TSMC
Annual Report 2012

Plain-text annual report

TSMC ANNUAL REPORT 2012 (I) TSMC VISION & CORE VALUES TABLE OF CONTENTS TSMC’s Vision Our vision is to be the most advanced and largest technology and foundry services provider to fabless companies and IDMs, and in partnership with them, to forge a powerful competitive force in the semiconductor industry. To realize our vision, we must have a trinity of strengths: (1) be a technology leader, competitive with the leading IDMs (2) be the manufacturing leader (3) be the most reputable, service-oriented and maximum-total-benefits silicon foundry. TSMC Core Values Integrity – Integrity is our most basic and most important core value. We tell the truth. We believe the record of our accomplishments is the best proof of our merit. Hence, we do not brag. We do not make commitments lightly. Once we make a commitment, we devote ourselves completely to meeting that commitment. We compete to our fullest within the law, but we do not slander our competitors and we respect the intellectual property rights of others. With vendors, we maintain an objective, consistent, and impartial attitude. We do not tolerate any form of corrupt behavior or politicking. When selecting new employees, we place emphasis on the candidates’ qualifications and character, not connections or access. Commitment – TSMC is committed to the welfare of customers, suppliers, employees, shareholders, and society. These stakeholders all contribute to TSMC’s success, and TSMC is dedicated to serving their best interests. In return, TSMC hopes all these stakeholders will make a mutual commitment to the Company. Innovation – Innovation is the wellspring of TSMC’s growth, and is a part of all aspects of our business, from strategic planning, marketing and management, to technology and manufacturing. At TSMC, innovation means more than new ideas, it means putting ideas into practice. Customer Trust – At TSMC, customers come first. Their success is our success, and we value their ability to compete as we value our own. We strive to build deep and enduring relationships with our customers, who trust and rely on us to be part of their success over the long term. 2 2 0 0 1 1 2 2 T T S S M M C C A A N N N N U U A A L L R R E E P P O O R R T T 1. Letter to Shareholders 2. Company Profile 2.1 An Introduction to TSMC 2.2 Market/Business Summary 2.3 Organization 2.4 Board Members 2.5 Management Team 3. Corporate Governance 3.1 Board of Directors 3.2 Major Resolutions of Shareholders’ Meeting and Board Meetings 3.3 Taiwan Corporate Governance 5 10 10 10 14 16 22 32 32 36 5. Operational Highlights 5.1 Business Activities 5.2 Technology Leadership 5.3 Manufacturing Excellence 5.4 Customer Trust 5.5 Employees 5.6 Material Contracts 6. Financial Highlights 6.1 Financial Status and Operating Results 6.2 Risk Management 7. Corporate Social Responsibility 7.1 Environmental, Safety and Health (ESH) Implementation as Required by the Taiwan Management 64 64 65 71 73 75 78 82 82 86 98 99 105 106 7.2 TSMC Education and Culture Foundation 7.3 TSMC Volunteer Program 7.4 Social Responsibility Implementation Status as Required by the Taiwan Financial Supervisory Commission 109 8. Subsidiary Information and Other Special Notes 8.1 Subsidiaries 8.2 Status of TSMC Common Shares and ADRs Acquired, Disposed of, and Held by Subsidiaries 8.3 Special Notes 112 112 117 117 Financial Supervisory Commission 3.4 Code of Ethics and Business Conduct 3.5 Regulatory Compliance 3.6 Internal Control System Execution Status 3.7 Status of Personnel Responsible for the Company’s Financial and Business Operation 3.8 Information Regarding TSMC’s Independent Auditor 3.9 Material Information Management Procedure 4. Capital and Shares 4.1 Capital and Shares 4.2 Issuance of Corporate Bonds 4.3 Preferred Shares 4.4 Issuance of American Depositary Shares 4.5 Status of Employee Stock Option Plan 4.6 Status of Employee Restricted Stock 4.7 Status of New Share Issuance in Connection with Mergers and Acquisitions 4.8 Financing Plans and Implementation 38 39 43 44 45 45 45 48 48 54 56 56 58 60 60 60 1. Letter to Shareholders Dear Shareholders, In 2012 TSMC achieved record revenue and net profit, despite a decline in world semiconductor industry revenue related to slower global economic growth. Our performance was driven largely by the growing global demand for mobile IC products, such as tablets and smartphones. Designers of these products are rapidly migrating to 28-nanometer technology, where TSMC has commanded a very strong position among the semiconductor foundry players. As we continued to expand our technology leadership with multiple years of intensified R&D and capital investment, our leadership position in mobile IC was strengthened by our close partnerships with customers, who count on TSMC to deliver the advanced technology nodes that enable their innovative designs with higher speed, lower power consumption and smaller form factor. We believe TSMC is well positioned to meet the strong demand for mobile products in the next several years. In 2012 we accelerated the installation of 28-nanometer capacity and production at an unprecedented pace in order to meet customers’ strong demand. As a result, TSMC’s shipment of 28-nanometer wafers increased thirty-fold in 2012 from its 2011 level. Other achievements in 2012 include: ● Our total wafer shipments reached 14.04 million 8-inch equivalent wafers. ● Our advanced technologies (65-nanometer and beyond) reached 62 percent of total wafer revenue. ● Our share of the total semiconductor foundry segment increased for the third consecutive year and reached 45 percent. 2012 Financial Performance Capacity Plan 17% 14% 11% 2011 2012 2013 Sales Breakdown by Technology Outlook 13.22 million 15.09 million 16.71 million 2011 2012 2013 44% 38% 33% 56% 62% 67% Innovations in mobile computing products have changed the way people live, and advancement of semiconductor technologies enabled these changes. Through our efforts in the past 25 years, TSMC has achieved technology leadership, manufacturing excellence, and the trust of our customers. Allied with our customers, suppliers, and ecosystem partners, we believe TSMC is well positioned to expand the technology frontier, enable innovations further, and to fulfill our mission as the trusted technology and capacity provider for the global logic IC industry for years to come. Annual Growth Rate Capacity: 8-inch equivalent wafers ≥ 90nm 2013 wafer shipment is expected to be ≤ 65nm approximately 15 million 8-inch equivalent wafers. TSMC became the world’s first foundry to provide a full system integration, turn-key solution to customers in 2012. Our backend technologies included advanced interconnect, production-ready fine pitch silicon interposer with through silicon via (TSV) and chip stacking, and advanced wafer-level-chip scale packaging (WLCSP). We can offer customers design tools, technology and mass production capability. TSMC has gained important customer wins and segment share not only through manufacturing excellence, but also through other key competitive advantages, not the least of which is our open design ecosystem, the Open Innovation Platform® (OIP). OIP becomes an even more important competitive advantage for TSMC as customers engage the exploration-solution-validation design cycle at 20- and 16-nanometer geometries, which represent a new frontier in precision technology manufacturing. Consolidated revenue totaled NT$506.25 billion, an increase of 18.5 percent over NT$427.08 billion in 2011. Net income was NT$166.16 billion and diluted earnings per share were NT$6.41, both increased 23.8 percent from the 2011 level of NT$134.20 billion net income and Corporate Developments NT$5.18 diluted EPS. In US dollars, TSMC generated net income of US$5.62 billion on consolidated revenue of US$17.12 billion, compared with net income of US$4.57 billion on consolidated revenue of US$14.54 billion for 2011. To accelerate the development of key next-generation lithographic technology, in August 2012 TSMC joined the ASML Holding N.V. Customer Co-Investment Program. The program’s scope includes development of extreme ultraviolet (EUV) lithography technology and 450-millimeter lithography tools. Under the agreement with ASML, TSMC made an investment of €838 million to acquire 5 percent of ASML’s equity, and will commit €277 million, spread over five years, to ASML’s R&D program. Gross profit margin was 48.1 percent compared with 45.4 percent in 2011, and operating profit margin reached 35.8 percent compared with 33.1 percent a year earlier. Net profit margin was 32.8 percent, an increase of 1.4 percentage points from the previous year’s 31.4 Honors and Awards percent. Technological Developments We are augmenting our strong position in 28-nanometer technology with the development of our 20-nanometer System-on-Chip (20-SoC) and 16-nanometer FinFET, or field-effect transistor with three-dimensional architecture. Both 20-nanometer and 16-nanometer FinFET are making progress in R&D and represent state-of-the-art leading-edge technologies, not just in foundry but in the whole semiconductor industry. In November 2012, we began to accept customers’ test chips for our 20-nanometer SoC technology, and volume production is scheduled to begin in 2014. In 2012, we completed the 16-nanometer FinFET technology definition and began development, and we successfully taped out process development test vehicle and demonstrated functional yield on the FinFET-based SRAM bit-cells. Risk production of TSMC’s 16-FinFET is expected to follow 20-SoC by one year. This is a somewhat faster cadence than our previous generations, enabled by the similarity in interconnect density shared between 20-SoC and 16-FinFET. At the same time, pathfinding for 10-nanometer node has started with multiple patterning on immersion scanners. Innovative processes are being developed to deal with the unique challenges of this technology node. 2 0 1 2 T S M C A N N U A L R E P O R T 005 TSMC in 2012 received numerous honors and awards for our efforts in sustainability, corporate governance, investor relations, and innovation from Corporate Governance Asia, EuroMoney, FinanceAsia, Institutional Investor, IR Magazine, CommonWealth Magazine, and Global Views Magazine. As a leader in green manufacturing, we were honored that TSMC’s Fab 12, Phases 1 and 2, manufacturing facility earned the world’s first LEED1 “Platinum” certification for a semiconductor wafer fab. Dow Jones Sustainability Indexes (DJSI) not only included TSMC in its index for the 12th consecutive year, but also named TSMC the semiconductor sector leader for the second time since 2010, highlighting our dedication to corporate social responsibility, leadership in adopting international sustainability management standards, and continued innovation in the economic, environmental, and social dimensions. Morris Chang Morris Chang Chairman and Chief Executive Officer Chairman and Chief Executive Officer Footnote 1: LEED stands for the “Leadership in Energy and Environmental Design,” a rating system run by the U.S. Green Building Council that conducts the certifi cation process. 006 007 506.2 2012 Revenues NT$ Billion Reaching Another Record High 2008 Revenues NT$ Billion Exceeding US$10 Billion for the First Time 333.2 166.2 2000 Revenues NT$ Billion Exceeding NT$100 Billion for the First Time 1997 Revenues NT$ Billion ADRs Listed on New York Stock Exchange 43.9 19.3 1994 Revenues NT$ Billion Listed on Taiwan Stock Exchange 1988 Revenues NT$ Billion First Profitable Year 1.0 1987 TSMC Founded 2. Company Profile 2.1 An Introduction to TSMC TSMC’s subsidiaries “TSMC Solid State Lighting Ltd.” and “TSMC Solar Ltd.” also respectively engage in the researching, developing, TSMC is the world’s largest pure-play semiconductor foundry. designing, manufacturing and selling of solid state lighting devices as Founded on February 21, 1987 and headquartered in Hsinchu, well as related products and systems, and solar-related technologies Taiwan, TSMC pioneered the business model of focusing solely on and products. manufacturing customers’ semiconductor designs. As a pure-play semiconductor foundry, the Company does not design, manufacture, The Company is listed on the Taiwan Stock Exchange (TWSE) under or market semiconductor products under its own brand name, ticker number 2330, and its American Depositary Shares trade on the ensuring that TSMC does not compete directly with its customers. New York Stock Exchange (NYSE) under the symbol “TSM”. With a diverse global customer base, TSMC-manufactured microchips are used in a broad variety of applications that cover various segments of the computer, communications, consumer, industrial and other electronics markets. 2.2 Market/Business Summary 2.2.1 TSMC Achievements ● 16nm FinFET technology (16FF) is under development to provide best value in speed/power optimization to meet next generation ● 0.18μm BCD second generation is in risk production stage. It offers worldwide competitive power LDMOS Rds(on) performance products requirements in CPU (Central Processing Unit), GPU and with wide voltage spectrum from 6V to 70V for multiple (Graphics Processing Unit), APU (Accelerated Processing Unit), applications in Computing, Communication and Consumer markets. FPGA (Field-Programmable Gate Array), Networking and mobile computing applications, including smartphones, tablets and ● 0.18μm and 0.25μm high-precision analog process was fully released, and offers TFR (Thin Film Resistor) and high linearity high-end SoC (System-on-Chip) devices. MIM (Metal-Insulator-Metal) for performance-driven mixed-signal ● 20nm System-on-Chip technology (20-SoC) is under applications. development to provide the migration path from 28nm for both performance-driven products and mobile computing applications. In addition, TSMC further strengthened its comprehensive ● 28nm High Performance (28HP) technology for performance-driven development of specialty technologies in 2012, including the release markets like CPU, GPU, APU, FPGA and high-speed networking of 0.5μm ultra high voltage power IC technology, 90nm/65nm applications. smartcard, 40nm automotive and Backside Illumination CMOS Image ● 28nm High Performance Mobile computing (28HPM) technology Sensor (BSI CIS), which successfully migrated to 65nm from 0.11μm for tablets, smartphones, and high-end SoC applications. and to volume production in 12-inch fabs. In 2012, TSMC offered ● 28nm Low Power (28LP & 28HPL) and RF (28HPL-RF) technology a motion sensor 3D modular MEMS (Micro Electro Mechanical for mainstream smartphones, application processors, tablets, home Systems) with 30μm thick MEMS structure and wafer level bonding entertainment and digital consumer applications. for hermetic seal of the MEMS device. These first wave customers ● 40nm general purpose technology for performance-driven markets like CPU, GPU, FPGA, HDD, Game Console, Network Processor and have adapted the modular MEMS structure with separate ASIC driver chip for accelerometer application and are now in production. TSMC Annual capacity of the manufacturing facilities managed by TSMC, segment of the global semiconductor industry, with an estimated including subsidiaries and joint ventures, totaled 15.09 million 8-inch market segment share of 45%. TSMC achieved this result amid ● 40nm low power and RF technology for smartphones, DTV (Digital rule in the first quarter 2013 as a general offering. These specialty Television), STB (Set-Top-Box), game and wireless connectivity technologies are key differentiators from our competitors and provide equivalent wafers in 2012. In Taiwan, TSMC operates three advanced intense competition from both established players and relatively new applications. customers more added value. In 2012, TSMC maintained its leading position in the total foundry Gigabit Ethernet applications. will offer fully integrated CMOS 3D modular MEMS with design 12-inch wafer fabs, four 8-inch wafer fabs, and one 6-inch wafer fab. entrants to the business. TSMC also manages two 8-inch fabs at wholly owned subsidiaries: WaferTech in the United States and TSMC China Company Limited. In Leadership in advanced process technologies is a key factor in TSMC’s addition, TSMC obtains 8-inch wafer capacity from other companies strong market position. In 2012, 77% of TSMC’s wafer revenue in which the Company has an equity interest. came from manufacturing processes with geometries of 0.13μm and below; 62% of TSMC’s wafer revenue came from 65nm processes TSMC provides customer service through its account management and below. and engineering services offices in North America, Europe, Japan, China, South Korea, and India. The Company employed more than 37,000 people worldwide as of the end of 2012. With TSMC’s focus on customer trust, the Company continuously strengthened its Open Innovation Platform® (OIP) initiative in 2012 with additional innovative services. During the 2012 TSMC continued to lead the foundry segment of the semiconductor TSMC Technology Symposium and the 2012 Design Automation industry in both advanced and “More-than-Moore” process technologies. Already the first foundry to provide 65nm and 40nm production capacity, TSMC in 2012 also reached full volume Conference of IEEE/ACM, the Company revealed TSMC 20nm Reference Flow, CoWoSTM Reference Flow, the fourth revision of radio frequency (RF) reference design kit, and 20nm Custom Design production of 28nm featuring 28HP & 28HPM for high performance Reference Flow, to highlight the success of design enablement and 28LP & 28HPL for low power, and began the initial customer tape out of 20nm technology. In addition to general-purpose logic through OIP. The OIP Ecosystem Forum, which was held in October 2012 at San Jose, California, was well attended by both customers process technology, TSMC supports the wide-ranging needs of its and ecosystem partners to demonstrate the value of collaboration customers with embedded non-volatile memory, embedded DRAM, through OIP to foster innovations. Mixed Signal/RF, high voltage, CMOS image sensor, MEMS, silicon ● 40nm eFlash for non-volatile memory technologies under joint development for high-end automotive application. ● 55nm low power RF technology for WLAN (Wireless Local Area 2.2.2 Market Overview Network), Bluetooth and other handheld applications. We estimate that the worldwide semiconductor market in 2012 ● 55nm & 65nm 5V LDMOS (Laterally Diffused Metal Oxide reached US$308 billion in revenue, a 2% decline compared to 2011. Semiconductor) for power management application. Total foundry, a manufacturing sub-segment of the semiconductor ● 55nm and 85nm ultra-low power technology for flash controller industry, generated total revenues of US$34 billion in 2012, or 16% applications. YoY growth. ● 65nm joint developed eFlash technology qualified and in production for industrial/automotive microcontroller and smartcard applications. ● 80nm & 0.11μm high voltage process for high resolution HD720 and FHD display driver IC, which could support Retina to Super Retina display quality in smartphones. ● 90nm uLL (Ultra Low Leakage) eFlash technology qualified and in production for ASIC (Application-Specific Integrated Circuit) and microcontroller applications. ● 0.13μm new generation BCD (Binary Coded Decimal) process for mobile computing is in risk production stage. It offers worldwide competitive power LDMOS Rds(on) performance for better power efficiency and allows micro controller integration to further increase germanium technologies and automotive service packages. TSMC continued to advance the semiconductor roadmap in 2012. battery life. Examples of technologies the Company either developed or rolled out include: 011 2 0 1 2 T S M C A N N U A L R E P O R T 010 2.2.3 Industry Outlook, Opportunities and Threats Requirements of lower power, higher performance and integration 2.2.4 TSMC Position, Differentiation and Strategy To address the dual challenges of falling wafer prices and fiercer Industry Demand and Supply Outlook Following 5% growth in 2011, foundry segment growth accelerated significantly by 16% in 2012, mainly driven by fabless market share gain over IDM and process technology advancement. We forecast total semiconductor market to grow 3% YoY in 2013. Longer term, increasing semiconductor content in electronics devices, continuing market share gain of fabless, and increasing in-house ASIC from system companies, foundry sales are expected to display much stronger growth than the projected 4% compound annual growth rate (CAGR) for the total semiconductor industry from 2012 through 2017. As an upstream supplier in the semiconductor supply chain, the condition of the foundry segment is tightly correlated with the market health of the 3Cs: communications, computer and consumer. ● Communications The communications sector, particularly the handset segment, posted a modest 5% growth in unit shipments for 2012. Smartphones, which have much higher semiconductor content, have been leading the growth of the sector. The continuing transition to 4G/LTE handsets will bring positive momentum to the market. Smartphones with increasing for key computer components such as CPU, GPU, Chipset, etc., should drive product design demand for leading process technologies. ● Consumer After flat sales in 2011, the consumer sector lost momentum in 2012 with a decline of 2% in aggregated unit shipment growth YoY. Economic uncertainties have stifled buyers’ appetite for consumer electronics products, and the growth of mobile computing devices has also impacted the consumer electronics sales. Moving forward, new product launches such as the introduction of a new generation of game consoles will stimulate new interest in video games. Low-priced, large screen TVs will kindle end-consumer buying interest. And, government subsidy programs in multiple countries should drive the adoption of DTV. Meanwhile, increasing innovations in the consumer sector have also encouraged new usage models, such as integration of touch sensing, motion recognition, high-resolution and 3D display. Besides the need for advanced technologies, “More-than-Moore” technologies such as CMOS Image Sensor (CIS), High-Voltage (HV) drivers, embedded memory, micro-controller and MEMS are becoming prominent requirements. With its comprehensive technology portfolio, TSMC will be able to capitalize on these trends. performance, lower power and more intelligent features will continue Emerging Applications to propel the buying interest of new handsets in 2013. The growing Emerging new applications such as tablets are increasing popularity of low-end smartphones in the emerging countries is also contributions to foundry segment revenue. Led by Apple’s iPad, a new catalyst driving the growth of the sector. around 155 million tablets shipped in 2012 compared with 68 Low power IC is an essential requirement among handset 2013 as more models are introduced by other OEMs. We forecast the manufacturers. The System-on-Chip (SoC) design for more optimized tablet market will grow with a 23% CAGR from 2012 through 2017, cost, power and form-factor (i.e. device footprint), plus the appetite and become a strong growth driver for both the semiconductor million units in 2011. The strong sales momentum will continue in for higher performance to run complicated software, will continue to industry and foundry segment. accelerate the migration to advanced process technologies in which TSMC is already the leader. Supply Chain ● Computer The computer sector’s unit shipment growth declined 3% YoY in 2012 after a close to flat year in 2011. Cautious spending in developed countries and budget competition from tablet products were among the factors causing the weak demand. Moving into 2013, PC market will decline. While pessimism regarding the economic outlook will overhang the sector, new innovative features and form-factors such as detachable keyboard, hybrid notebook and the introduction of the new Windows 8 operating system are expected to stimulate PC demand. The electronics industry consists of a long and complex supply chain, the elements of which are highly dependent and correlated with each other. At the upstream IC manufacturing level, it is important for IC vendors to have sufficient and flexible supply to support the dynamic market situation. The foundry vendors are playing an important role to ensure the health of the supply chain. As a leader in the foundry segment, TSMC provides leading technologies and large-scale capacity to complement the innovations created along the downstream chain. 2 0 1 2 T S M C A N N U A L R E P O R T 012 competition from other semiconductor manufacturing companies, TSMC continually strengthens its core competitiveness and properly deploys its short-term and long-term technology and business development plans in order to enhance its Return on Investment (ROI) and growth objectives. ● Short-term semiconductor business development plan 1) Substantially ramp up the business and sustain market segment share of advanced technologies with further investment in capacity. 2) Maintain market segment share of mainstream technology by expanding business into new customer and market segments with off-the-shelf technologies. 3) Grow business with IDMs by establishing a closer relationship on technology development. ● Long-term semiconductor business development plan 1) Continue developing the leading edge technologies consistent with Moore’s law. 2) Broaden “More-than-Moore” business contribution by further developing derivative technologies. 3) Further expand TSMC’s business and service infrastructure into emerging and developing markets. Position As the leader in the semiconductor foundry segment, TSMC commanded a 45% share of this segment in 2012, with total consolidated revenue of US$17.1 billion. In terms of geographic distribution of net sales, 69% came from companies headquartered in North America; 14% from the Asia Pacific region, excluding China and Japan; 9% from Europe; 5% from China; and 3% from Japan. By end product application, 19% of TSMC’s net sales came from the computer sector, 50% from communications, 9% from consumer products, and 22% from industrial and standard products. Differentiation TSMC’s leadership position is based on a trinity of key differentiating strengths: technology leadership, manufacturing excellence, and customer trust. As a technology leader, TSMC has consistently been first among pure-play foundries in developing the next generation of leading-edge technologies. As a manufacturing leader, TSMC is renowned for its yield management, and offers best-in-class designer/developer support services to expedite time-to-market and time-to-volume. As to customer trust, TSMC works closely with its customers on end-to-end collaboration to optimize design and manufacturing efficiencies. And as a pure-play foundry, TSMC does not compete with its customers. TSMC continually builds on this trinity of strengths to provide the best overall value to its customers. Strategy TSMC is confident its differentiating strengths will enable it to leverage the attractive growth opportunities in the foundry sector going forward. TSMC works constantly to ensure that these strengths are maintained and improved. For example, TSMC is intensively working on the leading-edge 20nm and 16nm FinFET technologies to maintain its technology leadership position. Numerous efforts are also underway to ensure manufacturing excellence, such as continuing enhancement of Design-For-Manufacturing (DFM) support services to increase yield and efficiency. TSMC also expanded its Open Innovation Platform® initiative, a set of ecosystem interfaces and collaborative components initiated and supported by TSMC that efficiently empowers innovation throughout the supply chain to enhance timely innovation. TSMC conducted customer reviews and surveys throughout 2012 to better understand customer needs and wants, and accordingly may adjust its offerings in response, thereby further strengthening its relationship with customers. 013 2.3 Organization 2.3.1 Organization Chart Audit Committee Compensation Committee Shareholders’ Meeting Board of Directors Chairman Vice Chairman CEO Internal Audit Finance and Spokesperson Co-COO Office Legal Research and Development Information Technology Materials Management and Risk Management Operations Human Resources Worldwide Sales and Marketing Business Development North America Corporate Planning Organization Quality and Reliability Note: Senior Vice President of R&D Dr. Shang-yi Chiang, Senior Vice President of Operations Dr. Mark Liu, and Senior Vice President of Business Development Dr. C.C. Wei were appointed as Executive Vice Presidents and Co-Chief Operating Officers of TSMC on March 2, 2012. Following these appointments, the three Executive VPs and Co-COOs, as well as TSMC’s Finance and Legal organizations, will report directly to the Chairman and Chief Executive Officer Dr. Morris Chang. All other organizations will report to the three Executive VPs and Co-COOs. The new organizational structure became effective on March 5, 2012. 2.3.2 Major Corporate Functions North America Research and Development ● Advanced and mainstream technology research and development, ● Sales operations, market development, field technical support and service for North America customers exploratory research and development, design services and Corporate Planning Organization technology platform development Information Technology ● Operation resources planning, production and demand planning, and business process integration ● Technology system integration, business system integration, IT Quality and Reliability infrastructure and communication service, IT security, IT productivity ● Quality and reliability management and quality management Materials Management and Risk Management ● Purchasing, warehousing, import and export, logistics support, environmental protection, industrial safety, health management, and risk management Operations Finance and Spokesperson ● Corporate finance, accounting, investor relations, public relations, tax, financial planning, investment management, and strategic program ● Corporate spokesperson Legal ● Product development, manufacturing technology, mainstream fabs, 300mm fabs, affiliate fabs, and back-end technology and service ● Corporate legal affairs, litigation, commercial transactions, patents and other intellectual property management, compliance and Human Resources regulatory work ● Human resources management and organizational development Internal Audit ● Proprietary information protection (PIP) and physical security ● Internal control risk monitoring and independent assessment of management compliance Worldwide Sales and Marketing ● Brand management, market analysis & forecast, customer service and regional sales operations or service and field technical support for Japan, Asia, China and Europe Business Development ● Develop semiconductor foundry business in mobile computing, computer, consumer electronics, communication and industrial related products; identify new applications and markets, and solidify customer relationship 015 2 0 1 2 T S M C A N N U A L R E P O R T 014 2.4 Board Members 2.4.1 Information Regarding Board Members Title/Name Chairman Morris Chang Vice Chairman F.C. Tseng Date Elected Term Expires Date First Elected 06/12/2012 06/11/2015 12/10/1986 Shareholding When Elected Current Shareholding Spouse & Minor Shareholding Shares 123,137,914 % 0.48% Shares 123,137,914 % 0.47% Shares 135,217 % 0.00% Selected Education, Past Positions & Current Positions at Non-profit Organizations B.S. and M.S. degrees in Mechanical Engineering, MIT Ph.D. in Electrical Engineering, Stanford University Former Group Senior Vice-President, Texas Instruments Inc. Former President & COO, General Instrument Corporation Former Chairman, Industrial Technology Research Institute Life Member Emeritus of MIT Corporation Member of National Academy of Engineering, U.S. 06/12/2012 06/11/2015 05/13/1997 34,662,675 0.13% 34,662,675 0.13% 132,855 0.00% Ph.D. in Electrical Engineering, National Chengkung University, Taiwan Former President, Vanguard International Semiconductor Corp. Former President, TSMC Former Deputy CEO, TSMC Chairman, TSMC Education and Culture Foundation As of 02/28/2013 Selected Current Positions at TSMC and Other Companies CEO, TSMC Chairman of: - TSMC China Company Ltd. - Global Unichip Corp. Director of: - TSMC Solar Ltd. - TSMC Solid State Lighting Ltd. - Vanguard International Semiconductor Corp. - digimax, Inc. Independent Director, Compensation Committee member & Chairman of the Financial Statement and Internal Control Review Committee, Acer Inc. Director National Development Fund, Executive Yuan (Note 1) Representative: Johnsee Lee 06/12/2012 06/11/2015 12/10/1986 1,653,709,980 6.38% 1,653,709,980 6.38% 08/06/2010 (Note 2) - - - - 06/12/2012 06/11/2015 06/03/2003 33,665,046 0.13% 32,687,046 0.13% 06/12/2012 06/11/2015 05/07/2002 - - - - - - - - - - Ph.D. in Chemical Engineering, Illinois Institute of Technology MBA, University of Chicago Graduate of Harvard Business School’s Advanced Management Program Independent Director of: - Taiwan Polysilicon Corp. - Zhen Ding Technology Holding Ltd. - Far Eastern New Century Corp. Former Principal Investigator, Argonne National Laboratory Former Senior Manager, Johnson Matthey Inc. Former President, Industrial Technology Research Institute Chairman, Development Center for Biotechnology President, Taiwan Bio Industry Organization - Ph.D. in Material Science, Cornell University, U.S. Former President, Vanguard International Semiconductor Corp. Former Executive Vice President, Worldwide Marketing and Sales, TSMC Former COO, TSMC Former President & CEO, TSMC Former President of New Businesses, TSMC Advisor, Executive Yuan, R.O.C. - Honours Degree in Engineering, Loughborough University Fellow of the Royal Academy of Engineering Chair of Council and Senior Pro-Chancellor, Loughborough University, UK Former Chairman and CEO, ICL Plc Former CEO and Chairman of the Executive Committee, British Telecommunications Plc Former Vice President, the British Quality Foundation Chairman & CEO, TSMC Solar Ltd. Chairman & CEO, TSMC Solid State Lighting Ltd. Director, TSMC subsidiary President, TSMC subsidiaries Director, Motech Industries, Inc. Chairman, NXP Semiconductors N.V., the Netherlands Director of: - Sony Corporation, Japan - L.M. Ericsson, Sweden - Mentor Graphics Corporation Inc., Oregon, U.S. Member of: - The Longreach Group Advisory Board - The Sony Corporation Advisory Board - New Venture Partners LLP Advisory Board Advisor to Apax Partners LLP Board Mentor, CMi Senior Advisor to Rothschild, London 06/12/2012 06/11/2015 04/14/2000 1,480,286 0.01% 1,480,286 0.01% 16,116 0.00% BSEE and MSEE in National Chiao Tung University, Taiwan Honorary EE Ph.D. in National Chiao Tung University, Taiwan Honorary Doctor of Technology, The Hong Kong Polytechnic University Honorary Fellowship, University of Wales, Cardiff, UK Honorary Doctor of International Law, Thunderbird, American Graduate School of International Management, U.S. Group Chairman, iD SoftCapital Director of: - Acer Inc. - Qisda Corp. - Wistron Corp. - Nan Shan Life Insurance Co., Ltd. Co-Founder, Chairman Emeritus, Acer Group Former Chairman & CEO, Acer Group Chairman, National Culture and Arts Foundation, R.O.C. (Continued) 017 Director Rick Tsai Independent Director Sir Peter Leahy Bonfield Independent Director Stan Shih 2 0 1 2 T S M C A N N U A L R E P O R T 016 Title/Name Date Elected Term Expires Date First Elected Independent Director Thomas J. Engibous 06/12/2012 06/11/2015 06/10/2009 Independent Director Gregory C. Chow 06/12/2012 06/11/2015 06/09/2011 Shareholding When Elected Current Shareholding Shares - - % - - Shares - - % - - Spouse & Minor Shareholding Shares - - % - - Selected Education, Past Positions & Current Positions at Non-profit Organizations Bachelor Degree in Electrical Engineering, Purdue University Master Degree in Electrical Engineering, Purdue University Honorary Doctorate in Engineering, Purdue University Member, National Academy of Engineering Member, Texas Business Hall of Fame Woodrow Wilson Award Former Executive Vice President and President of the Semiconductor Group, Texas Instruments Inc. Former President and CEO, Texas Instruments Inc. Former Chairman of the Board, Texas Instruments Inc. Former Chairman of the Board of Catalyst Honorary Director of Catalyst Honorary Trustee, Southwestern Medical Foundation Bachelor Degree in Economics, Cornell University, 1951 Master Degree in Economics, Chicago University, 1952 Ph.D. in Economics, Chicago University, 1955 Academician, Academia Sinica, R.O.C. Member, American Philosophical Society Fellow of the American Statistical Association Fellow of the Econometric Society Former President, Society of Economic Dynamics and Control Honorary Doctor’s, Zhongshan University L.L.D., Lingnan University Hon. Dr. of Business Adm, Hong Kong University of Science and Technology Honorary Professor of Fudan, Guangxi, Hainan, Nankai, Shandong, Remin, Huazhong U of Science and Tech, Graduate School of Management of Chinese Academy of Sciences, Zhongshan Universities and the City University of Hong Kong Assistant Professor, M.I.T., 1955-1959 Associate Professor, Cornell University, 1959-1962 Research Staff Member and Manager of Economics Research, IBM Thomas Watson Research Center, 1962-1970 Adjunct Professor, Columbia University, 1964-1970 Professor and Director, Econometric Research Program, Princeton University, 1970-2001 (In 2001 Princeton University renamed the Program the Gregory C. Chow Econometric Research Program in his honor.) Class of 1913 Professor of Political Economy, Princeton University, 1976-2001 Chairman of the American Economic Association’s Committee on Exchanges in Economics with the People’s Republic of China, 1981-1994 Co-chairman of the U.S. Committee on Economics Education and Research in China, 1985-1994 Advisor to Prime Ministers and Chairmen of the Economic Planning and Development Council of the Executive Yuan in Taiwan on economic policy from the mid 1960’s to the early 1980’s Advisor to the Prime Minister and the State Commission for Restructuring the Economic System on economic reform in China, 1985-1989 Professor of Economics and Class of 1913 Professor of Political Economy, Emeritus, Princeton University, 2001-Present Lecturer with the Rank of Professor, Princeton University Independent Director Kok-Choo Chen 06/12/2012 06/11/2015 06/09/2011 - - - - 5,120 0.00% 2 0 1 2 T S M C A N N U A L R E P O R T 018 Remarks: 1. No member of the Board of Directors held TSMC shares by nominee arrangement. 2. No member of the Board of Directors had a spouse or relative within two degrees of consanguinity serving as a manager or director at TSMC. Note 1: Major Shareholder of TSMC’s Director that is an Institutional Shareholder. Director that is an Institutional Shareholder of TSMC National Development Fund, Executive Yuan Major institutional shareholders of National Development Fund: Not applicable. Note 2: Mr. Johnsee Lee was appointed as the representative of National Development Fund on August 6, 2010. Top 10 Shareholders Not Applicable Inns of Court School of Law, England Barrister-at-law, England Advocate & Solicitor, Singapore Attorney-at-law, California, U.S. Senior Vice-President & General Counsel, TSMC, 1997-2001 President, National Culture & Arts Foundation, R.O.C., 1995-1997 Vice-President, Echo Publishing, Taiwan, 1992-1995 Partner, Chen & Associates Law Offices, Taiwan, 1988-1992 Partner, Ding & Ding Law Offices, Taiwan, 1975-1988 Lawyer, Heller, Erhman, White & McAuliffe, San Francisco, California, U.S., 1974-1975 Lawyer, Sullivan & Cromwell, New York, U.S., 1971-1974 Lawyer, Tan, Rajah & Cheah, Singapore, 1969-1970 Professor, Soochow University, 2001-2008 Professor, National Chengchi University, 2001-2004 Chair Professor, National Tsing Hua University, 1999-2002 Associate Professor, Soochow University, 1981-1998 Lecturer, Nanyang University, Singapore, 1970-1971 Sponsor and Founder, two Taiwan heritage site museums (Taipei Story House and Futai Street Mansion) Advisor, Executive Yuan, R.O.C. Advisor, Taipei City Government Director of TSMC Education and Culture Foundation Director of National Culture and Arts Foundation, R.O.C. Director of Republic of China Female Cancer Foundation Selected Current Positions at TSMC and Other Companies Chairman, J. C. Penney Company Inc. None None 019 2.4.2 Remuneration Paid to Directors (Note 1) Director's Remuneration Base Compensation (A) Severance Pay and Pensions (B) (Note 4) Compensation to Directors (C) Allowances (D) (Note 6) Total Remuneration (A+B+C+D) as a % of 2012 Net Income Compensation Earned by a Director Who is an Employee of TSMC or of TSMC’s Consolidated Entities Base Compensation, Bonuses, and Allowances (E) (Note 7) Severance Pay and Pensions (F) (Note 4) Employee Profit Sharing (G) (Note 8) Exercisable Employee Stock Options (H) (Note 9) Granted Employee Restricted Stock (I) (Note 10) Total Compensation (A+B+C+D+E+F+G) as a % of 2012 Net Income (Note 11) From TSMC From All Consolidated Entities From TSMC From All Consolidated Entities From TSMC (Note 5) From All Consolidated Entities From TSMC From All Consolidated Entities From TSMC From All Consolidated Entities From TSMC From All Consolidated Entities From TSMC From All Consolidated Entities From TSMC From All Consolidated Entities Cash Stock (Fair Market Value) Cash Stock (Fair Market Value) From TSMC From All Consolidated Entities From TSMC From All Consolidated Entities From TSMC From All Consolidated Entities Compensation Paid to Directors from Non- consolidated Affiliates (J) 30,347 30,347 731 731 71,351 71,351 3,894 3,894 0.06% 0.06% 105,844 158,749 0 561 105,751 0 105,751 0 0 0 0 0 0.19% 0.22% 2,490 Unit: NT$ thousands Title/Name Chairman & CEO Morris Chang (Note 2) Vice Chairman F.C. Tseng Director Rick Tsai (Note 3) Independent Director Sir Peter Leahy Bonfield Independent Director Stan Shih Independent Director Thomas J. Engibous Independent Director Gregory C. Chow Independent Director Kok-Choo Chen Director Na tional Development Fund, Executive Yuan Representative: Johnsee Lee Note 1: Remuneration policies, standards/packages, procedures, the linkage to operating performance and future risk exposure: The base compensation for the Chairman, Vice-Chairman and directors are determined in accordance with the procedures set forth in TSMC’s Articles of Incorporation. The Articles of Incorporation also provides that the compensation to directors shall be no more than 0.3% of earnings available for distribution and directors who also serve as executive officers of TSMC are not entitled to receive compensation to directors. The distribution of compensation to directors shall be made in accordance with TSMC’s “Rules for Distribution of Compensation to Directors”. Note 2: No compensation to directors was paid to Dr. Morris Chang. Note 3: Mr. Rick Tsai is currently the Chairman and CEO of two TSMC subsidiaries, TSMC Solar Ltd. and TSMC Solid State Lighting Ltd. Note 4: Pensions funded according to applicable law. Note 5: TSMC Board adopted a proposal that includes 2012 compensation to TSMC’s directors in the amount of NT$71,351 thousand at its meeting on February 5, 2013. Note 6: The above-mentioned figures include the expense for company cars and gasoline reimbursement, but does not include compensation paid to company drivers (totaled NT$4,743 thousand). Note 7: The above-mentioned figures include the employees’ cash bonuses distributed in June, August, November 2012 and February 2013. Note 8: The above-mentioned figures are preliminary and the proposed employee profit sharing distribution will be processed after the approval of the same by shareholders at the Annual Shareholders’ Meeting on June 11, 2013. Note 9: Represents the number of cumulative employee stock options exercisable as of the date of this Annual Report. Note 10: TSMC did not issue employee restricted stock in 2012, and as of the date of this Annual Report. Note 11: Total remuneration and compensation paid to TSMC’s directors in 2011 was NT$343,815 thousand, accounting for 0.26% of 2011 net income. Remuneration Paid to Directors Total Remuneration (A+B+C+D) Total Compensation (A+B+C+D+E+F+G+J) From TSMC From All Consolidated Entities From TSMC From All Consolidated Entities and Non-consolidated Affiliates 2012 Under NT$2,000,000 NT$2,000,000 ~ NT$4,999,999 Rick Tsai NT$5,000,000 ~ NT$9,999,999 National Development Fund, Executive Yuan National Development Fund, Executive Yuan NT$10,000,000 ~ NT$14,999,999 Sir Peter Leahy Bonfield, Stan Shih, Thomas J. Engibous, Gregory C. Chow, Kok-Choo Chen Sir Peter Leahy Bonfield, Stan Shih, Thomas J. Engibous, Gregory C. Chow, Kok-Choo Chen NT$15,000,000 ~ NT$29,999,999 Morris Chang, F.C. Tseng F.C. Tseng NT$30,000,000 ~ NT$49,999,999 NT$50,000,000 ~ NT$99,999,999 Over NT$100,000,000 Total 9 Rick Tsai Morris Chang 9 2 0 1 2 T S M C A N N U A L R E P O R T 020 021 2.5 Management Team 2.5.1 Information Regarding Management Team Title Name Chairman & CEO Morris Chang On-board Date (Note 1) 01/01/1987 Shareholding Spouse & Minor Shareholding 123,137,914 % 0.47% Shareholding % 135,217 0.00% Executive Vice President & Co-Chief Operating Officer Shang-yi Chiang (Note 2) 07/07/1997 1,062,481 0.00% Executive Vice President & Co-Chief Operating Officer Mark Liu (Note 2) 11/15/1993 13,127,114 0.05% - - - - Executive Vice President & Co-Chief Operating Officer C.C. Wei (Note 2) 02/01/1998 8,460,207 0.03% 261 0.00% 12/16/1996 14,425,064 0.06% 01/02/2002 869,892 0.00% - - - - 06/01/1999 6,381,080 0.02% 110,268 0.00% TSMC Shareholding by Nominee Arrangement (Shares) Education & Selected Past Positions Selected Current Positions at Other Companies As of 02/28/2013 Managers Who are Spouses or within Second-degree Relative of Consanguinity to Each Other Title Name Relation - - - - - - - Ph.D., Electrical Engineering, Stanford University, U.S. Chairman, Industrial Technology Research Institute President & Chief Operation Officer, General Instrument Corporation Group Senior Vice-President, Texas Instruments Inc. Ph.D., Electrical Engineering, Stanford University, U.S. Senior Vice President, Research and Development, TSMC Chairman, VisEra Technologies Company and Xintec Inc. Ph.D., Electrical Engineering & Computer Science, University of California, Berkeley, U.S. Senior Vice President of Operations, TSMC Senior Vice President, Advanced Technology Business, TSMC Vice President, South Site Operation, TSMC President, Worldwide Semiconductor Manufacturing Corp. Director, TSMC affiliate Ph.D., Electrical Engineering, Yale University, U.S. Senior Vice President of Business Development, TSMC Senior Vice President, Mainstream Technology Business, TSMC Vice President, South Site Operation, TSMC Senior Vice President, Chartered Semiconductor Manufacturing Ltd. Ph.D., Materials Science & Engineering, University of California, Berkeley, U.S. President, WaferTech, LLC Senior Vice President, Operations, TSMC General Manager of CVD Products, Applied Material J.D., Rutgers School of Law, State University of New Jersey, U.S. Ph.D., History, University of Virginia, U.S. Partner, Haynes Boone, LLP Vice President Corporate Staff, Assistant General Counsel, Texas Instruments Inc. Director, TSMC subsidiary Director, TSMC affiliates Director, TSMC subsidiary Director, TSMC subsidiaries Director, TSMC affiliate Master, Business Administration, National Taiwan University, Taiwan Director, Accounting, TSMC Vice President& CFO, TI-Acer Semiconductor Manufacturing Corp. Director and/or Supervisor, TSMC subsidiaries Director, TSMC affiliates President, TSMC subsidiaries - - - - - - - - - - - - - - - - - - - - - - - - 03/31/2005 27,320 0.00% 122 0.00% 2,000,000 Master, Business Administration, University of Missouri-Columbia, U.S. Vice President & Co-Director of Worldwide Sales & Marketing Group, Intel Director, TSMC subsidiaries Me mber of Joint Management Committee, 01/01/1987 7,592,595 0.03% 07/01/2004 1,913,127 0.01% 06/02/1997 4,402,831 0.02% - - - - - - 01/01/1987 7,540,122 0.03% 2,194,107 0.01% 03/01/2000 2,051,180 0.01% 1,103,253 0.00% - - - - - Master, Applied Chemistry, Chungyuan University, Taiwan Vice President, Mainstream Technology Business, TSMC Senior Director, Fab 2 Operation, TSMC Ph.D., Solid State Physics & Surface Chemistry, University of California, Berkeley, U.S. Vice President, Advanced Technology Business, TSMC Vice President, Research & Development, TSMC Vice President, Operation II, TSMC Director, Advanced Technology Development & CTM Plant Manager, Intel Ph.D., Electrical Engineering, University of Illinois at Urbana-Champaign, U.S. Vice President, Research and Development, TSMC Senior Director, Logic Technology Division, TSMC Senior Manager of R&D, International Business Machines (IBM) Master, Electrical Engineering, National Cheng Kung University, Taiwan Vice President, Advanced Technology Business, TSMC Senior Director, Product Engineering & Services, TSMC Ph.D., Material Science, Massachusetts Institute of Technology, U.S. Senior Director, Assembly Test Technology & Service, TSMC Vice President, Operations, Vanguard International Semiconductor Corp. TSMC affiliate Director, TSMC subsidiaries Department Manager M.J. Tzeng Siblings - - - - - - - - - - - - (Continued) 023 Senior Vice President & Chief Information Officer Information Technology & Materials Management and Risk Management Stephen T. Tso Senior Vice President & General Counsel Legal Richard Thurston Senior Vice President, Chief Financial Officer & Spokesperson Finance Lora Ho Senior Vice President Worldwide Sales and Marketing Jason C.S. Chen Vice President Operations/Affiliate Fabs M.C. Tzeng Vice President Research and Development Wei-Jen Lo Vice President & Chief Technology Officer Research and Development Jack Sun Vice President Operations/Product Development Y.P. Chin Vice President Quality and Reliability N.S. Tsai 2 0 1 2 T S M C A N N U A L R E P O R T 022 Title Name Vice President & President of TSMC North America Rick Cassidy Vice President Human Resources L.C. Tu (Note 3) Vice President Operations/Mainstream Fabs and Manufacturing Technology J.K. Lin Vice President Operations/300mm Fabs J.K. Wang Vice President Corporate Planning Organization Irene Sun Vice President Research and Development Burn J. Lin Vice President Research and Development Y.J. Mii Vice President Research and Development Cliff Hou On-board Date (Note 1) 11/14/1997 Shareholding Spouse & Minor Shareholding - % - Shareholding - % - 01/01/1987 9,347,440 0.04% 1,252,481 0.00% 01/01/1987 12,507,018 0.05% 1,663,036 0.01% 02/11/1987 2,553,947 0.01% 160,844 0.00% 10/01/2003 960,709 0.00% - - 04/26/2000 2,997,746 0.01% 1,024,933 0.00% 11/14/1994 1,000,419 0.00% - - 12/15/1997 752,532 0.00% 60,802 0.00% TSMC Shareholding by Nominee Arrangement (Shares) Education & Selected Past Positions Selected Current Positions at Other Companies Managers Who are Spouses or within Second-degree Relative of Consanguinity to Each Other Title Name Relation - - - - - - - - Bachelor, Engineering Technology, United States Military Academy at West Point, U.S. Vice President of TSMC North America Account Management Director, TSMC North America Master, Business Administration, Tulane University, U.S. Senior Director, Corporate Planning Organization, TSMC Senior Director, Fab 5 Operation, TSMC Bachelor, Science, National Changhua University of Education, Taiwan Senior Director, Mainstream Fabs, TSMC Master, Chemical Engineering, National Cheng Kung University, Taiwan Senior Director, 300mm fab operations, TSMC Ph.D., Materials Science and Engineering, Cornell University, U.S. Senior Director, Corporate Planning Organization, TSMC Ph.D., Electrical Engineering, Ohio State University Senior Director, Nanopatterning Technology Division, TSMC Ph.D., Electrical Engineering, University of California, Los Angeles Senior Director, R&D Platform I Division, TSMC Ph.D., Electrical Engineering, Syracuse University Senior Director, Design and Technology Platform, TSMC Director, TSMC subsidiaries Director, TSMC affiliate President, TSMC subsidiaries - - - - - - - - - Manager J.J. Wang Siblings Manager Thomas T. Sun Siblings - - - - - - - - - Note 1: On-board date means the offical date joining TSMC. Note 2: On March 2, 2012, Senior Vice President of R&D Dr. Shang-yi Chiang, Senior Vice President of Operations Dr. Mark Liu, and Senior Vice President of Business Development Dr. C.C. Wei were appointed as Executive Vice Presidents and Co-Chief Operating Officers, effective March 5, 2012. Note 3: On March 5, 2013, Vice President of Human Resources Mr. L.C. Tu was appointed as the President of TSMC China, effective March 15, 2013. 2 0 1 2 T S M C A N N U A L R E P O R T 024 025 2.5.2 Compensation Paid to CEO and Executive Officers (Note 1) Unit: NT$ thousands Salary (A) Severance Pay and Pensions (B) (Note 4) Bonuses and Allowances (C) (Note 5) From TSMC From All Consoildated Entities From TSMC From All Consoildated Entities From TSMC From All Consoildated Entities Employee Profit Sharing (D) (Note 6) From TSMC Cash Stock (Fair Market Value) From All Consoildated Entities Stock (Fair Market Value) Cash Total Compensation as a % of 2012 Net Income (A,B,C,D) (Note 7) Exercisable Employee Stock Options (K shares) (Note 8) Exercisable Employee Restricted Stock (K shares) (Note 9) From TSMC From All Consoildated Entities From TSMC From All Consoildated Entities From TSMC From All Consoildated Entities Compensation Received from Non-consoildated Affiliates 81,386 112,347 2,278 2,604 567,997 608,437 538,077 0 538,077 0 0.72% 0.76% 0 0 0 0 135 Title Name Chairman & CEO Executive Vice President & Co-Chief Operating Officer Executive Vice President & Co-Chief Operating Officer Executive Vice President & Co-Chief Operating Officer Senior Vice President & Chief Information Officer Information Technology & Materials Management and Risk Management Senior Vice President & General Counsel Legal Senior Vice President, Chief Financial Officer & Spokesperson Finance Senior Vice President Worldwide Sales and Marketing Vice President Operations/Affiliate Fabs Vice President Research and Development Vice President & Chief Technical Officer Research and Development Vice President Operations/Product Development Vice President Quality and Reliability Vice President & President of TSMC North America Vice President Human Resources Vice President Operations/Mainstream Fabs and Manufacturing Technology Vice President Operations/300mm Fabs Vice President Corporate Planning Organization Vice President Research and Development Vice President Research and Development Vice President Research and Development Morris Chang Shang-yi Chiang (Note 2) Mark Liu (Note 2) C.C. Wei (Note 2) Stephen T. Tso Richard Thurston Lora Ho Jason C.S. Chen M.C. Tzeng Wei-Jen Lo Jack Sun Y.P. Chin N.S. Tsai Rick Cassidy L.C. Tu (Note 3) J.K. Lin J.K. Wang Irene Sun Burn J. Lin Y.J. Mii Cliff Hou Note 1: Compensation Policy: The cash compensation and profit sharing paid to CEO and each executive officer are also reviewed by the Compensation Committee individually based on their job responsibility, contribution, and projected future risks facing the Company before the compensation and profit sharing proposals are submitted to the Board of Directors for approval. Note 2: On March 2, 2012, Senior Vice President of R&D Dr. Shang-yi Chiang, Senior Vice President of Operations Dr. Mark Liu, and Senior Vice President of Business Development Dr. C.C. Wei were appointed as Executive Vice Presidents and Co-Chief Operating Officers, effective March 5, 2012. Note 3: On March 5, 2013, Vice President of Human Resources Mr. L.C. Tu was appointed as the President of TSMC China, effective March 15, 2013. Note 4: Pensions funded according to applicable law. Note 5: The above-mentioned figures include the expense for the employees’ cash bonuses distributed in June, August, November 2012 and February 2013, company cars and gasoline reimbursement, but does not include compensation paid to company drivers (totaled NT$5,491 thousand). Note 6: The above-mentioned figures are preliminary and the proposed employee profit sharing distribution will be processed after the approval of the same by shareholders at the Annual Shareholders’ Meeting on June 11, 2013. Note 7: Total compensation paid to TSMC’s CEO and Executive Officers in 2011 was NT$1,101,388 thousand, accounting for 0.82% of 2011 net income. Note 8: Represents cumulative employee stock options exercisable as of the date of this Annual Report. Note 9: TSMC did not issue employee restricted stock in 2012, and as of the date of this Annual Report. Compensation Paid to CEO and Executive Officers Under NT$2,000,000 NT$2,000,000 ~ NT$4,999,999 NT$5,000,000 ~ NT$9,999,999 NT$10,000,000 ~ NT$14,999,999 NT$15,000,000 ~ NT$29,999,999 NT$30,000,000 ~ NT$49,999,999 NT$50,000,000 ~ NT$99,999,999 Over NT$100,000,000 Total From TSMC Rick Cassidy 2012 From All Consolidated Entities and Non-consoildated Affiliates Irene Sun, Y.J. Mii, Cliff Hou M.C. Tzeng, Jack Sun, Y.P. Chin, N.S. Tsai, L.C. Tu, J.K. Lin, J.K. Wang, Burn J. Lin Shang-yi Chiang, Mark Liu, C.C. Wei, Stephen T. Tso, Richard Thurston, Lora Ho, Jason C.S. Chen, Wei-Jen Lo Morris Chang 21 Irene Sun, Y.J. Mii, Cliff Hou M.C. Tzeng, Jack Sun, Y.P. Chin, N.S. Tsai, L.C. Tu, J.K. Lin, J.K. Wang, Burn J. Lin Shang-yi Chiang, Mark Liu, C.C. Wei, Stephen T. Tso, Richard Thurston, Lora Ho, Jason C.S. Chen, Wei-Jen Lo, Rick Cassidy Morris Chang 21 2 0 1 2 T S M C A N N U A L R E P O R T 026 027 2.5.3 Employee Profit Sharing Granted to Management Team (Note 1) Unit: NT$ thousands Title Chairman & CEO Executive Vice President & Co-Chief Operating Officer Executive Vice President & Co-Chief Operating Officer Executive Vice President & Co-Chief Operating Officer Senior Vice President & Chief Information Officer Information Technology & Materials Management and Risk Management Senior Vice President & General Counsel Legal Senior Vice President, Chief Financial Officer & Spokesperson Finance Senior Vice President Worldwide Sales and Marketing Vice President Operations/Affiliate Fabs Vice President Research and Development Vice President & Chief Technical Officer Research and Development Vice President Operations/Product Development Vice President Quality and Reliability Vice President & President of TSMC North America Vice President Human Resources Vice President Operations/Mainstream Fabs and Manufacturing Technology Vice President Operations/300mm Fabs Vice President Corporate Planning Organization Vice President Research and Development Vice President Research and Development Vice President Research and Development Senior Director Finance Name Morris Chang Shang-yi Chiang (Note 2) Mark Liu (Note 2) C.C. Wei (Note 2) Stephen T. Tso Richard Thurston Lora Ho Jason C.S. Chen M.C. Tzeng Wei-Jen Lo Jack Sun Y.P. Chin N.S. Tsai Rick Cassidy L.C. Tu (Note 3) J.K. Lin J.K. Wang Irene Sun Burn J. Lin Y.J. Mii Cliff Hou Jan Kees van Vliet (Note 4) Note 1: The above-mentioned figures are preliminary and the proposed employee profit sharing distribution will be processed after the approval of the same by shareholders at the Annual Shareholders’ Meeting on June 11, 2013. Note 2: On March 2, 2012, Senior Vice President of R&D Dr. Shang-yi Chiang, Senior Vice President of Operations Dr. Mark Liu, and Senior Vice President of Business Development Dr. C.C. Wei were appointed as Executive Vice Presidents and Co-Chief Operating Officers, effective March 5, 2012. Note 3: On March 5, 2013, Vice President of Human Resources Mr. L.C. Tu was appointed as the President of TSMC China, effective March 15, 2013. Note 4: Mr. Jan Kees van Vliet voluntarily retired on September 7, 2012. 2 0 1 2 T S M C A N N U A L R E P O R T 028 Stock (Fair Market Value) Cash Total Employee Profit Sharing Total Employee Profit Sharing Paid to Management Team as a % of 2012 Net Income 0 538,077 538,077 0.32% 029 R.O.C. Securities & Futures Institute Ranked A++ in Information Disclosure by Public Companies FinanceAsia Best Managed Company - Ranked No. 1 in Taiwan Asian Corporate Governance Association Number 1 Corporate Governance Ranking in Asia Pacific Euromoney Asia Best Managed Company-Technology Sector CommonWealth Magazine The Most Admired Company in Taiwan FinanceAsia Best Corporate Governance Company - Ranked No.1 in Taiwan CommonWealth Magazine Corporate Citizenship Award 3. Corporate Governance TSMC advocates and acts upon the principles of operational In the spirit of Chairman Chang’s approach to corporate governance, transparency and respect for shareholder rights. We believe that a board of directors’ primary duty is to supervise. The Board should the basis for successful corporate governance is a sound and supervise the Company’s: compliance with relevant laws and effective Board of Directors. In line with this principle, the TSMC regulations; financial transparency; timely disclosure of material Board delegates various responsibilities and authority to two Board information, and maintaining of the highest integrity within the Committees, Audit Committee and Compensation Committee. Company. Each Committee has a written charter approved by the Board. Each Committee’s chairperson regularly reports to the Board on the TSMC’s Board of Directors strives to perform these responsibilities activities and actions of the relevant committee. The Audit Committee through the Audit Committee and the Compensation Committee, the and Compensation Committee consist solely of independent hiring of a financial expert for the Audit Committee, and coordination directors. with the Internal Audit department. 2012 Corporate Governance Awards Organization Awards Corporate Governance Asia 8th Recognition Awards 2012 - The Best of Asia - Taiwan Companies FinanceAsia - Asia’s Best Managed Companies in Hong Kong and Taiwan - Best Managed Company - Ranked No. 1 in Taiwan - Best Corporate Governance Company - Ranked No. 1 in Taiwan The second duty of the Board of Directors is to provide guidance to the management team of the Company. Quarterly, TSMC’s management reports to the Board on a variety of subjects. The management also reviews the Company’s business strategies with the Board, and updates TSMC’s Board on the progress of those strategies, obtaining Board guidance as appropriate. The third duty of the Board of Directors is to evaluate the No. 1 Corporate Governance Ranking in Asia Pacific management’s performance and to dismiss officers of the Company Asian Corporate Governance Association (ACGA) R.O.C. Securities & Futures Institute 9th Information Disclosure of Public Companies Ranking - Ranked A++ when necessary. TSMC’s management has maintained a healthy and functional communication with the Board of Directors, has been devoted in executing guidance of the Board, and is dedicated in running the business operations, all to achieve the best interests for TSMC shareholders. Directors’ Compensation Currently, TSMC Directors’ compensation consists exclusively of fixed compensation. TSMC’s Articles of Incorporation restricts the amount of compensation payable to its directors that the Company may make from its distributable earnings (defined as net income after required regulatory provisions). Over the years, TSMC directors’ compensation declined from 1% of TSMC’s distributable earnings to 0.3%, before being capped to no more than 0.3% of its distributable compensation. Because director’s compensation is capped at 0.3% of distributable earnings, currently, TSMC Directors’ compensation consists exclusively of fixed compensation which is in line with international best practice on board compensation. In 2012, total compensation paid to TSMC’s directors only accounted for 0.06% of our 2012 net income. In addition, directors who also serve as executive officers of the Company are not entitled to receive any director compensation. 3.1 Board of Directors Board Structure TSMC’s 12th Board of Directors was elected at TSMC’s 2012 Annual Shareholders’ Meeting. All Directors continue in office. TSMC’s Board of Directors consists of nine distinguished members with a great breadth of experience as world-class business leaders or scholars. We rely on them for their diverse knowledge, personal perspectives, and solid business judgment. Five of the nine members are independent directors: former British Telecommunications Chief Executive Officer, Sir Peter Bonfield; former Acer Group Chairman, Mr. Stan Shih; former Texas Instruments Inc. Chairman of the Board, Mr. Thomas J. Engibous; Professor of Princeton University, Gregory C. Chow; and advisor to the Taiwan Executive Yuan and the Taipei City Government, Ms. Kok-Choo Chen. The number of Independent Directors is more than 50% of the total number of Directors. Board Responsibilities Under the leadership of Chairman Morris Chang, TSMC’s Board of Directors takes a serious and forthright approach to its duties and is a dedicated, competent and independent Board. 