 and 27)
Research and development			40,402,138				8				33,829,880				8
General and administrative			17,638,088				3				14,164,114				3
Marketing			4,497,451				1				4,517,816				1
Total operating expenses			62,537,677				12				52,511,810				12
INCOME FROM OPERATIONS (Note 34)			181,057,193				36				141,557,418				33
NON-OPERATING INCOME AND GAINS
Equity in earnings of equity method investees, net (Notes 2 and 10)			2,028,611				1				897,611				—
Interest income			1,645,036				—				1,479,514				1
Settlement income (Note 30)			883,845				—				947,340				—
Foreign exchange gain, net (Note 2)			582,498				—				—				—
Gain on settlement and disposal of financial assets, net (Notes 2 and 26)			541,089				—				233,214				—
Technical service income (Note 27)			496,654				—				407,089				—
Valuation gain on financial instruments, net (Notes 2, 5 and 26)			—				—				507,432				—
Others (Notes 2 and 27)			604,304				—				886,327				—
Total non-operating income and gains			6,782,037				1				5,358,527				1

 

(Continued)

 

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Taiwan Semiconductor Manufacturing Company Limited

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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

 

 

		2012								2011
		Amount				%				Amount				%
NON-OPERATING EXPENSES AND LOSSES
Impairment of financial assets (Notes 2, 6, 10, 12 and 26)		$	4,231,602				1			$	265,515				—
Interest expense			1,020,422				—				626,725				—
Impairment loss on idle assets (Note 2)			444,505				—				98,009				—
Loss on disposal of property, plant and equipment (Note 2)			31,816				—				200,673				—
Foreign exchange loss, net (Note 2)			—				—				185,555				—
Others (Notes 2, 5 and 26)			556,909				—				391,791				—
Total non-operating expenses and losses			6,285,254				1				1,768,268				—
INCOME BEFORE INCOME TAX			181,553,976				36				145,147,677				34
INCOME TAX EXPENSE (Notes 2 and 20)			15,590,287				3				10,694,417				3
NET INCOME		$	165,963,689				33			$	134,453,260				31
ATTRIBUTABLE TO:
Shareholders of the parent		$	166,158,802				33			$	134,201,279				31
Minority interests			(195,113	)			—				251,981				—
		$	165,963,689				33			$	134,453,260				31

 

		2012								2011
		Income Attributable  to Shareholders of the Parent								Income Attributable  to Shareholders of the Parent
		Before Income Tax				After Income Tax				Before Income Tax				After Income Tax
EARNINGS PER SHARE (NT$, Note 25)
Basic earnings per share		$	7.01			$	6.41			$	5.59			$	5.18
Diluted earnings per share		$	7.01			$	6.41			$	5.59			$	5.18

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

 

(Concluded)

 

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Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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

 

 

		Equity Attributable to Shareholders of the Parent
		Capital Stock - Common Stock												Retained Earnings
		Shares (In Thousands)				Amount				Capital Surplus				Legal Capital Reserve				Special Capital Reserve				Unappropriated Earnings				Total
BALANCE, JANUARY 1, 2011			25,910,078			$	259,100,787			$	55,698,434			$	86,239,494			$	1,313,047			$	178,227,030			$	265,779,571
Appropriations of prior year’s earnings
Legal capital reserve			—				—				—				16,160,501				—				(16,160,501	)			—
Special capital reserve			—				—				—				—				5,120,827				(5,120,827	)			—
Cash dividends to shareholders - NT$3.00 per share			—				—				—				—				—				(77,730,236	)			(77,730,236	)
Net income in 2011			—				—				—				—				—				134,201,279				134,201,279
Adjustment arising from changes in percentage of ownership in equity method investees			—				—				59,898				—				—				—				—
Translation adjustments			—				—				—				—				—				—				—
Issuance of stock from exercising employee stock options			7,144				71,439				146,258				—				—				—				—
Net changes of valuation gain/loss on available-for-sale financial assets			—				—				—				—				—				—				—
Net change in shareholders’ equity from equity method investees			—				—				(56,094	)			—				—				—				—
Net change in unrealized gain/loss on hedging derivative financial instruments			—				—				—				—				—				—				—
Acquisition of treasury stock - shareholders executed the appraisal right			—				—				—				—				—				—				—
Retirement of treasury stock			(1,000	)			(10,000	)			(2,139	)			—				—				(59,459	)			(59,459	)
Decrease in minority interests			—				—				—				—				—				—				—
Effect of changes in consolidated entities			—				—				—				—				—				—				—
BALANCE, DECEMBER 31, 2011			25,916,222				259,162,226				55,846,357				102,399,995				6,433,874				213,357,286				322,191,155
Appropriations of prior year’s earnings
Legal capital reserve			—				—				—				13,420,128				—				(13,420,128	)			—
Special capital reserve			—				—				—				—				1,172,350				(1,172,350	)			—
Cash dividends to shareholders - NT$3.00 per share			—				—				—				—				—				(77,748,668	)			(77,748,668	)
Net income in 2012			—				—				—				—				—				166,158,802				166,158,802
Adjustment arising from changes in percentage of ownership in equity method investees			—				—				128,595				—				—				—				—
Translation adjustments			—				—				—				—				—				—				—
Net loss not recognized as pension cost			—				—				—				—				—				—				—
Issuance of stock from exercising employee stock options			8,213				82,131				160,357				—				—				—				—
Stock option compensation cost			—				—				2,500				—				—				—				—
Net changes of valuation gain/loss on available-for-sale financial assets			—				—				—				—				—				—				—
Net change in shareholders’ equity from equity method investees			—				—				—				—				—				—				—
Net change in unrealized gain/loss on hedging derivative financial instruments			—				—				—				—				—				—				—
Increase in minority interests			—				—				—				—				—				—				—
BALANCE, DECEMBER 31, 2012			25,924,435			$	259,244,357			$	56,137,809			$	115,820,123			$	7,606,224			$	287,174,942			$	410,601,289

 

		Equity Attributable to Shareholders of the Parent
		Others
		Cumulative Translation Adjustments				Net Loss Not Recognized as Pension Cost				Unrealized Gain/Loss on Financial Instruments																Total Shareholders’ Equity
														Treasury Stock				Total				Minority Interests
BALANCE, JANUARY 1, 2011		$	(6,543,163	)		$	—			$	109,289			$	—			$	574,144,918			$	4,559,487			$	578,704,405
Appropriations of prior year’s earnings
Legal capital reserve			—				—				—				—				—				—				—
Special capital reserve			—				—				—				—				—				—				—
Cash dividends to shareholders - NT$3.00 per share			—				—				—				—				(77,730,236	)			—				(77,730,236	)
Net income in 2011			—				—				—				—				134,201,279				251,981				134,453,260
Adjustment arising from changes in percentage of ownership in equity method investees			—				—				—				—				59,898				1,152				61,050
Translation adjustments			109,794				—				—				—				109,794				7,587				117,381
Issuance of stock from exercising employee stock options			—				—				—				—				217,697				—				217,697
Net changes of valuation gain/loss on available-for-sale financial assets			—				—				(1,241,249	)			—				(1,241,249	)			(3,325	)			(1,244,574	)
Net change in shareholders’ equity from equity method investees			—				—				(41,133	)			—				(97,227	)			—				(97,227	)
Net change in unrealized gain/loss on hedging derivative financial instruments			—				—				238				—				238				344				582
Acquisition of treasury stock - shareholders executed the appraisal right			—				—				—				(71,598	)			(71,598	)			—				(71,598	)
Retirement of treasury stock			—				—				—				71,598				—				—				—
Decrease in minority interests			—				—				—				—				—				(379,334	)			(379,334	)
Effect of changes in consolidated entities			—				—				—				—				—				(1,987,855	)			(1,987,855	)
BALANCE, DECEMBER 31, 2011			(6,433,369	)			—				(1,172,855	)			—				629,593,514				2,450,037				632,043,551
Appropriations of prior year’s earnings
Legal capital reserve			—				—				—				—				—				—				—
Special capital reserve			—				—				—				—				—				—				—
Cash dividends to shareholders - NT$3.00 per share			—				—				—				—				(77,748,668	)			—				(77,748,668	)
Net income in 2012			—				—				—				—				166,158,802				(195,113	)			165,963,689
Adjustment arising from changes in percentage of ownership in equity method investees			—				—				—				—				128,595				(38,233	)			90,362
Translation adjustments			(4,320,394	)			—				—				—				(4,320,394	)			52,900				(4,267,494	)
Net loss not recognized as pension cost			—				(4,416	)			—				—				(4,416	)			—				(4,416	)
Issuance of stock from exercising employee stock options			—				—				—				—				242,488				—				242,488
Stock option compensation cost			—				—				—				—				2,500				3,719				6,219
Net changes of valuation gain/loss on available-for-sale financial assets			—				—				9,128,633				—				9,128,633				(3,664	)			9,124,969
Net change in shareholders’ equity from equity method investees			—				(883	)			17,450				—				16,567				—				16,567
Net change in unrealized gain/loss on hedging derivative financial instruments			—				—				93				—				93				139				232
Increase in minority interests			—				—				—				—				—				286,200				286,200
BALANCE, DECEMBER 31, 2012		$	(10,753,763	)		$	(5,299	)		$	7,973,321			$	—			$	723,197,714			$	2,555,985			$	725,753,699

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

 

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Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of New Taiwan Dollars)

 

 

		2012				2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income attributable to shareholders of the parent		$	166,158,802			$	134,201,279
Net income (loss) attributable to minority interests			(195,113	)			251,981
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			131,349,289				107,681,521
Unrealized gross profit from affiliates			25,029				74,029
Amortization of premium/discount of financial assets			4,850				24,711
Stock option compensation cost			6,219				—
Impairment loss of financial assets			4,231,602				265,515
Gain on disposal of available-for-sale financial assets, net			(399,598	)			(212,442	)
Gain on disposal of financial assets carried at cost, net			(141,491	)			(20,772	)
Equity in earnings of equity method investees, net			(2,028,611	)			(897,611	)
Cash dividends received from equity method investees			2,088,472				2,848,141
Gain on disposal of property, plant and equipment and other assets, net			(103	)			(3,286	)
Settlement income from receiving equity securities			(886	)			(158,779	)
Impairment loss on idle assets			444,505				98,009
Deferred income tax			573,234				(491,122	)
Changes in operating assets and liabilities:
Financial assets and liabilities at fair value through profit or loss			(22,311	)			(13,734	)
Receivables from related parties			(168,047	)			123,265
Notes and accounts receivable			(11,936,558	)			3,627,110
Allowance for doubtful receivables			(10,633	)			(12,844	)
Allowance for sales returns and others			975,853				(2,478,001	)
Other receivables from related parties			(63,258	)			2,294
Other financial assets			122,322				376,342
Inventories			(12,989,916	)			2,611,297
Prepaid expenses and other current assets			(626,405	)			(403,762	)
Accounts payable			1,395,907				(1,968,820	)
Payables to related parties			(605,182	)			462,578
Income tax payable			4,979,470				3,490,268
Salary and bonus payable			1,386,797				(275,565	)
Accrued profit sharing to employees and bonus to directors and supervisors			2,105,298				(1,925,594	)
Accrued expenses and other current liabilities			2,337,647				212,128
Accrued pension cost			66,617				98,915
Net cash provided by operating activities			289,063,801				247,587,051

 

(Continued)

 

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Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of New Taiwan Dollars)

 

 

		2012				2011
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of:
Property, plant and equipment		$	(246,137,361	)		$	(213,962,521	)
Available-for-sale financial assets			(31,525,876	)			(35,088,394	)
Held-to-maturity financial assets			—				(584,280	)
Financial assets carried at cost			(56,512	)			(403,908	)
Proceeds from disposal or redemption of:
Available-for-sale financial assets			964,367				59,305,023
Held-to-maturity financial assets			2,711,440				4,789,000
Financial assets carried at cost			353,656				226,226
Property, plant and equipment and other assets			157,484				698,055
Increase in deferred charges			(1,782,299	)			(1,715,892	)
Decrease in refundable deposits			2,092,151				4,149,543
Decrease in other assets			26,688				63,723
Net cash used in investing activities			(273,196,262	)			(182,523,425	)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term loans			8,788,401				(5,287,416	)
Cash dividends			(77,748,668	)			(77,730,236	)
Proceeds from long-term bank loans			50,000				2,250,000
Repayment of long-term bank loans			(212,500	)			(1,142,968	)
Proceeds from issuance of bonds			62,000,000				18,000,000
Repayment of bonds			(4,500,000	)			—
Decrease in obligations under capital leases			(108,863	)			—
Decrease in other long-term payables			(2,367,866	)			(3,633,052	)
Decrease in guarantee deposits			(240,093	)			(342,242	)
Proceeds from exercise of employee stock options			242,488				217,697
Acquisition of treasury stock			—				(71,598	)
Increase (decrease) in minority interests			286,200				(118,226	)
Net cash used in financing activities			(13,810,901	)			(67,858,041	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			2,056,638				(2,794,415	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS			(2,118,327	)			(147,682	)
EFFECT OF CHANGES IN CONSOLIDATED ENTITIES			—				(1,472,581	)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR			143,472,277				147,886,955
CASH AND CASH EQUIVALENTS, END OF YEAR		$	143,410,588			$	143,472,277

 

(Continued)

 

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Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(In Thousands of New Taiwan Dollars)

 

 

		2012				2011
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid		$	736,607			$	540,611
Capitalized interest			(6,442	)			(9,093	)
Interest paid (excluding capitalized interest)		$	730,165			$	531,518
Income tax paid		$	11,312,039			$	7,677,085
INVESTING ACTIVITIES AFFECTING BOTH CASH AND NON-CASH ITEMS
Acquisition of property, plant and equipment		$	257,689,153			$	207,175,565
Decrease (increase) in payables to contractors and equipment suppliers			(11,551,723	)			6,846,682
Nonmonetary exchange trade-out price			(69	)			(3,164	)
Increase in other liabilities			—				(56,562	)
Cash paid		$	246,137,361			$	213,962,521
Disposal of property, plant and equipment and other assets		$	157,553			$	543,219
Decrease in other financial assets			—				158,000
Nonmonetary exchange trade-out price			(69	)			(3,164	)
Cash received		$	157,484			$	698,055
Acquisition of deferred charges		$	2,253,722			$	1,715,892
Increase in accounts payable			(303,584	)			—
Increase in payables to related parties			(25,274	)			—
Increase in other long-term payables			(142,565	)			—
Cash paid		$	1,782,299			$	1,715,892
NON-CASH INVESTING AND FINANCING ACTIVITIES
Idle assets reclassified from property, plant and equipment		$	444,505			$	98,009
Current portion of other long-term payables (under accrued expenses and other current liabilities)		$	913,485			$	3,399,855
Current portion of bonds payable		$	—			$	4,500,000
Current portion of long-term bank loans		$	128,125			$	62,500

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

 

(Concluded)

 

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Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(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. Beginning in 2010, TSMC also engages in the researching, developing, designing, manufacturing and selling of solid state lighting devices and related applications products and systems, and renewable energy and efficiency related technologies and products. In August 2011, TSMC transferred its solid state lighting and solar businesses into its wholly-owned, newly incorporated subsidiaries, TSMC Solid State Lighting Ltd. (TSMC SSL) and TSMC Solar Ltd. (TSMC Solar), respectively.

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).

As of December 31, 2012 and 2011, TSMC and its subsidiaries had 39,267 and 35,457 employees, respectively.

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements are presented in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers and accounting principles generally accepted in the R.O.C.

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.

Significant accounting policies are summarized as follows:

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of all directly and indirectly majority owned subsidiaries of TSMC, and the accounts of investees in which TSMC’s ownership percentage is less than 50% but over which TSMC has a controlling interest. All significant intercompany balances and transactions are eliminated upon consolidation.

 

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The consolidated entities were as follows:

 

				Percentage of Ownership December 31
Name of Investor		Name of Investee		2012				2011				Remark
TSMC		TSMC North America			100	%			100	%		—
		TSMC Japan Limited (TSMC Japan)			100	%			100	%		—
		TSMC Partners, Ltd. (TSMC Partners)			100	%			100	%		—
		TSMC Korea Limited (TSMC Korea)			100	%			100	%		—
		TSMC Europe B.V. (TSMC Europe)			100	%			100	%		—
		TSMC Global, Ltd. (TSMC Global)			100	%			100	%		—
		TSMC China Company Limited (TSMC China)			100	%			100	%		—
		VentureTech Alliance Fund III, L.P. (VTAF III)			50	%			53	%		(Note 1)
		VentureTech Alliance Fund II, L.P. (VTAF II)			98	%			98	%		—
		Emerging Alliance Fund, L.P. (Emerging Alliance)			99.5	%			99.5	%		—
		Global Unichip Corporation (GUC)			(Note 2)				(Note 2)			—
		Xintec Inc. (Xintec)			40	%			40	%		TSMC obtained three out of five director positions and has a controlling interest in Xintec
		TSMC SSL			95	%			100	%		Established in August 2011 TSMC and TSMC GN aggregately have a controlling interest of 96% in TSMC SSL
		TSMC Solar			99	%			100	%		Established in August 2011 TSMC and TSMC GN aggregately have a controlling interest of 99% in TSMC Solar
		TSMC Guang Neng Investment, Ltd. (TSMC GN)			100	%			—			Established in January 2012
TSMC Partners		TSMC Design Technology Canada Inc. (TSMC Canada)			100	%			100	%		—
		TSMC Technology, Inc. (TSMC Technology)			100	%			100	%		—
		TSMC Development, Inc. (TSMC Development)			100	%			100	%		—
		InveStar Semiconductor Development Fund, Inc. (ISDF)			97	%			97	%		—
		InveStar Semiconductor Development Fund, Inc. (II) LDC. (ISDF II)			97	%			97	%		—
TSMC Development		WaferTech, LLC (WaferTech)			100	%			100	%		—
VTAF III		Mutual-Pak Technology Co., Ltd. (Mutual-Pak)			58	%			57	%		—
		Growth Fund Limited (Growth Fund)			100	%			100	%		—
VTAF III, VTAF II and Emerging Alliance		VentureTech Alliance Holdings, LLC (VTA Holdings)			100	%			100	%		—
GUC		Global Unichip Corp.-NA (GUC-NA)			(Note 2)				(Note 2)			—
		Global Unichip Japan Co., Ltd. (GUC-Japan)			(Note 2)				(Note 2)			—
		Global Unichip Europe B.V. (GUC-Europe)			(Note 2)				(Note 2)			—
		Global Unichip (BVI) Corp. (GUC-BVI)			(Note 2)				(Note 2)			—

 

(Continued)

 

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				Percentage of  Ownership December 31
Name of Investor		Name of Investee		2012				2011				Remark
GUC-BVI		Global Unichip (Shanghai) Company, Limited (GUC-Shanghai)			(Note 2)				(Note 2)			—
TSMC SSL		TSMC Lighting North America, Inc. (TSMC Lighting NA)			100	%			100	%		(Note 1)
TSMC Solar		TSMC Solar North America, Inc. (TSMC Solar NA)			100	%			100	%		(Note 1)
		TSMC Solar Europe B.V. (TSMC Solar Europe)			100	%			100	%		(Note 1)
		VentureTech Alliance Fund III, L.P. (VTAF III)			49	%			46	%		(Note 1)
TSMC Solar Europe		TSMC Solar Europe GmbH			100	%			100	%		(Note 1)

(Concluded)

 

Note 1:		In August 2011, TSMC adjusted its investment structure by transferring TSMC Lighting NA to TSMC SSL and transferring TSMC Solar Europe, TSMC Solar NA and part of VTAF III to TSMC Solar.
Note 2:		Since July 2011, TSMC is no longer deemed to be a controlling entity of GUC and its subsidiaries due to the termination of a Shareholders’ Agreement. As a result, GUC and its subsidiaries are no longer consolidated and are accounted for using the equity method.

The following diagram presents information regarding the relationship and ownership percentages between TSMC and its consolidated investees as of December 31, 2012:

 

Since July 2011, TSMC is no longer deemed to be a controlling entity of GUC and its subsidiaries due to the termination of a Shareholders’ Agreement. As a result, GUC and its subsidiaries are no longer consolidated and are accounted for using the equity method.

TSMC North America is engaged in selling and marketing of integrated circuits and semiconductor devices. TSMC Japan, TSMC Korea and TSMC Europe are engaged mainly in marketing or customer service, engineering and technical supporting activities. TSMC Partners is engaged in investment in companies involved in the design, manufacture, and other related business in the semiconductor industry. TSMC Global, TSMC Development and TSMC GN are engaged in investing activities. TSMC China is engaged in the manufacturing and selling of integrated circuits pursuant to the orders from and product design specifications provided by customers. Emerging Alliance, VTAF II, VTAF III, VTA Holdings, ISDF, ISDF II and Growth Fund are engaged in investing in new start-up technology companies. TSMC Canada and TSMC Technology are engaged mainly in engineering support activities. WaferTech is engaged in the manufacturing, selling, testing and computer-aided designing of integrated circuits and other semiconductor devices. Xintec is engaged in the provision of wafer packaging service. TSMC SSL is engaged in researching, developing, designing, manufacturing and selling solid state lighting devices and related applications products and systems. TSMC Lighting NA is engaged in selling and marketing of solid state lighting related products. TSMC Solar is engaged in researching, developing, designing, manufacturing and selling renewable energy and energy saving related technologies and products. TSMC Solar NA is engaged in selling and marketing of solar related products. TSMC Solar Europe is engaged in investing activities of solar related business. TSMC Solar Europe GmbH is engaged in the selling and customer service of solar cell modules and related products. Mutual-Pak is engaged in the manufacturing and selling of electronic parts and researching, developing and testing of RFID.

