TSMC
Annual Report 2013

Plain-text annual report

i T a w a n S e m i c o n d u c t o r M a n u f a c t u r i n g C o m p a n y , L t d . A n n u a l R e p o r t 2 0 1 3 ( I ) TSE: 2330 NYSE: TSM TSMC Annual Report 2013 (I) ●Taiwan Stock Exchange Market Observation Post System：http://mops.twse.com.tw ●TSMC annual report is available at http://www.tsmc.com/english/investorRelations/annual_reports.htm Printed on March 12, 2014 TSMC Vision, Mission & 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’s Mission Our mission is to be the trusted technology and capacity provider of the global logic IC industry for years to come. TSMC’s 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. 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 Overview 3.2 Board of Directors 3.3 Major Resolutions of Shareholders’ Meeting and Board Meetings 3.4 Taiwan Corporate Governance Implementation as Required by the Taiwan Financial Supervisory Commission 3.5 Code of Ethics and Business Conduct 3.6 Regulatory Compliance 3.7 Internal Control System Execution Status 3.8 Status of Personnel Responsible for the Company’s Financial and Business Operation 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 Overview 7.2 Environmental, Safety and Health (ESH) Management 7.3 TSMC Education and Culture Foundation 7.4 TSMC Volunteer Program 7.5 Social Responsibility Implementation Status as Required by the Taiwan Financial Supervisory Commission 2 6 6 8 12 14 20 28 29 30 34 35 36 40 42 43 3.9 Information Regarding TSMC’s Independent Auditor 43 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 3.10 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 43 44 45 52 54 54 56 58 58 58 60 60 62 67 69 71 75 76 76 81 92 93 96 104 106 109 110 110 115 115 1. Letter to Shareholders TSMC achieved record revenue in 2013, and will continuously invest in R&D and capacity to help customers win market opportunities. Dear Shareholders, In 2013, TSMC enjoyed another year of record revenue and profit as we continued to harvest the benefits of a shift in our strategy that began in 2009. Four years ago, we began to invest heavily in research and development as well as capital expenditure when we saw signs that the arrival of mobile computing devices such as smartphones and tablets could present promising opportunities to the semiconductor industry. Today, mobile products are indeed driving a new wave of growth and the most successful ICs in mobile computing come from TSMC customers, enabled by our process technologies and capacity buildup. TSMC’s investments in R&D helped our customers to realize their design innovations, and TSMC’s capacity buildup paved the way for our customers to maximize their market opportunities. We are now better positioned than any company engaging in the IC foundry business to help IC designers benefit from the worldwide growth in demand for mobile products. Rapid adoption of TSMC’s 28-nanometer process by IC designers seeking superior performance, lower power consumption, and smaller die size for their mobile products drove a nearly threefold increase in shipments and revenue for our 28-nanometer wafers in 2013. Thanks to our differentiated technologies and manufacturing excellence, we enjoyed a segment share of more than 80 percent in the served-available market for 28-nanometer technologies. Other achievements in 2013 include: ● Total wafer shipments reached 15.67 million 8-inch equivalent wafers versus 14.04 million in 2012. ● Advanced technologies (40/45-nanometer and beyond) accounted for 50 percent of total wafer revenue. ● TSMC’s market share in the total semiconductor foundry segment rose successively during the last four years and reached 49 percent. 002 003 2013 Financial Performance Consolidated revenue totaled NT$597.02 billion, an increase of 17.8 percent over NT$506.75 billion in 2012. Net income was NT$188.15 billion and diluted earnings per share were NT$7.26. Both increased 13.1 percent from the 2012 level of NT$166.32 billion net income and NT$6.41 diluted EPS. In US dollars, TSMC generated net income of US$6.34 billion on consolidated revenue of US$20.11 billion, compared with net income of US$5.62 billion on consolidated revenue of US$17.12 billion for 2012. Gross profit margin was 47.1 percent compared with 48.2 percent in 2012, and operating profit margin was 35.1 percent compared with 35.8 percent a year earlier. Net profit margin was 31.5 percent, a decrease of 1.3 percentage points from the previous year’s 32.8 In 2013, we also began the development work of our 10-nanometer technology, which is scheduled to enter risk production in 2015 and