2 0 1 2 T S M C A N N U A L R E P O R T 032 Directors’ Professional Qualifications and Independent Analysis According to the relevant requirements set by Taiwan’s Securities and Futures Bureau, the professional qualifications and independence status of the Company’s Board members are listed in the table below. Meet the Following Professional Qualification Requirements, Together with at Least Five Years Work Experience Criteria (Note) An Instructor or Higher Position in a Department of Commerce, Law, Finance, Accounting, or Other Academic Department Related to the Business Needs of the Company in a Public or Private Junior College, College or University A Judge, Public Prosecutor, Attorney, Certified Public Accountant, or Other Professional or Technical Specialists Who Has Passed a National Examination and Been Awarded a Certificate in a Profession Necessary for the Business of the Company Have Work Experience in the Area of Commerce, Law, Finance, or Accounting, or Otherwise Necessary for the Business of the Company 1 2 3 4 5 6 7 8 9 10 Number of Other Taiwanese Public Companies Concurrently Serving as an Independent Director ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ 0 1 3 0 0 0 0 0 0 Name/Criteria Morris Chang Chairman F.C. Tseng Vice Chairman Johnsee Lee Director Rick Tsai Director Sir Peter Leahy Bonfield Independent Director Stan Shih Independent Director Thomas J. Engibous Independent Director Gregory C. Chow Independent Director Kok-Choo Chen Independent Director Note: Directors, during the two years before being elected and during the term of office, meet any of the following situations, please tick the appropriate corresponding boxes: 1. Not an employee of the company or any of its affiliates; 2. Not a director or supervisor of the company or any of its affiliates. The same does not apply, however, in cases where the person is an independent director of the company, its parent company, or any subsidiary in which the company holds, directly or indirectly, more than 50 percent of the voting shares; 3. Not a natural-person shareholder who holds shares, together with those held by the person’s spouse, minor children, or held by the person under others’ names, in an aggregate amount of one percent or more of the total number of issued shares of the company or ranks as one of its top ten shareholders; 4. Not a spouse, relative within the second degree of kinship, or lineal relative within the third degree of kinship, of any of the above persons in the preceding three subparagraphs; 5. Not a director, supervisor, or employee of a corporate/institutional shareholder that directly holds five percent or more of the total number of issued shares of the company or ranks as one of its top five shareholders; 6. Not a director, supervisor, officer, or shareholder holding five percent or more of the shares of a specified company or institution that has a financial or business relationship with the company; 7. Not a professional individual who, or an owner, partner, director, supervisor, or officer of a sole proprietorship, partnership, company, or institution that, provides commercial, legal, financial, accounting services or consultation to the company or to any affiliate of the company, or a spouse thereof, provided that this restriction does not apply to any member of the compensation committee who exercises powers pursuant to Article 7 of the “Regulations Governing the Establishment and Exercise of Powers of Compensation Committees of Companies whose Stock is Listed on the TWSE or Traded on the GTSM”; 8. Not having a marital relationship, or a relative within the second degree of kinship to any other director of the company; 9. Not been a person of any conditions defined in Article 30 of the Company Law; and 10. Not a governmental, juridical person or its representative as defined in Article 27 of the Company Law. 3.1.1 Audit Committee The Audit Committee assists the Board in fulfilling its oversight of the quality and integrity of the accounting, auditing, reporting, and financial control practices of the Company. The Audit Committee is responsible to review the Company’s: financial reports; auditing and accounting policies and procedures; internal control systems; material asset or derivatives transactions; material lending funds, endorsements or guarantees; offering or issuance of any equity-type securities; legal compliance; related-party transactions and potential conflicts of interests involving executive officers and directors; Ombudsman reports; corporate risk management; hiring or dismissal of an attesting CPA, or the compensation given thereto; and appointment or discharge of financial, accounting, or internal auditing officers. 033 Under R.O.C. law, the membership of Audit Committee shall consist of all independent Directors. TSMC’s Audit Committee satisfies this statutory requirement. The Committee also engaged a financial expert consultant in accordance with the rules of the U.S. Securities and Exchange 3.1.3 Directors and Committees Members’ Attendance Commission. The Audit Committee annually conducts self-evaluation to assess the Committee’s performance and identify areas for further Each Director is expected to attend every Board meeting and the committees meeting on which he or she serves. In 2012, the average Board attention. Meeting attendance rate was 83% and the attendance rate for the Audit Committee and Compensation Committee’s Meetings were 100%. TSMC’s Audit Committee is empowered by its Charter to conduct any study or investigation it deems appropriate to fulfill its responsibilities. Board of Directors Meeting Status It has direct access to TSMC’s internal auditors, the Company’s independent auditors, and all employees of the Company. The Committee is authorized to retain and oversee special legal, accounting, or other consultants as it deems appropriate to fulfill its mandate. The Audit Committee Charter is available on TSMC’s corporate website. 3.1.2 Compensation Committee The Compensation Committee assists the Board in discharging its responsibilities related to TSMC’s compensation and benefits policies, plans and programs, and in the evaluation and compensation of TSMC’s directors of the Board and executives. The members of the Compensation Committee are appointed by the Board as required by R.O.C. law. According to TSMC’s Compensation Committee Charter, the Committee shall consist of no fewer than three independent directors of the Board. Currently, the Compensation Committee is comprised of all five independent directors; the Chairman of the Board, Dr. Morris Chang, is invited by the Committee to attend all meetings and is excused from the Committee’s discussion of his own compensation. TSMC’s Compensation Committee is authorized by its Charter to retain an independent consultant to assist in the evaluation of CEO, or executive officer compensation. The Compensation Committee Charter is available on TSMC’s corporate website. Compensation Committee Members’ Professional Qualifications and Independent Analysis According to the relevant requirements set by Taiwan’s Securities and Futures Bureau, the professional qualifications and independence status of the Company’s Compensation Committee members are listed in the table below. Meet the Following Professional Qualification Requirements, Together with at Least Five Years Work Experience Criteria (Note) An Instructor or Higher Position in a Department of Commerce, Law, Finance, Accounting, or Other Academic Department Related to the Business Needs of the Company in a Public or Private Junior College, College or University A Judge, Public Prosecutor, Attorney, Certified Public Accountant, or Other Professional or Technical Specialists Who Has Passed a National Examination and Been Awarded a Certificate in a Profession Necessary for the Business of the Company Have Work Experience in the Area of Commerce, Law, Finance, or Accounting, or Otherwise Necessary for the Business of the Company 1 2 3 4 5 6 7 8 Number of Other Taiwanese Public Companies Concurrently Serving as a Compensation Committee Member in Taiwan ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ 0 0 0 0 0 ˇ ˇ ˇ Name Title/Criteria Stan Shih Independent Director Sir Peter Leahy Bonfield Independent Director Thomas J. Engibous Independent Director Gregory C. Chow Independent Director Kok-Choo Chen Independent Director Note: Compensation Committee Members, during the two years before being elected or during the term of office, meet any of the following situations, please tick the appropriate corresponding boxes: 1. Not an employee of the company or any of its affiliates; 2. Not a director or supervisor of the company or any of its affiliates. The same does not apply, however, in cases where the person is an independent director of the company, its parent company, or any subsidiary in which the company holds, directly or indirectly, more than 50 percent of the voting shares; 3. Not a natural-person shareholder who holds shares, together with those held by the person’s spouse, minor children, or held by the person under others’ names, in an aggregate amount of one percent or more of the total number of issued shares of the company or ranks as one of its top ten shareholders; 4. Not a spouse, relative within the second degree of kinship, or lineal relative within the third degree of kinship, of any of the above persons in the preceding three subparagraphs; 5. Not a director, supervisor, or employee of a corporate/institutional shareholder that directly holds five percent or more of the total number of issued shares of the company or ranks as one of its top five shareholders; 6. Not a director, supervisor, officer, or shareholder holding five percent or more of the shares of a specified company or institution that has a financial or business relationship with the company; 7. Not a professional individual who, or an owner, partner, director, supervisor, or officer of a sole proprietorship, partnership, company, or institution that, provides commercial, legal, financial, accounting services or consultation to the company or to any affiliate of the company, or a spouse thereof; 8. Not been a person of any conditions defined in Article 30 of the Company Law. 2 0 1 2 T S M C A N N U A L R E P O R T 034 Dr. Morris Chang, the Chairman of the Board of Directors, convened four regular meetings and three special meetings in 2012. The directors’ attendance status is as follows: Title Name Chairman Morris Chang Vice Chairman F. C. Tseng Director Director Independent Director Independent Director Independent Director Independent Director Independent Director National Development Fund, Executive Yuan Representative: Johnsee Lee Rick Tsai Sir Peter Leahy Bonfield Stan Shih Thomas J. Engibous Gregory C. Chow Kok-Choo Chen Attendance in Person By Proxy Attendance Rate in Person (%) Notes 7 6 7 7 4 6 4 4 7 0 1 0 0 3 1 3 3 0 100% Renewal of office (Note) 86% Renewal of office (Note) 100% Renewal of office (Note) 100% Renewal of office (Note) 57% Renewal of office (Note) Sir Peter Bonfield participated in the discussion through telephone at two Special Meetings, represented by proxy. 86% Renewal of office (Note) 57% 57% Renewal of office (Note) Mr. Thomas J. Engibous participated in the discussion through telephone at one Special Meeting, represented by proxy. Renewal of office (Note) Mr. Gregory C. Chow participated in the discussion through telephone at one Special Meeting, represented by proxy. 100% Renewal of office (Note) Annotations: 1. There were no written or otherwise recorded resolutions on which an independent director had a dissenting opinion or qualified opinion in 2012. 2. There were no recusals of Directors due to conflicts of interests in 2012. 3. Measures taken to strengthen the functionality of the Board: We believe that the basis for successful corporate governance is a sound and effective Board of Directors. In line with this principle, TSMC’s Board of Directors has established an Audit Committee and a Compensation Committee to assist the Board in carrying out its various duties. Note: TSMC’s 12th Board of Directors was elected at TSMC’s Annual Shareholders’ Meeting on June 12, 2012. All Directors continue to serve in office. Their respective tenures are from June 12, 2012 to June 11, 2015. Audit Committee Meeting Status Sir Peter Bonfield, Chairman of the Audit Committee, convened four regular meetings in 2012. The Committee members and consultant’s attendance status is shown in the following table. In addition to these meetings, the Committee members and consultant participated in five telephone conferences to discuss the Company’s Annual Report to be filed with the Taiwan and U.S. authorities and investor conference materials with management. Title Chair Member Member Member Member Name Sir Peter Leahy Bonfield Stan Shih Thomas J. Engibous Gregory C. Chow Kok-Choo Chen Financial Expert J. C. Lobbezoo Attendance in Person By Proxy Attendance Rate in Person (%) Notes 4 4 4 4 4 4 0 0 0 0 0 0 100% Renewal of office (Note) 100% Renewal of office (Note) 100% Renewal of office (Note) 100% Renewal of office (Note) 100% Renewal of office (Note) 100% None Annotations: 1. There was no Securities and Exchange Act §14-5 resolution which was not approved by the Audit Committee but was approved by two thirds or more of all directors in 2012. 2. There were no recusals of independent directors due to conflicts of interests in 2012. 3. Descriptions of the communications between the independent directors, the internal auditors, and the independent auditors in 2012 (e.g. the channels, items and/or results of the audits on the corporate finance and/or operations, etc.): (1) The internal auditors have sent the audit reports to the members of the Audit Committee periodically, and presented the findings of all audit reports in the quarterly meetings of the Audit Committee. The head of Internal Audit will immediately report to the members of the Audit Committee any material matters. During 2012, the head of Internal Audit did not report any such material matters. The communication channel between the Audit Committee and the internal auditor functioned well. (2) The Company’s independent auditors have presented the findings of their quarterly review or audits on the Company’s financial results. Under applicable laws and regulations, the independent auditors are also required to immediately communicate to the Audit Committee any material matters that they have discovered. During 2012, the Company’s independent auditors did not report any irregularity. The communication channel between the Audit Committee and the independent auditors functioned well. Note: Sir Peter Leahy Bonfield, Stan Shih, Thomas J. Engibous, Gregory C. Chow and Kok-Choo Chen were elected as TSMC’s independent directors and became members of the Audit Committee on June 12, 2012. Their respective tenures are from June 12, 2012 to June 11, 2015. 035 Compensation Committee Meeting Status Mr. Stan Shih, Chairman of the Compensation Committee, convened four regular meetings in 2012. The Committee members’ attendance status is as follows: Title Chair Member Member Member Member Name Stan Shih Sir Peter Leahy Bonfield Thomas J. Engibous Gregory C. Chow Kok-Choo Chen Attendance in Person By Proxy Attendance Rate in Person (%) Notes 4 4 4 4 4 0 0 0 0 `0 100% Renewal of office (Note) 100% Renewal of office (Note) 100% Renewal of office (Note) 100% Renewal of office (Note) 100% Renewal of office (Note) Annotation: 1. There was no recommendation of the Compensation Committee which was not adopted or was modified by the Board of Directors in 2012. 2. There were no written or otherwise recorded resolutions on which a member of the Compensation Committee had a dissenting opinion or qualified opinion. Note: At the meeting of June 12, 2012, TSMC’s Board of Directors approved the appointment of all five Independent Directors, Stan Shih, Sir Peter Leahy Bonfield, Thomas J. Engibous, Gregory C. Chow and Kok-Choo Chen, as members of the Compensation Committee. Their respective tenures are from June 12, 2012 to June 11, 2015. 3.2 Major Resolutions of Shareholders’ Meeting and Board Meetings 3.2.1 Major Resolutions of Shareholders’ Meeting and Implementation Status TSMC’s 2012 Annual Shareholders’ Meeting was held in Hsinchu, Taiwan on June 12, 2012. At the meeting, shareholders present in person or by proxy approved the following resolutions: (1) The 2011 Business Report and Financial Statements; (2) The distribution of 2011 profits; (3) The revisions to the Articles of Incorporation; (4) The revisions to the Rules for Election of Directors; and (5) Election of nine directors (including five independent directors). Implementation Status All the resolutions of the Shareholders’ Meeting have been fully implemented in accordance with the resolutions. The nine newly elected directors were Morris Chang, F.C. Tseng, Sir Peter Leahy Bonfield (Independent Director), Stan Shih (Independent Director), Thomas J. Engibous (Independent Director), Gregory C. Chow (Independent Director), Kok-Choo Chen (Independent Director), Johnsee Lee (representative of National Development Fund, Executive Yuan) and Rick Tsai. 3.2.2 Major Resolutions of Board Meetings During the 2012 calendar year, and as of the date of this Annual Report, major resolutions approved at Board meetings are ● approving capital appropriations of US$3,176.65 million; ● approving R&D capital appropriation of US$233.2 million; and ● approving issuance of an unsecured straight corporate bond in the domestic market for an amount not exceeding NT$45 summarized below: billion. (1) Regular Board Meeting of February 13 & 14, 2012: (5) Regular Board Meeting of August 13 & 14, 2012: ● approving 2011 business report and financial statements; ● approving 2012 semi-annual financial statements; and ● approving distribution of 2011 profits, and cash dividends, ● approving capital appropriations of US$2,786.53 million. employee cash bonus and employee profit sharing; (6) Regular Board Meeting of November 12 & 13, 2012: ● approving capital appropriations of US$1,395.49 million; ● approving capital appropriations of US$2,975 million; ● approving R&D capital appropriation of US$239.6 million; and ● approving R&D capital appropriation and 2013 sustaining ● convening the 2012 Annual Shareholders’ Meeting, at which shareholders will hold an election for TSMC’s nine-member Board of Directors, including five independent directors. capital appropriation totaling approximately US$209.5 million; ● approving issuance of an unsecured straight corporate bond in the domestic market for an amount not exceeding NT$45 (2) Special Board Meeting of March 2, 2012: billion; ● approving the appointment of Senior Vice President of R&D Dr. Shang-yi Chiang, Senior Vice President of Operations Dr. Mark ● approving the subscription of NT$1,243 million in new shares to be issued by TSMC Solid State Lighting Ltd. in 2013; and Liu, and Senior Vice President of Business Development Dr. ● approving the subscription of NT$636 million in new shares to C.C. Wei as Executive Vice Presidents and Co-Chief Operating Officers of TSMC. be issued by TSMC Solar Ltd. in 2013. (7) Regular Board Meeting of February 4 & 5, 2013: Following these appointments, the three Executive Vice ● approving 2012 business report and financial statements; Presidents and Co-COOs, as well as TSMC’s Finance and Legal ● approving distribution of 2012 profits, and cash dividends, organizations, will report directly to Chairman and Chief employee cash bonus and employee profit sharing; Executive Officer Dr. Morris Chang. All other organizations will ● approving capital appropriations of US$2,714.76 million; report to the three Executive Vice Presidents and Co-COOs. The ● approving R&D capital appropriations of US$103.6 million; new organizational structure will take effect on March 5, 2012. ● approving the provision of a loan guarantee to (3) Special Board Meeting of April 26, 2012: wholly-owned subsidiary TSMC Global for its issuance of US ● approving capital appropriations of US$1,814.2 million; and dollar-denominated senior unsecured corporate bonds for an ● listing five qualified candidates for independent directors amount not to exceed US$1.5 billion; and to stand for election at TSMC’s 2012 Annual Shareholders’ ● convening the 2013 Annual Shareholders’ Meeting. Meeting. (4) Regular Board Meeting of June 12 & 13, 2012: 3.2.3 Major Issues of Record or Written Statements ● re-election of Dr. Morris Chang as the Chairman and Dr. F.C. Tseng as the Vice Chairman of the Board of Directors; ● approving the appointment of the five independent Directors, Stan Shih, Sir Peter Leahy Bonfield, Thomas J. Engibous, Gregory C. Chow and Kok-Choo Chen, as members of the Compensation Committee; Made by Any Director Dissenting to Important Resolutions Passed by the Board of Directors during the 2012 Calendar Year and as of the Date of this Annual Report: None. 2 0 1 2 T S M C A N N U A L R E P O R T 036 037 3.3 Taiwan Corporate Governance Implementation as Required by the Taiwan Continuing Education/Training of Directors in 2012 Financial Supervisory Commission Item Implementation Status 1. Shareholding Structure & Shareholders’ Rights (1) Method of handling shareholder suggestions or complaints TSMC has designated appropriate departments, such as Corporate Communication Division, the SEC Compliance Department, Legal Department, etc., to handle shareholder suggestions or complaints. (2) The Company’s possession of a list of major shareholders and a list of ultimate owners of these major shareholders TSMC tracks the shareholdings of directors, officers, and shareholders holding more than 10% of the outstanding shares of TSMC. (3) Risk management mechanism and “firewall” between the Company and its affiliates TSMC has established appropriate guidelines in its “Internal Control System” and “TSMC Invested Entity Governance and Management Policy”. Non-implementation and Its Reason(s) None 2. Composition and Responsibilities of the Board of Directors (1) Independent Directors (2) Regular evaluation of external auditors’ independence 3. Communication Channel with Stakeholders 4. Information Disclosure (1) Establishment of a corporate website to disclose information regarding the Company’s financials, business and corporate governance status (2) Other information disclosure channels (e.g. maintaining an English- language website, designating people to handle information collection and disclosure, appointing spokespersons, webcasting investors conference etc.) None None None Sir Peter Leahy Bonfield, Mr. Stan Shih, Mr. Thomas J. Engibous, Mr. Gregory C. Chow and Ms. Kok-Choo Chen are the independent directors of TSMC. The TSMC Audit Committee regularly evaluates the independence of external auditors. TSMC has designated appropriate departments, such as Corporate Communication Division, the SEC Compliance Department, etc., to communicate with stakeholders on a case by case basis, as needed. Furthermore, the contact information providing access to the Company’s spokesperson and relevant departments is available on TSMC’s website. TSMC discloses information through its website (in both Chinese and English) http://www.tsmc.com. Since TSMC is a foreign private issuer with American Depository Receipts listed on the New York Stock Exchange (NYSE), TSMC is subject to various NYSE regulations, one of which requires TSMC to disclose the significant ways in which its corporate governance practices differ from those followed by U.S. domestic companies under NYSE listing standards. Such disclosure information may be found at the following web address: http://www.tsmc.com/download/english/e03_governance/NYSE_Section_303A.pdf TSMC has designated appropriate departments (e.g. Corporate Communication Division, the SEC Compliance Department, etc.) to handle the collection and disclosure of information as required by the relevant laws and regulations of Taiwan and other jurisdictions. TSMC has designated spokespersons as required by relevant regulations. TSMC webcasts live investor conferences. 5. Operations of the Company’s Nomination Committee or other committees of the Board of Directors TSMC’s Board of Directors has established an Audit Committee and a Compensation Committee. Please refer to “3. Corporate Governance” on page 32-45 of this Annual Report for details. None 6. If the Company has established corporate governance policies based on TSE Corporate Governance Best Practice Principles, please describe any discrepancy between the policies and their implementation. TSMC advocates and acts upon the principles of operational transparency and respect for shareholder rights. We believe that the basis for successful corporate governance is a sound and effective Board of Directors. In line with this principle, TSMC’s Board of Directors established an Audit Committee in 2002 and a Compensation Committee in 2003. For the status of TSMC’s corporate governance, please refer to “3. Corporate Governance” on page 32-45 of this Annual Report. 7. Other important information to facilitate better understanding of the Company’s corporate governance practices (e.g., employee rights, employee wellness, investor relations, supplier relations, rights of stakeholders, directors’ training records, the implementation of risk management policies and risk evaluation measures, the implementation of customer relations policies, and purchasing insurance for directors): (1) Status of employee rights and employee wellness: Please refer to “5.5 Employees” on page 75-78 of this Annual Report. (2) Status of investor relations, supplier relations and rights of stakeholders: Please refer to “7. Corporate Social Responsibility” on page 98-109 of this Annual Report. (3) Directors’ training records: Please refer to page 39 of this Annual Report for details. (4) Status of Risk Management Policies and Risk Evaluation: Please refer to “6.2 Risk Management” on page 86-95 of this Annual Report. (5) Status of Customer Relations Policies: Please refer to “5.4 Customer Trust” on page 73-75 of this Annual Report. (6) TSMC maintains D&O Insurance for its directors and officers. 8. If the Company has a self corporate governance evaluation or has authorized any other professional organization to conduct such an evaluation, the evaluation results, major deficiencies or suggestions, and improvements are stated as follows: None TSMC’s corporate governance won international recognition in 2012: Corporate Governance Asia honored TSMC with its “Corporate Governance Asia Recognition Awards 2012”. FinancialAsia honored TSMC with its “Best Corporate Governance Company – Ranked No. 1 in Taiwan”. Asian Corporate Governance Association honored TSMC with its “Top 1 Corporate Governance Raking in Asia Pacific”. Securities & Futures Institute’s 9th Information Disclosure of Public Companies Ranking ranked TSMC “A++”. Commonwealth Magazine honored TSMC with its “Most Admired Company in Taiwan”. 2 0 1 2 T S M C A N N U A L R E P O R T 038 Name Morris Chang (Note) Date 10/25 Host by Training/Speech Title The Economic Daily News 2012 Master Forum - Far away from the Storm and Sailing alone Steady - a panel discussion with visiting 2011 Nobel Economics Prize winner Christopher Sims 06/25 The United Daily New Group A Critical Two Years for Taiwan’s Economic Development Forum - a panel discussion: The Priority of The Critical Two Years F.C. Tseng Stan Shih (Note) 08/16 04/18 Global Unichip Corp. Executive Compensation and Long-Term Incentive Program Taiwan Corporate Governance Association Speech: Enterprise Management & Corporate Governance 10/25 Securities & Future Institute 11/30 Kok-Choo Chen 05/22 Taiwan Corporate Governance Association Taiwan Corporate Governance Association Johnsee Lee 05/23 Securities & Future Institute The 8th Taipei Corporate Governance Forum Speech: Wangdao & Corporate Governance International Corporate Governance Forum Speech: Wangdao & Corporate Governance Function Performance of Independent Directors and Practice of Audit Committee 3 hours Directors and Supervisors Practice Advanced Seminar: Financial Forecast and Risk Management 3 hours Duration 40 minutes 1.5 hours 1 hour 2 hours 20 minutes 3 hours 11/07 Global Views Monthly Magazine The Chinese Enterprise Leader Forum - Global Change and New Leadership 2 days 1. From time to time, TSMC provides directors with information concerning regulatory requirements and developments as related to directors’ activities. TSMC management also regularly presents updates on the Company’s business and other information to directors. 2. Regular regulatory update reports are provided by TSMC’s General Counsel and by the Company’s independent auditors at the Audit Committee meetings. Note: Selected speeches on corporate governance and related topics. Continuing Education/Training of Management in 2012 Name/Title Jessica Chou Director, Accounting Division John Liang Director, Internal Audit Date 02/20 02/20 11/20 11/21 12/10 12/10 11/20 12/20 Host by Training Accounting Research and Development Foundation Guiding principles of amending regulations of financial statements preparation under IFRS (International Financial Reporting Standard) Accounting Research and Development Foundation Conference on business finance and tax: Case study of administrative proceedings regarding enterprise income tax and business tax Accounting Research and Development Foundation The legal responsibility and case study of environmental protection (development and sustainable environment) for enterprise Accounting Research and Development Foundation Case study of “Transfer Pricing” audit in China, and the latest development in value added tax in China Accounting Research and Development Foundation Analysis of 2012 International Financial Reporting Standard -Chapter one: Preparation of financial statements Accounting Research and Development Foundation Analysis of 2012 International Financial Reporting Standard -Chapter two: Revenue and inventory The Institute of Internal Auditors, R.O.C. The Institute of Internal Auditors, Taiwan Supervision of Subsidiary Audit for Newly Added Items of Internal Control System Duration 3 hours 3 hours 3 hours 3 hours 3 hours 3 hours 7 hours 7 hours Note: In 2012, Our Management attended various external, internal training programs, and speech presentations, such as the one conducted by our Sr. Vice President & CFO, Lora Ho on “TSMC Corporate Income Tax”. 3.4 Code of Ethics and Business Conduct Ethics Values Integrity is the most important core value of TSMC’s culture. TSMC is committed to acting ethically in all aspects of our business; constantly and vigilantly promoting integrity, honesty, fairness, accuracy, and transparency in all that we say and do. At the heart of our corporate governance culture is TSMC’s Code of Ethics and Business Conduct (the “Code”) that applies to TSMC and its subsidiaries, and this Code requires that each employee bears a heavy personal responsibility to preserve and to protect TSMC’s ethical values and reputation and to comply with various applicable laws and regulations. 039 In so doing, each of us: ● must not advance our personal interests at the expense of, or in conflict with the Company; ● must refrain from corruption, unfair competition, fraud, waste and abuse; ● must not undertake any practices detrimental to TSMC, the environment and to society; ● must procure all of our raw materials from socially responsible sources; ● must abide by both the spirit and letter of all applicable laws, rules and regulations; and conduct when dealing with us or our officers and employees; we also promote our ethical culture to our business partners through regular live seminars to prevent any unethical conduct. We have established an online “hotline” that any relevant person may use to report any ethical irregularities to be investigated personally by designated senior management of TSMC. The internal auditors of TSMC regularly audit the compliance by the Company, our vendors, suppliers, and customers, of relevant rules and regulations. ● must avoid any efforts improperly to influence the decisions of anyone, including government officials, agencies, and courts, as well as our customers, suppliers, and vendors. TSMC Internal Audit assists the Board of Directors and Management in inspecting and reviewing whether TSMC’s internal control system is In order to continue to build an environment of innovation, technology leadership, and sustainable profitable growth, the Code requires that we 1. Financial, managerial, and operating information is accurate, reliable, and timely. must promote business relationships founded upon an unwavering respect for the intellectual property rights, proprietary information and trade 2. Legislative or regulatory issues impacting the organization are recognized and addressed properly. secrets of TSMC, our customers, and others; and the proper use of the Company’s assets, not for personal use, but for achieving TSMC’s vision 3. Employee’s actions are in compliance with policies, standards, procedures, and applicable laws and regulations. for many years to come. 4. Resources are acquired economically, used efficiently, and adequately protected. adequate in design and effective in operation to ensure: All employees, officers and Board members must whole-heartedly embrace and practice the Code. TSMC’s management must set the best To achieve the above objectives, Internal Audit submits an annual audit plan incorporating the regulatory compliance audit projects to the example of integrity and ethical conduct. TSMC’s officers, especially our CEO, CFO, and General Counsel, with oversight from our Board, are Board of Directors for approval. Subsequent to the audits, Internal Audit reports the audit findings along with issue follow-up to the Board and responsible for the full, fair, accurate, timely, and understandable financial accounting and financial disclosure in reports and documents filed by Management on a regular basis. the Company with securities authorities and in all TSMC public communications and disclosures. Code Administration and Disciplinary Action Compliance Activities Prevention - Employee declaration - Employee education - Continuing promotion - Stakeholder promotion/cooperation Detection - Internal auditor - Internal/external hotline - Administrative discipline/legal action Enhancement - Monitor and analyze outcomes - Propose improved procedures - Implement enhanced management system All employees, officers and managers must comply with the Code and other policies and procedures. TSMC expects our customers, suppliers, vendors, advisors and others with which we come into contact to understand and respect the Company’s ethics standards and culture. As part of our ethics compliance program, all employees must disclose any matters that have or may have the appearance of undermining the Code, such as any actual or potential conflict of interest. Key employees and senior officers must periodically declare their compliance status with the Code. To encourage an open culture of ethics compliance, we also have implemented several related policies that allow employees or any whistleblowers with relevant evidence to report any financial, legal, or ethical irregularities through the “Complaint Policy and Procedures for Certain Accounting and Legal Matters” or “Procedures for Ombudsman System”. When an employee finds or suspects a breach of this Code, he/she should report it immediately to any of the following persons: their supervisor; the Function Head of Human Resources; the Company’s Ombudsman; or to the Chairman of the Company’s Audit Committee, depending on the nature of the suspected breach. In order to promote a culture of awareness, we have made all of our various policies available through easy access on our intranet and require all employees to be trained on our core values and compliance regime. Our compliance program for all employees includes regular live seminars and online training on various topics on ethics, including the requirements to prevent bribery and to protect our intellectual property. Our intranet website posts various guidelines and informative articles on ethics and honorable business conduct. We also require our stakeholders such as our suppliers, vendors and other partners to accept and abide by the same high ethical standard to which we hold all of our officers and employees. For example, we require all of our suppliers, vendors and partners to declare in writing that they will not engage in any fraud or any unethical 2 0 1 2 T S M C A N N U A L R E P O R T 040 We have a “zero tolerance” rule for any violation of any ethics rule. Simply put, any officer or employee regardless of their seniority will be severely punished (including immediate dismissal and judicial prosecution as appropriate) to the full extent of our policies and the law, for any violation of our ethical standards. For example, the Company prosecuted one legal action against former employees for misappropriation of the Company’s intellectual property in 2012. Additionally, TSMC terminated 4 employees during 2012 for violating our Proprietary Information Protection (“PIP”) and other ethics Rules. 3.4.1 Taiwan Corporate Conduct and Ethics Implementation as Required by the Taiwan Financial Supervisory Commission Non-implementation and Its Reason(s) None Item Implementation Status 1. Establishment of Corporate Conduct and Ethics Policy and Implementation Measures (1) The company’s guidelines on corporate conduct and ethics are provided in internal policies and disclosed publicly. The Board of Directors and the management team demonstrate their commitments to implement the policies. (2) The company establishes relevant policies for preventing any unethical conduct. The implementation of the relevant procedures, guidelines and training mechanism are provided in the policies. (3) The company establishes appropriate measures for preventing bribery and illegal political contribution for higher potential unethical conduct in the relevant policies. Integrity is the most important core value of TSMC’s culture. TSMC is committed to acting ethically in all aspects of our business. TSMC has established the Code of Ethics and Business Conduct (the “Code”) to require that each employee bears a heavy personal responsibility to uphold TSMC’s ethics value. All details of the Code and the measures that the Board and the management team take to ensure compliance of the Code are reported in TSMC’s annual report and the Corporate Social Responsibility Report. In order to promote a culture of awareness, we have made available through easy access all of our various policies on our intranet and require all employees to be trained periodically on our core values and compliance regime. We also require our stakeholders such as our suppliers, vendors and other partners to accept and abide by the same high ethical standard to which we hold all of our officers and employees. The internal auditors of TSMC regularly audit compliance by the Company, our vendors, suppliers, and customers, of relevant rules and regulations. In order to prevent any unethical conduct, all employees must disclose any matters that have or may have the appearance of undermining the Code, such as any actual or potential conflict of interest. Key employees and senior officers must periodically declare their compliance status with the Code. TSMC requires all of our suppliers, vendors and partners to declare in writing that they will not engage in any fraud or provide unethical conduct when dealing with us or our officers and employees. We have established internal and external online “hotline” that any relevant person may use to report any ethical irregularities to be investigated personally by designated senior management of TSMC. (Continued) 041 Non-implementation and Its Reason(s) None Item Implementation Status 2. Corporate Conduct and Ethics Compliance Practice (1) The company shall prevent doing business with whom has unethical records and include business conduct and ethics related clauses in the business contracts. (2) The company sets up dedicated unit in charge of promotion and execution of the company’s corporate conduct and ethics. The board of directors supervises such execution and compliance of the policies. (3) The company establishes policies to prevent conflict of interest and provides appropriate communication and complaint channels. (4) The company establishes effective accounting and internal control systems for the implementation of policies, and the internal auditors audit such execution and compliance. TSMC requires our stakeholders such as our suppliers, vendors and other partners to accept and abide by the same high ethical standard to which we hold all of our officers and employee. For example, we require all of our suppliers, vendors and partners to declare in writing that they will not engage in any fraud or provide unethical conduct when dealing with us or our officers and employees. We also promote our ethical culture to our business partners through regular live seminars to prevent any unethical conduct. Integrity is the most important core value of TSMC’s culture. TSMC’s Board, under the leadership of the Chairman, the Company’s Ombudsman and other internal functions of the Company including Legal Department, Human Resources and Internal Auditors fully promote the code values of the Company from the various perspectives. All employees, officers, and Board members must whole-heartedly embrace and practice the Code. TSMC’s management must set the best example of integrity and ethical conduct. TSMC’s officers, especially our CEO, CFO, and General Counsel, with oversight from our Board, are responsible for the full, fair, accurate, timely, and understandable financial accounting and financial disclosure in reports/documents filed by the Company with securities authorities and in all TSMC public communications/disclosures. TSMC requires each new hiring employee to declare if there is any conflict of interest, and asks all employees to disclose any matters that have, or may have the appearance of undermining the Code, such as any actual or potential conflict of interest. Key employees and senior officers must periodically declare their compliance status with the Code. TSMC requires all of our suppliers, vendors and partners to declare in writing that they will not engage in any fraud or provide unethical conduct when dealing with us or our officers and employees. We have established internal and external online “hotline” that any relevant person may use to report any ethical irregularities to be investigated personally by designated senior management of TSMC. TSMC continues maintaining the integrity of its financial reporting processes and controls and establishes appropriate internal control systems for preventing higher potential unethical conduct. The Internal auditors formulate annual audit plans based on the results of the risk assessment and report to the Board its audit report. 3. The company establishes the channels for reporting any ethical irregularities and sets up punishment for violations of the policies. TSMC has established internal and external online “hotline” that any employee or relevant person may use to report any ethical irregularities to be investigated personally by designated senior management of TSMC. None 4. Information Disclosure (1) To set up a corporate website that publishes information relating to company’s corporate conduct and ethics. (2) Other information disclosure channels (e.g. maintaining an English website, designating personnel to handle information collection and disclosure) Any officer or employee will be severely punished (including immediate dismissal and judicial prosecution as appropriate) and prosecuted to the full extent of our policies and the law, for any violation of our ethical standards. For example, the Company prosecuted a legal action against former employee for misappropriation of the Company’s intellectual property in 2012. Additionally, TSMC terminated 4 employees during 2012 for violating our PIP and other ethical rules. Our intranet website posts various guidelines and informative articles on ethics and honorable business conduct for employees’ reference (in both Chinese and English). TSMC discloses the relevant information in its’ Annual Report and CSR Report which are available in TSMC external website (http://www.tsmc.com, in both Chinese and English) None 5. If the company has established corporate governance policies based on TSE Corporate Conduct and Ethics Best Practice Principles, please describe any discrepancy between the policies and their implementation. TSMC has established the Code of Ethics and Business Conduct (the “Code”) to require that all employees, officers and board members comply with the Code and the other policies and procedures. For details on the implementation of TSMC’s Corporate Conduct and Ethics, please refer to “3.4 Code of Ethics and Business Conduct” on page 39-42 of this Annual Report. 6. Other important information to facilitate better understanding of the company’s corporate conduct and ethics compliance practices (e.g., promote and demonstrate the company’s commitment to ethical standard and provide training to its business partners; review the company’s corporate conduct and ethics policy). For details on the implementation of TSMC’s Corporate Conduct and Ethics, please refer to “3.4 Code of Ethics and Business Conduct” on page 39-42 of this Annual Report. 2 0 1 2 T S M C A N N U A L R E P O R T 042 3.5 Regulatory Compliance ● Live seminars are offered for topics related to Anti-bribery/ corruption, Anti-harassment and discrimination, Antitrust, PIP, TSMC operates in many countries; in order to achieve compliance Insider Trading, Export Control, Financial Reporting, Contract with governing legislation, applicable laws, regulations and Management, Intellectual Property, and Privacy Law. The Privacy regulatory expectations, we closely monitor domestic and foreign Protection course has been updated and reworked to reflect the government policies and regulatory developments that could have a newly adoption of Taiwan’s Personal Information Protection Act. material impact on TSMC’s business and financial operations. These courses are mandatory to managers and certain employees because of the nature of the business activities they perform. In addition to TSMC’s Code of Ethics and Business Conduct, TSMC ● Members of our legal team regularly attend outside training in has also established policies, guidelines and procedures in other Taiwan and abroad to receive legal updates and new development policy areas, including: Anti-bribery/corruption, Anti-harassment/ in compliance and other areas. discrimination, Antitrust (unfair competition), Environment, Export ● Inviting legal professionals and industry experts to lecture Control, Financial Reporting/Internal controls, Insider Trading, on new areas of knowledge and the latest developments on Intellectual Property, PIP, Privacy, as well as procuring of raw industry-specific compliance matters. materials from socially responsible sources and so forth. With respect ● To enhance compliance and risk management to our subsidiaries to “PIP,” it is one of the six key strategies of TSMC as announced in and affiliates, we regularly hold compliance meetings with them to June 2010. ensure that all of our subsidiaries and affiliates (as appropriate) are aligned with the compliance standards at TSMC headquarters. TSMC and our employees are expected to comply with all laws and regulations that govern our business. Training is a major component To increase awareness of all employees in relation to the various of our compliance program and is conducted throughout the year compliance topics, various trainings and resources are available to refresh employees’ commitment to ethical conduct, and to get through our intranet, including Company’s latest internal policies. updated information on any changes to the law. Highlights of our Furthermore, compliance education and articles are published compliance training program include the following: regulatory on TSMC’s Legal Organization website. Actively promoting ● A wide range of on-line learning programs are designed to provide employees with an understanding of the law and key compliance issues. Topics available via on-line learning including competition law (antitrust), environmental protection, insider trading, export control management, PIP and more. the right behavior is our key focus. For example, through various promotion campaigns, we have raised awareness of behavior associated with anti-bribery in 2012. 043 3.6 Internal Control System Execution Status 3.7 Status of Personnel Responsible for the Company’s Financial and Business Operation Taiwan Semiconductor Manufacturing Company Limited Statement of Internal Control System 3.7.1 Resignation or Dismissal of Personnel Responsible for the Company’s Financial and Business Operation during the 2012 Calendar Year and as of the Date of this Annual Report: None. Date: February 5, 2013 3.7.2 Certification Details of Employees Whose Jobs are Related to the Release of the Company’s Financial Based on the findings of a self-assessment, Taiwan Semiconductor Manufacturing Company Limited (TSMC) states the following with regard to its internal control system during the year 2012: 1. TSMC’s Board of Directors and Management are responsible for establishing, implementing, and maintaining an adequate internal control system. Our internal control is a process designed to provide reasonable assurance over the effectiveness and efficiency of our operations (including profitability, performance, and safeguarding of assets), reliability of our financial reporting, and compliance with applicable laws and regulations. 2. An internal control system has inherent limitations. No matter how perfectly designed, an effective internal control system can provide only reasonable assurance of accomplishing its stated objectives. Moreover, the effectiveness of an internal control system may be subject to changes due to extenuating circumstances beyond our control. Nevertheless, our internal control system contains self-monitoring mechanisms, and TSMC takes immediate remedial actions in response to any identified deficiencies. 3. TSMC evaluates the design and operating effectiveness of its internal control system based on the criteria provided in the Regulations Governing the Establishment of Internal Control Systems by Public Companies (herein below, the “Regulations”). The criteria adopted by the Regulations identify five key components of managerial internal control: (1) control environment, (2) risk assessment, (3) control activities, (4) information and communication, and (5) monitoring. 4. TSMC has evaluated the design and operating effectiveness of its internal control system according to the aforesaid Regulations. 5. Based on the findings of such evaluation, TSMC believes that, on December 31, 2012, we have maintained, in all material respects, an effective internal control system (that includes the supervision and management of our subsidiaries), to provide reasonable assurance over our operational effectiveness and efficiency, reliability of financial reporting, and compliance with applicable laws and regulations. 6. This Statement will be an integral part of TSMC’s Annual Report for the year 2012 and Prospectus, and will be made public. Any falsehood, concealment, or other illegality in the content made public will entail legal liability under Articles 20, 32, 171, and 174 of the Securities and Exchange Law. Information Certification Certified Public Accountants (CPA) U.S. Certified Public Accountants (U.S. CPA) Certified Internal Auditor (CIA) Chartered Financial Analyst (CFA) Certified Management Accountant (CMA) Financial Risk Manager (FRM) Cerficate in Financial Management (CFM) Certification in Control Self-Assessment (CCSA) Certified Information Systems Auditor (CISA) BS7799/ISO 27001 Lead Auditor Number of Employees Internal Audit Finance 2 2 9 0 0 0 0 3 3 1 21 10 6 2 2 1 1 0 0 0 Note Note 1 3.8 Information Regarding TSMC’s Independent Auditor 3.8.1 Audit Fees Unit: NT$ thousands Accounting Firm Name of CPA Audit Fee Non-audit Fee Whether the CPA’s Audit Period Covers an Entire Fiscal Year System Design Company Registration Human Resource Others (Note 2) Subtotal Yes No Audit Period Deloitte & Touche Hung-Peng Lin, Shu-Chieh Huang, and others 66,048 - 370 - 2,470 2,840 V Note 1: Article 10-4 of Regulation Governing Information to be published in Annual Report of Public Companies was not applicable to TSMC. Note 2: Fees mainly related to R.O.C. IFRS adoption project. 7. This Statement has been passed by the Board of Directors in their meeting held on February 5, 2013, with none of the nine attending 3.8.2 TSMC did not Replace Its Independent Auditor during 2011, 2012, and as of February 28, 2013. directors expressing dissenting opinions, and the remainder all affirming the content of this Statement. Taiwan Semiconductor Manufacturing Company Limited Morris Chang, Chairman and Chief Executive Officer 3.8.3 TSMC’s Chairman, Chief Executive Officer, Chief Financial Officer, and Managers in Charge of Its Finance and Accounting Operations did not Hold Any Positions within TSMC’s Independent Audit Firm or Its Affiliates during 2012. 3.9 Material Information Management Procedure TSMC has established relevant procedures for material information management and disclosure. All relevant departments and employees are required to comply with the procedures and other applicable regulations when they become aware of any potential material information and the disclosure thereof. 045 2 0 1 2 T S M C A N N U A L R E P O R T 044 Advanced Technologies 65nm and beyond Reached of Total Wafer Revenues 62% Share of the Total Semiconductor Foundry Market Reached 45% More than Customers Worldwide 600 Wafer Shipments Reached Million 8-inch Equivalent Wafers 14.04 4. Capital and Shares Distribution Profile of Share Ownership Common Share Shareholder Ownership (Unit: Share) Number of Shareholders 4.1 Capital and Shares 4.1.1 Capitalization Unit: Share/NT$ Authorized Share Capital Capital Stock Month/ Year Issue Price (Per Share) Shares Amount Shares Amount Sources of Capital Remark Capital Increase by Assets Other than Cash 03/2012 10 28,050,000,000 280,500,000,000 25,916,222,575 259,162,225,750 Exercise of Employee Stock None Options: NT$20,733,670 07/2012 10 28,050,000,000 280,500,000,000 25,920,604,605 259,206,046,050 Exercise of Employee Stock None Options: NT$43,820,300 09/2012 10 28,050,000,000 280,500,000,000 25,920,709,359 259,207,093,590 Exercise of Employee Stock None Options: NT$1,047,540 12/2012 10 28,050,000,000 280,500,000,000 25,922,047,578 259,220,475,780 Exercise of Employee Stock None Options: NT$13,382,190 4.1.2 Capital and Shares Unit: Share Type of Stock Common Stock Shelf Registration: None. 4.1.3 Composition of Shareholders As of 02/28/2013 Date of Approval & Approval Document No. 03/22/2012 Yuan Shang Tzu No.1010008872 07/09/2012 Yuan Shang Tzu No.1010020130 09/04/2012 Yuan Shang Tzu No.1010027766 12/17/2012 Yuan Shang Tzu No.1010039355 As of 02/28/2013 Total 179,839 146,222 32,754 13,134 5,653 6,415 2,944 1,813 3,518 1,863 1,173 479 268 203 1,398 397,676 1 ~ 999 1,000 ~ 5,000 5,001 ~ 10,000 10,001 ~ 15,000 15,001 ~ 20,000 20,001 ~ 30,000 30,001 ~ 40,000 40,001 ~ 50,000 50,001 ~ 100,000 100,001 ~ 200,000 200,001 ~ 400,000 400,001 ~ 600,000 600,001 ~ 800,000 800,001 ~ 1,000,000 Over 1,000,001 Total Preferred Share: None. 4.1.4 Major Shareholders Common Share Shareholders ADR-Taiwan Semiconductor Manufacturing Company, Ltd. JPMorgan Chase Bank N.A. Taipei Branch in custody for Saudi Arabian Monetary Agency Government of Singapore JPMorgan Chase Bank N.A. Taipei Branch in custody for EuroPacific Growth Fund JPMorgan Chase Bank N.A. Taipei Branch in custody for ABU DHABI Investment Authority Cathay Life Insurance Co.,Ltd. Polaris Taiwan Top 50 Tracker Fund iShares MSCI Emerging Markets Index Fund National Westminster Bank plc as Depositary of First State Asia Pacific Leaders Fund a sub fund of First State Investments ICVC Authorized Share Capital Issued Shares Listed Non-listed Total Unissued Shares 25,926,367,175 0 25,926,367,175 2,123,632,825 28,050,000,000 National Development Fund, Executive Yuan Common Share Type of Shareholders Number of Shareholders Shareholding Holding Percentage (%) Government Agencies 11 Financial Institutions 252 Other Juridical Persons Foreign Institutions & Natural Persons Domestic Natural Persons 1,000 3,315 393,098 Total 397,676 1,653,736,247 808,520,232 1,193,067,566 19,662,338,939 2,603,046,375 25,920,709,359 6.38% 3.12% 4.60% 75.86% 10.04% 100.00% As of 07/10/2012 (last record date) 2 0 1 2 T S M C A N N U A L R E P O R T 048 Ownership 40,386,381 322,008,654 231,441,009 158,402,696 98,500,500 154,591,336 101,246,006 81,277,324 243,418,575 256,673,695 330,352,824 233,532,296 185,504,687 181,682,616 23,301,690,760 25,920,709,359 Total Shares Owned 5,458,510,828 1,653,709,980 813,105,396 496,005,919 413,565,136 271,795,529 255,515,235 237,011,423 229,265,000 226,137,807 As of 07/10/2012 (last record date) Ownership (%) 0.16% 1.24% 0.89% 0.61% 0.38% 0.60% 0.39% 0.31% 0.94% 0.99% 1.27% 0.90% 0.72% 0.70% 89.90% 100.00% As of 07/10/2012 (last record date) Ownership (%) 21.06% 6.38% 3.14% 1.91% 1.60% 1.05% 0.99% 0.91% 0.88% 0.87% 049 4.1.5 Net Change in Shareholding and Net Change in Shares Pledged by Directors, Management and Shareholders with 10% Shareholdings or More Unit: Share Title Name Chairman & CEO Morris Chang Vice Chairman F.C. Tseng Director National Development Fund, Executive Yuan Representative: Johnsee Lee Director Rick Tsai Independent Director Sir Peter Leahy Bonfield Independent Director Stan Shih Independent Director Thomas J. Engibous Independent Director Gregory C. Chow Independent Director Kok-Choo Chen Executive Vice President & Co-Chief Operating Officer Shang-yi Chiang (Note 2) Executive Vice President & Co-Chief Operating Officer Mark Liu (Note 2) Executive Vice President & Co-Chief Operating Officer C.C. Wei (Note 2) Senior Vice President & Chief Information Officer Information Technology & Materials Management and Risk Management Stephen T. Tso Senior Vice President & General Counsel Legal Richard Thurston Senior Vice President, Chief Financial Officer & Spokesperson Finance Lora Ho Senior Vice President Worldwide Sales and Marketing Jason C.S. Chen Vice President Operations/Affiliate Fabs M.C. Tzeng Vice President Research and Development Wei-Jen Lo Vice President & Chief Technology Officer Research and Development Jack Sun Vice President Operations/Product Development Y.P. Chin Vice President Quality and Reliability N.S. Tsai Vice President & President of TSMC North America Rick Cassidy 2 0 1 2 T S M C A N N U A L R E P O R T 050 2012 01/01/2013 ~ 02/28/2013 Net Change in Shareholding Net Change in Shares Pledged (Note 1) Net Change in Shareholding Net Change in Shares Pledged (Note 1) - - - - (1,124,000) - - - - - (1,080,000) (385,000) - (350,000) (720,000) - (270,000) - (357,000) (224,000) (265,000) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (170,000) - - - - - (50,000) (35,000) 276,882 (130,000) - - (50,000) (26,000) (76,000) - (80,000) - - - - - - - - - - - - - - - - - - - - - - - - - (Continued) Title Name Vice President Human Resources L.C. Tu (Note 3) Vice President Operations/Mainstream Fabs and Manufacturing Technology J.K. Lin Vice President Operations/300mm Fabs J.K. Wang Vice President Corporate Planning Organization Irene Sun Vice President Research and Development Burn J. Lin Vice President Research and Development Y.J. Mii Vice President Research and Development Cliff Hou 2012 01/01/2013 ~ 02/28/2013 Net Change in Shareholding Net Change in Shares Pledged (Note 1) Net Change in Shareholding Net Change in Shares Pledged (Note 1) - 324,900 - (300,000) (5,000) 565,578 - - - - - - - - (24,000) - - (89,000) (24,000) - - - - - - - - - Note 1: This refers to the creation of security interest over TSMC shares in favor of creditors, usually in connection with a shareholder’s own financing activities. Note 2: On March 2, 2012, Senior Vice President of R&D Dr. Shang-yi Chiang, Senior Vice President of Operations Dr. Mark Liu, and Senior Vice President of Business Development Dr. C.C. Wei were appointed as Executive Vice Presidents and Co-Chief Operating Officers, effective March 5, 2012. Note 3: On March 5, 2013, Vice President of Human Resources Mr. L.C. Tu was appointed as the President of TSMC China, effective March 15, 2013. 4.1.6 Stock Trade with Related Party: None. 4.1.7 Stock Pledge with Related Party: None. 4.1.8 Related Party Relationship among Our 10 Largest Shareholders Common Share Name Current Shareholding Spouse & Minor Shareholding TSMC Shareholding by Nominee Arrangement As of 07/10/2012 (last record date) Name and Relationship between TSMC’s Shareholders as Defined in the Statement of Financial Accounting Standards No.6 Shares % Shares ADR-Taiwan Semiconductor Manufacturing Company, Ltd. 5,458,510,828 National Development Fund, Executive Yuan Representatives: Johnsee Lee 1,653,709,980 - 21.06% 6.38% - JPMorgan Chase Bank N.A. Taipei Branch in custody for Saudi Arabian Monetary Agency 813,105,396 3.14% Government of Singapore JPMorgan Chase Bank N.A. Taipei Branch in custody for EuroPacific Growth Fund JPMorgan Chase Bank N.A. Taipei Branch in custody for ABU DHABI Investment Authority Cathay Life Insurance Co.,Ltd. Chairman: Homg-Tu Tsai Polaris Taiwan Top 50 Tracker Fund iShares MSCI Emerging Markets Index Fund National Westminster Bank plc as Depositary of First State Asia Pacific Leaders Fund a sub fund of First State Investments ICVC 496,005,919 413,565,136 1.91% 1.60% 271,795,529 1.05% 255,515,235 0.99% 237,011,423 229,265,000 226,137,807 0.91% 0.88% 0.87% N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A % N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Shares % Name Relationship N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A None None None None None None N/A None N/A None N/A N/A N/A None None None None None None None None None None None None None None 051 4.1.9 Long-term Investment Ownership Ownership by TSMC (1) Ownership by Directors, Managers and Directly/indirectly Owned Subsidiaries (2) Total Ownership (1) + (2) Shares % Shares % Shares Long-term Investment Equity Method: TSMC Partners, Ltd. TSMC Global Ltd. TSMC North America TSMC Europe B.V. TSMC Japan Limited TSMC Korea Limited 988,268,244 1,284 11,000,000 200 6,000 80,000 100% 100% 100% 100% 100% 100% - - - - - - - - - - - - - - 988,268,244 1,284 11,000,000 200 6,000 80,000 Not Applicable (Note 1) Not Applicable (Note 1) TSMC China Company Limited Not Applicable (Note 1) 100% Not Applicable (Note 1) TSMC Guang Neng Investment, Ltd. Not Applicable (Note 1) 100% Not Applicable (Note 1) TSMC Solar Ltd. TSMC Solid State Lighting Ltd. 1,118,000,000 430,400,000 Systems on Silicon Manufacturing Co. Pte Ltd. 313,603 Vanguard International Semiconductor Corp. 628,223,493 Xintec Inc. Global UniChip Corporation 94,950,005 46,687,859 98.58% 95.01% 38.79% 40.47% 40.20% 34.84% 5,794,000 4,919,500 - 0.51% 1.09% - 1,123,794,000 435,319,500 313,603 279,239,917 17.99% (Note 2) 907,463,410 - 15,000 - - - - 94,950,005 46,702,859 Not Applicable (Note 1) Not Applicable (Note 1) Emerging Alliance Fund, L.P. Not Applicable (Note 1) 99.50% Not Applicable (Note 1) VentureTech Alliance Fund II, L.P. Not Applicable (Note 1) 98.00% Not Applicable (Note 1) VentureTech Alliance Fund III, L.P. Not Applicable (Note 1) 50.25% Not Applicable (Note 1) 48.73% Not Applicable (Note 1) Cost Method: Non-publicly Traded United Industrial Gases Co., Ltd. Shin-Etsu Handotai Taiwan Co., Ltd. W.K. Technology Fund IV Funds 19,300,377 10,500,000 4,000,000 9.75% 7.00% 1.89% - - - Horizon Ventures Fund I, L.P. Not Applicable (Note 1) 12.11% Not Applicable (Note 1) Crimson Asia Capital Ltd., L.P. Not Applicable (Note 1) 1.07% Not Applicable (Note 1) Note 1: Not applicable. These firms do not issue shares. TSMC’s investment is measured as a percentage of ownership. Note 2: TSMC’s Director, National Development Fund of Executive Yuan, holds 17.65% while other Directors and Management hold 0.34%. 4.1.10 Share Information - - - - - 19,300,377 10,500,000 4,000,000 Not Applicable (Note 1) Not Applicable (Note 1) TSMC’s earnings per share increased 23.8% in 2012 to NT$6.41 per share. The following table details TSMC’s net worth, earnings, dividends and market price per common share in 2012, as well as other data regarding return on investment. Net Worth, Earnings, Dividends, and Market Price Per Common Share Unit: NT$, except for weighted average shares and return on investment ratios Item Market Price Per Share (Note 1) Highest Market Price Lowest Market Price Average Market Price Net Worth Per Share Before Distribution After Distribution Earnings Per Share 2011 78.00 63.30 72.09 24.29 21.29 2012 01/01/2013 ~ 02/28/2013 99.20 74.30 84.08 27.90 (Note 5) Weighted Average Shares (thousand shares) Diluted Earnings Per Share 25,924,682 5.18 25,927,936 6.41 (Note 5) As of 12/31/2012 % 100% 100% 100% 100% 100% 100% 100% 100% 99.09% 96.10% 38.79% 58.46% 40.20% 34.84% 99.50% 98.00% 98.98% 9.75% 7.00% 1.89% 12.11% 1.07% 109.00 99.00 102.27 - - - - (Continued) 2 0 1 2 T S M C A N N U A L R E P O R T 052 Item Dividends Per Share Cash Dividends Accumulated Undistributed Dividend Return on Investment Price/Earnings Ratio (Note 2) Price/Dividend Ratio (Note 3) Cash Dividend Yield (Note 4) Note 1: Referred to TWSE website Note 2: Price/Earnings Ratio = Average Market Price/Diluted Earnings Per Share Note 3: Price/Dividend Ratio = Average Market Price/Cash Dividends Per Share Note 4: Cash Dividend Yield = Cash Dividends Per Share/Average Market Price Note 5: Pending shareholders’ approval 4.1.11 Dividend Policy 2011 3.00 - 13.92 24.03 4% 2012 01/01/2013 ~ 02/28/2013 3.00 (Note 5) - (Note 5) (Note 5) (Note 5) - - - - - TSMC’s profits may be distributed by way of cash dividend and/or stock dividend. The preferred method of distributing profits is by way of an annual cash dividend. Under TSMC’s Articles of Incorporation, stock dividends shall not exceed 50% of the total dividend distribution in any given fiscal year. TSMC does not pay dividends when there is no profit or retained earnings. 4.1.12 Distribution of Profit The Board adopted a proposal for 2012 profit distribution at its Meeting on February 5, 2013. The proposal will be effected according to the relevant regulations, upon the approval of shareholders at the Annual Shareholders’ Meeting on June 11, 2013. In addition, according to the Company’s Articles of Incorporation, TSMC shall allocate no more than 0.3% of earnings available for distribution (net income after a regulatory required deduction for prior years’ losses and contributions to legal and special reserves) as compensation to directors, and not less than 1% as a bonus to employees. Profit sharing to employees, to be distributed after the 2013 Annual Shareholders’ Meeting, was recorded as a charge to earnings of proximately 6.7% of net income in year 2012; compensation to directors were expensed based on estimated amount of payment. The proposal will be effected according to the relevant regulations, upon the approval of shareholders at the Annual Shareholders’ Meeting on June 11, 2013. If the actual amounts subsequently resolved by the shareholders differ from the above estimated amounts, the differences will be recorded in the year of shareholders’ resolution as a change in accounting estimate. Proposal to Distribute 2012 Profits Unit: NT$ Cash Dividends to Common Shareholders (NT$3.0 per share) Note: Employees’ cash bonus and profit sharing and compensation to directors for the year 2012 which have been expensed under the Company’s income statements are listed below: －NT$11,115,239,773 distributed employees’ cash bonus －NT$11,115,239,772 employees’ cash profit sharing to be distributed after 2013 Annual Shareholders’ Meeting －NT$71,351,700 directors’ compensation 2011 Directors’ Compensation and Employee Profit Sharing 77,773,307,004 Directors’ Compensation (Cash) Employee’s Cash Profit Sharing Total Board Resolution (02/14/2012) Actual Result (Note) Amount (NT$) 62,323,764 8,990,026,475 9,052,350,239 Amount (NT$) 62,323,764 8,990,026,475 9,052,350,239 Note: Each of the above two items, being approved by the Board, has been expensed at the same amount under the Company’s 2011 income statements. 4.1.13 Impact to 2013 Business Performance and EPS Resulting from Stock Dividend Distribution: Not applicable. 