 

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TSMC together with its subsidiaries are hereinafter referred to collectively as the “Company.”

Minority interests in the aforementioned subsidiaries are presented as a separate component of shareholders’ equity.

Foreign-currency Transactions and Translation of Foreign-currency Financial Statements

Foreign-currency transactions other than derivative contracts are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occur. Exchange gains or losses derived from foreign-currency transactions or monetary assets and liabilities denominated in foreign currencies are recognized in earnings.

At the balance sheet date, monetary assets and liabilities denominated in foreign currencies are revalued at prevailing exchange rates with the resulting gains or losses recognized in earnings.

The financial statements of foreign subsidiaries are translated into New Taiwan dollars at the following exchange rates: Assets and liabilities - spot rates at year-end; shareholders’ equity - historical rates; income and expenses - average rates during the year. The resulting translation adjustments are recorded as a separate component of shareholders’ equity.

Use of Estimates

The preparation of consolidated financial statements in conformity with the aforementioned guidelines and principles requires management to make reasonable assumptions and estimates of matters that are inherently uncertain. The actual results may differ from management’s estimates.

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 balance sheet date. Current liabilities are obligations incurred for trading purposes and obligations expected to be settled within one year from the balance sheet date. Assets and liabilities that are not classified as current are noncurrent assets and liabilities, respectively.

Cash Equivalents

Repurchase agreements collateralized by corporate bonds, short-term commercial paper and government bonds acquired with maturities of less than three months from the date of purchase are classified as cash equivalents. The carrying amount approximates fair value due to their short term nature.

Financial Assets/Liabilities at Fair Value through Profit or Loss

Derivatives that do not meet the criteria for hedge accounting are initially recognized at fair value, with transaction costs expensed as incurred. The derivatives are remeasured at fair value subsequently with changes in fair value recognized in earnings. A regular way purchase or sale of financial assets is accounted for using settlement date accounting.

 

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Fair value is estimated using valuation techniques incorporating estimates and assumptions that are consistent with prevailing market conditions. When the fair value is positive, the derivative is recognized as a financial asset; when the fair value is negative, the derivative is recognized as a financial liability.

Available-for-sale Financial Assets

Available-for-sale financial assets are initially recognized at fair value plus transaction costs that are directly attributable to the acquisition. Changes in fair value from subsequent remeasurement are reported as a separate component of shareholders’ equity. The corresponding accumulated gains or losses are recognized in earnings when the financial asset is derecognized from the balance sheet. A regular way purchase or sale of financial assets is accounted for using settlement date accounting.

Fair value is determined as follows: Money market funds - net asset values at the end of the year; and publicly traded stocks - closing prices at the end of the year.

Cash dividends are recognized as investment income upon resolution of shareholders of an investee. Stock dividends are recorded as an increase in the number of shares held and do not affect investment income. The cost per share is recalculated based on the new total number of shares.

If there is objective evidence which indicates that a financial asset is impaired, a loss is recognized. For equity securities, if the fair value subsequently increases, the increase in value is recorded in shareholders’ equity.

Held-to-maturity Financial Assets

Debt securities for which the Company has a positive intention and ability to hold to maturity are categorized as held-to-maturity financial assets and are carried at amortized cost. Those financial assets are initially recognized at fair value plus transaction costs that are directly attributable to the acquisition. Gains or losses are recognized at the time of derecognition, impairment or amortization. A regular way purchase or sale of financial assets is accounted for using settlement date accounting.

If there is objective evidence which indicates that a financial asset is impaired, a loss is recognized. If, in a subsequent period, the amount of the impairment loss decreases and the decrease is clearly attributable to an event which occurred after the impairment loss was recognized, the previously recognized impairment loss is reversed to the extent of the decrease. The reversal may not result in a carrying amount that exceeds the amortized cost that would have been determined as if no impairment loss had been recognized.

Hedging Derivative Financial Instruments

Hedge derivatives are mainly derivatives instruments that are for cash flow hedge purposes and determined to be an effective hedge. The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognized in shareholders’ equity. The amount recognized in shareholders’ equity is recognized in profit or loss in the same year or year during which the hedged forecast transaction or an asset or liability arising from the hedged forecast transaction affects profit or loss. However, if all or a portion of a loss recognized in shareholders’ equity is not expected to be recovered in the future, the amount that is not expected to be recovered is reclassified into profit or loss.

 

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Financial Assets Carried at Cost

Investments for which the Company does not exercise significant influence and that do not have a quoted market price in an active market and whose fair value cannot be reliably measured, such as non-publicly traded stocks and mutual funds, are carried at their original cost. The costs of non-publicly traded stocks and mutual funds are determined using the weighted-average method. If there is objective evidence which indicates that a financial asset is impaired, a loss is recognized. A subsequent reversal of such impairment loss is not allowed.

The accounting treatment for cash dividends and stock dividends arising from financial assets carried at cost is the same as that for cash and stock dividends arising from available-for-sale financial assets.

Allowance for Doubtful Receivables

An allowance for doubtful receivables is provided based on a review of the collectability of receivables. The Company assesses the collectability of receivables by performing the account aging analysis and examining current trends in the credit quality of its customers.

TSMC’s provision was originally set at 1% of the amount of outstanding receivables. On January 1, 2011, the Company adopted the third revision of Statement of Financial Accounting Standards (SFAS) No. 34, “Financial Instruments: Recognition and Measurement (SFAS No. 34).” One of the main revisions is that the impairment of receivables originated by the Company is subject to the provisions of SFAS No. 34. Accordingly, the Company evaluates for indication of impairment of accounts receivable based on an individual and collective basis at the end of each reporting period. When objective evidence indicates that the estimated future cash flow of accounts receivable decreases as a result of one or more events that occurred after the initial recognition of the accounts receivable, such accounts receivable are deemed to be impaired.

Because of the Company’s short average collection period, the amount of the impairment loss recognized is the difference between the carrying amount of accounts receivable and estimated future cash flows without considering the discounting effect. Changes in the carrying amount of the allowance account are recognized as bad debt expense which is recorded in the operating expenses - general and administrative. When accounts receivable are considered uncollectable, the amount is written off against the allowance account.

Inventories

Inventories are recorded at standard cost and adjusted to approximate weighted-average cost on the balance sheet date.

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

Investments Accounted for Using Equity Method

Investments in companies wherein the Company exercises significant influence over the operating and financial policy decisions are accounted for using the equity method. The Company’s share of the net income or net loss of an investee is recognized in the “equity in earnings/losses of equity method investees, net” account. The cost of an investment shall be analyzed and the cost of investment in excess of the fair value of identifiable net assets acquired, representing goodwill, shall not be amortized. If the fair value of identifiable net assets acquired exceeds the cost of investment, the excess shall be proportionately allocated as reductions to fair values of non-current assets (except for financial assets other than investments accounted for using the equity method and deferred income tax assets).

 

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When an indication of impairment is identified, the carrying amount of the investment is reduced by the difference of the carrying amount (including goodwill) of each investment and its own recoverable amount, with the related impairment loss recognized in earnings. If the recoverable amount increases in a subsequent period, the amount previously recognized as impairment would be reversed and recognized as a gain.

When the Company subscribes for additional investee’s shares at a percentage different from its existing ownership percentage, the resulting carrying amount of the investment in the investee differs from the amount of the Company’s share of the investee’s equity. The Company records such a difference as an adjustment to long-term investments with the corresponding amount charged or credited to capital surplus. Cash dividends received from an investee shall reduce the carrying amount of the investment. Stock dividends are recorded as an increase in the number of shares held and do not affect investment income.

Gains or losses on sales from the Company to equity method investees or from equity method investees to the Company are deferred in proportion to the Company’s ownership percentages in the investees until such gains or losses are realized through transactions with third parties.

If an investee’s functional currency is a foreign currency, differences will result from the translation of the investee’s financial statements into the reporting currency of the Company. Such differences are charged or credited to cumulative translation adjustments, a separate component of shareholders’ equity.

Property, Plant and Equipment, Assets Leased to Others and Idle Assets

Property, plant and equipment and assets leased to others are stated at cost less accumulated depreciation. Properties covered by agreements qualifying as capital leases are carried at the lower of the leased equipment’s market value or the present value of the minimum lease payments at the inception date of the lease, with the corresponding amount recorded as obligations under capital leases. Borrowing costs directly attributable to the acquisition or construction of property, plant and equipment are capitalized as part of the cost of those assets. When an indication of impairment is identified, any excess of the carrying amount of an asset over its recoverable amount is recognized as a loss. If the recoverable amount increases in a subsequent period, the amount previously recognized as impairment would be reversed and recognized as a gain. However, the adjusted amount may not exceed the carrying amount that would have been determined, net of depreciation, as if no impairment loss had been recognized. Significant additions, renewals and betterments incurred during the construction period are capitalized. Maintenance and repairs are expensed as incurred.

Depreciation is computed using the straight-line method over the following estimated service lives: land improvements - 20 years; buildings - 10 to 20 years; machinery and equipment - 3 to 5 years; office equipment - 3 to 15 years; and leased assets - 20 years.

Upon sale or disposal of property, plant and equipment and assets leased to others, the related cost and accumulated depreciation are deducted from the corresponding accounts, with any gain or loss recorded as non-operating gains or losses in the year of sale or disposal.

When property, plant and equipment are determined to be idle or useless, they are transferred to idle assets at the lower of the net realizable value or carrying amount. Depreciation on the idle assets is provided continuously, and the idle assets are tested for impairment on a periodical basis.

 

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Intangible Assets

Goodwill represents the excess of the consideration paid for acquisition over the fair value of identifiable net assets acquired. Goodwill is no longer amortized and instead is tested for impairment annually, or more frequently if events or changes in circumstances suggest that the carrying amount may not be recoverable. If an event occurs or circumstances change which indicate that the fair value of goodwill is more likely than not below its carrying amount, an impairment loss is recognized. A subsequent reversal of such impairment loss is not allowed.

Deferred charges consist of technology license fees, software and system design costs and patent and others. The amounts are amortized over the following periods: Technology license fees - the estimated life of the technology or the term of the technology transfer contract; software and system design costs - 2 to 5 years; patent and others - the economic life or contract period. When an indication of impairment is identified, any excess of the carrying amount of an asset over its recoverable amount is recognized as a loss. If the recoverable amount increases in a subsequent period, the previously recognized impairment loss would be reversed and recognized as a gain. However, the adjusted amount may not exceed the carrying amount that would have been determined, net of amortization, as if no impairment loss had been recognized.

Expenditures related to research activities and those related to development activities that do not meet the criteria for capitalization are charged to expense when incurred.

Pension Costs

For employees who participate in defined contribution pension plans, pension costs are recorded based on the actual contributions made to employees’ individual pension accounts during their service periods. For employees who participate in defined benefit pension plans, pension costs are recorded based on actuarial calculations.

If additional accrued pension cost based on actuarial calculation is not in excess of the sum of the unamortized balance of prior service costs and unrecognized net transition obligation, “deferred pension cost” will be debited. Otherwise, the excess amount should be debited to “net loss not recognized as pension cost” as a deduction in stockholders’ equity.

Income Tax

The Company applies an inter-period allocation for its income tax whereby deferred income tax assets and liabilities are recognized for the tax effects of temporary differences, net operating loss carryforwards and unused tax credits. Valuation allowances are provided to the extent, if any, that it is more likely than not that deferred income tax assets will not be realized. A deferred tax asset or liability is classified as current or noncurrent in accordance with the classification of its related asset or liability. However, if a deferred tax asset or liability does not relate to an asset or liability in the financial statements, then it is classified as either current or noncurrent based on the expected length of time before it is realized or settled.

Any tax credits arising from purchases of machinery and equipment, research and development expenditures and personnel training expenditures are recognized using the flow-through method.

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

Income tax on unappropriated earnings (excluding earnings from foreign consolidated subsidiaries) at a rate of 10% is expensed in the year of shareholder approval which is the year subsequent to the year the earnings are generated.

 

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Stock-based Compensation

Employee stock options that were granted or modified in the period from January 1, 2004 to December 31, 2007 are accounted for by the interpretations issued by the Accounting Research and Development Foundation of the Republic of China. The Company adopted the intrinsic value method and any compensation cost determined using this method is recognized in earnings over the employee vesting period. Employee stock option plans that were granted or modified after December 31, 2007 are accounted for using fair value method in accordance with SFAS No. 39, “Accounting for Share-based Payment.” Under the statement, the value of the stock options granted, which is equal to the best available estimate of the number of stock options expected to vest multiplied by the grant-date fair value, is expensed on a straight-line basis over the vesting period, with a corresponding adjustment to capital surplus - employee stock options. The estimate is revised if subsequent information indicates that the number of stock options expected to vest differs from previous estimates.

Treasury Stock

Treasury stock represents the outstanding shares that the Company buys back from market, which is stated at cost and shown as a deduction in shareholders’ equity. When the Company retires treasury stock, the treasury stock account is reduced and the common stock as well as the capital surplus - additional paid-in capital are reversed on a pro rata basis. When the book value of the treasury stock exceeds the sum of the par value and additional paid-in capital, the difference is charged to capital surplus - treasury stock transactions and to retained earnings for any remaining amount. While disposing of the treasury stock, the treasury stock shall be reversed, and if the disposal value is greater than the book value, the amount in excess of the book value shall be credited to additional paid-in capital - treasury stock.

Revenue Recognition and Allowance for Sales Returns and Others

The Company recognizes revenue when evidence of an arrangement exists, the rewards of ownership and significant risk of the goods has been transferred to the buyer, price is fixed or determinable, and collectability is reasonably assured. Provisions for estimated sales returns and other allowances are recorded in the year the related revenue is recognized, based on historical experience, management’s judgment, and any known factors that would significantly affect the allowance.

Sales prices are determined using fair value taking into account related sales discounts agreed to by the Company and its customers. Sales agreements typically provide that payment is due 30 days from invoice date for a majority of the customers and 30 to 45 days after the end of the month in which sales occur for some customers. Since the receivables from sales are collectible within one year and such transactions are frequent, fair value of the receivables is equivalent to the nominal amount of the cash to be received.

 

3.	ACCOUNTING CHANGES

On January 1, 2011, the Company prospectively adopted the newly revised SFAS No. 34, “Financial Instruments: Recognition and Measurement.” The main revisions include (1) finance lease receivables are now covered by SFAS No. 34; (2) the scope of the applicability of SFAS No. 34 to insurance contracts is amended; (3) loans and receivables originated by the Company are now covered by SFAS No. 34; (4) additional guidelines on impairment testing of financial assets carried at amortized cost when the debtor has financial difficulties and the terms of obligations have been modified; and (5) accounting treatment by a debtor for modifications in the terms of obligations. This accounting change did not have a significant effect on the Company’s consolidated financial statements as of and for the year ended December 31, 2011.

 

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On January 1, 2011, the Company adopted the newly issued SFAS No. 41, “Operating Segments.” The statement requires identification and disclosure of operating segments on the basis of how the Company’s chief operating decision maker regularly reviews information in order to allocate resources and assess performance. This statement supersedes SFAS No. 20, “Segment Reporting” and the Company conformed to the disclosure requirement and provided the operating segments disclosure in the consolidated financial statements accordingly.

 

4.	CASH AND CASH EQUIVALENTS

 

		December 31
		2012				2011
Cash and deposits in banks		$	140,072,294			$	139,637,363
Repurchase agreements collateralized by corporate bonds			2,691,042				—
Repurchase agreements collateralized by short-term commercial paper			349,341				—
Repurchase agreements collateralized by government bonds			297,911				3,834,914
		$	143,410,588			$	143,472,277

 

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

 

		December 31
		2012				2011
Trading financial assets
Forward exchange contracts		$	38,607			$	15,360
Cross currency swap contracts			947				—
		$	39,554			$	15,360
Trading financial liabilities
Forward exchange contracts		$	12,174			$	13,623
Cross currency swap contracts			3,451				119
		$	15,625			$	13,742

The Company entered into derivative contracts during the years ended December 31, 2012 and 2011 to manage exposures due to fluctuations of foreign exchange rates. The derivative contracts entered into by the Company did not meet the criteria for hedge accounting. Therefore, the Company did not apply hedge accounting treatment for derivative contracts.

 

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Outstanding forward exchange contracts consisted of the following:

 

		Maturity Date		Contract Amount (In Thousands)
December 31, 2012
Sell NT$/Buy EUR		January 2013		NT$9,417,062/EUR246,000
Sell US$/Buy RMB		January 2013		US$20,000/RMB124,735
Sell US$/Buy NT$		January 2013 to March 2013		US$13,700/NT$398,239
Sell NT$/Buy US$		January 2013		NT$590,403/US$20,400
Sell NT$/Buy JPY		January 2013		NT$44,110/JPY130,000
December 31, 2011
Sell EUR/Buy NT$		January 2012		EUR38,600/NT$1,528,206
Sell US$/Buy NT$		January 2012 to February 2012		US$16,900/NT$510,122
Sell US$/Buy EUR		January 2012		US$2,082/EUR1,591
Sell US$/Buy JPY		January 2012		US$3,335/JPY259,830
Sell RMB/Buy US$		January 2012		RMB1,118,705/US$177,000
Sell NT$/Buy US$		January 2012 to February 2012		NT$163,491/US$5,400

Outstanding cross currency swap contracts consisted of the following:

 

Maturity Date		Contract Amount (In Thousands)		Range of Interest Rates Paid		Range of Interest Rates Received
December 31, 2012
January 2013		US$275,000/NT$7,986,190		0.14%-0.17%			—
January 2013		NT$1,083,139/US$37,280		—			0.06	%
December 31, 2011
January 2012		NT$420,431/US$13,880		—			0.48	%

For the years ended December 31, 2012 and 2011, a net loss on derivative financial instruments was NT$252,531 thousand and a net gain on derivative financial instruments was NT$507,432 thousand, respectively.

 

6.	AVAILABLE-FOR-SALE FINANCIAL ASSETS

 

		December 31
		2012				2011
Publicly traded stocks		$	41,160,437			$	3,306,248
Money market funds			1,443				2,522
			41,161,880				3,308,770
Current portion			(2,410,635	)			(3,308,770	)
		$	38,751,245			$	—

 

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In October 2012, the Company invested ASML Holding N.V. (ASML) for EUR837,816 thousand to acquire 5% of equity with a lock-up period of 2.5 years.

For the year ended December 31, 2012, the Company recognized an impairment loss on some of the overseas publicly traded stocks in the amount of NT$2,677,529 thousand due to the significant decline in fair value.

 

7.	HELD-TO-MATURITY FINANCIAL ASSETS

 

		December 31
		2012				2011
Corporate bonds		$	5,056,973			$	8,614,527
Government bonds			—				454,320
			5,056,973				9,068,847
Current portion			(5,056,973	)			(3,825,680	)
		$	—			$	5,243,167

 

8.	ALLOWANCES FOR DOUBTFUL RECEIVABLES, SALES RETURNS AND OTHERS

Movements of the allowance for doubtful receivables were as follows:

 

		Years Ended December 31
		2012				2011
Balance, beginning of year		$	490,952			$	504,029
Provision (reversal)			450				(3,130	)
Write-off			(11,083	)			(9,707	)
Effect of changes in consolidated entities			—				(233	)
Effect of exchange rate changes			(107	)			(7	)
Balance, end of year		$	480,212			$	490,952

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

 

		Years Ended December 31
		2012				2011
Balance, beginning of year		$	5,068,263			$	7,546,264
Provision			7,187,023				3,409,855
Write-off			(6,211,170	)			(5,890,416	)
Effect of exchange rate changes			(6,113	)			2,560
Balance, end of year		$	6,038,003			$	5,068,263

 

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9.	INVENTORIES

 

		December 31
		2012				2011
Finished goods		$	6,244,824			$	3,347,849
Work in process			25,713,217				17,940,960
Raw materials			3,864,105				1,808,615
Supplies and spare parts			2,008,352				1,743,158
		$	37,830,498			$	24,840,582

Write-down of inventories to net realizable value in the amount of NT$1,558,915 thousand and NT$35,316 thousand, respectively, were included in the cost of sales for the years ended December 31, 2012 and 2011.

 

10.	INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD

 

		December 31
		2012								2011
		Carrying Amount				% of Ownership				Carrying Amount				% of Ownership
Vanguard International Semiconductor Corporation (VIS)		$	9,462,038				40			$	8,988,007				39
Systems on Silicon Manufacturing Company Pte Ltd. (SSMC)			6,710,956				39				6,289,429				39
Motech Industries Inc. (Motech)			2,998,413				20				5,612,344				20
VisEra Holding Company (VisEra Holding)			3,035,641				49				2,853,364				49
GUC			1,222,972				35				1,157,188				35
Mcube Inc. (Mcube)			—				25				—				25
		$	23,430,020							$	24,900,332

Since July 2011, TSMC is no longer deemed to be a controlling entity of GUC and its subsidiaries due to the termination of a Shareholders’ Agreement. As a result, GUC and its subsidiaries are no longer consolidated and are accounted for using the equity method.

For the year ended December 31, 2012, the Company recognized an impairment loss in the amount of NT$1,186,674 thousand, due to the lower estimated recoverable amount compared with the carrying amount of its investments in stocks traded on the Taiwan GreTai Securities Market.

For the years ended December 31, 2012 and 2011, equity in earnings of equity method investees was a net gain of NT$2,028,611 thousand and NT$897,611 thousand, respectively.

As of December 31, 2012 and 2011, the quoted market price of publicly traded stocks in unrestricted investments accounted for using the equity method (VIS and GUC) were NT$17,350,833 thousand and NT$11,273,200 thousand, respectively.