volume production in 2016. This will be our third generation of FinFET technology, following 16-FinFET and 16-FinFET+, and is expected to deliver the industry’s leading performance and density. TSMC’s design ecosystem, the Open Innovation Platform® (OIP) continues to help our customers to rapidly adopt these advanced technologies and shorten their time-to-market. This ecosystem offers an increasingly important advantage to our customers as technologies grow more complex and the need for first-time silicon success and early time-to-market become more critical. In 2013, the libraries and silicon IP portfolio available on TSMC’s OIP were expanded to contain more than 6,300 items, representing the world’s largest IP portfolio of its kind. Over 60% of new tape-outs by our customers at TSMC adopted one or more libraries or IPs from this percent. Technological Developments Following the ongoing success of our 28-nanometer technology, our 20-nanometer System-on-Chip (20-SoC) has entered volume production in 2014 after we began accepting customers’ product tape-outs in 2013. TSMC’s 20-SoC technology possesses the highest gate density of any 20-/22-nanometer process in volume production, and we have received an enthusiastic response from customers with dozens of product tape-outs scheduled in 2014. We expect our 20-nanometer production ramp to be faster than our 28-nanometer, becoming a significant growth driver for TSMC in both 2014 and 2015. Next in the pipeline is our 16-nanometer process, which features a FinFET transistor structure for better performance. TSMC’s 16-nanometer (16-FinFET) entered risk production in November 2013 and is firmly on track to complete manufacturing qualification in early 2014 and to meet our target of volume production in 2015, just one year after 20-nanometer. TSMC’s 16-nanometer technology has captured the vast portion of 16-/14-nanometer products in the platform. Corporate Developments The Board of Directors appointed Dr. Mark Liu and Dr. C.C. Wei as President and Co-Chief Executive Officer of TSMC on November 12. Dr. Liu and Dr. Wei joined TSMC in 1993 and 1998 respectively, and Worldwide Sales and Marketing, and Business Development. They have also demonstrated seamless teamwork in the best traditions of TSMC’s corporate culture. Dr. S.Y. Chiang, formerly Executive Vice President and Co-Chief Operating Officer, retired in October 2013 after 16 years of distinguished service to the Company. Dr. Chiang continues to serve the Company as Adviser to the Chairman of the Board. I will continue to dedicate my full time and effort to the Company as Chairman of the Board and maintain the ultimate responsibility for the Company. Honors and Awards semiconductor foundry segment. More than 20 product tape-outs In 2013, TSMC was honored for our achievements in sustainability, already have been scheduled throughout 2014 from multiple customers across a wide range of applications. Meanwhile, we corporate governance, management, investor relations and innovation by organizations including Barron’s, FinanceAsia, are developing an enhanced transistor version of this technology, Institutional Investor, IR Magazine, GlobalViews Magazine, 16-FinFET+, that will offer an additional 15% performance CommonWealth Magazine, and Thomson Reuters. improvement and which we believe will be the highest performance technology among all available 16-/14-nanometer technologies in 2014. have served TSMC in managerial positions including Operations, R&D, in 2010 and 2012. Capacity Plan Sales Breakdown by Technology 2012 2013 2014 14% 11% 10% 14.83 million 16.45 million 18.09 million 2012 2013 2014 61% 50% 40% 39% 50% 60% Annual Growth Rate Capacity: 8-inch equivalent wafers Note: Starting 2013, TSMC no longer includes SSMC’s capacity in this capacity tables. > 40/45nm 2014 wafer shipment is expected to be ≤ 40/45nm approximately 18 million 8-inch equivalent wafers. The Dow Jones Sustainability Indexes (DJSI) recognized TSMC as We have therefore been working on imaging and MEMS the Semiconductors and Semiconductor Equipment Industry Group (micro-electro-mechanical system) sensors, power management, Leader in 2013, highlighting our leadership and continued progress radio-frequency, embedded-flash, advanced packaging, and in sustainability and corporate social responsibility. TSMC is the first Taiwan company, and one of only four Asian companies, to win ultra-low-power technologies. We have the experience and ability to integrate all these technologies together to provide SoC (system on the highest score among its industry peers in the DJSI’s 24 industry chip) or SiP (system in package) solutions which will be key to our groups, made up of 59 industries. In addition, TSMC is one of just future success. two semiconductor companies chosen as index components for 13 consecutive years, and was also named semiconductor industry leader Moreover, as TSMC forges ahead in technology leadership, we play Outlook While world semiconductor market is expected to grow at only 3-5% annually in the next five years, we expect to significantly out-grow the semiconductor market during that period as we have done in 25 of the last 27 years since our founding. We have become the basic technology and capacity supplier to the world semiconductor industry, particularly the strong-growth part of that industry. Our success has continued to contribute to the growth of the information technology industry. We are well on our way to a very competitive 10-nanometer technology, and have started 7-nanometer development. The future world of ubiquitous connectivity will require us to integrate our advanced logic technology with many specialty technologies. a central role of a Grand Alliance with key suppliers, customers, and our design ecosystem partners, forming the main open technology platform for the widest range of product innovations in the semiconductor industry today. Together with our Grand Alliance, we believe TSMC will continue to capture the opportunities presented by a world that values and rewards innovation. Morris Chang Chairman 004 005 2. Company Profile 2.1 An Introduction to TSMC Founded on February 21, 1987 and headquartered in Hsinchu, Taiwan, TSMC pioneered the foundry business model by focusing solely on manufacturing customers’ semiconductor designs. As a pure-play semiconductor foundry, the Company does not design, manufacture, or market semiconductor products under its own brand name, ensuring that TSMC does not compete directly with its customers. Today, TSMC is the world’s largest pure-play semiconductor foundry, manufacturing more than 8,600 different products using 202 different technologies for over 440 different customers in 2013. With a diverse global customer base, TSMC-manufactured semiconductors are used in a wide variety of applications covering various segments of the computer, communications, consumer, industrial and standard semiconductor markets. Annual capacity of the manufacturing facilities managed by TSMC and its subsidiaries totaled 16.4 million 8-inch equivalent wafers in 2013. TSMC’s managed manufacturing facilities include three 12-inch wafer GIGAFABTM facilities, four 8-inch wafer fabs, and one 6-inch wafer fab in Taiwan, as well as two 8-inch wafer fabs at wholly owned subsidiaries: WaferTech in the United States and TSMC China Company Limited. TSMC is the first foundry to provide 28nm and 20nm production capabilities. It captured 49% of total foundry market segment share in 2013. 006 007 TSMC provides customer service through its account management and engineering services offices in North America, Europe, Japan, China, South Korea, and India. The Company employed more than 40,000 people worldwide at the end of 2013. With TSMC’s focus on customer trust, the Company strengthened its Open Innovation Platform® (OIP) initiative in 2013 with additional services. During the 2013 Open Innovation Platform® (OIP) Ecosystem Forum, the Company revealed 16nm FinFET Reference Flow (both full-chip and IP Design) and 3D-IC Reference Flow, to highlight TSMC continued to lead the foundry segment of the semiconductor the success of design enablement through OIP. The OIP Ecosystem industry in both advanced and specialty process technologies. By Forum, which was held in October 2013 at San Jose, California, leveraging the experience of 65nm and 40nm, TSMC successfully was well attended by both customers and ecosystem partners ● 28nm High Performance Mobile Computing (28HPM) technology 2.2.2 Market Overview for tablets, smartphones, and SoC applications with better power efficiency requirement. ● 28nm Low Power (28LP and 28HPL) and RF (28HPL-RF and 28LP-RF) technology for mainstream smartphones, application processors, tablets, home entertainment and digital consumer applications. ● 40nm general purpose (40G) technology for performance-driven markets like CPU, GPU, FPGA, HDD, Game Console, Network reached volume production of 28nm with excellent yield performance to demonstrate the value of collaboration through OIP to foster Processor and Gigabit Ethernet applications. in 2013 featuring 28HP and 28HPM for high performance and 28LP innovations. and 28HPL for low power. Furthermore, TSMC delivered 20nm SoC ● 40nm Low Power (40LP and 40LP+) and RF technology for smartphones, DTV (Digital Television), STB (Set-Top-Box), game and and 16nm FinFET technology nodes on-schedule and successfully TSMC offers the foundry segment’s widest technology portfolio wireless connectivity applications. received initial customer tape-outs of 20nm technology. In addition and continues to invest in advanced technologies and specialty ● 55nm low power RF technology for WLAN (Wireless Local Area to general-purpose logic process technology, TSMC supports the technologies, which is a key differentiator from our competitors and Network), Bluetooth and other handheld applications. wide-ranging needs of its customers with embedded non-volatile provides customers more added value. ● 55nm and 85nm ultra-low power technology for mobile relevant memory, embedded DRAM, Mixed Signal/RF, high voltage, CMOS image sensor, MEMS, silicon germanium technologies and Technologies which the Company either developed or rolled out in automotive service packages. 2013 include: applications. Specialty Technology TSMC’s subsidiaries TSMC Solid State Lighting Ltd. and TSMC Advanced Technology ● 40nm eFlash is under development for general offerings. ● 55nm eFlash technology passed qualification; production is Solar Ltd. also engage in researching, developing, designing, manufacturing and selling solid state lighting devices and related products and systems, and solar-related technologies and products, respectively. ● 10nm FinFET technology is under development to keep TSMC’s expected to start in 2014. technology leadership position in the industry. It is expected to be ready for production by end of 2015. 10nm can provide the best ● 55nm and 65nm 5V LDMOS (Laterally Diffused Metal Oxide Semiconductor) for power management application. density/cost benefit with desired speed/power performance to meet ● 65nm joint developed eFlash technology was qualified and entered The Company is listed on the Taiwan Stock Exchange (TWSE) under ticker number 2330, and its American Depositary Shares trade on the New York Stock Exchange (NYSE) under the symbol “TSM“. 2.2 Market/Business Summary 2.2.1 TSMC Achievements In 2013, TSMC maintained its leading position in the total foundry segment of the global semiconductor industry, with an estimated market segment share of 49%. TSMC achieved this result amid intense competition from both established players and relatively new entrants to the business. Leadership in advanced process technologies is a key factor in TSMC’s strong market position. In 2013, 50% of TSMC’s wafer revenue came from manufacturing processes with geometries of 40/45nm and below. customers’ expectations. It can serve customers from all different applications, such as APU (Accelerated Processing Unit), CPU (Central Processing Unit), FPGA (Field-Programmable Gate Array), into production for smartcard applications. ● 55nm and 80nm high voltage process for high resolution FHD and WQXGA display driver IC, which could support Retina to Super GPU (Graphics Processing Unit), Networking and mobile computing Retina display quality in smartphones. applications, including smartphones, tablets and high-end SoC ● 90nm eFlash technology passed automotive qualification; devices. production is expected to start in 2014. ● 16nm FinFET technology (16FF) passed qualification and entered ● 0.13μm BCD was qualified on 12-inch process in the third quarter risk production stage on-schedule. It provides the best value in speed/power optimization to meet next generation products requirements in CPU, GPU, APU, FPGA, Networking and mobile computing applications, including smartphones, tablets and of 2013 and achieved one identical SPICE model for both 8-inch and 12-inch processes. It allows TSMC to expand its capacity support to our PMIC customers from 8-inch fab to 12-inch GIGAFABTM facilities for high volume production. high-end SoC devices. Meanwhile, we are developing an enhanced ● 0.18μm BCD second generation entered into production with version of this technology, 16-FinFET+, which is expected to offer multiple products from multiple customers. The technology also an additional 15% performance improvement. ● 20nm System-on-Chip technology (20SoC) passed all qualification items and entered into production stage with stable yield passed automotive process qualification criteria. It offers worldwide competitive power LDMOS Rds(on) performance and with wide voltage spectrum from 6V to 70V for multiple applications in performance. It provides better density and power value than 28nm Computing, Communication- Consumer and automotive markets. for