4.1.14 Buyback of Common Stock: None. 053 4.2 Issuance of Corporate Bonds 4.2.1 Corporate Bonds Issuance Issuing Date Denomination Offering Price Total Amount Coupon Tenor and Maturity Date Guarantor Trustee Underwriter Legal Counsel Auditor Repayment Outstanding Redemption or Early Repayment Clause Covenants Credit Rating Other Rights of Bondholders Conversion Right None Amount of Converted or Exchanged Common Shares, ADRs or Other Securities Not Applicable Dilution Effect and Other Adverse Effects on Existing Shareholders Custodian None None 4.2.2 Convertible Bond: None. 4.2.3 Exchangeable Bond: None. 4.2.4 Shelf Registration: None. 4.2.5 Bond with Warrants: None. 2 0 1 2 T S M C A N N U A L R E P O R T 054 Domestic Unsecured Bond (100-1) Domestic Unsecured Bond (100-2) Domestic Unsecured Bond (101-1) Domestic Unsecured Bond (101-2) Domestic Unsecured Bond (101-3) Domestic Unsecured Bond (101-4) Domestic Unsecured Bond (102-1) As of 02/28/2013 09/28/2011 NT$10,000,000 Par NT$18,000,000,000 Tranche A: 1.40% p.a. Tranche B: 1.63% p.a. Tranche A: 5 years Maturity: 09/28/2016 Tranche B: 7 years Maturity: 09/28/2018 01/11/2012 NT$10,000,000 Par NT$17,000,000,000 Tranche A: 1.29% p.a. Tranche B: 1.46% p.a. Tranche A: 5 years Maturity: 01/11/2017 Tranche B: 7 years Maturity: 01/11/2019 08/02/2012 NT$10,000,000 Par NT$18,900,000,000 Tranche A: 1.28% p.a. Tranche B: 1.40% p.a. Tranche A: 5 years Maturity: 08/02/2017 Tranche B: 7 years Maturity: 08/02/2019 09/26/2012 NT$10,000,000 Par NT$21,700,000,000 Tranche A: 1.28% p.a. Tranche B: 1.39% p.a. Tranche A: 5 years Maturity: 09/26/2017 Tranche B: 7 years Maturity: 09/26/2019 10/09/2012 NT$10,000,000 Par NT$4,400,000,000 1.53% p.a. Tenor: 10 years Maturity: 10/09/2022 None None None None None 01/04/2013 NT$10,000,000 Par NT$23,600,000,000 Tranche A: 1.23% p.a. Tranche B: 1.35% p.a. Tranche C: 1.49% p.a. Tranche A: 5 years Maturity: 01/04/2018 Tranche B: 7 years Maturity: 01/04/2020 Tranche C: 10 years Maturity: 01/04/2023 None 02/06/2013 NT$10,000,000 Par NT$21,400,000,000 Tranche A: 1.23% p.a. Tranche B: 1.38% p.a. Tranche C: 1.50% p.a. Tranche A: 5 years Maturity: 02/06/2018 Tranche B: 7 years Maturity: 02/06/2020 Tranche C: 10 years Maturity: 02/06/2023 None Mega International Commercial Bank Mega International Commercial Bank Mega International Commercial Bank Taipei Fubon Commercial Bank Taipei Fubon Commercial Bank Taipei Fubon Commercial Bank Taipei Fubon Commercial Bank Not Applicable Modern Law Office Deloitte & Touche Bullet Not Applicable Modern Law Office Deloitte & Touche Bullet Not Applicable Modern Law Office Deloitte & Touche Bullet NT$18,000,000,000 NT$17,000,000,000 NT$18,900,000,000 None None None None None None Not Applicable Modern Law Office Deloitte & Touche Bullet NT$21,700,000,000 None None Not Applicable Modern Law Office Deloitte & Touche Bullet NT$4,400,000,000 None None Not Applicable Modern Law Office Deloitte & Touche Bullet NT$23,600,000,000 None None Not Applicable Modern Law Office Deloitte & Touche Bullet NT$21,400,000,000 None None twAAA (Taiwan Ratings Corporation, 08/24/2011) twAAA (Taiwan Ratings Corporation, 12/06/2011) twAAA (Taiwan Ratings Corporation, 07/02/2012) twAAA (Taiwan Ratings Corporation, 08/23/2012) twAAA (Taiwan Ratings Corporation, 09/04/2012) twAAA (Taiwan Ratings Corporation, 11/29/2012) twAAA (Taiwan Ratings Corporation, 12/18/2012) None Not Applicable None None None Not Applicable None None None Not Applicable None None None Not Applicable None None None Not Applicable None None None Not Applicable None None 055 4.3 Preferred Shares 4.3.1 Preferred Share: None. 4.3.2 Preferred Share with Warrants: None. 4.4 Issuance of American Depositary Shares Issuing Date 10/08/1997 11/20/1998 01/12/1999 - 01/14/1999 07/15/1999 08/23/1999 - 09/09/1999 02/22/2000 - 03/08/2000 04/17/2000 06/07/2000 - 06/15/2000 05/14/2001 - 06/11/2001 06/12/2001 11/27/2001 02/07/2002 - 02/08/2002 11/21/2002 - 12/19/2002 07/14/2003 - 07/21/2003 11/14/2003 08/10/2005 - 09/08/2005 05/23/2007 Issuance & Listing NYSE NYSE NYSE NYSE NYSE NYSE NYSE NYSE NYSE NYSE NYSE NYSE NYSE NYSE NYSE NYSE NYSE Total Amount (US$) 594,720,000 184,554,440 35,500,000 296,499,641 158,897,089 379,134,599 224,640,000 1,167,873,850 240,999,660 297,649,640 320,600,000 1,001,650,000 160,097,914 908,514,880 1,077,000,000 1,402,036,500 2,563,200,000 Offering Price Per ADS (US$) 24.78 15.26 17.75 24.516 28.964 57.79 56.16 35.75 20.63 20.63 16.03 16.75 8.73 10.40 10.77 8.6 10.68 Units Issued 24,000,000 12,094,000 2,000,000 12,094,000 5,486,000 6,560,000 4,000,000 32,667,800 11,682,000 14,428,000 20,000,000 59,800,000 18,348,000 87,357,200 100,000,000 163,027,500 240,000,000 Underlying Securities TSMC Common Shares from Selling Shareholders TSMC Common Shares from Selling Shareholders TSMC Common Shares from Selling Shareholders TSMC Common Shares from Selling Shareholders TSMC Common Shares from Selling Shareholders (Pursuant to ADR Conversion Sale Program) TSMC Common Shares from Selling Shareholders (Pursuant to ADR Conversion Sale Program) TSMC Common Shares from Selling Shareholders Cash Offering and TSMC Common Shares from Selling Shareholders TSMC Common Shares from Selling Shareholders (Pursuant to ADR Conversion Sale Program) TSMC Common Shares from Selling Shareholders TSMC Common Shares from Selling Shareholders TSMC Common Shares from Selling Shareholders TSMC Common Shares from Selling Shareholders (Pursuant to ADR Conversion Sale Program) TSMC Common Shares from Selling Shareholders TSMC Common Shares from Selling Shareholders TSMC Common Shares from Selling Shareholders TSMC Common Shares from Selling Shareholders Common Shares Represented Rights & Obligations of ADS Holders 120,000,000 60,470,000 10,000,000 60,470,000 27,430,000 32,800,000 20,000,000 163,339,000 58,410,000 72,140,000 100,000,000 299,000,000 91,740,000 436,786,000 500,000,000 815,137,500 1,200,000,000 Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Trustee Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Depositary Bank Citibank, N.A. – New York Citibank, N.A. – New York Citibank, N.A. – New York Citibank, N.A. – New York Citibank, N.A. – New York Citibank, N.A. – New York Citibank, N.A. – New York Citibank, N.A. – New York Citibank, N.A. – New York Citibank, N.A. – New York Citibank, N.A. – New York Citibank, N.A. – New York Citibank, N.A. – New York Citibank, N.A. – New York Citibank, N.A. – New York Citibank, N.A. – New York Citibank, N.A. – New York Custodian Bank (Note 1) Citibank, N.A. – Taipei Branch Citibank, N.A. – Taipei Branch Citibank, N.A. – Taipei Branch Citibank, N.A. – Taipei Branch Citibank, N.A. – Taipei Branch Citibank, N.A. – Taipei Branch Citibank, N.A. – Taipei Branch Citibank, N.A. – Taipei Branch Citibank, N.A. – Taipei Branch Citibank, N.A. – Taipei Branch Citibank, N.A. – Taipei Branch Citibank, N.A. – Taipei Branch Citibank, N.A. – Taipei Branch Citibank, N.A. – Taipei Branch Citibank, N.A. – Taipei Branch Citibank, N.A. – Taipei Branch Citibank, N.A. – Taipei Branch ADSs Outstanding (Note 2) Apportionment of Expenses for Issuance & Maintenance Terms and Conditions in the Deposit Agreement & Custody Agreement 24,000,000 46,222,650 48,222,650 71,407,859 76,893,859 83,453,859 87,453,859 144,608,739 156,290,739 170,718,739 259,006,235 318,806,235 369,019,413 485,898,166 585,898,166 864,210,597 1,128,739,639 (Note 3) See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details (Note 4) See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details (Note 3) See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details Closing Price Per ADS (US$) 2012 01/01/2013 - 02/28/2013 High Low Average High Low Average 17.27 12.57 14.56 19.15 17.52 18.14 Note 1: Citibank, N.A., Taipei Branch has changed its name to “Citibank Taiwan Limited” on August 1, 2009. Note 2: TSMC has in aggregate issued 813,544,500 ADSs since 1997, which, if taking into consideration stock dividend distributed over the period, would amount to 1,147,835,205 ADSs. Stock dividends distributed in 1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008 and 2009 was 45%, 23%, 28%, 40%, 10%, 8%, 14.08668%, 4.99971%, 2.99903%, 0.49991%, 0.50417% and 0.49998% respectively. As of February 28, 2013, total number of outstanding ADSs was 1,091,467,817 after 56,367,388 ADSs were redeemed. Note 3: All fees and expenses such as underwriting fees, legal fees, listing fees and other expenses related to issuance of ADSs were borne by the selling shareholders, while maintenance expenses such as annual listing fees and accountant fees were borne by TSMC. Note 4: All fees and expenses such as underwriting fees, legal fees, listing fees and other expenses related to issuance of ADSs were borne by TSMC and the selling shareholders, while maintenance expenses such as annual listing feesand accountant fees were borne by TSMC. 2 0 1 2 T S M C A N N U A L R E P O R T 056 057 4.5 Status of Employee Stock Option Plan 4.5.1 Issuance of Employee Stock Options ESOP Granted Approval Date Issue (Grant) Date Number of Options Granted Percentage of Shares Exercisable to Outstanding Common Shares Option Duration Source of Option Shares Vesting Schedule Shares Exercised Value of Shares Exercised (NT$) Shares Unexercised Original Grant Price Per Share (NT$) Adjusted Exercise Price Per Share (NT$) Percentage of Shares Unexercised to Outstanding Common Shares Impact to Shareholders’ Equity First Grant 06/25/2002 08/22/2002 18,909,700 0.10154% 10 years Second Grant 06/25/2002 11/08/2002 1,085,000 0.00583% 10 years Third Grant 06/25/2002 03/07/2003 6,489,514 0.03485% 10 years Fourth Grant 06/25/2002 06/06/2003 23,090,550 0.12399% 10 years Fifth Grant 10/29/2003 12/03/2003 842,900 0.00416% 10 years Sixth Grant 10/29/2003 02/19/2004 15,720 0.00008% 10 years Seventh Grant 10/29/2003 05/11/2004 11,167,817 0.05510% 10 years Eighth Grant 10/29/2003 08/11/2004 135,300 0.00058% 10 years Ninth Grant 01/06/2005 05/17/2005 10,742,350 0.04620% 10 years As of 02/28/2013 New Common Share New Common Share New Common Share New Common Share New Common Share New Common Share New Common Share New Common Share New Common Share 2nd Year: up to 50% 3rd Year: up to 75% 4th Year: up to 100% 2nd Year: up to 50% 3rd Year: up to 75% 4th Year: up to 100% 2nd Year: up to 50% 3rd Year: up to 75% 4th Year: up to 100% 2nd Year: up to 50% 3rd Year: up to 75% 4th Year: up to 100% 2nd Year: up to 50% 3rd Year: up to 75% 4th Year: up to 100% 2nd Year: up to 50% 3rd Year: up to 75% 4th Year: up to 100% 2nd Year: up to 50% 3rd Year: up to 75% 4th Year: up to 100% 2nd Year: up to 50% 3rd Year: up to 75% 4th Year: up to 100% 2nd Year: up to 50% 3rd Year: up to 75% 4th Year: up to 100% 20,585,621 696,435,850 0 NT$53.0 NT$25.6 0.00000% 1,416,203 45,875,186 0 NT$51.0 NT$24.6 0.00000% 7,385,017 170,789,855 199,537 NT$41.6 NT$20.2 0.00077% 23,363,569 807,621,328 1,475,410 NT$58.5 NT$28.3 0.00569% 522,185 26,754,961 60,926 NT$66.5 NT$50.1 0.00023% 12,251 592,895 3,165 NT$63.5 NT$47.8 0.00001% 9,561,511 423,881,664 783,017 NT$57.5 NT$43.2 0.00302% 128,014 4,982,968 0 NT$43.8 NT$38.0 0.00000% 7,445,854 354,649,036 1,491,228 NT$54.3 NT$47.2 0.00575% Dilution to Shareholders’ Equity is limited Dilution to Shareholders’ Equity is limited Dilution to Shareholders’ Equity is limited Dilution to Shareholders’ Equity is limited Dilution to Shareholders’ Equity is limited Dilution to Shareholders’ Equity is limited Dilution to Shareholders’ Equity is limited Dilution to Shareholders’ Equity is limited Dilution to Shareholders’ Equity is limited 2 0 1 2 T S M C A N N U A L R E P O R T 058 059 4.5.2 Employee Stock Options Granted to Management Team and to Top 10 Employees Title Name Number of Options Granted (Note 3) % of Shares Exercisable to Outstanding Common Shares Exercised Unexercised Shares Exercised Exercise Price Per Share Value of Shares Exercised (NT$) % of Shares Exercised to Outstanding Common Shares Shares Unexercised Adjusted Grant Price Per Share Value of Shares Unexercised (NT$) As of 02/28/2013 % of Shares Unexercised to Outstanding Common Shares Chairman &Chief Executive Officer Executive Vice President & Co-Chief Operating Officer Executive Vice President & Co-Chief Operating Officer Morris Chang (Note 1) Mark Liu (Note 1) C.C. Wei (Note 1) Senior Vice President & Chief Information Officer Stephen T. Tso (Note 1) Directors Senior Vice President &General Counsel Richard Thurston (Note 1) Vice President & Chief Technical Officer Jack Sun (Note 1) Vice President & President of TSMC North America Rick Cassidy Vice President Vice President Vice President Director Director Sr. Vice President of TSMC North America L.C. Tu (Note 1 & 2) J.K. Lin (Note 1) Burn J. LIN (Note 1) Jessica Chou Lie-Szu Juang Pan-Wei Lai Sr. Vice President of TSMC North America Bradford Paulsen Employees Sr. Vice President of TSMC North America Vice President of TSMC North America President of WaferTech Director of WaferTech Program Director of WaferTech Deputy FAB Manager of WaferTech David Keller Sajiv Dalal Kuo Chin Hsu Charlton Ku Wayne Yeh Tsung Kuo 5,610,424 0.02164% 5,610,424 24.8 139,177,343 0.02164% 0 0.0 0 0.00000% 7,674,288 0.02960% 7,167,464 43.7 313,329,626 0.02765% 506,824 47.2 23,922,093 0.00195% Note 1: TSMC granted options to certain of its officers (as listed above) as a result of their voluntary selection to exchange part of their profit sharing for stock options in 2003. This includes a voluntary exchange by Chairman Morris Chang in his capacity as Chief Executive Officer. Note 2: On March 5, 2013, Vice President of Human Resources Mr. L.C. Tu was appointed as the President of TSMC China, effective March 15, 2013. Note 3: Number of options granted includes the additional shares due to stock dividend distributed in 2004, 2005, 2006, 2007, 2008 and 2009. 4.6 Status of Employee Restricted Stock TSMC did not issue employee restricted stock in 2012, and as of the date of this Annual Report. 4.6.1 Status of Employee Restricted Stock: Not applicable. 4.6.2 Employee Restricted Stock Granted to Management Team and to Top 10 Employees: Not applicable. 4.7 Status of New Share Issuance in Connection with Mergers and Acquisitions TSMC did not issue new shares in connection with mergers or acquisitions during 2012, and as of the date of this Annual Report. 4.8 Financing Plans and Implementation: Not applicable. 2 0 1 2 T S M C A N N U A L R E P O R T 060 061 20 nm 2012 28 nm 2010 40 nm 2008 65 nm 2005 90 nm 2004 0.13 µm 2001 5. Operational Highlights 5.1 Business Activities 5.1.1 Business Scope As the founder and a leader of the dedicated semiconductor foundry segment, TSMC has built its reputation by offering advanced and “More-than-Moore” wafer production processes and unparalleled manufacturing efficiency. TSMC strives to provide the best overall value to its 5.1.4 Production in 2012 and 2011 Unit: Capacity / Output (8-inch equivalent wafers) / Amount (NT$ thousands) Year 2012 2011 5.2 Technology Leadership 5.2.1 R&D Organization and Investment Wafers Capacity 15,090,605 13,221,316 Output 13,875,440 12,019,882 Amount 270,740,990 204,927,905 Amount: NT$ thousands R&D Expenditures customers, and the success of TSMC’s business is manifested in the success of its customers. TSMC further expanded many aspects of Research and Development TSMC provides a full range of integrated semiconductor foundry services that fulfill the increasing variety of customer needs. In the process, it has experienced strong growth by building close relationships with customers. Semiconductor suppliers from around the world trust TSMC with their manufacturing needs, thanks to its unique integration of cutting-edge process technologies, pioneering design services, manufacturing budget was 8.0% of total revenue. This level of R&D investment equals or exceeds that of many leading-edge technology companies. Along with the budget increase, the R&D organization increased staffing by 2012 40,402,138 in 2012 to strengthen Technology Leadership. In 2012, the total R&D 2011 33,829,880 productivity and product quality. over 27.5%. 01/01/2013~ 02/28/2013 6,990,383 In May 2009, TSMC established the New Businesses organization to explore non-foundry related business opportunities. In August 2011, the TSMC recognizes that the technology challenge required to extend New Businesses organization was formally separated from the main TSMC organization as two subsidiaries, TSMC Solid State Lighting Ltd. and Moore’s Law, the business law behind CMOS scaling, is getting increasingly complex. R&D Vice Presidents bring their rich industry experiences to TSMC Solar Ltd., responsible for solid state lighting and solar business activities, respectively. 5.1.2 Customer Applications lead the strengthening of the R&D team and to navigate through the technological and competitive challenges ahead. In 2012, TSMC worked intensively on ramping 28nm technology, which contributed close to 22% of fourth quarter 2012 revenue and will further increase in 2013. TSMC accelerated the development of advanced transistors, especially 3D transistors using FinFET structure for 16nm process node, embedded Over the past 25 years, more than 600 customers worldwide have relied on TSMC to manufacture chips that are used across the entire spectrum memories, and copper (Cu)/low-K interconnect technologies. During 2012, the R&D organization once again proved its capabilities by developing of electronic applications, including computers and peripherals, information appliances, wired and wireless communications systems, automotive 20nm technology as well as establishing 16nm transistor leadership capabilities. Furthermore, TSMC broadened the horizon of transistor research and industrial equipment, consumer electronics such as DVDs, digital TVs, game consoles, digital still cameras (DSCs), and many other by investing R&D in alternative high-speed and low-power channel materials other than silicon, such as germanium and III-V compounds. applications. The rapid evolution of end products drives our customers to utilize TSMC’s innovative technologies and services, while at the same time spurring IMEC in Belgium, the respected European R&D consortium. TSMC also has strategic agreements with IP providers to enable the development of TSMC also expanded its external R&D partnerships and alliances with world-class research institutions. For example, TSMC is a core partner of TSMC’s own development of technology. As always, success depends on leading rather than following industry trends. 5.1.3 Unconsolidated Shipments and Gross Sales in 2012 and 2011 Unit: Shipments (8-inch equivalent wafers) / Gross Sales (NT$ thousands) Wafer Package Other Total Domestic Export Domestic Export Domestic Export Domestic Export 2012 2011 Shipments 2,348,115 11,508,104 0 143,267 2,348,115 11,651,371 Gross Sales 64,958,354 401,877,584 0 6,124,451 4,180,117 29,557,232 69,138,471 437,559,267 Shipments 2,077,487 10,411,227 0 24,881 2,077,487 10,436,108 Gross Sales 49,039,389 340,588,566 0 1,045,714 4,499,828 26,298,590 53,539,217 367,932,870 2 0 1 2 T S M C A N N U A L R E P O R T 064 reusable IPs through the advanced technology nodes. TSMC strengthened its collaborations with key development partners on design-process optimization, and provides funding for nanotechnology researches at leading research universities worldwide to promote innovations and the advancement of technology. These research efforts enable the Company to continuously offer its customers the foundry-leading, first-to-market technologies and design solutions that contribute to their product success in today’s complex and challenging market environment. 5.2.2 R&D Accomplishments in 2012 R&D Highlights ● 28nm Technology In 2012, TSMC’s 28nm technology offering added 28nm High Performance Plus (28HPP) and 28nm High Performance Triple-Gate (28HPT). 28HPP and 28HPT achieved 10% faster speed than that in previous 28nm High Performance (28HP) and 28nm High Performance Mobile Computing (28HPM) offered in 2011. 28HPP was qualified and demonstrated first silicon success in early production. 28HPT received first customer tape out in December 2012, and was scheduled to deliver first silicon success by April 2013. ● 20nm Technology In 2012, TSMC continued to focus on 20nm technology development, including process baseline setup and yield learning, design rule definition and enhancement, SPICE model generation, and reliability evaluation. To offer a leading-edge technology for both digital and analog applications, the Company adopted an advanced lithography process for smaller feature size. With the second generation of high-K metal-gate, more Si strain, and new device structure, the intrinsic transistor performance continues to enhance following Moore’s Law. Meanwhile, external resistance can be effectively reduced and controlled by a specially designed process technique. The back-end-of-line (BEOL) interconnect process 065 features extreme low-K inter-metal dielectric materials and copper topography with the 3D device structures. In addition, TSMC has also lithography not only has the potential for imaging critical layers, it metallization with the novel low-resistance scheme. The logic developed the patterning solution to delineate the tightest single also offers cost reduction potential for non-critical layers and 450mm transistor and SRAM bit-cell offering, using the 20nm process, can patterning pitch of 80nm for the metal layer enabling further increase wafers. satisfy high performance System-on-Chip (SoC) applications. of pattern density for customers. Building on the learning of the Development of 20nm technology will create superior gate density control that enable fast cycle time for SRAM development and yield 20nm node, TSMC has automated the in-line pilot run process and its ● Mask Technology Mask technology is an integral part of advanced lithography ● Advanced Package Development To provide innovative and cost competitive lead-free bumping and packaging solutions in 2012, TSMC developed and qualified 28nm technology node Bump-on-Trace packaging technology with ultra-fine pitch array (100μm pitch) Cu-bump for mobile devices. The Company expanded the lead-free packaging technology and chip performance. The cost and complexity of advanced learning. technology will continue to escalate for customers. In 2012, TSMC technology. In 2012, TSMC completed the development of the envelope to 20nm node and offered a wide variety of lead-free flip mask technology for the 20nm node to enable double patterning. chip packaging technologies for both mobile/handheld and high successfully taped out the process development test vehicle, defect The pathfinding for 10nm node has been started on immersion TSMC’s R&D mask facility received more state-of-the-art mask performance applications to enhance customers’ competitiveness. reduction vehicle and product-like yield learning vehicle, on which the scanners. This technology will become more sophisticated and play advanced ARM-core block was included. With the vehicle and process a key role as the process baseline, based on considerations of cost development, TSMC provided V1.0 process flow, design kits (design and next-generation tool availability. Innovative processes are being rules, SPICE models, and PDK files) and intellectual property (IP) to developed to deal with the process control challenges brought with help reduce foundry-access costs in 2012. The Company achieved this technology node. Optical proximity correction has solved the processing tools to enable engineers to complete the development of mask technologies for the 16nm and 10nm nodes in the coming years. Development of mask technology for EUV lithography has been underway with its unique requirements in e-beam writing, etching, inspection, repair, and verification. As a core member of its outstanding transistor performance target and demonstrated process problem. Both cost and measurement accuracy were greatly SEMATECH and a joint-development partner of EIDEC, TSMC is an ● 3D IC In 2012, R&D completed CoWoSTM process and package qualifications and transferred the technology for production. CoWoSTM solution provides a simple integration process for customers to realize their products with the optimized cost and the functional and natural yield of the leading-edge SRAM bit-cells improved with this change. as planned. Besides the internal test vehicles, the Company also active participant in the development of key infrastructure pieces for cycle time. We have also developed the 3D IC 28HPM through EUV masks such as the actinic repair verification tool and the actinic transistor stacking (TTS) technology, that can enable customers for launched two public cyber shuttles in April and November 2012. Development of EUV lithography and multiple e-beam direct write is inspection tool of EUV blanks. More than 10 customers took the shuttles and verified their IPs. TSMC’s high-performance 20nm process enters risk production in aimed at the 7nm node because of late availability. Nevertheless, the 10nm node will be used to exercise these technologies. first quarter of 2013. At the front of specialty technology, R&D lithography has further ● 16nm Technology TSMC completed 16nm technology definition and began 16nm extended the limitation of scanners in the 8-inch fabs, to shrink the design rules and help customers gain more gross dies per wafer to technology development in 2012. In order to further extend reduce the die cost. R&D has transferred multiple eFlash technologies Moore’s Law, the FinFET transistor, an advanced 3D device structure, for manufacturing and delivered eMRAM and eRRAM lithography was introduced in the 16nm technology in addition to the third technologies. For MEMS, R&D has developed and transferred the generation of high-K metal gate, the fifth generation of strain manufacturing technology for microphones and accelerometers. technology and advanced 193nm lithography. As a result, the 16nm technology offers substantial power reduction for the same chip TSMC continues to work with exposure-tool partner ASML in the performance, a must for advanced mobile applications as compared development of immersion and EUV lithographic technologies. Faced to technologies built with the traditional planar structure. with delays in the EUV source technology, capabilities of 193nm immersion scanners are being extended with more resolution- In 2012, TSMC achieved significant progress on test vehicle enhancement features, tighter specifications, and higher throughput generation, process baseline setup, design rule definition, SPICE to enable multiple patterning. In the meantime, using NXE3100 model generation and reliability evaluation. TSMC successfully beta-tool in Fab 12, we have been developing single-patterning EUV taped out a process development test vehicle, provided customers processes for 10nm and 7nm applications, with associated mask early design kits (design rules and SPICE models) and demonstrated and resist technologies. However, the application of EUV lithography functional yield on the FinFET-based SRAM bit-cells according to plan. in high-volume manufacturing of these nodes will depend on the success of the EUV source technology to reach over 100 wafers per ● Lithography 20nm lithography progressed steadily in 2012. There has been hour. continuous learning and improvement in material quality, process The KLA-Tencor REBL multiple-e-beam direct-write tool is being recipe robustness, and litho-cell maintenance that resulted in robust extensively studied for feasibility, performance, and improvements. patterning solutions. The achieved defect learning and D0 goals A TSMC team from the design, CMOS, MEMS, and packaging areas enable successful yield learning on SRAM qualification vehicles and is jointly developing and fabricating the dynamic pattern generation several key customer tape-outs. Lithography for the 16nm node signifies the introduction of novel patterning techniques to achieve 48nm pitch FinFET, especially to chip for the REBL system. Two test stands for qualification of dynamic pattern generation and resist testing are being built and will be delivered to the TSMC Fab 12 GIGAFABTM facility in 2013. Two scanner companies are performing sizing feasibility for multiple ensure sufficient coverage and planarization of high aspect ratio e-beam direct-write lithography. Multiple e-beam direct-write 2 0 1 2 T S M C A N N U A L R E P O R T 066 Integrated Interconnect and Packaging In 2012, TSMC became the world’s first foundry to provide full system integration turn-key solutions to customers. The Company developed and delivered backend technologies starting from advanced back-end-of-line (BEOL) interconnect, to the production-ready fine pitch silicon interposer with through silicon via (TSV) & chip stacking, and all the way to the advanced wafer-level-chip scale packaging (WLCSP) including fan-in and fan-out, and ultra fine pitch large die lead-free flip chip packaging. applications requiring small form factor, high performance and low power dissipation. Realizing the critical nature of 3D IC thermal management, TSMC has also developed thermal solutions associated with the CoWoSTM process and TTS technologies. Overall, TSMC delivers technology solutions to enable SiP design that includes package design, electrical analysis of package extraction, timing, signal integrity, IR drop, and thermal to physical verification of design rule check (DRC) and layout verification of schematic (LVS). Such integrated solution for product realization is available to customers. Advanced Transistor Research TSMC can offer our customers corresponding design tools, Continuous quest for high performance and low power drives technology and mass production capability. Such options were made innovation and research in transistor architecture in advanced logic available to customers in 2012. Advanced BEOL interconnection is technologies across all segments. TSMC invested heavily in alternative further refined and extended with innovative damascene processes. high speed and low power channel materials other than silicon, such And the flip chip packaging technology envelope was expanded to as germanium and III-V compounds. New concepts of transistor larger chip size and finer bump pitches for advanced technology structures employing innovative nanotechnology are also under nodes (28nm and 20nm). Efforts are also made to include fan-in intensive investigation. and fan-out wafer level packaging technology in our offerings to customers. The solution has been qualified by selective customers. Spectrum of Technology ● Advanced Interconnect Advanced interconnects with low resistance/capacitance RC delay continued to be the primary focus of TSMC BEOL technology development in 2012. For 16nm node and beyond, we have developed a new interconnect scheme to achieve minimum pitch and a new metal patterning to minimize resistance/capacitance RC delay. At the 20nm node, the effective resistivity of our Cu lines is highly competitive and lower than that projected by the International Technology Roadmap for Semiconductors (ITRS). In addition to CMOS logic technology, TSMC continues to conduct research and development on a broad mix of capabilities. The Company enhanced its SoC roadmap, with higher integration and more variants. ● Mixed Signal/Radio Frequency (MS/RF) Technology TSMC developed full scope 28nm oxi-nitride and poly-Si based RFCMOS technology for next generation RF transceivers (ex. 4G LTE) with the advantages of low power & low cost. Besides standard-Vt and low-Vt devices, extreme-low-Vt devices were also included for larger design margins and smaller active-power consumption. TSMC delivered a CMOS process compatible technology for enabling cellular RF switch applications on Si to compete with traditional compound 067 semiconductor- based process. TSMC enabled production of the In October 2012, TSMC announced full delivery of 20nm design IPD (Integrated Passive Device) technology, specifically for rapidly ecosystem through OIP collaboration. TSMC’s 20nm design expanding mobile devices. ecosystem is ready with foundation design collaterals such as DRC, LVS, and PDKs; foundation IPs, including standard-cell libraries, In 2011, TSMC set up a dedicated quality management system to drive for highest quality assurance for soft-IP continuing the successful story of excellent quality records as seen in hard-IP. Customers can access soft-IP9000 assessment status reports of CoWoSTM Reference Flow was announced in October 2012. The emerging 3D integration and process technologies allow the designs with multi-technology support. CoWoSTM Reference Flow enables heterogeneous integration across multiple technologies and memory standard I/O, e-Fuse and memory compilers; and standard interface soft-IPs through TSMC Online. In 2012, the new soft-IP Handoff integration through Wide-IO. In order to satisfy the demands of and the first product from a partner customer has shipped technology requirements. timing, and congestion) and advanced formal lint checks. ● Power IC/BCD Technology In 2012, TSMC’s HV/ Power technologies collectively shipped more IPs such as USB, PCI, and DDR/LPDDR. Customers can conveniently than 1 million wafers to customers. On top of the production base, download these materials at TSMC Online. In addition, new design R&D team released the second generation of 0.18 BCD technology, enablement of EDA tools is updated regularly to satisfy 20nm engineering samples to system customer. ● Panel Driver Technology In 2012, 80HV for smartphone display driver chips was released to production. And a customized derivative of the technology has also supported partner customer’s lead product design. Other than small panel for smartphone, we also have been developing a 0.11μm TSMC addressed the most critical design challenges through two technology- specific Reference Flows in 2012: 20nm Reference Flow and CoWoSTM Reference Flow. Through these two new reference flows, customers gain access to needed solutions in order to design in TSMC 20nm technology and CoWoSTM technology. technology specifically for tablet applications. In October 2012, TSMC also announced the foundry segment’s 20nm ● Micro-electromechanical Systems (MEMS) Technology In 2012, TSMC’s modular MEMS technology for accelerometer was released and supported the partner customer production Custom Design Reference Flow, and the fourth revision of the Radio Frequency Reference Design Kit (RF RDK), providing needed design enablement for custom design and RF design. ramping. A microphone project for high-resolution noise cancellation To ensure timely enhancement of OIP Ecosystem partners’ tool applications was executed. compliance with new process requirements, TSMC works with EDA partners to proactively certify EDA tool readiness and publish a report ● Flash/Embedded Flash Technology In 2012, TSMC achieved several milestones in embedded flash on TSMC online. technologies at 65/55nm node. The split-gate cell at the 65nm node Starting from 20nm, the coverage of EDA certification further was qualified for automotive process and is currently in production. expanded from DRC, LVS, RC extraction, placement and routing, to For other NOR-type cells, a customer is shipping several prototypes static timing analysis, electro-migration, IR drop and custom design. for sampling. For hybrid cells, products for 100k chip card application are in sampling. In order to lower the barrier of technology adoption for customers, TSMC introduced the Integrated Sign-Off Flow (ISF) in 65nm/55nm At the 40nm node, TSMC has engaged with leading IDMs to develop in 2009, announced 40nm ISF in 2011 and 28nm in 2012. ISF nitride film storage flash cell and NOR type cell for both automotive is a production-proven design flow based on TSMC’s expertise and consumer applications. 5.2.3 Technology Platform accumulated over the years. ISF started to bear fruit in 2010, and enabled a large number of first-time customers to leapfrog from 0.13μm node to 65nm/55nm node. The introduction of 40nm ISF has further helped customers seize more business TSMC equips modern IC designers with a comprehensive design opportunities to jumpstart their product solutions, with examples infrastructure required to optimize productivity and cycle time. of successful tape-outs for mobile processor application and 3G/4G This includes design flow for electronic design automation (EDA), silicon-proven building blocks such as libraries and IPs, simulation and communication from China in 2011. The newly revealed 28nm ISF in 2012 helped customers seize opportunities in mobile communication verification design kits such as process design kit (PDK) and tech-files. with designs in 28nm node. All these are built on top of the technology foundation, and each technology needs its own design infrastructure to be usable for The Soft-IP Alliance Program aims to improve soft-IP readiness for designers. This is the concept of a technology platform. advanced technology nodes and to drive earlier time-to-market. Soft-IP has historically been process technology independent TSMC’s technology platforms reflect the culmination of years of work and therefore not optimized for power, performance, and area by TSMC and its alliance partners. The Company has added additional deliverables to its Open Innovation Platform® initiative to further enhance its technology platforms every year since OIP was launched in 2008. considerations. Given the ever-increasing need of first-time silicon success and early time-to-market for highly integrated circuits, such as System-on-Chip (SoC), close technical collaboration between the foundry and the IP provider is imperative to emphasize this critical trade-off. 2 0 1 2 T S M C A N N U A L R E P O R T 068 Package (the soft-IP Kit 2.0) is ready for soft-IP Partners. Soft-IP Kit 2.0 provides an enhanced set of checks that covers such additional design checks as early physical implementation aspects (e.g., area, emerging systems for scaling, performance and functionality, the CoWoSTM Reference Flow provides a complete analysis suite for power integrity, thermal analysis, simultaneously switching noise 5.2.4 Design Enablement Customers can design directly using TSMC technologies through and innovative DFT and place-and-route solution. With cooperating TSMC ecosystem partners, CoWoSTM design methodology provides the most cost-effective solution for the TSMC recommended design environment. The CoWoSTM design platform can take all benefits of advanced nodes and mature technologies in a very flexible way to the Company’s internal design team as well as via alliance partners. achieve target design requirements. TSMC’s technology platform provides a solid foundation for design enablement. Tech File and PDK Because of TSMC’s broader, earlier, and deeper collaboration with customers through the OIP initiative, customers gain greater benefit from TSMC tech-files and process design kit (PDK). The benefits are evidenced by a significant increase to more than 100,000 downloads in 2012, from 50,000 downloads in 2011. TSMC also increased resources to meet the high demand on PDK for specialty technologies. Library and IP TSMC and its alliance partners offer TSMC’s customers a rich portfolio of libraries and IPs. These reusable building blocks are essential for many design projects. In 2012, over 60% of new tape-outs at TSMC adopted one or more libraries or IPs from TSMC and/or its IP partners. To support the high demand, TSMC also invested resources to expand its library and silicon IP portfolio. The total number of library or IP content in the portfolio, including soft IPs, increased to 5,400 in 2012, compared with 3,740 in 2011. Design Methodology and Flow TSMC announced in October 2012 the full delivery of 20nm support within Open Innovation Platform® (OIP) design infrastructure. TSMC’s 20nm deign ecosystem is ready with foundation design collaterals such as DRC, LVS, and PDKs; foundation IPs, including standard-cell libraries, standard I/O, e-Fuse & memory compilers; and standard interface IPs such as USB, PCI, and DDR/LPDDR. Customers can download these files at TSMC Online. Collaboration with the EDA community for 20nm has been very thorough in order to achieve tool consistency for improved design results. 20nm Reference Flow features new design solutions/capabilities in place-and-route, RC extraction, DRC, timing analysis, electro migration and IR-drop to enable 20nm designs in double patterning and with characteristics that closely match silicon behavior. 20nm Custom Design Reference Flow enables double patterning capability. It provides solutions to process requirements that are significant in 20nm, including a direct link with simulators for the verification of voltage-dependent DRC rules, an integrated layout- dependent-effect solutions and handling of high-K metal-gate edge effect. The updated RF RDK provides a solution to address common challenges that RF designers encounter. RF RDK 4.0 offers flexible five-terminal MOS device and accurate noise model for slow wave transmission line. RDK4.0 also offers comprehensive electro-magnetic work flow for radio-frequency passive device synthesis through integrated-passive-device, 60GHz and scalable VCO reference example to assist customers in inductor design. 5.2.5 Intellectual Property A strong portfolio of intellectual property rights strengthens TSMC’s technology leadership and protects our advanced and leading edge technologies. In 2012, TSMC received a record breaking 647 U.S. patents, as well as 300+ issued patents in Taiwan and the PRC, and other patents issued in various other countries. In 2012, TSMC achieved a patent milestone: breaking into the “Top 50” U.S. patent grants in 2012. TSMC’s patent portfolio is now approximately 20,000 patents worldwide (includes patent applications in queue). We continue to implement a unified strategic plan for TSMC’s intellectual capital management. Strategic considerations and close alignment with the business objectives drive the timely creation, management and use of our intellectual property. At TSMC, we have built a process to extract value from our intellectual property by aligning our intellectual property strategy with our R&D, business objectives, marketing, and corporate development strategies. Intellectual property rights protect our freedom to operate, enhance our competitive position, and give us leverage to participate in many profit-generating activities. 069 We have worked continuously to improve the quality of our 5.2.7 Future R&D Plans intellectual property portfolio and to reduce the costs of maintaining 5.3 Manufacturing Excellence 5.3.3 Precision and Lean Operations it. We plan to continue investing in our intellectual property portfolio In light of the significant accomplishments of TSMC’s advanced and intellectual property management system to ensure that we technologies in 2012, the Company plans to continue to grow its 5.3.1 GIGAFABTM Facilities TSMC’s unique manufacturing infrastructure is tailored for a high product mix foundry environment. Following its commitment to protect our technology leadership and receive maximum business R&D investments. The Company plans to reinforce its exploratory TSMC’s 12-inch fabs are a key part of its manufacturing strategy. manufacturing excellence, TSMC has equipped a sophisticated value from our intellectual property rights. development work on new transistors and technologies, such as 3D scheduling and dispatching system, implemented industry-leading 5.2.6 TSMC University Shuttle Program structures, strained-layer CMOS, high mobility materials and novel 3D IC devices. These studies of the fundamental physics of nanometer CMOS transistors are core aspects of our efforts to improve the TSMC currently operates three 12-inch GIGAFABTM fabrication facilities – Fab 12, Fab 14, and Fab 15 – whose combined capacity automated materials handling systems, and employed Lean Manufacturing approaches to provide customers with reached 3,936,000 12-inch wafers in 2012. Production within on-time-delivery and best-in-class cycle time. Real-time equipment The TSMC University Shuttle Program was established to handle understanding and guide the design of transistors at advanced these three facilities supports 0.13μm, 90nm, 65nm, 40nm, 28nm, performance and productivity monitoring, analysis, diagnosis MPW (Multi-Project Wafer) access requests by qualified professors at nodes. The findings of these studies are being applied to ensure our and 20nm process technologies, and their sub-nodes. Part of the and control minimize production interruption and maximize cost leading research universities worldwide. To participating professors, continued industry leadership at the 28nm and 20nm nodes and to capacity is reserved for research and development work and currently effectiveness. TSMC University Shuttle Program provides annual pre-approved extend our leadership to the 10nm and 7nm nodes. One of TSMC’s supports 16nm, 10nm and beyond technology development. TSMC access to quality technologies, including 65nm, 40nm process nodes goals is to extend Moore’s Law through both innovative in-house has developed a centralized fab manufacturing management for the 5.3.4 450mm Wafer Manufacturing Transition for analog/mixed-signal circuits and RF design, and 0.11μm/0.18μm work and by collaborating with industry leaders and academia. We customers’ benefit of consistent quality and reliability performance, process nodes for micro-electromechanical system designs. For very seek to push the envelope in finding cost-effective technologies and greater flexibility of demand fluctuations, faster yield learning and TSMC joined the Global 450mm Consortium (G450C) located in advanced logic design and SRAM researches, the 28nm process manufacturing solutions. node is provided to special university projects. To TSMC, the key performance indices are the 3Rs: Recruiting, Research results transfer from universities to TSMC, and Recognition. TSMC intends to continue working closely with international consortia and lithography equipment suppliers to ensure the time-to-volume, and minimized costly product re-qualification. It the College of Nanoscale Science and Engineering (CNSE) of New enables Fab 15 to fast ramp 28nm capacity from zero to 50,000 York University at Albany, New York. The consortium includes five IC wafers output per month in eight months to satisfy customers’ demand. makers and CNSE (which represents New York State and provides the clean room facility), as well as key 450mm tool suppliers as associate timely development of 193nm high-NA scanner technology, EUV members. Participations in the TSMC University Shuttle Program include the lithography, and massively parallel e-beam direct-write technologies. active participation of major university research groups: in the U.S., These technologies are increasingly important to TSMC’s process 5.3.2 Engineering Performance Optimization Currently, TSMC has 16 experienced employees working in the M.I.T., Stanford University, UC Berkeley, Harvard University, and development efforts at the 10nm, 7nm, and smaller nodes. Highly sophisticated information technology (IT) solutions, such consortium. TSMC has assumed the Operation GM position in the UCLA; in Taiwan, National Taiwan University, National Chiao-Tung as advanced equipment control, fault detection and diagnosis, consortium and commits to lead the industry for a cost-effective University, and National Tsing-Hua University; in China, Tsing Hua TSMC continues to work with mask writing and inspection engineering big data mining, and centralized operation platforms, 450mm transition. The clean room of G450C in Albany has been University in Beijing, and Hong Kong University of Science and equipment suppliers to develop viable mask making technology to are implemented to optimize TSMC equipment, process and yield ready for tool installation since Q1 2013. The majority of the tools Technology, and in Singapore, Nanyang Technological University. help ensure that the Company maintains its leadership position in performance. They also improve production efficiency, effectiveness, will be installed in 2013. The TSMC University Shuttle Program serves as an effective bridge to prototyping and production requirements. optimization and automation. mask quality & cycle time and continues to meet aggressive R&D, and engineering capability via information integration, workflow link motivated professors and graduate students in leading research Besides 450mm tool readiness, TSMC is also developing novel 450mm operation to bring the maximum value of semiconductor universities worldwide with enthusiastic directors and managers With a highly competent and dedicated R&D team and its Advanced analytical methods identify critical equipment and process wafer fabrication to customers, including advanced quality and the at TSMC to contribute to newer level of excellence in advancing unwavering commitment to innovation, TSMC is confident of its parameters that are linked to device performance. Methodologies most competitive cycle time in advanced technology. 450mm will be technologies and in nurturing new generations of talent in the ability to deliver the best and most cost-effective SoC technologies such as virtual metrology, yield dissection and management integrate a new era of semiconductor manufacturing with new manufacturing semiconductor field. for its customers, thereby supporting the Company’s business growth Advanced Process Control (APC), Fault Detection Classification (FDC), capability advanced from today’s leading edge technology. and profitability. Statistical Process Control (SPC), and Circuit Probe data in order to TSMC’s University Shuttle Program has been very effective and is praised by professors around the world. They have recognized that TSMC R&D Future Major Project Summary this Program allows their graduate students to implement exciting designs ranging from low-power memories, analog-to-digital Project Name Description Risk Production (Estimated Target Schedule) converters and digital designs to advanced radio-frequency and mixed-signal bio-medical systems. This is a truly “win-win” collaboration. In 2012, TSMC received specific letters of appreciation from professors at M.I.T., Stanford University, UC Berkeley, Harvard University, UCLA, National Taiwan University and National Chiao-Tung University. 2 0 1 2 T S M C A N N U A L R E P O R T 070 16nm logic platform technology and applications 10nm logic platform technology and applications 3D IC Next-generation lithography Long-term research Next-generation technology for both digital and analog products Exploratory technology for both digital and analog products 2013 2015 Cost-effective solution with better form factor and performance for SIP 2013 - 2014 EUV and multiple e-beam to extend Moore’s Law 2014 – 2016 Special SoC technology (including new NVM, MEMS, RF, analog) and 10nm transistors 2013 – 2015 The above plans account for roughly 70% of the total R&D budget in 2013, while total R&D budget is currently estimated to be around 8% of 2013 revenue. optimize equipment performance to match device performance. 5.3.5 Raw Materials and Supply Chain Risk Management Accurate modeling and control at each process stage drives intelligent module loop control. The process control hierarchy In 2012, TSMC continued Supply Chain Risk Management meetings dispatched via sophisticated computer-integrated manufacturing systems enables optimization from equipment to end product, periodically to integrate Company resources from materials management, fab operations, risk management and quality which achieves precision and lean operation in a high product mix management. TSMC worked with its suppliers to enhance the semiconductor manufacturing environment. performance of quality, delivery, risk management, and to support green procurement, environmental protection and safety. 071 Raw Materials Supply Major Materials Major Suppliers Market Status Procurement Strategy Raw Wafers F.S.T. MEMC S.E.H. Siltronic SUMCO These five suppliers together provide over 90% of the world’s wafer supply. Each supplier has multiple manufacturing sites in order to meet customer demand, including plants in North America, Asia, and Europe. ● TSMC’s suppliers of silicon wafers are required to pass stringent quality certification procedures. ● TSMC procures wafers from multiple sources to ensure adequate supplies for volume manufacturing and to appropriately manage supply risk. ● TSMC maintains competitive price and service agreements with its wafer suppliers, and, when necessary, enters into strategic and collaborative agreements with key suppliers. ● TSMC regularly reviews the quality, delivery, cost and service performance of its wafer suppliers. The results of these reviews are incorporated into TSMC’s subsequent purchasing decisions. ● A periodic audit of each wafer supplier’s quality assurance systems ensures that TSMC can maintain the highest quality in its own products. Chemicals Litho Materials Gases Slurry, Pad, Disk Air Products ATMI BASF Dow KANTO-PPC MGC AZ Dow JSR Nissan Shin-Etsu Chemical Sumitomo T.O.K. Air Liquide Air Products Linde Taiyo Nippon Sanso Asahi Glass Cabot Microelectronics DA Nano Dow Chemical Fujifilm Planar Solutions Fujimi Hitachi Chemical Kinik 3M These six companies are the major suppliers for bulk and specialty chemicals. ● Most suppliers have relocated many of their operations closer to TSMC’s major manufacturing facilities, thereby significantly improving procurement logistics. ● The suppliers’ products are regularly reviewed to ensure that TSMC’s specifications are met and product quality is satisfactory. These seven companies are the major suppliers for worldwide litho materials ● TSMC works closely with its suppliers to develop materials able to meet application and cost requirements. ● TSMC and suppliers periodically conducts improvement programs of their quality, delivery, sustainability and green policy, to ensure continuous progress of TSMC’s supply chain. These four companies are the major suppliers of specialty gases. ● The majority of the four suppliers are located in different geographic locations, minimizing supply risk to TSMC. ● TSMC conducts periodic audits of the suppliers’ quality assurance systems to ensure that they meet TSMC’s standards. These nine companies are the major suppliers for CMP materials. ● TSMC works closely with its suppliers to develop materials able to meet application and cost requirements. ● TSMC and suppliers periodically conducts improvement programs of their quality, delivery, sustainability and green policy, to ensure continuous progress of TSMC’s supply chain. Suppliers Accounted for at Least 10% of Annual Consolidated Net Procurement Unit: NT$ thousands Supplier Company A Company B VIS SSMC Others Total Net Procurement 2012 2011 Procurement Amount As % of 2012 Total Net Procurement Relation to TSMC Procurement Amount As % of 2011 Total Net Procurement Relation to TSMC 6,708,942 5,846,449 4,475,674 3,638,633 20,710,694 41,380,392 None None Investee accounted for using equity method Investee accounted for using equity method 16% 14% 11% 9% 50% 100% 5,549,444 3,035,441 5,597,895 3,949,176 6,775,433 24,907,389 None None Investee accounted for using equity method Investee accounted for using equity method 22% 12% 22% 16% 28% 100% 2 0 1 2 T S M C A N N U A L R E P O R T 072 5.3.6 Quality and Reliability chemical analysis and fault isolation equipment were added at a record pace in 2012 to support development activities of the 20nm A characteristic of TSMC’s industry reputation is its commitment to and 16nm technology nodes. providing customers with the best quality wafers and service for their products. Quality and Reliability (Q&R) services aim to achieve “quality In compliance with the electronic industry’s lead-free and green on demand” to fulfill customers’ needs regarding time-to-market, IC package policy, Q&R qualified and released lead-free bumping reliable quality, and market competition over a broad range of to satisfy customer demands, and made lead-free bump package products. possible for 0.13μm, 45nm, 40nm and 28nm technology products by collaborating with the major outsource assembly & testing Q&R technical services assist customers in the technology subcontractors (OSAT). This enabled TSMC customers to introduce development and product design stage to design-in their product and ramp lead-free products with excellent assembly quality. In 2012, reliability requirements. Since 2008, Q&R has worked with R&D to TSMC Q&R ramped wafer-level Chip Scale Package (CSP) to 20K successfully establish and implement new qualification methodology per month and lead-free to 40K per month without major quality for High-k/Metal Gate (HKMG). Q&R also works with design issues. For mainstream technologies, Q&R qualified ultra, extreme services on embedded memory, high voltage, e-Fuse and MEMS IP low leakage and high endurance embedded Flash IP, IPD (Integrated developments to expand TSMC’s design portfolio. Since 2009, Q&R Passive Device), hybrid of Copper, Copper-Aluminum technology has worked with R&D and the design service team to improve the with customers. Q&R continues to build reliability testing and quality of design kits through integrated R&D and design quality monitoring to ensure excellent manufacturing quality of automotive, platform. In 2012, Q&R continued to work with R&D and the design team to develop DRM infrastructure with iEDA layout platform. Q&R high-voltage products, CMOS image sensors and embedded-Flash memory products. also deployed an SRAM cell review system to improve bit cell change quality of third parties and customers. Q&R has been collaborating TSMC Q&R is also responsible for leading the Company towards with SEMI to establish an IC Quality Committee since May in order the ultimate goal of zero-defect production through the use of to enhance product quality of the semiconductor supply chain. For continuous improvement programs. Periodic customer feedback backend technology development, Q&R worked with R&D, BTSD indicates that products shipped from TSMC have consistently met (Backend Technology and Service Division) and Product Engineering to complete the CoWoSTM technology development and production transfer. After establishing Power Cycling capability and methodology or exceeded their field quality and reliability requirements. In 2012, a third-party audit verified the effectiveness of the TSMC quality management system (including R&D labs) in compliance with ISO/TS in 2011, Q&R will further extend backend characterization by adding 16949:2009 and IECQ QC 080000 certificates requirements. system-level temperature cycling, bending, drop and vibration tests in 2013. 5.4 Customer Trust Q&R has deployed systems to ensure robust quality in managing 5.4.1 Customers production and in design services, including third-party IP management, to meet the business requirements of customers. Q&R TSMC’s worldwide customers have diverse product specialties also implemented innovative statistical matching methodologies and excellent performance records in various segments of the to enhance manufacturing quality, including matching of facility, semiconductor industry. Fabless customers include: Advanced Micro metrology and process tools, wafer acceptance test (WAT) data Devices, Inc., Altera Corporation, Broadcom Corporation, Marvell and reliability performance. In 2011, Q&R tightened the post-fab Semiconductor Inc., MediaTek Inc., NVIDIA Corporation, OmniVision outgoing visual inspection criteria for wafer quality improvement to Technologies and Qualcomm Inc. IDM customers include: Analog AQL 0.4% from AQL 0.65%. Devices Inc., STMicroelectronics and Texas Instruments Inc. etc. To sustain production quality and to minimize risk to customers Customer Service when deviations occur, manufacturing quality monitoring and event management span all critical stages – from raw material supply, mask making, and real-time in-process monitoring, to bumping, wafer sort and reliability performance. Advanced failure and materials analysis techniques are also developed and effectively deployed in process development, customer new product development and product manufacturing. In addition to adapting analytical techniques to aid in the release and monitoring of advanced Fab tools and processes for advanced technology nodes, state-of-the-art electron microscopy, TSMC believes that providing superior customer service is critical to enhancing customer satisfaction and loyalty, which is the path to retaining existing customers, attracting new customers, and strengthening customer relationships. With a dedicated customer service team as a main contact window for coordination and facilitation, TSMC strives to provide world-class, high-quality, efficient and professional services in design support, masking, manufacturing, and backend to achieve optimum experience for our customers and, in return, to gain customer’s trust and sustain Company profitability. 073 To facilitate customer interaction and information access on a real-time basis, TSMC’s EFOUNDRY® services offer a suite of web-based applications that provide a more active role in design, engineering, and logistics. Designers have 24-hour a day, seven-day-a-week access to critical information and are able to create custom reports through EFOUNDRY® online services. Design Collaboration focuses on content availability and accessibility, with close attention to complete, accurate, and current information at each level of the wafer design life cycle. Engineering Collaboration includes online access to engineering lots, wafer yields, wafer acceptance test (WAT) analysis, and quality reliability data. Logistics Collaboration provides access to data updated three times a day on any given wafer lot’s status in order, fabrication, assembly and testing, and shipping. Customer Satisfaction To assess customer satisfaction and to ensure that as many as possible of our customers’ needs and wants are adequately addressed, TSMC conducts an annual customer satisfaction survey (ACSS) with all active customers, either by web or interview survey, through an independent consultancy. Complementary with ACSS, quarterly-based business reviews (QBRs) are also performed by the customer service team to survey customers’ satisfaction during their visits on technical and business related services offered. Through both surveys and intensive interaction with customers by account team, TSMC is able to maintain close touch with customers for better service and collaboration. All customer feedback is routinely reviewed by executives and developed into improvement plans to become an integral part of this survey process with a complete closed-loop. TSMC has maintained a focus on customer survey data as one key indicator of corporate performance – not just of past performance, but also as a leading indicator of future performance. TSMC has acted on the belief that satisfaction leads to loyalty, and customer loyalty leads to higher levels of retention and expansion. Customers Accounted for at Least 10% of Annual Consolidated Net Sales Unit: NT$ thousands Customer Customer A Others Total Net Sales 2012 2011 Net Sales As % of 2012 Total Net Sales Relation to TSMC Net Sales As % of 2011 Total Net Sales Relation to TSMC 85,357,353 420,891,227 506,248,580 None 17% 83% 100% 59,203,844 367,876,801 427,080,645 None 14% 86% 100% 5.4.2 Open Innovation Platform® (OIP) Initiative Innovation has long been both an exciting and challenging proposition. Competition among semiconductor companies is becoming more active and intense in the face of increasing customer consolidation and the commoditization of technology at more mature, conventional levels. Companies must find ways to continue innovating in order to prosper further. Companies innovating openly from the “outside in” as well as from the “inside out” accelerate innovation through active collaborations with external partners. This active collaboration of TSMC with external partners is known as Open Innovation. TSMC has adopted this path to innovate via the Open Innovation Platform® (OIP) initiative. The TSMC Open Innovation Platform® (OIP) initiative is a comprehensive design technology infrastructure that encompasses all critical IC implementation areas to reduce design barriers and improve first-time silicon success. OIP promotes the speedy implementation of innovation amongst the semiconductor design community and its ecosystem partners with TSMC’s IPs, design implementation and DFM capabilities, process technology and backend services. A key element of OIP is a set of ecosystem interfaces and collaborative components initiated and supported by TSMC that more efficiently empowers innovation throughout the supply chain and, in turn, drives the creation and sharing of newly-created revenue and profits. TSMC’s Active Accuracy Assurance (AAA) initiative is critical to OIP, providing the accuracy and quality required by the ecosystem interfaces and collaborative components. TSMC’s Open Innovation model brings together the innovative thinking of customers and partners under the common goal of shortening design time, minimizing time-to-volume and speeding time-to-market and, ultimately, time-to-revenue: 2 0 1 2 T S M C A N N U A L R E P O R T 074 the needed design infrastructure with timely enhancement of EDA Education ● The foundry segment’s largest, most comprehensive and robust silicon-proven intellectual properties (IPs) and library portfolio; ● Advanced design methodology delivery through reference flows, design for manufacturing (DFM), and process design kits; and ● Comprehensive design ecosystem alliance programs covering market-leading EDA, library, IPs, and design service partners. TSMC’s OIP Alliance consists of 30 electronic design automation (EDA) partners, 41 IP partners, and 26 design service partners. TSMC and its partners proactively work together, and engage much earlier and deeper than before in order to address mounting design challenges at advanced technology nodes. Through this early and intensive collaboration effort, TSMC OIP is able to deliver tools, early availability of critical IPs and quality design services when customers need them. This is critical to success for the customers to take full advantage of the process technologies once they reach production-ready maturity. In October 2012, TSMC hosted OIP Ecosystem Forum at San Jose Convention Center in California, with keynote addresses from the executives of TSMC as well as OIP ecosystem partners. The forum was well attended by both customers and ecosystem partners and demonstrated the value of collaboration through OIP to nurture innovations. TSMC’s OIP Partner Management Portal facilitates communication with our ecosystem partners for efficient business productivity. This portal is designed with an intuitive interface and can be linked directly from TSMC-Online. 