 

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Movements of the difference between the cost of investments and the Company’s share in investees’ net assets allocated to depreciable assets were as follows:

 

		Years Ended December 31
		2012				2011
Balance, beginning of year		$	1,645,810			$	2,491,891
Amortization			(501,779	)			(846,081	)
Balance, end of year		$	1,144,031			$	1,645,810

As of December 31, 2012 and 2011, balance of the aforementioned difference allocated to goodwill was NT$1,415,565 thousand. There was no acquisition or impairment in goodwill for the years ended December 31, 2012 and 2011.

 

11.	HEDGING DERIVATIVE FINANCIAL INSTRUMENTS

 

		December 31
		2012				2011
Hedging derivative financial liabilities
Interest rate swap contract		$	—			$	232

The Company entered into forward exchange contracts to hedge cash flow risk arising from foreign exchange rate fluctuations of an expected equity security transaction. The forward exchange contract was due in October 2012. For the year ended December 31, 2012, the adjustment to shareholders’ equity amounted to a net gain of NT$8,833 thousand for the above forward exchange contracts.

The Company’s long-term bank loans bear floating interest rates; therefore, changes in the market interest rate may cause future cash flows to be volatile. Accordingly, the Company entered into an interest rate swap contract in order to hedge cash flow risk caused by floating interest rates. The interest rate swap contract of the Company was due in August 2012.

The outstanding interest rate swap contract consisted of the following:

 

Contract Amount (In Thousands)		Maturity Date		Range of Interest Rates Paid				Range of Interest Rates Received
December 31, 2011
NT$80,000		August 31, 2012			1.38	%		0.63%-0.86%

For the years ended December 31, 2012 and 2011, the adjustment to shareholders’ equity amounted to a net gain of NT$5 thousand and a net loss of NT$98 thousand, respectively; and the amount removed from shareholders’ equity and recognized as a loss from the above interest rate swap contract amounted to NT$227 thousand and NT$680 thousand, respectively.

 

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12.	FINANCIAL ASSETS CARRIED AT COST

 

		December 31
		2012				2011
Non-publicly traded stocks		$	3,314,713			$	4,004,314
Mutual funds			290,364				310,691
		$	3,605,077			$	4,315,005

The common stock of InvenSense, Inc. and Audience, Inc. was listed on the NYSE and NASDAQ in November 2011 and in May 2012, respectively. Thus, the Company reclassified the aforementioned investments from financial assets carried at cost to available-for-sale financial assets.

For the years ended December 31, 2012 and 2011, the Company recognized impairment on financial assets carried at cost of NT$367,399 thousand and NT$265,515 thousand, respectively.

 

13.	PROPERTY, PLANT AND EQUIPMENT

 

		Year Ended December 31, 2012
		Balance, Beginning of Year				Additions				Disposals				Reclassification				Effect of Exchange Rate Changes				Balance, End of Year
Cost
Land and land improvements		$	1,541,128			$	18,500			$	—			$	—			$	(32,504	)		$	1,527,124
Buildings			172,872,550				25,183,927				(26,789	)			(11,074	)			(703,937	)			197,314,677
Machinery and equipment			1,057,588,736				226,497,664				(2,024,948	)			(456,577	)			(2,437,156	)			1,279,167,719
Office equipment			16,969,266				3,658,525				(563,454	)			35				(90,650	)			19,973,722
Leased asset			791,480				—				—				—				(24,748	)			766,732
			1,249,763,160			$	255,358,616			$	(2,615,191	)		$	(467,616	)		$	(3,288,995	)			1,498,749,974
Accumulated depreciation
Land and land improvements			355,555			$	26,983			$	—			$	—			$	(15,169	)			367,369
Buildings			101,004,047				11,148,134				(24,528	)			(164	)			(390,192	)			111,737,297
Machinery and equipment			762,774,355				116,070,821				(1,886,797	)			(45,137	)			(2,127,820	)			874,785,422
Office equipment			11,820,728				1,875,785				(555,485	)			8				(74,689	)			13,066,347
Leased asset			297,535				40,135				—				—				(9,601	)			328,069
			876,252,220			$	129,161,858			$	(2,466,810	)		$	(45,293	)		$	(2,617,471	)			1,000,284,504
Advance payments and construction in progress			116,863,976			$	2,330,537			$	—			$	(30,707	)		$	(99,830	)			119,063,976
		$	490,374,916																			$	617,529,446

 

		Year Ended December 31, 2011
		Balance, Beginning of Year				Additions				Disposals				Reclassification				Effect of Changes in Consolidated Entities				Effect of Exchange Rate Changes				Balance, End of Year
Cost
Land and land improvements		$	891,197			$	652,011			$	—			$	—			$	—			$	(2,080	)		$	1,541,128
Buildings			145,966,024				26,592,895				(47,667	)			(388	)			(242,718	)			604,404				172,872,550
Machinery and equipment			913,155,252				146,048,745				(2,305,971	)			(82,475	)			(375,702	)			1,148,887				1,057,588,736
Office equipment			14,856,582				2,825,159				(431,847	)			(72,041	)			(236,153	)			27,566				16,969,266
Leased asset			701,552				56,562				—				—				—				33,366				791,480
			1,075,570,607			$	176,175,372			$	(2,785,485	)		$	(154,904	)		$	(854,573	)		$	1,812,143				1,249,763,160
Accumulated depreciation
Land and land improvements			328,792			$	26,805			$	—			$	—			$	—			$	(42	)			355,555
Buildings			90,472,703				10,343,346				(21,452	)			(55	)			(32,791	)			242,296				101,004,047
Machinery and equipment			671,268,636				93,499,249				(2,252,415	)			(31,287	)			(293,605	)			583,777				762,774,355
Office equipment			10,957,676				1,430,941				(427,103	)			(13,563	)			(148,862	)			21,639				11,820,728
Leased asset			250,350				34,646				—				—				—				12,539				297,535
			773,278,157			$	105,334,987			$	(2,700,970	)		$	(44,905	)		$	(475,258	)		$	860,209				876,252,220
Advance payments and construction in progress			86,151,573			$	31,000,193			$	(455,372	)		$	(2,091	)		$	—			$	169,673				116,863,976
		$	388,444,023																							$	490,374,916

The Company entered into agreements to lease buildings that qualify as capital leases. The term of the leases is from December 2003 to November 2018.

 

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As of December 31, 2012, future lease payments were as follows:

 

Year		Amount
2013		$	27,042
2014			27,042
2015			27,042
2016			27,042
2017			27,042
2018 and thereafter			729,566
		$	864,776

During the years ended December 31, 2012 and 2011, the Company capitalized the borrowing costs directly attributable to the acquisition or construction of property, plant and equipment. Information about capitalized interest was as follows:

 

		Years Ended December 31
		2012		2011
Capitalized interest		$6,442		$9,093
Capitalization rates		1.08%-1.20%		1.07%-1.29%

 

14.	DEFERRED CHARGES, NET

 

		Year Ended December 31, 2012
		Balance, Beginning of Year				Additions				Amortization				Reclassification				Effect of Exchange Rate Changes				Balance, End of Year
Technology license fees		$	1,682,892			$	31,022			$	(442,467	)		$	191,580			$	(1,134	)		$	1,461,893
Software and system design costs			2,366,483				1,795,360				(1,143,493	)			(48,912	)			(496	)			2,968,942
Patent and others			1,118,189				427,340				(594,815	)			57,438				(3,125	)			1,005,027
		$	5,167,564			$	2,253,722			$	(2,180,775	)		$	200,106			$	(4,755	)		$	5,435,862

 

		Year Ended December 31, 2011
		Balance, Beginning of Year				Additions				Amortization				Disposals				Reclassification				Effect of Changes in Consolidated Entities				Effect of Exchange Rate Changes				Balance, End of Year
Technology license fees		$	2,455,348			$	10,308			$	(716,067	)		$	—			$	—			$	(66,186	)		$	(511	)		$	1,682,892
Software and system design costs			2,333,271				1,360,846				(1,152,331	)			(46	)			2,091				(177,916	)			568				2,366,483
Patent and others			1,238,466				344,738				(469,172	)			—				—				—				4,157				1,118,189
		$	6,027,085			$	1,715,892			$	(2,337,570	)		$	(46	)		$	2,091			$	(244,102	)		$	4,214			$	5,167,564

 

15.	SHORT-TERM LOANS

 

		December 31
		2012				2011
Unsecured loans:
US$1,195,500 thousand, due in January 2013, and annual interest at 0.39%-0.58% in 2012; US$856,000 thousand, due by February 2012, and annual interest at 0.45%-1.00% in 2011		$	34,714,929			$	25,926,528

 

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16.	BONDS PAYABLE

 

		December 31
		2012				2011
Domestic unsecured bonds:
Issued in September 2011 and repayable in September 2016, 1.40% interest payable annually		$	10,500,000			$	10,500,000
Issued in September 2011 and repayable in September 2018, 1.63% interest payable annually			7,500,000				7,500,000
Issued in January 2012 and repayable in January 2017, 1.29% interest payable annually			10,000,000				—
Issued in January 2012 and repayable in January 2019, 1.46% interest payable annually			7,000,000				—
Issued in August 2012 and repayable in August 2017, 1.28% interest payable annually			9,900,000				—
Issued in August 2012 and repayable in August 2019, 1.40% interest payable annually			9,000,000				—
Issued in September 2012 and repayable in September 2017, 1.28% interest payable annually			12,700,000				—
Issued in September 2012 and repayable in September 2019, 1.39% interest payable annually			9,000,000				—
Issued in October 2012 and repayable in October 2022, 1.53% interest payable annually			4,400,000				—
Issued in January 2002 and repayable in January 2012, 3.00% interest payable annually			—				4,500,000
			80,000,000				22,500,000
Current portion			—				(4,500,000	)
		$	80,000,000			$	18,000,000

With the approval from the Financial Supervisory Commission (FSC), the Company issued domestic unsecured bonds in the amount of NT$23,600,000 thousand in January 2013 and is expected to issue domestic unsecured bonds in the amount of NT$21,400,000 thousand in February 2013.

The provision of a loan guarantee to TSMC Global, a subsidiary of TSMC, for its issuance of unsecured corporate bonds for an amount not to exceed US$1,500,000 thousand had been approved in the meeting of the Board of Directors of TSMC held on February 5, 2013.

 

17.	LONG-TERM BANK LOANS

 

		December 31
		2012				2011
Bank loans for working capital:
Repayable in full in one lump sum payment in June 2016, annual interest at 1.08%-1.21% in 2012 and 1.00%-1.08% in 2011		$	550,000			$	650,000
Repayable in full in one lump sum payment in March 2014, annual interest at 1.16%-1.18% in 2012 and 1.02%-1.16% in 2011			450,000				500,000
Repayable from July 2012 in 16 quarterly installments, annual interest at 1.21%-1.24% in 2012 and 1.11%-1.21% in 2011			262,500				300,000

 

(Continued)

 

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		December 31
		2012				2011
Repayable from September 2012 in 16 quarterly installments, annual interest at 1.21%-1.24% in 2012 and 1.13%-1.21% in 2011		$	175,000			$	200,000
Repayable from October 2013 in 16 quarterly installments, annual interest at 1.23%-1.24% in 2012			50,000				—
			1,487,500				1,650,000
Current portion			(128,125	)			(62,500	)
		$	1,359,375			$	1,587,500

(Concluded)

Pursuant to the loan agreements, financial ratios calculated based on semi-annual and annual financial statements of Xintec must comply with predetermined financial covenants. As of December 31, 2012, Xintec was in compliance with all such financial covenants.

As of December 31, 2012, future principal repayments for the long-term bank loans were as follows:

 

Year of Repayment		Amount
2013		$	128,125
2014			587,500
2015			137,500
2016			625,000
2017			9,375
		$	1,487,500

 

18.	OTHER LONG-TERM PAYABLES

 

		December 31
		2012				2011
Payables for acquisition of property, plant and equipment (Note 30g)		$	825,447			$	3,399,855
Payables for software and system design costs			113,000				—
Payables for technology transfer			29,038				—
			967,485				3,399,855
Current portion (classified under accrued expenses and other current liabilities)			(913,485	)			(3,399,855	)
		$	54,000			$	—

As of December 31, 2012, future payments for other long-term payables were as follows:

 

Year of Payment		Amount
2013		$	913,485
2014			18,000
2015			18,000
2016			18,000
		$	967,485

 

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19.	PENSION PLANS

The pension mechanism under the Labor Pension Act (the “Act”) is deemed a defined contribution plan. Pursuant to the Act, TSMC, GUC, Xintec, Mutual-Pak, TSMC SSL and TSMC Solar have made monthly contributions equal to 6% of each employee’s monthly salary to employees’ pension accounts. Furthermore, TSMC North America, TSMC China, TSMC Europe, TSMC Canada, TSMC Solar NA and TSMC Solar Europe GmbH are required by local regulations to make monthly contributions at certain percentages of the basic salary of their employees. Pursuant to the aforementioned Act and local regulations, the Company recognized pension costs of NT$1,403,507 thousand and NT$1,297,583 thousand for the years ended December 31, 2012 and 2011, respectively.

TSMC, GUC, Xintec, TSMC SSL and TSMC Solar have defined benefit plans under the 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 aforementioned companies contribute 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.

Pension information on the defined benefit plans is summarized as follows:

 

a.

Components of net periodic pension cost for the year

 

		2012				2011
Service cost		$	129,217			$	132,995
Interest cost			160,018				167,911
Projected return on plan assets			(63,279	)			(68,067	)
Amortization			65,146				74,814
Net periodic pension cost		$	291,102			$	307,653

 

b.

Reconciliation of funded status of the plans and accrued pension cost at December 31, 2012 and 2011

 

		2012				2011
Benefit obligation
Vested benefit obligation		$	427,874			$	313,463
Nonvested benefit obligation			6,069,738				5,456,913
Accumulated benefit obligation			6,497,612				5,770,376
Additional benefits based on future salaries			3,635,749				3,443,749
Projected benefit obligation			10,133,361				9,214,125
Fair value of plan assets			(3,352,567	)			(3,120,665	)
Funded status			6,780,794				6,093,460
Unrecognized net transition obligation			(66,444	)			(74,766	)
Prior service cost			140,324				147,564
Unrecognized net loss			(2,879,665	)			(2,257,750	)
Additional liability			4,532				—
Accrued pension cost		$	3,979,541			$	3,908,508
Vested benefit		$	479,621			$	349,981
Net loss not recognized as pension cost		$	4,532			$	—

 

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		2012				2011
c.      Actuarial assumptions at December 31, 2012 and 2011
Discount rate used in determining present values			1.50%-1.75%				1.75%
Future salary increase rate			2.00%-3.00%				2.50%-3.00%
Expected rate of return on plan assets			1.75%-2.00%				2.00%
d.      Contributions to the Funds for the year		$	221,063			$	211,963
e.      Payments from the Funds for the year		$	26,119			$	7,339

 

20.	INCOME TAX

 

a.

A reconciliation of income tax expense based on “income before income tax” at the statutory rates and income tax currently payable was as follows:

 

		Years Ended December 31
		2012				2011
Income tax expense based on “income before income tax” at statutory rates		$	33,654,070			$	25,964,235
Tax effect of the following:
Tax-exempt income			(9,830,280	)			(13,832,239	)
Temporary and permanent differences			(3,020,685	)			(1,597,357	)
Additional income tax under the Alternative Minimum Tax Act			—				286,827
Additional tax at 10% on unappropriated earnings			4,193,497				6,293,384
Net operating loss carryforwards used			(647,755	)			(395,258	)
Investment tax credits used			(9,588,226	)			(6,318,215	)
Income tax currently payable		$	14,760,621			$	10,401,377

 

b.

Income tax expense consisted of the following:

 

		Years Ended December 31
		2012				2011
Income tax currently payable		$	14,760,621			$	10,401,377
Income tax adjustments on prior years			55,313				470,376
Other income tax adjustments			201,119				312,999
Net change in deferred income tax assets
Investment tax credits			7,102,848				2,304,884
Net operating loss carryforwards			182,797				224,141
Temporary differences			74,324				(71,013	)
Valuation allowance			(6,786,735	)			(2,873,378	)
Effect of changes in consolidated entities			—				(74,969	)
Income tax expense		$	15,590,287			$	10,694,417

 

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c.

Net deferred income tax assets consisted of the following:

 

		December 31
		2012				2011
Current deferred income tax assets
Investment tax credits		$	6,214,708			$	4,913,791
Temporary differences
Allowance for sales returns and others			718,044				506,172
Unrealized loss on inventories			416,555				44,013
Unrealized loss on financial instruments, net			224,618				308,929
Others			473,688				304,066
Valuation allowance			(46,411	)			(140,481	)
		$	8,001,202			$	5,936,490
Noncurrent deferred income tax assets
Investment tax credits		$	6,995,793			$	15,399,558
Net operating loss carryforwards			2,224,264				2,491,708
Temporary differences
Depreciation			1,420,778				2,280,923
Others			759,698				654,672
Valuation allowance			(6,624,518	)			(13,390,144	)
		$	4,776,015			$	7,436,717

Effective in May 2010, the Article 5 of the Income Tax Law of the Republic of China was amended, in which the income tax rate of profit-seeking enterprises would be reduced from 20% to 17%. The last amended income tax rate of 17% is retroactively applied on January 1, 2010.

Under the Article 10 of the Statute for Industrial Innovation (SII), effective in May 2010, a profit-seeking enterprise may deduct up to 15% of its research and development expenditures from its income tax payable for the year in which these expenditures are incurred, but this deduction should not exceed 30% of the income tax payable for that year. This incentive is retroactive to January 1, 2010 and effective until December 31, 2019.

Under the Income Basic Tax Act amended in August 2012, the standard deduction and the tax rate of Alternative Minimum Tax were amended from NT$1,000 thousand to be NT$500 thousand and from 10% to 12%, respectively. The amended Income Basic Tax Act is effective on January 1, 2013.

The Company has evaluated the impact from above amendments and adjusted the deferred tax assets with the resulting differences recorded as income tax expense for the year ended December 31, 2012. In addition, the Company evaluated the effect of Alternative Minimum Tax and the applicable year of the profits generated from projects exempt from income tax for a five-year period. As the Company plans to apply the tax-exempt income in later years, income tax payable is anticipated to increase and the Company will utilize available investment tax credits as an offset against income taxes. Since more investment tax credits can be utilized, valuation allowance has been adjusted down accordingly.

As of December 31, 2012, the net operating loss carryforwards generated by WaferTech, Xintec, Mutual-Pak, TSMC SSL and TSMC Solar would expire on various dates through 2023.

 

d.

Integrated income tax information:

The balance of the imputation credit account of TSMC as of December 31, 2012 and 2011 was NT$8,130,060 thousand and NT$4,003,228 thousand, respectively.

 

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The estimated and actual creditable ratios for distribution of TSMC’s earnings of 2012 and 2011 were 7.92% and 6.69%, respectively.

The imputation credit allocated to shareholders is based on its balance as of the date of the dividend distribution. The estimated creditable ratio may change when the actual distribution of the imputation credit is made.

 

e.

All of TSMC’s earnings generated prior to December 31, 1997 have been appropriated.

 

f.

As of December 31, 2012, investment tax credits of TSMC, Xintec, Mutual-Pak and TSMC SSL consisted of the following:

 

Law/Statute		Item		Total Creditable Amount				Remaining Creditable Amount				Expiry Year
Statute for Upgrading Industries		Purchase of machinery and equipment		$	6,961			$	—				2012
					6,514,226				927,549				2013
					7,045,590				7,045,590				2014
					505,215				505,215				2015
				$	14,071,992			$	8,478,354
Statute for Upgrading Industries		Research and development expenditures		$	1,179,808			$	—				2012
					4,732,147				4,732,147				2013
				$	5,911,955			$	4,732,147
Statute for Upgrading Industries		Personnel training expenditures		$	17,406			$	—				2012
Statute for Industrial Innovation		Research and development expenditures		$	2,828,300			$	—				2012

 

g.

The profits generated from the following projects of TSMC and Xintec are exempt from income tax for a five-year period:

 

		Tax-exemption Period
Construction and expansion of 2004 by TSMC		2008 to 2012
Construction and expansion of 2005 by TSMC		2010 to 2014
Construction and expansion of 2006 by TSMC		2011 to 2015
Construction and expansion of 2003 and 2006 by Xintec		2010 to 2014

 

h.

The tax authorities have examined income tax returns of TSMC through 2009. All investment tax credit adjustments assessed by the tax authorities have been recognized accordingly.

 

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21.	LABOR COST, DEPRECIATION AND AMORTIZATION

 

		Year Ended December 31, 2012
						Classified as
		Classified as				Operating
		Cost of Sales				Expenses				Total
Labor cost
Salary and bonus		$	31,326,400			$	23,070,244			$	54,396,644
Labor and health insurance			1,618,274				1,153,028				2,771,302
Pension			1,053,125				641,435				1,694,560
Meal			765,476				314,279				1,079,755
Welfare			747,446				277,803				1,025,249
Others			96,385				305,116				401,501
		$	35,607,106			$	25,761,905			$	61,369,011
Depreciation		$	118,313,581			$	10,848,277			$	129,161,858
Amortization		$	1,344,819			$	835,956			$	2,180,775

 

		Year Ended December 31, 2011
						Classified as
		Classified as				Operating
		Cost of Sales				Expenses				Total
Labor cost
Salary and bonus		$	26,548,111			$	20,686,957			$	47,235,068
Labor and health insurance			1,316,726				923,645				2,240,371
Pension			971,263				634,476				1,605,739
Meal			710,547				297,762				1,008,309
Welfare			714,628				266,891				981,519
Others			341,156				372,673				713,829
		$	30,602,431			$	23,182,404			$	53,784,835
Depreciation		$	98,065,992			$	7,261,159			$	105,327,151
Amortization		$	1,463,405			$	874,165			$	2,337,570

 

22.	SHAREHOLDERS’ EQUITY

As of December 31, 2012, 1,091,468 thousand ADSs of TSMC were traded on the NYSE. The number of common shares represented by the ADSs was 5,457,339 thousand (one ADS represents five common shares).