5.5 Employees 5.5.1 Human Capital Human capital is one of the most important assets of TSMC. The Company strives to provide employees with a challenging, enjoyable and rewarding work environment. In 2012, TSMC was named the “Most Admired Company in Taiwan” by CommonWealth Magazine for the 16th consecutive year. At the end of 2012, TSMC had over 37,000 employees worldwide, including 3,614 managers and 15,264 professionals. Female managers comprised 11.4% of all managers, and non-Taiwanese nationals comprised 8.5% of all TSMC managers and professionals. In addition, when consolidating TSMC and all its subsidiaries, we had over 39,000 employees at the end of 2012. The following table summarized TSMC workforce structure at the end of February, 2013: TSMC Workforce Structure 12/31/2011 12/31/2012 02/28/2013 Job Total Gender Managers Professionals Assistant Engineer/ Clerical Technician Male Female Ph.D. Master’s Bachelor’s Other Higher Education High School Average Age (years) Average Years of Service (years) 5.5.2 Recruitment 3,374 13,111 2,745 14,439 33,669 54.1% 45.9% 3.5% 32.8% 25.9% 13.9% 23.9% 33.0 6.2 3,614 15,264 3,006 15,265 37,149 56.2% 43.8% 3.6% 35.3% 25.6% 13.0% 22.5% 33.3 6.4 3,652 15,594 3,084 15,199 37,529 56.7% 43.3% 3.7% 35.7% 25.7% 12.7% 22.2% 33.4 6.4 TSMC advocates equal opportunity employment, and its practices center on the principles of open-and-fair recruitment. We consider the candidate according to his/her qualification as related to the requirement of each position, rather than race, gender, age, religion, nationality, or political affiliation. Although facing a stagnated global economy, TSMC’s continuous growth requires constant talent sourcing and recruitment activities to support its business. We recruited over 3,600 managers and professionals, and 2,000 assistants and technicians in 2012. In order to cultivate a young talent pipeline for recruitment around the world, TSMC deploys a number of recruiting activities and university programs, including Joint Development Programs, University Shuttle Program, Summer Internship; Job Fairs in Taiwan, U.S., Singapore and India, Fresh Graduate Career Symposium, and Outstanding Student Research Award. These programs also advance novel or innovative academic semiconductor research. 5.5.3 People Development TSMC has committed to cultivating a continuous and diversified learning environment. Under this mission, we established the Procedure of Employee Training and Education to ensure the Company’s and individuals’ development objectives can be achieved through internal and external training resources. 075 The Company provides employees with a wide range of on-site To enrich employees’ work experience, the Company continuously In 2012, TSMC employees continued to be recognized through a host of prestigious external awards, including Top 10 National Outstanding general, professional and management training programs. In implements programs to enhance employee caring, benefits, rewards Managers Award, Outstanding Engineer Award, Outstanding Young Engineer Award, as well as National Industrial Innovation Award. addition to external experts engaged as trainers, hundreds of and communication. The various initiatives include the following: TSMC employees are trained as qualified instructors for delivering valuable know-how in internal training courses. During 2012, TSMC Employee Benefit Programs ● Diverse employee welfare programs: employees can enjoy 70 hobby clubs, 45 speeches covering diverse topics (in 2012), Sports Day, Family Day and so on. In addition, holiday bonuses, marriage bonuses, condolence allowances and emergency subsidies are also Employee Communication TSMC values two-way communication and is committed to keeping the communication channels between the management level and their subordinates, as well as among peers, open and transparent. Our continuous efforts lie in reinforcing mutual and timely employee communication, based on multiple channels and platforms, which in turn fosters harmonious labor relations and creates a win-win situation for the Company and the employees. conducted 1,377 internal training sessions, for a company-wide total of over 780,000 training hours and a total of 520,000 attendees participating. Employees on average attended 21 hours of training. The total training expenses were almost NT$60 million. TSMC’s training programs include: ● New Employee Training: includes new employee basic training and job orientation. Furthermore, newcomers’ manager and our well-established Buddy System are actively engaged in the assimilation process. ● General Training: refers to training required by government regulations and/or Company policies. Such training includes subjects of industry-specific safety, workplace health and safety, quality, fab emergency response, languages, and personal effectiveness training. ● Professional/Functional Training: provides technical and professional training required by various functions within the Company. We offer training courses on equipment engineering, process engineering, accounting, and information technology, and so forth. ● Management Training: programs tailored to the needs of managers at all levels, including New, Experienced, and Senior Manager programs, as well as other elective courses. ● Direct Labor (DL) Training: enables production line employees to acquire the knowledge, skills and attitudes they need to perform their job well and to pass the certification for operating equipment. Training includes DL Skill Training, Technician “Train-the-Trainer” Training, and Manufacturing Leader Training. Based on individual job nature, work performance and career development track, a tailor-made Individual Development Plan (IDP) is established for each employee. Meanwhile, our employees are provided with a comprehensive network of learning resources, including on-the-job training, coaching, mentoring, job rotation, on-site training and e-learning. They are also subsidized when taking external short-term courses, credit courses and degrees. 5.5.4 Employee Satisfaction TSMC is committed to providing above-industry-average quality jobs to its employees, and it is dedicated to foster a dynamic and fun work environment. The Company encourages employees to maintain a healthy and well-balanced life, apart from their time spent working. TSMC’s commitment in employee caring and its unceasing efforts as an advocator of employees’ work-life balance has earned it the prestigious first place as the “Happiest Corporation” of the Top 10 Happy Corporations, released by China Credit Information Service (CCIS), under its survey released in the second half of 2012. 2 0 1 2 T S M C A N N U A L R E P O R T 076 available to cater for employees’ needs. A host of channels, including both face-to-face and virtual, are leveraged to maintain the unobstructed flow of information between the ● Convenient on-site services: cafeteria, dry-cleaning, convenience store, travel, banking, haircutting service, housing, and commuting assistance are accessible for employees in the fabs, ensuring the highest convenience of daily-life necessities for employees at work. ● Comprehensive health enhancement programs: physical care and psychological consultation services are available to employees to ensure their well-being. Five free counseling sessions are offered to TSMC employees on an annual basis, with extension available depending on the individual’s needs. Additional health management level of the Company and the employees, including: ● Regular communication meetings held for the various levels of managers and employees. ● Periodic employee satisfaction surveys and follow-up actions based on the survey findings. ● Enhanced corporate employee portal (myTSMC 2.0): – Corporate messages, executive interviews, employee activities and so on are posted on the intranet for employees’ timely reference. – Important talks from Chairman are webcasted via the intranet to reach employees worldwide. ● eSilicon Garden: The website hosting TSMC’s internal publication, available in both Chinese and English, is updated on a bi-weekly basis with its content ranging from work to run. enhancement programs provided by TSMC include weight control, To ensure that employees’ opinions and voices are heard, and their issues are addressed and solved, impartial and smooth voice submission medical check-up, smoking secession, exercise camp, massage service, sleep assistance, abdominal and neck x-ray, female care, blood donation, liver disease prevention, monthly seminar, etc. ● Premium Sports Center: with a variety of workout facilities to all employees and their families, as well as exercise sessions conducted mechanisms, including quarterly labor-management communication meetings, are in place to provide timely support. ● Complaints regarding major management, financial and auditing issues are directed to the following channels, which handle the complaints with high level of confidentiality: – The independent Audit Committee; and by professional instructors available for employees’ choices to – Ombudsman system led by an appointed Vice President. promote a healthier lifestyle. ● Flexible Preschool Service: the service, operated as per employees’ working time to meet their need for childcare, is available in Hsinchu ● The Suggestion Box provides a channel for employees to express their opinions regarding their work and the overall work environment. ● Employee care teams in each fab take care of the issues related to employees’ work and personal life. and Tainan. In 2012, TSMC’s preschool was recognized as the The Company also sets and promotes policies and measures to ensure gender equity in accordance with employment laws and sexual harassment “Premium Corporate Facility” by Taiwan’s Council of Labor Affairs. prevention policies to foster a fair work environment for employees of both genders. Employee Recognition TSMC sponsors various award programs to recognize employees’ outstanding achievement, both as a team or on the individual level. With these award programs, TSMC aims to encourage employees’ sustainable development that in turn adds to the Company’s competitive advantage. The various award programs sponsored by TSMC include: ● TSMC Medal of Honor, presented exclusively by Chairman, recognizes those who contribute to the Company’s business performance significantly. ● TSMC Academy recognizes outstanding TSMC scientists and engineers whose individual technical capabilities make significant contributions to the Company. ● Outstanding Engineer Award for each fab and Total Quality Excellence Conference Award recognize employees’ continuous efforts in creating value for the Company. ● Service Award represents TSMC’s appreciation toward senior employees’ dedication and commitment to the Company. ● Excellent Instructor Award praises the outstanding performance and contribution of the Company’s internal instructors in training courses. All in all, the comprehensive communication channels provided by TSMC can be showcased by the following chart: All TSMC Employees Face-to-Face Meeting: Functional/Work Unit/Skip-Level Announcement Fab/Functional Activity Employee Portal Employee Voice Channels Employee Survey Employee Recognition HR Area Service Team Communication Meeting by Request eSilicon Garden Announcement Company-Wide Activity Ombudsman System Sexual Harassment Investigation Committee Internal Communication Structure Managers of All Levels Employee Assistance Program ● Employee Emergency Reaction Center ● Wellness Center ● Counseling Service ● EWC Emergency Assistance ● Sexual Harassment Prevention Policy Human Resources Chairman’s Executive Communication Meeting System Committee Chair 077 5.5.5 Retention 5.5.7 Retirement Policy From the employee’s initial adaptation to professional and career TSMC’s retirement policy is set according to the Labor Standards Act development, TSMC works proactively to retain outstanding and Labor Pension Act of the Republic of China. With the Company’s employees through creating an innovative, challenging, and fun sound financial system, TSMC ensures employees a solid pension environment. All these efforts contributed to a healthy turnover rate contribution and payments, which encourages employees to set of 5.7% for 2012. long-term career plans and raises their commitment to TSMC. Manufacturing, License, and Technology Transfer Agreement Term of Agreement: Research and Development Funding Agreement Term of Agreement: 10/31/2012 - 12/31/2017 04/01/2004 - 03/31/2006, automatically renewable for successive Contracting Party: one-year terms until and unless both parties decide otherwise by ASML Holding N.V. (ASML) mutual consent in writing Contracting Party: Summary: TSMC will provide EUR277 million to ASML’s research and Vanguard International Semiconductor Corporation (VIS) development programs from 2013 to 2017. 5.5.6 Compensation 5.6 Material Contracts Summary: TSMC provides a diversified and competitive compensation program Shareholders Agreement that is competitive externally, fair internally, and adapted locally. TSMC upholds the philosophy of sharing wealth with employees in order to attract, retain, develop, motivate and reward talented employees. With excellent operating performance, employment at TSMC entitles employees to a comprehensive compensation and benefits program above the industry average. TSMC’s compensation program includes a monthly salary, an employee cash bonus based on quarterly business results, and employee profit sharing when the Company distributes its profit each year. The purpose of the employee cash bonus and profit sharing programs is to reward employee contributions appropriately, to encourage employees to work consistently toward ensuring the success of TSMC, and to link employees’ interests with those of TSMC’s shareholders. The Company determines the amount of the cash bonus and profit sharing based on operating results and industry practice in the Republic of China. The amount and form of the employee cash bonus and profit sharing are determined by the Board of Directors based on the Compensation Committee’s recommendation, and the employee profit sharing is subject to shareholders’ approval at the Annual Shareholders’ Meeting. Individual awards are based on each employee’s job responsibility, contribution and performance. In addition to providing employees of TSMC’s overseas subsidiaries with a locally competitive base salary, the Company grants short-term and long-term bonuses as a part of total compensation. The performance bonus is a short-term incentive and is granted in line with local regulations, market practices, and the overall operating performance of each subsidiary. The long-term incentive bonus is awarded based on TSMC’s financial performance and is vested over the course of several years in order to encourage long-term employee commitment and development within the Company. Term of Agreement: Effective as of 03/30/1999 and may be terminated as provided in the agreement Contracting Parties: Koninklijke Philips Electronics N.V. (Philips) and EDB Investments Pte Ltd. (EDBI) (In September 2006, Philips assigned its rights and obligations under this agreement to Philips Semiconductors International B.V. which has now been renamed NXP B.V. In November 2006, NXP B.V. and TSMC purchased all SSMC shares owned by EDBI; EDBI is no longer a contracting party to this agreement.) Summary: TSMC, Philips and EDBI had formed a Singapore joint venture “Systems on Silicon Manufacturing Company Pte Ltd.” (SSMC) for providing semiconductor foundry services. Philips Semiconductor (now NXP B.V.) and TSMC are committed to purchasing a certain percentage of SSMC’s capacity. Technology Cooperation Agreement Term of Agreement: 03/30/1999 - 03/29/2004, automatically renewable for successive five-year terms until and unless either party gives written notice to terminate one year before the end of then existing term Contracting Party: Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) Summary: TSMC agreed to transfer certain process technologies to SSMC, and SSMC agreed to pay TSMC a certain percentage of the net selling price of SSMC products. Patent License Agreement Term of Agreement: 12/20/2007 - 12/31/2017 Contracting Party: A multinational company Summary: The parties entered into a cross licensing arrangement for certain semiconductor patents. TSMC pays license fees to the contracting company. 2 0 1 2 T S M C A N N U A L R E P O R T 078 VIS reserves certain capacity to manufacture TSMC products on Note: TSMC is not currently party to any other material contract, mutually agreed terms. TSMC may also transfer certain technologies other than contracts entered into in the ordinary course of to VIS, for which it will in return receive royalties from VIS. our business. The Company’s “Significant Commitments and Contingencies” are disclosed in Annual Report (II), Financial Patent License Agreement Information, page 68-69. Term of Agreement: 11/01/2002 - 10/31/2012 Contracting Party: A multinational company Summary: The parties entered into a cross licensing arrangement for certain semiconductor patents. TSMC pays license fees to the contracting party. Amended Research and Development Collaboration Agreement Term of Agreement: 01/01/2009 - 12/31/2009, renewable on annual basis upon mutual agreement Contracting Party: NXP B.V. Summary: The parties entered into research and development collaboration to develop advanced semiconductor technologies. Investment Agreement & Shareholder Agreement Term of Investment Agreement: 08/05/2012 - 04/15/2013 Term of Shareholder Agreement: Effective as of 10/31/2012 and may be terminated as provided in the agreement Contracting Party: ASML Holding N.V. (ASML) Summary: TSMC joined the Customer Co-Investment Program of ASML Holding N.V. (ASML) and entered into the investment agreement and shareholder agreement. The agreements include an investment of EUR837,815,664 by TSMC Global to acquire a non-voting 5% in ASML’s equity with a lock-up period of 2.5 years. 079 ISO 50001 Energy Management System QC 080000 Hazardous Substance Process Management System ISO 14001 Environmental Management System OHSAS 18001 Occupational Health and Safety Management System TOSHMS Taiwan Occupational Safety and Health Management System 6. Financial Highlights 6.1 Financial Status and Operating Results 6.1.1 Financial Status Unconsolidated Unit: NT$ thousands Item Current Assets Fixed Assets Other Assets Total Assets Current Liabilities Long-term Liabilities Total Liabilities Capital Stock Capital Surplus Retained Earnings Total Shareholders’ Equity 2012 207,815,340 586,603,294 12,006,629 946,173,183 138,795,878 84,179,591 222,975,469 259,244,357 56,137,809 410,601,289 723,197,714 2011 158,563,352 454,373,533 19,070,145 761,407,874 109,514,430 22,299,930 131,814,360 259,162,226 55,846,357 322,191,155 629,593,514 Difference 49,251,988 132,229,761 (7,063,516) 184,765,309 29,281,448 61,879,661 91,161,109 82,131 291,452 88,410,134 93,604,200 % 31% 29% -37% 24% 27% 277% 69% 0% 1% 27% 15% ● Analysis of Deviation over 20% The increase in current assets was mainly due to increase in cash and cash equivalents and receivables from related parties. The increase in fixed assets was mainly due to acquisition of advanced technology equipment during 2012. The decrease in other assets was mainly due to return of refundable deposits and decrease in deferred income tax assets. The increase in total assets was mainly due to increase in fixed assets. The increase in current liabilities was mainly due to increase in payables to contractors and equipment suppliers, short-term loans and income tax payable. The increase in long-term liabilities was mainly due to issuance of corporate bonds of $62 billion in 2012. The increase in total liabilities was mainly due to increase in long-term liabilities. The increase in retained earnings was mainly due to net income of 2012, partially offset by distribution of 2011 earnings. ● Major Impact on Financial Position The above deviations had no major impact on TSMC’s financial position. ● Future Plan on Financial Position: Not applicable. 2 0 1 2 T S M C A N N U A L R E P O R T 082 Consolidated Unit: NT$ thousands Item Current Assets Fixed Assets Other Assets Total Assets Current Liabilities Long-term Liabilities Total Liabilities Capital Stock Capital Surplus Retained Earnings Equity Attributable to Shareholders of the Parent Total Shareholders’ Equity 2012 252,288,635 617,529,446 19,430,182 955,034,605 142,435,944 86,844,962 229,280,906 259,244,357 56,137,809 410,601,289 723,197,714 725,753,699 2011 225,260,396 490,374,916 24,171,126 774,264,942 117,006,687 25,214,704 142,221,391 259,162,226 55,846,357 322,191,155 629,593,514 632,043,551 Difference 27,028,239 127,154,530 (4,740,944) 180,769,663 25,429,257 61,630,258 87,059,515 82,131 291,452 88,410,134 93,604,200 93,710,148 % 12% 26% -20% 23% 22% 244% 61% 0% 1% 27% 15% 15% ● Analysis of Deviation over 20% The increase in fixed assets was mainly due to acquisition of advanced technology equipment during 2012. The decrease in other assets was mainly due to return of refundable deposits and decrease in deferred income tax assets. The increase in total assets was mainly due to increase in fixed assets and long-term investments. The increase in current liabilities was mainly due to increase in payables to contractors and equipment suppliers, short-term loans and income tax payable. The increase in long-term liabilities was mainly due to issuance of corporate bonds of NT$62 billion in 2012. The increase in total liabilities was mainly due to increase in long-term liabilities. The increase in retained earnings was mainly due to net income of 2012, partially offset by distribution of 2011 earnings. ● Major Impact on Financial Position The above deviations had no major impact on TSMC’s financial position. ● Future Plan on Financial Position: Not applicable. 6.1.2 Financial Performance Unconsolidated Unit: NT$ thousands Item Gross Sales Sales Returns & Allowances Net Sales Cost of Sales Gross Profit before Affiliates Elimination Realized (Unrealized) Gross Profit from Affiliates Gross Profit Operating Expenses Income from Operations Non-operating Income & Gains Non-operating Expenses & Losses Income before Income Tax Income Tax Expenses Net Income 2012 506,697,738 (6,825,851) 499,871,887 265,538,540 234,333,347 (25,029) 234,308,318 57,506,548 176,801,770 11,188,077 4,359,899 183,629,948 (17,471,146) 166,158,802 2011 421,472,087 (3,226,594) 418,245,493 233,083,068 185,162,425 398,440 185,560,865 46,655,102 138,905,763 7,287,046 1,484,965 144,707,844 (10,506,565) 134,201,279 Difference 85,225,651 (3,599,257) 81,626,394 32,455,472 49,170,922 (423,469) 48,747,453 10,851,446 37,896,007 3,901,031 2,874,934 38,922,104 (6,964,581) 31,957,523 % 20% 112% 20% 14% 27% -106% 26% 23% 27% 54% 194% 27% 66% 24% 083 ● Analysis of Deviation over 20% Increase in gross sales and net sales: The increase was the result of higher wafer shipment and growth in 28-nanometer technology during 2012. Increase in sales returns and allowance: The increase was mainly due to higher provision of sales returns and allowances resulting from higher sales. Increase in gross profit before affiliates elimination and gross profit: The increase was mainly due to higher wafer shipment during 2012. Increase in unrealized gross profit from affiliates: The increase was due to higher sales to affiliates in 4Q’12. Increase in operating expenses: The increase was mainly due to higher research and development expenditures for advanced technologies. Increase in income from operations: The increase was mainly due to realized gross profit increased at a higher rate than the increase in operating expenses. Increase in non-operating income and gains: The increase was primarily due to increase in earnings of equity method investees. Increase in non-operating expenses and losses: The increase was primarily due to impairment loss of financial assets recognized in 2012. Increase in income before income tax: The increase was mainly due to higher income from operations. Increase in income tax expenses: The increase was mainly due to higher taxable income and tax rate. Increase in net income: The increase was mainly due to higher income before income tax. ● Sales Volume Forecast and Related Information For additional details, please refer to "Letter to Shareholders" on pages 5-7 of this Annual Report. Consolidated Unit: NT$ thousands Item Gross Sales Sales Returns & Allowances Net Sales Cost of Sales Gross Profit before Affiliates Elimination Unrealized Gross Profit from Affiliates Gross Profit Operating Expenses Income from Operations Non-operating Income & Gains Non-operating Expenses & Losses Income before Income Tax Income Tax Expenses Net Income Net Income Attributable to Shareholders of the Parent 2012 513,435,603 (7,187,023) 506,248,580 262,628,681 243,619,899 (25,029) 243,594,870 62,537,677 181,057,193 6,782,037 6,285,254 181,553,976 (15,590,287) 165,963,689 166,158,802 2011 430,490,500 (3,409,855) 427,080,645 232,937,388 194,143,257 (74,029) 194,069,228 52,511,810 141,557,418 5,358,527 1,768,268 145,147,677 (10,694,417) 134,453,260 134,201,279 Difference 82,945,103 (3,777,168) 79,167,935 29,691,293 49,476,642 49,000 49,525,642 10,025,867 39,499,775 1,423,510 4,516,986 36,406,299 (4,895,870) 31,510,429 31,957,523 % 19% 111% 19% 13% 25% -66% 26% 19% 28% 27% 255% 25% 46% 23% 24% ● Analysis of Deviation over 20% Increase in sales returns and allowance: The increase was mainly due to higher provision of sales returns and allowances resulting from higher sales. Increase in gross profit before affiliates elimination and gross profit: The increase was mainly due to higher wafer shipment during 2012. Decrease in unrealized gross profit from affiliates: The decrease was due to lower sales to affiliates in 4Q’12. Increase in income from operations: The increase was mainly due to gross profit increased at a higher rate than the increase in operating expenses. Increase in non-operating income and gains: The increase was primarily due to increase in earnings of equity method investees. Increase in non-operating expenses and losses: The increase was primarily due to higher impairment loss of financial assets. Increase in income before income tax: The increase was mainly due to higher income from operations. Increase in income tax expenses: The increase was mainly due to higher taxable income and tax rate. Increase in net income and net income attributable to shareholders of the parent: The increase was mainly due to higher income before income tax. ● Sales Volume Forecast and Related Information For additional details, please refer to “Letter to Shareholders“on pages 5-7 of this Annual Report. 2 0 1 2 T S M C A N N U A L R E P O R T 084 6.1.3 Cash Flow Unconsolidated Unit: NT$ thousands Cash Balance 12/31/2011 Net Cash Provided by Operating Activities in 2012 Net Cash Used in Investing and Financing Activities in 2012 Cash Balance 12/31/2012 Remedy for Cash Shortfall Investment Plan Financing Plan 85,262,521 277,288,704 (253,400,415) 109,150,810 - - ● Analysis of Cash Flow NT$277.3 billion net cash provided by operating activities: Mainly from net income and depreciation/amortization. NT$241.9 billion net cash used in investing activities: Primarily for capital expenditures. NT$11.5 billion net cash used in financing activities: Mainly for payment of cash dividends, partially offset by issuance of corporate bonds. ● Remedial Actions for Cash Shortfall: In view of positive operating cash flow and cash on-hand, remedial actions are not required. ● Cash Flow Projection for Next Year: Not applicable. Consolidated Unit: NT$ thousands Cash Balance 12/31/2011 Net Cash Provided by Operating Activities in 2012 Net Cash Used in Investing and Financing Activities in 2012 Cash Balance 12/31/2012 Remedy for Cash Shortfall Investment Plan Financing Plan 143,472,277 289,063,801 (289,125,490) 143,410,588 - - ● Analysis of Cash Flow NT$289.1 billion net cash provided by operating activities: Mainly from net income and depreciation/amortization. NT$273.2 billion net cash used in investing activities: Primarily for capital expenditures. NT$13.8 billion net cash used in financing activities: Mainly for payment of cash dividends, partially offset by issuance of corporate bonds. ● Remedial Actions for Cash Shortfall: As a result of positive operating cash flows and cash on-hand, remedial actions are not required. ● Cash Flow Projection for Next Year: Not applicable. 6.1.4 Major Capital Expenditure Major Capital Expenditures and Sources of Funding Unit: NT$ thousands Plan Production Facilities and Equipment R&D Equipment Others Total Expected Future Benefits Actual or Planned Source of Capital Total Amount as of 12/31/2012 Actual Use of Capital 2009 2010 2011 2012 Cash flow generated from operations and issuance of corporate bonds Cash flow generated from operations Cash flow generated from operations Cash flow generated from operations 675,249,808 80,923,392 174,490,585 196,936,605 222,899,226 54,510,161 6,371,056 11,235,029 15,909,970 20,994,106 5,069,022 490,458 1,218,589 1,115,946 2,244,029 734,828,991 87,784,906 186,944,203 213,962,521 246,137,361 Based on capital expenditures listed above and projected for 2013, it is estimated that TSMC’s annual production capacity will increase by approximately 1.62 million 8-inch equivalent wafers in 2013. 085 6.1.5 Long-term Investment Policy and Results ● RM Steering Committee Reports to Audit Committee; TSMC’s long-term investments, accounted for under the equity Is composed of functional heads; method, were all made for strategic purposes; however, when Reviews risk control progress; and technologies and rapidly develop new and innovative technologies, competitive activities may decrease TSMC’s customer base, or or if the Company’s competitors unforeseeably gain sudden TSMC’s average selling prices, or both. access to more advanced technologies, TSMC may not be able to provide foundry services on competitive terms. In addition, TSMC’s Over the past few years, TSMC has seen the rise of certain companies the strategic value of an investment is no longer valid, it may be Identifies and approves the prioritized risk lists. customers have significantly decreased the time in which their with the capability of providing foundry services. These companies considered a financial investment. In 2012, the investment gain from these investments amounted to NT$8,127,748 thousands (NT$2,028,611 thousands on consolidated basis), increasing ● RM Working Committee Is composed of representatives from each function; significantly compared to 2011 mainly due to the high growth Aligns functional ERM activities; and of mobile computing products. For future investments, TSMC Follows up the risk control action plan. will continue to focus on strategic purposes through prudent assessments. 6.2 Risk Management TSMC and its subsidiaries are committed to proactively and cost effectively integrating and managing strategic, operational, financial and hazardous risks together with potential consequences to operations and revenue. TSMC established its Enterprise Risk Management (ERM) program based on both its corporate vision and its long-term sustainability and responsibility to both industry and society. ERM seeks to provide for the appropriate management of risks by TSMC on behalf of all stakeholders. To reduce TSMC’s supply chain risks, a cross-function taskforce comprised of members from fab operations, material management, risk management and quality system management worked with TSMC’s primary suppliers to develop business continuity plans, and effectively manage the risks faced by its suppliers. As a result of those efforts, there was no interruption in TSMC’s supply lines in 2012. As TSMC continued to expand production capacity in 2012, risk treatment practices and green factory projects were initiated and implemented, beginning in the design phase for all new fabs. products or services are launched into the market. If it is unable are committed to attracting TSMC’s customers. If TSMC is unable to to meet these shorter product time-to-market, TSMC risks losing compete with these new competitors with better technologies and these customers. These challenges also place greater demands on manufacturing capacity and capabilities, it risks losing customers to its research and development capabilities. If TSMC is unable to these new contenders. innovate new technologies that meet the demands of its customers, its revenues may decline significantly. Although it has concentrated The Company competes primarily on the basis of process technology, on maintaining a competitive edge in research and development, if quality and service. The level of competition differs according to TSMC fails to achieve advances in technologies or processes, or to the process technology involved. For example, in more mature obtain access to advanced technologies or processes developed by technologies, the number of competitors tends to be more numerous ● RM Program Coordinates the RM Working Committee activities; Facilitates functional risk management activities; and 6.2.2 Strategic Risks Industry Developments Consolidates ERM reports into the RM Steering Committee. others, it may become less competitive. and specialized. Some companies compete with TSMC in selected geographic regions or application end markets. In recent years, Decrease in Demand and Average Selling Price substantial investments have been made by others to establish new A vast majority of the Company’s revenue is derived from customers who use TSMC’s services in communication devices, personal pure-play foundry companies in mainland China and elsewhere, or to spin off integrated device manufacturers’ manufacturing operations and transform them into a pure-play foundry company. The electronics industries and semiconductor market have historically computers, consumer electronics products and industrial/standard been cyclical and subject to significant, and often rapid, increases and decreases in product demand. TSMC’s semiconductor foundry business is affected by market conditions in such highly cyclical product. Any significant decrease in the demand for one of these products may decrease the demand for such other products as well as overall global semiconductor foundry services, including Risks Associated with Changes in the Government Policies and Regulatory Environment electronics and semiconductor industries, within which most of its TSMC’s services, and may adversely affect the Company’s revenues. TSMC management closely monitors all domestic and foreign customers operate. Variations in order levels from customers result in Further, a significant portion of TSMC’s operating costs is fixed governmental policies and regulations that might impact TSMC’s volatility in the Company’s revenues and earnings. because the Company owns most of its manufacturing capacities. business and financial operations. As of February 28, 2013, the From time to time, the electronics industries and semiconductor industries have experienced significant, and sometimes prolonged, periods of downturns and overcapacity. Because TSMC is, and will continue to be, dependent on the requirements of electronics and In general, these costs do not decline when customer demand or following changes or developments in governmental policies and TSMC’s capacity utilization rates drop, and thus declines in customer regulations may influence the Company’s business operations: demand, among other factors, may significantly decrease margins. Conversely, as product demand rises and factory utilization increases, The Taiwan Financial Supervisory Commission (FSC) requires the fixed costs are spread over increased output, which can improve listed companies, starting from January 1, 2013, to prepare their semiconductor companies for its services, periods of downturn and TSMC’s margins. Additionally, the historical and current trend consolidated financial statements in accordance with Taiwan’s overcapacity in the general electronics and semiconductor industries of declining average selling prices of end-use applications places “Guidelines Governing the Preparation of Financial Reports by could lead to reduced demand for overall semiconductor foundry services, including TSMC’s services. If it cannot take appropriate downward pressure on the prices of the components that go into Securities Issuers” and the following FSC endorsed standards and such applications. If the average selling prices of end-use applications interpretations: “International Financial Reporting Standards,” 6.2.1 Risk Management (RM) Organization Chart actions such as reducing TSMC’s costs to sufficiently offset declines in continue to decrease, the pricing pressure on components produced “International Accounting Standards,” and relevant Interpretations Audit Committee CEO demand, the Company’s revenues, margins and earnings will suffer during periods of downturn and overcapacity. Furthermore, due to the increasingly complex technological nature of its products and services and the ever uncertain global economic environment, TSMC may need to provide higher accounting provisions on potential sales returns and allowances by its customers that may adversely affect the results of its operations. Changes in Technology RM Steering Committee Materials Management and Risk Management The semiconductor industry and its technologies are constantly changing. TSMC competes by developing process technologies RM Working Committee RM Program using increasingly advanced nodes and on manufacturing products with more functions. TSMC also competes by developing new derivative technologies. If it does not anticipate these changes in by the Company may lead to a reduction of TSMC’s revenues, margin (collectively, “IFRSs”). TSMC has already set up an IFRSs project team and earnings. Competition TSMC competes internationally and domestically with other foundry service providers, as well as with integrated device manufacturers that devote a significant portion of their manufacturing capacity to foundry operations. Some of these companies may have access to more advanced technologies and greater financial and other resources than TSMC, such as the possibility of receiving direct or indirect government bailout/economic stimulus funds or other incentives that are unavailable to us. The Company’s competition may, from time to time, also decide to undertake aggressive pricing initiatives in one or more technology nodes. Increases in these in 2009 and is currently implementing its IFRSs adoption plan. In addition, the progress of such adoption is regularly reported to the Board. The impact of IFRSs adoption may include certain changes in the accounting treatment for certain types of transactions and certain modifications to the presentation of financial statements. TSMC will keep monitoring IFRSs updates and the development of related laws and regulations in Taiwan and evaluate the respective impact to the Company. According to FSC’s requirements, TSMC has disclosed its IFRSs project plan, status and the effects arising from the significant differences between IFRSs and its current accounting policy in its 2012 annual and interim consolidated financial statements. 2 0 1 2 T S M C A N N U A L R E P O R T 086 087 The Taiwan “National Health Insurance Act” was amended in January Other than the above laws and regulations, it is not expected that customers who are successfully exploiting this new business model provides its projected demand for various items to many of its 2011, to create an obligation for employers and employees to pay an other governmental policies or regulatory changes would materially paradigm. Also, in order to respond to the new business model equipment suppliers to help them plan their production in advance. extra 2% “supplementary premium,” effective from January 1, 2013. impact TSMC’s operations and financial condition. paradigm, TSMC has seen the nature of its customers’ business The Company has purchased used tools and continues to seek TSMC will need to pay such extra 2% “supplementary premium” when TSMC distributes employees’ profit sharing and variable bonus. 6.2.3 Operational Risks TSMC will continue participating in the seminars and briefings held by the National Health Insurance Bureau to understand the details Risks Associated with Capacity Expansion TSMC performs regular long term market demand forecasts to estimate market and general economic conditions for its products and services. Based upon these estimates, TSMC manages its overall capacity in accordance with market demand. Because market conditions may vary significantly and unexpectedly, our market demand forecast may change significantly at any time. Further, since certain manufacturing lines or tools in some of TSMC’s manufacturing facilities may be suspended or shut down temporarily during periods of decreased demand, the Company may not be able to ramp up in a timely manner during periods of increased demand. Base on demand forecast, TSMC has been adding capacity to its 12-inch wafer fabs in the Hsinchu Science Park, Southern Taiwan model changes. For example, there is a growing trend toward the opportunities to acquire relevant used tools. Further, the growing rise of system houses that operate in a manner which make their complexities especially in next-generation lithographic technologies products and services more marketable in a changing consumer may delay the timely availability of the equipments and parts needed market. The loss of, or significant curtailment of purchases by, one or to exploit time sensitive business opportunities and also increase more of the Company’s top customers, including curtailments due to the market price for such equipment and parts. If TSMC is unable increased competitive pressures, industrial consolidation, or change in to obtain equipment in a timely manner to fulfill its customers’ their manufacturing sourcing policies or practices of these customers, orders, or at a reasonable cost, its financial condition and results of or the timing of customer or distributor inventory adjustments, or operations could be negatively impacted. change in its major customers’ business models may adversely affect TSMC’s results of operations and financial condition. Risks Associated with Intellectual Property Rights Risks Associated with Purchase Concentration ● Raw Materials TSMC’s production operations require that it obtain adequate The Company’s ability to compete successfully and to achieve future growth will depend in part on the continued strength of its intellectual property portfolio. While TSMC actively enforces and protects its intellectual property rights, there can be no assurance supplies of raw materials, such as silicon wafers, gases, chemicals and that its efforts will be adequate to prevent the misappropriation photoresist, on a timely basis. In the past, shortages in the supply of or improper use of its proprietary technologies, trade secrets, some materials, whether by specific vendors or by the semiconductor software or know-how. Also, the Company cannot assure that, as Science Park and Central Taiwan Science Park. Total monthly capacity industry generally, have resulted in occasional industry-wide price its business or business models expand into new areas, or otherwise, of the Company’s 12-inch wafer fabs was increased from 290,100 adjustments and delivery delays. Also, since TSMC procures some of it will be able to develop independently the technologies, trade wafers as of December 31, 2011 to 366,800 wafers as of December its raw materials from sole-source suppliers, there is a risk that its secrets, patents, software or know-how necessary to conduct its 31, 2012. Overall, TSMC increased its annual production capacity need for such raw materials may not be met when needed or that business or that it can do so without unknowingly infringing the by approximately 1.87 million 8-inch equivalent wafers in 2012. The back-up supplies may not be readily obtainable. The Company’s intellectual property rights of others. As a result, TSMC may have total average billing utilization rate for 2012 was 91%. Expansion revenue and earnings could decline if it is unable to obtain adequate to rely increasingly on licensed technologies and patent licenses and modification of the Company’s production facilities will, among supplies of the necessary raw materials in a timely manner or if there from others. To the extent that the Company relies on licenses from other factors, increase TSMC’s costs. For example, the Company will need to purchase additional equipment, and hire and train additional personnel to operate the new equipment. If TSMC cannot are significant increases in the costs of raw materials that it cannot others, there can be no assurance that it will be able to obtain any pass on to its customers. or all of the necessary licenses in the future on terms it considers reasonable or at all. The lack of necessary licenses could expose TSMC generate higher revenue to offset these higher costs, TSMC’s financial To reduce the supply chain risk and to manage the cost actively, to claims for damages and/or injunctions from third parties, as well performance may be adversely affected. TSMC is committing resources toward developing new supply as claims for indemnification by its customers in instances where it sources. In addition, the Company encourages its suppliers to reduce has contractually agreed to indemnify its customers against damages TSMC has established systems and processes to evaluate and forecast their supply chain risk by decentralizing production plants, and to resulting from infringement claims. market demand and refers to these forecasts and evaluations when considering whether to expand or reduce capacity. As of the date of this Annual Report, the benefits brought about by such capacity expansion were in line with TSMC’s expectations. Risks Associated with Sales Concentration Over the years, TSMC’s customer profile and the nature of its customers’ business have changed dramatically. While it generates revenue from hundreds of customers worldwide, TSMC’s ten largest customers accounted for approximately 56% and 59% of net sales in 2011 and 2012, respectively, and the Company’s largest customer accounted for approximately 14% and 17% of net sales in 2011 and 2012, respectively. This customer concentration results in part from the changing dynamics of the electronics industry with the structural shift to mobile devices and applications and software that provide the content for such devices. There are only a limited number of intensify their cost competitiveness by moving their production site to Taiwan from high-cost areas. The Company believes this benefits TSMC has received, from time-to-time, communications from third both suppliers and TSMC. Moreover, the Company continually refines parties asserting that its technologies, manufacturing processes, its planning system and monitors its inventory and replenishment on the design of the integrated circuits made by TSMC or the use by a daily basis so as to sustain an optimal level with rational cost. its customers of semiconductors made by TSMC may infringe upon ● Equipment The Company’s operations and ongoing expansion plans depend their patents or other intellectual property rights. Because of the nature of the industry, the Company may continue to receive such communications in the future. In some instances, these disputes have on its ability to obtain an appropriate amount of equipment and resulted in litigation. Recently, there has been a notable increase related services from a limited number of suppliers in a market in the number of claims or lawsuits initiated by certain litigious, that is characterized from time to time by limited supply and long non-practicing entities and these non-practicing entities are also delivery cycles. During such times, supplier-specific or industry-wide becoming more aggressive in their monetary demands and requests lead times for delivery can be as long as six months or more. To for court-issued injunctions. Such lawsuits or claims may increase better manage its supply chain, the Company has implemented TSMC’s cost of doing business and may potentially be extremely various business models and risk management contingencies disruptive if the plaintiffs succeed in blocking the trade of its products with suppliers to shorten the procurement lead time. TSMC also and services. If TSMC fail to obtain or maintain certain government, 089 related to the implementation and take the necessary managerial and financial precautionary steps with respect to such amendment. According to the “Income Basic Tax Act“ (i.e., Alternative Minimum Tax, “AMT”) amended in August, 2012, effective on January 1, 2013, the corporate income tax rate of AMT will be increased from 10% to 12%. As a result of this change, and changes in the various tax credit incentives and exemptions available to the Company, TSMC anticipates its effective tax rate for 2013 will be 14.0%, an increase from 8.7% in 2012, which is anticipated to negatively affect its net income in 2013. TSMC has evaluated the impact of these amendments on its financial statements and will ensure compliance in accordance with the relevant laws. The “Personal Information Protection Act,“ as amended and promulgated in May 2010, for the most part took effect on October 1, 2012. All nature persons, legal entities and other organizations that collect, process and use personal information are now subject to this new law which expands the scope of protected personal information to include both electronically and paper-stored data. Appropriate protective measures must be taken to prevent personal information security breaches. TSMC has had adequate mechanisms in place to properly process and retain personal information and will continue to protect and manage personal information in compliance with applicable laws and regulations. In addition, the Taiwan legislative authority has been studying relevant laws relating to environmental protection and employee safety and health protection (e.g. “Greenhouse Gas Reduction Act,” “Energy Tax Act” and “Labor Safety and Health Act”). Though the “Greenhouse Gas Reduction Act” has not been passed, TSMC has been implementing various long-term energy saving and carbon reduction programs since 2000. As to the proposed “Energy Tax Act,“ there has been no concrete guidance or law issuing from the Taiwan government as of yet, so the impacts of such law are indeterminable at the moment. However, it is very likely that such law may increase the operating costs of the Company. The “Labor Safety and Health Act” will be amended (and renamed “Occupational Safety and Health Act”) to increase the duties of employers to protect the physical and mental health of their employees. TSMC has already developed relevant initiatives and implemented various policies and will continuously improve and maintain the safety and health of its workplace and employees. 2 0 1 2 T S M C A N N U A L R E P O R T 088 technologies or intellectual property licenses and, if litigation relating Risks Associated with Mergers and Acquisitions to alleged intellectual property matters occurs, it could prevent it from manufacturing or selling particular products or applying particular technologies, which could reduce its opportunities to generate revenues. TSMC has taken other measures to minimize potential loss of shareholder value arising from intellectual property claims and litigation filed against the Company. These measures include: obtaining licenses from certain semiconductor and other technology companies; timely securing of intellectual property rights for defensive and/or offensive protection of TSMC technology and business; aggressively defending against frivolous litigation; and acquiring or licensing strategic intellectual property rights necessary to protect its technologies and business offerings. Risks Associated with Litigation As is the case with many companies in the semiconductor industry, TSMC has received from time-to-time communications from third parties asserting that its technologies, manufacturing processes, the design of the integrated circuits made by it or the use by its customers of semiconductors made by it may infringe upon patents or other intellectual property rights of others. In some instances, these disputes have resulted in litigation by or against the Company and certain settlement payments by it in some cases. Irrespective of the validity of these claims, TSMC could incur significant costs in the defense thereof or could suffer adverse effects on its operations. 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. 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 infringing several U.S. patents. The outcome cannot be determined at this time. Other than the matters described above, TSMC was not involved in any other material litigation in 2012 and are not currently involved in any material litigation. As of the date of this Annual Report, there were no such risks for TSMC. Risks Associated with Recruiting and Retaining Qualified Personnel The Company depends on the continued services and contributions of its executive officers and skilled technical and other personnel. TSMC’s business could suffer if it lost, for whatever reasons, the services and contributions of some of these personnel and it cannot adequately replace them. The Company may be required to increase or reduce the number of employees in connection with any business expansion or contraction, in accordance with market demand for its products and services. Since there is intense competition for the recruitment of these personnel, the Company cannot ensure it will be able to fulfill its personnel requirements in a timely manner during an economic upturn. Therefore, TSMC provides a varied and competitive compensation programs, and is generous in sharing the Company’s long-term business achievements with its employees. Furthermore, in order to attract and retain talent, the Compensation Committee of the Board of Directors decided to enhance the compensation system and provide a timely distribution of employees’ cash bonus from the Company’s profits. TSMC believes that by rewarding employees’ hard work in a timely fashion, it not only encourages employees to contribute consistently to ensure the success of TSMC, but also links their interests with those of TSMC’s shareholders. Future R&D Plans and Expected R&D Spending For additional details, please refer to “5.2.7 Future R&D Plans” on page 70 of this Annual Report. Changes in Corporate Image and Impact on Company’s Crisis Management TSMC has established an excellent corporate image around the world based on its core values of “Integrity, Commitment, Innovation, and Customer Trust,” as well as its outstanding operations, rigorous corporate governance, and dedication to corporate social responsibility to pursue sustainable development, equality and justice, and a harmonious society to live and work. TSMC’s corporate image was further strengthened in 2012 with a number of awards. The Company was once again recognized as Semiconductor Sector Leader by the Dow Jones Sustainability Index, and was selected as an index component for a 12th consecutive year. In addition, TSMC received the R.O.C. Environmental Protection 6.2.4 Financial Risks Administration (EPA) National Enterprise Environmental Protection Award, the EPA Energy Conservation and Carbon Reduction Action Internal Management of Economic Risks Mark, and the Science Park Low-Carbon Enterprise Achievement Award. TSMC was also recognized as the Most Admired Company in Taiwan by CommonWealth Magazine, and won the CommonWealth Corporate Citizenship Award as well as the first prize in the Environmental Protection category for the GlobalViews Magazine Corporate Social Responsibility Award. The Company was named as “Best Managed Company in Asia - Technology Sector” by Euromoney, the Most Recognized Foundry in the EETimes China Fabless Awards, ranked first place in the China Credit Information Service poll of “Top 10 Happiest Companies” in Taiwan, first place in the Asia Corporate Governance Association and CLSA Asia-Pacific Markets survey of Corporate Governance in Asia, and received the “Best-Managed Company in Taiwan and Hong Kong,” “Best Corporate Governance, Taiwan,” and “Best Corporate Social Responsibility, Taiwan” Awards from FinanceAsia. In addition, TSMC has departments such as Brand Management, Customer Service, Public Relations, Employee Relations, Investor Relations, Risk Management, Fab Industrial Safety and Environmental Protection, Internal Audit, and the TSMC Foundation to coordinate the Company’s resources and further enhance TSMC’s positive corporate image. To address potential events that may affect the Company’s public image, including natural disasters, fires, workplace accidents, power outages, water shortages and workplace injuries, these departments have established emergency response procedures, hold regular drills, and continue to improve emergency performance. In the event of emergencies, early warning procedures eliminate or reduce casualties and minimize impact on the surrounding environment, company property, and manufacturing operations. The Public Relations department is also involved in the first stage of emergency response to communicate with stakeholders and act as a single point of contact with outside parties to maintain the Company’s reputation. Risks Associated with Change in Management ● Interest Rate Fluctuation TSMC’s exposure to interest rate risks derives primarily from short-term borrowing and long-term debt obligations incurred in the normal course of business. In order to limit its exposure to interest rate risks, TSMC finances its funding needs primarily through internal generation of cash and the issuance of long-term, fixed-rate debt. On the asset side, we place our cash on hand mainly in very short tenor time deposits. Furthermore, the primary objective of TSMC’s cash investments in fixed income securities is to preserve principal in highly liquid markets. In order to maintain the Company’s liquidity profile, the majority of fixed income securities are at the short end of the yield curve. ● Foreign Exchange Volatility Over one-half of TSMC’s capital expenditures and manufacturing costs are denominated in currencies other than NT dollars, primarily in US dollars, Japanese yen and Euros. In 2012, more than 90% of the Company’s sales were denominated in US dollars and currencies other than NT dollars. Therefore, any significant fluctuation to its disadvantage in such exchange rates would have an adverse effect on TSMC’s financial condition. For example, during the period from September 1, 2010 to December 30, 2010, the US dollar depreciated 8.9% against the NT dollar, which had a negative impact on the Company’s results of operations. Specifically, based on TSMC’s 2012 results, every 1% depreciation of the US dollar against the NT dollar exchange rate may result in approximately 0.4 percentage point decrease in TSMC’s operating margin. TSMC utilizes short-term debt denominated in foreign currencies and derivative financial instruments, including currency forward contracts and cross currency swaps, to hedge our currency exposure. Fluctuations in the exchange rate between the US dollar and the NT dollar may affect the US dollar value of the Company’s common shares and the market price of the Company’s American Depositary Shares (ADSs) and of any cash dividends paid in NT dollars on TSMC’s As of the date of this Annual Report, there were no such risks for common shares represented by ADSs. TSMC. ● Inflation & Deflation The world economy is becoming more vulnerable to sudden unexpected fluctuations in inflationary and deflationary market expectations and conditions. For example, certain structural changes that resulted from the global financial crisis in 2008-2009 and EU sovereign debt crises, such as highly accommodative monetary 091 2 0 1 2 T S M C A N N U A L R E P O R T 090 policies by major central banks worldwide, may cause variations The financial transactions of a “derivative” nature that TSMC entered purchases, assets purchases, licensing of major intellectual property manufacturing fabs have been ISO 14001 certified (Environmental in the expectation of inflation or deflation. Both high inflation into were strictly for hedging purposes and not for any trading or rights, joint investments or research and development projects, Management System), OHSAS 18001 certified (Occupational and deflation adversely affect an economy, at both the macro and speculative purpose. For more information, please refer to page 53 outright mergers and acquisitions, private equity transactions or Health and Safety Management System) and QC 080000 micro levels, by reducing economic efficiency, disrupting saving and 55 of Annual Report (II), Financial Information. The fair market receiving investments from a consortium of large institutional, public certified (Hazardous Substance Process Management System); all and investment decisions and reducing the efficiency of the market value of our trading and available for sale financial securities are or private investors, etc. Any such investment will incur risks, which manufacturing fabs in Taiwan have also been TOSHMS (Taiwan prices as a mechanism to allocate resources. Such fluctuations may subject to prevailing market conditions and may fluctuate from may result in losses if not carefully managed. Any such loss resulting Occupational Safety and Health Management System) certified. The negatively affect the costs of TSMC’s operations and the business TSMC’s carrying value from time to time, which may impact the from such investments may result in significant impairment charges, new fabs will also acquire the above certificates within 18 months operations of its customers who may be forced to plan their returns of those securities. lower profit margin and ultimately lower distributable earnings. after mass production. purchases of TSMC’s goods and services within an uncertain macro and micro economy. Therefore, the demand for TSMC’s products To control various types of financial transactions, the Company has Risks Associated with Impairment Charges The Company pays special attention to preparedness for emergencies and services could unexpectedly fluctuate severely in accordance with established internal policies and procedures based on sound financial market and consumer expectations of inflation or deflation. and business practices, all in compliance with the relevant rules and Risks Associated with External Financing Capital requirements are difficult to plan in the highly dynamic, cyclical and rapidly changing semiconductor industry. From time to time and increasingly so for the foreseeable next few years, TSMC will continue to need significant capital to fund its operations and manage its capacity in accordance with market demand. TSMC’s regulations issued by the Taiwan Securities and Futures Bureau. TSMC policies and procedures include “Policies and Procedures for Financial Derivative Transactions,” “Procedures for Lending Funds to Other Parties,” “Procedures for Acquisition or Disposal of Assets,” and “Procedures for Endorsement and Guarantee”. Risks Associated with Strategic Investments Under Generally Accepted Accounting Principles (GAAP) of both the Republic of China and the United States, TSMC is required to evaluate its investments, long-lived assets and intangible assets for impairment whenever triggering events or changes in circumstances indicate that the asset may be impaired. If certain criteria are met, TSMC is required to record an impairment charge. TSMC is also required under R.O.C. GAAP and U.S. GAAP to evaluate goodwill for impairment at least on an annual basis or more frequently whenever triggering events or changes in circumstances indicate that goodwill continued ability to obtain sufficient external financing is subject to a From time to time, TSMC has made or will make a series of strategic may be impaired and the carrying value may not be recoverable. variety of uncertainties, including: investments that serve two major purposes. Firstly, some of TSMC’s For example, TSMC holds certain investments in publicly listed ● its future financial condition, results of operations and cash flow; Company open new sources of revenues and innovate alternative ● general market conditions for financing activities; business models that target to generate additional shareholders’ ● market conditions for financing activities of semiconductor value going forward in the future. For example, in order to help companies; and the Company grow into next generation business areas, TSMC has ● social, economic, financial, political and other conditions in Taiwan invested to develop potential businesses in solid state lighting, solar major strategic investments were (or will be) made to help the companies, some of which have incurred certain impairment charges disclosed in Annual Report (II), Financial Information, page 54-55. The determination of an impairment charge at any given time is based significantly on the expected results of the Company’s operations over a number of years subsequent to that time. As a result, an impairment and elsewhere. power and other renewable sources of energy. The Company believes charge is more likely to occur during a period when the Company’s these investments into these areas will generate new sources of operating results are otherwise already depressed. Sufficient external financing may not be available to the Company revenues as the transition into consuming cleaner sources of power on a timely basis, on reasonable market terms, or at all. As a result, is generally expected gradually. For further information on these TSMC has established the process and system to closely monitor and TSMC may be forced to curtail its expansion and modification plans investments, please refer to “8. Subsidiary Information and Other assess the risk of any impairment charge. However, management or delay the deployment of new or expanded services until it obtains Special Notes” on page 112-117 of this Annual Report. Secondly, such financing. some of TSMC’s significant strategic investments were (or will be) currently is unable to estimate the extent or timing of any impairment charge for future years. Any impairment charge required may have a made to help the Company grow its existing business by augmenting material adverse effect on the Company’s net income. Risks Associated with High-risk/High-leveraged Investment; Lending, Endorsements, and Guarantees for Other Parties; and Financial Derivative Transactions key technology development. For example, to accelerate the development of next-generation lithographic technology, in August 2012, TSMC joined the ASML Holding N.V. Customer Co-Investment 6.2.5 Hazardous Risks TSMC did not make high-risk or high-leveraged financial investments during 2012 and up to the date of this report. The Board approved TSMC’s provision of a guarantee to TSMC Global, a wholly-owned subsidiary of TSMC, for its issuance of US dollar-denominated senior unsecured corporate bonds for an amount not to exceed US$1,500 million at its Meeting on February 5, 2013. As of February 28, 2013, TSMC had an intercompany loan of US$160.5 million arranged among the Company’s subsidiaries, which was in compliance with relevant rules and regulations. Program (along with other major technology firms). The program’s TSMC maintains a comprehensive risk management system scope includes development of extreme ultraviolet (EUV) lithography dedicated to the conservation of natural resources, the safety of technology and 450-millimeter (450mm) lithography tools. Under the people, and the protection of property. In order to effectively handle agreement with ASML, TSMC invested EUR838 million to acquire 5% emergencies and natural disasters at each facility, management has of ASML’s equity and has committed EUR277 million to be spread over five years, to ASML’s research and development program. The Company is exposed to share price fluctuations arising from the developed comprehensive plans and procedures that focus on risk prevention, emergency response, crisis management, and business continuity. TSMC has adopted local and international standards investments in ASML, especially when its equity investment is subject for Environmental, Safety & Health (ESH) management. All TSMC to a lock-up period of 2.5 years. In the future, TSMC may make more strategic investments in various forms, whether through stock or disasters, such as typhoons, floods, droughts caused by climate change, earthquakes, environmental contamination, large-scale product returns, service disruption of IT systems, strikes, pandemics (such as H1N1 influenza), and sudden and unexpected disruptions to the supply of raw materials or water, electricity, and other public utilities. TSMC has established a company-wide task force dedicated to managing the risk of water shortage that might arise due to climate change. This task force keeps watch on the external supply and internal demand for water. Cross-company consolidations and external collaborations with public agencies are also ongoing in the industrial parks to ensure and sustain a stable water supply. TSMC has further strengthened its business continuity plans, which include periodic risk assessment, risk mitigation , and implementation through the establishment of emergency task forces when necessary, combined with the preparation of a thorough analysis of the emergency, its impact, alternative actions, and solutions for each possible scenario together with appropriate precautionary and/or recovery measures. Each task force is given the responsibility of ensuring TSMC’s ability to conduct business while minimizing personal injury, business disruption, and financial impact under the circumstances. TSMC’s business continuity plan is periodically reviewed according to results of test scenarios or practical implementation for ensuring effective and successful business continuity. Customers are informed of TSMC’s strong business continuity capability in order to establish resilience and flexibility in both their supply chain and insurance placement. For the year 2012, and up to the date of this Annual Report, there have been no reportable material events that have necessitated the activation of such contingency plans. The Company has also conducted a continuous improvement project, including evaluating building anti-seismic capability, holding earthquake response drills and enhancing tool anchorage, and has improved TSMC business continuity procedures with reference to BS 25999 business continuity management. 