Capital surplus can be used to offset a deficit under the Company Law. However, the capital surplus generated from donations and the excess of the issuance price over the par value of capital stock (including the stock issued for new capital, mergers, convertible bonds and the surplus from treasury stock transactions) may be appropriated as stock dividends, which are limited to a certain percentage of TSMC’s paid-in capital. In addition, the capital surplus from long-term investments may not be used for any purpose. However, according to the revised Company Law, effective January 2012, the aforementioned capital surplus generated from donations and the excess of the issuance price over the par value of capital stock can also be used to distribute cash in proportion to original shareholders’ holding.

 

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Capital surplus consisted of the following:

 

		December 31
		2012				2011
Additional paid-in capital		$	23,934,607			$	23,774,250
From merger			22,804,510				22,804,510
From convertible bonds			8,892,847				8,892,847
From long-term investments			503,290				374,695
From employee stock options			2,500				—
Donations			55				55
		$	56,137,809			$	55,846,357

TSMC’s Articles of Incorporation provide that, when allocating the net profits for each fiscal year, TSMC shall first offset its losses in previous years and then set aside the following items accordingly:

 

a.

Legal capital reserve at 10% of the profits left over, until the accumulated legal capital reserve equals TSMC’s paid-in capital;

 

b.

Special capital reserve in accordance with relevant laws or regulations or as requested by the authorities in charge;

 

c.

Bonus to directors and profit sharing to employees of TSMC of not more than 0.3% and not less than 1% of the remainder, respectively. Directors who also serve as executive officers of TSMC are not entitled to receive the bonus to directors. TSMC may issue profit sharing to employees in stock of an affiliated company meeting the conditions set by the Board of Directors or, by the person duly authorized by the Board of Directors;

 

d.

Any balance left over shall be allocated according to the resolution of the shareholders’ meeting.

TSMC’s Articles of Incorporation also provide that profits of TSMC may be distributed by way of cash dividend and/or stock dividend. However, distribution of profits shall be made preferably by way of cash dividend. Distribution of profits may also be made by way of stock dividend; provided that the ratio for stock dividend shall not exceed 50% of the total distribution.

Any appropriations of the profits are subject to shareholders’ approval in the following year.

TSMC accrued profit sharing to employees based on certain percentage of net income during the year, which amounted to NT$11,115,240 thousand and NT$8,990,026 thousand for the years ended December 31, 2012 and 2011, respectively. Bonuses to directors were expensed based on estimated amount of payment. If the actual amounts subsequently resolved by the shareholders differ from the estimated amounts, the differences are recorded in the year of shareholders’ resolution as a change in accounting estimate. If profit sharing is resolved to be distributed to employees in stock, the number of shares is determined by dividing the amount of profit sharing by the closing price (after considering the effect of dividends) of the shares on the day preceding the shareholders’ meeting.

TSMC no longer has supervisors since January 1, 2007. The required duties of supervisors are being fulfilled by the Audit Committee.

According to the revised Company Law, effective January 2012, the appropriation for legal capital reserve shall be made until the reserve equals the Company’s paid-in capital. The reserve may be used to offset a deficit, or be distributed as dividends in cash or stocks for the portion in excess of 25% of the paid-in capital if the Company incurs no loss.

 

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A special capital reserve equivalent to the net debit balance of the other components of shareholders’ equity (for example, cumulative translation adjustments, unrealized loss on financial instruments and net loss not recognized as pension cost, but excluding treasury stock) shall be made from unappropriated earnings pursuant to existing regulations promulgated by the Securities and Futures Bureau (SFB). Any special reserve appropriated may be reversed to the extent that the net debit balance reverses.

The appropriations of earnings for 2011 and 2010 had been approved in the TSMC’s shareholders’ meetings held on June 12, 2012 and June 9, 2011, respectively. The appropriations and dividends per share were as follows:

 

		Appropriation of Earnings								Dividends Per  Share (NT$)
		For Fiscal				For Fiscal				For Fiscal				For Fiscal
		Year 2011				Year 2010				Year 2011				Year 2010
Legal capital reserve		$	13,420,128			$	16,160,501
Special capital reserve			1,172,350				5,120,827
Cash dividends to shareholders			77,748,668				77,730,236			$	3.00			$	3.00
		$	92,341,146			$	99,011,564

TSMC’s profit sharing to employees and bonus to directors in the amounts of NT$8,990,026 thousand and NT$62,324 thousand in cash for 2011, respectively, and profit sharing to employees and bonus to directors in the amounts of NT$10,908,338 thousand and NT$51,131 thousand in cash for 2010, respectively, had been approved in the shareholders’ meeting held on June 12, 2012 and June 9, 2011, respectively. The resolved amounts of the profit sharing to employees and bonus to directors were consistent with the resolutions of meeting of the Board of Directors held on February 14, 2012 and February 15, 2011 and same amount had been charged against earnings of 2011 and 2010, respectively.

TSMC’s appropriations of earnings for 2012 had been resolved in the meeting of the Board of Directors held on February 5, 2013. The appropriations and dividends per share were as follows:

 

		Appropriation of Earnings				Dividends Per Share (NT$)
		For Fiscal Year 2012				For Fiscal Year 2012
Legal capital reserve		$	16,615,880
Special capital reserve			(4,820,483	)
Cash dividends to shareholders			77,773,307			$	3.00
		$	89,568,704

The Board of Directors of TSMC also resolved to appropriate profit sharing to employees and bonus to directors in the amounts of NT$11,115,240 thousand and NT$71,351 thousand in cash for 2012, respectively. There is no significant difference between the aforementioned resolved amounts and the amounts charged against earnings of 2012.

The appropriations of earnings, profit sharing to employees and bonus to directors for 2012 are to be resolved in the TSMC’s shareholders’ meeting held on June 11, 2013 (expected).

The information about the appropriations of TSMC’s profit sharing to employees and bonus to directors is available at the Market Observation Post System website.

 

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Under the Integrated Income Tax System that became effective on January 1, 1998, the R.O.C. resident shareholders are allowed a tax credit for their proportionate share of the income tax paid by TSMC on earnings generated since January 1, 1998.

 

23.	STOCK-BASED COMPENSATION PLANS

 

a.

Under Intrinsic Value Method

TSMC’s Employee Stock Option Plans, consisting of the TSMC 2004 Plan, TSMC 2003 Plan and TSMC 2002 Plan, were approved by the SFB on January 6, 2005, October 29, 2003 and June 25, 2002, respectively. The maximum number of options authorized to be granted under the TSMC 2004 Plan, TSMC 2003 Plan and TSMC 2002 Plan was 11,000 thousand, 120,000 thousand and 100,000 thousand, respectively, with each option eligible to subscribe for one common share of TSMC when exercised. The options may be granted to qualified employees of TSMC or any of its domestic or foreign subsidiaries, in which TSMC’s shareholding with voting rights, directly or indirectly, is more than fifty percent (50%). The options of all the plans are valid for ten years and exercisable at certain percentages subsequent to the second anniversary of the grant date. Under the terms of the plans, the options are granted at an exercise price equal to the closing price of TSMC’s common shares listed on the TWSE on the grant date.

Options of the plans that had never been granted or had been granted but subsequently canceled had expired as of December 31, 2012.

Information about TSMC’s outstanding options for the years ended December 31, 2012 and 2011 was as follows:

 

		Number of Options (In Thousands)				Weighted- average Exercise Price (NT$)
Year ended December 31, 2012
Balance, beginning of year			14,293			$	31.4
Options exercised			(8,213	)			29.5
Options canceled			(135	)			34.6
Balance, end of year			5,945				34.6
Year ended December 31, 2011
Balance, beginning of year			21,437			$	31.4
Options exercised			(7,144	)			30.5
Balance, end of year			14,293				32.1

The numbers of outstanding options and exercise prices have been adjusted to reflect the distribution of earnings by TSMC in accordance with the plans.

 

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As of December 31, 2012, information about TSMC’s outstanding options was as follows:

 

		Options Outstanding
						Weighted-average
						Remaining				Weighted-average
Range of Exercise Price		Number of Options				Contractual Life				Exercise Price
(NT$)		(In Thousands)				(Years)				(NT$)
$20.2-$28.3			3,362				0.4			$	25.9
38.0-  50.1			2,583				2.0				45.8
			5,945				1.1				34.6

As of December 31, 2012, all of the above outstanding options were exercisable.

Xintec’s Employee Stock Option Plans, consisting of the Xintec 2007 Plan and Xintec 2006 Plan, were approved by the SFB on June 26, 2007 and July 3, 2006, respectively. The maximum number of options authorized to be granted under the Xintec 2007 Plan and Xintec 2006 Plan was 6,000 thousand each, with each option eligible to subscribe for one common share of Xintec when exercised. The options may be granted to qualified employees of Xintec or any of its subsidiaries. The options of Xintec 2007 Plan and Xintec 2006 Plan are valid for ten years and exercisable at certain percentages subsequent to the second anniversary of the grant date.

Information about Xintec’s outstanding options for the years ended December 31, 2012 and 2011 was as follows:

 

						Weighted-
		Number of				average
		Options				Exercise
		(In Thousands)				Price (NT$)
Year ended December 31, 2012
Balance, beginning of year			825			$	15.0
Options exercised			(291	)			17.1
Options canceled			(19	)			15.0
Balance, end of year			515				13.8
Year ended December 31, 2011
Balance, beginning of year			1,832			$	14.4
Options exercised			(967	)			14.4
Options canceled			(40	)			17.4
Balance, end of year			825				15.1

The exercise prices have been adjusted to reflect the distribution of earnings by Xintec in accordance with the plans.

 

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As of December 31, 2012, information about Xintec’s outstanding and exercisable options was as follows:

 

		Options Outstanding												Options Exercisable
						Weighted-				Weighted-								Weighted-
						average				average								average
Range of		Number of				Remaining				Exercise				Number of				Exercise
Exercise		Options (In				Contractual				Price				Options (In				Price
Price (NT$)		Thousands)				Life (Years)				(NT$)				Thousands)				(NT$)
$ 10.7-$12.5			201				3.7			$	10.7				198			$	10.7
14.8-  18.6			314				4.6				15.8				314				15.8
			515				4.2				13.8				512				13.8

No compensation cost was recognized under the intrinsic value method for the years ended December 31, 2012 and 2011. Had the Company used the fair value based method to evaluate the options using the Black-Scholes model, the valuation assumptions at the various grant dates and pro forma results of the Company for the years ended December 31, 2012 and 2011 would have been as follows:

 

		TSMC		Xintec
Valuation assumptions:
Expected dividend yield		1.00%-3.44%		0.80%
Expected volatility		43.77%-46.15%		31.79%-47.42%
Risk free interest rate		3.07%-3.85%		1.88%-2.45%
Expected life		5 years		3 years

 

		Years Ended December 31
		2012				2011
Net income attributable to shareholders of the parent:
As reported		$	166,158,802			$	134,201,279
Pro forma			165,986,009				134,146,490
Earnings per share (EPS) - after income tax (NT$):
Basic EPS as reported		$	6.41			$	5.18
Pro forma basic EPS			6.40				5.18
Diluted EPS as reported			6.41				5.18
Pro forma diluted EPS			6.40				5.17

 

b.

Under Fair Value Method

The Board of Directors of TSMC SSL and TSMC Solar resolved on November 21, 2011 to issue new shares for cash and reserved 17,175 thousand shares and 12,341 thousand shares, respectively, for their employees to subscribe to, according to the Company Law. The aforementioned shares were fully vested on the grant date.

 

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Information about TSMC SSL’s and TSMC Solar’s employee stock options related to the aforementioned new shares issued was as follows:

 

		TSMC SSL								TSMC Solar
						Weighted-								Weighted-
		Number of				average				Number of				average
		Options				Exercise				Options				Exercise
		(In Thousands)				Price (NT$)				(In Thousands)				Price (NT$)
Year ended December 31, 2012
Balance, beginning of year			—			$	—				—			$	—
Options granted			17,175				10.0				12,341				10.0
Options exercised			(17,175	)			10.0				(12,341	)			10.0
Balance, end of year			—				—				—				—

The grant date of aforementioned stock options was January 9, 2012. TSMC SSL and TSMC Solar used the Black-Scholes model to determine the fair value of the options. The valuation assumptions were as follows:

 

		TSMC SSL				TSMC Solar
Valuation assumptions:
Stock price on grant date (NT$/share)		$	8.9			$	9.0
Exercise price (NT$/share)		$	10.0			$	10.0
Expected volatility			40.32	%			40.32	%
Expected life			40 days				40 days
Risk free interest rate			0.76	%			0.76	%

The stock price on grant date was determined based on the cost approach. The expected volatility was calculated using the historical rate of return based on the TWSE Optoelectronic Index.

The fair value of the aforementioned stock option was close to nil, and accordingly, no compensation cost was recognized.

Xintec’s Employee Stock Option Plan was approved by the SFB on January 10, 2012 (the “Xintec 2011 Plan”). The maximum number of options authorized to be granted under the Xintec 2011 Plan was 6,000 thousand, with each option eligible to subscribe for one common share of Xintec when exercised. The options may be granted to qualified employees of Xintec or any of its subsidiaries. The options of Xintec 2011 Plan are valid for five years and exercisable at certain percentages subsequent to the second anniversary of the grant date.

 

						Weighted-
		Number of				average
		Options				Exercise
		(In Thousands)				Price (NT$)
Year ended December 31, 2012
Balance, beginning of year			—			$	—
Options granted			6,000				22.3
Options canceled			(472	)			22.1
Balance, end of year			5,528				22.1
Weighted-average fair value of options granted (NT$)		$	5.82

 

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The exercise prices have been adjusted to reflect the distribution of earnings by Xintec in accordance with the plan.

As of December 31, 2012, information about the outstanding and exercisable options of Xintec 2011 Plan was as follows:

 

		Options Outstanding												Options Exercisable
Range of Exercise Price (NT$)		Number of Options (In Thousands)				Weighted- average Remaining Contractual Life (Years)				Weighted- average Exercise Price (NT$)				Number of Options (In Thousands)				Weighted- average Exercise Price (NT$)
$22.1			5,528				4.5			$	22.1				—			$	—

The grant date of Xintec 2011 Plan was June 14, 2012. Xintec used the Black-Scholes model to determine the fair value of the option. The valuation assumptions were as follow:

 

		Xintec
Valuation assumptions:
Stock price on grant date (NT$/share)		$	19.42
Exercise price (NT$/share)		$	22.30
Expected volatility			43.73	%
Expected life			3.875 years
Expected dividend yield			—
Risk free interest rate			0.96	%

The stock price on grant date was determined based on the market approach. The expected volatility was calculated based on the historical stock prices of the comparative companies of Xintec.

For the year ended December 31, 2012, Xintec recognized compensation costs of the above stock option in the amount of NT$6,219 thousand.

 

24.	TREASURY STOCK

(Shares in Thousands)

Purpose of Treasury Stock		Number of Shares, Beginning of Year				Addition				Retirement				Number of Shares, End of Year
Year ended December 31, 2011
Shareholders executed the appraisal right			—				1,000				(1,000	)			—

In August 2011, at the option of the shareholders of TSMC, certain shareholders requested TSMC to buy back their shares pursuant to the Company Law, which shares were subsequently retired in November 2011.

 

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25.	EARNINGS PER SHARE

EPS is computed as follows:

 

										Number of Shares (Denominator) (In Thousands)				EPS (NT$)
		Amounts (Numerator)												Before Income Tax				After Income Tax
		Before Income Tax				After Income Tax
Year ended December 31, 2012
Basic EPS
Earnings available to common shareholders of the parent		$	181,756,619			$	166,158,802				25,920,735			$	7.01			$	6.41
Effect of dilutive potential common shares			—				—				7,201
Diluted EPS
Earnings available to common shareholders of the parent (including effect of dilutive potential common shares)		$	181,756,619			$	166,158,802				25,927,936			$	7.01			$	6.41
Year ended December 31, 2011
Basic EPS
Earnings available to common shareholders of the parent		$	144,852,948			$	134,201,279				25,914,076			$	5.59			$	5.18
Effect of dilutive potential common shares			—				—				10,606
Diluted EPS
Earnings available to common shareholders of the parent (including effect of dilutive potential common shares)		$	144,852,948			$	134,201,279				25,924,682			$	5.59			$	5.18

If the Company may settle the obligation by cash, by issuing shares, or in combination of both cash and shares, profit sharing to employees which will be settled in shares should be included in the weighted average number of shares outstanding in calculation of diluted EPS, if the shares have a dilutive effect. The number of shares is estimated by dividing the amount of profit sharing to employees in stock by the closing price (after considering the dilutive effect of dividends) of the common shares on the balance sheet date. Such dilutive effect of the potential shares needs to be included in the calculation of diluted EPS until the shares of profit sharing to employees are resolved in the shareholders’ meeting in the following year.

 

26.	DISCLOSURES FOR FINANCIAL INSTRUMENTS

 

a.

Fair values of financial instruments were as follows:

 

		December 31
		2012								2011
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
Assets
Financial assets at fair value through profit or loss		$	39,554			$	39,554			$	15,360			$	15,360
Available-for-sale financial assets			41,161,880				41,161,880				3,308,770				3,308,770
Held-to-maturity financial assets			5,056,973				5,066,363				9,068,847				9,128,063
Financial assets carried at cost			3,605,077				—				4,315,005				—

 

(Continued)

 

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		December 31
		2012								2011
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
Liabilities
Financial liabilities at fair value through profit or loss		$	15,625			$	15,625			$	13,742			$	13,742
Hedging derivative financial liabilities			—				—				232				232
Bonds payable (including current portion)			80,000,000				80,343,413				22,500,000				22,597,115
Long-term bank loans (including current portion)			1,487,500				1,487,500				1,650,000				1,650,000
Other long-term payables (including current portion)			967,485				967,485				3,399,855				3,399,855
Obligations under capital leases (including current portion)			756,305				756,305				870,993				870,993

(Concluded)

 

b.

Methods and assumptions used in the estimation of fair values of financial instruments

 

1)

The aforementioned financial instruments do not include cash and cash equivalents, receivables, other financial assets, refundable deposits, short-term loans, payables and guarantee deposits. The carrying amounts of these financial instruments approximate their fair values due to their short maturities.

 

2)

Except for derivatives, available-for-sale and held-to-maturity financial assets were based on their quoted market prices.

 

3)

The fair values of those derivatives are determined using valuation techniques incorporating estimates and assumptions that were consistent with prevailing market conditions.

 

4)

Financial assets carried at cost have no quoted prices in an active market and entail an unreasonably high cost to obtain verifiable fair values. Therefore, no fair value is presented.

 

5)

Fair value of bonds payable was based on their quoted market price.

 

6)

Fair values of long-term bank loans, other long-term payables and obligations under capital leases were based on the present value of expected cash flows, which approximate their carrying amounts.

 

c.

Valuation gains/losses arising from changes in fair value of derivatives contracts determined using valuation techniques were recognized as net gains of NT$23,929 thousand and NT$1,618 thousand for the years ended December 31, 2012 and 2011, respectively.

 

d.

As of December 31, 2012 and 2011, financial assets exposed to fair value interest rate risk were NT$5,097,970 thousand and NT$9,086,729 thousand, respectively; financial liabilities exposed to fair value interest rate risk were NT$116,312,306 thousand and NT$52,711,118 thousand, respectively; and financial liabilities exposed to cash flow interest rate risks were NT$1,487,500 thousand and NT$1,650,232 thousand, respectively.

 

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e.

Movements of the unrealized gains or losses on financial instruments for the years ended December 31, 2012 and 2011 were as follows:

 

		Year Ended December 31, 2012
		From Available- for-sale Financial Assets				Equity Method Investments				Gain (Loss) on Cash Flow Hedges				Total
Balance, beginning of year		$	(1,155,091	)		$	(17,671	)		$	(93	)		$	(1,172,855	)
Recognized directly in shareholders’ equity			7,282,331				17,450				2				7,299,783
Removed from shareholders’ equity and recognized in earnings			1,846,302				—				91				1,846,393
Balance, end of year		$	7,973,542			$	(221	)		$	—			$	7,973,321

 

		Year Ended December 31, 2011
		From Available- for-sale Financial Assets				Equity Method Investments				Gain (Loss) on Cash Flow Hedges				Total
Balance, beginning of year		$	86,158			$	23,462			$	(331	)		$	109,289
Recognized directly in shareholders’ equity			(1,034,446	)			(41,402	)			(36	)			(1,075,884	)
Removed from shareholders’ equity and recognized in earnings			(206,534	)			—				274				(206,260	)
Effect of changes in consolidated entities			(269	)			269				—				—
Balance, end of year		$	(1,155,091	)		$	(17,671	)		$	(93	)		$	(1,172,855	)

 

f.

Information about financial risks

 

1)

Market risk. The derivative financial instruments categorized as financial assets/liabilities at fair value through profit or loss are mainly used to hedge the market exchange rate fluctuations of foreign-currency assets and liabilities; therefore, the market exchange rate risk of derivatives will be offset by the foreign exchange risk of these hedged items. Available-for-sale financial assets and held-to-maturity financial assets held by the Company are mainly fixed-interest-rate debt securities and publicly traded stocks; therefore, the fluctuations in market interest rates and market prices will result in changes in fair values of these debt securities and the fluctuations in market prices will result in changes in fair values of publicly traded stocks.

 

2)

Credit risk. Credit risk represents the potential loss that would be incurred by the Company if the counter-parties or third-parties breached contracts. Financial instruments with positive fair values at the balance sheet date are evaluated for credit risk. The Company evaluated whether the financial instruments for any possible counter-parties or third-parties are reputable financial institutions, business enterprises and government agencies and accordingly, the Company believed that the Company’s exposure to credit risk was not significant.

 

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3)

Liquidity risk. The Company has sufficient operating capital and bank facilities to meet cash needs upon settlement of derivative financial instruments, bonds payable and bank loans. Therefore, the liquidity risk is low.

 

4)

Cash flow interest rate risk. The Company mainly invests in fixed-interest-rate debt securities. Therefore, cash flows are not expected to fluctuate significantly due to changes in market interest rates. The long-term bank loans were floating-rate loans; therefore, changes in the market interest rates will result in changes in the interest rate of the long-term bank loans, which will affect future cash flows.

 

g.

The Company seeks to reduce the effects of future cash flow related interest rate changes by primarily using derivative financial instruments.

The Company entered into forward exchange contracts to hedge cash flow risk arising from foreign exchange rate fluctuations of an expected equity transaction. The forward exchange contract was due in October 2012.

The Company’s long-term bank loans bear floating interest rates; therefore, changes in the market interest rate may cause future cash flows to be volatile. Accordingly, the Company entered into an interest rate swap contract in order to hedge cash flow risk caused by floating interest rates. The interest rate swap contract of the Company was due in August 2012. Information about outstanding interest rate swap contract consisted of the following:

 

Hedged Item		Hedging Financial Instrument		Fair Value				Expected Cash Flow Generated Period		Expected Timing for the Recognition of Gains or Losses from Hedge
December 31, 2011
Long-term bank loans		Interest rate swap contract		$	(232	)		2011 to 2012		2011 to 2012

 

27.	RELATED PARTY TRANSACTIONS

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

 

a.

Investees of TSMC

GUC (prior to July 2011, GUC was a subsidiary. Since July 2011, GUC is accounted for using the equity method.)

VIS (accounted for using the equity method)

SSMC (accounted for using the equity method)

 

b.

Indirect investees

VisEra Technology Company, Ltd. (VisEra) (accounted for using the equity method)

Mcube (accounted for using the equity method)

 

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c.

Others

Related parties over which the Company has significant influence but with which the Company had no material transactions.

 

		2012								2011
		Amount				%				Amount				%
For the year
Sales
GUC		$	4,880,507				1			$	2,461,345				1
VIS			177,514				—				302,844				—
Others			253,010				—				61,227				—
		$	5,311,031				1			$	2,825,416				1
Purchases
VIS		$	4,475,674				2			$	5,597,895				2
SSMC			3,638,633				1				3,949,176				2
Others			—				—				124,673				—
		$	8,114,307				3			$	9,671,744				4
Manufacturing expenses
VisEra (primarily outsourcing and rent)		$	15,544				—			$	49,155				—
VIS (rent)			8,270				—				5,902				—
Others			77				—				—				—
		$	23,891				—			$	55,057				—
Research and development expenses
VisEra		$	8,911				—			$	19,018				—
GUC			4,521				—				—				—
VIS (rent)			—				—				1,984				—
Others			123				—				—				—
		$	13,555				—			$	21,002				—
Sales of property, plant and equipment and other assets
VIS		$	20,380				13			$	36,008				7
VisEra			9,000				6				—				—
		$	29,380				19			$	36,008				7
Purchase of property, plant and equipment and other assets
GUC		$	47,051				—			$	1,812				—
VisEra			1,224				—				11,110				—
VIS			—				—				45,473				—
		$	48,275				—			$	58,395				—

 

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		2012								2011
		Amount				%				Amount				%
Non-operating income and gains
VIS (primarily technical service income)		$	261,836				4			$	227,024				4
SSMC (primarily technical service income)			221,210				3				199,377				4
Others			2,452				—				4,054				—
		$	485,498				7			$	430,455				8
As of December 31
Receivables
GUC		$	273,412				77			$	154,086				83
Mcube			80,212				23				31,466				17
Others			187				—				212				—
		$	353,811				100			$	185,764				100
Other receivables
VIS		$	128,751				69			$	87,507				72
SSMC			56,799				31				34,260				28
Others			—				—				525				—
		$	185,550				100			$	122,292				100
Refundable deposits
VIS		$	5,813				—			$	—				—
Others			4				—				—				—
		$	5,817				—			$	—				—
Payables
VIS		$	368,617				49			$	987,937				75
SSMC			351,389				47				336,037				25
Others			28,607				4				4,547				—
		$	748,613				100			$	1,328,521				100
Deferred credits (other assets)
VIS		$	(7,806	)			(1	)		$	—				—
VisEra			948				—				—				—
		$	(6,858	)			(1	)		$	—				—

The sales prices and payment terms to related parties were not significantly different from those of sales to third parties. For other related party transactions, prices and terms were determined in accordance with mutual agreements.

The Company leased certain office space and facilities from VIS. The lease terms and prices were determined in accordance with mutual agreements. The rental expense was paid monthly and the related expenses were classified under research and development expenses and manufacturing expenses.

The Company leased certain factory building from VisEra. The lease terms and prices were determined in accordance with mutual agreements. The rental expense was paid monthly and the related expenses were classified under manufacturing expenses. The lease expired in June 2011.

 

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The Company deferred the disposal gains/losses (classified under other assets and deferred credits) derived from sales of property, plant and equipment and other assets to VIS and VisEra, and then recognized such gains/losses (classified under non-operating gains and losses) over the depreciable lives of the disposed assets.

Compensation of directors and management personnel:

 

		Years Ended December 31
		2012				2011
Salaries, incentives and special compensation		$	883,177			$	752,767
Bonus			538,077				445,681
		$	1,421,254			$	1,198,448

The information about the compensation of directors and management personnel is available in the annual report for the shareholders’ meeting. Total compensation expense for the year ended December 31, 2012 includes estimated profit sharing to employees and bonus to directors of the Company that relate to 2012 but will be paid in the following year. The actual amount will be finalized and approved upon the resolution of the shareholders’ meeting in 2013. The total compensation for the year ended December 31, 2011 included the bonuses appropriated from earnings of 2011 which was approved by the shareholders’ meeting held in 2012.

 

28.	PLEDGED OR MORTGAGED ASSETS

The Company provided other financial assets as collateral mainly for building lease agreements. As of December 31, 2012 and 2011, the aforementioned other financial assets amounted to NT$119,710 thousand and NT$121,140 thousand, respectively.

 

29.	SIGNIFICANT LONG-TERM LEASES

The Company leases several parcels of land, factory and office premises from the Science Park Administration and Jhongli Industrial Park Service Center. These operating leases expire on various dates from March 2013 to July 2032 and can be renewed upon expiration.

The Company entered into lease agreements for its office premises and certain office equipment located in the United States, Japan, Shanghai and Taiwan. These operating leases expire between 2013 and 2020 and can be renewed upon expiration.

As of December 31, 2012, future lease payments were as follows:

 

Year		Amount
2013		$	693,758
2014			651,339
2015			639,099
2016			625,243
2017			562,762
2018 and thereafter			4,221,524
		$	7,393,725

 

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30.	SIGNIFICANT COMMITMENTS AND CONTINGENCIES

Significant commitments and contingencies of the Company as of December 31, 2012, excluding those disclosed in other notes, were as follows:

 

a.

Under a technical cooperation agreement with Industrial Technology Research Institute, the R.O.C. Government or its designee approved by TSMC can use up to 35% of TSMC’s capacity if TSMC’s outstanding commitments to its customers are not prejudiced. The term of this agreement is for five years beginning from January 1, 1987 and is automatically renewed for successive periods of five years unless otherwise terminated by either party with one year prior notice.

 

b.

Under a Shareholders Agreement entered into with Philips and EDB Investments Pte Ltd. on March 30, 1999, the parties formed a joint venture company, SSMC, which is an integrated circuit foundry in Singapore. TSMC’s equity interest in SSMC was 32%. Nevertheless, Philips parted with its semiconductor company which was renamed as NXP B.V. in September 2006. TSMC and NXP B.V. purchased all the SSMC shares owned by EDB Investments Pte Ltd. pro rata according to the Shareholders Agreement on November 15, 2006. After the purchase, TSMC and NXP B.V. currently own approximately 39% and 61% of the SSMC shares respectively. TSMC and Philips (now NXP B.V.) are required, in the aggregate, to purchase at least 70% of SSMC’s capacity, but TSMC alone is not required to purchase more than 28% of the capacity. If any party defaults on the commitment and the capacity utilization of SSMC fall below a specific percentage of its capacity, the defaulting party is required to compensate SSMC for all related unavoidable costs.

 

c.

In August 2006, TSMC filed a lawsuit against Semiconductor Manufacturing International Corporation, SMIC (Shanghai) and SMIC Americas (aggregately referred to as “SMIC”) in the Superior Court of California for Alameda County for breach of a 2005 agreement that settled an earlier trade secret misappropriation and patent infringement litigation between the parties, as well as for trade secret misappropriation, seeking injunctive relief and monetary damages. In September 2006, SMIC filed a cross-complaint against TSMC in the same court alleging breach of settlement agreement, implied covenant of good faith and fair dealing. SMIC also filed a civil action against TSMC in November 2006 with the Beijing People’s High Court alleging defamation and breach of good faith. On June 10, 2009, the Beijing People’s High Court ruled in favor of TSMC and dismissed SMIC’s lawsuit. On November 4, 2009, after a two-month trial, a jury in the California action found SMIC to have both breached the 2005 settlement agreement and misappropriated TSMC’s trade secrets. TSMC has subsequently settled both lawsuits with SMIC. Pursuant to the new settlement agreement, the parties have agreed to the entry of a stipulated judgment in favor of TSMC in the California action, and to the dismissal of SMIC’s appeal against the Beijing High Court’s finding in favor of TSMC. Under the new settlement agreement and the related stipulated judgment, SMIC has agreed to make cash payments by installments to TSMC totaling US$200 million, which are in addition to the US$135 million previously paid to TSMC under the 2005 settlement agreement, and, conditional upon relevant government regulatory approvals, to issue to TSMC a total of 1,789,493,218 common shares of Semiconductor Manufacturing International Corporation and a three-year warrant to purchase 695,914,030 common shares (subject to adjustment) of Semiconductor Manufacturing International Corporation at HK$1.30 per share (subject to adjustment). TSMC has acquired the above mentioned common shares in July 2010, which are recorded within available for sale financial assets, and obtained the subsequent cash settlement income in accordance with the agreement.

 

d.

In June 2010, Keranos, LLC. filed a lawsuit in the U.S. District Court for the Eastern District of Texas alleging that TSMC, TSMC North America, and several other leading technology companies infringe three expired U.S. patents. In response, TSMC, TSMC North America, and several co-defendants in the Texas case filed a lawsuit against Keranos in the U.S. District Court for the Northern District of California in November 2010, seeking a judgment declaring that they did not infringe the asserted patents, and that those patents are invalid. These two litigations have been consolidated into a single case in the U.S. District Court for the Eastern District of Texas. The outcome cannot be determined at this time.

 

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e.

In December 2010, Ziptronix, Inc. filed a complaint in the U.S. District Court for the Northern District of California accusing TSMC, TSMC North America and one other company of allegedly infringing several U.S. patents. The outcome cannot be determined at this time.

 

f.

TSMC joined the Customer Co-Investment Program of ASML and entered into the investment agreement in August 2012. The agreement includes an investment of EUR837,816 thousand by TSMC Global to acquire 5% of ASML’s equity with a lock-up period of 2.5 years. TSMC Global has acquired the aforementioned equity in October 2012. Both parties also signed the research and development funding agreement and TSMC will provide EUR277,000 thousand to ASML’s research and development programs from 2013 to 2017.

 

g.

TSMC entered into an agreement with a counterparty in 2003 whereby TSMC China is obligated to purchase certain property, plant and equipment at the agreed-upon price within the contract period. If the purchase is not completed, TSMC China is obligated to compensate the counterparty for the loss incurred. The property, plant and equipment have been in use by TSMC China since 2004 and are being depreciated over their estimated service lives. The related obligation totaled NT$825,447 thousand and NT$3,399,855 thousand as of December 31, 2012 and 2011, respectively, which is included in accrued expenses and other current liabilities.

 

h.

Amounts available under unused letters of credit as of December 31, 2012 were NT$99,671 thousand.

 

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

The significant financial assets and liabilities denominated in foreign currencies were as follows:

 

		December 31
		2012								2011
		Foreign Currencies (In Thousands)				Exchange Rate (Note)				Foreign Currencies (In Thousands)				Exchange Rate (Note)
Financial assets
Monetary items
USD		$	3,437,165				29.038			$	3,744,817				30.288
EUR			125,973				38.39-38.49				135,857				39.18-39.27
JPY			35,734,874				0.3352-0.3364				37,276,671				0.3897-0.3906
RMB			102,995				4.66				201,385				4.81
Non-monetary items
USD			1,611,474				29.038				141,498				30.288
HKD			492,014				3.75				671,060				3.90
Investments accounted for using equity method
USD			328,281				29.038				294,797				30.288
Financial liabilities
Monetary items
USD			2,193,343				29.038				1,744,746				30.288
EUR			247,052				38.39-38.49				111,750				39.18-39.27
JPY			43,311,360				0.3352-0.3364				35,349,169				0.3897-0.3906
RMB			205,930				4.66				278,877				4.81

 

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Note:

Exchange rate represents the number of N.T. dollars for which one foreign currency could be exchanged.

 

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

According to the Rule No. 0990004943 issued by the FSC on February 2, 2010, the Company is required to provide pre-disclosure regarding the adoption of the International Financial Reporting Standards (IFRSs) in the consolidated financial statements as follows.

 

a.

On May 14, 2009, the FSC announced the roadmap of IFRSs adoption for R.O.C. companies. Accordingly, starting 2013, companies with shares listed on the TWSE or traded on the Taiwan GreTai Securities Market or Emerging Stock Market should prepare the consolidated financial statements in accordance with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, the IFRSs, International Accounting Standards (IASs), interpretations as well as related guidance translated by Accounting Research and Development Foundation (ARDF) and issued by the FSC. To comply with the aforementioned amendments, the Company established a taskforce to monitor and execute the IFRSs adoption plan. The important plan items, responsible divisions and plan progress are listed as follows.

 

Plan Item		Responsible Division		Plan Progress
1)    Establish the IFRSs taskforce		Accounting division		Finished
2)    Complete the identification of GAAP differences and impact		Accounting division, finance division and employee benefit and payroll section		Finished
3)    Complete the identification of consolidated entities under IFRSs		Accounting division		Finished
4)    Evaluate potential effect to business operations		Accounting division, finance division, employee benefit and payroll section and business system integration division		Finished
5)    Complete the preliminary evaluation of resources and budget needed for IFRSs adoption		Accounting division and business system integration division		Finished
6)    Set up a work plan for IFRSs adoption		Accounting division and business system integration division		Finished
7)    Personnel training		Accounting division		Finished
8)    Determine IFRSs accounting policies		Accounting division, finance division and employee benefit and payroll section		Finished
9)    Develop financial statement template under IFRSs		Accounting division and finance division		Finished

 

(Continued)

 

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Plan Item		Responsible Division		Plan Progress
10)  Complete evaluation, configuration and testing of the IT systems		Accounting division and business system integration division		Finished
11)  Communicate with related departments on the impact of IFRSs adoption		Accounting division		Finished
12)  Complete the preparation of opening balance sheet under IFRSs		Accounting division		Finished
13)  Complete modification to the relevant internal controls		Accounting division and internal audit division		Finished
14)  Prepare comparative financial information under IFRSs for 2012		Accounting division and finance division		In progress according to the plan

(Concluded)

 

b.

Exemptions from IFRS 1

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

 

1)

Business combinations. The Company elected not to apply IFRS 3, “Business Combinations,” retrospectively to business combinations occurred before January 1, 2012. Therefore, in the opening balance sheet, the amount of goodwill generated from past business combinations remains the same compared with the one under R.O.C. GAAP as of December 31, 2011.

 

2)

Employee benefits. The Company elected to recognize all cumulative actuarial gains and losses in retained earnings as of January 1, 2012. In addition, the Company elected to apply the exemption disclosure requirement provided by IFRS 1, in which the amounts of present value of defined benefit obligations, the fair value of plan assets, the surplus or deficit in the plan and the experience adjustments are determined for each accounting period prospectively from the transition date.

 

3)

Share-based payment. The Company elected to take the optional exemption from applying IFRS 2, “Share-based Payment,” retrospectively for the shared-based payment transactions granted and vested before January 1, 2012.

 

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c.

As of December 31, 2012, based on the Company’s assessment, the significant differences between the Company’s current accounting policies under R.O.C. GAAP and the ones under IFRSs are stated as follows:

 

1)

Reconciliation of consolidated balance sheet as of January 1, 2012

 

						Effect of Transition to IFRSs
R.O.C. GAAP						Recognition and Measurement				Presentation				IFRSs
Item		Amount				Difference				Difference				Amount				Item		Note
Current assets
Cash and cash equivalents		$	143,472,277			$	—			$	—			$	143,472,277			Cash and cash equivalents
Financial assets at fair value through profit or loss			15,360				—				—				15,360			Financial assets at fair value through profit or loss
Available-for-sale financial assets			3,308,770				—				—				3,308,770			Available-for-sale financial assets
Held-to-maturity financial assets			3,825,680				—				—				3,825,680			Held-to-maturity financial assets
Receivables from related parties			185,764				—				—				185,764			Receivables from related parties
Notes and accounts receivable			46,321,240				—				(490,952	)			45,830,288			Notes and accounts receivable
Allowance for doubtful receivables			(490,952	)			—				490,952				—			—
Allowance for sales returns and others			(5,068,263	)			—				5,068,263				—			—		a)
Other receivables from related parties			122,292				—				—				122,292			Other receivables from related parties
Other financial assets			617,142				—				—				617,142			Other financial assets
Inventories			24,840,582				—				—				24,840,582			Inventories
Deferred income tax assets			5,936,490				—				(5,936,490	)			—			—		b)
Prepaid expenses and other current assets			2,174,014				—				—				2,174,014			Other current asset
Total current assets			225,260,396				—				(868,227	)			224,392,169			Total current assets
Long-term investments
Investments accounted for using equity method			24,900,332				(13,401	)			—				24,886,931			Investments accounted for using equity method		e)
Held-to-maturity financial assets			5,243,167				—				—				5,243,167			Held-to-maturity financial assets
Financial assets carried at cost			4,315,005				—				—				4,315,005			Financial assets carried at cost
Total long-term investments			34,458,504				(13,401	)			—				34,445,103			Total long-term investments
Net property, plant and equipment			490,374,916				—				47,237				490,422,153			Property, plant and equipment		c)
Intangible assets			10,861,563				—				—				10,861,563			Intangible assets
Other assets
Deferred income tax assets			7,436,717				231,011				5,936,490				13,604,218			Deferred income tax assets		b), d)
Refundable deposits			4,518,863				—				—				4,518,863			Refundable deposits
Others			1,353,983				—				(47,237	)			1,306,746			Others		c)
Total other assets			13,309,563				231,011				5,889,253				19,429,827			Total other assets
Total		$	774,264,942			$	217,610			$	5,068,263			$	779,550,815			Total
Current liabilities
Short-term loans		$	25,926,528			$	—			$	—			$	25,926,528			Short-term loans
Financial liabilities at fair value through profit or loss			13,742				—				—				13,742			Financial liabilities at fair value through profit or loss
Hedging derivative financial liabilities			232				—				—				232			Hedging derivative financial liabilities
Accounts payable			10,530,487				—				—				10,530,487			Accounts payable
Payables to related parties			1,328,521				—				—				1,328,521			Payables to related parties
Income tax payable			10,656,124				—				—				10,656,124			Income tax payable
Salary and bonus payable			6,148,499				—				—				6,148,499			Salary and bonus payable
Accrued profit sharing to employees and bonus to directors and supervisors			9,081,293				—				—				9,081,293			Accrued profit sharing to employees and bonus to directors and supervisors
Payables to contractors and equipment suppliers			35,540,526				—				—				35,540,526			Payables to contractors and equipment suppliers
Accrued expenses and other current liabilities			13,218,235				—				—				13,218,235			Accrued expenses and other current liabilities

 

(Continued)

 

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						Effect of Transition to IFRSs
R.O.C. GAAP						Recognition and Measurement				Presentation				IFRSs
Item		Amount				Difference				Difference				Amount				Item		Note
Current portion of bonds payable and long-term bank loans		$	4,562,500			$	—			$	—			$	4,562,500			Current portion of bonds payable and long-term bank loans
—			—				—				5,068,263				5,068,263			Provisions		a)
Total current liabilities			117,006,687				—				5,068,263				122,074,950			Total current liabilities
Long-term liabilities
Bonds payable			18,000,000				—				—				18,000,000			Bonds payable
Long-term bank loans			1,587,500				—				—				1,587,500			Long-term bank loans
Obligations under capital leases			870,993				—				—				870,993			Obligations under capital leases
Total long-term liabilities			20,458,493				—				—				20,458,493			Total long-term liabilities
Other liabilities
Accrued pension cost			3,908,508				2,332,516				—				6,241,024			Accrued pension cost		d)
Guarantee deposits			443,983				—				—				443,983			Guarantee deposits
—			—				—				2,889				2,889			Provisions
Others			403,720				—				(2,889	)			400,831			Others
Total other liabilities			4,756,211				2,332,516				—				7,088,727			Total other liabilities
Total liabilities			142,221,391				2,332,516				5,068,263				149,622,170			Total liabilities
Equity attributable to shareholders of the parent
Capital stock			259,162,226				—				—				259,162,226			Capital stock
Capital surplus			55,846,357				(374,695	)			—				55,471,662			Capital surplus		e)
Retained earnings			322,191,155				(1,726,828	)			—				320,464,327			Retained earnings		d), e)
Others
Cumulative translation adjustments			(6,433,369	)			5				—				(6,433,364	)		Foreign currency translation reserve		e)
Unrealized gain/loss on financial instruments			(1,172,855	)			—				93				(1,172,762	)		Unrealized gain/loss from available-for-sales financial assets
—			—				—				(93	)			(93	)		Cash flow hedging reserve
			(7,606,224	)			5				—				(7,606,219	)
Equity attributable to shareholders of the parent			629,593,514				(2,101,518	)			—				627,491,996			Equity attributable to shareholders of the parent
Minority interests			2,450,037				(13,388	)			—				2,436,649			Noncontrolling interests		d)
Total shareholders’ equity			632,043,551				(2,114,906	)			—				629,928,645			Total shareholders’ equity
Total		$	774,264,942			$	217,610			$	5,068,263			$	779,550,815			Total