093 2 0 1 2 T S M C A N N U A L R E P O R T 092 6.2.7 Other Risks Potential Impact and Risks Associated with Sales of Significant Numbers of Shares by TSMC’s Directors, and/ or Major Shareholders Who Own 10% or More of TSMC’s Total Outstanding Shares The value of TSMC shareholders’ investment may be reduced by possible future sales of TSMC shares owned by the major shareholders. One or more of our existing shareholders may, from time to time, dispose of significant numbers of our common shares or ADSs. For example, the National Development Fund, which owned 6.4% of TSMC’s outstanding shares as of February 28, 2013, sold our shares in the form of ADSs in several transactions during the period between 1997 and 2005. Currently no shareholder owns 10% or more of TSMC’s total outstanding shares. Other Material Risks During 2012 and as of the date of this Annual Report, TSMC’s management is not aware of any other risk event that could impart a potentially material impact on the financial status of the Company. TSMC and many of its suppliers use highly combustible and toxic gas emissions” programs, or “carbon credit trading” programs; (c) materials in its manufacturing processes and are therefore subject modify our product designs and manufacturing processes, or incur to the risk of loss arising from explosion, fire, or environmental other significant expenses associated with such laws and regulations influences which cannot be completely eliminated. Although the such as obtaining substitute raw materials or chemicals that may cost Company maintains many overlapping risk prevention and protection more or be less available for our operations. It is still unclear whether systems, as well as comprehensive fire and casualty insurance, such necessary actions would affect the reliability or efficiency of our including insurance for loss of property and loss of profit resulting products and services. from business interruption, TSMC’s risk management and insurance coverage may not be sufficient to cover all of the Company’s Any of the above contingencies resulting from the actual and potential losses. If any of TSMC’s fabs or vendor facilities were potential impact of local or international laws and regulations as well to be damaged, or cease operations as a result of an explosion, as international accords on environmental or climate change, could fire or environmental influences, it could reduce the Company’s harm the Company’s business and operational results by increasing manufacturing capacity and may cause it to lose important expenses or requiring TSMC to alter its manufacturing, assembly and customers, thereby having a potentially adverse and material test processes. impact on TSMC’s financial performance. In addition to periodic fire protection system inspection and firefighting drills, the Company has Increasing climate change and environmental concerns could affect also carried out a corporate-wide fire risk mitigation project focused the results of TSMC’s operations if any of its customers request that on management and hardware improvements. TSMC exceed any standard(s) set for environmentally compliant Changes may cause unpredictable interruption to production. In products and services. For example, TSMC has been working on an on-going basis with our suppliers, customers, and several industry order to reduce such uncertainty, TSMC has adopted a number consortia to develop and provide products that are compliant of standards to maintain operational continuity, ranging from with the EU “RoHS” (European Union Restriction of Hazardous design, procurement and construction of facilities, to operation and Substances) Directive. Even though TSMC are entitled to rely on decommission. 6.2.6 Climate Change Risks various exemptions under RoHS, some of our customers might request that we provide products that exceed the legal standard set by RoHS without using any of the exemptions still permitted under RoHS. If TSMC is unable to offer such products or offer products that The manufacturing, assembling and testing of our products require are compliant, but are not as reliable due to the lack of reasonably the use of chemicals and materials that are subject to environmental, available alternative technologies or materials, it may lose market climate-related, and health and safety laws and regulations issued share to our competitors. worldwide. Although TSMC may be eligible for various exemptions and/or extensions of time for compliance, our failure to comply with Further, energy costs in general could increase significantly due to any of these applicable laws or regulations could result in: future climate change and other regulations. Therefore, TSMC’s ● significant penalties and legal liabilities, such as the denial of import pass on their costs, either fully or partially, such as those associated permits; with carbon taxes, emission caps and carbon credit trading programs. ● the temporary or permanent suspension of production of the affected products; To mitigate risks resulting from climate change, TSMC continues to ● unfavorable alterations in our manufacturing, fabrication and carry out energy conservation measures, implementing voluntary energy costs may increase significantly if utility or power companies assembly and test processes; and ● restrictions on our operations or sales. PFC emission reduction projects and conducting GHG inventory and verification each year. TSMC has publicly disclosed climate change information every year since 2005 through participation in an annual Existing and future environmental and climate related laws and survey conducted by the nonprofit Carbon Disclosure Project (CDP), regulations as well as applicable international accords to which which includes greenhouse gas emission and reduction information TSMC are subject, could also require it, among other things, to do for all TSMC fabs. the following: (a) purchase, use or install expensive pollution control, reduction or remediation equipment; (b) implement climate change mitigation programs and “abatement or reduction of greenhouse 2 0 1 2 T S M C A N N U A L R E P O R T 094 095 Dow Jones Sustainability Indexes Semiconductor Sector Leader First Certified Green Campus in Taiwan The World’s First LEED Platinum Certification for a Semiconductor Wafer Fab Globalviews Magazine 1st Prize in Environmental Protection, CSR Award Taiwan EEWH Diamond Certification First to Gain Taiwan Green Factory Mark 7. Corporate Social Responsibility TSMC is an important part of the technology industry. As we look to the future, we not only aim to maintain our leadership in worldwide competition and promote Taiwan’s globalization and economic growth, we also will continue to carry out our corporate social responsibility and do our utmost to be good corporate citizens. Our 10 principles for practicing corporate social responsibility are important standards for continuing to support positive change in society: 1. We insist on honesty and integrity. We are honest to our shareholders, employees, customers, and to the public alike. 2. We respect the rule of law and always obey the law. 3. We abhor cronyism. We do not seek favoritism from the government or any government official, and we do not bribe. 7.1 Environmental, Safety and Health (ESH) Management computing data center. In 2012, Fab 12 Phase 4/5 and Fab 14 Phase 3/4 also earned the ISO 50001 certifications. TSMC believes its environmental, safety and health practices must TSMC regularly communicates with suppliers and contractors not only comply with legal requirements, but also measure up to or regarding environmental, safety and health issues and encourages exceed recognized international practices. In 2010, the Company’s them to improve their ESH performance. In line with this policy, ESH policy was renewed and endorsed by Chairman and Chief TSMC uses priority work management and self-management to Executive Officer Dr. Morris Chang. The policy aims to reach the goals govern work performed by contractors. TSMC requires contractors of “zero incident” and “sustainable development,” and to make performing high-risk operations to complete certification for TSMC a world-class company in environmental, safety and health technicians, and to establish their own OHSAS 18001 safety and management. The Company’s strategies for reaching these goals are health management system before bidding on contracts. This to comply with regulations, promote safety and health, strengthen self-management is aimed at increasing the sense of responsibility of recycling and pollution prevention, manage ESH risks, instill an ESH TSMC’s contractors, with the goal of promoting safety awareness and culture, establish a green supply chain, and fulfill its related corporate technical improvement for all contractors in the industry. 4. We practice good corporate governance, and balance the interests of shareholders, employees, and all stakeholders in the Company. social responsibilities. 5. We do not engage in politics. 6. We provide good job opportunities with a safe, comfortable, and intellectually challenging environment to give our employees both physical comfort and mental stimulation. 7. We contribute our part in controlling climate change and place great importance on the protection of the environment. 8. We emphasize and reward innovation, and actively manage the risks that innovation may bring. 9. We invest in green businesses such as solid state lighting and solar to contribute to a greener world. 10. We support educational and cultural activities, and provide long-term care to communities. TSMC fulfills its social responsibilities to all stakeholders. As we carry out the principles listed above, it is our firm belief that customers will trust us more because of our honesty and integrity, respect for the law, and good corporate governance. Investors will be more willing to invest over the long term because of our clear core values, and employees will feel closer to the Company as they identify with those values. Carrying out TSMC’s social responsibilities brings us greater competitive advantage, creates greater value for shareholders, and benefits all of our stakeholders. All TSMC manufacturing facilities have received ISO 14001:2004 Company’s supply chain regarding ESH-related issues such as carbon certification for environmental management systems and OHSAS and water footprinting, and conflict mineral management. TSMC not 18001:2007 certification for occupational safety and health management systems. All fabs in Taiwan have also been TOSHMS only performs on-site ESH audits at its suppliers manufacturing sites, but also proactively assists them with improving ESH performance. TSMC collaborates with suppliers to improve the sustainability of the (Taiwan Occupational Safety and Health Management System) certified since 2009. Reducing the carbon and water footprints of TSMC’s supply chain is essential to the Company’s green supply chain ideals. Since 2009, TSMC strives for continuous improvement and actively seeks to TSMC has required suppliers to set up carbon inventory procedures. enhance pollution prevention, power and resource conservation, In 2010 TSMC led 15 selected suppliers to join the carbon footprint waste reduction, safety and health management, fire and explosion development project, which was sponsored by the Taiwan Industrial prevention and minimize the impact of other risks, such as Development Bureau and assisted by the Industrial Technology earthquakes, in order to reduce the overall environmental, safety and Research Institute. In this project, the Company completed a carbon Corporate Social Responsibility: Uplift Society health risk. TSMC Society Morality Business Ethics Economy Rule of Law Sustainability Work/Life Balance Happiness Philanthropy ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ Integrity Law Compliance Anti-Corruption Anti-Bribery Anti-Cronyism Environmental Protection Climate Control Energy Conservation Corporate Governance Provide Well-paying Jobs Good Shareholder Return Employees’ Work-life Balance Encourage Innovation Good Work Environment Volunteers Organization Education and Culture Foundation ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ 2 0 1 2 T S M C A N N U A L R E P O R T 098 footprint of both TSMC and suppliers’ products. In addition to 12-inch, TSMC continued to set up 8-inch wafer and 6-inch wafer In 2006, TSMC began to adopt the IECQ QC 080000 Hazardous product carbon footprints and received PAS2050 certifications in Substance Process Management (HSPM) System in order to meet 2011 and 2012. regulatory and customer needs for the management of hazardous materials. All TSMC manufacturing facilities have been QC 080000 TSMC also monitors potential water shortages in the supply chain certified since 2007. By practicing QC 080000, TSMC ensures that and investigates the supply chain’s water inventory. TSMC is its products comply with regulatory and customer requirements, also preparing to work with suppliers on water footprinting and including the European Union’s Restriction of Hazardous Substances conservation plans. The ESH management programs of TSMC (RoHS) Directive, EU REACH (Registration, Evaluation, Authorization suppliers are tied to a sustainability index that includes three and Restriction of Chemicals), Montreal Protocol on substances that components: the Green Index, the Social Index and the Risk Index. deplete the ozone layer, halogen free in electronic products, and The “Green Index” includes environmental management systems, Perfluorooctane Sulfonates (PFOS) restriction standards. regulatory compliance, hazardous substance management, conflict mineral investigation, greenhouse gas inventory, carbon footprinting, In 2011, TSMC adopted ISO 50001 Energy Management System water footprinting and other green activities. The “Social Index” for the continuous improvement of energy conservation. TSMC, includes labor and ethical conduct and participation in social represented by Fab 12 Phase 4 data center, has become Taiwan’s activities. The “Risk Index” includes safety and health management, first company to earn the ISO 50001 certification for a high density fire prevention, natural disaster mitigation, IT interruption recovery, 099 transportation reliability, supply chain management, pandemic Air and Water Pollution Control response planning and a business continuity plan. This sustainability index is applied to TSMC’s critical suppliers. 7.1.1 Environmental Protection Greenhouse Gas (GHG) Emission Reduction TSMC has installed effective air and water pollution control equipment in each wafer fab to meet regulatory emissions standards. In addition, TSMC maintains backup pollution control systems, including emergency power supplies, to lower the risk of pollutant emission in the event of equipment breakdown. TSMC centrally monitors the operations of air and water pollution control equipment TSMC is an active participant in international environmental around the clock and tracks system effectiveness to ensure the quality regulatory and protection programs. TSMC achieved its voluntary of emitted air and discharged water. PFC emissions reduction goal as per its commitment to the World to promote economically efficient programs. With environmental costs expected to continue growing, environmental accounting can help us manage more effectively. TSMC’s environmental accounting measures are to define the various environmental costs and set up independent environmental account codes, then provide these to all units for use in annual budgeting. This online system can output data for environmental cost statistics. Our economic benefit evaluation calculates cost savings for reduction of energy, water or wastes and waste recycling benefits according to our environmental protection programs. The environmental benefits disclosed in this report include real income from projects such as waste recycling and savings from major environmental projects. In 2012, 101 environmental projects were completed and the total benefits including waste recycling are more than Semiconductor Council (WSC) and the Taiwan Environmental To make the most effective use of Taiwan’s limited water resources, NT$1,368 million. Protection Administration (EPA) in 2010. all TSMC fabs make an effort to increase water reclamation rates by adjusting the water usage of manufacturing equipment and In 2005, TSMC was Taiwan’s first semiconductor company to make improving wastewater reclamation systems. New fabs are able to a complete inventory of its GHG emissions and to gain ISO 14064 reclaim more than 85% of process water, meeting or exceeding the certification for its processes and outputs. The purpose of the standards of the each Science Park Administration and outperforming inventory was to serve as a baseline reference for TSMC’s strategy most semiconductor fabs around the world. TSMC also strives to to reduce GHG emissions, to meet future domestic regulatory reduce non-manufacturing-related water consumption, including requirements, and to prepare for carbon trading and corporate water used in air conditioning systems, sanitary facilities, cleaning, carbon asset management. All TSMC facilities continue to conduct landscaping and kitchens. TSMC uses an intranet website to collect a GHG inventory on an annual basis. The inventory result shows and measure water recycling volumes company wide. that the major direct GHG emissions are perfluorinated compounds 2012 Environmental Cost of TSMC Fabs in Taiwan Unit: NT$ thousands Classification Description 1. Direct Cost for Reducing Environmental Impact (1) Pollution Control Fees for air pollution control, water pollution control, and others (2) Resource Conservation Costs for resource (e.g. water) conservation (3) Waste Disposal and Recycling Costs for waste treatment (including recycling, incineration and landfill) 2. Indirect Cost for Reducing Environmental Impact (Managerial Cost) (1) Cost of training (2) Environmental management system and certification expenditures (3) Environmental measurement and monitoring fees (4) Environmental protection product costs (5) Environmental protection organization fees (1) Costs for decontamination and remediation (2) Environmental damage insurance and environmental taxes (3) Costs related to environmental settlement, compensations, penalties and lawsuits Investment Expense 3,799,276 1,420,032 0 217,302 2,579,410 85,522 411,730 170,893 0 0 5,436,610 3,247,555 (PFCs), which are used in the semiconductor manufacturing process. Since water resources are inherently local, TSMC shares its water 3. Other Environment-Related Costs The primary indirect GHG emission is electricity consumption. saving experiences with other semiconductor companies through the Association of Science-Based Industrial Park to promote water 4.Total TSMC is also taking measures to reduce its emission of GHGs. TSMC conservation. At the same time, TSMC collaborates with the Science endorsed a memorandum of understanding between the Taiwan Park Administrations to assist small facilities in each Science Park with Semiconductor Industry Association, the Taiwan EPA, and the WSC, water resource management in order to achieve the Science Park’s whereby TSMC committed to reducing PFC emissions to 10% below goals and ensure a long-term balance of supply and demand. the average of 1997 and 1999 by 2010, a commitment that it was proud to achieve. This emissions target remains fixed as TSMC Waste Management and Recycling continues to grow and expand its manufacturing facilities. TSMC continues its active participation in WSC’s activities to set up a global voluntary PFC emissions reduction goal for the next 10 years and integrated past experience to develop best practices. The implementation of best practices for new semiconductor fabs has been adopted by WSC for the major element of the 2020 goal. Coal-fired power generators are the major source of electricity in Taiwan and emit large amounts of carbon dioxide (CO2). TSMC has not only adopted energy-conserving designs for both its manufacturing fabs and offices, but has also continuously improved the energy efficiency of facilities during operation. These efforts simultaneously reduce both carbon dioxide gas emissions and costs. TSMC has established a designated unit responsible for waste recycling and disposal. To meet the goal of sustainable resource utilization, TSMC’s first priority is to reduce process waste before considering recycling or disposal. TSMC carefully selects waste disposal and recycling contractors and performs annual audits of certification documents, site operations and transportation routes to ensure the legal and proper disposal of waste. TSMC achieved a 92% waste recycling rate in 2012, surpassing its goal of 90%. The Company’s landfill rate has been remained less than 1% since 2008. Environmental Accounting The purpose of TSMC’s environmental accounting system is to identify and calculate environmental costs for internal management. At the same time, we can also evaluate the cost reduction or economic benefits of environmental protection programs so as 2012 Environmental Efficiency of TSMC Fabs in Taiwan Unit: NT$ thousands Catrgory Cost Saving of Environmental Protection Projects Description Energy saving: completed 37 projects Water saving: completed 6 projects Waste reduction: completed 8 projects Material reduction: completed 50 projects Real Income of Industrial Waste Recycling Recycling of used chemicals, wafers, targets, batteries, lamps, packaging materials, paper cardboard, metals, plastics, and other wastes Total Other Environmental Protection Programs Efficiency 607,300 70,400 26,900 467,700 195,722 1,368,022 TSMC conducts “Product Life Cycle Assessments” (Product LCA), collecting and analyzing data from the entire semiconductor manufacturing chain from raw materials suppliers to finished products, including statistics for such items as energy, raw material consumption, and pollution. The Product LCA study has established “Eco-Profiles” for all TSMC fabs and will help the Company to meet future international regulations, such as the European Union’s “Energy-Using Product” directive. These “Eco-Profiles” can also be provided to customers who require such documentation. 2 0 1 2 T S M C A N N U A L R E P O R T 100 101 TSMC also maintains “green procurement” procedures, requiring raw 7.1.2 Safety and Health materials suppliers to declare that the materials they supply to TSMC do not contain any prohibited substances. This ensures that products Safety and Health Management TSMC’s safety and health management is built on the framework of the OHSAS 18001 system, and adheres to the management principle of “Plan, Do, Check, Act” to prevent accidents and protect employee safety and health as well as Company assets. TSMC fabs in Taiwan have also received TOSHMS (Taiwan Occupational Safety and Health Management System) certification. Besides accident prevention, TSMC has established emergency response procedures to protect the lives of employees and contractors if disasters should occur, as well as to minimize the negative impact on society and the environment. TSMC continually communicates with its suppliers to ensure that potential risk in the operation of production equipment is minimized, and rigorously follows safety control procedures when installing production equipment. The Company places stringent controls on high-risk operations and also evaluates the seismic tolerance of its facilities and equipment to reduce the risk of earthquake damage. manufactured by TSMC comply with customer requirements and the regulatory requirements of the European Union’s RoHS Directive. TSMC also encourages employees to use “Green Mark” products in offices, such as recycled paper, desktop PCs, LCD monitors, and batteries. TSMC has adopted both the Taiwan “Green Building” and the U.S. Leadership in Energy and Environmental Design (LEED) standards for new fab and office building designs since 2006 to achieve better energy and resource efficiency than conventional designs. At the same time, TSMC planed to upgrade existing office buildings to comply with the LEED standard each year. From 2008 to 2012, seven of TSMC’s fabs and office buildings (Fab 14 Phase 3&4 manufacturing facility, Fab 14 Phase 3 office building, Fab 12 Phase 4 manufacturing facility and office building, and Fab 12 Phase 1&2 manufacturing facility and office building) achieved LEED certifications. Four of them also won Taiwan’s EEWH Diamond class certification. For these projects, TSMC invited Dr. Kath Williams, former vice president of the United States Green Building Council (USGBC) to serve as a consultant, and also consulted experts from leading Taiwan universities. TSMC believes that manufacturing companies should convert their facilities into green factories to effectively improve the environment and lower construction costs. Therefore, TSMC freely shares its practical experience with industry, government, and academia. As of the end of 2012, more than 4,628 visitors from 112 different industry, government, academia and general community groups contacted TSMC to gain understanding on the Company’s green factory practices. TSMC led industry to support the Taiwan government to establish “Green Factory Labeling System” from 2009, a system that included “Clean Production Evaluation System” and “Green Factory Evaluation System”. In 2012, TSMC received Taiwan’s first “Green Factory Label” from the government and three labels in total for Fab 12 Phase 4, Fab 14 Phase 3 and Fab 14 Phase 4. Environmental Compliance Record in the field of occupational health. Under this MOU, both TSMC and NTU held the second Workplace Health Improvement Forum on October 12, 2012, inviting representatives from government, industry, and academia to join an in-depth discussion on improving occupational health. The forum has become an important platform for dialog. The theme of 2012 forum is “New Labor Health Policies and Prevention of Occupational Illness” and “Promoting Work/Life As of February 28, 2013, TSMC had not received any environmental Balance,” focusing industry and academic attention on a timely issue penalties or fines during or related to 2012 and early 2013. of public concern in the fields of employee health and safety and human resources. 2 0 1 2 T S M C A N N U A L R E P O R T 102 TSMC also developed occupational management tools tailored for TSMC by industry-academic cooperation, including the promotion ● Working Environment Measurement TSMC conducts workplace hazard assessment and interventions to of personnel stress management and the measurement of radio provide a comfortable and safe workplace to Company employees. frequency (RF) exposure to wireless network antennas and TSMC also requests employees to use personal protective equipment mobile phone in the offices. TSMC offers annual employee health (PPE) to prevent hazard exposures. examinations and consultation services as well as on-site clinics and a dental clinic for a better access to medical assistance. As office work is primarily performed on computers, TSMC launched In order to avoid infectious disease epidemics, TSMC has established chairs and desks to meet the needs of taller or shorter employees. company-level prevention committees and procedures for emergency Whenever new employees of significantly above or below-average response to infectious diseases outbreak. height enter the Company, the assessment and intervention will be an office ergonomics program to adjust the height of office Working Environment and Employee Safety Protection TSMC’s ESH policy is committed to establishing a safe working environment, preventing occupational injury and illness, keeping employees healthy, enhancing every employee’s awareness and sense of accountability to ESH, and building an ESH culture. TSMC safety and health management operations apply to: ● Hardware Equipment Safety and Health Management In addition to meeting regulatory requirements and internal “New Chemical Review Committee” to ensure that environmental and safety and health concerns are well controlled, including engineering control, the installation of personal protection equipment, and operational safety training during storage, transportation, usage, and disposal. ● General Safety Management, Training and Audit All TSMC manufacturing facilities hold environmental, safety and health committee meetings on a monthly basis. TSMC takes preventive measures such as controls on high-risk work, contractor management, chemical safety management, personal protective equipment requirements, and safety audit management. In addition, TSMC also maintains detailed disaster response procedures and performs regular drills designed to minimize harm to employees and property, as well as the impact on society and the environment in the event of a disaster. initiated proactively by site ESH professionals. TSMC requires that all new tools meet SEMI-S8 requirements and that appropriate supplementary control measures be taken to reduce ergonomic risk. Moreover, TSMC endeavors to automate 300mm front-opening unified pod (FOUP) transportation to prevent accumulative damage caused by long-term manual handling of 300mm FOUPs. TSMC 300mm fabs have achieved 99.9% in automatic transportation. TSMC performs semi-annual workplace environment assessments of physical and chemical hazards, including CO2 concentration, illumination, noise, and hazardous chemical substances regulated by domestic laws. When abnormal measurements or events happen, site ESH professionals will conduct onsite observation and interventions to ensure exposure risk acceptable. TSMC also conducts Indoor Air Quality Program to set up indoor air quality standard, measurement, and control measures to provide a more comfortable and safer workplace continuously. ● Emerging Infectious Disease Response TSMC has a dedicated corporate ESH organization which monitors emerging infectious diseases around the world, assesses any potential impact on the workplace and provides a strategic response plan. In previous outbreaks (such as SARS in 2003 and the H1N1 influenza outbreak in 2009), TSMC convened the Corporate Influenza Response Committee to develop the Company’s strategies. These strategies include educating employees in prevention and response, publishing guidelines for managers, establishing guidelines for employee sick leave due to flu, and installing alcohol-based hand sanitizers at appropriate locations. The Committee also monitors the status of employee leave due to illness and, at the same time, develops a continuous plan to address manpower shortages as well as minimize business impact. 103 TSMC believes that employees’ physical and mental health is not only standards as well as mitigating ESH-related risks when building or fundamental to maintaining normal business operations but also part rebuilding facilities, TSMC also maintains procedures governing new of a corporation’s responsibility. In 2012, TSMC strengthened industry-academy cooperation to enhance the Company’s capability on occupational management. TSMC and the National Taiwan University (NTU) College of Public Health signed a memorandum of understanding (MOU) to equipment and raw materials, safety approvals for bringing new tools online, updating safety rules, seismic protection measures, and other safety measures. ● Environmental, Safety and Health Evaluation of Hazardous Chemical Substances collaborate on occupational health enhancement. This MOU marked Any new chemical substance introduced to TSMC – from the R&D as an important step in the long-term industry-academy cooperation phase to mass production – is carefully reviewed before use by the ● Emergency Response The planning and execution of an effective emergency response must lay out clearly defined safety precautions and preventative measures. In addition, contractors working on high-risk engineering requires big-picture thinking, continuous improvement and practice projects must establish OHSAS 18001 systems and the workers must 7.2 TSMC Education and Culture Foundation As part of TSMC’s aesthetic education plan, the TSMC Foundation continued to support the Taipei Fine Arts Museum to expand the “TSMC Children’s Art Education Center,” which will be the most drills. TSMC’s emergency response plans include procedures for rapid successfully complete work skill training. The TSMC Education and Culture Foundation, established in 1998 important base for promoting children’s art education in Taiwan. response to accidents and disaster recovery as well as establishing response procedures for potential disasters. ● Supply Chain Sustainability As one of the global leaders in semiconductor industry, TSMC corporate social responsibility, continues to devote its resources At the high school level, TSMC emphasizes the need for a towards education, promotion of art and culture events, community balanced education in both science and the humanities. In science, to coordinate the Company’s sponsorship as part of its efforts in All TSMC fabs conduct major annual emergency response exercises has been working together with our suppliers in several fields of building, and the employee volunteer program. collaborating with the Education Prime Minister and the Wu and evacuation drills. TSMC’s Tainan-site fabs initiated quarterly spot sustainable development, such as greening our supply chain, carbon Chien-Shiung Foundation, the TSMC Foundation continued the drills, which have been recognized as good practices. TSMC’s on-site management for climate change, ESH management and business In 2012, the TSMC Foundation continued to contribute NT$63 project “Lifting the Ability of High School Physics Experiments” service contractors also participate in emergency response planning continuity plans for natural disasters. In 2012, TSMC announced our million to its long-term projects of promoting education and arts. for the third consecutive year. One week’s training offered science and exercises to ensure cooperation in handling accidents and to sustainability standard for suppliers and encouraged our suppliers to In science education, “Lifting the Ability of High School Physics teachers a chance to enhance their teaching skills and experimental effectively minimize any damage caused by disasters. create sustainable value in these fields. To enhance the supply chain Experiments,” cooperated with Wu Chien-shiung Education abilities. As of the end of 2012, the program has provided sustainability and partnership with our suppliers, TSMC also shared its Foundation and the Ministry of Education, this public/private professional development for 159 science teachers, reaching over In addition to the regular emergency response drills held by experience and practice at the TSMC 2012 Supply Chain Sustainability partnership gained overwhelmingly responses from school teachers. 30,000 high school students nationwide. In addition to the teachers’ engineering and facilities departments each quarter, the Company’s and Risk Management Forum. laboratory, canteen, dormitory, and shuttle bus personnel also hold emergency response drills to prepare for events such as earthquakes, chemical leakage, ammonia release, fires and automobile accidents. ● Employee Health Enhancement Workplace stress and employee health have recently become new topics of concern for the government, society, employers, and employees as areas that require further attention and effort. The TSMC Employee Assistance Program (EAP) provides free individual Environmental, Safety and Health-related Awards in 2012 TSMC was honored to be chosen for membership in the Dow Jones Sustainability World Index for a 12th consecutive year in 2012, and be the semiconductor sector leader in 2010 and 2012. The Company’s Environmental, Safety and Health-related Awards in 2012 are listed as follows. counseling sessions, group sharing, workshops, and mental TSMC Fab Governmental Organization Award assessment, as well as lectures on personal and family issues to take care of employees’ well-being. Health promotion activities for employees include fitness programs, women’s health care programs, mother’s rooms, body weight control Environmental Protection F5, F12 P4 Taiwan EPA F12 P1/P4, F14, F15 Taiwan EPA programs, sleep problem management, massage and chiropractic F12 P1 Taiwan EPA Enterprise Environmental Protection Award Energy Conservation and Carbon Reduction Action Mark Excellence in Waste Resource Management Award services, hepatitis and flu vaccinations, and health lectures. TSMC believes employees who are physically and mentally fit can enjoy a better quality of life and be more productive. Supplier and Contractor Management ● Supplier Management As a means of enhancing its supply chain management, TSMC is committed to communicating with and encouraging its contractors F14 F2&5, F3 F3 F2&5, F8 F6 F8 Taiwan MOEA Energy Conservation Award Taiwan MOEA Excellence in Greenhouse Gas Reduction Award Taiwan MOEA Water Conservation Award Hsinchu SPA Tainan SPA Low Carbon Enterprise Award Excellence in Environmental Protection Award Hsinchu City EPB National Environmental Education Award and suppliers to improve their quality, cost effectiveness, delivery Safety and Health performance and sustainability on environmental protection, safety F2&5, F8 Hsinchu SPA and health. By means of communication between senior managers, site audits and experience sharing, TSMC collaborates with major suppliers and contractors to enhance partnership and ensure continual improvement for better performance and increased joint contributions to society. Contractors performing high-risk activities F14 Tainan Site Tainan Site Taiwan BHP Taiwan BHP Taiwan BHP Note: 1. EPA: Environmental Protection Administration 2. MOEA: Ministry of Economic Affairs 3. SPA: Science Park Administration 4. EPB: Environmental Protection Bureau 5. BHP: Bureau of Health Promotion Excellence in Labor Safety and Hygiene Award Health Leading Award Annual Special Contribution Award Outstanding Work Place for Weight Loss 2 0 1 2 T S M C A N N U A L R E P O R T 104 The TSMC Foundation also supported National Tsing-hua University training, TSMC brought science knowledge to the campuses. to hold “Senior High School Academic Train” to promote lecture This year the TSMC Foundation supported National Tsing-hua courses for academic knowledge in senior high schools. In art University to launch the “Senior High School Academic Train,” education, TSMC brought 10,000 students to visit the exhibition “King Wu Ding and Lady Hao: Art and Culture of the Late Shang inviting professors from the University to introduce senior high school students to the latest knowledge of technology and common Dynasty” in National Palace Museum. And the TSMC Foundation knowledge for daily life and science. The courses will be held in continued its support of the Taipei Fine Arts Museum to build up twelve senior high schools located in northern, central, southern, the “TSMC Children’s Art Education Center,” which will be operated eastern and Kinmen areas. At the same time the TSMC Foundation in 2013. Aside from financial sponsorships, the TSMC Foundation continued to sponsor science camps for talented science students to supports TSMC Volunteer Society, organizing the employees to meet with world-class scholars for inspiring their scientific potential. devote themselves to the caring of the underprivileged of the communities. In the humanities, the TSMC Foundation organized the fifth “TSMC Youth Calligraphy Contest,” holding three workshops at three high Commitment to Aesthetic and Scientific Education schools to inspire the students to appreciate the beauty and cultural Talents are essential to the development of the economy. As a leader of Taiwan’s knowledge-based industry, TSMC regards cultivating talented people for society as a core responsibility. Thus the TSMC Foundation tailors various programs to target a whole range of education needs at different age levels. richness of calligraphy. The TSMC Foundation also continued the TSMC Youth Literature Award to encourage talented young writer to create new works for nine years. In addition to the competition, we also invited famous writers to held lectures for students and the public to increase their appreciation for literature. At the primary-school level, the TSMC Foundation’s focus is on aesthetic education. To bridge the urban-rural gap, we launched the “TSMC Aesthetic Tour” to take children from remote townships to visit National Palace Museum, Taipei Fine Arts Museum, and the exhibitions for inspiring their interest in art. This year, in addition to the annual visitation plan, the TSMC Foundation took more than 10,000 students from junior high schools and primary schools to visit the exhibition “King Wu Ding and Lady Hao: Art and Culture of the Late Shang Dynasty” for increasing their understanding of Chinese Ancient Art and Culture. Over the last 10 years, over 70,000 students have participated in the tour to cultivate their appreciation of art. At the college level, in 2012 the TSMC Foundation continued its “TSMC Mentor Scholarship” to support and encourage underprivileged students of National Tsing Hua University and National Central University. In addition to providing financial assistance, the TSMC Foundation recruited senior TSMC employees to mentor the students regularly. We hope that the rich practical experience of TSMC employees can provide productive consultations for the students both in schools and future career paths. In the meantime, the TSMC Foundation continued to endow chair professorships to enhance academic research of Taiwan universities. 105 Promotion of Arts and Culture Fantastique” at Hsinchu, and National Taiwan Symphony Orchestra As many as 194 people volunteered in 2004. Youth volunteers were In 2012, TSMC expanded its service scope to eight schools from five. with the French Pianist Jean-Yves Thibaudet performed E. Grieg piano added in 2006, and employees were encouraged to invite their high Today, 318 volunteers read books with children in Hsinchu, Taichung concerto in a minor. In addition to the theater performances, the school children to join the Volunteer Docent Program. In 2007, the and Tainan. They have served for eight consecutive years and will TSMC Foundation also organized two activities at the public space of program was expanded to recruit new blood from TSMC-affiliated continue to help pave the road for these underprivileged children’s our communities, the children concert “The Animal Festival” held at companies, including Vanguard, VisEra, Xintec, and Global Unichip. future. Hsinchu Zoo Park, and the children drama “Visiting Little Confucius” The docent’s enthusiasm and professionalism have been highly The TSMC Education and Culture Foundation has for years devoted its efforts to the promotion of Taiwan Art Groups. This year, the TSMC Foundation supported the National Symphony Orchestra to perform Opera Australia Production “Madama Butterfly,” one of Giacomo Puccini’s masterpieces. The performance showcased not only Taiwan Artists’ phenomenal performance but also the paradigm of sino-western art and culture exchange. Promoting Chinese Philosophy is also the core program of the TSMC Foundation. After Confucius Analects, the TSMC Foundation Tainan. continued to promote another Chinese Classic, Chung-tzu. We invited Professor Hsin Yih-yun to produce the broadcasting program “Analects in Chung-tzu’s View”. Through Professor Hsin Yih-yun’s rich knowledge and vivid examples, the TSMC Foundation hopes that more people can understand Chung-tzu’s philosophy, and gain wisdom from it. Noting the importance of preserving historic sites, the TSMC Foundation continued to sponsor the Taipei Story House’s Literature Salon. Cultural activities such as regular author readings on the site gave the old building a new life and attracted the general public to this cultural heritage site. Community Building The TSMC Foundation continues to promote arts and cultural activities in our site communities. Every year we organize the TSMC Hsin-chu Art Festival to bring cultural activities to these high-tech cities and encourage a greater art appreciation in the communities. This year is the 10th anniversary of the TSMC Hsin-chu Arts Festival. In past years, through the TSMC Foundation’s invitation, numerous masters had been gathered at the festival. Such as Chinese Opera performers Pai Hsien-yung, Wu Hsing-kuo, Wei Hai-ming, and Li Bao-chun as well as the great classical music masters Lin Cho-liang, Li Yun-di, Ann-Sophie Mutter, James Galway and Kun Woo Paik brought the inhabitants marvelous performances and concerts. For the last ten years, more than 230,000 participants enjoyed the programs presented by the TSMC Hsin-chu Festival. This year, following the steps of TSMC’s building sites, the Hsin-chu Art Festival was held not only at Hsinchu and Tainan, but also Taichung. For Chinese opera fans the TSMC Foundation hosted the “One Hundred Years on Stage” performed by the Guoguang Opera Company. Gathering together Taiwan’s most fantastic performers, the play led the audience to look at the history of Chinese opera through a web of love, lust and hatred among operatic performers/characters on and off the stage. Two Taiwan major orchestras gathered at the festival for the first time. National Symphony Orchestra performed H. Berlioz’s masterpiece “Symphonie 2 0 1 2 T S M C A N N U A L R E P O R T 106 held at the Confucius Temples located at both Hsinchu and Tainan. By infusing the art energy, TSMC hopes to revive the public space of our homes. More than 40 performances of the 2012 Hsin-chu Festival nurtured over 15,000 inhabitants of Hsinchu, Taichung and 7.3 TSMC Volunteer Program Social responsibility has been a feature of TSMC’s culture since its founding. The TSMC Foundation is dedicated to promoting education and culture, providing aid for the underprivileged, advocating energy saving, and caring for communities. The TSMC Foundation launched an employee volunteer program in 2003 as a channel through which its most valuable asset, high-tech professional employees, give to the society. Employees and their family members have been invited to participate in the following programs: TSMC Volunteer Docent Program TSMC Book Reading Volunteer Program TSMC Energy-saving Volunteer Program TSMC Community Volunteer Program TSMC Ecology Volunteer Program (2012 new initiative) appreciated by visitors, and each year the group is recognized as an TSMC Energy Saving Volunteer Program “Outstanding Volunteer Team” by the National Museum of Science. When the new “The World of Semiconductor” opened in 2011 the TSMC volunteer program recruited around 500 volunteers. In 2012, the number grew to more than 700 volunteers. With global warming and the depletion of limited natural resources and fossil fuel, saving energy has become a global common goal. TSMC recruited employees with expertise in energy conservation to start the Energy-Saving Volunteer Program, and has provided schools in the Hsinchu and Tainan areas with professional consulting service. The team helps to come up with plans for schools to improve power TSMC Book Reading Volunteer Program efficiency and reduce carbon emissions. TSMC believes the future hope and competitiveness of Taiwan lies in the children of the next generation, and education is the key to the Formed in 2008 by 25 TSMC employees, the Energy-Saving Volunteer development of these children. Hoping to help reduce the disparity Program initially served neighborhood schools. Two high schools in of educational resources between rural and urban schools, TSMC Hsinchu were chosen, and a team was sent to each school to assist Foundation has sponsored the Hope Reading Program organized by in lowering water, electricity and telecommunication bills, as well as the CommonWealth Magazine since 2004. Besides donating 20,000 improving environmental safety and air-conditioning. After assessing books annually to 200 schools in remote rural areas, the TSMC the facilities, collecting data, and evaluating power efficiency, the Foundation recruited employees and their family members to form teams proposed energy-saving plans and ways to reduce carbon a volunteer team to read to children in the hope of sparking their emissions to the schools interest in reading. During the first year, 49 volunteers joined and started serving two the Company and Taiwan but also wish to do what they can to elementary schools in the remote townships in Hsinchu. Now more preserve the earth. The program expanded service to Taichung in than 100 people travel to the remote schools to tell stories to the 2011 in to achieve its promise: “Where TSMC is, their volunteers are children on a regular basis. With increasing participants, the program also”. In 2012, volunteers input 950 hours in the Hsinchu, Taichung The Energy-Saving volunteers not only endeavor to save energy for TSMC Volunteer Docent Program was extended to Tainan in 2006. Volunteers encourage children and Tainan areas. One important way in which a corporation can serve and respond to to read and to make use of the books donated through the Hope its communities is to share its knowledge. The spread of knowledge Reading Program. furthers people’s understanding of their environment and may inspire the future generations and bring forth change in society. Volunteers prepare plays or plan activities during holidays to further encourage children’s interest in reading. Working regularly with To promote science education and to further people’s understanding the children over the long term, many volunteers have developed of the IC industry, TSMC made a donation to the National Museum profound friendships with the children. of Natural Science (Taichung) in 1997 to set up an exhibition hall – The World of the Integrated Circuits. In 2003 and 2011, TSMC The selfless service of Book Reading Volunteer Program participants sponsored the renovation of the hall, adding interactive displays that has been greatly appreciated by the schools and the children. This explain semiconductor principles, the development of integrated circuits, and the important role the IC industry plays in daily life. In 2004, TSMC Foundation recruited employees and their family members to serve as volunteer docents at the exhibition hall on weekends and holiday. program has become a great model frequently reported by the mass media, which has helped to spread the spirit of encouraging reading through reading aloud. TSMC Community Volunteer Program When the TSMC Community Volunteer Program started recruiting employees, a central focus was to continually deploy their expertise to help those who need them the most. When Typhoon Morakot struck southern Taiwan in 2009, TSMC employees, deeply saddened by the suffering it caused, immediately established the Typhoon Morakot Project Team and provided assistance and relief measures to the typhoon victims. The experience prompted TSMC employees to ponder what else could be done to help the community and, consequently, the Typhoon Morakot Project Team became the Community Volunteer Program in 2010, aiming to reach out to the needy. 107 The needy, the elderly and children are the focus of TSMC Community volunteers partly because Taiwan is an aging society ● Summer Camps: During summer vacation, volunteers accompanied the children to three-day camps in Kaohsiung. The children have with more than two million people over the age of 65, among thus become closer to the volunteers. whom one fifth need nursing care. Because of rapid changes in society, it is critical for children – the future of the country – to build ● Tom’s Bear & McDonald Happy Hour: All the children were invited to Tom’s Bear amusement @ Big City Mall in Hsinchu for a treat, their characters at an early age. It is important for children to have and they spent one happy afternoon participating in all sorts of productive interactions with their parents, something often lacking activities. in dysfunctional families, whose children need warmth, care and company. Taitung Project activities: There are 36 volunteers accompanied with children in Taitung who suffered type 1 diabetes. 2012 results as TSMC Community Volunteer Program mainly serves the elderly at following: Hsinchu Veterans Home and the children at St. Teresa Children ● First contact: Volunteers hosted a gathering between volunteers Center. In 2010, when we first recruited volunteers, 156 people and children in April in Taitung, first mixing as one mass and then joined. In 2012, there are 404 volunteers. The elderly, the children, reforming into five subgroups (families). Each family developed their and the volunteers are closely linked through regular activities. own activities to maintain close connection. Hsinchu Veterans Home activities: In 2012, a total of 308 TSMC ● Summer vacation activities: Each family hosted their own summer camps in July and August. After that, their sensibilities become volunteers visited Hsinchu Veterans Home every weekend to spend tighter then before. time with the elderly veterans. Volunteers are divided into three groups: ● Dream come true plan: Qualified children were invited to join two-day events: “Dream come true activity” in early 2013. ● The Energetic Group: Volunteers exercise with the elderly veterans. Volunteers play croquet with them every other week and hold little contests occasionally. The elderly veterans get to stretch their bodies and enjoy the exciting matches. ● The Warm, Romantic Group: Volunteers sing songs to the physically handicapped veterans or play interactive games with them. When they sing karaoke together, joy seems to float with the notes among all of them. ● The Art Group: In some art classes, volunteers and the veterans create artistic works such as rock-painting. The veterans get to enjoy the beauty of arts, and volunteers and the veterans get to understand each other through chatting. We hope that the elderly veterans tell us their wishes and that someday we may be able to make their wishes come true. In 2012, TSMC Volunteer Program organized one holiday volunteer event on December 8 in Hsinchu Veterans Home. Over 200 employees and families participated to join lunch banquet. TSMC Volunteer Program also invited symphony to perform for the elderly. St. Teresa Children Center activities: There are 62 volunteers serving at the Center, giving warm and timely care to the children. Among their accomplishments: ● One-on-one companionship: During the monthly family day at the Center, volunteers spend a wonderful weekend going on an outing with the children or reading to them in the Center. TSMC Ecology Volunteer Program In 2012, TSMC launched a new volunteer initiative: the Ecology Volunteer Program. Two groups of employees who are interested in natural ecology donate their time to environmental protection service at ecology parks in Taichung & Tainan. Volunteers are trained as ecology docents popularize natural ecology concepts with school children and the public visiting the two parks. ● Taichung Fab 15 ecology park docent: With 47 employees joining the subgroup, TSMC Volunteer Program hosted three advanced training courses to enhance skills and abilities of the volunteers. Their task is to be docents to guide visitors to Fab 15 ecology park in Taichung. They guided Ju-Liu elementary school through Fab 15 ecology park for the first visit at the end of 2012. ● Tainan Jacana ecology education park docent: TSMC Volunteer Program recruited 91 employees and their family members to serve as volunteer docents at the Jacana ecology education park on weekends and holidays. 2 0 1 2 T S M C A N N U A L R E P O R T 108 7.4 Social Responsibility Implementation Status as Required by the Taiwan Financial Supervisory Commission Item Implemention Status 1. Implementation of Corporate Governance (1) Corporate social responsibility policy and performance evaluation (1) Please refer to “7. Corporate Social Responsibility” on page 98-109 of this Annual Report. (2) Dedicated organization for the promotion and execution of corporate social (2) TSMC follows the ten principles of corporate social responsibility set by the Non-implentation and Its Reason(s) None responsibility Chairman, Dr. Morris Chang. Each unit in TSMC incorporates corporate social responsibility principals into daily operations. All issues of stakeholders’ concerns are collected regularly or through ad hoc communication channels. Each unit will assess and identify material issues, and incorporate them into execution plans and daily operations. (3) Regular training and promotion of corporate ethics among employees and the Board of Directors, and integration with the employee performance appraisal system (3) Please refer to “3.4 Code of Ethics and Business Conduct” on page 39-42 of this Annual Report. 2. Sustainable Environment Development (1) Commitment to improving resources utilization and the use of renewable Please refer to “7.1.1 Environmental Protection” on page 100-102 of this Annual Report. None materials (2) Environmental management system designed to industry characteristics (3) Dedicated environmental management unit or personnel (4) Company strategy for climate change, energy conservation and greenhouse gas reduction 3. Promotion of social welfare (1) Compliance with labor regulations, international recognized human right principles, protection of employee rights and employment fairness, and appropriate management measures and procedures (1) Please refer to “5.5 Employees” on page 75-78 of this Annual Report. None (2) Safety and health in working environment (2) Please refer to “7.1.2 Safety and Health” on page 102-104 of this Annual Report. (3) Mechanism of periodical communication with employees, and reasonable (3) Please refer to “5.5 Employees” on page 75-78 of this Annual Report. notice measures regarding significant operational changes which might cause signifigant impacts to employees. (4) Disclosure of consumer rights policy, and official channel for consumer (4) Please refer to “5.4 Customer Trust” on page 73-75 of this Annual Report. complaints (5) Collaboration with suppliers (5) TSMC brought together fab operations, materials management, risk management, and quality system management in an internal committee dedicated to managing our supply chain. The focuses of the committee are risk mitigation and supply chain improvement. The steering team, including a senior vice president and managers, sets goals annually and reviews progress each quarter. The committee’s working team assists suppliers in lowering production and transportation risks by sharing risk management practices and helping suppliers improve quality systems, green procurement, protection of the environment, and safety. At the same time, we monitor the financial situation of key suppliers through regular communication or public information, and the inventory of supply chain, with corresponding backup plans. The working team holds monthly meetings to monitor progress and actively handle suppliers’ issues. Please refer to TSMC’s website for additional information: http://www.tsmc.com/english/csr/supply_chain_management.htm (6) Participation in community development and charities through commercial (6) Please refer to “7. Corporate Social Responsibility” on page 98-109 of this activities, donations or volunteers 4. Enhancement of Information Disclosure (1) Disclosure of corporate social responsibility related information with significance and reliability. (2) Published corporate social responsibility report and disclosure of implementation of corporate social responsibility Annual Report. TSMC has published “Corpoarte Social Responsibility Report” since 2008, which has been verified by third party in compliance with the requirements of Global Reporting Initiative (GRI) G3.1 level A+ and AA1000AS: 2008 standard. None 5. If the company has established its corporate social responsibility code of practice according to “Listed Companies Corporate Social Responsibility Code of Practice,” please describe the operational status and differences. TSMC does not establish the code for corporate social responsibility. For our corporate social responsibility operational status, please refer to “7. Corporate Social Responsibility” on page 98-109 of this Annual Report and our corporate social responsibility related information in our website: http://www.tsmc.com/english/csr/index.htm 6. Other important information to facilitate better understanding of the Company’s implementation of corporate social responsibility (e.g., environmental protection, community participation, social contribution, social services, social welfare, consumers’ rights, human rights and safety and health): Please refer to TSMC’s website for our corporate social responsibility implementation status: http://www.tsmc.com/english/csr/index.htm 7. Other information regarding products or “Corporate Social Responsibility Report” which are verified by certification bodies: (1) TSMC obtained Integrated Circuit carbon footprint and Type 3 Environmental Product Label verification, which comply with PAS2050 and ISO14025 standards. (2) TSMC Corporate Social Responsibility Report is compliant with the requirements of Global Reporting Initiative (GRI) G3.1 level A+ and AA1000AS:2008 standard. 109 More than 37,000 Employees Worldwide Three Advanced 12-inch GIGAFAB™ Facilities, Four 8-inch Fabs, and One 6-inch Fab in Taiwan TSMC Serves Customers through Offices in America, Canada, Europe, Japan, China, South Korea, and India WaferTech, LLC Shareholding: 100% TSMC China Company Limited Aug. 04, 2003 Shanghai, China RMB 4,502,080 Manufacturing and selling of integrated circuits at the order of and pursuant to product design specifications provided by customers 8. Subsidiary Information and Other Special Notes 8.1 Subsidiaries 8.1.1 TSMC Subsidiaries Chart As of 12/31/2012 Taiwan Semiconductor Manufacturing Company Limited TSMC North America Shareholding: 100% TSMC Europe B.V. Shareholding: 100% TSMC Japan Limited Shareholding: 100% TSMC Korea Limited Shareholding: 100% TSMC China Company Limited Shareholding: 100% TSMC Partners, Ltd. Shareholding: 100% TSMC Global Ltd. Shareholding: 100% Xintec Inc. Shareholding: 40.20% Emerging Alliance Fund, L.P. Shareholding: 99.5% VentureTech Alliance Fund II, L.P. Shareholding: 98% VentureTech Alliance Fund III, L.P. Shareholding: 50.25% TSMC Solar Ltd. Shareholding: 98.58% TSMC Technology, Inc. Shareholding: 100% TSMC Development, Inc. Shareholding: 100% InveStar Semiconductor Development Fund, Inc. Shareholding: 97.09% InveStar Semiconductor Development Fund, Inc. (II) LDC. Shareholding: 97.09% TSMC Design Technology Canada Inc. Shareholding: 100% VentureTech Alliance Holdings, LLC Shareholding: 100% Mutual-Pak Technology Co., Ltd. Shareholding: 58.33% Growth Fund Limited Shareholding: 100% VentureTech Alliance Fund III, L.P. Shareholding: 48.73% TSMC Solar North America, Inc. Shareholding: 100% TSMC Solar Europe B.V. Shareholding: 100% TSMC Solar Europe GmbH Shareholding: 100% TSMC Solid State Lighting Ltd. Shareholding: 95.01% TSMC Lighting North America, Inc. Shareholding: 100% TSMC Guang Neng Investment, Ltd Shareholding: 100% TSMC Solar Ltd. Shareholding: 0.38% TSMC Solid State Lighting Ltd. Shareholding: 0.75% Remarks: TSMC Guang Neng Investment, Ltd was established in January 2012. 2 0 1 2 T S M C A N N U A L R E P O R T 112 8.1.2 Business Scope of TSMC and Its Subsidiaries TSMC and its subsidiaries strive to provide the best foundry services in the industry. Sales or engineering support offices in North America, Europe, Japan, China, and South Korea are dedicated to servicing TSMC customers worldwide. WaferTech in the United States and TSMC China Company Limited provide additional 8-inch wafer capacity. Other subsidiaries support the Company’s core foundry business with related services such as design service and back-end assembly and test services, and invest in start-up companies involved in design, manufacturing, and other related businesses in the semiconductor industry. Beginning in 2010, TSMC’s subsidiaries also engage in the researching, developing, designing, manufacturing and selling of solid state lighting devices and related products and systems, and solar-related technologies and products. 