(Concluded)

 

2)

Reconciliation of consolidated balance sheet as of December 31, 2012

 

						Effect of Transition to IFRSs
R.O.C. GAAP						Recognition and Measurement				Presentation				IFRSs
Item		Amount				Difference				Difference				Amount				Item		Note
Current assets
Cash and cash equivalents		$	143,410,588			$	—			$	—			$	143,410,588			Cash and cash equivalents
Financial assets at fair value through profit or loss			39,554				—				—				39,554			Financial assets at fair value through profit or loss
Available-for-sale financial assets			2,410,635				—				—				2,410,635			Available-for-sale financial assets
Held-to-maturity financial assets			5,056,973				—				—				5,056,973			Held-to-maturity financial assets
Receivables from related parties			353,811				—				—				353,811			Receivables from related parties
Notes and accounts receivable			58,257,798				—				(480,212	)			57,777,586			Notes and accounts receivable
Allowance for doubtful receivables			(480,212	)			—				480,212				—			—
Allowance for sales returns and others			(6,038,003	)			—				6,038,003				—			—		a)
Other receivables from related parties			185,550				—				—				185,550			Other receivables from related parties
Other financial assets			473,833				—				—				473,833			Other financial assets
Inventories			37,830,498				—				—				37,830,498			Inventories
Deferred income tax assets			8,001,202				—				(8,001,202	)			—			—		b)
Prepaid expenses and other current assets			2,786,408				—				—				2,786,408			Other current assets
Total current assets			252,288,635				—				(1,963,199	)			250,325,436			Total current assets

 

(Continued)

 

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						Effect of Transition to IFRSs
R.O.C. GAAP						Recognition and Measurement				Presentation				IFRSs
Item		Amount				Difference				Difference				Amount				Item		Note
Long-term investments
Investments accounted for using equity method		$	23,430,020			$	(69,102	)		$	—			$	23,360,918			Investments accounted for using equity method		e)
Available-for-sale financial assets			38,751,245				—				—				38,751,245			Available-for-sale financial assets
Financial assets carried at cost			3,605,077				—				—				3,605,077			Financial assets carried at cost
Total long-term investments			65,786,342				(69,102	)			—				65,717,240			Total long-term investments
Net property, plant and equipment			617,529,446				—				32,742				617,562,188			Property, plant and equipment		c)
Intangible assets			10,959,569				—				—				10,959,569			Intangible assets
Other assets
Deferred income tax assets			4,776,015				351,002				8,001,202				13,128,219			Deferred income tax assets		b), d)
Refundable deposits			2,426,712				—				—				2,426,712			Refundable deposits
Others			1,267,886				—				(32,742	)			1,235,144			Others		c)
Total other assets			8,470,613				351,002				7,968,460				16,790,075			Total other assets
Total		$	955,034,605			$	281,900			$	6,038,003			$	961,354,508			Total
Current liabilities
Short-term loans		$	34,714,929			$	—			$	—			$	34,714,929			Short-term loans
Financial liabilities at fair value through profit or loss			15,625				—				—				15,625			Financial liabilities at fair value through profit or loss
Accounts payable			14,490,429				—				—				14,490,429			Accounts payable
Payables to related parties			748,613				—				—				748,613			Payables to related parties
Income tax payable			15,635,594				—				—				15,635,594			Income tax payable
Salary and bonus payable			7,535,296				—				—				7,535,296			Salary and bonus payable
Accrued profit sharing to employees and bonus to directors and supervisors			11,186,591				—				—				11,186,591			Accrued profit sharing to employees and bonus to directors and supervisors
Payables to contractors and equipment suppliers			44,831,798				—				—				44,831,798			Payables to contractors and equipment suppliers
Accrued expenses and other current liabilities			13,148,944				—				—				13,148,944			Accrued expenses and other current liabilities
Current portion of bonds payable and long-term bank loans			128,125				—				—				128,125			Current portion of bonds payable and long-term bank loans
—			—				—				6,038,003				6,038,003			Provisions		a)
Total current liabilities			142,435,944				—				6,038,003				148,473,947			Total current liabilities
Long-term liabilities
Bonds payable			80,000,000				—				—				80,000,000			Bonds payable
Long-term bank loans			1,359,375				—				—				1,359,375			Long-term bank loans
Other long-term payable			54,000				—				—				54,000			Other long-term payable
Obligations under capital leases			748,115				—				—				748,115			Obligations under capital leases
Total long-term liabilities			82,161,490				—				—				82,161,490			Total long-term liabilities
Other liabilities
Accrued pension cost			3,979,541				2,941,693				—				6,921,234			Accrued pension cost		d)
Guarantee deposits			203,890				—				—				203,890			Guarantee deposits
—			—				—				4,891				4,891			Provisions
Others			500,041				—				(4,891	)			495,150			Others
Total other liabilities			4,683,472				2,941,693				—				7,625,165			Total other liabilities
Total liabilities			229,280,906				2,941,693				6,038,003				238,260,602			Total liabilities
Equity attributable to shareholders of the parent
Capital stock			259,244,357				—				—				259,244,357			Capital stock
Capital surplus			56,137,809				(462,469	)			—				55,675,340			Capital surplus		e)
Retained earnings			410,601,289				(2,189,821	)			—				408,411,468			Retained earnings		d), e)
Others
Cumulative translation adjustments			(10,753,763	)			(43	)			—				(10,753,806	)		Foreign currency translation reserve		e)
Net loss not recognized as pension cost			(5,299	)			5,299				—				—			—		d)
Unrealized gain/loss on financial instruments			7,973,321				—				—				7,973,321			Unrealized gain/loss from available-for-sales financial assets
			(2,785,741	)			5,256				—				(2,780,485	)
Equity attributable to shareholders of the parent			723,197,714				(2,647,034	)			—				720,550,680			Equity attributable to shareholders of the parent
Minority interests			2,555,985				(12,759	)			—				2,543,226			Noncontrolling interests		d)
Total shareholders’ equity			725,753,699				(2,659,793	)			—				723,093,906			Total shareholders’ equity
Total		$	955,034,605			$	281,900			$	6,038,003			$	961,354,508			Total

 

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3)

Reconciliation of consolidated statement of comprehensive income for the year ended December 31, 2012

 

						Effect of Transition to IFRSs
R.O.C. GAAP						Recognition and Measurement				Presentation				IFRSs
Item		Amount				Difference				Difference				Amount				Item		Note
Net sales		$	506,248,580			$	—			$	496,654			$	506,745,234			Net sales			f)
Cost of sales			262,628,681				(45,583	)			—				262,583,098			Cost of sales			d)
Gross profit before affiliates elimination			243,619,899				45,583				496,654				244,162,136			Gross profit before affiliates elimination
Unrealized gross profit from affiliates			(25,029	)			—				—				(25,029	)		Unrealized profit from affiliates
Gross profit			243,594,870				45,583				496,654				244,137,107			Gross profit
Operating expenses
Research and development			40,402,138				(18,943	)			—				40,383,195			Research and development			d)
General and administrative			17,638,088				(6,394	)			—				17,631,694			General and administrative			d)
Marketing			4,497,451				(1,465	)			—				4,495,986			Marketing			d)
Total operating expenses			62,537,677				(26,802	)			—				62,510,875
—			—				—				(449,364	)			(449,364	)		Other operating gains and losses			f)
Income from operations			181,057,193				72,385				47,290				181,176,868			Income from operations
Non-operating income and gains
Equity in earnings of equity method investees, net			2,028,611				45,118				—				2,073,729			Equity in earnings of equity method investees, net			e)
Interest income			1,645,036				—				(1,645,036	)			—			—			f)
Settlement income			883,845				—				(883,845	)			—			—			f)
Foreign exchange gain, net			582,498				—				—				582,498			Foreign exchange gain, net
Gain on settlement and disposal of financial assets, net			541,089				—				(541,089	)			—			—			f)
Technical service income			496,654				—				(496,654	)			—			—			f)
Others			604,304				—				(604,304	)			—			—			f)
—			—				—				1,715,824				1,715,824			Other income			f)
—			—				4,977				(2,857,018	)			(2,852,041	)		Other gains and losses			e), f)
			6,782,037				50,095				(5,312,122	)			1,520,010
Non-operating expenses and losses
Impairment of financial assets			4,231,602				—				(4,231,602	)			—			—			f)
Interest expense			1,020,422				—				—				1,020,422			Finance cost
Impairment loss on idle assets			444,505				—				(444,505	)			—			—			f)
Loss on disposal of property, plant and equipment			31,816				—				(31,816	)			—			—			f)
Others			556,909				—				(556,909	)			—			—			f)
			6,285,254				—				(5,264,832	)			1,020,422
Income before income tax			181,553,976				122,480				—				181,676,456			Income before income tax
Income tax expense			15,590,287				(37,633	)			—				15,552,654			Income tax expense			d)
Net income		$	165,963,689			$	160,113			$	—				166,123,802			Net income
															(4,322,697	)		Exchange differences on translating foreign operations
															232			Cash flow hedges
															9,534,269			Net valuation gain on available-for-sale financial assets
															53,748			Share of other comprehensive income of associates and joint venture			d)
															(685,978	)		Actuarial loss from defined benefit pension			d)
															(326,942	)		Income tax expense relating to components of other comprehensive income			d)
															4,252,632			Other comprehensive income for the year, net of tax effect
														$	170,376,434			Total comprehensive income for the year

 

- 54 -

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4)

Notes to the reconciliation of the significant differences:

 

a)

Allowance for sales returns and others

Under R.O.C. GAAP, provisions for estimated sales returns and others are recognized as a reduction in revenue in the period the related revenue is recognized based on historical experience. Allowance for sales returns and others is recorded as a deduction in accounts receivable. Under IFRSs, the allowance for sales returns and others is a present obligation with uncertain timing and an amount that arises from past events and is therefore reclassified as provisions (classified under current liabilities) in accordance with IAS No. 37, “Provisions, Contingent Liabilities and Contingent Assets.”

As of December 31, 2012 and January 1, 2012, the amounts reclassified from allowance for sales returns and others to provisions were NT$6,038,003 thousand and NT$5,068,263 thousand, respectively.

 

b)

Classifications of deferred income tax asset/liability and valuation allowance

Under R.O.C. GAAP, a deferred tax asset and liability is classified as current or non-current in accordance with the classification of its related asset or liability. However, if a deferred income tax asset or liability does not relate to an asset or liability in the financial statements, it is classified as either current or non-current based on the expected length of time before it is realized or settled. Under IFRSs, a deferred tax asset and liability is classified as non-current asset or liability.

In addition, under R.O.C. GAAP, valuation allowances are provided to the extent, if any, that it is more likely than not that deferred income tax assets will not be realized. In accordance with IAS No. 12, “Income Taxes,” deferred tax assets are only recognized to the extent that it is probable that there will be sufficient taxable profits and the valuation allowance account is no longer used.

As of December 31, 2012 and January 1, 2012, the amounts reclassified from deferred income tax assets to non-current assets were NT$8,001,202 thousand and NT$5,936,490 thousand, respectively.

 

c)

The classification of leased assets and idle assets

Under R.O.C. GAAP, leased assets and idle assets are classified under other assets. Under IFRSs, the aforementioned items are classified as property, plant and equipment according to their nature. Leased assets are mainly dormitories leased to employees and factories leased to suppliers. In accordance with IAS No. 40, “Investment Property,” the dormitories leased to employees are not classified as investment properties; factories leased to suppliers are not considered as investment properties since they cannot be sold separately and comprise only an insignificant portion of the plant.

As of December 31, 2012 and January 1, 2012, the amounts reclassified from leased assets and idle assets to property, plant and equipment were NT$32,742 thousand and NT$47,237 thousand, respectively.

 

- 55 -

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d)

Employee benefits

The Company had previously applied an actuarial valuation on its defined benefit obligation and recognized the related pension cost and retirement benefit obligation in conformity with R.O.C. GAAP. Under IFRSs, the Company should carry out actuarial valuation on defined benefit obligation in accordance with IAS No. 19, “Employee Benefits.”

In addition, under R.O.C. GAAP, it is not allowed to recognize actuarial gains and losses from defined benefit plans directly to equity; instead, actuarial gains and losses should be accounted for under the corridor approach which resulted in the deferral of gains and losses. When using the corridor approach, actuarial gains and losses should be amortized over the expected average remaining working lives of the participating employees.

Under IAS No. 19, “Employee Benefits,” the Company elects to recognize actuarial gains and losses immediately in full in the period in which they occur, as other comprehensive income. The subsequent reclassification to earnings is not permitted.

At the transition date, the Company performed the actuarial valuation under IAS No. 19, “Employee Benefits,” and recognized the valuation difference directly to retained earnings under the requirement of IFRS 1.

In addition, under R.O.C. GAAP, the minimum pension liability should be recognized in the balance sheet. If the accrued pension cost is less than the minimum amount, the difference should be recognized as an additional liability. Under IFRSs, there is no aforementioned requirement of minimum pension liability.

As of December 31, 2012 and January 1, 2012, accrued pension cost of the Company was adjusted from the aforementioned differences for an increase of NT$2,941,693 thousand and NT$2,332,516 thousand, respectively; deferred income tax assets were adjusted for an increase of NT$351,002 thousand and NT$231,011 thousand, respectively. As of December 31, 2012, net loss not recognized as pension cost was adjusted for a decrease of NT$4,416 thousand. Pension cost and income tax expense for the year ended December 31, 2012 were also adjusted for a decrease of NT$72,385 thousand and NT$37,633 thousand, respectively; actuarial loss from defined benefit plans and associated tax benefit were recognized in the amount of NT$685,978 thousand and NT$82,358 thousand, respectively.

 

e)

Investments accounted for using the equity method

The Company has evaluated significant differences between current accounting policies and IFRSs for the Company’s associates and joint ventures accounted for using the equity method. The significant difference is mainly due to the adjustment to employee benefits.

In addition, if the investing company subscribes for additional investee’s shares at a percentage different from its existing ownership percentage that results in a decrease in the investing company’s holding percentage in the investee, the resulting carrying amount of the investment in the investee differs from the amount of its share in the investee’s equity. Under R.O.C. GAAP, the investing company records such a difference as an adjustment to long-term investments with the corresponding amount charged or credited to capital surplus. Under IFRSs, such transaction is deemed a disposal and aforementioned difference is recognized in earnings accordingly.

 

- 56 -

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As of December 31, 2012 and January 1, 2012, as a result of the differences mentioned above, investment accounted for using the equity method was adjusted for a decrease of NT$69,102 thousand and NT$13,401 thousand, respectively; cumulative translation adjustments was adjusted for a decrease of NT$43 thousand and an increase of NT$5 thousand, respectively; capital surplus was adjusted for a decrease of NT$462,469 thousand and NT$374,695 thousand, respectively. As of December 31, 2012, net loss not recognized as pension cost was adjusted for a decrease of NT$883 thousand. In addition, equity in earnings of equity method investees and share of other comprehensive income of associates and joint venture were adjusted for an increase of NT$45,118 thousand and for a decrease of NT$18,905 thousand, respectively; other gains and losses was adjusted for a gain of NT$4,977 thousand due from the deemed disposal for the year ended December 31, 2012.

 

f)

The reclassification of line items in the consolidated statement of comprehensive income

In accordance with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers before its amendment due to the adoption of IFRSs, income from operations in the consolidated income statement only includes net sales, cost of sales and operating expenses. Under IFRSs, based on the nature of operating transactions, technical service income is reclassified under net sales; rental revenue, depreciation of rental assets, net gain or loss on disposal of property, plant and equipment and other assets, and impairment loss on idle assets, are reclassified under other operating gains and losses, which are reflected in income from operations.

Under IFRSs, based on the nature of operating transactions, the Company reclassified technical service income of NT$496,654 thousand for the year ended December 31, 2012 to net sales, rental revenue of NT$808 thousand, net gain on disposal of property, plant and equipment and other assets of NT$103 thousand, other income of NT$886 thousand, depreciation of rental assets of NT$6,656 thousand and impairment loss on idle assets of NT$444,505 thousand to other operating gains and losses. In addition, interest income of NT$1,645,036 thousand and dividend income of NT$70,788 thousand were also reclassified to other income; settlement income of NT$883,845 thousand, net gain of disposal of financial assets of NT$541,089 thousand, others of NT$499,903 thousand (under non-operating income and gains), net valuation loss on financial instruments of NT$252,530 thousand, impairment of financial assets of NT$4,231,602 thousand as well as others of NT$297,723 thousand (under non-operating expenses and losses) were reclassified to other gains and losses for the year ended December 31, 2012.

 

d.

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

 

33.	ADDITIONAL DISCLOSURES

Following are the additional disclosures required by the SFB for TSMC and its investees in which all significant intercompany balances and transactions are eliminated upon consolidation:

 

a.

Financings provided: Please see Table 1 attached;

 

b.

Endorsement/guarantee provided: None;

 

c.

Marketable securities held: Please see Table 2 attached;

 

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d.

Marketable securities acquired and disposed of at costs or prices of at least NT$100 million or 20% of the paid-in capital: Please see Table 3 attached;

 

e.

Acquisition of individual real estate properties at costs of at least NT$100 million or 20% of the paid-in capital: Please see Table 4 attached;

 

f.

Disposal of individual real estate properties at prices of at least NT$100 million or 20% of the paid-in capital: None;

 

g.

Total purchases from or sales to related parties of at least NT$100 million or 20% of the paid-in capital: Please see Table 5 attached;

 

h.

Receivables from related parties amounting to at least NT$100 million or 20% of the paid-in capital: Please see Table 6 attached;

 

i.

Names, locations, and related information of investees over which TSMC exercises significant influence: Please see Table 7 attached;

j.

Information on investment in Mainland China

 

1)

The name of the investee in Mainland China, the main businesses and products, its issued capital, method of investment, information on inflow or outflow of capital, percentage of ownership, equity in the net gain or net loss, ending balance, amount received as dividends from the investee, and the limitation on investee: Please see Table 8 attached.

 

2)

Significant direct or indirect transactions with the investee, its prices and terms of payment, unrealized gain or loss, and other related information which is helpful to understand the impact of investment in Mainland China on financial reports: Please see Table 9 attached.

 

k.

Intercompany relationships and significant intercompany transactions: Please see Table 9 attached.

 

34.	OPERATING SEGMENTS INFORMATION

The Company’s only reportable segment is the foundry segment. The foundry segment engages mainly in the manufacturing, selling, packaging, testing and computer-aided design of integrated circuits and other semiconductor devices and the manufacturing of masks. The Company also had other operating segments that did not exceed the quantitative threshold for separate reporting. These segments mainly engage in the researching, developing, and providing SoC (System on Chip) design and also engage in the researching, developing, designing, manufacturing and selling of solid state lighting devices and renewable energy and efficiency related technologies and products.

The Company uses the operating profit as the measurement for segment profit and the basis of performance assessment. There was no material inconsistency between the accounting policies of the operating segment and the accounting policies described in Note 2.

 

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The Company’s operating segment information was as follows:

 

a.

Industry financial information

 

		Foundry				Others				Elimination				Total
Year ended December 31, 2012
Sales from external customers		$	506,097,932			$	150,648			$	—			$	506,248,580
Sales among intersegments			—				14,678				(14,678	)			—
Operating profit (loss)			183,682,972				(2,625,779	)			—				181,057,193
Equity in earnings (losses) of equity method investees, net			3,428,408				(1,399,797	)			—				2,028,611
Income tax expense			15,590,287				—				—				15,590,287
Year ended December 31, 2011
Sales from external customers			422,691,098				4,389,547				—				427,080,645
Sales among intersegments			1,588,601				6,224				(1,594,825	)			—
Operating profit (loss)			143,222,120				(1,664,702	)			—				141,557,418
Equity in earnings (losses) of equity method investees, net			1,635,303				(737,692	)			—				897,611
Income tax expense			10,649,688				44,729				—				10,694,417

 

b.

Geographic information

 

		Years Ended December 31
		Sales to Other Than Consolidated Entities								Non-current Assets
		2012				2011				2012				2011
Taiwan		$	64,744,102			$	49,798,532			$	603,844,829			$	472,168,728
United States			334,704,735				250,811,666				7,699,344				8,284,575
Asia			72,953,214				75,946,671				18,196,790				22,121,979
Europe			30,476,592				48,982,743				15,938				15,180
Others			3,369,937				1,541,033				—				—
		$	506,248,580			$	427,080,645			$	629,756,901			$	502,590,462

The geographic information is presented by billed regions. Non-current assets include property, plant and equipment, intangible assets and other assets, but do not include financial instruments and deferred income tax assets.

 

c.

Production information

 

		Years Ended December 31
Production		2012				2011
Wafer		$	462,970,436			$	384,632,494
Mask			26,266,912				23,818,656
Others			17,011,232				18,629,495
		$	506,248,580			$	427,080,645

 

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d.

Major customers representing at least 10% of gross sales

 

		Years Ended December 31
		2012								2011
		Amount				%				Amount				%
Customer A		$	87,099,340				17			$	60,412,085				14

 

35.	THE AUTHORIZATION OF FINANCIAL STATEMENTS

The financial statements were approved by the Board of Directors and authorized for issue on February 5, 2013.

 

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TABLE 1

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

FINANCINGS PROVIDED

FOR THE YEAR ENDED DECEMBER 31, 2012

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

 

 

No.		Financing Company		Counter- party		Financial Statement Account		Maximum Balance for  the Period (US$ in Thousands) (Note 4)				Ending Balance (US$ in Thousands) (Note 4)				Amount Actually Drawn (US$ in Thousands)				Interest Rate		Nature for Financing		Transaction				Reason for		Allowance for Bad				Collateral								Financing Limits for Each Borrowing				Financing Company’s Total Financing Amount Limits
																								Amounts				Financing		Debt				Item				Value				Company				(Note 3)
1		TSMC Partners		TSMC China		Other receivables from related parties		$ (US$	7,259,500 250,000	)		$ (US$	3,774,940 130,000	)		$ (US$	3,774,940 130,000	)		0.25%-0.26%		The need for short-term financing		$	—			Purchase equipment		$	—				—			$	—			$	38,635,609 (Note 1	)		$	38,635,609
				TSMC Solar		Other receivables from related parties		(US$	1,161,520 40,000	)			—				—			—		The need for short-term financing			—			Operating capital			—				—				—				15,454,244 (Note 1	)			38,635,609
				TSMC SSL		Other receivables from related parties		(US$	871,140 30,000	)			—				—			—		The need for short-term financing			—			Operating capital			—				—				—				15,454,244 (Note 1	)			38,635,609
2		TSMC Development		TSMC Solar		Other receivables from related parties		(US$	2,323,040 80,000	)		(US$	2,323,040 80,000	)		(US$	1,495,457 51,500	)		0.21%-0.23%		The need for short-term financing			—			Operating capital			—				—				—				5,322,907 (Notes 1 and 5	)			13,307,266 (Note 5	)
				TSMC SSL		Other receivables from related parties		(US$	2,613,420 90,000	)		(US$	2,613,420 90,000	)		(US$	203,266 7,000	)		0.24%		The need for short-term financing			—			Operating capital			—				—				—				5,322,907 (Notes 1 and 5	)			13,307,266 (Note 5	)
3		TSMC Global		TSMC		Other receivables from related parties		(US$	5,807,600 200,000	)			—				—			—		The need for short-term financing			—			Support the parent company’s short-term operation requirement			—				—				—				49,954,386 (Note 2	)			49,954,386

 

Note 1:

The total amount for lending to a company for funding for a short-term period shall not exceed ten percent (10%) of the net worth of TSMC Partners and TSMC Development, respectively. In addition, the total amount lendable to any one borrower shall be no more than thirty percent (30%) of the borrower’s net worth. TSMC or offshore subsidiaries whose voting shares are 100% owned, directly or indirectly, by TSMC are not subject to the above restrictions. The restriction of thirty percent (30%) of the borrower’s net worth will not apply to subsidiaries whose voting shares are 90% or more owned, directly or indirectly, by TSMC. However, financing limits for those subsidiaries shall be no more than forty percent (40%) of the lender’s net worth.

Note 2:

The total amount for lending to a company for funding for a short-term period shall not exceed ten percent (10%) of the net worth of TSMC Global. In addition, the total amount lendable to any one borrower shall be no more than thirty percent (30%) of the borrower’s net worth. TSMC or offshore subsidiaries whose voting shares are 100% owned, directly or indirectly, by TSMC are not subject to the above restrictions.

Note 3:

The total amount available for lending purpose shall not exceed the net worth of TSMC Partners, TSMC Development and TSMC Global, respectively.

Note 4:

The maximum balance for the period and ending balance represents the amounts approved by Board of Directors.

Note 5:

The amount was determined based on the audited financial statements in accordance with local accounting principles.

 

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TABLE 2

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

MARKETABLE SECURITIES HELD

DECEMBER 31, 2012

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

 

 

								December 31, 2012																Note
Held Company Name		Marketable Securities Type and Name		Relationship with the Company		Financial Statement Account		Shares/ Units (In Thousands)				Carrying Value (Foreign Currencies in Thousands)				Percentage of Ownership (%)				Market Value or Net Asset Value (Foreign Currencies in Thousands)
TSMC		Corporate bond
		Nan Ya Plastics Corporation		—		Held-to-maturity financial assets			—			$	549,881				N/A			$	557,900
		China Steel Corporation		—		”			—				151,265				N/A				151,073
		Stock
		Semiconductor Manufacturing International Corporation		—		Available-for-sale financial assets			1,277,958				1,845,502				4				1,845,052
		TSMC Global		Subsidiary		Investments accounted for using equity method			1				49,954,386				100				49,954,386
		TSMC Partners		Subsidiary		”			988,268				38,635,129				100				38,635,609
		VIS		Investee accounted for using equity method		”			628,223				9,462,038				40				12,658,703
		SSMC		Investee accounted for using equity method		”			314				6,710,956				39				6,496,972
		TSMC Solar		Subsidiary		”			1,118,000				6,031,369				99				6,008,087
		TSMC North America		Subsidiary		”			11,000				3,209,288				100				3,209,288
		TSMC SSL		Subsidiary		”			430,400				2,411,212				95				2,411,212
		Xintec		Investee with a controlling financial interest		”			94,950				1,550,313				40				1,550,313
		GUC		Investee accounted for using equity method		”			46,688				1,222,972				35				4,692,130
		TSMC Europe		Subsidiary		”			—				235,761				100				253,761
		TSMC Japan		Subsidiary		”			6				142,412				100				142,412
		TSMC Korea		Subsidiary		”			80				26,935				100				26,935
		United Industrial Gases Co., Ltd.		—		Financial assets carried at cost			19,300				193,584				10				390,210
		Shin-Etsu Handotai Taiwan Co., Ltd.		—		”			10,500				105,000				7				341,742
		W.K. Technology Fund IV		—		”			4,000				40,000				2				34,221
		Fund
		Horizon Ventures Fund		—		Financial assets carried at cost			—				89,916				12				89,916
		Crimson Asia Capital		—		”			—				55,259				1				55,259
		Capital
		TSMC China		Subsidiary		Investments accounted for using equity method			—				17,828,683				100				17,886,314
		VTAF III		Subsidiary		”			—				1,047,285				50				1,025,275
		VTAF II		Subsidiary		”			—				563,056				98				556,869
		Emerging Alliance		Subsidiary		”			—				167,359				99				167,359
		TSMC GN		Subsidiary		”			—				65,007				100				65,007
TSMC Solar		Stock
		Motech		Investee accounted for using equity method		Investments accounted for using equity method			87,480				2,998,413				20				2,761,393
		TSMC Solar Europe		Subsidiary		”			—				175,016				100				175,016
		TSMC Solar NA		Subsidiary		”			1				44,037				100				44,037
		Capital
		VTAF III		Investee accounted for using equity method		Investments accounted for using equity method			—				1,322,024				49				1,322,024

 

(Continued)

 

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								December 31, 2012																Note
Held Company Name		Marketable Securities Type and Name		Relationship with the Company		Financial Statement Account		Shares/ Units (In Thousands)				Carrying Value (Foreign Currencies in Thousands)				Percentage of Ownership (%)				Market Value or Net Asset Value (Foreign Currencies in Thousands)
TSMC SSL		Stock
		TSMC Lighting NA		Subsidiary		Investments accounted for using equity method			1			$	2,864				100			$	2,864
TSMC GN		Stock
		TSMC Solar		Investee accounted for using equity method		Investments accounted for using equity method			4,294				23,076				—				23,076
		TSMC SSL		Investee accounted for using equity method		”			3,420				19,157				1				19,157
TSMC Partners		Stock
		TSMC Development, Inc. (TSMC Development)		Subsidiary		Investments accounted for using equity method			—			US$	604,367				100			US$	604,367
		VisEra Holding Company		Investee accounted for using equity method		”			43,000			US$	104,540				49			US$	104,540
		TSMC Technology		Subsidiary		”			—			US$	11,721				100			US$	11,721
		InveStar Semiconductor Development Fund, Inc. (II) LDC. (ISDF II)		Subsidiary		”			14,153			US$	10,479				97			US$	10,479
		InveStar Semiconductor Development Fund, Inc. (ISDF)		Subsidiary		”			787			US$	7,805				97			US$	7,805
		TSMC Canada		Subsidiary		”			2,300			US$	4,589				100			US$	4,589
		Mcube Inc.		Investee accounted for using equity method		”			6,333				—				25				—
		Fund
		Shanghai Walden Venture Capital Enterprise		—		Financial assets carried at cost			—			US$	5,000				6			US$	5,000
TSMC North America		Stock
		Spansion Inc.		—		Available-for-sale financial assets			270			US$	3,753				—			US$	3,753
TSMC Development		Stock
		WaferTech		Subsidiary		Investments accounted for using equity method			293,637			US$	262,053				100			US$	262,053
Emerging Alliance		Common stock
		Audience, Inc.		—		Available-for-sale financial assets			32			US$	335				—			US$	335
		Global Investment Holding Inc.		—		Financial assets carried at cost			11,124			US$	3,065				6			US$	3,065
		RichWave Technology Corp.		—		”			4,074			US$	1,545				10			US$	1,545
		Preferred stock
		Next IO, Inc.		—		Financial assets carried at cost			8			US$	500				—			US$	500
		QST Holdings, LLC		—		”			—			US$	142				4			US$	142
		Capital
		VentureTech Alliance Holdings, LLC (VTA Holdings)		Subsidiary		Investments accounted for using equity method			—				—				7				—
VTAF II		Common stock
		Audience, Inc.		—		Available-for-sale financial assets			203			US$	2,107				1			US$	2,107
		Sentelic		—		Financial assets carried at cost			1,806			US$	2,607				9			US$	2,607
		Aether Systems, Inc.		—		”			1,800			US$	1,701				23			US$	1,701
		RichWave Technology Corp.		—		”			1,267			US$	1,036				3			US$	1,036

 

(Continued)

 

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Held Company Name		Marketable Securities Type and Name		Relationship with the Company		Financial Statement Account		December 31, 2012																Note
								Shares/Units (In  Thousands)				Carrying Value (Foreign  Currencies in Thousands)				Percentage of Ownership (%)				Market Value or Net Asset Value (Foreign Currencies in Thousands)
VTAF II		Preferred stock
		5V Technologies, Inc.		—		Financial assets carried at cost			2,890			US$	2,168				4			US$	2,168
		Aquantia		—		”			4,556			US$	4,316				2			US$	4,316
		Cresta Technology Corporation		—		”			92			US$	28				—			US$	28
		Impinj, Inc.		—		”			711			US$	1,100				—			US$	1,100
		Next IO, Inc.		—		”			179			US$	1,219				1			US$	1,219
		QST Holdings, LLC		—		”			—			US$	593				13			US$	593
		Capital
		VTA Holdings		Subsidiary		Investments accounted for using equity method			—				—				31				—
VTAF III		Common stock
		Mutual-Pak Technology Co., Ltd.		Subsidiary		Investments accounted for using equity method			15,643			US$	2,120				58			US$	2,120
		InvenSense, Inc.		—		Available-for-sale financial assets			93			US$	1,037				—			US$	1,037
		Accton Wireless Broadband Corp.		—		Financial assets carried at cost			2,249			US$	315				6			US$	315
		Preferred stock
		BridgeLux, Inc.		—		Financial assets carried at cost			7,522			US$	9,379				3			US$	9,379
		GTBF, Inc.		—		”			1,154			US$	1,500				N/A			US$	1,500
		LiquidLeds Lighting Corp.		—		”			1,600			US$	800				11			US$	800
		Neoconix, Inc.		—		”			4,147			US$	4,841				4			US$	4,841
		Powervation, Ltd.		—		”			509			US$	7,938				16			US$	7,938
		Stion Corp.		—		”			8,152			US$	45,467				15			US$	45,467
		Tilera, Inc.		—		”			3,890			US$	3,025				2			US$	3,025
		Validity Sensors, Inc.		—		”			11,192			US$	4,197				4			US$	4,197
		Capital
		Growth Fund Limited (Growth Fund)		Subsidiary		Investments accounted for using equity method			—			US$	368				100			US$	368
		VTA Holdings		Subsidiary		”			—				—				62				—
ISDF		Common stock
		Integrated Memory Logic, Inc.		—		Available-for-sale financial assets			1,402			US$	4,322				2			US$	4,322
		Memsic, Inc.		—		”			1,286			US$	4,294				5			US$	4,294
		Preferred stock
		Sonics, Inc.		—		Financial assets carried at cost			230			US$	497				2			US$	497
ISDF II		Common stock
		Memsic, Inc.		—		Available-for-sale financial assets			1,072			US$	3,581				4			US$	3,581
		Alchip Technologies Limited		—		Financial assets carried at cost			7,520			US$	3,664				14			US$	3,664
		Sonics, Inc.		—		”			278			US$	10				3			US$	10
		Goyatek Technology, Corp.		—		”			745			US$	163				6			US$	163
		Auden Technology MFG. Co., Ltd.		—		”			1,035			US$	220				3			US$	220
		Preferred stock
		Sonics, Inc.		—		Financial assets carried at cost			264			US$	455				3			US$	455

 

(Continued)

 

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Held Company Name		Marketable Securities Type and Name		Relationship with the Company		Financial Statement Account		December 31, 2012																Note
								Shares/Units (In  Thousands)				Carrying Value (Foreign Currencies in Thousands)				Percentage of Ownership (%)				Market Value or Net Asset Value (Foreign Currencies in Thousands)
Xintec		Capital
		Compositech Ltd.		—		Financial assets carried at cost			587			$	—				3			$	—
TSMC Solar Europe		Stock
		TSMC Solar Europe GmbH		Subsidiary		Investments accounted for using equity method			—			EUR	4,469				100			EUR	4,469
TSMC Global		Stock
		ASML		—		Available-for-sale financial assets			20,993			US$	1,334,501				5			US$	1,334,501
		Money market fund
		Ssga Cash Mgmt Global Offshore		—		Available-for-sale financial assets			50			US$	50				N/A			US$	50
		Corporate bond
		Aust + Nz Banking Group		—		Held-to-maturity financial assets			20,000			US$	19,999				N/A			US$	20,033
		Commonwealth Bank of Australia		—		”			25,000			US$	25,000				N/A			US$	25,006
		Commonwealth Bank of Australia		—		”			25,000			US$	25,000				N/A			US$	25,043
		Deutsche Bank AG London		—		”			20,000			US$	19,999				N/A			US$	20,007
		JP Morgan Chase + Co.		—		”			35,000			US$	35,006				N/A			US$	34,956
		Westpac Banking Corp.		—		”			25,000			US$	25,000				N/A			US$	25,013

 

(Concluded)

 

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TABLE 3

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

MARKETABLE SECURITIES ACQUIRED AND DISPOSED OF AT COSTS OR PRICES OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL

FOR THE YEAR ENDED DECEMBER 31, 2012

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

 

 

Company Name		Marketable Securities Type and Name		Financial Statement Account		Counter- party				Nature of Relationship		Beginning Balance								Acquisition								Disposal																Ending Balance (Note)
												Shares/ Units (In Thousands)				Amount (Foreign Currencies in Thousands)				Shares/ Units (In Thousands)				Amount (Foreign Currencies in Thousands)				Shares/ Units (In Thousands)				Amount (Foreign Currencies in Thousands)				Carrying Value (Foreign Currencies in Thousands)				Gain/Loss on Disposal (Foreign Currencies in Thousands)				Shares/ Units (In Thousands)				Amount (Foreign Currencies in Thousands)
TSMC		Corporate bond
		Nan Ya Plastics Corporation		Held-to-maturity financial assets			—			—			—			$	1,099,629				—			$	—				—			$	550,000			$	550,000			$	—				—			$	549,881
		China Steel Corporation		”			—			—			—				303,798				—				—				—				150,000				150,000				—				—				151,265
		Stock
		Semiconductor Manufacturing International Corporation		Available-for-sale financial assets			—			—			1,789,493				2,617,134				—				—				511,535				612,834				502,200				110,634				1,277,958				1,845,052
		TSMC SSL		Investments accounted for using equity method			—			Subsidiary			227,000				1,746,893				203,400				2,034,000				—				—				—				—				430,400				2,411,212
		Capital
		TSMC GN		Investments accounted for using equity method			—			Subsidiary			—				—				—				100,000				—				—				—				—				—				65,007
TSMC Partners		Corporate bond
		General Elec Cap Corp. Mtn		Held-to-maturity financial assets			—			—			—			US$	20,012				—				—				—			US$	20,000			US$	20,000				—				—				—
		General Elec Cap Corp. Mtn		”			—			—			—			US$	20,059				—				—				—			US$	20,000			US$	20,000				—				—				—
VTAF II		Preferred stock
		Power Analog Microelectronics		Financial assets carried at cost			—			—			7,330			US$	3,482				—				—				7,330			US$	3,345			US$	3,482			US$	(137	)			—				—
VTAF III		Stock
		InvenSense, Inc.		Available-for-sale financial assets			—			—			796			US$	7,932				—				—				703			US$	7,460			US$	861			US$	6,599				93			US$	1,037
TSMC Global		Stock
		ASML		Available-for-sale financial assets			—			—			—				—				20,993			US$	1,085,474				—				—				—				—				20,993			US$	1,334,501
		Government bond
		Societe De Financement De Lec		Held-to-maturity financial assets			—			—			15,000			US$	15,000				—				—				15,000			US$	15,000			US$	15,000				—				—				—
		Corporate bond
		Nationwide Building Society-UK Government Guarantee		Held-to-maturity financial assets			—			—			8,000			US$	8,000				—				—				8,000			US$	8,000			US$	8,000				—				—				—
		Westpac Banking Corp. 12/12 Frn		”			—			—			5,000			US$	5,000				—				—				5,000			US$	5,000			US$	5,000				—				—				—
ISDF		Common stock
		Integrated Memory Logic, Inc.		Available-for-sale financial assets			—			—			2,161			US$	6,289				127				—				886			US$	3,152			US$	207			US$	2,945				1,402			US$	4,322
TSMC Solar Europe		Stock
		TSMC Solar Europe GmbH		Investments accounted for using equity method			—			Subsidiary			—			EUR	5,103				—			EUR	2,500				—				—				—				—				—			EUR	4,469

 

Note:

The ending balance includes the amortization of premium/discount on bonds investments, translation adjustments, equity in earnings/losses of equity method investees and other adjustments to long-term investments accounted for using equity method.

 

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TABLE 4

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

ACQUISITION OF INDIVIDUAL REAL ESTATE PROPERTIES AT COSTS OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL

FOR THE YEAR ENDED DECEMBER 31, 2012

(Amounts in Thousands of New Taiwan Dollars)

 

 

Company Name

Types of Property

Transaction Date

Transaction Amount

Payment Term

Counter-party

Nature of Relationships

Prior Transaction of Related Counter-party

Price Reference

Purpose of Acquisition

Other Terms

Owner

Relationships

Transfer Date

Amount

TSMC

Fab

February 7, 2012 to December 27, 2012

$

249,912

By the construction progress

MandarTech Interiors Inc.

—

N/A

N/A

N/A

N/A

Public bidding

Manufacturing purpose

None

Fab

February 7, 2012 to December 27, 2012

219,807

By the construction progress

I Domain Industrial Co., Ltd.

—

N/A

N/A

N/A

N/A

Public bidding

Manufacturing purpose

None

Fab

February 13, 2012 to December 28, 2012

5,015,656

By the construction progress

Da Cin Construction Co., Ltd.

—

N/A

N/A

N/A

N/A

Public bidding

Manufacturing purpose

None

Fab

February 13, 2012 to December 27, 2012

1,766,332

By the construction progress

Fu Tsu Construction Co., Ltd.

—

N/A

N/A

N/A

N/A

Public bidding

Manufacturing purpose

None

Fab

March 19, 2012 to December 27, 2012

2,958,930

By the construction progress

China Steel Structure Co., Ltd.

—

N/A

N/A

N/A

N/A

Public bidding

Manufacturing purpose

None

Fab

March 19, 2012 to July 27, 2012

185,115

By the construction progress

Toko Steel Structure Corporation

—

N/A

N/A

N/A

N/A

Public bidding

Manufacturing purpose

None

Fab

May 28, 2012 to November 27, 2012

320,705

By the construction progress

Tasa Construction Corporation

—

N/A

N/A

N/A

N/A

Public bidding

Manufacturing purpose

None

Fab

August 28, 2012 to December 26, 2012

131,678

By the construction progress

Shiny G&M Associated Co., Ltd.