8.1.3 TSMC Subsidiaries Unit: NT(USD, EUR, JPY, KRW, RMB, CAD)$ thousands Company TSMC North America TSMC Europe B.V. TSMC Japan Limited TSMC Korea Limited Date of Incorporation Jan. 18, 1988 Place of Registration Capital Stock Business Activities San Jose, California, U.S. US$ 11,000 Selling and marketing of integrated circuits and semiconductor devices Mar. 04, 1994 Amsterdam, the Netherlands EUR 100 Marketing and engineering supporting activities Sep. 10, 1997 May 02, 2006 Yokohama, Japan JPY 300,000 Marketing activities Seoul, Korea KRW 400,000 Customer service and technical supporting activities As of 12/31/2012 TSMC Technology, Inc. Feb. 20, 1996 InveStar Semiconductor Development Fund, Inc. Sep. 10, 1996 Delaware, U.S. Cayman Islands US$ 0.001 Engineering support activities US$ 811 Investing in new start-up technology companies InveStar Semiconductor Development Fund, Inc. (II) LDC. Aug. 25, 2000 Cayman Islands US$ 14,578 Investing in new start-up technology companies TSMC Development, Inc. WaferTech, LLC Feb. 16, 1996 Jun. 03, 1996 Delaware, U.S. Washington, U.S. US$ 0.001 Investment activities US$ 280,000 Manufacturing, selling, testing and computer-aided designing of integrated circuits and other semiconductor devices TSMC Partners, Ltd. Mar. 26, 1998 Tortola, British Virgin Islands US$ 988,268 Investing in companies involved in the design, manufacture, and other related business in the semiconductor industry TSMC Design Technology Canada Inc. TSMC Global Ltd. Xintec Inc. May 28, 2007 Jul. 13, 2006 Ontario, Canada CAD 2,434 Engineering support activities Tortola, British Virgin Islands US$ 1,284,000 Investment activities Sep. 11, 1998 Taoyuan, Taiwan NT$ 2,362,079 Wafer level chip size packaging service Mutual-Pak Technology Co., Ltd. Mar. 22, 2006 Taipei, Taiwan NT$ 268,184 Manufacturing and selling of electronic parts and researching, developing and testing of RFID Emerging Alliance Fund, L.P. VentureTech Alliance Fund II, L.P. Jan. 10, 2001 Feb. 27, 2004 Cayman Islands Cayman Islands US$ 24,507 Investing in new start-up technology companies US$ 18,106 Investing in new start-up technology companies VentureTech Alliance Fund III, L.P. Mar. 25, 2006 Cayman Islands US$ 115,111 Investing in new start-up technology companies Growth Fund Limited VentureTech Alliance Holdings, LLC May 30, 2007 Apr. 25, 2007 Cayman Islands Delaware, U.S. US$ 1,830 Investing in new start-up technology companies N/A Investing in new start-up technology companies TSMC Solar Ltd. Aug. 16, 2011 Tai-Chung, Taiwan NT$ 11,341,000 Researching, developing, designing, manufacturing and selling renewable energy and energy saving related technologies and products TSMC Solar North America, Inc. TSMC Solar Europe B.V. TSMC Solar Europe GmbH Sep. 03, 2010 Sep. 29, 2010 Dec. 17, 2010 Delaware, U.S. US$ 1 Selling and marketing of solar related products Amsterdam, the Netherlands EUR 100 Investing in solar related business Hamburg , Germany EUR 100 TSMC Solid State Lighting Ltd. Aug. 16, 2011 Hsin-Chu, Taiwan NT$ 4,530,000 TSMC Lighting North America, Inc. Sep. 03, 2010 Delaware, U.S. US$ 1 Selling of solar related products and providing customer service Researching, developing, designing, manufacturing and selling solid state lighting devices and related products and systems Selling and marketing of solid state lighting related products TSMC Guang Neng Investment, Ltd. Jan. 19, 2012 Taipei, Taiwan NT$ 100,000 Investment activities 113 8.1.4 Common Shareholders of TSMC and Its Subsidiaries with Actual of Deemed Control: None. 8.1.5 Rosters of Directors, Supervisors, and Presidents of TSMC’s Subsidiaries Unit: NT$(USD/EUR), except shareholding Company Title Name TSMC North America TSMC Europe B.V. TSMC Japan Limited TSMC Korea Limited TSMC China Company Limited TSMC Technology, Inc. InveStar Semiconductor Development Fund, Inc. InveStar Semiconductor Development Fund, Inc. (II) LDC. TSMC Development, Inc. WaferTech, LLC TSMC Partners, Ltd. TSMC Design Technology Canada Inc. TSMC Global Ltd. Director Director President Director Director Director President Director Director Supervisor President Director Director Director Chairman Director Director Supervisor President Chairman Director Director President Director Director Chairman Director President Director Director President Director Director President Director Director Director President Director Director Jason Chen Rick Cassidy Rick Cassidy Jason Chen Wendell Huang Maria Marced Maria Marced Jason Chen Makoto Onodera Lora Ho Makoto Onodera Shing-Wha Lin Chih-Chun Tsai Wendell Huang F.C. Tseng M.C. Tzeng Jason Chen Lora Ho C.H. Chen Lora Ho Richard Thurston Cliff Hou Cliff Hou Wendell Huang Wendell Huang Lora Ho Richard Thurston Lora Ho M.C. Tzeng Steve Tso Kuo-Chin Hsu Lora Ho Richard Thurston Lora Ho Cliff Hou Sreedhar Natarajan Richard Thurston Cliff Hou Lora Ho Richard Thurston 2 0 1 2 T S M C A N N U A L R E P O R T 114 Shareholding Shares (Investment Amount) - - - TSMC holds 11,000,000 shares - - - - TSMC holds 200 shares - - - - TSMC holds 6,000 shares - - - TSMC holds 80,000 shares - - - - - (TSMC’s investment US$596,000,000) - - - - TSMC Partners, Ltd. holds 10 shares - TSMC Partners, Ltd. holds 786,907 shares - TSMC Partners, Ltd. holds 14,152,996 shares - - - TSMC Partners, Ltd. holds 10 shares - - - TSMC Development, Inc.holds 293,636,833 shares - - - TSMC holds 988,268,244 shares - - - - TSMC Partners, Ltd. holds 2,300,000 shares - - TSMC holds 1,284 shares Company Xintec Inc. As of 12/31/2012 % (Investment Holding%) - - - 100% - - - - 100% - - - - 100% - - - 100% - - - - - (100%) - - - - 100% - 97.09% - 97.09% - - - 100% - - - 100% - - - 100% - - - - 100% - - 100% (Continued) Mutual-Pak Technology Co., Ltd. Emerging Alliance Fund, L.P. VentureTech Alliance Fund II, L.P. VentureTech Alliance Fund III, L.P. Growth Fund Limited VentureTech Alliance Holdings, LLC TSMC Solar Ltd. TSMC Solar North America, Inc. TSMC Solar Europe B.V. TSMC Solar Europe GmbH TSMC Solid State Lighting Ltd. TSMC Lighting North America, Inc. TSMC Guang Neng Investment, Ltd. Title Name Shareholding Shares (Investment Amount) % (Investment Holding%) Chairman Director Director Director Director Supervisor Supervisor President Chairman Director Director Supervisor President None None None None None Chairman Director Director Supervisor President Director Director President Director Director Director Director Director Director Director Chairman Director Director Supervisor President Director Director President Director Director Representative of TSMC: Robert Kuan Representative of TSMC: C.C. Wei Representative of TSMC: Lora Ho Re presentative of OmniVision Investment Holding Inc.: Xiaoying Hong Tzun Eing Chen Re presentative of VisEra Holding Company: Cheng Ho Re presentative of VisEra Holding Company: W.M. Sheng Robert Kuan Hsu-Tung Chen Lewis Hwang Re prsentative of VentureTech Alliance Fund III, L.P.: Juine-Kai Tseng Wei-Pong Lin Lewis Hwang None None None None None Rick Tsai F.C. Tseng Richard Thurston Lora Ho Ying-Chen Chao Lora Ho Richard Thurston Rick Tsai Lora Ho Richard Thurston Rick Tsai Lora Ho Richard Thurston Stephen Mckenery Ying-Chen Chao Rick Tsai F.C. Tseng Richard Thurston Lora Ho Jacob Tarn Lora Ho Richard Thurston Rick Tsai Lora Ho Richard Thurston 94,950,005 shares 94,950,005 shares 94,950,005 shares 9,809,211 shares 882,350 shares 37,235,172 shares 37,235,172 shares 0 shares 1,107,010 shares 2,508,000 shares 15,643,347 shares 30,000 shares 2,508,000 shares (TSMC’s investment US$24,384,811) (TSMC’s investment US$17,743,610) (TSMC’s investment US$57,840,721) (TSMC Solar Ltd.’s investment US$56,090,001) (VentureTech Alliance Fund III, L.P.’s investment US$1,830,000) None 1,500,000 shares - - - TSMC holds 1,118,000,000 shares TSMC Guang Neng Investment, Ltd. holds 4,294,000 shares 1,200,000 shares - - - TSMC Solar Ltd. holds 1,000 shares - - TSMC Solar Ltd. holds 200 shares - - - - - TSMC Solar Europe B.V. holds 200 shares 1,500,000 shares - - - TSMC holds 430,400,000 shares TSMC Guang Neng Investment, Ltd. holds 3,419,500 shares 1,100,000 shares - - - TSMC Solid State Lighting Ltd. holds 1,000 shares - - (TSMC’s investment NT$100,000,000) 40.20% 40.20% 40.20% 4.15% 0.37% 15.76% 15.76% 0.00% 4.13% 9.35% 58.33% 0.11% 9.35% (99.5%) (98%) (50.25%) (48.73%) (100%) (100%) 0.13% - - - 98.58% 0.38% 0.11% - - - 100% - - 100% - - - - - 100% 0.33% - - - 95.01% 0.75% 0.24% - - - 100% - - 100% 115 8.1.6 Operational Highlights of TSMC Subsidiaries (Note) Unit: NT$ thousands, except EPS ($) Company Capital Stock Assets Liabilities Net Worth Net Sales As of 12/31/2012 Income (Loss) from Operation Net Income (Loss) Basic Earning (Loss) Per Share Subsidiaries: None. 8.3 Special Notes 8.2 Status of TSMC Common Shares and ADRs Acquired, Disposed of, and Held by 319,418 45,816,861 42,607,573 3,209,288 329,949,024 251,575 312,232 28.38 8.3.1 Private Placement Securities in 2012 and as of the Date of this Annual Report: None. 8.3.2 Regulatory Authorities’ Legal Penalties to the Company or Its Employees, and the Company’s Resulting Punishment on Its Employees for Violations of Internal Control System Provisions, Principal Deficiencies, and the State of Any Efforts to Make Improvements in 2012 and as of the Date of this Annual Report The competent authorities fined a minor fine totaling NT$109,200 for very few isolated incidents of administrative errors and noncompliance with relevant rules concerning employee attendance. After communicating with the authorities, TSMC has been implementing relevant remedial measures. 8.3.3 Any Events in 2012 and as of the Date of this Annual Report that Had Significant Impacts on Shareholders’ Right or Security Prices as Stated in Item 2 Paragraph 2 of Article 36 of Securities and Exchange Law of Taiwan: None. 8.3.4 Other Necessary Supplement: None. TSMC North America TSMC Europe B.V. TSMC Japan Limited TSMC Korea Limited 3,839 100,560 10,840 323,400 190,387 28,534 87,639 47,975 1,599 235,761 142,412 26,935 396,350 271,084 20,146 42,231 12,294 1,844 3,786 2,602 34,931 174,653.71 TSMC China Company Limited 20,979,693 24,868,744 6,982,430 17,886,314 15,846,546 4,483,920 4,757,121 TSMC Technology, Inc. InveStar Semiconductor Development Fund, Inc. InveStar Semiconductor Development Fund, Inc. (II) LDC. 0.03 23,536 437,624 271,037 97,261 37,592 340,363 233,445 738,589 87,483 35,171 73,766 32,721 73,740 423,304 313,560 159 313,401 2,257 (3,564) (3,564) TSMC Development, Inc. 0.03 17,549,612 - 17,549,612 4,253,142 4,270,444 4,269,368 426,936,768.69 WaferTech, LLC TSMC Partners, Ltd. 8,130,640 8,656,151 747,096 7,909,055 8,008,777 2,218,336 4,216,650 28,697,333 38,635,609 - 38,635,609 5,089,829 5,089,586 5,088,931 TSMC Design Technology Canada Inc. 71,142 167,761 34,504 133,257 37,284,792 49,954,509 123 49,954,386 469,933 365,991.08 2,362,079 6,029,008 2,172,281 3,856,727 3,139,385 TSMC Global Ltd. Xintec Inc. Mutual-Pak Technology Co., Ltd. Emerging Alliance Fund, L.P. VentureTech Alliance Fund II, L.P. VentureTech Alliance Holdings, LLC TSMC Solar North America, Inc. TSMC Lighting North America, Inc. TSMC Solar Europe B.V. TSMC Solar Europe GmbH TSMC Solar Ltd. VentureTech Alliance Fund III, L.P. 3,342,597 2,370,773 Growth Fund Limited 53,140 12,184 268,184 711,644 525,754 74,268 168,276 573,979 - 29 29 3,839 3,839 - 67,289 2,904 175,286 185,765 15,543 76 5,745 2,550 1,482 - 23,252 40 270 14,182 58,725 168,200 568,234 2,368,223 10,702 - 44,037 2,864 175,016 171,583 TSMC Solid State Lighting Ltd. 4,530,000 3,119,709 581,824 2,537,885 TSMC Guang Neng Investment, Ltd. 100,000 65,007 - 65,007 11,341,000 7,857,963 1,763,356 6,094,607 208,086 474,384 24,703 43,558 272,644 272,034 - - 18,917 470,909 (82,101) (39,094) 30,430 92,641 12,472 (91,177) (42,056) (2,940) 62,349 (177,152) (177,152) (3,453) (4,185) - - 1,890 (64,961) (65,268) (65,268.07) - - 50,149 88,455 54,223 - (7) (263) (7) (7.00) (119,668) (598,341.12) (48,041) (119,403) (597,015.78) (1,050,889) (4,037,825) (1,485,589) (1,466,733) (57) (24,928) (3.56) (3.24) N/A 631.02 32.52 N/A 3,272,090.62 93.72 (0.25) 14.36 5.15 5.42 (0.39) (2.03) N/A N/A N/A N/A N/A Note: Foreign exchange rates for balance sheet amounts are as follows: $1 USD = $29.038 NT, $1 EUR = $38.39 NT, $1 JPY = $0.3552 NT, $1 RMB = $4.66 NT, $1 KRW = $0.0271 NT, $1 CAD = $29.23 NT Foreign exchange rates for income statement amounts are as follows: $1 USD = $29.580 NT, $1 EUR = $38.11 NT, $1 JPY = $0.372 NT, $1 RMB = $4.69 NT, $1 KRW = $0.0263 NT, $1 CAD = $29.63 NT 2 0 1 2 T S M C A N N U A L R E P O R T 116 117 TABLE OF CONTENTS 1. Condensed Balance Sheet 2. Condensed Statement of Income 3. Financial Analysis 4. Auditors’ Opinions from 2008 to 2012 5. Audit Committee’s Report 6. Financial Difficulties 7. Financial Statements for the Years Ended December 31, 2012 and 2011 and Independent Auditors’ Report 8. Consolidated Financial Statements for the Years Ended December 31, 2012 and 2011 and Independent Auditors’ Report 9. U.S. GAAP Financial Information 2 3 4 6 6 6 7 42 94 1. Condensed Balance Sheet 1.1 Condensed Balance Sheet from 2008 to 2012 (Unconsolidated) 1.2 Condensed Balance Sheet from 2008 to 2012 (Consolidated) Unit: NT$ thousands Unit: NT$ thousands Item Current Assets 2008 2009 2010 2011 2012 Item 2008 2009 2010 2011 2012 179,849,479 185,831,537 192,234,282 158,563,352 207,815,340 Current Assets 252,618,431 259,803,748 261,519,317 225,260,396 252,288,635 Long-term Investments 124,184,663 118,427,813 117,913,756 129,400,844 139,747,920 Long-term Investments 39,981,515 37,845,503 39,775,528 34,458,504 65,786,342 Fixed Assets Other Assets Total Assets Current Liabilities Before distribution After distribution Long-term Liabilities Other Liabilities Capital Stock Capital Surplus Retained Earnings Before distribution After distribution 219,282,502 254,751,526 366,854,299 454,373,533 586,603,294 17,242,603 18,415,746 24,237,329 19,070,145 12,006,629 540,559,247 577,426,622 701,239,666 761,407,874 946,173,183 53,099,467 72,571,095 118,022,260 109,514,430 138,795,878 129,975,779 150,279,215 195,752,496 187,263,098 * Fixed Assets Other Assets Total Assets Current Liabilities Before distribution After distribution 243,645,350 273,674,787 388,444,023 490,374,916 617,529,446 22,671,293 23,372,182 29,190,036 24,171,126 19,430,182 558,916,589 594,696,220 718,928,904 774,264,942 955,034,605 56,806,756 79,133,288 123,191,113 117,006,687 142,435,944 133,683,068 156,841,408 200,921,349 194,755,355 * 5,431,252 4,916,390 4,500,000 18,000,000 80,054,000 Long-term Liabilities 16,191,041 11,388,479 12,050,755 20,458,493 82,161,490 5,651,417 4,856,425 4,572,488 4,299,930 4,125,591 256,254,373 259,027,066 259,100,787 259,162,226 259,244,357 49,875,255 55,486,010 55,698,434 55,846,357 56,137,809 170,053,667 181,882,682 265,779,571 322,191,155 410,601,289 92,664,846 104,174,562 188,049,335 244,442,487 * Other Liabilities Capital Stock Capital Surplus Retained Earnings Before distribution After distribution 5,546,325 5,125,905 4,982,631 4,756,211 4,683,472 256,254,373 259,027,066 259,100,787 259,162,226 259,244,357 49,875,255 55,486,010 55,698,434 55,846,357 56,137,809 170,053,667 181,882,682 265,779,571 322,191,155 410,601,289 92,664,846 104,174,562 188,049,335 244,442,487 * Cumulative Transaction Adjustments 481,158 (1,766,667) (6,543,163) (6,433,369) (10,753,763) Cumulative Transaction Adjustments 481,158 (1,766,667) (6,543,163) (6,433,369) (10,753,763) Net Loss Not Recognized as Pension Cost - - - - (5,299) Net Loss Not Recognized as Pension Cost - - - - (5,299) Unrealized Gain/Loss on Financial Instruments Total Liabilities Before distribution After distribution Total Equity Before distribution After distribution *Pending shareholders’ approval (287,342) 453,621 109,289 (1,172,855) 7,973,321 64,182,136 82,343,910 127,094,748 131,814,360 222,975,469 141,058,448 160,052,030 204,824,984 209,563,028 * 476,377,111 495,082,712 574,144,918 629,593,514 723,197,714 399,500,799 417,374,592 496,414,682 551,844,846 * Unrealized Gain/Loss on Financial Instruments Total Liabilities Before distribution After distribution Equity Attributable to Shareholders of the Parent Before distribution After distribution Minority Interests Total Equity Before distribution After distribution *Pending shareholders’ approval (287,342) 453,621 109,289 (1,172,855) 7,973,321 78,544,122 95,647,672 140,224,499 142,221,391 229,280,906 155,420,434 173,355,792 217,954,735 219,970,059 * 476,377,111 495,082,712 574,144,918 629,593,514 723,197,714 399,500,799 417,374,592 496,414,682 551,844,846 * 3,995,356 3,965,836 4,559,487 2,450,037 2,555,985 480,372,467 499,048,548 578,704,405 632,043,551 725,753,699 403,496,155 421,340,428 500,974,169 554,294,883 * 2 2. Condensed Statement of Income 2.1 Condensed Statement of Income from 2008 to 2012 (Unconsolidated) Unit: NT$ thousands (Except EPS: NT$) 2.2 Condensed Statement of Income from 2008 to 2012 (Consolidated) Unit: NT$ thousands (Except EPS: NT$) Item Net Sales Gross Profit 2008 2009 2010 2011 2012 321,767,083 285,742,868 406,963,312 418,245,493 499,871,887 Item Net Sales 2008 2009 2010 2011 2012 333,157,660 295,742,239 419,537,911 427,080,645 506,248,580 138,177,615 126,475,970 196,989,302 185,560,865 234,308,318 Gross Profit 141,749,561 129,328,611 207,053,591 194,069,228 243,594,870 Income from Operations 106,290,232 94,522,353 154,846,508 138,905,763 176,801,770 Income from Operations 104,435,368 91,961,886 159,175,335 141,557,418 181,057,193 Non-operating Income and Gains 6,725,625 4,121,509 15,907,968 7,287,046 11,188,077 Non-operating Income and Gains 10,821,449 5,653,548 13,136,072 5,358,527 6,782,037 Non-operating Expenses and Losses 2,257,039 3,662,840 1,464,272 1,484,965 4,359,899 Non-operating Expenses and Losses 3,784,571 2,152,787 2,041,012 1,768,268 6,285,254 Interest Revenue Interest Expense 2,728,892 1,117,374 355,056 142,026 764,027 214,641 697,196 445,887 867,227 945,114 Interest Revenue Interest Expense 5,373,823 2,600,925 1,665,193 1,479,514 1,645,036 614,988 391,479 425,356 626,725 1,020,422 Income before Income Tax 110,758,818 94,981,022 169,290,204 144,707,844 183,629,948 Income before Income Tax 111,472,246 95,462,647 170,270,395 145,147,677 181,553,976 99,933,168 89,217,836 161,605,009 134,201,279 166,158,802 Net Income 100,523,237 89,466,223 162,281,930 134,453,260 165,963,689 Net Income Basic Earnings Per Share Adjusted Basic Earnings Per Share Capitalized Interest * Based on weighted average shares outstanding in each year ** Retroactively adjusted for stock dividends for earning year 2008 3.86 * 3.84 ** - 3.45 * 3.45 - 6.24 * 6.24 - 5.18 * 5.18 - 6.41 * - - Net Income Attributable to Shareholders of the Parent Basic Earnings Per Share Adjusted Basic Earnings Per Share Capitalized Interest 99,933,168 89,217,836 161,605,009 134,201,279 166,158,802 3.86 * 3.84 ** - 3.45 * 3.45 - 6.24 * 6.24 - 5.18 * 5.18 9,093 6.41 * - 6,442 * Based on weighted average shares outstanding in each year ** Retroactively adjusted for stock dividends for earning year 2008 3 3. Financial Analysis 3.1 Financial Analysis from 2008 to 2012 (Unconsolidated) Capital Structure Analysis Debt Ratio (%) Liquidity Analysis Long-term Fund to Fixed Assets Ratio (%) Current Ratio (%) Quick Ratio (%) Times Interest Earned (times) Operating Performance Analysis Average Collection Turnover (times) Days Sales Outstanding Average Inventory Turnover (times) Average Inventory Turnover Days Average Payment Turnover (times) Fixed Assets Turnover (times) Total Assets Turnover (times) Return on Total Assets (%) Return on Equity (%) Operating Income to Paid-in Capital Ratio (%) Pre-tax Income to Paid-in Capital Ratio (%) Net Margin (%) Basic Earnings Per Share (NT$) (Note) Diluted Earnings Per Share (NT$) (Note) Cash Flow Ratio (%) Cash Flow Adequacy Ratio (%) Cash Flow Reinvestment Ratio (%) Operating Leverage Financial Leverage Profitability Analysis Cash Flow Leverage Analysis of deviation of 2012 vs. 2011 over 20% : 1. The debt ratio increased by 36% as a result of increase in bonds payable. 2. The times interest earned decreased by 40%, primarily due to increase in interest expense. 3. The operating income to paid-in capital ratio increased by 27%, mainly due to increase in operating income. 4. The pre-tax income to paid-in capital ratio increased by 27%, primarily due to increase in pre-tax income. 5. The basic and diluted earnings per share both increased by 24%, mainly due to increase in net income. Note: Retroactively adjusted for stock dividends for earning year 2008. 2008 11.87 219.72 338.70 312.83 312.95 11.08 32.93 10.86 33.59 20.40 1.47 0.60 18.35 20.74 41.48 43.22 31.06 3.84 3.81 399.16 134.79 12.95 2.50 1.00 2009 14.26 196.27 256.07 228.94 669.76 11.17 32.66 10.06 36.29 18.46 1.12 0.49 15.98 18.37 36.49 36.67 31.22 3.45 3.44 214.83 122.02 6.99 2.46 1.00 2010 18.12 157.73 162.88 140.07 789.71 10.93 33.40 9.44 38.67 16.89 1.11 0.58 25.31 30.23 59.76 65.34 39.71 6.24 6.23 188.12 109.98 11.20 2.17 1.00 2011 17.31 142.52 144.79 122.41 325.54 10.40 35.09 9.61 37.97 18.17 0.92 0.55 18.40 22.30 53.60 55.84 32.09 5.18 5.18 217.99 99.13 11.07 2.54 1.00 2012 23.57 136.93 149.73 122.85 195.29 11.01 33.14 9.13 39.97 18.23 0.85 0.53 19.56 24.57 68.20 70.83 33.24 6.41 6.41 199.78 93.47 11.53 2.37 1.01 *Glossary 1. Capital Structure Analysis (1) Debt Ratio (2) Long-term Fund to Fixed Assets Ratio 2. Liquidity Analysis (1) Current Ratio (2) Quick Ratio (3) Times Interest Earned 3. Operating Performance Analysis (1) Average Collection Turnover (2) Days Sales Outstanding (3) Average Inventory Turnover = Total Liabilities / Total Assets = (Shareholders’ Equity + Long-term Liabilities) / Net Fixed Assets = Current Assets / Current Liabilities = (Current Assets - Inventories - Prepaid Expenses) / Current Liabilities (4) Average Inventory Turnover Days (5) Average Payment Turnover (6) Fixed Assets Turnover (7) Total Assets Turnover 4. Profitability Analysis (1) Return on Total Assets = 365 / Average Inventory Turnover = Cost of Sales / Average Trade Payables = Net Sales / Net Fixed Assets = Net Sales / Total Assets 5. Cash Flow (1) Cash Flow Ratio (2) Cash Flow Adequacy Ratio = (Net Income + Interest Expenses * (1 - Effective Tax Rate)) / Average Total Assets (3) Cash Flow Reinvestment Ratio (2) Return on Equity (3) Operating Income to Paid-in Capital = Net Income / Average Shareholders’ Equity = Operating Income / Paid-in Capital = Earnings before Interest and Taxes / Interest Expenses Ratio = Net Sales / Average Trade Receivables = 365 / Average Collection Turnover = Cost of Sales / Average Inventory (4) Pre-tax Income to Paid-in Capital Ratio (5) Net Margin (6) Earnings Per Share = Income before Tax / Paid-in Capital = Net Income / Net Sales = (Net Income - Preferred Stock Dividend) / WeightedAverage Number of Shares Outstanding 6. Leverage (1) Operating Leverage (2) Financial Leverage = Net Cash Provided by Operating Activities / Current Liabilities = Five-year Sum of Cash from Operations / Five-year Sum of Capital Expenditures, Inventory Additions, and Cash Dividend = (Cash Provided by Operating Activities - Cash Dividends) / (Gross Fixed Assets + Investments + Other Assets + Working Capital) = (Net Sales - Variable Cost) / Income from Operations = Income from Operations / (Income from Operations - Interest Expenses) 4 3.2 Financial Analysis from 2008 to 2012 (Consolidated) Capital Structure Analysis Debts Ratio (%) Liquidity Analysis Long-term Fund to Fixed Assets (%) Current Ratio (%) Quick Ratio (%) Times Interest Earned (times) Operating Performance Analysis Average Collection Turnover (times) Days Sales Outstanding Average Inventory Turnover (times) Average Inventory Turnover Days Average Payment Turnover (times) Fixed Assets Turnover (times) Total Assets Turnover (times) Return on Total Assets (%) Return on Equity (%) Operating Income to Paid-in Capital Ratio (%) Pre-tax Income to Paid-in Capital Ratio (%) Net Margin (%) Basic Earnings Per Share (NT$) (Note 1) Diluted Earnings Per Share (NT$) (Note 1) Cash Flow Ratio (%) Cash Flow Adequacy Ratio (%) Cash Flow Reinvestment Ratio (%) Operating Leverage Financial Leverage Profitability Analysis Cash Flow Leverage 2008 14.05 203.81 444.70 415.32 182.26 10.73 34.01 9.88 36.94 20.02 1.37 0.60 17.89 20.74 40.75 43.50 30.17 3.84 3.81 389.91 139.50 12.98 2.53 1.01 2009 16.08 186.51 328.31 300.15 244.85 10.78 33.86 9.30 39.25 18.77 1.08 0.50 15.57 18.37 35.50 36.85 30.25 3.45 3.44 202.15 126.39 6.90 2.53 1.00 2010 19.50 152.08 212.29 187.57 401.30 10.57 34.54 8.62 42.36 17.23 1.08 0.58 24.77 30.23 61.43 65.72 38.68 6.24 6.23 186.28 113.91 11.13 2.12 1.00 2011 18.37 133.06 192.52 170.06 229.27 10.06 36.29 8.75 41.70 18.77 0.87 0.55 18.08 22.30 54.62 56.01 31.48 5.18 5.18 211.60 101.93 11.12 2.50 1.00 2012 24.01 130.83 177.12 149.81 177.80 10.77 33.89 8.38 43.55 19.39 0.82 0.53 19.30 24.57 69.84 70.03 32.78 6.41 6.41 202.94 95.97 11.69 2.31 1.01 Industry Specific Key Performance Indicator Billing Utilization Rate (%) 88 (Note 2) 75 (Note 2) 101 (Note 2) 91 (Note 2) 91 (Note 2) Advanced Technologies (65-nanometer and below) Percentage of Wafer Sales (%) Sales Growth (%) Net Income Growth (%) 21 3.3 -8.5 33 -11.2 -10.7 46 41.9 81.1 56 1.8 -17.0 62 18.5 23.8 Analysis of deviation of 2012 vs. 2011 over 20% : 1. The debt ratio increased by 31% as a result of increase in bonds payable. 2. The times interest earned decreased by 22%, primarily due to increase in interest expense. 3. The operating income to paid-in capital ratio increased by 28%, mainly due to increase in operating income. 4. The pre-tax income to paid-in capital ratio increased by 25%, primarily due to increase in pre-tax income. 5. The basic and diluted earnings per share both increased by 24%, mainly due to increase in net income. Note 1: Retroactively adjusted for stock dividends for earning year 2008. Note 2: Capacity includes wafers committed by Vanguard and SSMC. *Glossary 1. Capital Structure Analysis (1) Debt Ratio (2) Long-term Fund to Fixed Assets Ratio 2. Liquidity Analysis (1) Current Ratio (2) Quick Ratio (3) Times Interest Earned 3. Operating Performance Analysis (1) Average Collection Turnover (2) Days Sales Outstanding (3) Average Inventory Turnover = Total Liabilities / Total Assets = (Shareholders’ Equity + Long-term Liabilities) / Net Fixed Assets = Current Assets / Current Liabilities = (Current Assets - Inventories - Prepaid Expenses) / Current Liabilities = Earnings before Interest and Taxes / Interest Expenses = Net Sales / Average Trade Receivables = 365 / Average Collection Turnover = Cost of Sales / Average Inventory (4) Average Inventory Turnover Days (5) Average Payment Turnover (6) Fixed Assets Turnover (7) Total Assets Turnover 4. Profitability Analysis (1) Return on Total Assets = 365 / Average Inventory Turnover = Cost of Sales / Average Trade Payables = Net Sales / Net Fixed Assets = Net Sales / Total Assets 5. Cash Flow (1) Cash Flow Ratio (2) Cash Flow Adequacy Ratio = (Net Income + Interest Expenses * (1 - Effective Tax Rate)) / Average Total Assets (3) Cash Flow Reinvestment Ratio (2) Return on Equity (3) Operating Income to Paid-in Capital Ratio = Operating Income / Paid-in Capital = Income before Tax / Paid-in Capital (4) Pre-tax Income to Paid-in Capital Ratio = Net Income / Net Sales (5) Net Margin = (Net Income - Preferred Stock Dividend) / Weighted (6) Earnings Per Share = Net Income / Average Shareholders’ Equity Average Number of Shares Outstanding 6. Leverage (1) Operating Leverage (2) Financial Leverage = Net Cash Provided by Operating Activities / Current Liabilities = Five-year Sum of Cash from Operations / Five-year Sum of Capital Expenditures, Inventory Additions, and Cash Dividend = (Cash Provided by Operating Activities - Cash Dividends) / (Gross Fixed Assets + Investments + Other Assets + Working Capital) = (Net Sales - Variable Cost) / Income from Operations = Income from Operations / (Income from Operations - Interest Expenses) 5 4. Auditors’ Opinions from 2008 to 2012 6. Financial Difficulties The Company should disclose the financial impact to the Company if the Company and its affiliated companies have incurred any financial or cash flow difficulties in 2012 and as of the date of this Annual Report: None Year 2008 2009 2010 2011 2012 CPA Hung-Peng Lin, Shu-Chieh Huang Hung-Peng Lin, Shu-Chieh Huang Hung-Peng Lin, Shu-Chieh Huang Hung-Peng Lin, Shu-Chieh Huang Hung-Peng Lin, Shu-Chieh Huang Deloitte & Touche 12F, No. 156, Sec. 3, Min-Sheng E. Rd., Taipei, Taiwan, R.O.C. Tel: 886-2-2545-9988 5. Audit Committee’s Report Audit Opinion An Unqualified Opinion with explanatory paragraph referring to adoption of new accounting standards An Unqualified Opinion with explanatory paragraph referring to adoption of new accounting standards An Unqualified Opinion An Unqualified Opinion An Unqualified Opinion The Board of Directors has prepared the Company’s 2012 Business Report, Financial Statements, and proposal for allocation of profits. The CPA firm of Deloitte & Touche was retained to audit TSMC’s Financial Statements and has issued an audit report relating to the Financial Statements. The Business Report, Financial Statements, and profit allocation proposal have been reviewed and determined to be correct and accurate by the Audit Committee members of Taiwan Semiconductor Manufacturing Company Limited. According to Article 14-4 of the Securities and Exchange Act and Article 219 of the Company Law, we hereby submit this report. Taiwan Semiconductor Manufacturing Company Limited Chairman of the Audit Committee: Sir Peter Leahy Bonfield February 5, 2013 6 7. Financial Statements for the Years Ended December 31, 2012 and 2011 and Independent Auditors’ Report INDEPENDENT AUDITORS’ REPORT 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. 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 7 Taiwan Semiconductor Manufacturing Company Limited BALANCE SHEETS DECEMBER 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars, Except Par Value) ASSETS CURRENT ASSETS Cash and cash equivalents (Notes 2 and 4) Financial assets at fair value through profit or loss (Notes 2, 5 and 23) Available-for-sale financial assets (Notes 2, 6 and 23) Held-to-maturity financial assets (Notes 2, 7 and 23) Receivables from related parties (Notes 3 and 24) Notes and accounts receivable (Note 3) Allowance for doubtful receivables (Notes 2, 3 and 8) Allowance for sales returns and others (Notes 2 and 8) Other receivables from related parties (Notes 3 and 24) Other financial assets Inventories (Notes 2 and 9) Deferred income tax assets (Notes 2 and 17) Prepaid expenses and other current assets Total current assets LONG-TERM INVESTMENTS (Notes 2, 7, 10, 11 and 23) Investments accounted for using equity method Held-to-maturity financial assets Financial assets carried at cost Total long-term investments PROPERTY, PLANT AND EQUIPMENT (Notes 2, 12 and 24) Cost Buildings Machinery and equipment Office equipment Accumulated depreciation Advance payments and construction in progress Net property, plant and equipment INTANGIBLE ASSETS Goodwill (Note 2) Deferred charges, net (Notes 2 and 13) Total intangible assets OTHER ASSETS Refundable deposits Deferred income tax assets (Notes 2 and 17) Others (Notes 2 and 24) Total other assets 2012 Amount $ 109,150,810 38,824 1,845,052 701,146 40,987,444 15,726,431 (474,037) (5,732,738) 274,963 175,261 35,296,391 7,728,464 2,097,329 207,815,340 139,264,161 - 483,759 139,747,920 173,344,932 1,202,761,097 16,683,484 1,392,789,513 (924,961,566) 118,775,347 586,603,294 1,567,756 4,882,081 6,449,837 2,394,826 2,244,947 917,019 5,556,792 2011 Amount $ 85,262,521 14,925 2,617,134 701,136 24,777,534 19,894,386 (485,120) (4,887,879) 188,028 122,010 22,853,397 5,779,544 1,725,736 158,563,352 128,200,718 702,291 497,835 129,400,844 % 11 - - - 3 3 - - - - 3 1 - 21 17 - - 17 149,495,478 984,978,666 13,824,434 1,148,298,578 (804,740,797) 110,815,752 20 129 2 151 (106) 14 454,373,533 59 1,567,756 4,719,244 6,287,000 4,491,735 7,221,824 1,069,586 12,783,145 - 1 1 1 1 - 2 % 12 - - - 4 2 - (1) - - 4 1 - 22 15 - - 15 18 127 2 147 (98) 13 62 - 1 1 - - - - LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES 2012 2011 Amount % Amount % Short-term loans (Note 14) Financial liabilities at fair value through profit or loss (Notes 2, 5 and 23) Accounts payable Payables to related parties (Note 24) Income tax payable (Notes 2 and 17) Accrued profit sharing to employees and bonus to directors (Note 19) Payables to contractors and equipment suppliers Accrued expenses and other current liabilities (Note 23) Current portion of bonds payable (Notes 15 and 23) $ 34,714,929 6,274 13,392,221 3,230,342 15,196,399 11,186,591 44,371,108 16,698,014 - 4 - 1 - 2 1 5 2 - $ 25,926,528 - 9,522,688 2,992,582 10,647,797 9,055,704 33,811,970 13,057,161 4,500,000 3 - 1 - 1 1 5 2 1 Total current liabilities 138,795,878 15 109,514,430 14 LONG-TERM LIABILITIES Bonds payable (Notes 15 and 23) Other long-term payables (Note 23) Total long-term liabilities OTHER LIABILITIES Accrued pension cost (Notes 2 and 16) Guarantee deposits Total other liabilities Total liabilities CAPITAL STOCK - NT$10 PAR VALUE (Note 19) Authorized: 28,050,000 thousand shares Issued: 25,924,435 thousand shares in 2012 25,916,222 thousand shares in 2011 CAPITAL SURPLUS (Notes 2 and 19) RETAINED EARNINGS (Note 19) Appropriated as legal capital reserve Appropriated as special capital reserve Unappropriated earnings OTHERS Cumulative translation adjustments (Note 2) Net loss not recognized as pension cost Unrealized gain/loss on financial instruments (Notes 2 and 23) Total shareholders’ equity 80,000,000 54,000 80,054,000 3,926,276 199,315 4,125,591 9 - 9 - - - 18,000,000 - 18,000,000 3,860,898 439,032 4,299,930 2 - 2 1 - 1 222,975,469 24 131,814,360 17 259,244,357 56,137,809 115,820,123 7,606,224 287,174,942 410,601,289 (10,753,763) (5,299) 7,973,321 (2,785,741) 723,197,714 27 6 12 1 30 43 (1) - 1 - 76 259,162,226 55,846,357 102,399,995 6,433,874 213,357,286 322,191,155 (6,433,369) - (1,172,855) (7,606,224) 629,593,514 34 8 13 1 28 42 (1) - - (1) 83 TOTAL $ 946,173,183 100 $ 761,407,874 100 TOTAL $ 946,173,183 100 $ 761,407,874 100 The accompanying notes are an integral part of the financial statements. 8 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) GROSS SALES (Notes 2 and 24) $ 506,697,738 $ 421,472,087 NON-OPERATING EXPENSES AND LOSSES 2012 2011 Amount % Amount % 2012 2011 Amount % Amount % 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) GROSS PROFIT BEFORE AFFILIATES ELIMINATION REALIZED (UNREALIZED) GROSS PROFIT FROM AFFILIATES (Note 2) GROSS PROFIT OPERATING EXPENSES (Notes 18 and 24) Research and development General and administrative Marketing Total operating expenses INCOME FROM OPERATIONS NON-OPERATING INCOME AND GAINS Equity in earnings of equity method investees, net (Notes 2 and 10) Settlement income (Note 26) Interest income Technical service income (Note 24) Valuation gain on financial instruments, net (Notes 2, 5 and 23) Others (Notes 2 and 24) Total non-operating income and gains 265,538,540 234,333,347 (25,029) 234,308,318 38,788,245 16,330,060 2,388,243 57,506,548 176,801,770 8,127,748 883,845 867,227 497,638 - 811,619 11,188,077 53 47 - 47 8 3 - 11 36 2 - - - - - 2 233,083,068 185,162,425 398,440 185,560,865 31,594,034 12,715,339 2,345,729 46,655,102 138,905,763 3,778,083 947,340 697,196 408,153 801,195 655,079 7,287,046 56 44 - 44 7 3 1 11 33 1 1 - - - - 2 (Continued) Impairment loss of financial assets (Notes 2, 6 and 23) Interest expense (Note 24) Impairment loss on idle assets (Note 2) Loss on disposal of property, plant and equipment (Notes 2 and 24) Foreign exchange loss, net (Note 2) Others (Note 2) $ 2,677,529 945,114 418,330 146,647 - 172,279 Total non-operating expenses and losses INCOME BEFORE INCOME TAX INCOME TAX EXPENSE (Notes 2 and 17) 4,359,899 183,629,948 17,471,146 1 - - - - - 1 37 4 $ - 445,887 - 202,901 673,085 163,092 1,484,965 144,707,844 10,506,565 NET INCOME $ 166,158,802 33 $ 134,201,279 - - - - - - - 35 3 32 EARNINGS PER SHARE (NT$, Note 22) Basic earnings per share Diluted earnings per share 2012 2011 Before Income Tax After Income Tax Before Income Tax After Income Tax $ 7.08 $ 7.08 $ 6.41 $ 6.41 $ 5.58 $ 5.58 $ 5.18 $ 5.18 The accompanying notes are an integral part of the financial statements. (Concluded) 9 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) Capital Stock - Common Stock Retained Earnings Shares (In Thousands) Capital Surplus Amount Legal Capital Reserve Special Capital Reserve Unappropriated Earnings Total Cumulative Translation Adjustments Others Net Loss Not Recognized as Pension Cost Unrealized Gain/Loss on Financial Instruments Treasury Stock Total Shareholders’ Equity 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 Special capital reserve Cash dividends to shareholders - NT$3.00 per share Net income in 2011 Adjustment arising from changes in percentage of ownership in equity method investees Translation adjustments Issuance of stock from exercising employee stock options Net changes of valuation gain/loss on available-for-sale financial assets Net change in shareholders’ equity from equity method investees Acquisition of treasury stock - shareholders executed the appraisal right Retirement of treasury stock Effect of spin-off - - - - - - 7,144 - - - (1,000) - - - - - - - 71,439 - - - (10,000) - - - - - 16,160,501 - - - - 5,120,827 - - (16,160,501) (5,120,827) (77,730,236) 134,201,279 - - (77,730,236) 134,201,279 59,898 - 146,258 - - - (2,139) (56,094) - - - - - - - - - - - - - - - - - - - - - - - - - - - (59,459) - - (59,459) - - - - - - (112,326) - - - - - 222,120 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) Appropriations of prior year’s earnings Legal capital reserve Special capital reserve Cash dividends to shareholders - NT$3.00 per share Net income in 2012 Adjustment arising from changes in percentage of ownership in equity method investees Translation adjustments Issuance of stock from exercising employee stock options Net changes of valuation gain/loss on available-for-sale financial assets Net change in shareholders’ equity from equity method investees - - - - - - 8,213 - - - - - - - - 82,131 - - - - - - 13,420,128 - - - - 1,172,350 - - (13,420,128) (1,172,350) (77,748,668) 166,158,802 - - (77,748,668) 166,158,802 131,095 - 160,357 - - - - - - - - - - - - - - - - - - - - - - - - - - - (4,320,394) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (1,112,995) (165,851) - - (3,298) (1,172,855) - - - - - - - 1,998,347 (5,299) 7,147,829 - - - - - - - - - (71,598) 71,598 - - - - - - - - - - - - - (77,730,236) 134,201,279 59,898 (112,326) 217,697 (1,112,995) (165,851) (71,598) - 162,728 629,593,514 - - (77,748,668) 166,158,802 131,095 (4,320,394) 242,488 1,998,347 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. 10 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 2012 2011 CASH FLOWS FROM OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash provided by operating activities: $ 166,158,802 $ 134,201,279 Depreciation and amortization Unrealized (realized) gross profit from affiliates Amortization of premium/discount of financial assets Gain on disposal of available-for-sale financial assets Loss on disposal of financial assets carried at cost Equity in earnings of equity method investees, net Cash dividends received from equity method investees Loss on disposal of property, plant and equipment and other assets, net Impairment loss of financial assets Impairment loss on idle assets Deferred income tax Changes in operating assets and liabilities: Financial assets and liabilities at fair value through profit or loss Receivables from related parties Notes and accounts receivable Allowance for doubtful receivables Allowance for sales returns and others Other receivables from related parties Other financial assets Inventories Prepaid expenses and other current assets Accounts payable Payables to related parties Income tax payable Accrued profit sharing to employees and bonus to directors Accrued expenses and other current liabilities Accrued pension cost 124,399,879 25,029 2,281 (110,634) 269 (8,127,748) 1,688,878 125,488 2,677,529 418,330 2,618,657 (17,625) (16,209,910) 4,167,955 (11,083) 844,859 (89,347) (53,251) (12,442,994) (371,593) 1,361,012 (67,770) 4,548,602 2,130,887 3,556,824 65,378 102,925,423 (398,440) 9,860 (35,151) - (3,778,083) 2,941,548 99,884 - - (493,026) (22,759) 956,440 2,356,519 (2,880) (2,453,565) (38,049) 138,196 2,775,646 (382,852) (1,805,422) 418,132 3,538,928 (1,903,765) (410,047) 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 Acquisitions of: Property, plant and equipment Investments accounted for using equity method Financial assets carried at cost Proceeds from return of capital by investees Proceeds from disposal or redemption of: Available-for-sale financial assets Held-to-maturity financial assets Financial assets carried at cost Property, plant and equipment and other assets Increase in deferred charges Decrease in refundable deposits Decrease in other assets - (1,270,340) (242,063,668) (2,259,244) (1,093) 587,902 612,834 700,000 14,900 93,984 (1,743,043) 2,096,909 17,600 (202,757,541) (7,390,883) - 320,013 1,035,151 4,789,000 - 4,650,078 (1,658,296) 4,147,014 27,600 Net cash used in investing activities (241,942,919) (198,108,204) (Continued) CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in short-term loans Cash dividends Proceeds from issuance of bonds Repayment of bonds Decrease in guarantee deposits Proceeds from exercise of employee stock options Acquisition of treasury stock $ 8,788,401 (77,748,668) 62,000,000 (4,500,000) (239,717) 242,488 - $ (4,982,109) (77,730,236) 18,000,000 - (308,855) 217,697 (71,598) Net cash used in financing activities (11,457,496) (64,875,101) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 23,888,289 85,262,521 (24,248,609) 109,511,130 CASH AND CASH EQUIVALENTS, END OF YEAR $ 109,150,810 $ 85,262,521 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid Income tax paid INVESTING ACTIVITIES AFFECTING BOTH CASH AND NON-CASH ITEMS Acquisition of property, plant and equipment Decrease (increase) in payables to contractors and equipment suppliers Increase in payables to related parties Nonmonetary exchange trade-out price Cash paid Disposal of property, plant and equipment and other assets Decrease in other receivables to related parties Decrease in other financial assets Nonmonetary exchange trade-out price Cash received Acquisition of deferred charges Increase in accounts payable Increase in payables to related parties Increase in other long-term payables Cash paid NON-CASH INVESTING AND FINANCING ACTIVITIES Idle assets reclassified from property, plant and equipment Current portion of other long-term payables (under accrued expenses and other current liabilities) Current portion of bonds payable $ 670,165 $ 10,312,114 $ 369,085 $ 7,454,386 $ 255,108,068 (12,764,075) (280,256) (69) $ 242,063,668 $ 195,932,728 6,827,106 - (2,293) $ 202,757,541 $ 91,641 2,412 - (69) $ 93,984 $ 3,370,165 1,124,206 158,000 (2,293) $ 4,650,078 $ 2,184,901 (303,584) (25,274) (113,000) $ 1,743,043 $ 1,658,296 - - - $ 1,658,296 $ 418,330 $ - $ 59,000 $ - $ - $ 4,500,000 (Continued) 11 SUPPLEMENTAL INFORMATION FOR SPIN-OFF BUSINESSES Taiwan Semiconductor Manufacturing Company Limited 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: Acquired investments accounted for using equity method Non-cash items transferred Current assets Long-term investments Property, plant and equipment Other assets Current liabilities Other liabilities Capital surplus Unrealized gain/loss on financial instruments Cumulative translation adjustments TSMC SSL TSMC Solar Total $ 2,270,000 $ 11,180,000 $ 13,450,000 36,050 2,872 1,929,563 234,696 (292,728) (36,272) - - 256 (1,874,437) 18,807 7,912,710 2,372,214 201,677 (337,439) (25,218) (56,094) (3,298) 221,864 (10,305,223) 54,857 7,915,582 4,301,777 436,373 (630,167) (61,490) (56,094) (3,298) 222,120 (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) 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. 12 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. 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. 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. 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. 13 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. 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. 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. 14 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. 3. ACCOUNTING CHANGES 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. 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. 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. 4. CASH AND CASH EQUIVALENTS Cash and deposits in banks Repurchase agreements collateralized by corporate bonds Repurchase agreements collateralized by short-term commercial paper Repurchase agreements collateralized by government bonds $ 105,873,048 2,660,042 349,341 268,379 December 31 2012 2011 $ 81,467,607 - - 3,794,914 $ 109,150,810 $ 85,262,521 5. FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS Trading financial assets Forward exchange contracts Cross currency swap contracts Trading financial liabilities Forward exchange contracts Cross currency swap contracts December 31 2012 2011 $ 37,877 947 $ 14,925 - $ 38,824 $ 14,925 $ 3,572 2,702 $ - - $ 6,274 $ - 15 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) 8. ALLOWANCES FOR DOUBTFUL RECEIVABLES, SALES RETURNS AND OTHERS Movements of the allowance for doubtful receivables were as follows: Balance, beginning of year Write-off Balance, end of year Years Ended December 31 2012 2011 $ 485,120 (11,083) $ 488,000 (2,880) $ 474,037 $ 485,120 January 2013 NT$9,417,062/EUR246,000 Movements of the allowance for sales returns and others were as follows: Balance, beginning of year Provision Write-off Balance, end of year 9. INVENTORIES Finished goods Work in process Raw materials Supplies and spare parts Years Ended December 31 2012 2011 $ 4,887,879 6,825,851 (5,980,992) $ 7,341,444 3,226,594 (5,680,159) $ 5,732,738 $ 4,887,879 December 31 2012 $ 5,936,018 24,442,123 3,666,048 1,252,202 2011 $ 3,250,637 16,971,209 1,593,393 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$74,861 thousand was reversed in the cost of sales for the year ended December 31, 2011 when the related inventory items were scrapped or sold. December 31, 2012 Sell NT$/Buy EUR December 31, 2011 Sell EUR/Buy NT$ January 2012 EUR38,600/NT$1,528,206 Outstanding cross currency swap contracts consisted of the following: Maturity Date December 31, 2012 Contract Amount (In Thousands) Range of Interest Rates Paid Range of Interest Rates Received 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 $ 701,146 (701,146) $ 1,403,427 (701,136) $ - $ 702,291 Corporate bonds Current portion 16 10. INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD For the years ended December 31, 2012 and 2011, equity in earnings of equity method investees was December 31 a net gain of NT$8,127,748 thousand and NT$3,778,083 thousand, respectively. 2012 2011 As of December 31, 2012 and 2011, the quoted market price of publicly traded stocks in unrestricted Carrying Amount % of Ownership Carrying Amount % of Ownership investments accounted for using the equity method (VIS and GUC) were NT$17,350,833 thousand and NT$11,273,200 thousand, respectively. TSMC Global Ltd. (TSMC Global) TSMC Partners, Ltd. (TSMC Partners) TSMC China Company Limited (TSMC China) Vanguard International Semiconductor Corporation (VIS) Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) TSMC Solar TSMC North America TSMC SSL Xintec Inc. (Xintec) Global UniChip Corporation (GUC) VentureTech Alliance Fund III, L.P. (VTAF III) VentureTech Alliance Fund II, L.P. (VTAF II) TSMC Europe B.V. (TSMC Europe) Emerging Alliance Fund, L.P. (Emerging Alliance) TSMC Japan Limited (TSMC Japan) TSMC Guang Neng Investment, Ltd. (TSMC GN) TSMC Korea Limited (TSMC Korea) $ 49,954,386 38,635,129 17,828,683 9,462,038 6,710,956 6,031,369 3,209,288 2,411,212 1,550,313 1,222,972 1,047,285 563,056 235,761 167,359 142,412 65,007 26,935 100 100 100 40 39 99 100 95 40 35 50 98 100 99 100 100 100 $ 44,071,845 34,986,964 13,542,181 8,988,007 6,289,429 10,153,244 2,981,639 1,746,893 1,606,694 1,157,188 1,311,044 762,135 205,171 213,235 161,601 - 23,448 100 100 100 39 39 100 100 100 40 35 53 98 100 99 100 - 100 $ 139,264,161 $ 128,200,718 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: Balance, beginning of year Amortizations Effect of spin-off Balance, end of year Years Ended December 31 2012 2011 $ 275,584 (172,492) - $ 2,504,496 (721,482) (1,507,430) $ 103,092 $ 275,584 Movements of the difference allocated to goodwill were as follows: 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. Balance, beginning of year Effect of spin-off Balance, end of year To foster a stronger sense of corporate entrepreneurship and facilitate business specializations in 11. FINANCIAL ASSETS CARRIED AT COST 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. Non-publicly traded stocks Mutual funds Years Ended December 31 2012 2011 $ 1,061,885 - $ 1,415,565 (353,680) $ 1,061,885 $ 1,061,885 December 31 2012 2011 $ 338,584 145,175 $ 338,584 159,251 $ 483,759 $ 497,835 17 12. PROPERTY, PLANT AND EQUIPMENT Cost Buildings Machinery and equipment Office equipment Accumulated depreciation Buildings Machinery and equipment Office equipment Advance payments and construction in progress Year Ended December 31, 2012 Balance, Beginning of Year Additions Disposals Reclassification Balance, End of Year $ 149,495,478 984,978,666 13,824,434 1,148,298,578 $ 23,886,199 219,868,105 3,348,864 $ 247,103,168 $ (25,671) (1,649,440) (489,814) $ (2,164,925) $ (11,074) (436,234) - $ (447,308) $ 173,344,932 1,202,761,097 16,683,484 1,392,789,513 90,274,267 704,885,017 9,581,513 804,740,797 110,815,752 $ 9,428,212 111,325,894 1,617,053 $ 122,371,159 $ 8,004,900 $ (24,403) (1,607,195) (489,814) $ (2,121,412) $ (45,305) $ (164) (28,814) - $ (28,978) $ - 99,677,912 814,574,902 10,708,752 924,961,566 118,775,347 $ 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 $ 128,646,942 852,733,592 11,730,537 993,111,071 $ 22,343,302 135,641,295 2,495,001 $ 160,479,598 $ (36,929) (2,079,115) (362,032) $ (2,478,076) $ (388) (17,225) - $ (17,613) $ (1,457,449) (1,299,881) (39,072) $ (2,796,402) $ 149,495,478 984,978,666 13,824,434 1,148,298,578 81,347,877 616,495,207 8,762,361 706,605,445 $ 8,966,377 90,613,430 1,184,310 $ 100,764,117 $ (14,293) (2,025,728) (362,031) $ (2,402,052) $ (55) (5,569) - $ (5,624) $ (25,639) (192,323) (3,127) $ (221,089) 90,274,267 704,885,017 9,581,513 804,740,797 Cost Buildings Machinery and equipment Office equipment Accumulated depreciation Buildings Machinery and equipment Office equipment Ad vance 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 Software and system design costs Patent and others $ 1,617,310 2,316,571 785,363 $ - 1,772,958 411,943 $ (390,723) (1,117,478) (513,863) $ - (57,438) 57,438 $ 1,226,587 2,914,613 740,881 $ 4,719,244 $ 2,184,901 $ (2,022,064) $ - $ 4,882,081 Technology license fees So ftware and system design costs Patent and others Year Ended December 31, 2011 Balance, Beginning of Year Additions Amortization Disposals Effect of Spin-off Balance, End of Year $ 2,277,832 $ 10,308 $ (670,830) $ - $ - $ 1,617,310 2,075,935 1,102,660 1,324,958 323,030 (1,064,884) (416,630) (46) - (19,392) (223,697) 2,316,571 785,363 $ 5,456,427 $ 1,658,296 $ (2,152,344) $ (46) $ (243,089) $ 4,719,244 14. SHORT-TERM LOANS 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 15. BONDS PAYABLE December 31 2012 2011 $ 34,714,929 $ 25,926,528 Domestic unsecured bonds: Issued in September 2011 and repayable in September 2016, 1.40% interest payable annually $ 10,500,000 $ 10,500,000 December 31 2012 2011 Issued in September 2011 and repayable in September 2018, 1.63% interest payable annually Issued in January 2012 and repayable in January 2017, 1.29% interest payable annually Issued in January 2012 and repayable in January 2019, 1.46% interest payable annually Issued in August 2012 and repayable in August 2017, 1.28% interest payable annually Issued in August 2012 and repayable in August 2019, 1.40% interest payable annually Issued in September 2012 and repayable in September 2017, 1.28% interest payable annually Issued in September 2012 and repayable in September 2019, 1.39% interest payable annually Issued in October 2012 and repayable in October 2022, 1.53% interest payable annually Issued in January 2002 and repayable in January 2012, 3.00% interest payable annually Current portion 7,500,000 10,000,000 7,000,000 9,900,000 9,000,000 12,700,000 9,000,000 4,400,000 - 80,000,000 - 7,500,000 - - - - - - - 4,500,000 22,500,000 (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. 18 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. c. Actuarial assumptions at December 31, 2012 and 2011 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 Service cost Interest cost Projected return on plan assets Amortization Net periodic pension cost 2012 2011 $ 125,895 156,773 (61,664) 62,694 $ 131,975 164,372 (67,051) 73,306 Discount rate used in determining present values Future salary increase rate Expected rate of return on plan assets d. Contributions to the Fund for the year e. Payments from the Fund for the year 17. INCOME TAX 2012 1.75% 3.00% 2.00% 2011 1.75% 3.00% 2.00% 2012 2011 $ 214,782 $ 209,260 2012 2011 $ 26,119 $ 7,339 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: Income tax expense based on “income before income tax” at statutory rate (17%) Tax effect of the following: Tax-exempt income Temporary and permanent differences Additional income tax under the Alternative Minimum Tax Act Additional tax at 10% on unappropriated earnings Income tax credits used Years Ended December 31 2012 2011 $ 31,217,091 $ 24,600,334 (8,360,834) (2,852,308) - 4,186,013 (9,580,742) (13,231,821) (1,429,188) 286,827 6,259,344 (6,259,344) $ 283,698 $ 302,602 Income tax currently payable $ 14,609,220 $ 10,226,152 b. Reconciliation of funded status of the plans and accrued pension cost at December 31, 2012 and 2011 b. Income tax expense consisted of the following: Benefit obligation Vested benefit obligation Nonvested benefit obligation Accumulated benefit obligation Additional benefits based on future salaries Projected benefit obligation Fair value of plan assets Funded status Unrecognized net transition obligation Prior service cost Unrecognized net loss Accrued pension cost Vested benefit 2012 2011 $ 375,523 5,971,564 6,347,087 3,584,608 9,931,695 (3,264,786) 6,666,909 (65,429) 138,133 (2,813,337) $ 280,629 5,356,405 5,637,034 3,389,649 9,026,683 (3,039,871) 5,986,812 (73,599) 145,259 (2,197,574) $ 3,926,276 $ 3,860,898 $ 420,158 $ 312,213 Income tax currently payable Income tax adjustments on prior years Other income tax adjustments Net change in deferred income tax assets Investment tax credits Temporary differences Valuation allowance Effect of spin-off Income tax expense Years Ended December 31 2012 2011 $ 14,609,220 48,609 194,660 $ 10,226,152 464,078 309,361 7,067,886 81,752 (4,530,981) - 1,795,254 27,284 (2,314,671) (893) $ 17,471,146 $ 10,506,565 19 c. Deferred income tax assets consisted of the following: d. Integrated income tax information: December 31 2012 2011 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. Current deferred income tax assets Investment tax credits Temporary differences Allowance for sales returns and others Unrealized loss on inventories Unrealized loss on financial instruments, net Others Noncurrent deferred income tax assets Investment tax credits Temporary differences Depreciation Others Valuation allowance $ 6,179,000 $ 4,892,158 687,929 359,823 224,694 277,018 488,788 - 308,929 89,669 $ 7,728,464 $ 5,779,544 $ 6,933,074 $ 15,287,802 819,231 299,752 (5,807,110) 2,044,680 227,433 (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. 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. 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 Statute for Upgrading Purchase of machinery and Industries equipment Total Creditable Amount Remaining Creditable Amount Expiry Year $ 6,503,176 7,006,655 482,351 $ 916,499 7,006,655 482,351 2013 2014 2015 $ 13,992,182 $ 8,405,505 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. Statute for Upgrading Research and development Industries expenditures $ 1,148,374 4,706,569 $ - 4,706,569 2012 2013 $ 5,854,943 $ 4,706,569 Statute for Upgrading Personnel training expenditures $ 17,391 $ - 2012 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. Industries Statute for Industrial Innovation Research and development $ 2,828,300 $ - 2012 expenditures g. The profits generated from the following projects are exempt from income tax for a five-year period: Construction and expansion of 2004 Construction and expansion of 2005 Construction and expansion of 2006 Tax-exemption Period 2008 to 2012 2010 to 2014 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. 20 18. LABOR COST, DEPRECIATION AND AMORTIZATION Capital surplus consisted of the following: Labor cost Salary and bonus Labor and health insurance Pension Meal Welfare Others Depreciation Amortization Labor cost Salary and bonus Labor and health insurance Pension Meal Welfare Others Depreciation Amortization Year Ended December 31, 2012 Classified as Cost of Sales Classified as Operating Expenses Total $ 27,681,298 1,509,487 946,117 678,279 259,656 36,051 $ 19,198,385 920,024 543,174 293,917 153,907 57,676 $ 46,879,683 2,429,511 1,489,291 972,196 413,563 93,727 $ 31,110,888 $ 21,167,083 $ 52,277,971 $ 111,929,312 $ 1,273,689 $ 10,441,847 $ 748,375 $ 122,371,159 $ 2,022,064 Additional paid-in capital From merger From convertible bonds From long-term investments Donations December 31 2012 $ 23,934,607 22,804,510 8,892,847 505,790 55 2011 $ 23,774,250 22,804,510 8,892,847 374,695 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; Year Ended December 31, 2011 Classified as Cost of Sales Classified as Operating Expenses b. Special capital reserve in accordance with relevant laws or regulations or as requested by the authorities in Total charge; $ 23,511,116 1,225,757 899,039 640,257 230,762 294,010 $ 16,780,285 713,298 523,178 273,002 137,019 143,151 $ 40,291,401 1,939,055 1,422,217 913,259 367,781 437,161 $ 26,800,941 $ 18,569,933 $ 45,370,874 $ 93,898,048 $ 1,407,787 $ 6,858,236 $ 744,557 $ 100,756,284 $ 2,152,344 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. 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. 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. 21 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 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$71,351 thousand in cash for 2012, respectively. There is no significant difference between the aforementioned resolved amounts and the amounts charged against earnings of 2012. The appropriations of earnings, profit sharing to employees and bonus to directors for 2012 are to be resolved in the shareholders’ meeting held on June 11, 2013 (expected). The information about the appropriations of profit sharing to employees and bonus to directors is available at the Market Observation Post System website. Under the Integrated Income Tax System that became effective on January 1, 1998, R.O.C. resident shareholders are allowed a tax credit for their proportionate share of the income tax paid by the Company on earnings generated since January 1, 1998. The appropriations of earnings for 2011 and 2010 had been approved in the shareholders’ meetings held on June 12, 2012 and June 9, 2011, respectively. The appropriations and dividends per share were as follows: 20. STOCK-BASED COMPENSATION PLANS Appropriation of Earnings Dividends Per Share (NT$) For Fiscal Year 2011 For Fiscal Year 2010 For Fiscal Year 2011 For Fiscal Year 2010 Legal capital reserve Special capital reserve Cash dividends to shareholders $ 13,420,128 1,172,350 77,748,668 $ 16,160,501 5,120,827 77,730,236 $ 92,341,146 $ 99,011,564 $ 3.00 $ 3.00 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 $ 16,615,880 (4,820,483) 77,773,307 $ 89,568,704 $ 3.00 Legal capital reserve Special capital reserve Cash dividends to shareholders 22 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. Information about outstanding options for the years ended December 31, 2012 and 2011 was as follows: Year ended December 31, 2012 Balance, beginning of year Options exercised Options canceled Balance, end of year Year ended December 31, 2011 Balance, beginning of year Options exercised Balance, end of year Number of Options (In Thousands) Weighted-average Exercise Price (NT$) 14,293 (8,213) (135) 5,945 21,437 (7,144) 14,293 $ 31.4 29.5 34.6 34.6 $ 31.4 30.5 32.1 The number of outstanding options and exercise prices have been adjusted to reflect the distribution of earnings in accordance with the plans. 22. EARNINGS PER SHARE EPS is computed as follows: As of December 31, 2012, information about outstanding options was as follows: Range of Exercise Price (NT$) $20.2-$28.3 38.0- 50.1 Options Outstanding Number of Options (In Thousands) Weighted-average Remaining Contractual Life (Years) 3,362 2,583 5,945 0.4 2.0 1.1 Weighted-average Exercise Price (NT$) $ 25.9 45.8 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: Amounts (Numerator) Before Income Tax After Income Tax Number of Shares (Denominator) (In Thousands) EPS (NT$) Before Income Tax After Income Tax Year ended December 31, 2012 Basic EPS Earnings available to common shareholders Effect of dilutive potential common shares $ 183,629,948 - $ 166,158,802 - 25,920,735 7,201 $ 7.08 $ 6.41 Diluted EPS Earnings available to common shareholders (including effect of dilutive potential common shares) Year ended December 31, 2011 Basic EPS $ 183,629,948 $ 166,158,802 25,927,936 $ 7.08 $ 6.41 Earnings available to common shareholders Effect of dilutive potential common shares $ 144,707,844 - $ 134,201,279 - 25,914,076 10,606 $ 5.58 $ 5.18 Valuation assumptions: Expected dividend yield Expected volatility Risk free interest rate Expected life Net income: Net income as reported Pro forma net income Earnings per share (EPS) - after income tax (NT$): Basic EPS as reported Pro forma basic EPS Diluted EPS as reported Pro forma diluted EPS 21. TREASURY STOCK Purpose of Treasury Stock Year ended December 31, 2011 1.00%-3.44% 43.77%-46.15% 3.07%-3.85% 5 years 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 Years Ended December 31 2012 2011 $ 166,158,802 165,986,009 $ 134,201,279 134,146,490 $ 6.41 6.40 6.41 6.40 $ 5.18 5.18 5.18 5.17 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: Number of Shares, Beginning of Year Addition Retirement (Shares in Thousands) Number of Shares, End of Year Assets December 31 2012 2011 Carrying Amount Fair Value Carrying Amount Fair Value 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. Financial assets at fair value through profit or loss Available-for-sale financial assets Held-to-maturity financial assets Financial assets carried at cost $ 38,824 1,845,052 701,146 483,759 $ 38,824 1,845,052 708,973 - $ 14,925 2,617,134 1,403,427 497,835 $ 14,925 2,617,134 1,426,474 - Liabilities Financial liabilities at fair value through profit or loss Bonds payable (including current portion) Other long-term payables (including current portion) 6,274 80,000,000 113,000 6,274 80,343,413 113,000 - 22,500,000 - - 22,597,115 - 23 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. Year Ended December 31, 2011 From Available-for-sale Financial Assets Equity-method Investments Total Balance, beginning of year Recognized directly in shareholders’ equity Removed from shareholders’ equity and recognized in earnings Effect of spin-off $ (395,306) (1,077,844) (35,151) - $ 504,595 (165,851) - (3,298) $ 109,289 (1,243,695) (35,151) (3,298) Balance, end of year $ (1,508,301) $ 335,446 $ (1,172,855) 3) The fair values of those derivatives are determined using valuation techniques incorporating estimates and assumptions that were consistent with prevailing market conditions. f. Information about financial risks 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. 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. c. Valuation gains/losses arising from changes in fair value of derivatives contracts determined using 2) Credit risk. Credit risk represents the potential loss that would be incurred by the Company if the 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. 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 Recognized directly in shareholders’ equity Removed from shareholders’ equity and recognized in earnings $ (1,508,301) (132,176) 2,130,523 $ 335,446 7,147,829 - $ (1,172,855) 7,015,653 2,130,523 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. 24. RELATED PARTY TRANSACTIONS The Company engages in business transactions with the following related parties: Balance, end of year $ 490,046 $ 7,483,275 $ 7,973,321 a. Subsidiaries 24 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: Research and development expenses TSMC Technology (primarily consulting fee) TSMC Canada (primarily consulting fee) TSMC Europe (primarily consulting fee) VIS (rent) Others Marketing expenses - commission TSMC Europe TSMC Japan TSMC China Others Sales of property, plant and equipment and other assets TSMC China VIS VisEra Others Purchases of property, plant and equipment and other assets TSMC China GUC TSMC Solar VIS Others 2012 2011 Amount % Amount % Non-operating income and gains For the year Sales TSMC North America Others Purchases TSMC China WaferTech VIS SSMC Others Manufacturing expenses Xintec (outsourcing and rent) VisEra (outsourcing) VIS (rent) Others $ 326,768,469 4,567,656 $ 331,336,125 $ 15,708,447 8,026,114 4,475,674 3,638,633 - $ 31,848,868 $ 180,768 14,586 - 230 $ 195,584 64 1 65 26 14 8 6 - 54 - - - - - $ 234,902,043 3,882,801 $ 238,784,844 $ 10,392,189 7,305,879 5,577,762 3,949,176 124,673 $ 27,349,679 $ 260,250 14,588 5,902 - $ 280,740 56 1 57 21 15 12 8 - 56 - - - - - (Continued) VIS (primarily technical service income) SSMC (primarily technical service income) TSMC China (primarily technical service income and gains on disposal $ 261,780 221,210 of property, plant and equipment) Others Non-operating expenses and losses TSMC China (losses on disposal of property, plant and equipment) Xintec (settlement loss) Others 984 14,746 $ 498,720 $ 18,699 - 132 $ 18,831 As of December 31 Receivables TSMC North America Others $ 40,748,905 238,539 99 1 $ 24,661,104 116,430 99 1 $ 40,987,444 100 $ 24,777,534 100 (Continued) 25 2012 2011 Amount % Amount % $ 713,323 206,894 49,763 - 18,373 $ 988,353 $ 345,906 277,374 72,373 20,643 $ 716,296 $ 46,941 14,531 9,000 10 $ 70,482 $ 216,084 47,051 14,448 - 1,224 $ 278,807 2 1 - - - 3 14 12 3 1 30 51 16 10 - 77 - - - - - - 2 2 - - 4 - - - - $ 534,804 192,616 45,489 1,984 30,605 $ 805,498 $ 357,582 284,644 64,907 22,049 $ 729,182 $ 2,885,847 36,008 - 73,133 $ 2,994,988 $ 70,491 1,812 - 45,473 - $ 117,776 $ 227,024 193,781 96,050 11,211 $ 528,066 $ - 19,686 - $ 19,686 2 1 - - - 3 15 12 3 1 31 86 1 - 2 89 - - - - - - 3 3 1 - 7 - 1 - 1 2012 Amount $ 122,893 88,827 56,799 2,686 1,594 2,164 2011 Amount $ 87,507 23,887 34,260 23,688 14,196 4,490 % 45 32 21 1 1 - % 46 13 18 13 8 2 The Company borrowed funds from related parties (classified under other payables to related parties). Additional disclosures consisted of the following: Financing Name Maximum Balance (In Thousands) Ending Balance Interest Rate Interest Expense Interest Payable TSMC Global $ 5,807,600 $ - 0.3911% $ 4,870 $ - Year Ended December 31, 2012 (US$ 200,000) $ 274,963 100 $ 188,028 100 Year Ended December 31, 2011 Other receivables VIS TSMC North America SSMC TSMC China WaferTech Others Payables TSMC China WaferTech VIS SSMC Others Deferred credits (other assets) TSMC China VIS VisEra Others $ 1,616,342 580,064 364,790 351,389 317,757 50 18 11 11 10 $ 946,826 420,459 987,937 336,037 301,323 32 14 33 11 10 $ 3,230,342 100 $ 2,992,582 100 $ 17,271 (7,806) 948 8 2 (1) - - $ (1,493) - - - $ 10,421 1 $ (1,493) - - - - - (Concluded) 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. 26 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: Salaries, incentives and special compensation Bonus Years Ended December 31 2012 2011 $ 757,984 538,077 $ 654,972 445,681 $ 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. 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 2013 2014 2015 2016 2017 2018 and thereafter Amount $ 485,963 468,143 457,694 447,531 409,829 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. 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: Current assets Long-term investments Property, plant and equipment Other assets Current liabilities Other liabilities Capital surplus Unrealized gain/loss on financial instruments Cumulative translation adjustments TSMC SSL TSMC Solar Total $ 431,613 2,872 1,929,563 234,696 (292,728) (36,272) - - 256 $ 893,584 7,912,710 2,372,214 201,677 (337,439) (25,218) (56,094) (3,298) 221,864 $ 1,325,197 7,915,582 4,301,777 436,373 (630,167) (61,490) (56,094) (3,298) 222,120 $ 2,270,000 $ 11,180,000 $ 13,450,000 27 28. EXCHANGE RATE INFORMATION OF FOREIGN-CURRENCY FINANCIAL ASSETS h. Receivables from related parties amounting to at least NT$100 million or 20% of the paid-in capital: AND LIABILITIES Please see Table 6 attached; 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) $ 2,255,391 117,136 35,290,837 492,014 3,445,339 6,141 424,858 3,838,265 2,171,316 245,237 43,052,403 29.038 38.39 0.3352 3.75 29.038 38.39 0.3352 4.66 29.038 38.39 0.3352 $ 1,566,212 124,425 33,073,336 671,060 2,983,866 5,225 414,680 2,823,953 1,626,129 106,931 34,942,421 30.288 39.27 0.3897 3.90 30.288 39.27 0.3897 4.81 30.288 39.27 0.3897 Financial assets Monetary items USD EUR JPY Non-monetary items HKD Investments accounted for using equity method USD EUR JPY RMB Financial liabilities Monetary items USD EUR JPY 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: Sell US$/Buy RMB Maturity Date January 2013 Contract Amount (In Thousands) 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$5,068 thousand. Note: Exchange rate represents the number of N.T. dollars for which one foreign currency could be exchanged. 2) Xintec 29. ADDITIONAL DISCLOSURES Following are the additional disclosures required by the SFB for the Company and its investees: a. Financings provided: Please see Table 1 attached; b. Endorsement/guarantee provided: None; c. Marketable securities held: Please see Table 2 attached; Xintec entered into forward exchange contracts during the year ended December 31, 2012 to manage exposures due to foreign exchange rate fluctuations. Outstanding forward exchange contracts as of December 31, 2012 consisted of the following: Sell US$/Buy NT$ January 2013 to March 2013 US$13,700/NT$398,239 Maturity Date Contract Amount (In Thousands) For the year ended December 31, 2012, net gains arising from forward exchange contracts of Xintec amounted to NT$19,339 thousand. 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; 3) TSMC Partners 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; 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. 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: For the year ended December 31, 2012, net losses arising from forward exchange contracts of TSMC Partners amounted to NT$62,282 thousand. Please see Table 5 attached; 28 4) TSMC Solar TSMC Solar entered into derivative contracts during the year ended December 31, 2012 to manage exposures due to foreign exchange rate fluctuations. Outstanding forward exchange contracts as of December 31, 2012 consisted of the following: Sell NT$/Buy US$ Sell NT$/Buy JPY Maturity Date January 2013 January 2013 Contract Amount (In Thousands) NT$457,394/US$15,800 NT$22,055/JPY65,000 Outstanding cross currency swap contracts as of December 31, 2012 consisted of the following: Maturity Date January 2013 Contract Amount (In Thousands) Range of Interest Rates Paid Range of Interest Rates Received 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$37,824 thousand. 5) TSMC SSL TSMC SSL entered into derivative contracts during the year ended December 31, 2012 to manage exposures due to foreign exchange rate fluctuations. Outstanding forward exchange contracts as of December 31, 2012 consisted of the following: Sell NT$/Buy US$ Sell NT$/Buy JPY Maturity Date January 2013 January 2013 Contract Amount (In Thousands) NT$133,009/US$4,600 NT$22,055/JPY65,000 Outstanding cross currency swap contracts as of December 31, 2012 consisted of the following: 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. Maturity Date January 2013 Contract Amount (In Thousands) NT$58,100/US$2,000 Range of Interest Rates Paid Range of Interest Rates Received - 0.06% 30. OPERATING SEGMENTS INFORMATION For the year ended December 31, 2012, net losses arising from derivative financial instruments of TSMC SSL amounted to NT$13,882 thousand. Meet the criteria for hedge accounting 1) Xintec Xintec monitors and manages the financial risk through the analysis of business environment and evaluation of entity’s financial risks. Further, Xintec seeks to reduce the effects of future cash flow related interest rate exposures by primarily using derivative financial instruments. The Company has provided the operating segments disclosure in the consolidated financial statements. 31. THE AUTHORIZATION OF FINANCIAL STATEMENTS The financial statements were approved by the Board of Directors and authorized for issue on February 5, 2013. 29 TABLE 1 Taiwan Semiconductor Manufacturing Company Limited and Investees FINANCINGS PROVIDED FOR THE YEAR ENDED DECEMBER 31, 2012 (Amounts in Thousands of New Taiwan Dollars, Unless Specified Otherwise) No. Financing Company Counter- party Financial Statement Account 1 TSMC Partners TSMC China TSMC Solar TSMC SSL TSMC Solar TSMC SSL 2 TSMC Development Other receivables from related parties Other receivables from related parties Other receivables from related parties Other receivables from related parties Other receivables from related parties Maximum Balance for the Period (US$ in Thousands) (Note 4) $ 7,259,500 (US$ 250,000) 1,161,520 (US$ 40,000) 871,140 (US$ 30,000) 2,323,040 (US$ 80,000) 2,613,420 (US$ 90,000) Ending Balance (US$ in Thousands) (Note 4) Amount Actually Drawn (US$ in Thousands) $ 3,774,940 (US$ 130,000) - $ 3,774,940 (US$ 130,000) - - - 0.25%-0.26% The need for short- term financing The need for short- term financing The need for short- term financing - - 2,323,040 (US$ 80,000) 2,613,420 (US$ 90,000) 1,495,457 (US$ 51,500) 203,266 (US$ 7,000) 0.21%-0.23% The need for short- term financing 0.24% The need for short- term financing 3 TSMC Global TSMC Other receivables from related parties 5,807,600 (US$ 200,000) - - - The need for short- term financing Interest Rate Nature for Financing Transaction Amounts Reason for Financing Allowance for Bad Debt Collateral Item Value Financing Limits for Each Borrowing Company Financing Company’s Total Financing Amount Limits (Note 3) $ - Purchase equipment $ - - - - - - Operating capital Operating capital Operating capital Operating capital Support the parent company’s short-term operation requirement - - - - - - - - - - - $ - - - - - - $ 38,635,609 (Note 1) 15,454,244 (Note 1) 15,454,244 (Note 1) 5,322,907 (Notes 1 and 5) 5,322,907 (Notes 1 and 5) 49,954,386 (Note 2) $ 38,635,609 38,635,609 38,635,609 13,307,266 (Note 5) 13,307,266 (Note 5) 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. 30 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) Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2012 Shares/Units (In Thousands) Carrying Value (Foreign Currencies in Thousands) Percentage of Ownership (%) Market Value or Net Asset Value (Foreign Currencies in Thousands) Note Held-to-maturity financial assets 〃 - - $ 549,881 151,265 N/A N/A $ 557,900 151,073 TSMC Corporate bond Nan Ya Plastics Corporation China Steel Corporation Stock Semiconductor Manufacturing International Corporation TSMC Global - - - Subsidiary TSMC Partners VIS SSMC TSMC Solar TSMC North America TSMC SSL Xintec GUC TSMC Europe TSMC Japan TSMC Korea United Industrial Gases Co., Ltd. Shin-Etsu Handotai Taiwan Co., Ltd. W.K. Technology Fund IV Fund Horizon Ventures Fund Crimson Asia Capital Capital TSMC China VTAF III VTAF II Emerging Alliance TSMC GN Stock Motech TSMC Solar Europe TSMC Solar NA TSMC Solar Available-for-sale financial assets Investments accounted for using equity method Subsidiary Investee accounted for using equity method Investee accounted for using equity method Subsidiary Subsidiary Subsidiary Investee with a controlling financial interest Investee accounted for using equity 〃 〃 〃 〃 〃 〃 〃 〃 method Subsidiary Subsidiary Subsidiary - - - - - Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary 〃 〃 〃 Financial assets carried at cost 〃 〃 Financial assets carried at cost 〃 Investments accounted for using equity method 〃 〃 〃 〃 1,277,958 1 988,268 628,223 1,845,502 49,954,386 38,635,129 9,462,038 314 6,710,956 1,118,000 11,000 430,400 94,950 46,688 - 6 80 19,300 10,500 4,000 - - - - - - - 6,031,369 3,209,288 2,411,212 1,550,313 1,222,972 235,761 142,412 26,935 193,584 105,000 40,000 89,916 55,259 17,828,683 1,047,285 563,056 167,359 65,007 Investee accounted for using equity Investments accounted for using 87,480 2,998,413 method Subsidiary Subsidiary equity method 〃 〃 - 1 175,016 44,037 4 100 100 40 39 99 100 95 40 35 100 100 100 10 7 2 12 1 100 50 98 99 100 20 100 100 1,845,052 49,954,386 38,635,609 12,658,703 6,496,972 6,008,087 3,209,288 2,411,212 1,550,313 4,692,130 253,761 142,412 26,935 390,210 341,742 34,221 89,916 55,259 17,886,314 1,025,275 556,869 167,359 65,007 2,761,393 175,016 44,037 (Continued) 31 Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2012 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 Solar TSMC SSL TSMC GN Capital VTAF III Stock TSMC Lighting NA Stock TSMC Solar TSMC SSL Investee accounted for using equity Investments accounted for using - $ 1,322,024 49 $ 1,322,024 method equity method Subsidiary Investments accounted for using equity method 1 2,864 100 2,864 Investee accounted for using equity Investments accounted for using method equity method Investee accounted for using equity 〃 4,294 3,420 23,076 19,157 - 1 23,076 19,157 TSMC Partners Stock TSMC Development, Inc. (TSMC Development) method Subsidiary Investments accounted for using equity method VisEra Holding Company TSMC Technology InveStar Semiconductor Development Fund, Inc. (II) LDC. (ISDF II) InveStar Semiconductor Development Fund, Inc. (ISDF) TSMC Canada Mcube Inc. Investee accounted for using equity method Subsidiary Subsidiary Subsidiary Subsidiary Investee accounted for using equity method 〃 〃 〃 〃 〃 〃 - US$ 604,367 100 US$ 604,367 43,000 US$ 104,540 49 US$ 104,540 - 14,153 787 2,300 6,333 US$ 11,721 US$ 10,479 US$ 7,805 US$ 4,589 - 100 97 97 100 25 6 - US$ 11,721 US$ 10,479 US$ 7,805 US$ 4,589 - US$ 5,000 US$ 3,753 - - Financial assets carried at cost - US$ 5,000 Available-for-sale financial assets 270 US$ 3,753 Subsidiary Investments accounted for using 293,637 US$ 262,053 100 US$ 262,053 equity method TSMC North America TSMC Development Emerging Alliance Fund Shanghai Walden Venture Capital Enterprise Stock Spansion Inc. Stock WaferTech Common stock Audience, Inc. Global Investment Holding Inc. RichWave Technology Corp. Preferred stock Next IO, Inc. QST Holdings, LLC - - - - - Capital VentureTech Alliance Holdings, LLC (VTA Holdings) Subsidiary VTAF II Common stock Audience, Inc. Sentelic Aether Systems, Inc. RichWave Technology Corp. - - - - 32 Available-for-sale financial assets Financial assets carried at cost 〃 32 11,124 4,074 US$ 335 US$ 3,065 US$ 1,545 Financial assets carried at cost 〃 Investments accounted for using equity method Available-for-sale financial assets Financial assets carried at cost 〃 〃 8 - - US$ 500 US$ 142 - 203 1,806 1,800 1,267 US$ 2,107 US$ 2,607 US$ 1,701 US$ 1,036 - 6 10 - 4 7 1 9 23 3 US$ 335 US$ 3,065 US$ 1,545 US$ 500 US$ 142 - US$ 2,107 US$ 2,607 US$ 1,701 US$ 1,036 (Continued) Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2012 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 VTAF III ISDF ISDF II Xintec TSMC Solar Europe Preferred stock 5V Technologies, Inc. Aquantia Cresta Technology Corporation Impinj, Inc. Next IO, Inc. QST Holdings, LLC Capital VTA Holdings Common stock Mutual-Pak Technology Co., Ltd. InvenSense, Inc. Accton Wireless Broadband Corp. Preferred stock BridgeLux, Inc. GTBF, Inc. LiquidLeds Lighting Corp. Neoconix, Inc. Powervation, Ltd. Stion Corp. Tilera, Inc. Validity Sensors, Inc. Capital Growth Fund Limited (Growth Fund) VTA Holdings Common stock Integrated Memory Logic, Inc. Memsic, Inc. Preferred stock Sonics, Inc. Common stock Memsic, Inc. Alchip Technologies Limited Sonics, Inc. Goyatek Technology, Corp. Auden Technology MFG. Co., Ltd. Preferred stock Sonics, Inc. Capital Compositech Ltd. Stock TSMC Solar Europe GmbH - - - - - - Financial assets carried at cost 〃 〃 〃 〃 〃 Subsidiary Investments accounted for using equity method 2,890 4,556 92 711 179 - - US$ 2,168 US$ 4,316 US$ 28 US$ 1,100 US$ 1,219 US$ 593 - 4 2 - - 1 13 31 US$ 2,168 US$ 4,316 US$ 28 US$ 1,100 US$ 1,219 US$ 593 - Subsidiary Investments accounted for using 15,643 US$ 2,120 58 US$ 2,120 - - - - - - - - - - equity method Available-for-sale financial assets Financial assets carried at cost Financial assets carried at cost 〃 〃 〃 〃 〃 〃 〃 Subsidiary Subsidiary Investments accounted for using equity method 〃 93 2,249 US$ 1,037 US$ 315 - 6 US$ 1,037 US$ 315 7,522 1,154 1,600 4,147 509 8,152 3,890 11,192 - - US$ 9,379 US$ 1,500 US$ 800 US$ 4,841 US$ 7,938 US$ 45,467 US$ 3,025 US$ 4,197 3 N/A 11 4 16 15 2 4 US$ 9,379 US$ 1,500 US$ 800 US$ 4,841 US$ 7,938 US$ 45,467 US$ 3,025 US$ 4,197 US$ 368 100 US$ 368 - - - - - - - - - - - Available-for-sale financial assets 〃 1,402 1,286 US$ 4,322 US$ 4,294 Financial assets carried at cost 230 US$ 497 Available-for-sale financial assets Financial assets carried at cost 〃 〃 〃 1,072 7,520 278 745 1,035 US$ 3,581 US$ 3,664 US$ 10 US$ 163 US$ 220 Financial assets carried at cost 264 US$ 455 Financial assets carried at cost 587 - 62 2 5 2 4 14 3 6 3 3 3 - US$ 4,322 US$ 4,294 US$ 497 US$ 3,581 US$ 3,664 US$ 10 US$ 163 US$ 220 US$ 455 - Subsidiary Investments accounted for using equity method - EUR 4,469 100 EUR 4,469 (Continued) 33 Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2012 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 Global Stock ASML Money market fund Ssga Cash Mgmt Global Offshore Corporate bond Aust + Nz Banking Group Commonwealth Bank of Australia Commonwealth Bank of Australia Deutsche Bank AG London JP Morgan Chase + Co. Westpac Banking Corp. - - - - - - - - Available-for-sale financial assets 20,993 US$ 1,334,501 5 US$ 1,334,501 Available-for-sale financial assets 50 US$ 50 N/A US$ 50 Held-to-maturity financial assets 〃 〃 〃 〃 〃 20,000 25,000 25,000 20,000 35,000 25,000 US$ 19,999 US$ 25,000 US$ 25,000 US$ 19,999 US$ 35,006 US$ 25,000 N/A N/A N/A N/A N/A N/A US$ 20,033 US$ 25,006 US$ 25,043 US$ 20,007 US$ 34,956 US$ 25,013 (Concluded) 34 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 China Steel Corporation Stock Semiconductor Manufacturing International Corporation TSMC SSL Capital TSMC GN TSMC Partners Corporate bond General Elec Cap Corp. Mtn VTAF II VTAF III General Elec Cap Corp. Mtn Preferred stock Power Analog Microelectronics Stock InvenSense, Inc. TSMC Global Stock ASML Government bond Societe De Financement De Lec Held-to-maturity financial assets 〃 Available-for-sale financial assets Investments accounted for using equity method Investments accounted for using equity method Held-to-maturity financial assets 〃 Financial assets carried at cost Available-for-sale financial assets Available-for-sale financial assets Held-to-maturity financial assets Corporate bond Nationwide Building Society-UK Government Guarantee Held-to-maturity financial assets Westpac Banking Corp. 12/12 Frn 〃 ISDF Common stock Integrated Memory Logic, Inc. TS MC Solar Europe Stock TSMC Solar Europe GmbH Available-for-sale financial assets Investments accounted for using equity method - - - - - - - - - - - - - - - - - - - - - - - - - - - - - $ 1,099,629 303,798 1,789,493 2,617,134 - - - $ - - - Subsidiary 227,000 1,746,893 203,400 2,034,000 Subsidiary - - - US$ 20,012 - US$ 20,059 7,330 US$ 3,482 796 US$ 7,932 - - - - - 100,000 - - - - - - $ 550,000 $ 550,000 $ - 150,000 150,000 - - - $ 549,881 151,265 511,535 612,834 502,200 110,634 1,277,958 1,845,052 - - - - - - - US$ 20,000 US$ 20,000 - US$ 20,000 US$ 20,000 - - - - 7,330 US$ 3,345 US$ 3,482 US$ (137) 430,400 2,411,212 - - - - 65,007 - - - 703 US$ 7,460 US$ 861 US$ 6,599 93 US$ 1,037 - - 20,993 US$ 1,085,474 - - - 15,000 US$ 15,000 8,000 US$ 8,000 5,000 US$ 5,000 - - - 2,161 US$ 6,289 127 - - - - 15,000 US$ 15,000 US$ 15,000 8,000 US$ 8,000 US$ 8,000 5,000 US$ 5,000 US$ 5,000 - - - - 20,993 US$ 1,334,501 - - - - - - 886 US$ 3,152 US$ 207 US$ 2,945 1,402 US$ 4,322 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. 35 Subsidiary - EUR 5,103 - EUR 2,500 - - - - - EUR 4,469 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 Owner Relationships Transfer Date Amount Price Reference Purpose of Acquisition Other Terms TSMC Fab Fab Fab Fab Fab Fab Fab Fab Land Fe bruary 7, 2012 to $ 249,912 By the construction MandarTech Interiors December 27, 2012 Fe bruary 7, 2012 to December 27, 2012 Fe bruary 13, 2012 to December 28, 2012 Fe bruary 13, 2012 to December 27, 2012 Ma rch 19, 2012 to December 27, 2012 March 19, 2012 to July 27, 2012 May 28, 2012 to November 27, 2012 August 28, 2012 to December 26, 2012 November 21, 2012 progress Inc. 219,807 By the construction I Domain Industrial progress Co., Ltd. 5,015,656 By the construction Da Cin Construction progress Co., Ltd. 1,766,332 By the construction Fu Tsu Construction progress Co., Ltd. 2,958,930 By the construction China Steel Structure progress 185,115 By the construction progress 320,705 By the construction progress Co., Ltd. Toko Steel Structure Corporation Tasa Construction Corporation 131,678 By the construction Shiny G&M Associated 963,600 progress By the contract Co., Ltd. Miaoli County Government - - - - - - - - - N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Public bidding Manufacturing purpose None N/A Public bidding Manufacturing purpose None N/A Public bidding Manufacturing purpose None N/A Public bidding Manufacturing purpose None N/A Public bidding Manufacturing purpose None N/A Public bidding Manufacturing purpose None N/A Public bidding Manufacturing purpose None N/A Public bidding Manufacturing purpose None N/A Public bidding Manufacturing purpose None 36 TABLE 5 Taiwan Semiconductor Manufacturing Company Limited and Investees TOTAL PURCHASES FROM OR SALES TO RELATED PARTIES OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL FOR THE YEAR ENDED DECEMBER 31, 2012 (Amounts in Thousands of New Taiwan Dollars, Unless Specified Otherwise) Transaction Details Abnormal Transaction Notes/Accounts Payable or Receivable Company Name Related Party Nature of Relationships Purchases/Sales Amount (US$ in Thousands) % to Total Payment Terms Unit Price (Note) Payment Terms (Note) TSMC TSMC North America GUC VIS TSMC China WaferTech VIS SSMC Subsidiary Investee accounted for using equity method Investee accounted for using equity method Subsidiary Indirect subsidiary Investee accounted for using equity method Investee accounted for using equity method Sales Sales Sales Purchases Purchases Purchases Purchases TSMC North America GUC Investee accounted for using equity method Sales Mcube Inc. Investee accounted for using equity method Sales by TSMC by TSMC $ 326,768,469 4,370,617 177,331 15,708,447 8,026,114 4,475,674 3,638,633 509,890 (US$ 17,238) 249,375 (US$ 8,431) 64 1 - 26 14 8 6 - - Net 30 days after invoice date Net 30 days after monthly closing Net 30 days after monthly closing Net 30 days after monthly closing Net 30 days after monthly closing Net 30 days after monthly closing Net 30 days after monthly closing Net 30 days after invoice date Net 60 days after invoice date Xintec OmniVision Parent company of director (represented for Sales 1,261,163 40 Net 30 days after monthly closing Xintec) 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. - - - - - - - - - - - - - - - - - - - - Ending Balance (US$ in Thousands) $ 40,748,905 238,380 - (1,616,342) (580,064) (364,790) (351,389) 35,032 (US$ 1,206) 80,212 (US$ 2,762) 215,403 Note % to Total 72 - - 10 3 2 2 - - 50 37 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 Amount Action Taken TSMC TSMC North America GUC VIS Subsidiary Investee accounted for using equity method Investee accounted for using equity method $ 40,837,732 238,380 122,893 TSMC Partners TSMC China The same parent company TSMC TSMC Solar The same parent company Development TSMC SSL The same parent company 3,793,421 (US$ 130,636) 1,496,194 (US$ 51,525) 203,277 (US$ 7,000) Xintec OmniVision Parent company of director (represented for 215,403 Xintec) TSMC Technology TSMC Parent company WaferTech TSMC Parent company 117,283 (US$ 4,039) 580,064 (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. 37 15 (Note 2) (Note 2) (Note 2) (Note 2) 66 (Note 2) 16 $ 15,905,710 - - - - - - - - - - - - - - - - - Amounts Received in Subsequent Period $ 17,191,890 - - Allowance for Bad Debts $ - - - - - - - - - - - - - - - 38 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 TSMC Investee Company Location Main Businesses and Products Original Investment Amount Balance as of December 31, 2012 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) Net Income (Losses) of the Investee (Foreign Currencies in Thousands) Equity in the Earnings (Losses) (Note 1) (Foreign Currencies in Thousands) Note TSMC Global TSMC Partners Tortola, British Virgin Islands Tortola, British Virgin Islands Investment activities Investing in companies involved in the design, $ 42,327,245 31,456,130 $ 42,327,245 31,456,130 1 988,268 100 100 $ 49,954,386 38,635,129 $ 469,933 5,088,931 $ 469,933 5,088,451 Subsidiary Subsidiary manufacture, and other related business in the semiconductor industry TSMC China Shanghai, China Manufacturing and selling of integrated circuits 18,939,667 18,939,667 - 100 17,828,683 4,757,121 4,740,524 Subsidiary at the order of and pursuant to product design specifications provided by customers VIS SSMC Hsin-Chu, Taiwan Research, design, development, manufacture, 13,232,288 13,232,288 628,223 packaging, testing and sale of memory integrated circuits, LSI, VLSI and related parts Singapore Fabrication and supply of integrated circuits 5,120,028 5,120,028 314 TSMC Solar Tai-Chung, Taiwan Engaged in researching, developing, designing, 11,180,000 11,180,000 1,118,000 TSMC North America San Jose, California, U.S.A. TSMC SSL Hsin-Chu, Taiwan manufacturing and selling renewable energy and saving related technologies and products Selling and marketing of integrated circuits and semiconductor devices Engaged in researching, developing, designing, manufacturing and selling solid state lighting devices and related applications products and systems 333,718 333,718 11,000 4,304,000 2,270,000 430,400 Xintec GUC VTAF III VTAF II TSMC Europe Emerging Alliance TSMC Japan TSMC GN TSMC Korea Taoyuan, Taiwan Wafer level chip size packaging service 1,357,890 1,357,890 Hsin-Chu, Taiwan Researching, developing, manufacturing, testing and 386,568 386,568 Cayman Islands Cayman Islands Amsterdam, the Netherlands Cayman Islands Yokohama, Japan Taipei, Taiwan Seoul, Korea marketing of integrated circuits Investing in new start-up technology companies Investing in new start-up technology companies Marketing and engineering supporting activities Investing in new start-up technology companies Marketing activities Investment activities Customer service and technical supporting activities 1,896,914 704,447 15,749 852,258 83,760 100,000 13,656 2,074,155 949,267 15,749 892,855 83,760 - 13,656 94,950 46,688 - - - - 6 - 80 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 VTAF III Cayman Islands Investing in new start-up technology companies 1,801,918 1,795,131 TSMC Solar Europe TSMC Solar NA Amsterdam, the Netherlands Delaware, U.S.A. Investing in solar related business Selling and marketing of solar related products 504,107 205,772 411,032 147,686 TSMC SSL TSMC Lighting NA Delaware, U.S.A. Selling and marketing of solid state lighting related 3,133 3,133 products - - 1 1 40 39 99 100 95 40 35 50 98 100 99 100 100 100 20 49 100 100 100 9,462,038 2,329,808 770,379 6,710,956 4,721,908 1,831,634 Investee accounted for using equity method Investee accounted for using equity method 6,031,369 (4,037,825) (4,044,944) Subsidiary 3,209,288 312,232 312,232 Subsidiary 2,411,212 (1,466,733) (1,397,589) Subsidiary 1,550,313 (91,177) (49,604) Investee with a controlling 1,222,972 612,369 209,312 financial interest Investee accounted for using equity method 1,047,285 563,056 235,761 167,359 142,412 65,007 26,935 (177,152) 62,349 34,931 (2,940) 3,786 (24,928) 2,602 122,852 61,102 34,931 (2,925) 3,786 (24,928) 2,602 Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary 2,998,413 (5,037,203) Note 2 1,322,024 (177,152) Note 2 Investee accounted for using equity method Investee accounted for using equity method 175,016 44,037 2,864 (119,668) (65,268) Note 2 Note 2 Subsidiary Subsidiary (7) Note 2 Subsidiary (Continued) 39 Investor Company Investee Company Location Main Businesses and Products Original Investment Amount Balance as of December 31, 2012 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) Net Income (Losses) of the Investee(Foreign Currencies in Thousands) Equity in the Earnings (Losses) (Note 1) (Foreign Currencies in Thousands) Note TSMC Partners TSMC Development VisEra Holding Company Delaware, U.S.A. Cayman Islands Investment activities Investing in companies involved in the design, US$ 0.001 US$ 0.001 US$ 43,000 US$ 43,000 TSMC Technology ISDF II ISDF TSMC Canada Mcube Inc. Delaware, U.S.A. Cayman Islands Cayman Islands Ontario, Canada Delaware, U.S.A. manufacturing, and other related businesses in the semiconductor industry Engineering support activities Investing in new start-up technology companies Investing in new start-up technology companies Engineering support activities Research, development, and sale of micro- semiconductor device US$ 0.001 US$ 0.001 US$ 14,153 US$ 14,153 US$ 787 US$ 787 US$ 2,300 US$ 2,300 US$ 1,800 US$ 1,800 - 43,000 - 14,153 787 2,300 6,333 100 US$ 604,367 US$ 144,333 49 US$ 104,540 US$ 30,091 100 US$ 11,721 US$ 1,106 97 US$ 10,479 US$ (121) 97 US$ 7,805 US$ 2,493 100 US$ 4,589 US$ 422 US$ (12,599) - 25 Note 2 Note 2 Note 2 Note 2 Note 2 Note 2 Note 2 Subsidiary Investee accounted for using equity method Subsidiary Subsidiary Subsidiary Subsidiary Investee accounted for using equity method TSMC WaferTech Washington, U.S.A. Manufacturing, selling, testing and computer- US$ 280,000 US$ 280,000 293,637 100 US$ 262,053 US$ 142,551 Note 2 Subsidiary Development VTAF III Mutual-Pak Technology Co., Taipei, Taiwan Ltd. Growth Fund VTA Holdings Cayman Islands Delaware, U.S.A. aided designing of integrated circuits and other semiconductor devices Manufacturing and selling of electronic parts and researching, developing, and testing of RFID Investing in new start-up technology companies Investing in new start-up technology companies VTAF II VTA Holdings Delaware, U.S.A. Investing in new start-up technology companies Emerging Alliance VTA Holdings Delaware, U.S.A. Investing in new start-up technology companies US$ 5,212 US$ 3,937 15,643 58 US$ 2,120 US$ (1,422) Note 2 Subsidiary US$ 1,830 US$ 1,830 - - - - - - - - - - - 100 US$ 368 - 62 US$ (141) - Note 2 Note 2 Subsidiary Subsidiary 31 7 - - - - Note 2 Subsidiary Note 2 Subsidiary 100 EUR 4,469 EUR (3,133) Note 2 Subsidiary TSMC Solar Europe TSMC Solar Europe GmbH Hamburg, Germany Selling of solar related products and providing EUR 12,400 EUR 9,900 customer service TSMC GN TSMC Solar Tai-Chung, Taiwan Engaged in researching, developing, designing, $ 42,945 $ - 4,294 - $ 23,076 $ (4,037,825) Note 2 TSMC SSL Hsin-Chu, Taiwan manufacturing and selling renewable energy and saving related technologies and products 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 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. Investee accounted for using equity method Investee accounted for using equity method (Concluded) 40 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 TSMC China Ma nufacturing and selling of integrated circuits at the order of and pursuant to product design specifications provided by customers Total Amount of Paid-in Capital (Foreign Currencies in Thousands) Method of Investment $ 18,939,667 (RMB 4,502,080) (Note 1) Accumulated Outflow of Investment from Taiwan as of January 1, 2012 (US$ in Thousands) $ 18,939,667 (US$ 596,000) Investment Flows Outflow Inflow $ - $ - Accumulated Outflow of Investment from Taiwan as of December 31, 2012 (US$ in Thousands) $ 18,939,667 (US$ 596,000) Sh anghai Walden Venture Capital Investing in new start-up technology Enterprise companies 2,324,062 (US$ 78,791) (Note 2) 147,485 (US$ 5,000) - - 147,485 (US$ 5,000) Investee Company Percentage of Ownership Equity in the Earnings (Losses) TSMC China Sh anghai Walden Venture Capital Enterprise 100% 6% $ 4,740,524 (Note 3) Carrying Value as of December 31, 2012 (US$ in Thousands) $ 17,828,683 Accumulated Inward Remittance of Earnings as of December 31, 2012 $ - (Note 4) 145,190 (US$ 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) $ 19,087,152 (US$ 601,000) $ 19,087,152 (US$ 601,000) $ 19,087,152 (US$ 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. 41 8. 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 MORRIS CHANG Chairman February 5, 2013 42 INDEPENDENT AUDITORS’ REPORT 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. 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 43 Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2012 AND 2011 (In Thousands of New Taiwan Dollars, Except Par Value) ASSETS CURRENT ASSETS Cash and cash equivalents (Notes 2 and 4) Financial assets at fair value through profit or loss (Notes 2, 5 and 26) Available-for-sale financial assets (Notes 2, 6 and 26) Held-to-maturity financial assets (Notes 2, 7 and 26) Receivables from related parties (Notes 3 and 27) Notes and accounts receivable (Note 3) Allowance for doubtful receivables (Notes 2, 3 and 8) Allowance for sales returns and others (Notes 2 and 8) Other receivables from related parties (Notes 3 and 27) Other financial assets (Note 28) Inventories (Notes 2 and 9) Deferred income tax assets (Notes 2 and 20) Prepaid expenses and other current assets Total current assets LONG-TERM INVESTMENTS (Notes 2, 6, 7, 10, 12 and 26) Investments accounted for using equity method Available-for-sale financial assets Held-to-maturity financial assets Financial assets carried at cost Total long-term investments PROPERTY, PLANT AND EQUIPMENT (Notes 2, 13 and 27) Cost Land and land improvements Buildings Machinery and equipment Office equipment Leased assets Accumulated depreciation Advance payments and construction in progress 2012 Amount $ 143,410,588 39,554 2,410,635 5,056,973 353,811 58,257,798 (480,212) (6,038,003) 185,550 473,833 37,830,498 8,001,202 2,786,408 252,288,635 23,430,020 38,751,245 - 3,605,077 65,786,342 2011 Amount $ 143,472,277 15,360 3,308,770 3,825,680 185,764 46,321,240 (490,952) (5,068,263) 122,292 617,142 24,840,582 5,936,490 2,174,014 225,260,396 24,900,332 - 5,243,167 4,315,005 34,458,504 % 15 - - 1 - 6 - (1) - - 4 1 - 26 3 4 - - 7 % 19 - - 1 - 6 - (1) - - 3 1 - 29 3 - 1 1 5 1,527,124 197,314,677 1,279,167,719 19,973,722 766,732 1,498,749,974 (1,000,284,504) 119,063,976 - 21 134 2 - 157 (105) 13 1,541,128 172,872,550 1,057,588,736 16,969,266 791,480 1,249,763,160 (876,252,220) 116,863,976 - 22 137 2 - 161 (113) 15 Net property, plant and equipment 617,529,446 65 490,374,916 63 INTANGIBLE ASSETS Goodwill (Note 2) Deferred charges, net (Notes 2 and 14) Total intangible assets OTHER ASSETS Deferred income tax assets, net (Notes 2 and 20) Refundable deposits (Note 27) Others (Notes 2 and 27) Total other assets 5,523,707 5,435,862 10,959,569 4,776,015 2,426,712 1,267,886 8,470,613 1 - 1 1 - - 1 5,693,999 5,167,564 10,861,563 7,436,717 4,518,863 1,353,983 13,309,563 1 - 1 1 1 - 2 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES Short-term loans (Note 15) Financial liabilities at fair value through profit or loss (Notes 2, 5 and 26) Hedging derivative financial liabilities (Notes 2, 11 and 26) Accounts payable Payables to related parties (Note 27) Income tax payable (Notes 2 and 20) Salary and bonus payable Accrued profit sharing to employees and bonus to directors and supervisors (Notes 2 and 22) Payables to contractors and equipment suppliers Accrued expenses and other current liabilities (Notes 13, 18, 26 and 30) Current portion of bonds payable and long-term bank loans (Notes 16, 17 and 26) 2012 Amount $ 34,714,929 15,625 - 14,490,429 748,613 15,635,594 7,535,296 11,186,591 44,831,798 13,148,944 128,125 2011 Amount $ 25,926,528 13,742 232 10,530,487 1,328,521 10,656,124 6,148,499 9,081,293 35,540,526 13,218,235 4,562,500 % 4 - - 1 - 2 1 1 5 1 - % 3 - - 1 - 1 1 1 5 2 1 Total current liabilities 142,435,944 15 117,006,687 15 LONG-TERM LIABILITIES Bonds payable (Notes 16 and 26) Long-term bank loans (Notes 17, 26 and 28) Other long-term payables (Notes 18, 26 and 30) Obligations under capital leases (Notes 2, 13 and 26) Total long-term liabilities OTHER LIABILITIES Accrued pension cost (Notes 2 and 19) Guarantee deposits Others (Note 27) Total other liabilities Total liabilities EQUITY ATTRIBUTABLE TO SHAREHOLDERS OF THE PARENT Capital stock - NT$10 par value (Note 22) Authorized: 28,050,000 thousand shares Issued: 25,924,435 thousand shares in 2012 25,916,222 thousand shares in 2011 Capital surplus (Notes 2 and 22) Retained earnings (Note 22) Appropriated as legal capital reserve Appropriated as special capital reserve Unappropriated earnings Others Cumulative translation adjustments (Note 2) Net loss not recognized as pension cost (Note 2) Unrealized gain/loss on financial instruments (Notes 2, 11 and 26) Equity attributable to shareholders of the parent MINORITY INTERESTS (Note 2) Total shareholders’ equity 80,000,000 1,359,375 54,000 748,115 82,161,490 3,979,541 203,890 500,041 4,683,472 9 - - - 9 - - - - 18,000,000 1,587,500 - 870,993 20,458,493 3,908,508 443,983 403,720 4,756,211 3 - - - 3 - - - - 229,280,906 24 142,221,391 18 259,244,357 56,137,809 115,820,123 7,606,224 287,174,942 410,601,289 (10,753,763) (5,299) 7,973,321 (2,785,741) 723,197,714 2,555,985 725,753,699 27 6 12 1 30 43 (1) - 1 - 76 - 76 259,162,226 55,846,357 102,399,995 6,433,874 213,357,286 322,191,155 (6,433,369) - (1,172,855) (7,606,224) 629,593,514 2,450,037 632,043,551 33 7 13 1 28 42 (1) - - (1) 81 1 82 TOTAL $ 955,034,605 100 $ 774,264,942 100 TOTAL $ 955,034,605 100 $ 774,264,942 100 The accompanying notes are an integral part of the consolidated financial statements. 44 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 NON-OPERATING EXPENSES AND LOSSES 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) GROSS PROFIT BEFORE AFFILIATES ELIMINATION UNREALIZED GROSS PROFIT FROM AFFILIATES (Note 2) GROSS PROFIT OPERATING EXPENSES (Notes 21 and 27) Research and development General and administrative Marketing Total operating expenses INCOME FROM OPERATIONS (Note 34) NON-OPERATING INCOME AND GAINS Equity in earnings of equity method investees, net (Notes 2 and 10) Interest income Settlement income (Note 30) Foreign exchange gain, net (Note 2) Gain on settlement and disposal of financial assets, net (Notes 2 and 26) Technical service income (Note 27) Valuation gain on financial instruments, net (Notes 2, 5 and 26) Others (Notes 2 and 27) Total non-operating income and gains 262,628,681 243,619,899 (25,029) 243,594,870 40,402,138 17,638,088 4,497,451 62,537,677 181,057,193 2,028,611 1,645,036 883,845 582,498 541,089 496,654 - 604,304 6,782,037 52 48 - 48 8 3 1 12 36 1 - - - - - - - 1 232,937,388 194,143,257 (74,029) 194,069,228 33,829,880 14,164,114 4,517,816 52,511,810 141,557,418 897,611 1,479,514 947,340 - 233,214 407,089 507,432 886,327 5,358,527 55 45 - 45 8 3 1 12 33 - 1 - - - - - - 1 (Continued) Impairment of financial assets (Notes 2, 6, 10, 12 and 26) Interest expense Impairment loss on idle assets (Note 2) Loss on disposal of property, plant and equipment (Note 2) Foreign exchange loss, net (Note 2) Others (Notes 2, 5 and 26) Total non-operating expenses and losses INCOME BEFORE INCOME TAX INCOME TAX EXPENSE (Notes 2 and 20) NET INCOME ATTRIBUTABLE TO: Shareholders of the parent Minority interests EARNINGS PER SHARE (NT$, Note 25) Basic earnings per share Diluted earnings per share 2012 2011 Amount % Amount % $ 4,231,602 1,020,422 444,505 31,816 - 556,909 6,285,254 181,553,976 15,590,287 1 - - - - - 1 36 3 $ 265,515 626,725 98,009 200,673 185,555 391,791 1,768,268 145,147,677 10,694,417 $ 165,963,689 33 $ 134,453,260 $ 166,158,802 (195,113) $ 165,963,689 33 - 33 $ 134,201,279 251,981 $ 134,453,260 2012 2011 - - - - - - - 34 3 31 31 - 31 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 $ 7.01 $ 7.01 $ 6.41 $ 6.41 $ 5.59 $ 5.59 $ 5.18 $ 5.18 The accompanying notes are an integral part of the consolidated financial statements. (Concluded) 45 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) Capital Stock - Common Stock Retained Earnings Others Equity Attributable to Shareholders of the Parent Shares (In Thousands) Capital Surplus Amount Legal Capital Reserve Special Capital Reserve Unappropriated Earnings Total Cumulative Translation Adjustments Net Loss not Recognized as Pension Cost Unrealized Gain/Loss on Financial Instruments Treasury Stock Total Minority Interests Total Shareholders’ Equity 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 $ 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 Net income in 2011 Adjustment arising from changes in percentage of ownership in equity method investees Translation adjustments Issuance of stock from exercising employee stock - - - - - - - - - - - - 59,898 - 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 Net change in unrealized gain/loss on hedging derivative financial instruments Acquisition of treasury stock - shareholders executed the appraisal right Retirement of treasury stock Decrease in minority interests Effect of changes in consolidated entities - - - - - - - (1,000) - - - (10,000) - - - (56,094) - - (2,139) - - - - - - 16,160,501 - - - - 5,120,827 - - (16,160,501) (5,120,827) (77,730,236) 134,201,279 - - (77,730,236) 134,201,279 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (59,459) - - - (59,459) - - 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) Appropriations of prior year’s earnings Legal capital reserve Special capital reserve Cash dividends to shareholders - NT$3.00 per share Net income in 2012 Adjustment arising from changes in percentage of ownership in equity method investees Translation adjustments Net loss not recognized as pension cost Issuance of stock from exercising employee stock options Stock option compensation cost 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 - - - - - - - - - - - - - - 8,213 - 82,131 - - - - - - - - - - - - - 13,420,128 - - - - 1,172,350 - - (13,420,128) (1,172,350) (77,748,668) 166,158,802 - - (77,748,668) 166,158,802 - - - - 128,595 - - 160,357 2,500 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (4,320,394) - - - (4,416) (1,172,855) - - - - - - - - - 9,128,633 (883) 17,450 - - 93 - - - - - - 109,794 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (1,241,249) (41,133) 238 - - - - - - - - - - - - - - (71,598) 71,598 - - - - (77,730,236) 134,201,279 59,898 109,794 217,697 - - - 251,981 1,152 7,587 - - (77,730,236) 134,453,260 61,050 117,381 - 217,697 (1,241,249) (3,325) (1,244,574) (97,227) 238 (71,598) - - - - 344 - - (379,334) (1,987,855) (97,227) 582 (71,598) - (379,334) (1,987,855) 629,593,514 2,450,037 632,043,551 - - (77,748,668) 166,158,802 128,595 (4,320,394) (4,416) 242,488 2,500 - - - (195,113) (38,233) 52,900 - - 3,719 - - (77,748,668) 165,963,689 90,362 (4,267,494) (4,416) 242,488 6,219 9,128,633 (3,664) 9,124,969 16,567 - 16,567 93 - 139 286,200 232 286,200 - - - - - - - - - - - - - - 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 $ 2,555,985 $ 725,753,699 The accompanying notes are an integral part of the consolidated financial statements. 46 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) CASH FLOWS FROM OPERATING ACTIVITIES Net income attributable to shareholders of the parent Net income (loss) attributable to minority interests Adjustments to reconcile net income to net cash provided by operating activities: 2012 2011 $ 166,158,802 (195,113) $ 134,201,279 251,981 Depreciation and amortization Unrealized gross profit from affiliates Amortization of premium/discount of financial assets Stock option compensation cost Impairment loss of financial assets Gain on disposal of available-for-sale financial assets, net Gain on disposal of financial assets carried at cost, net Equity in earnings of equity method investees, net Cash dividends received from equity method investees Gain on disposal of property, plant and equipment and other assets, net Settlement income from receiving equity securities Impairment loss on idle assets Deferred income tax Changes in operating assets and liabilities: Financial assets and liabilities at fair value through profit or loss Receivables from related parties Notes and accounts receivable Allowance for doubtful receivables Allowance for sales returns and others Other receivables from related parties Other financial assets Inventories Prepaid expenses and other current assets Accounts payable Payables to related parties Income tax payable Salary and bonus payable Accrued profit sharing to employees and bonus to directors and supervisors Accrued expenses and other current liabilities Accrued pension cost 131,349,289 25,029 4,850 6,219 4,231,602 (399,598) (141,491) (2,028,611) 2,088,472 (103) (886) 444,505 573,234 (22,311) (168,047) (11,936,558) (10,633) 975,853 (63,258) 122,322 (12,989,916) (626,405) 1,395,907 (605,182) 4,979,470 1,386,797 2,105,298 2,337,647 66,617 107,681,521 74,029 24,711 - 265,515 (212,442) (20,772) (897,611) 2,848,141 (3,286) (158,779) 98,009 (491,122) (13,734) 123,265 3,627,110 (12,844) (2,478,001) 2,294 376,342 2,611,297 (403,762) (1,968,820) 462,578 3,490,268 (275,565) (1,925,594) 212,128 98,915 Net cash provided by operating activities 289,063,801 247,587,051 CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of: Property, plant and equipment Available-for-sale financial assets Held-to-maturity financial assets Financial assets carried at cost Proceeds from disposal or redemption of: Available-for-sale financial assets Held-to-maturity financial assets Financial assets carried at cost Property, plant and equipment and other assets Increase in deferred charges Decrease in refundable deposits Decrease in other assets (246,137,361) (31,525,876) - (56,512) 964,367 2,711,440 353,656 157,484 (1,782,299) 2,092,151 26,688 (213,962,521) (35,088,394) (584,280) (403,908) 59,305,023 4,789,000 226,226 698,055 (1,715,892) 4,149,543 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 Cash dividends Proceeds from long-term bank loans Repayment of long-term bank loans Proceeds from issuance of bonds Repayment of bonds Decrease in obligations under capital leases Decrease in other long-term payables Decrease in guarantee deposits Proceeds from exercise of employee stock options Acquisition of treasury stock Increase (decrease) in minority interests 2012 2011 $ 8,788,401 (77,748,668) 50,000 (212,500) 62,000,000 (4,500,000) (108,863) (2,367,866) (240,093) 242,488 - 286,200 $ (5,287,416) (77,730,236) 2,250,000 (1,142,968) 18,000,000 - - (3,633,052) (342,242) 217,697 (71,598) (118,226) Net cash used in financing activities (13,810,901) (67,858,041) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS EFFECT OF CHANGES IN CONSOLIDATED ENTITIES 2,056,638 (2,118,327) - (2,794,415) (147,682) (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 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid Capitalized interest Interest paid (excluding capitalized interest) Income tax paid INVESTING ACTIVITIES AFFECTING BOTH CASH AND NON-CASH ITEMS Acquisition of property, plant and equipment Decrease (increase) in payables to contractors and equipment suppliers Nonmonetary exchange trade-out price Increase in other liabilities Cash paid Disposal of property, plant and equipment and other assets Decrease in other financial assets Nonmonetary exchange trade-out price Cash received Acquisition of deferred charges Increase in accounts payable Increase in payables to related parties Increase in other long-term payables Cash paid NON-CASH INVESTING AND FINANCING ACTIVITIES Idle assets reclassified from property, plant and equipment Current portion of other long-term payables (under accrued expensesand other current liabilities) Current portion of bonds payable Current portion of long-term bank loans (Continued) The accompanying notes are an integral part of the consolidated financial statements. $ 736,607 (6,442) $ 730,165 $ 11,312,039 $ 257,689,153 (11,551,723) (69) - $ 246,137,361 $ 157,553 - (69) $ 157,484 $ 2,253,722 (303,584) (25,274) (142,565) $ 1,782,299 $ 540,611 (9,093) $ 531,518 $ 7,677,085 $ 207,175,565 6,846,682 (3,164) (56,562) $ 213,962,521 $ 543,219 158,000 (3,164) $ 698,055 $ 1,715,892 - - - $ 1,715,892 $ 444,505 $ 98,009 $ 913,485 $ - $ 128,125 $ 3,399,855 $ 4,500,000 $ 62,500 (Concluded) 47 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. The consolidated entities were as follows: Name of Investor Name of Investee Percentage of Ownership December 31 Remark TSMC TSMC North America TSMC Japan Limited (TSMC Japan) TSMC Partners, Ltd. (TSMC Partners) TSMC Korea Limited (TSMC Korea) TSMC Europe B.V. (TSMC Europe) TSMC Global, Ltd. (TSMC Global) TSMC China Company Limited (TSMC China) VentureTech Alliance Fund III, L.P. (VTAF III) VentureTech Alliance Fund II, L.P. (VTAF II) Emerging Alliance Fund, L.P. (Emerging Alliance) Global Unichip Corporation (GUC) Xintec Inc. (Xintec) TSMC SSL TSMC Solar TSMC Guang Neng Investment, Ltd. (TSMC GN) TSMC Design Technology Canada Inc. (TSMC Canada) TSMC Technology, Inc. (TSMC Technology) TSMC Development, Inc. (TSMC Development) InveStar Semiconductor Development Fund, Inc. (ISDF) InveStar Semiconductor Development Fund, Inc. (II) LDC. (ISDF II) 2012 100% 100% 100% 100% 100% 100% 100% 50% 98% 99.5% (Note 2) 40% 2011 100% 100% 100% 100% 100% 100% 100% 53% 98% 99.5% (Note 2) 40% 95% 100% 99% 100% 100% 100% 100% 100% 97% 97% 100% 58% 100% - 100% 100% 100% 97% 97% 100% 57% 100% - - - - - - - (Note 1) - - - TSMC obtained three out of five director positions and has a controlling interest in Xintec Established in August 2011 TSMC and TSMC GN aggregately have a controlling interest of 96% in TSMC SSL Established in August 2011 TSMC and TSMC GN aggregately have a controlling interest of 99% in TSMC Solar Established in January 2012 - - - - - - - - - - - - - - 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). TSMC Partners 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 TSMC Development WaferTech, LLC (WaferTech) 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. 48 VTAF III Mutual-Pak Technology Co., Ltd. (Mutual-Pak) Growth Fund Limited (Growth Fund) VTAF III, VTAF II and Emerging Alliance GUC VentureTech Alliance Holdings, LLC (VTA Holdings) 100% 100% Global Unichip Corp.-NA (GUC-NA) Global Unichip Japan Co., Ltd. (GUC-Japan) Global Unichip Europe B.V. (GUC-Europe) Global Unichip (BVI) Corp.(GUC-BVI) Global Unichip (Shanghai) Company, Limited (Note 2) (Note 2) (Note 2) (Note 2) (Note 2) (Note 2) (Note 2) (Note 2) GUC-BVI (GUC-Shanghai) (Note 2) (Note 2) TSMC SSL (TSMC Lighting NA) TSMC Lighting North America, Inc. TSMC Solar TSMC Solar North America, Inc. (TSMC Solar NA) TSMC Solar Europe B.V. (TSMC Solar Europe) VentureTech Alliance Fund III, L.P. (VTAF III) TSMC Solar Europe TSMC Solar Europe GmbH 100% 100% 100% 49% 100% 100% (Note 1) 100% 100% (Note 1) (Note 1) 46% (Note 1) 100% (Note 1) 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: TSMC 100% 100% 100% 100% 100% 100% 100% 50% 98% 99.5% 95% 40% 99% 100% TSMC North America TSMC Japan TSMC Partners TSMC Korea TSMC Europe TSMC Global TSMC China VTAF III VTAF II Emerging Alliance TSMC SSL Xintec TSMC Solar TSMC GN 100% 100% 100% 97% 97% 58% 100% 100% 100% 100% 49% 1% 0.4% TSMC Canada TSMC Technology TSMC Development ISDF ISDF II Mutual-Pak Growth Fund VTA Holdings TSMC Lighting NA TSMC Solar NA TSMC Solar Europe VTAF III TSMC SSL TSMC Solar 62% 31% 7% 100% WaferTech 100% TSMC Solar Europe GmbH 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. 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. 49 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. 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. 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. 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. 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. 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. 50 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). 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. 51 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. 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. 52 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. 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 Cash and deposits in banks Repurchase agreements collateralized by corporate bonds Repurchase agreements collateralized by short-term commercial paper Repurchase agreements collateralized by government bonds $ 140,072,294 2,691,042 349,341 297,911 December 31 2012 2011 $ 139,637,363 - - 3,834,914 $ 143,410,588 $ 143,472,277 5. FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS Trading financial assets Forward exchange contracts Cross currency swap contracts Trading financial liabilities Forward exchange contracts Cross currency swap contracts December 31 2012 2011 $ 38,607 947 $ 15,360 - $ 39,554 $ 15,360 $ 12,174 3,451 $ 13,623 119 $ 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. Outstanding forward exchange contracts consisted of the following: December 31, 2012 Sell NT$/Buy EUR Sell US$/Buy RMB Sell US$/Buy NT$ Sell NT$/Buy US$ Sell NT$/Buy JPY December 31, 2011 Sell EUR/Buy NT$ Sell US$/Buy NT$ Sell US$/Buy EUR Sell US$/Buy JPY Sell RMB/Buy US$ Sell NT$/Buy US$ Maturity Date Contract Amount (In Thousands) January 2013 January 2013 January 2013 to March 2013 January 2013 January 2013 NT$9,417,062/EUR246,000 US$20,000/RMB124,735 US$13,700/NT$398,239 NT$590,403/US$20,400 NT$44,110/JPY130,000 January 2012 January 2012 to February 2012 January 2012 January 2012 January 2012 January 2012 to February 2012 EUR38,600/NT$1,528,206 US$16,900/NT$510,122 US$2,082/EUR1,591 US$3,335/JPY259,830 RMB1,118,705/US$177,000 NT$163,491/US$5,400 Outstanding cross currency swap contracts consisted of the following: Contract Amount (In Thousands) Range of Interest Rates Paid Range of Interest Rates Received US$275,000/NT$7,986,190 NT$1,083,139/US$37,280 0.14%-0.17% - Maturity Date December 31, 2012 January 2013 January 2013 December 31, 2011 January 2012 NT$420,431/US$13,880 - 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. - 0.06% 0.48% 53 6. AVAILABLE-FOR-SALE FINANCIAL ASSETS Movements of the allowance for sales returns and others were as follows: Publicly traded stocks Money market funds Current portion December 31 2012 $ 41,160,437 1,443 41,161,880 (2,410,635) 2011 $ 3,306,248 2,522 3,308,770 (3,308,770) $ 38,751,245 $ - 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 Balance, beginning of year Provision Write-off Effect of exchange rate changes Balance, end of year 9. INVENTORIES Finished goods Work in process Raw materials Supplies and spare parts Years Ended December 31 2012 2011 $ 5,068,263 7,187,023 (6,211,170) (6,113) $ 7,546,264 3,409,855 (5,890,416) 2,560 $ 6,038,003 $ 5,068,263 December 31 2012 $ 6,244,824 25,713,217 3,864,105 2,008,352 2011 $ 3,347,849 17,940,960 1,808,615 1,743,158 $ 37,830,498 $ 24,840,582 Corporate bonds Government bonds Current portion December 31 2012 $ 5,056,973 - 5,056,973 (5,056,973) 2011 $ 8,614,527 454,320 9,068,847 (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: Balance, beginning of year Provision (reversal) Write-off Effect of changes in consolidated entities Effect of exchange rate changes Years Ended December 31 2012 2011 $ 490,952 450 (11,083) - (107) $ 504,029 (3,130) (9,707) (233) (7) Balance, end of year $ 480,212 $ 490,952 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 Vanguard International Semiconductor Corporation (VIS) Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) Motech Industries, Inc. (Motech) VisEra Holding Company (VisEra Holding) GUC Mcube Inc. (Mcube) December 31 2012 2011 Carrying Amount % of Ownership Carrying Amount % of Ownership $ 9,462,038 6,710,956 2,998,413 3,035,641 1,222,972 - 40 39 20 49 35 25 $ 8,988,007 6,289,429 5,612,344 2,853,364 1,157,188 - 39 39 20 49 35 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. 54 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. 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. 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. The outstanding interest rate swap contract consisted of the following: 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: Balance, beginning of year Amortization Balance, end of year Years Ended December 31 2012 2011 $ 1,645,810 (501,779) $ 2,491,891 (846,081) $ 1,144,031 $ 1,645,810 Contract Amount (In Thousands) December 31, 2011 Maturity Date Range of Interest Rates Paid Range of Interest Rates Received 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. 12. FINANCIAL ASSETS CARRIED AT COST 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. Non-publicly traded stocks Mutual funds December 31 2012 2011 $ 3,314,713 290,364 $ 4,004,314 310,691 $ 3,605,077 $ 4,315,005 11. HEDGING DERIVATIVE FINANCIAL INSTRUMENTS December 31 2012 2011 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. Hedging derivative financial liabilities Interest rate swap contract $ - $ 232 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. 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. 55 13. PROPERTY, PLANT AND EQUIPMENT Cost Land and land improvements Buildings Machinery and equipment Office equipment Leased asset Accumulated depreciation Land and land improvements Buildings Machinery and equipment Office equipment Leased asset Advance payments and construction in progress Cost Land and land improvements Buildings Machinery and equipment Office equipment Leased asset Accumulated depreciation Land and land improvements Buildings Machinery and equipment Office equipment Leased asset Advance payments and construction in progress Balance, Beginning of Year $ 1,541,128 172,872,550 1,057,588,736 16,969,266 791,480 1,249,763,160 355,555 101,004,047 762,774,355 11,820,728 297,535 876,252,220 116,863,976 $ 490,374,916 Year Ended December 31, 2012 Additions Disposals Reclassification Effect of Exchange Rate Changes Balance, End of Year $ 18,500 25,183,927 226,497,664 3,658,525 - $ 255,358,616 $ 26,983 11,148,134 116,070,821 1,875,785 40,135 $ 129,161,858 $ 2,330,537 $ - (26,789) (2,024,948) (563,454) - $ (2,615,191) $ - (24,528) (1,886,797) (555,485) - $ (2,466,810) $ - $ - (11,074) (456,577) 35 - $ (467,616) $ - (164) (45,137) 8 - $ (45,293) $ (30,707) $ (32,504) (703,937) (2,437,156) (90,650) (24,748) $ (3,288,995) $ (15,169) (390,192) (2,127,820) (74,689) (9,601) $ (2,617,471) $ (99,830) $ 1,527,124 197,314,677 1,279,167,719 19,973,722 766,732 1,498,749,974 367,369 111,737,297 874,785,422 13,066,347 328,069 1,000,284,504 119,063,976 $ 617,529,446 Year Ended December 31, 2011 Additions Disposals Reclassification Effect of Changes in Consolidated Entities Effect of Exchange Rate Changes Balance, End of Year $ 652,011 26,592,895 146,048,745 2,825,159 56,562 $ 176,175,372 $ 26,805 10,343,346 93,499,249 1,430,941 34,646 $ 105,334,987 $ 31,000,193 $ - (47,667) (2,305,971) (431,847) - $ (2,785,485) $ - (21,452) (2,252,415) (427,103) - $ (2,700,970) $ (455,372) $ - (388) (82,475) (72,041) - $ (154,904) $ - (55) (31,287) (13,563) - $ (44,905) $ (2,091) $ - (242,718) (375,702) (236,153) - $ (854,573) $ - (32,791) (293,605) (148,862) - $ (475,258) $ - $ (2,080) 604,404 1,148,887 27,566 33,366 $ 1,812,143 $ (42) 242,296 583,777 21,639 12,539 $ 860,209 $ 169,673 $ 1,541,128 172,872,550 1,057,588,736 16,969,266 791,480 1,249,763,160 355,555 101,004,047 762,774,355 11,820,728 297,535 876,252,220 116,863,976 $ 490,374,916 Balance, Beginning of Year $ 891,197 145,966,024 913,155,252 14,856,582 701,552 1,075,570,607 328,792 90,472,703 671,268,636 10,957,676 250,350 773,278,157 86,151,573 $ 388,444,023 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. 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: As of December 31, 2012, future lease payments were as follows: Year 2013 2014 2015 2016 2017 2018 and thereafter 56 Capitalized interest Capitalization rates Amount $ 27,042 27,042 27,042 27,042 27,042 729,566 $ 864,776 Years Ended December 31 2012 2011 $ 6,442 1.08%-1.20% $ 9,093 1.07%-1.29% 14. DEFERRED CHARGES, NET Technology license fees Software and system design costs Patent and others Year Ended December 31, 2012 Balance, Beginning of Year $ 1,682,892 2,366,483 1,118,189 Additions Amortization Reclassification $ 31,022 1,795,360 427,340 $ (442,467) (1,143,493) (594,815) $ 191,580 (48,912) 57,438 Effect of Exchange Rate Changes $ (1,134) (496) (3,125) Balance, End of Year $ 1,461,893 2,968,942 1,005,027 $ 5,167,564 $ 2,253,722 $ (2,180,775) $ 200,106 $ (4,755) $ 5,435,862 Technology license fees Software and system design costs Patent and others Balance, Beginning of Year $ 2,455,348 2,333,271 1,238,466 Additions Amortization Disposals Reclassification Effect of Changes in Consolidated Entities Effect of Exchange Rate Changes $ 10,308 1,360,846 344,738 $ (716,067) (1,152,331) (469,172) $ - (46) - $ - 2,091 - $ (66,186) (177,916) - $ (511) 568 4,157 Balance, End of Year $ 1,682,892 2,366,483 1,118,189 $ 6,027,085 $ 1,715,892 $ (2,337,570) $ (46) $ 2,091 $ (244,102) $ 4,214 $ 5,167,564 Year Ended December 31, 2011 December 31 2012 2011 interest payable annually $ 12,700,000 $ - Issued in September 2012 and repayable in September 2017, 1.28% December 31 2012 2011 15. SHORT-TERM LOANS 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. 16. BONDS PAYABLE $ 34,714,929 $ 25,926,528 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 Issued in January 2012 and repayable in January 2017, 1.29% interest payable annually Issued in January 2012 and repayable in January 2019, 1.46% interest payable annually Issued in August 2012 and repayable in August 2017, 1.28% interest payable annually Issued in August 2012 and repayable in August 2019, 1.40% interest payable annually 7,500,000 10,000,000 7,000,000 9,900,000 9,000,000 7,500,000 - - - - (Continued) Issued in September 2012 and repayable in September 2019, 1.39% interest payable annually Issued in October 2012 and repayable in October 2022, 1.53% interest payable annually Issued in January 2002 and repayable in January 2012, 3.00% interest payable annually Current portion 9,000,000 4,400,000 - 80,000,000 - - - 4,500,000 22,500,000 (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. 57 17. LONG-TERM BANK LOANS As of December 31, 2012, future payments for other long-term payables were as follows: December 31 2012 2011 $ 550,000 $ 650,000 Year of Payment 2013 2014 2015 2016 Amount $ 913,485 18,000 18,000 18,000 $ 967,485 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 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 Repayable from July 2012 in 16 quarterly installments, annual interest at 1.21%-1.24% in 2012 and 1.11%-1.21% in 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 Repayable from October 2013 in 16 quarterly installments, annual interest at 1.23%-1.24% in 2012 Current portion 450,000 262,500 175,000 50,000 1,487,500 (128,125) 500,000 300,000 200,000 - 1,650,000 (62,500) $ 1,359,375 $ 1,587,500 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 2013 2014 2015 2016 2017 Amount $ 128,125 587,500 137,500 625,000 9,375 $ 1,487,500 18. OTHER LONG-TERM PAYABLES Payables for acquisition of property, plant and equipment (Note 30g) Payables for software and system design costs Payables for technology transfer Current portion (classified under accrued expenses and other current liabilities) December 31 2012 $ 825,447 113,000 29,038 967,485 2011 $ 3,399,855 - - 3,399,855 (913,485) (3,399,855) $ 54,000 $ - 58 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 Service cost Interest cost Projected return on plan assets Amortization Net periodic pension cost 2012 2011 $ 129,217 160,018 (63,279) 65,146 $ 132,995 167,911 (68,067) 74,814 $ 291,102 $ 307,653 b. Reconciliation of funded status of the plans and accrued pension cost at December 31, 2012 and 2011 20. INCOME TAX Benefit obligation Vested benefit obligation Nonvested benefit obligation Accumulated benefit obligation Additional benefits based on future salaries Projected benefit obligation Fair value of plan assets Funded status Unrecognized net transition obligation Prior service cost Unrecognized net loss Additional liability Accrued pension cost Vested benefit 2012 2011 a. A reconciliation of income tax expense based on “income before income tax” at the statutory rates and $ 427,874 6,069,738 6,497,612 3,635,749 10,133,361 (3,352,567) 6,780,794 (66,444) 140,324 (2,879,665) 4,532 $ 313,463 5,456,913 5,770,376 3,443,749 9,214,125 (3,120,665) 6,093,460 (74,766) 147,564 (2,257,750) - $ 3,979,541 $ 3,908,508 $ 479,621 $ 349,981 income tax currently payable was as follows: Income tax expense based on “income before income tax” at statutory rates Tax effect of the following: Tax-exempt income Temporary and permanent differences Additional income tax under the Alternative Minimum Tax Act Additional tax at 10% on unappropriated earnings Net operating loss carryforwards used Investment tax credits used Years Ended December 31 2012 2011 $ 33,654,070 $ 25,964,235 (9,830,280) (3,020,685) - 4,193,497 (647,755) (9,588,226) (13,832,239) (1,597,357) 286,827 6,293,384 (395,258) (6,318,215) Income tax currently payable $ 14,760,621 $ 10,401,377 Net loss not recognized as pension cost $ 4,532 $ - b. Income tax expense consisted of the following: c. Actuarial assumptions at December 31, 2012 and 2011 Discount rate used in determining present values Future salary increase rate Expected rate of return on plan assets d. Contributions to the Funds for the year e. Payments from the Funds for the year 2012 1.50%-1.75% 2.00%-3.00% 1.75%-2.00% 2011 1.75% 2.50%-3.00% 2.00% 2012 2011 $ 221,063 $ 211,963 2012 2011 $ 26,119 $ 7,339 Income tax currently payable Income tax adjustments on prior years Other income tax adjustments Net change in deferred income tax assets Investment tax credits Net operating loss carryforwards Temporary differences Valuation allowance Effect of changes in consolidated entities Years Ended December 31 2012 2011 $ 14,760,621 55,313 201,119 $ 10,401,377 470,376 312,999 7,102,848 182,797 74,324 (6,786,735) - 2,304,884 224,141 (71,013) (2,873,378) (74,969) Income tax expense $ 15,590,287 $ 10,694,417 c. Net deferred income tax assets consisted of the following: Current deferred income tax assets Investment tax credits Temporary differences Allowance for sales returns and others Unrealized loss on inventories Unrealized loss on financial instruments, net Others Valuation allowance December 31 2012 2011 $ 6,214,708 $ 4,913,791 718,044 416,555 224,618 473,688 (46,411) 506,172 44,013 308,929 304,066 (140,481) $ 8,001,202 $ 5,936,490 (Continued) 59 December 31 2012 2011 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 Noncurrent deferred income tax assets Investment tax credits Net operating loss carryforwards Temporary differences Depreciation Others Valuation allowance $ 6,995,793 2,224,264 $ 15,399,558 2,491,708 the following: 1,420,778 759,698 (6,624,518) 2,280,923 654,672 (13,390,144) $ 4,776,015 $ 7,436,717 Law/Statute Item Statute for Upgrading Purchase of machinery and Industries equipment Total Creditable Amount Remaining Creditable Amount Expiry Year $ 6,961 6,514,226 7,045,590 505,215 $ - 927,549 7,045,590 505,215 2012 2013 2014 2015 $ 14,071,992 $ 8,478,354 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. Statute for Upgrading Research and development Industries expenditures $ 1,179,808 4,732,147 $ - 4,732,147 2012 2013 $ 5,911,955 $ 4,732,147 Statute for Upgrading Personnel training expenditures $ 17,406 $ - 2012 Industries Statute for Industrial Innovation Research and development $ 2,828,300 $ - 2012 expenditures 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. g. The profits generated from the following projects of TSMC and Xintec are exempt from income tax for a five-year period: 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. 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. 60 Construction and expansion of 2004 by TSMC Construction and expansion of 2005 by TSMC Construction and expansion of 2006 by TSMC Construction and expansion of 2003 and 2006 by Xintec Tax-exemption Period 2008 to 2012 2010 to 2014 2011 to 2015 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. 21. LABOR COST, DEPRECIATION AND AMORTIZATION Labor cost Salary and bonus Labor and health insurance Pension Meal Welfare Others Classified as Cost of Sales $ 31,326,400 1,618,274 1,053,125 765,476 747,446 96,385 Year Ended December 31, 2012 Classified as Operating Expenses $ 23,070,244 1,153,028 641,435 314,279 277,803 305,116 Total $ 54,396,644 2,771,302 1,694,560 1,079,755 1,025,249 401,501 $ 35,607,106 $ 25,761,905 $ 61,369,011 Depreciation Amortization $ 118,313,581 $ 1,344,819 $ 10,848,277 $ 835,956 $ 129,161,858 $ 2,180,775 Year Ended December 31, 2011 b. Special capital reserve in accordance with relevant laws or regulations or as requested by the authorities in Labor cost Salary and bonus Labor and health insurance Pension Meal Welfare Others Classified as Cost of Sales $ 26,548,111 1,316,726 971,263 710,547 714,628 341,156 Classified as Operating Expenses $ 20,686,957 923,645 634,476 297,762 266,891 372,673 Total charge; $ 47,235,068 2,240,371 1,605,739 1,008,309 981,519 713,829 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; $ 30,602,431 $ 23,182,404 $ 53,784,835 d. Any balance left over shall be allocated according to the resolution of the shareholders’ meeting. Depreciation Amortization $ 98,065,992 $ 1,463,405 $ 7,261,159 $ 874,165 $ 105,327,151 $ 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. Capital surplus consisted of the following: Additional paid-in capital From merger From convertible bonds From long-term investments From employee stock options Donations December 31 2012 $ 23,934,607 22,804,510 8,892,847 503,290 2,500 55 2011 $ 23,774,250 22,804,510 8,892,847 374,695 - 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: 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. 