—

N/A

N/A

N/A

N/A

Public bidding

Manufacturing purpose

None

Land

November 21, 2012

963,600

By the contract

Miaoli County Government

—

N/A

N/A

N/A

N/A

Public bidding

Manufacturing purpose

None

 

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TABLE 5

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

TOTAL PURCHASES FROM OR SALES TO RELATED PARTIES OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL

FOR THE YEAR ENDED DECEMBER 31, 2012

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

 

 

Company Name		Related Party		Nature of Relationships		Transaction Details												Abnormal Transaction								Notes/Accounts Payable or Receivable								Note
						Purchases/ Sales		Amount (US$ in Thousands)				% to Total				Payment Terms		Unit Price (Note)				Payment Terms (Note)				Ending Balance (US$ in Thousands)				% to Total
TSMC		TSMC North America		Subsidiary		Sales		$	326,768,469				64			Net 30 days after invoice date			—				—			$	40,748,905				72
		GUC		Investee accounted for using equity method		Sales			4,370,617				1			Net 30 days after monthly closing			—				—				238,380				—
		VIS		Investee accounted for using equity method		Sales			177,331				—			Net 30 days after monthly closing			—				—				—				—
		TSMC China		Subsidiary		Purchases			15,708,447				26			Net 30 days after monthly closing			—				—				(1,616,342	)			10
		WaferTech		Indirect subsidiary		Purchases			8,026,114				14			Net 30 days after monthly closing			—				—				(580,064	)			3
		VIS		Investee accounted for using equity method		Purchases			4,475,674				8			Net 30 days after monthly closing			—				—				(364,790	)			2
		SSMC		Investee accounted for using equity method		Purchases			3,638,633				6			Net 30 days after monthly closing			—				—				(351,389	)			2
TSMC North America		GUC		Investee accounted for using equity method by TSMC		Sales		(US$	509,890 17,238	)			—			Net 30 days after invoice date			—				—			(US$	35,032 1,206	)			—
		Mcube Inc.		Investee accounted for using equity method by TSMC		Sales		(US$	249,375 8,431	)			—			Net 60 days after invoice date			—				—			(US$	80,212 2,762	)			—
Xintec		OmniVision		Parent company of director (represented for Xintec)		Sales			1,261,163				40			Net 30 days after monthly closing			—				—				215,403				50

 

Note:

The sales prices and payment terms to related parties were not significantly different from those of sales to third parties. For other related party transactions, prices and terms were determined in accordance with mutual agreements.

 

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TABLE 6

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

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

DECEMBER 31, 2012

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

 

 

Company Name		Related Party		Nature of Relationships		Ending Balance (US$ in Thousands)				Turnover Days (Note 1)				Overdue								Amounts Received in Subsequent Period				Allowance for Bad Debts
														Amount				Action Taken
TSMC		TSMC North America		Subsidiary		$	40,837,732				37			$	15,905,710				—			$	17,191,890			$	—
		GUC		Investee accounted for using equity method			238,380				15				—				—				—				—
		VIS		Investee accounted for using equity method			122,893				(Note 2	)			—				—				—				—
TSMC Partners		TSMC China		The same parent company		(US$	3,793,421 130,636	)			(Note 2	)			—				—				—				—
TSMC Development		TSMC Solar		The same parent company		(US$	1,496,194 51,525	)			(Note 2	)			—				—				—				—
		TSMC SSL		The same parent company		(US$	203,277 7,000	)			(Note 2	)			—				—				—				—
Xintec		OmniVision		Parent company of director (represented for Xintec)			215,403				66				—				—				—				—
TSMC Technology		TSMC		Parent company		(US$	117,283 4,039	)			(Note 2	)			—				—				—				—
WaferTech		TSMC		Parent company		(US$	580,064 19,976	)			16				—				—				—				—

 

Note 1:

The calculation of turnover days excludes other receivables from related parties.

Note 2:

The ending balance is primarily consisted of other receivables, which is not applicable for the calculation of turnover days.

 

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TABLE 7

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

NAMES, LOCATIONS, AND RELATED INFORMATION OF INVESTEES OVER WHICH THE COMPANY EXERCISES SIGNIFICANT INFLUENCE

DECEMBER 31, 2012

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

 

 

Investor Company		Investee Company		Location		Main Businesses and Products		Original Investment Amount								Balance as of December 31, 2012												Net Income (Losses) of the Investee (Foreign Currencies in Thousands)				Equity in the Earnings (Losses) (Note 1) (Foreign Currencies in Thousands)				Note
								December 31, 2012 (Foreign Currencies in Thousands)				December 31, 2011 (Foreign Currencies in Thousands)				Shares (In Thousands)				Percentage of Ownership				Carrying Value (Foreign Currencies in Thousands)
TSMC		TSMC Global		Tortola, British Virgin Islands		Investment activities		$	42,327,245			$	42,327,245				1				100			$	49,954,386			$	469,933			$	469,933			Subsidiary
		TSMC Partners		Tortola, British Virgin Islands		Investing in companies involved in the design, manufacture, and other related business in the semiconductor industry			31,456,130				31,456,130				988,268				100				38,635,129				5,088,931				5,088,451			Subsidiary
		TSMC China		Shanghai, China		Manufacturing and selling of integrated circuits at the order of and pursuant to product design specifications provided by customers			18,939,667				18,939,667				—				100				17,828,683				4,757,121				4,740,524			Subsidiary
		VIS		Hsin-Chu, Taiwan		Research, design, development, manufacture, packaging, testing and sale of memory integrated circuits, LSI, VLSI and related parts			13,232,288				13,232,288				628,223				40				9,462,038				2,329,808				770,379			Investee accounted for using equity method
		SSMC		Singapore		Fabrication and supply of integrated circuits			5,120,028				5,120,028				314				39				6,710,956				4,721,908				1,831,634			Investee accounted for using equity method
		TSMC Solar		Tai-Chung, Taiwan		Engaged in researching, developing, designing, manufacturing and selling renewable energy and saving related technologies and products			11,180,000				11,180,000				1,118,000				99				6,031,369				(4,037,825	)			(4,044,944	)		Subsidiary
		TSMC North America		San Jose, California, U.S.A.		Selling and marketing of integrated circuits and semiconductor devices			333,718				333,718				11,000				100				3,209,288				312,232				312,232			Subsidiary
		TSMC SSL		Hsin-Chu, Taiwan		Engaged in researching, developing, designing, manufacturing and selling solid state lighting devices and related applications products and systems			4,304,000				2,270,000				430,400				95				2,411,212				(1,466,733	)			(1,397,589	)		Subsidiary
		Xintec		Taoyuan, Taiwan		Wafer level chip size packaging service			1,357,890				1,357,890				94,950				40				1,550,313				(91,177	)			(49,604	)		Investee with a controlling financial interest
		GUC		Hsin-Chu, Taiwan		Researching, developing, manufacturing, testing and marketing of integrated circuits			386,568				386,568				46,688				35				1,222,972				612,369				209,312			Investee accounted for using equity method
		VTAF III		Cayman Islands		Investing in new start-up technology companies			1,896,914				2,074,155				—				50				1,047,285				(177,152	)			122,852			Subsidiary
		VTAF II		Cayman Islands		Investing in new start-up technology companies			704,447				949,267				—				98				563,056				62,349				61,102			Subsidiary
		TSMC Europe		Amsterdam, the Netherlands		Marketing and engineering supporting activities			15,749				15,749				—				100				235,761				34,931				34,931			Subsidiary
		Emerging Alliance		Cayman Islands		Investing in new start-up technology companies			852,258				892,855				—				99				167,359				(2,940	)			(2,925	)		Subsidiary
		TSMC Japan		Yokohama, Japan		Marketing activities			83,760				83,760				6				100				142,412				3,786				3,786			Subsidiary
		TSMC GN		Taipei, Taiwan		Investment activities			100,000				—				—				100				65,007				(24,928	)			(24,928	)		Subsidiary
		TSMC Korea		Seoul, Korea		Customer service and technical supporting activities			13,656				13,656				80				100				26,935				2,602				2,602			Subsidiary
TSMC Solar		Motech		Taipei, Taiwan		Manufacturing and sales of solar cells, crystalline silicon solar cell, and test and measurement instruments and design and construction of solar power systems			6,228,661				6,228,661				87,480				20				2,998,413				(5,037,203	)			Note 2			Investee accounted for using equity method
		VTAF III		Cayman Islands		Investing in new start-up technology companies			1,801,918				1,795,131				—				49				1,322,024				(177,152	)			Note 2			Investee accounted for using equity method
		TSMC Solar Europe		Amsterdam, the Netherlands		Investing in solar related business			504,107				411,032				—				100				175,016				(119,668	)			Note 2			Subsidiary
		TSMC Solar NA		Delaware, U.S.A.		Selling and marketing of solar related products			205,772				147,686				1				100				44,037				(65,268	)			Note 2			Subsidiary

 

(Continued)

 

- 70 -

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Investor Company		Investee Company		Location		Main Businesses and Products		Original Investment Amount								Balance as of December 31, 2012												Net Income (Losses) of the Investee (Foreign Currencies in Thousands)				Equity in the Earnings (Losses) (Note 1) (Foreign Currencies in Thousands)				Note
								December 31, 2012 (Foreign Currencies in Thousands)				December 31, 2011 (Foreign Currencies in Thousands)				Shares (In Thousands)				Percentage of Ownership				Carrying Value (Foreign Currencies in Thousands)
TSMC SSL		TSMC Lighting NA		Delaware, U.S.A.		Selling and marketing of solid state lighting related products		$	3,133			$	3,133				1				100			$	2,864			$	(7	)			Note 2			Subsidiary
TSMC Partners		TSMC Development		Delaware, U.S.A.		Investment activities		US$	0.001			US$	0.001				—				100			US$	604,367			US$	144,333				Note 2			Subsidiary
		VisEra Holding Company		Cayman Islands		Investing in companies involved in the design, manufacturing, and other related businesses in the semiconductor industry		US$	43,000			US$	43,000				43,000				49			US$	104,540			US$	30,091				Note 2			Investee accounted for using equity method
		TSMC Technology		Delaware, U.S.A.		Engineering support activities		US$	0.001			US$	0.001				—				100			US$	11,721			US$	1,106				Note 2			Subsidiary
		ISDF II		Cayman Islands		Investing in new start-up technology companies		US$	14,153			US$	14,153				14,153				97			US$	10,479			US$	(121	)			Note 2			Subsidiary
		ISDF		Cayman Islands		Investing in new start-up technology companies		US$	787			US$	787				787				97			US$	7,805			US$	2,493				Note 2			Subsidiary
		TSMC Canada		Ontario, Canada		Engineering support activities		US$	2,300			US$	2,300				2,300				100			US$	4,589			US$	422				Note 2			Subsidiary
		Mcube Inc.		Delaware, U.S.A.		Research, development, and sale of micro-semiconductor device		US$	1,800			US$	1,800				6,333				25				—			US$	(12,599	)			Note 2			Investee accounted for using equity method
TSMC Development		WaferTech		Washington, U.S.A.		Manufacturing, selling, testing and computer-aided designing of integrated circuits and other semiconductor devices		US$	280,000			US$	280,000				293,637				100			US$	262,053			US$	142,551				Note 2			Subsidiary
VTAF III		Mutual-Pak Technology Co., Ltd.		Taipei, Taiwan		Manufacturing and selling of electronic parts and researching, developing, and testing of RFID		US$	5,212			US$	3,937				15,643				58			US$	2,120			US$	(1,422	)			Note 2			Subsidiary
		Growth Fund		Cayman Islands		Investing in new start-up technology companies		US$	1,830			US$	1,830				—				100			US$	368			US$	(141	)			Note 2			Subsidiary
		VTA Holdings		Delaware, U.S.A.		Investing in new start-up technology companies			—				—				—				62				—				—				Note 2			Subsidiary
VTAF II		VTA Holdings		Delaware, U.S.A.		Investing in new start-up technology companies			—				—				—				31				—				—				Note 2			Subsidiary
Emerging Alliance		VTA Holdings		Delaware, U.S.A.		Investing in new start-up technology companies			—				—				—				7				—				—				Note 2			Subsidiary
TSMC Solar Europe		TSMC Solar Europe GmbH		Hamburg, Germany		Selling of solar related products and providing customer service		EUR	12,400			EUR	9,900				—				100			EUR	4,469			EUR	(3,133	)			Note 2			Subsidiary
TSMC GN		TSMC Solar		Tai-Chung, Taiwan		Engaged in researching, developing, designing, manufacturing and selling renewable energy and saving related technologies and products		$	42,945			$	—				4,294				—			$	23,076			$	(4,037,825	)			Note 2			Investee accounted for using equity method
		TSMC SSL		Hsin-Chu, Taiwan		Engaged in researching, developing, designing, manufacturing and selling solid state lighting devices and related applications products and systems			34,266				—				3,420				1				19,157				(1,466,733	)			Note 2			Investee accounted for using equity method

 

Note 1:

Equity in earnings/losses of investees includes the effect of unrealized gross profit from affiliates.

Note 2:

The equity in the earnings/losses of the investee company is not reflected herein as such amount is already included in the equity in the earnings/losses of the investor company.

 

(Concluded)

 

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TABLE 8

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

INFORMATION ON INVESTMENT IN MAINLAND CHINA

FOR THE YEAR ENDED DECEMBER 31, 2012

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

 

 

Investee Company		Main Businesses and Products		Total Amount of Paid-in Capital (Foreign Currencies in Thousands)				Method of Investment		Accumulated Outflow of Investment from Taiwan as of January 1, 2012 (US$ in Thousands)				Investment Flows								Accumulated Outflow of Investment from Taiwan as of December 31, 2012 (US$ in Thousands)				Percentage of Ownership				Equity in the Earnings (Losses)				Carrying Value as of December 31, 2012 (US$ in Thousands)				Accumulated Inward Remittance of Earnings as of December 31, 2012
														Outflow				Inflow
TSMC China		Manufacturing and selling of integrated circuits at the order of and pursuant to product design specifications provided by customers		$ (RMB	18,939,667 4,502,080	)		(Note 1)		$ (US$	18,939,667 596,000	)		$	—			$	—			$ (US$	18,939,667 596,000	)			100	%		$	4,740,524 (Note 3	)		$	17,828,683			$	—
Shanghai Walden Venture Capital Enterprise		Investing in new start-up technology companies		(US$	2,324,062 78,791	)		(Note 2)		(US$	147,485 5,000	)			—				—			(US$	147,485 5,000	)			6	%			(Note 4	)		(US$	145,190 5,000	)			—

 

Accumulated Investment in Mainland China as of December 31, 2012 (US$ in Thousands)				Investment Amounts Authorized by Investment Commission, MOEA (US$ in Thousands)				Upper Limit on  Investment (US$ in Thousands)
$ (US$	19,087,152 601,000)			$ (US$	19,087,152 601,000	)		$ (US$	19,087,152 601,000	)

 

Note 1:

TSMC directly invested US$596,000 thousand in TSMC China.

Note 2:

TSMC indirectly invested in China company through third region, TSMC Partners.

Note 3:

Amount was recognized based on the audited financial statements.

Note 4:

TSMC Partners invested in financial assets carried at cost, equity in the earnings from which was not recognized.

 

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TABLE 9

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

INTERCOMPANY RELATIONSHIPS AND SIGNIFICANT INTERCOMPANY TRANSACTIONS

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

 

 

A.	For the year ended December 31, 2012

 

No.		Company Name		Counter Party		Nature  of Relationship (Note 1)		Intercompany Transactions
								Financial Statements Item		Amount				Terms (Note 2)		Percentage of Consolidated Total Gross Sales or Total Assets
0		TSMC		TSMC North America		1		Sales		$	326,768,469			—			64	%
								Receivables from related parties			40,748,905			—			4	%
								Other receivables from related parties			88,827			—			—
								Payables to related parties			37,972			—			—
				TSMC China		1		Sales			2,956			—			—
								Purchases			15,708,447			—			3	%
								Marketing expenses - commission			72,373			—			—
								Disposal of property, plant and equipment			46,941			—			—
								Purchases of property, plant and equipment			216,084			—			—
								Loss on disposal of property, plant and equipment, net			18,699			—			—
								Other receivables from related parties			2,686			—			—
								Payables to related parties			1,616,342			—			—
								Deferred credits			17,271			—			—
				TSMC Japan		1		Marketing expenses - commission			277,374			—			—
								Payables to related parties			41,532			—			—
				TSMC Europe		1		Marketing expenses - commission			345,906			—			—
								Research and development expenses			49,763			—			—
								Payables to related parties			32,226			—			—
				TSMC Korea		1		Marketing expenses - commission			20,643			—			—
				TSMC Technology		1		Research and development expenses			713,323			—			—
								Payables to related parties			117,283			—			—
				WaferTech		1		Sales			12,745			—			—
								Purchases			8,026,114			—			2	%
								Payables to related parties			580,064			—			—
				TSMC Canada		1		Research and development expenses			206,894			—			—
								Payables to related parties			14,388			—			—
				Xintec		1		Manufacturing expenses			180,768			—			—
								Research and development expenses			5,023			—			—
								Payables to related parties			36,434			—			—
				TSMC SSL		1		Miscellaneous revenue			5,625			—			—
				TSMC Solar		1		General and administrative expenses			2,694			—			—
								Purchases of property, plant and equipment			14,448			—			—
								Miscellaneous revenue			5,625			—			—
								Payables to related parties			7,373			—			—
				TSMC Global		1		Interest expenses			4,870			—			—

 

(Continued)

 

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No.		Company Name		Counter Party		Nature of Relationship (Note 1)		Intercompany Transactions
								Financial Statements Item		Amount				Terms (Note 2)		Percentage of Consolidated Total Gross Sales or Total Assets
1		TSMC Partners		TSMC China		3		Other receivables from related parties		$	3,793,421			—			—
								Interest income			16,905			—			—
				TSMC Solar		3		Interest income			2,558			—			—
2		TSMC Solar		TSMC Solar Europe GmbH		1		Sales			23,771			—			—
								Receivables from related parties			3,659			—			—
				TSMC Solar NA		1		Sales			3,897			—			—
				TSMC Development		3		Other payable to related parties			1,496,194			—			—
3		TSMC SSL		TSMC Development		3		Other payable to related parties			203,277			—			—
3		TSMC Development		WaferTech		1		Other receivables from related parties			35,416			—			—

 

Note 1:

No. 1 represents the transactions from parent company to subsidiary.

No. 3 represents the transactions between subsidiaries.

Note 2:

The sales prices and payment terms of intercompany sales are not significantly different from those to third parties. For other intercompany transactions, prices and terms are determined in accordance with mutual agreements.

 

(Continued)

 

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B.	For the year ended December 31, 2011

 

								Intercompany Transactions
No.		Company Name		Counter Party		Nature of Relationship (Note 1)		Financial Statements Item		Amount				Terms (Note 2)		Percentage of Consolidated  Total Gross Sales or Total Assets
0		TSMC		TSMC North America		1		Sales		$	234,902,043			—			55	%
								Receivables from related parties			24,661,104			—			3	%
								Other receivables from related parties			23,887			—			—
								Payables to related parties			26,536			—			—
				TSMC China		1		Sales			9,834			—			—
								Purchases			10,392,189			—			2	%
								Marketing expenses - commission			64,907			—			—
								Sales of property, plant and equipment			2,885,847			—			1	%
								Purchases of property, plant and equipment			70,491			—			—
								Gain on disposal of property, plant and equipment			94,987			—			—
								Technical service income			1,063			—			—
								Other receivables from related parties			23,688			—			—
								Payables to related parties			946,826			—			—
								Other assets			1,493			—			—
				TSMC Japan		1		Marketing expenses - commission			284,644			—			—
								Payables to related parties			68,873			—			—
				TSMC Europe		1		Marketing expenses - commission			357,582			—			—
								Research and development expenses			45,489			—			—
								Payables to related parties			29,957			—			—
				TSMC Korea		1		Marketing expenses - commission			22,049			—			—
								Payables to related parties			3,146			—			—
				GUC (Note 3)		1		Sales			1,158,302			—			—
								Research and development expenses			5,718			—			—
				TSMC Technology		1		Research and development expenses			534,804			—			—
								Payables to related parties			112,926			—			—
				WaferTech		1		Sales			27,049			—			—
								Purchases			7,305,879			—			2	%
								Sales of property, plant and equipment			72,880			—			—
								Gain on disposal of property, plant and equipment			1,463			—			—
								Other receivables from related parties			14,196			—			—
								Payables to related parties			420,459			—			—
				TSMC Canada		1		Research and development expenses			192,616			—			—
								Payables to related parties			18,887			—			—
				Xintec		1		Manufacturing overhead			260,250			—			—
								Research and development expenses			7,313			—			—
								Settlement loss			19,686			—			—
								Payables to related parties			37,013			—			—
				TSMC Solar Europe GmbH		1		Sales			148,898			—			—
				TSMC SSL		1		Miscellaneous revenue			2,625			—			—
								Other receivables from related parties			1,947			—			—
				TSMC Solar		1		Miscellaneous revenue			2,625			—			—
								Other receivables from related parties			1,857			—			—
				TSMC Global		1		Interest expense			22,293			—			—

 

(Continued)

 

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No.		Company Name		Counter Party				Intercompany Transactions
						Nature of Relationship (Note 1)		Financial Statements Item		Amount				Terms (Note 2)		Percentage of Consolidated  Total Gross Sales or Total Assets
1		GUC (Note 3)		TSMC North America		3		Purchases		$	296,462			—			—
								Manufacturing overhead			120,408			—			—
				GUC-NA		3		Operating expenses			61,369			—			—
								Manufacturing overhead			30,583			—			—
				GUC-Japan		3		Operating expenses			21,826			—			—
				GUC-Shanghai		3		Operating expenses			8,568			—			—
2		TSMC Partners		TSMC China		3		Long-term receivables from related parties			7,591,420			—			1	%
								Interest income			17,773			—			—
				TSMC SSL		3		Other receivables from related parties			348,369			—			—
				TSMC Solar		3		Other receivables from related parties			454,634			—			—

 

Note 1:

No. 1 represents the transactions from parent company to subsidiary.

No. 3 represents the transactions between subsidiaries.

Note 2:

The sales prices and payment terms of intercompany sales are not significantly different from those to third parties. For other intercompany transactions, prices and terms are determined in accordance with mutual agreements.

Note 3:

The Company has no controlling interest over the financial, operating and personnel hiring policy decisions of GUC and its subsidiaries since July 2011. As a result, GUC and its subsidiaries are no longer consolidated and are accounted for using the equity method.

 

(Concluded)

 

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