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. a. Legal capital reserve at 10% of the profits left over, until the accumulated legal capital reserve equals TSMC’s paid-in capital; 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: 61 Appropriation of Earnings Dividends Per Share (NT$) 23. STOCK-BASED COMPENSATION PLANS For Fiscal Year 2011 For Fiscal Year 2010 For Fiscal Year 2011 For Fiscal Year 2010 a. Under Intrinsic Value Method Legal capital reserve Special capital reserve Cash dividends to shareholders $ 13,420,128 1,172,350 77,748,668 $ 16,160,501 5,120,827 77,730,236 $ 92,341,146 $ 99,011,564 $ 3.00 $ 3.00 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 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: Legal capital reserve Special capital reserve Cash dividends to shareholders $ 16,615,880 (4,820,483) 77,773,307 $ 89,568,704 $ 3.00 Year ended December 31, 2012 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$71,351 thousand in cash for 2012, respectively. There is no significant difference between the aforementioned resolved amounts and the amounts charged against earnings of 2012. The appropriations of earnings, profit sharing to employees and bonus to directors for 2012 are to be resolved in the TSMC’s shareholders’ meeting held on June 11, 2013 (expected). Balance, beginning of year Options exercised Options canceled Balance, end of year Year ended December 31, 2011 Balance, beginning of year Options exercised Balance, end of year Number of Options (In Thousands) Weighted-average Exercise Price (NT$) 14,293 (8,213) (135) 5,945 21,437 (7,144) 14,293 $ 31.4 29.5 34.6 34.6 $ 31.4 30.5 32.1 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. The numbers of outstanding options and exercise prices have been adjusted to reflect the distribution of earnings by TSMC in accordance with the plans. 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. As of December 31, 2012, information about TSMC’s outstanding options was as follows: Range of Exercise Price (NT$) $20.2-$28.3 38.0- 50.1 Options Outstanding Number of Options (In Thousands) Weighted-average Remaining Contractual Life (Years) 3,362 2,583 5,945 0.4 2.0 1.1 Weighted-average Exercise Price (NT$) $ 25.9 45.8 34.6 62 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: Year ended December 31, 2012 Balance, beginning of year Options exercised Options canceled Balance, end of year Year ended December 31, 2011 Balance, beginning of year Options exercised Options canceled Balance, end of year Number of Options (In Thousands) Weighted-average Exercise Price (NT$) 825 (291) (19) 515 1,832 (967) (40) 825 $ 15.0 17.1 15.0 13.8 $ 14.4 14.4 17.4 15.1 The exercise prices have been adjusted to reflect the distribution of earnings by Xintec in accordance with the plans. As of December 31, 2012, information about Xintec’s outstanding and exercisable options was as follows: Range of Exercise Price (NT$) $10.7-$12.5 14.8- 18.6 Number of Options (In Thousands) Options Outstanding Weighted-average Remaining Contractual Life (Years) Options Exercisable Weighted-average Exercise Price (NT$) Number of Options (In Thousands) Weighted-average Exercise Price (NT$) 201 314 515 3.7 4.6 4.2 $ 10.7 15.8 13.8 198 314 512 $ 10.7 15.8 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: Valuation assumptions: Expected dividend yield Expected volatility Risk free interest rate Expected life Net income attributable to shareholders of the parent: As reported Pro forma Earnings per share (EPS) - after income tax (NT$): Basic EPS as reported Pro forma basic EPS Diluted EPS as reported Pro forma diluted EPS b. Under Fair Value Method TSMC Xintec 1.00%- 3.44% 43.77%- 46.15% 3.07%- 3.85% 5 years 0.80% 31.79%- 47.42% 1.88%- 2.45% 3 years Years Ended December 31 2012 2011 $ 166,158,802 165,986,009 $ 134,201,279 134,146,490 $ 6.41 6.40 6.41 6.40 $ 5.18 5.18 5.18 5.17 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. Information about TSMC SSL’s and TSMC Solar’s employee stock options related to the aforementioned new shares issued was as follows: Year ended December 31, 2012 Balance, beginning of year Options granted Options exercised TSMC SSL TSMC Solar Number of Options (In Thousands) Weighted-average Exercise Price (NT$) Number of Options (In Thousands) Weighted-average Exercise Price (NT$) - 17,175 (17,175) $ - 10.0 10.0 - 12,341 (12,341) $ - 10.0 10.0 13.8 Balance, end of year - - - - 63 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: As of December 31, 2012, information about the outstanding and exercisable options of Xintec 2011 Plan was as follows: Valuation assumptions: Stock price on grant date (NT$/share) Exercise price (NT$/share) Expected volatility Expected life Risk free interest rate TSMC SSL TSMC Solar $ 8.9 $ 10.0 40.32% 40 days 0.76% $ 9.0 $ 10.0 40.32% 40 days 0.76% Range of Exercise Price (NT$) Number of Options (In Thousands) Options Outstanding Weighted-average Remaining Contractual Life (Years) Options Exercisable Weighted-average Exercise Price (NT$) Number of Options (In Thousands) Weighted-average Exercise Price (NT$) $ 22.1 5,528 4.5 $ 22.1 - $ - 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 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: 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. Valuation assumptions: Stock price on grant date (NT$/share) Exercise price (NT$/share) Expected volatility Expected life Expected dividend yield Risk free interest rate Xintec $ 19.42 $ 22.30 43.73% 3.875 years - 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. Year ended December 31, 2012 Balance, beginning of year Options granted Options canceled Balance, end of year Number of Options (In Thousands) Weighted-average Exercise Price (NT$) For the year ended December 31, 2012, Xintec recognized compensation costs of the above stock option in the amount of NT$6,219 thousand. - 6,000 (472) 5,528 $ - 22.3 22.1 24. TREASURY STOCK 22.1 Purpose of Treasury Stock Number of Shares, Beginning of Year Addition Retirement (Shares in Thousands) Number of Shares, End of Year Weighted-average fair value of options granted (NT$) $ 5.82 Year ended December 31, 2011 The exercise prices have been adjusted to reflect the distribution of earnings by Xintec in accordance with the plan. 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. 64 25. EARNINGS PER SHARE EPS is computed as follows: 26. DISCLOSURES FOR FINANCIAL INSTRUMENTS a. Fair values of financial instruments were as follows: Amounts (Numerator) Before Income Tax After Income Tax Number of Shares (Denominator) (In Thousands) EPS (NT$) Before Income Tax After Income Tax December 31 2012 2011 Carrying Amount Fair Value Carrying Amount Fair Value Year ended December 31, 2012 Basic EPS Earnings available to common shareholders of the parent Effect of dilutive potential common shares Diluted EPS Earnings available to common shareholders of the parent (including effect of dilutive potential common shares) Year ended December 31, 2011 Basic EPS Earnings available to common shareholders of the parent Effect of dilutive potential common shares Diluted EPS Earnings available to common shareholders of the parent (including effect of dilutive potential common shares) $ 181,756,619 $ 166,158,802 25,920,735 $ 7.01 $ 6.41 - - 7,201 $ 181,756,619 $ 166,158,802 25,927,936 $ 7.01 $ 6.41 $ 144,852,948 $ 134,201,279 25,914,076 $ 5.59 $ 5.18 - - 10,606 $ 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. Assets Financial assets at fair value through profit or loss Available-for-sale financial assets Held-to-maturity financial assets Financial assets carried at cost Liabilities Financial liabilities at fair value through profit or loss Hedging derivative financial liabilities Bonds payable (including current portion) Long-term bank loans (including current portion) Other long-term payables (including current portion) Obligations under capital leases (including current portion) $ 39,554 41,161,880 5,056,973 3,605,077 $ 39,554 41,161,880 5,066,363 - $ 15,360 3,308,770 9,068,847 4,315,005 $ 15,360 3,308,770 9,128,063 - 15,625 - 80,000,000 1,487,500 967,485 756,305 15,625 - 80,343,413 1,487,500 967,485 756,305 13,742 232 22,500,000 1,650,000 13,742 232 22,597,115 1,650,000 3,399,855 3,399,855 870,993 870,993 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. 65 c. Valuation gains/losses arising from changes in fair value of derivatives contracts determined using 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, 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 December 31, 2011 Hedging Financial Instrument Fair Value Expected Cash Flow Generated Period Expected Timing for the Recognition of Gains or Losses from Hedge Long-term bank loans Interest rate swap contract $ (232) 2011 to 2012 2011 to 2012 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. e. Movements of the unrealized gains or losses on financial instruments for the years ended December 31, 2012 and 2011 were as follows: Balance, beginning of year Recognized directly in shareholders’ equity Removed from shareholders’ equity and recognized in earnings Year Ended December 31, 2012 From Available- for-sale Financial Assets Equity Method Investments Gain (Loss) on Cash Flow Hedges Total $ (1,155,091) 7,282,331 $ (17,671) 17,450 $ (93) 2 $ (1,172,855) 7,299,783 1,846,302 - 91 1,846,393 Balance, end of year $ 7,973,542 $ (221) $ - $ 7,973,321 Balance, beginning of year Recognized directly in shareholders’ equity Removed from shareholders’ equity and recognized in earnings Effect of changes in consolidated entities Year Ended December 31, 2011 From Available- for-sale Financial Assets Equity Method Investments Gain (Loss) on Cash Flow Hedges Total $ 86,158 (1,034,446) $ 23,462 (41,402) $ (331) (36) $ 109,289 (1,075,884) (206,534) (269) - 269 274 - (206,260) - 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. 66 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) Research and development expenses VisEra GUC VIS (rent) Others Sales of property, plant and equipment and other assets VIS VisEra SSMC (accounted for using the equity method) Purchase of property, plant and equipment and other assets b. Indirect investees VisEra Technology Company, Ltd. (VisEra) (accounted for using the equity method) Mcube (accounted for using the equity method) c. Others Related parties over which the Company has significant influence but with which the Company had no material transactions. For the year Sales GUC VIS Others Purchases VIS SSMC Others Manufacturing expenses VisEra (primarily outsourcing and rent) VIS (rent) Others 2012 2011 Amount % Amount % $ 4,880,507 177,514 253,010 $ 5,311,031 $ 4,475,674 3,638,633 - $ 8,114,307 $ 15,544 8,270 77 $ 23,891 1 - - 1 2 1 - 3 - - - - $ 2,461,345 302,844 61,227 $ 2,825,416 $ 5,597,895 3,949,176 124,673 $ 9,671,744 $ 49,155 5,902 - $ 55,057 1 - - 1 2 2 - 4 - - - - GUC VisEra VIS Non-operating income and gains VIS (primarily technical service income) SSMC (primarily technical service income) Others As of December 31 Receivables GUC Mcube Others Other receivables VIS SSMC Others Refundable deposits VIS Others Payables VIS SSMC Others Deferred credits (other assets) (Continued) VIS VisEra 2012 2011 Amount % Amount % $ 8,911 4,521 - 123 $ 13,555 $ 20,380 9,000 $ 29,380 $ 47,051 1,224 - $ 48,275 $ 261,836 221,210 2,452 $ 485,498 - - - - - 13 6 19 - - - - 4 3 - 7 $ 19,018 - 1,984 - $ 21,002 $ 36,008 - $ 36,008 $ 1,812 11,110 45,473 $ 58,395 $ 227,024 199,377 4,054 $ 430,455 - - - - - 7 - 7 - - - - 4 4 - 8 $ 273,412 80,212 187 $ 353,811 $ 128,751 56,799 - 77 23 - 100 69 31 - $ 154,086 31,466 212 $ 185,764 $ 87,507 34,260 525 83 17 - 100 72 28 - $ 185,550 100 $ 122,292 100 $ 5,813 4 $ 5,817 $ 368,617 351,389 28,607 - - - 49 47 4 $ - - $ - $ 987,937 336,037 4,547 - - - 75 25 - $ 748,613 100 $ 1,328,521 100 $ (7,806) 948 $ (6,858) (1) - (1) $ - - $ - - - - (Concluded) 67 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. 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: 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 2013 2014 2015 2016 2017 2018 and thereafter Amount $ 693,758 651,339 639,099 625,243 562,762 4,221,524 $ 7,393,725 Salaries, incentives and special compensation Bonus $ 883,177 538,077 $ 752,767 445,681 $ 1,421,254 $ 1,198,448 Significant commitments and contingencies of the Company as of December 31, 2012, excluding those disclosed in other notes, were as follows: Years Ended December 31 2012 2011 30. SIGNIFICANT COMMITMENTS AND CONTINGENCIES 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. 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. 68 c. In August 2006, TSMC filed a lawsuit against Semiconductor Manufacturing International Corporation, g. TSMC entered into an agreement with a counterparty in 2003 whereby TSMC China is obligated to 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. 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. 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) $ 3,437,165 125,973 35,734,874 102,995 29.038 38.39-38.49 0.3352-0.3364 4.66 $ 3,744,817 135,857 37,276,671 201,385 30.288 39.18-39.27 0.3897-0.3906 4.81 1,611,474 492,014 328,281 29.038 3.75 29.038 141,498 671,060 294,797 30.288 3.90 30.288 2,193,343 247,052 43,311,360 205,930 29.038 38.39-38.49 0.3352-0.3364 4.66 1,744,746 111,750 35,349,169 278,877 30.288 39.18-39.27 0.3897-0.3906 4.81 Financial assets Monetary items USD EUR JPY RMB Non-monetary items USD HKD Investments accounted for using equity method USD Financial liabilities Monetary items USD EUR JPY RMB Note: Exchange rate represents the number of N.T. dollars for which one foreign currency could be exchanged. 69 32. PRE-DISCLOSURE OF THE ADOPTION OF INTERNATIONAL FINANCIAL b. Exemptions from IFRS 1 REPORTING STANDARDS 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. 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: 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 1) Establish the IFRSs taskforce Responsible Division Accounting division Plan Progress Finished 2) Complete the identification of GAAP differences Accounting division, finance division and employee Finished and impact benefit and payroll section 3) Complete the identification of consolidated entities Accounting division Finished under IFRSs 4) Evaluate potential effect to business operations Accounting division, finance division, employee Finished benefit and payroll section and business system integration division 5) Complete the preliminary evaluation of resources Accounting division and business system integration Finished and budget needed for IFRSs adoption division 6) Set up a work plan for IFRSs adoption Accounting division and business system integration Finished division 7) Personnel training Accounting division Finished 8) Determine IFRSs accounting policies Accounting division, finance division and employee Finished benefit and payroll section 9) Develop financial statement template under IFRSs Accounting division and finance division Finished 10) Complete evaluation, configuration and testing Accounting division and business system integration Finished of the IT systems division 11) Communicate with related departments on the Accounting division impact of IFRSs adoption 12) Complete the preparation of opening balance Accounting division sheet under IFRSs Finished Finished 13) Complete modification to the relevant internal Accounting division and internal audit division Finished controls 14) Prepare comparative financial information under Accounting division and finance division In progress according to the plan IFRSs for 2012 70 1) Reconciliation of consolidated balance sheet as of January 1, 2012 R.O.C. GAAP Effect of Transition to IFRSs IFRSs Item Current assets Cash and cash equivalents Financial assets at fair value through profit or loss Available-for-sale financial assets Held-to-maturity financial assets Receivables from related parties Notes and accounts receivable Allowance for doubtful receivables Allowance for sales returns and others Other receivables from related parties Other financial assets Inventories Deferred income tax assets Prepaid expenses and other current assets Total current assets Long-term investments Investments accounted for using equity method Held-to-maturity financial assets Financial assets carried at cost Total long-term investments Net property, plant and equipment Intangible assets Other assets Deferred income tax assets Refundable deposits Others Total other assets Total Current liabilities Short-term loans Financial liabilities at fair value through profit or loss Hedging derivative financial liabilities Accounts payable Payables to related parties Income tax payable Salary and bonus payable Accrued profit sharing to employees and bonus to directors and supervisors Payables to contractors and equipment suppliers Accrued expenses and other current liabilities Current portion of bonds payable and long-term bank loans - Total current liabilities Long-term liabilities Bonds payable Long-term bank loans Obligations under capital leases Total long-term liabilities Other liabilities Accrued pension cost Guarantee deposits - Others Total other liabilities Total liabilities Amount Recognition and Measurement Difference Presentation Difference Amount Item $ 143,472,277 15,360 3,308,770 3,825,680 185,764 46,321,240 (490,952) (5,068,263) 122,292 617,142 24,840,582 5,936,490 2,174,014 225,260,396 $ - - - - - - - - - - - - - - $ - - - - - (490,952) 490,952 5,068,263 - - - (5,936,490) - (868,227) $ 143,472,277 15,360 3,308,770 3,825,680 185,764 45,830,288 - - 122,292 617,142 24,840,582 - 2,174,014 224,392,169 Cash and cash equivalents Financial assets at fair value through profit or loss Available-for-sale financial assets Held-to-maturity financial assets Receivables from related parties Notes and accounts receivable - - Other receivables from related parties Other financial assets Inventories - Other current asset Total current assets 24,900,332 5,243,167 4,315,005 34,458,504 490,374,916 10,861,563 7,436,717 4,518,863 1,353,983 13,309,563 (13,401) - - (13,401) - - 231,011 - - 231,011 - - - - 47,237 - 5,936,490 - (47,237) 5,889,253 24,886,931 5,243,167 4,315,005 34,445,103 490,422,153 10,861,563 Investments accounted for using equity method Held-to-maturity financial assets Financial assets carried at cost Total long-term investments Property, plant and equipment Intangible assets 13,604,218 4,518,863 1,306,746 19,429,827 Deferred income tax assets Refundable deposits Others Total other assets $ 774,264,942 $ 217,610 $ 5,068,263 $ 779,550,815 Total $ 25,926,528 13,742 232 10,530,487 1,328,521 10,656,124 6,148,499 9,081,293 $ - - - - - - - - $ - - - - - - - - $ 25,926,528 13,742 232 10,530,487 1,328,521 10,656,124 6,148,499 9,081,293 Short-term loans Financial liabilities at fair value through profit or loss Hedging derivative financial liabilities Accounts payable Payables to related parties Income tax payable Salary and bonus payable Accrued profit sharing to employees and bonus to directors 35,540,526 13,218,235 4,562,500 - 117,006,687 18,000,000 1,587,500 870,993 20,458,493 3,908,508 443,983 - 403,720 4,756,211 142,221,391 - - - - - - - - - 2,332,516 - - - 2,332,516 2,332,516 - - - 5,068,263 5,068,263 - - - - - - 2,889 (2,889) - 5,068,263 and supervisors 35,540,526 13,218,235 4,562,500 5,068,263 122,074,950 Payables to contractors and equipment suppliers Accrued expenses and other current liabilities Current portion of bonds payable and long-term bank loans Provisions Total current liabilities 18,000,000 1,587,500 870,993 20,458,493 Bonds payable Long-term bank loans Obligations under capital leases Total long-term liabilities 6,241,024 443,983 2,889 400,831 7,088,727 149,622,170 Accrued pension cost Guarantee deposits Provisions Others Total other liabilities Total liabilities Note a) b) e) c) b), d) c) a) d) (Continued) 71 R.O.C. GAAP Effect of Transition to IFRSs IFRSs Item Equity attributable to shareholders of the parent Capital stock Capital surplus Retained earnings Others Cumulative translation adjustments Unrealized gain/loss on financial instruments - Equity attributable to shareholders of the parent Minority interests Total shareholders’ equity Total Amount Recognition and Measurement Difference Presentation Difference Amount Item $ 259,162,226 55,846,357 322,191,155 $ - (374,695) (1,726,828) $ - - - $ 259,162,226 55,471,662 320,464,327 Capital stock Capital surplus Retained earnings (6,433,369) (1,172,855) - (7,606,224) 629,593,514 2,450,037 632,043,551 5 - - 5 (2,101,518) (13,388) (2,114,906) - 93 (93) - - - - (6,433,364) (1,172,762) (93) (7,606,219) 627,491,996 2,436,649 629,928,645 Foreign currency translation reserve Unrealized gain/loss from available-for-sales financial assets Cash flow hedging reserve Equity attributable to shareholders of the parent Noncontrolling interests Total shareholders’ equity $ 774,264,942 $ 217,610 $ 5,068,263 $ 779,550,815 Total 2) Reconciliation of consolidated balance sheet as of December 31, 2012 R.O.C. GAAP Effect of Transition to IFRSs IFRSs Item Current assets Cash and cash equivalents Financial assets at fair value through profit or loss Available-for-sale financial assets Held-to-maturity financial assets Receivables from related parties Notes and accounts receivable Allowance for doubtful receivables Allowance for sales returns and others Other receivables from related parties Other financial assets Inventories Deferred income tax assets Prepaid expenses and other current assets Total current assets Long-term investments Investments accounted for using equity method Available-for-sale financial assets Financial assets carried at cost Total long-term investments Net property, plant and equipment Intangible assets Other assets Deferred income tax assets Refundable deposits Others Total other assets Total Current liabilities Amount Recognition and Measurement Difference Presentation Difference Amount Item $ 143,410,588 39,554 2,410,635 5,056,973 353,811 58,257,798 (480,212) (6,038,003) 185,550 473,833 37,830,498 8,001,202 2,786,408 252,288,635 $ - - - - - - - - - - - - - - $ - - - - - (480,212) 480,212 6,038,003 - - - (8,001,202) - (1,963,199) $ 143,410,588 39,554 2,410,635 5,056,973 353,811 57,777,586 - - 185,550 473,833 37,830,498 - 2,786,408 250,325,436 Cash and cash equivalents Financial assets at fair value through profit or loss Available-for-sale financial assets Held-to-maturity financial assets Receivables from related parties Notes and accounts receivable - - Other receivables from related parties Other financial assets Inventories - Other current assets Total current assets 23,430,020 38,751,245 3,605,077 65,786,342 617,529,446 10,959,569 4,776,015 2,426,712 1,267,886 8,470,613 (69,102) - - (69,102) - - 351,002 - - 351,002 - - - - 32,742 - 8,001,202 - (32,742) 7,968,460 23,360,918 38,751,245 3,605,077 65,717,240 617,562,188 10,959,569 Investments accounted for using equity method Available-for-sale financial assets Financial assets carried at cost Total long-term investments Property, plant and equipment Intangible assets 13,128,219 2,426,712 1,235,144 16,790,075 Deferred income tax assets Refundable deposits Others Total other assets $ 955,034,605 $ 281,900 $ 6,038,003 $ 961,354,508 Total Note e) d), e) e) d) Note a) b) e) c) b), d) c) Short-term loans Financial liabilities at fair value through profit or loss Accounts payable Payables to related parties Income tax payable $ 34,714,929 15,625 14,490,429 748,613 15,635,594 $ - - - - - $ - - - - - $ 34,714,929 15,625 14,490,429 748,613 15,635,594 Short-term loans Financial liabilities at fair value through profit or loss Accounts payable Payables to related parties Income tax payable (Continued) 72 Item Amount Recognition and Measurement Difference Presentation Difference Amount Item R.O.C. GAAP Effect of Transition to IFRSs IFRSs Salary and bonus payable Accrued profit sharing to employees and bonus to directors and $ 7,535,296 11,186,591 $ - - $ - - $ 7,535,296 11,186,591 Salary and bonus payable Accrued profit sharing to employees and bonus to directors and supervisors Payables to contractors and equipment suppliers Accrued expenses and other current liabilities Current portion of bonds payable and long-term bank loans - Total current liabilities Long-term liabilities Bonds payable Long-term bank loans Other long-term payable Obligations under capital leases Total long-term liabilities Other liabilities Accrued pension cost Guarantee deposits - Others Total other liabilities Total liabilities Equity attributable to shareholders of the parent Capital stock Capital surplus Retained earnings Others Cumulative translation adjustments Net loss not recognized as pension cost Unrealized gain/loss on financial instruments Equity attributable to shareholders of the parent Minority interests Total shareholders’ equity Total 44,831,798 13,148,944 128,125 - 142,435,944 80,000,000 1,359,375 54,000 748,115 82,161,490 3,979,541 203,890 - 500,041 4,683,472 229,280,906 259,244,357 56,137,809 410,601,289 (10,753,763) (5,299) 7,973,321 (2,785,741) 723,197,714 2,555,985 725,753,699 - - - - - - - - - - 2,941,693 - - - 2,941,693 2,941,693 - (462,469) (2,189,821) (43) 5,299 - 5,256 (2,647,034) (12,759) (2,659,793) - - - 6,038,003 6,038,003 - - - - - - - 4,891 (4,891) - 6,038,003 - - - - - - - - - - 44,831,798 13,148,944 128,125 6,038,003 148,473,947 80,000,000 1,359,375 54,000 748,115 82,161,490 6,921,234 203,890 4,891 495,150 7,625,165 238,260,602 supervisors Payables to contractors and equipment suppliers Accrued expenses and other current liabilities Current portion of bonds payable and long-term bank loans Provisions Total current liabilities Bonds payable Long-term bank loans Other long-term payable Obligations under capital leases Total long-term liabilities Accrued pension cost Guarantee deposits Provisions Others Total other liabilities Total liabilities 259,244,357 55,675,340 408,411,468 Capital stock Capital surplus Retained earnings (10,753,806) - 7,973,321 (2,780,485) 720,550,680 2,543,226 723,093,906 Foreign currency translation reserve - Unrealized gain/loss from available-for-sales financial assets Equity attributable to shareholders of the parent Noncontrolling interests Total shareholders’ equity $ 955,034,605 $ 281,900 $ 6,038,003 $ 961,354,508 Total 3) Reconciliation of consolidated statement of comprehensive income for the year ended December 31, 2012 R.O.C. GAAP Effect of Transition to IFRSs IFRSs Item Net sales Cost of sales Gross profit before affiliates elimination Unrealized gross profit from affiliates Gross profit Operating expenses Research and development General and administrative Marketing Total operating expenses - Income from operations Non-operating income and gains Equity in earnings of equity method investees, net Interest income Amount Recognition and Measurement Difference Presentation Difference Amount Item $ 506,248,580 262,628,681 243,619,899 (25,029) 243,594,870 $ - (45,583) 45,583 - 45,583 $ 496,654 - 496,654 - 496,654 $ 506,745,234 262,583,098 244,162,136 (25,029) 244,137,107 Net sales Cost of sales Gross profit before affiliates elimination Unrealized profit from affiliates Gross profit 40,402,138 17,638,088 4,497,451 62,537,677 - 181,057,193 2,028,611 1,645,036 (18,943) (6,394) (1,465) (26,802) - 72,385 45,118 - - - - - (449,364) 47,290 - (1,645,036) 40,383,195 17,631,694 4,495,986 62,510,875 (449,364) 181,176,868 Research and development General and administrative Marketing Other operating gains and losses Income from operations 2,073,729 - Equity in earnings of equity method investees, net - Note a) d) e) d), e) e) d) d) Note f) d) d) d) d) f) e) f) (Continued) 73 R.O.C. GAAP Effect of Transition to IFRSs IFRSs Item Settlement income Foreign exchange gain, net Gain on settlement and disposal of financial assets, net Technical service income Others - - Non-operating expenses and losses Impairment of financial assets Interest expense Impairment loss on idle assets Loss on disposal of property, plant and equipment Others Income before income tax Income tax expense Net income Amount Recognition and Measurement Difference Presentation Difference Amount Item $ 883,845 582,498 541,089 496,654 604,304 - - 6,782,037 $ - - - - - - 4,977 50,095 $ (883,845) - (541,089) (496,654) (604,304) 1,715,824 (2,857,018) (5,312,122) $ - 582,498 - - - 1,715,824 (2,852,041) 1,520,010 - Foreign exchange gain, net - - - Other income Other gains and losses 4,231,602 1,020,422 444,505 31,816 556,909 6,285,254 181,553,976 15,590,287 - - - - - - 122,480 (37,633) (4,231,602) - (444,505) (31,816) (556,909) (5,264,832) - - $ 165,963,689 $ 160,113 $ - - 1,020,422 - - - 1,020,422 181,676,456 15,552,654 166,123,802 (4,322,697) 232 9,534,269 53,748 (685,978) (326,942) - Finance cost - - - Income before income tax Income tax expense Net income Exchange differences on translating foreign operations Cash flow hedges Net valuation gain on available-for-sale financial assets Share of other comprehensive income of associates and joint venture Actuarial loss from defined benefit pension Income tax expense relating to components of other comprehensive income 4,252,632 Other comprehensive income for the year, net of tax effect $ 170,376,434 Total comprehensive income for the year Note f) f) f) f) f) e), f) f) f) f) f) d) d) d) d) 4) Notes to the reconciliation of the significant differences: b) Classifications of deferred income tax asset/liability and valuation allowance 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. 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. 74 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. 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. 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. 75 f) The reclassification of line items in the consolidated statement of comprehensive income 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; 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. 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. 33. ADDITIONAL DISCLOSURES k. Intercompany relationships and significant intercompany transactions: Please see Table 9 attached. 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; 76 34. OPERATING SEGMENTS INFORMATION b. Geographic 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. Taiwan United States Asia Europe Others Years Ended December 31 Sales to Other Than Consolidated Entities Non-current Assets 2012 2011 2012 2011 $ 64,744,102 334,704,735 72,953,214 30,476,592 3,369,937 $ 49,798,532 250,811,666 75,946,671 48,982,743 1,541,033 $ 603,844,829 7,699,344 18,196,790 15,938 - $ 472,168,728 8,284,575 22,121,979 15,180 - $ 506,248,580 $ 427,080,645 $ 629,756,901 $ 502,590,462 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. The Company’s operating segment information was as follows: 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 a. Industry financial information Year ended December 31, 2012 Sales from external customers Sales among intersegments Operating profit (loss) Equity in earnings (losses) of equity method investees, net Income tax expense Year ended December 31, 2011 Sales from external customers Sales among intersegments Operating profit (loss) Equity in earnings (losses) of equity method investees, net Income tax expense Foundry Others Elimination Total Production $ 506,097,932 - 183,682,972 $ 150,648 14,678 (2,625,779) $ - (14,678) - $ 506,248,580 - 181,057,193 3,428,408 15,590,287 (1,399,797) - - - 2,028,611 15,590,287 Wafer Mask Others Years Ended December 31 2012 2011 $ 462,970,436 26,266,912 17,011,232 $ 384,632,494 23,818,656 18,629,495 $ 506,248,580 $ 427,080,645 d. Major customers representing at least 10% of gross sales 422,691,098 1,588,601 143,222,120 1,635,303 10,649,688 4,389,547 6,224 (1,664,702) (737,692) 44,729 - (1,594,825) - - - 427,080,645 - 141,557,418 897,611 10,694,417 Customer A Years Ended December 31 2012 Amount $ 87,099,340 2011 Amount $ 60,412,085 % 17 % 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. 77 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 1 TSMC Partners TSMC China TSMC Solar TSMC SSL TSMC Solar TSMC SSL 2 TSMC Development Other receivables from related parties Other receivables from related parties Other receivables from related parties Other receivables from related parties Other receivables from related parties Maximum Balance for the Period (US$ in Thousands) (Note 4) $ 7,259,500 (US$ 250,000) 1,161,520 (US$ 40,000) 871,140 (US$ 30,000) 2,323,040 (US$ 80,000) 2,613,420 (US$ 90,000) Ending Balance (US$ in Thousands) (Note 4) Amount Actually Drawn (US$ in Thousands) $ 3,774,940 (US$ 130,000) - $ 3,774,940 (US$ 130,000) - - - 0.25%-0.26% The need for short- term financing The need for short- term financing The need for short- term financing - - 2,323,040 (US$ 80,000) 2,613,420 (US$ 90,000) 1,495,457 (US$ 51,500) 203,266 (US$ 7,000) 0.21%-0.23% The need for short- term financing 0.24% The need for short- term financing 3 TSMC Global TSMC Other receivables from related parties 5,807,600 (US$ 200,000) - - - The need for short- term financing Interest Rate Nature for Financing Transaction Amounts Reason for Financing Allowance for Bad Debt Collateral Item Value Financing Limits for Each Borrowing Company Financing Company’s Total Financing Amount Limits (Note 3) $ - Purchase equipment $ - - - - - - Operating capital Operating capital Operating capital Operating capital Support the parent company’s short-term operation requirement - - - - - - - - - - - $ - - - - - - $ 38,635,609 (Note 1) 15,454,244 (Note 1) 15,454,244 (Note 1) 5,322,907 (Notes 1 and 5) 5,322,907 (Notes 1 and 5) 49,954,386 (Note 2) $ 38,635,609 38,635,609 38,635,609 13,307,266 (Note 5) 13,307,266 (Note 5) 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. 78 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) Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2012 Shares/Units (In Thousands) Carrying Value (Foreign Currencies in Thousands) Percentage of Ownership (%) Market Value or Net Asset Value (Foreign Currencies in Thousands) Note Held-to-maturity financial assets 〃 - - $ 549,881 151,265 N/A N/A $ 557,900 151,073 TSMC Corporate bond Nan Ya Plastics Corporation China Steel Corporation Stock Semiconductor Manufacturing International Corporation TSMC Global - - - Subsidiary TSMC Partners VIS SSMC TSMC Solar TSMC North America TSMC SSL Xintec GUC TSMC Europe TSMC Japan TSMC Korea United Industrial Gases Co., Ltd. Shin-Etsu Handotai Taiwan Co., Ltd. W.K. Technology Fund IV Fund Horizon Ventures Fund Crimson Asia Capital Capital TSMC China VTAF III VTAF II Emerging Alliance TSMC GN Stock Motech TSMC Solar Europe TSMC Solar NA TSMC Solar Available-for-sale financial assets Investments accounted for using equity method Subsidiary Investee accounted for using equity method Investee accounted for using equity method Subsidiary Subsidiary Subsidiary Investee with a controlling financial interest Investee accounted for using equity 〃 〃 〃 〃 〃 〃 〃 〃 method Subsidiary Subsidiary Subsidiary - - - - - Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary 〃 〃 〃 Financial assets carried at cost 〃 〃 Financial assets carried at cost 〃 Investments accounted for using equity method 〃 〃 〃 〃 1,277,958 1 988,268 628,223 1,845,502 49,954,386 38,635,129 9,462,038 314 6,710,956 1,118,000 11,000 430,400 94,950 46,688 - 6 80 19,300 10,500 4,000 - - - - - - - 6,031,369 3,209,288 2,411,212 1,550,313 1,222,972 235,761 142,412 26,935 193,584 105,000 40,000 89,916 55,259 17,828,683 1,047,285 563,056 167,359 65,007 Investee accounted for using equity Investments accounted for using 87,480 2,998,413 method Subsidiary Subsidiary equity method 〃 〃 - 1 175,016 44,037 4 100 100 40 39 99 100 95 40 35 100 100 100 10 7 2 12 1 100 50 98 99 100 20 100 100 1,845,052 49,954,386 38,635,609 12,658,703 6,496,972 6,008,087 3,209,288 2,411,212 1,550,313 4,692,130 253,761 142,412 26,935 390,210 341,742 34,221 89,916 55,259 17,886,314 1,025,275 556,869 167,359 65,007 2,761,393 175,016 44,037 (Continued) 79 Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2012 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 Solar TSMC SSL TSMC GN Capital VTAF III Stock TSMC Lighting NA Stock TSMC Solar TSMC SSL Investee accounted for using equity Investments accounted for using - $ 1,322,024 49 $ 1,322,024 method equity method Subsidiary Investments accounted for using equity method 1 2,864 100 2,864 Investee accounted for using equity Investments accounted for using method equity method Investee accounted for using equity 〃 4,294 3,420 23,076 19,157 - 1 23,076 19,157 TSMC Partners Stock TSMC Development, Inc. (TSMC Development) method Subsidiary Investments accounted for using equity method VisEra Holding Company TSMC Technology InveStar Semiconductor Development Fund, Inc. (II) LDC. (ISDF II) InveStar Semiconductor Development Fund, Inc. (ISDF) TSMC Canada Mcube Inc. Investee accounted for using equity method Subsidiary Subsidiary Subsidiary Subsidiary Investee accounted for using equity method 〃 〃 〃 〃 〃 〃 - US$ 604,367 100 US$ 604,367 43,000 US$ 104,540 49 US$ 104,540 - 14,153 787 2,300 6,333 US$ 11,721 US$ 10,479 US$ 7,805 US$ 4,589 - 100 97 97 100 25 6 - US$ 11,721 US$ 10,479 US$ 7,805 US$ 4,589 - US$ 5,000 US$ 3,753 - - Financial assets carried at cost - US$ 5,000 Available-for-sale financial assets 270 US$ 3,753 Subsidiary Investments accounted for using 293,637 US$ 262,053 100 US$ 262,053 equity method TSMC North America TSMC Development Emerging Alliance Fund Shanghai Walden Venture Capital Enterprise Stock Spansion Inc. Stock WaferTech Common stock Audience, Inc. Global Investment Holding Inc. RichWave Technology Corp. Preferred stock Next IO, Inc. QST Holdings, LLC - - - - - Capital VentureTech Alliance Holdings, LLC (VTA Holdings) Subsidiary VTAF II Common stock Audience, Inc. Sentelic Aether Systems, Inc. RichWave Technology Corp. - - - - 80 Available-for-sale financial assets Financial assets carried at cost 〃 32 11,124 4,074 US$ 335 US$ 3,065 US$ 1,545 Financial assets carried at cost 〃 Investments accounted for using equity method Available-for-sale financial assets Financial assets carried at cost 〃 〃 8 - - US$ 500 US$ 142 - 203 1,806 1,800 1,267 US$ 2,107 US$ 2,607 US$ 1,701 US$ 1,036 - 6 10 - 4 7 1 9 23 3 US$ 335 US$ 3,065 US$ 1,545 US$ 500 US$ 142 - US$ 2,107 US$ 2,607 US$ 1,701 US$ 1,036 (Continued) Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2012 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 VTAF III ISDF ISDF II Xintec Preferred stock 5V Technologies, Inc. Aquantia Cresta Technology Corporation Impinj, Inc. Next IO, Inc. QST Holdings, LLC Capital VTA Holdings Common stock Mutual-Pak Technology Co., Ltd. InvenSense, Inc. Accton Wireless Broadband Corp. Preferred stock BridgeLux, Inc. GTBF, Inc. LiquidLeds Lighting Corp. Neoconix, Inc. Powervation, Ltd. Stion Corp. Tilera, Inc. Validity Sensors, Inc. Capital Growth Fund Limited (Growth Fund) VTA Holdings Common stock Integrated Memory Logic, Inc. Memsic, Inc. Preferred stock Sonics, Inc. Common stock Memsic, Inc. Alchip Technologies Limited Sonics, Inc. Goyatek Technology, Corp. Auden Technology MFG. Co., Ltd. Preferred stock Sonics, Inc. Capital Compositech Ltd. - - - - - - Financial assets carried at cost 〃 〃 〃 〃 〃 Subsidiary Investments accounted for using equity method 2,890 4,556 92 711 179 - - US$ 2,168 US$ 4,316 US$ 28 US$ 1,100 US$ 1,219 US$ 593 - 4 2 - - 1 13 31 US$ 2,168 US$ 4,316 US$ 28 US$ 1,100 US$ 1,219 US$ 593 - Subsidiary Investments accounted for using 15,643 US$ 2,120 58 US$ 2,120 - - - - - - - - - - equity method Available-for-sale financial assets Financial assets carried at cost Financial assets carried at cost 〃 〃 〃 〃 〃 〃 〃 Subsidiary Subsidiary Investments accounted for using equity method 〃 93 2,249 US$ 1,037 US$ 315 - 6 US$ 1,037 US$ 315 7,522 1,154 1,600 4,147 509 8,152 3,890 11,192 - - US$ 9,379 US$ 1,500 US$ 800 US$ 4,841 US$ 7,938 US$ 45,467 US$ 3,025 US$ 4,197 3 N/A 11 4 16 15 2 4 US$ 9,379 US$ 1,500 US$ 800 US$ 4,841 US$ 7,938 US$ 45,467 US$ 3,025 US$ 4,197 US$ 368 100 US$ 368 - - - - - - - - - - - Available-for-sale financial assets 〃 1,402 1,286 US$ 4,322 US$ 4,294 Financial assets carried at cost 230 US$ 497 Available-for-sale financial assets Financial assets carried at cost 〃 〃 〃 1,072 7,520 278 745 1,035 US$ 3,581 US$ 3,664 US$ 10 US$ 163 US$ 220 Financial assets carried at cost 264 US$ 455 Financial assets carried at cost 587 - 62 2 5 2 4 14 3 6 3 3 3 - US$ 4,322 US$ 4,294 US$ 497 US$ 3,581 US$ 3,664 US$ 10 US$ 163 US$ 220 US$ 455 - (Continued) 81 Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2012 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 Solar Europe Stock TSMC Solar Europe GmbH TSMC Global Stock ASML Money market fund Ssga Cash Mgmt Global Offshore Corporate bond Aust + Nz Banking Group Commonwealth Bank of Australia Commonwealth Bank of Australia Deutsche Bank AG London JP Morgan Chase + Co. Westpac Banking Corp. Subsidiary Investments accounted for using equity method - EUR 4,469 100 EUR 4,469 - - - - - - - - Available-for-sale financial assets 20,993 US$ 1,334,501 5 US$ 1,334,501 Available-for-sale financial assets 50 US$ 50 N/A US$ 50 Held-to-maturity financial assets 〃 〃 〃 〃 〃 20,000 25,000 25,000 20,000 35,000 25,000 US$ 19,999 US$ 25,000 US$ 25,000 US$ 19,999 US$ 35,006 US$ 25,000 N/A N/A N/A N/A N/A N/A US$ 20,033 US$ 25,006 US$ 25,043 US$ 20,007 US$ 34,956 US$ 25,013 (Concluded) 82 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 China Steel Corporation Stock Semiconductor Manufacturing International Corporation TSMC SSL Capital TSMC GN TSMC Partners Corporate bond General Elec Cap Corp. Mtn VTAF II VTAF III General Elec Cap Corp. Mtn Preferred stock Power Analog Microelectronics Stock InvenSense, Inc. TSMC Global Stock ASML Government bond Societe De Financement De Lec Held-to-maturity financial assets 〃 Available-for-sale financial assets Investments accounted for using equity method Investments accounted for using equity method Held-to-maturity financial assets 〃 Financial assets carried at cost Available-for-sale financial assets Available-for-sale financial assets Held-to-maturity financial assets Corporate bond Nationwide Building Society-UK Government Guarantee Held-to-maturity financial assets Westpac Banking Corp. 12/12 Frn 〃 ISDF Common stock Integrated Memory Logic, Inc. TS MC Solar Europe Stock TSMC Solar Europe GmbH Available-for-sale financial assets Investments accounted for using equity method - - - - - - - - - - - - - - - - - - - - - - - - - - - - - $ 1,099,629 303,798 1,789,493 2,617,134 - - - $ - - - Subsidiary 227,000 1,746,893 203,400 2,034,000 Subsidiary - - - US$ 20,012 - US$ 20,059 7,330 US$ 3,482 796 US$ 7,932 - - - - - 100,000 - - - - - - $ 550,000 $ 550,000 $ - 150,000 150,000 - - - $ 549,881 151,265 511,535 612,834 502,200 110,634 1,277,958 1,845,052 - - - - - - - US$ 20,000 US$ 20,000 - US$ 20,000 US$ 20,000 - - - - 7,330 US$ 3,345 US$ 3,482 US$ (137) 430,400 2,411,212 - - - - 65,007 - - - 703 US$ 7,460 US$ 861 US$ 6,599 93 US$ 1,037 - - 20,993 US$ 1,085,474 - - - 15,000 US$ 15,000 8,000 US$ 8,000 5,000 US$ 5,000 - - - 2,161 US$ 6,289 127 - - - - 15,000 US$ 15,000 US$ 15,000 8,000 US$ 8,000 US$ 8,000 5,000 US$ 5,000 US$ 5,000 - - - - 20,993 US$ 1,334,501 - - - - - - 886 US$ 3,152 US$ 207 US$ 2,945 1,402 US$ 4,322 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. 83 Subsidiary - EUR 5,103 - EUR 2,500 - - - - - EUR 4,469 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 Owner Relationships Transfer Date Amount Price Reference Purpose of Acquisition Other Terms TSMC Fab Fab Fab Fab Fab Fab Fab Fab Land Fe bruary 7, 2012 to $ 249,912 By the construction MandarTech Interiors December 27, 2012 Fe bruary 7, 2012 to December 27, 2012 Fe bruary 13, 2012 to December 28, 2012 Fe bruary 13, 2012 to December 27, 2012 Ma rch 19, 2012 to December 27, 2012 March 19, 2012 to July 27, 2012 May 28, 2012 to November 27, 2012 August 28, 2012 to December 26, 2012 November 21, 2012 progress Inc. 219,807 By the construction I Domain Industrial progress Co., Ltd. 5,015,656 By the construction Da Cin Construction progress Co., Ltd. 1,766,332 By the construction Fu Tsu Construction progress Co., Ltd. 2,958,930 By the construction China Steel Structure progress 185,115 By the construction progress 320,705 By the construction progress Co., Ltd. Toko Steel Structure Corporation Tasa Construction Corporation 131,678 By the construction Shiny G&M Associated 963,600 progress By the contract Co., Ltd. Miaoli County Government - - - - - - - - - N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Public bidding Manufacturing purpose None N/A Public bidding Manufacturing purpose None N/A Public bidding Manufacturing purpose None N/A Public bidding Manufacturing purpose None N/A Public bidding Manufacturing purpose None N/A Public bidding Manufacturing purpose None N/A Public bidding Manufacturing purpose None N/A Public bidding Manufacturing purpose None N/A Public bidding Manufacturing purpose None 84 TABLE 5 Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries TOTAL PURCHASES FROM OR SALES TO RELATED PARTIES OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL FOR THE YEAR ENDED DECEMBER 31, 2012 (Amounts in Thousands of New Taiwan Dollars, Unless Specified Otherwise) Transaction Details Abnormal Transaction Notes/Accounts Payable or Receivable Company Name Related Party Nature of Relationships Purchases/Sales Amount (US$ in Thousands) % to Total Payment Terms Unit Price (Note) Payment Terms (Note) TSMC TSMC North America GUC VIS TSMC China WaferTech VIS SSMC Subsidiary Investee accounted for using equity method Investee accounted for using equity method Subsidiary Indirect subsidiary Investee accounted for using equity method Investee accounted for using equity method Sales Sales Sales Purchases Purchases Purchases Purchases TSMC North America GUC Investee accounted for using equity method Sales Mcube Inc. Investee accounted for using equity method Sales by TSMC by TSMC $ 326,768,469 4,370,617 177,331 15,708,447 8,026,114 4,475,674 3,638,633 509,890 (US$ 17,238) 249,375 (US$ 8,431) 64 1 - 26 14 8 6 - - Net 30 days after invoice date Net 30 days after monthly closing Net 30 days after monthly closing Net 30 days after monthly closing Net 30 days after monthly closing Net 30 days after monthly closing Net 30 days after monthly closing Net 30 days after invoice date Net 60 days after invoice date Xintec OmniVision Parent company of director (represented for Sales 1,261,163 40 Net 30 days after monthly closing Xintec) 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. - - - - - - - - - - - - - - - - - - - - Ending Balance (US$ in Thousands) $ 40,748,905 238,380 - (1,616,342) (580,064) (364,790) (351,389) 35,032 (US$ 1,206) 80,212 (US$ 2,762) 215,403 Note % to Total 72 - - 10 3 2 2 - - 50 85 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 Amount Action Taken TSMC TSMC North America GUC VIS Subsidiary Investee accounted for using equity method Investee accounted for using equity method $ 40,837,732 238,380 122,893 TSMC Partners TSMC China The same parent company TSMC TSMC Solar The same parent company Development TSMC SSL The same parent company 3,793,421 (US$ 130,636) 1,496,194 (US$ 51,525) 203,277 (US$ 7,000) Xintec OmniVision Parent company of director (represented for 215,403 Xintec) TSMC Technology TSMC Parent company WaferTech TSMC Parent company 117,283 (US$ 4,039) 580,064 (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. 37 15 (Note 2) (Note 2) (Note 2) (Note 2) 66 (Note 2) 16 $ 15,905,710 - - - - - - - - - - - - - - - - - Amounts Received in Subsequent Period $ 17,191,890 - - Allowance for Bad Debts $ - - - - - - - - - - - - - - - 86 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 TSMC Investee Company Location Main Businesses and Products Original Investment Amount Balance as of December 31, 2012 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) Net Income (Losses) of the Investee (Foreign Currencies in Thousands) Equity in the Earnings (Losses) (Note 1) (Foreign Currencies in Thousands) Note TSMC Global TSMC Partners Tortola, British Virgin Islands Tortola, British Virgin Islands Investment activities Investing in companies involved in the design, $ 42,327,245 31,456,130 $ 42,327,245 31,456,130 1 988,268 100 100 $ 49,954,386 38,635,129 $ 469,933 5,088,931 $ 469,933 5,088,451 Subsidiary Subsidiary manufacture, and other related business in the semiconductor industry TSMC China Shanghai, China Manufacturing and selling of integrated circuits 18,939,667 18,939,667 - 100 17,828,683 4,757,121 4,740,524 Subsidiary at the order of and pursuant to product design specifications provided by customers VIS SSMC Hsin-Chu, Taiwan Research, design, development, manufacture, 13,232,288 13,232,288 628,223 packaging, testing and sale of memory integrated circuits, LSI, VLSI and related parts Singapore Fabrication and supply of integrated circuits 5,120,028 5,120,028 314 TSMC Solar Tai-Chung, Taiwan Engaged in researching, developing, designing, 11,180,000 11,180,000 1,118,000 TSMC North America San Jose, California, U.S.A. TSMC SSL Hsin-Chu, Taiwan manufacturing and selling renewable energy and saving related technologies and products Selling and marketing of integrated circuits and semiconductor devices Engaged in researching, developing, designing, manufacturing and selling solid state lighting devices and related applications products and systems 333,718 333,718 11,000 4,304,000 2,270,000 430,400 Xintec GUC VTAF III VTAF II TSMC Europe Emerging Alliance TSMC Japan TSMC GN TSMC Korea Taoyuan, Taiwan Wafer level chip size packaging service 1,357,890 1,357,890 Hsin-Chu, Taiwan Researching, developing, manufacturing, testing and 386,568 386,568 Cayman Islands Cayman Islands Amsterdam, the Netherlands Cayman Islands Yokohama, Japan Taipei, Taiwan Seoul, Korea marketing of integrated circuits Investing in new start-up technology companies Investing in new start-up technology companies Marketing and engineering supporting activities Investing in new start-up technology companies Marketing activities Investment activities Customer service and technical supporting activities 1,896,914 704,447 15,749 852,258 83,760 100,000 13,656 2,074,155 949,267 15,749 892,855 83,760 - 13,656 94,950 46,688 - - - - 6 - 80 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 VTAF III Cayman Islands Investing in new start-up technology companies 1,801,918 1,795,131 TSMC Solar Europe TSMC Solar NA Amsterdam, the Netherlands Delaware, U.S.A. Investing in solar related business Selling and marketing of solar related products 504,107 205,772 411,032 147,686 TSMC SSL TSMC Lighting NA Delaware, U.S.A. Selling and marketing of solid state lighting related 3,133 3,133 products - - 1 1 40 39 99 100 95 40 35 50 98 100 99 100 100 100 20 49 100 100 100 9,462,038 2,329,808 770,379 6,710,956 4,721,908 1,831,634 Investee accounted for using equity method Investee accounted for using equity method 6,031,369 (4,037,825) (4,044,944) Subsidiary 3,209,288 312,232 312,232 Subsidiary 2,411,212 (1,466,733) (1,397,589) Subsidiary 1,550,313 (91,177) (49,604) Investee with a controlling 1,222,972 612,369 209,312 financial interest Investee accounted for using equity method 1,047,285 563,056 235,761 167,359 142,412 65,007 26,935 (177,152) 62,349 34,931 (2,940) 3,786 (24,928) 2,602 122,852 61,102 34,931 (2,925) 3,786 (24,928) 2,602 Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary 2,998,413 (5,037,203) Note 2 1,322,024 (177,152) Note 2 Investee accounted for using equity method Investee accounted for using equity method 175,016 44,037 2,864 (119,668) (65,268) Note 2 Note 2 Subsidiary Subsidiary (7) Note 2 Subsidiary (Continued) 87 Investor Company Investee Company Location Main Businesses and Products Original Investment Amount Balance as of December 31, 2012 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) Net Income (Losses) of the Investee(Foreign Currencies in Thousands) Equity in the Earnings (Losses) (Note 1) (Foreign Currencies in Thousands) Note TSMC Partners TSMC Development VisEra Holding Company Delaware, U.S.A. Cayman Islands Investment activities Investing in companies involved in the design, US$ 0.001 US$ 0.001 US$ 43,000 US$ 43,000 TSMC Technology ISDF II ISDF TSMC Canada Mcube Inc. Delaware, U.S.A. Cayman Islands Cayman Islands Ontario, Canada Delaware, U.S.A. manufacturing, and other related businesses in the semiconductor industry Engineering support activities Investing in new start-up technology companies Investing in new start-up technology companies Engineering support activities Research, development, and sale of micro- semiconductor device US$ 0.001 US$ 0.001 US$ 14,153 US$ 14,153 US$ 787 US$ 787 US$ 2,300 US$ 2,300 US$ 1,800 US$ 1,800 - 43,000 - 14,153 787 2,300 6,333 100 US$ 604,367 US$ 144,333 49 US$ 104,540 US$ 30,091 100 US$ 11,721 US$ 1,106 97 US$ 10,479 US$ (121) 97 US$ 7,805 US$ 2,493 100 US$ 4,589 US$ 422 US$ (12,599) - 25 Note 2 Note 2 Note 2 Note 2 Note 2 Note 2 Note 2 Subsidiary Investee accounted for using equity method Subsidiary Subsidiary Subsidiary Subsidiary Investee accounted for using equity method TSMC WaferTech Washington, U.S.A. Manufacturing, selling, testing and computer- US$ 280,000 US$ 280,000 293,637 100 US$ 262,053 US$ 142,551 Note 2 Subsidiary Development VTAF III Mutual-Pak Technology Co., Taipei, Taiwan Ltd. Growth Fund VTA Holdings Cayman Islands Delaware, U.S.A. aided designing of integrated circuits and other semiconductor devices Manufacturing and selling of electronic parts and researching, developing, and testing of RFID Investing in new start-up technology companies Investing in new start-up technology companies VTAF II VTA Holdings Delaware, U.S.A. Investing in new start-up technology companies Emerging Alliance VTA Holdings Delaware, U.S.A. Investing in new start-up technology companies US$ 5,212 US$ 3,937 15,643 58 US$ 2,120 US$ (1,422) Note 2 Subsidiary US$ 1,830 US$ 1,830 - - - - - - - - - - - 100 US$ 368 - 62 US$ (141) - Note 2 Note 2 Subsidiary Subsidiary 31 7 - - - - Note 2 Subsidiary Note 2 Subsidiary 100 EUR 4,469 EUR (3,133) Note 2 Subsidiary TSMC Solar Europe TSMC Solar Europe GmbH Hamburg, Germany Selling of solar related products and providing EUR 12,400 EUR 9,900 customer service TSMC GN TSMC Solar Tai-Chung, Taiwan Engaged in researching, developing, designing, $ 42,945 $ - 4,294 - $ 23,076 $ (4,037,825) Note 2 TSMC SSL Hsin-Chu, Taiwan manufacturing and selling renewable energy and saving related technologies and products 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 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. Investee accounted for using equity method Investee accounted for using equity method (Concluded) 88 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 TSMC China Ma nufacturing and selling of integrated circuits at the order of and pursuant to product design specifications provided by customers Total Amount of Paid-in Capital (Foreign Currencies in Thousands) Method of Investment $ 18,939,667 (RMB 4,502,080) (Note 1) Accumulated Outflow of Investment from Taiwan as of January 1, 2012 (US$ in Thousands) $ 18,939,667 (US$ 596,000) Investment Flows Outflow Inflow $ - $ - Accumulated Outflow of Investment from Taiwan as of December 31, 2012 (US$ in Thousands) $ 18,939,667 (US$ 596,000) Sh anghai Walden Venture Capital Investing in new start-up technology Enterprise companies 2,324,062 (US$ 78,791) (Note 2) 147,485 (US$ 5,000) - - 147,485 (US$ 5,000) Investee Company Percentage of Ownership Equity in the Earnings (Losses) TSMC China Sh anghai Walden Venture Capital Enterprise 100% 6% $ 4,740,524 (Note 3) Carrying Value as of December 31, 2012 (US$ in Thousands) $ 17,828,683 Accumulated Inward Remittance of Earnings as of December 31, 2012 $ - (Note 4) 145,190 (US$ 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) $ 19,087,152 (US$ 601,000) $ 19,087,152 (US$ 601,000) $ 19,087,152 (US$ 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. 89 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. 0 Company Name Counter Party TSMC TSMC North America TSMC China TSMC Japan TSMC Europe TSMC Korea TSMC Technology WaferTech TSMC Canada Xintec TSMC SSL 90 Nature of Relationship (Note 1) 1 1 1 1 1 1 1 1 1 1 Financial Statements Item Sales Receivables from related parties Other receivables from related parties Payables to related parties Sales Purchases Marketing expenses - commission Disposal of property, plant and equipment Purchases of property, plant and equipment Loss on disposal of property, plant and equipment, net Other receivables from related parties Payables to related parties Deferred credits Marketing expenses - commission Payables to related parties Marketing expenses - commission Research and development expenses Payables to related parties Marketing expenses - commission Research and development expenses Payables to related parties Sales Purchases Payables to related parties Research and development expenses Payables to related parties Manufacturing expenses Research and development expenses Payables to related parties Miscellaneous revenue Intercompany Transactions Amount Terms (Note 2) Percentage of Consolidated Total Gross Sales or Total Assets $ 326,768,469 40,748,905 88,827 37,972 2,956 15,708,447 72,373 46,941 216,084 18,699 2,686 1,616,342 17,271 277,374 41,532 345,906 49,763 32,226 20,643 713,323 117,283 12,745 8,026,114 580,064 206,894 14,388 180,768 5,023 36,434 5,625 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 64% 4% - - - 3% - - - - - - - - - - - - - - - - 2% - - - - - - - (Continued) 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 Intercompany Transactions 0 1 2 3 3 TSMC TSMC Solar TSMC Partners TSMC Global TSMC China TSMC Solar TSMC Solar TSMC Solar Europe GmbH TSMC SSL TSMC Solar NA TSMC Development TSMC Development TSMC Development WaferTech 1 1 3 3 1 1 3 3 1 General and administrative expenses Purchases of property, plant and equipment Miscellaneous revenue Payables to related parties Interest expenses Other receivables from related parties Interest income Interest income Sales Receivables from related parties Sales Other payable to related parties Other payable to related parties Other receivables from related parties $ 2,694 14,448 5,625 7,373 4,870 3,793,421 16,905 2,558 23,771 3,659 3,897 1,496,194 203,277 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) 91 B. For the year ended December 31, 2011 No. 0 Company Name Counter Party TSMC TSMC North America TSMC China TSMC Japan TSMC Europe TSMC Korea GUC (Note 3) TSMC Technology WaferTech TSMC Canada Xintec 92 Nature of Relationship (Note 1) 1 1 1 1 1 1 1 1 1 1 Financial Statements Item Sales Receivables from related parties Other receivables from related parties Payables to related parties Sales Purchases Marketing expenses - commission Sales of property, plant and equipment Purchases of property, plant and equipment Gain on disposal of property, plant and equipment Technical service income Other receivables from related parties Payables to related parties Other assets Marketing expenses - commission Payables to related parties Marketing expenses - commission Research and development expenses Payables to related parties Marketing expenses - commission Payables to related parties Sales Research and development expenses Research and development expenses Payables to related parties Sales Purchases Sales of property, plant and equipment Gain on disposal of property, plant and equipment Other receivables from related parties Payables to related parties Research and development expenses Payables to related parties Manufacturing overhead Research and development expenses Settlement loss Payables to related parties Intercompany Transactions Amount Terms (Note 2) Percentage of Consolidated Total Gross Sales or Total Assets $ 234,902,043 24,661,104 23,887 26,536 9,834 10,392,189 64,907 2,885,847 70,491 94,987 1,063 23,688 946,826 1,493 284,644 68,873 357,582 45,489 29,957 22,049 3,146 1,158,302 5,718 534,804 112,926 27,049 7,305,879 72,880 1,463 14,196 420,459 192,616 18,887 260,250 7,313 19,686 37,013 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 55% 3% - - - 2% - 1% - - - - - - - - - - - - - - - - - - 2% - - - - - - - - - - (Continued) Intercompany Transactions Amount Terms (Note 2) Percentage of Consolidated Total Gross Sales or Total Assets No. 0 1 2 Company Name Counter Party TSMC TSMC Solar Europe GmbH TSMC SSL TSMC Solar GUC (Note 3) TSMC Global TSMC North America TSMC Partners GUC-NA GUC-Japan GUC-Shanghai TSMC China TSMC SSL TSMC Solar Nature of Relationship (Note 1) 1 1 1 1 3 3 3 3 3 3 3 Financial Statements Item Sales Miscellaneous revenue Other receivables from related parties Miscellaneous revenue Other receivables from related parties Interest expense Purchases Manufacturing overhead Operating expenses Manufacturing overhead Operating expenses Operating expenses Long-term receivables from related parties Interest income Other receivables from related parties Other receivables from related parties $ 148,898 2,625 1,947 2,625 1,857 22,293 296,462 120,408 61,369 30,583 21,826 8,568 7,591,420 17,773 348,369 454,634 - - - - - - - - - - - - - - - - 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. - - - - - - - - - - - - 1% - - - (Concluded) 93 9. U.S. GAAP Financial Information TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LIMITED AND SUBSIDIARIES TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES U.S. GAAP RECONCILIATIONS OF SHAREHOLDERS’ EQUITY December 31, 2012 and 2011 (In Thousand New Taiwan Dollars) U.S. GAAP RECONCILIATIONS OF NET INCOME For the Years Ended December 31, 2012 and 2011 (In Thousand New Taiwan Dollars) Total shareholders’ equity based on R.O.C. GAAP Adjustments - U.S. GAAP adjustments on equity-method investees - 10%tax on undistributed earnings - Goodwill - Carrying amount difference for 68% equity interest in TASMC’s share acquisition - Reversal of amortization of goodwill recognized under R.O.C. GAAP - Accrued pension cost - Accrual for deferred pension loss - Reversal of the increase in pension liability resulted from net loss not recognized as pension cost under R.O.C. GAAP - Gain from deconsolidation of GUC - Income tax effect of U.S. GAAP adjustments Net adjustment 2012 2011 $ 725,753,699 $ 632,043,551 (939,111) (9,629,231) 52,212,732 (11,643,424) (19,742) (2,734,595) 4,416 4,304,106 107,197 31,662,348 Net income Consolidated net income based on R.O.C. GAAP Adjustments - U.S. GAAP adjustments on equity-method investees - 10% tax on undistributed earnings - Profit sharing to employees - Fair market value adjustment of prior 52,212,732 year accrual - Pension expense - Stock-based compensation - Gain from deconsolidation of GUC - Income tax effect of U.S. GAAP adjustments Net adjustment (626,983) (2,808,380) (11,507,850) (23,683) (2,108,370) - 4,304,106 127,484 39,569,056 2012 2011 $ 165,963,689 $ 134,453,260 (319,519) (6,820,850) - 3,940 (157,655) - (15,138) (7,309,222) (127,210) (1,428,775) (30,610) 3,762 (60,074) 4,304,106 (11,145) 2,650,054 Consolidated net income based on U.S. GAAP $ 158,654,467 $ 137,103,314 Attributable to Shareholders of the parent Noncontrolling interests 158,849,580 (195,113) $ 158,654,467 136,872,746 230,568 $ 137,103,314 Total equity based on U.S. GAAP $ 757,416,047 $ 671,612,607 Attributable to Shareholders of the parent Noncontrolling interests 754,860,062 2,555,985 $ 757,416,047 669,162,570 2,450,037 $ 671,612,607 94 CONTACT INFORMATION Corporate Headquarters & Fab 12 8, Li-Hsin Rd. 6, Hsinchu Science Park, Hsinchu 300-78, Taiwan R.O.C. Tel: 886-3-5636688 Fax: 886-3-5637000 TSMC Europe B.V. World Trade Center, Zuidplein 60, 1077 XV Amsterdam The Netherlands Tel: 31-20-3059900 Fax: 31-20-3059911 Fab 2, Fab 5 121, Park Ave. 3, Hsinchu Science Park, Hsinchu 300-77, Taiwan R.O.C. Tel: 886-3-5636688 Fax: 886-3-5781546 TSMC Japan Limited 21F, Queen’s Tower C, 2-3-5, Minatomirai, Nishi-ku, Yokohama Kanagawa, 220-6221, Japan Tel: 81-45-6820670 Fax: 81-45-6820673 Fab 3 9, Creation Rd. 1, Hsinchu Science Park, Hsinchu 300-77, Taiwan R.O.C. Tel: 886-3-5636688 Fax: 886-3-5781548 TSMC China Company Limited 4000, Wen Xiang Road, Songjiang, Shanghai, China Postcode: 201616 Tel: 86-21-57768000 Fax: 86-21-57762525 Fab 6 1, Nan-Ke North Rd., Tainan Science Park, Tainan 741-44, Taiwan R.O.C. Tel: 886-6-5056688 Fax: 886-6-5052057 TSMC Korea Limited 15F, AnnJay Tower, 718-2, Yeoksam-dong, Gangnam-gu Seoul 135-080, Korea Tel: 82-2-20511688 Fax: 82-2-20511669 Fab 8 25, Li-Hsin Rd., Hsinchu Science Park, Hsinchu 300-78, Taiwan R.O.C. Tel: 886-3-5636688 Fax: 886-3-5662051 TSMC Liaison Office in India 1st Floor, Pine Valley, Embassy Golf-Links Business Park Bangalore-560071, India Tel: 1-408-3827960 Fax: 1-408-3828008 Fab 14 1-1, Nan-Ke North Rd., Tainan Science Park, Tainan 741-44, Taiwan R.O.C. Tel: 886-6-5056688 Fax: 886-6-5051262 TSMC Design Technology Canada Inc. 535 Legget Dr., Suite 600, Kanata, ON K2K 3B8, Canada Tel: 613-5761990 Fax: 613-5761999 Fab 15 1, Keya Rd. 6., Daya Dist., Taichung 428-82, Taiwan, R.O.C. Tel: 886-4-27026688 Fax: 886-4-25607548 TSMC North America 2585 Junction Avenue, San Jose, CA 95134, U.S.A. Tel: 1-408-3828000 Fax: 1-408-3828008 TSMC Spokesperson Name: Lora Ho Title: Senior Vice President & CFO Tel: 886-3-5054602 Fax: 886-3-5670121 Email: cyhsu@tsmc.com TSMC Deputy Spokesperson/Corporate Communications Name: Elizabeth Sun Title: Director, TSMC Corporate Communication Division Tel: 886-3-5682085 Fax: 886-3-5670121 Email: elizabeth_sun@tsmc.com Auditors Company: Deloitte & Touche Auditors: Hung-Peng Lin, Shu-Chieh Huang Address: 12F, 156, Sec. 3, Min-Sheng E. Rd., Taipei 105-96, Taiwan R.O.C. Tel: 886-2-25459988 Fax: 886-2-25459966 Website: http://www.deloitte.com.tw Common Share Transfer Agent and Registrar Company: The Transfer Agency Department of Chinatrust Commercial Bank Address: 5F, 83, Sec. 1, Chung-Ching S. Rd., Taipei 100-08, Taiwan R.O.C. Tel: 886-2-21811911 Fax: 886-2-23116723 Website: http://www.chinatrust.com.tw ADR Depositary Bank Company: Citibank, N.A. Depositary Receipts Services Address: 388 Greenwich Street, New York, NY 10013, U.S.A. Website: http://www.citi.com/dr Tel: 1-877-2484237 (toll free) Tel: 1-781-5754555 (out of US) Fax: 1-201-3243284 E-mail: citibank@shareholders-online.com TSMC’s depositary receipts of the common shares are listed on New York Stock Exchange (NYSE) under the symbol TSM. The information relating to TSM is available at http://www.nyse.com and http://mops. twse.com.tw Copyright © 2013 by Taiwan Semiconductor Manufacturing Company, Ltd. All rights reserved. 

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