both performance-driven products and mobile computing ● 40nm and 55nm high precision analog processes were released. applications migration. ● 28nm High Performance (28HP) technology for performance-driven They offer high speed data conversion applications like audio codec with options to integrate advanced DSP function and 5V amplifier. markets like CPU, GPU, APU, FPGA and high-speed networking ● Modular MEMS (Micro Electro Mechanical Systems) Service applications. delivered multiple accelerometer samples successfully for a few customers, and much improved their product time-to-market. TSMC estimates that the worldwide semiconductor market in 2013 reached US$322 billion in revenue, a 5% growth compared to 2012. Total foundry, a manufacturing sub-segment of the semiconductor industry, generated total revenues of US$37 billion in 2013, or 11% YoY growth. 2.2.3 Industry Outlook, Opportunities and Threats Industry Demand and Supply Outlook Following 16% growth in 2012, foundry segment again posted double-digit growth, to 11% in 2013, mainly driven by fabless market share gains over IDM and process technology advancement. TSMC forecasts total semiconductor market growth of 5% YoY in 2014. Over the longer term, due to: increasing semiconductor content in electronics devices; continuing market share gain of fabless; and increasing in-house Application-Specific Integrated Circuits (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 2013 through 2018. 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 4% growth in unit shipments for 2013. Smartphones, which have much stronger growth and higher semiconductor content, have been leading the growth of the sector. The continuing transition to 4G/LTE and LTE-Advanced handsets will bring positive momentum to the market. Smartphones with increasing performance, lower power and more intelligent features will continue to propel the buying interest of new handsets in 2014. The growing popularity of mid- to low-end smartphones in the emerging countries is also a new catalyst driving the growth of the sector. Low power IC is an essential requirement among handset manufacturers. The SoC design for more optimized cost, power and form-factor (i.e. device footprint), plus the appetite for higher performance to run complicated software, will continue to accelerate the migration to advanced process technologies in which TSMC is already the leader. 008 009 ● Computer The computer sector’s unit shipments dropped 10% YoY in 2013, into emerging countries and more diversified applications of tablets, such as Point-of-Sale (POS), education, and medical. TSMC after a decline in 2012. Cautious spending in developed countries, forecasts the tablet market will grow at a 16% CAGR from 2013 lack of innovation, and budget competition from tablets, were through 2018, and become a strong growth driver for both the among the factors causing the weak demand. semiconductor industry and the foundry segment. Moving into 2014, Personal Computer (PC) market will continue Supply Chain to decline. Meanwhile, increasing affordability of Ultrabooks, the introduction of new operating systems, and corporate replacement are expected to stimulate PC demand. Requirements of lower power, higher performance and integration for key computer components such as CPU, GPU, Chipset, etc., should drive product design demand for leading process technologies. ● Consumer The consumer sector faced the sharpest decline ever in 2013: aggregated unit shipments fell 7% YoY. The sales of handheld consumer electronics, such as digital cameras, MP3 players, and handheld game consoles, were significantly impacted by the growth of mobile computing (e.g. smartphones, tablets, etc.), while the home consumer electronics, such as DTV and DVD player, were reaching the plateau of their sales. Consumer electronics may start to regain growth momentum in 2014, thanks to the launch of new-generation game consoles and the emerging smart wearable devices. Riding on the strong growth of mobile computing and the support from the world’s leading companies, smart wearable devices are expected to leap in the coming years. 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. 2.2.4 TSMC Position, Differentiation and Strategy Position TSMC is the semiconductor foundry leader for both advanced and specialty process technologies. As a result, the Company commanded a 49% market share in 2013. In terms of TSMC’s net revenue geographic distribution, 71% came from companies headquartered in North America; 13% from the Asia Pacific region, excluding China and Japan; 7% from Europe; 6% from China; and 3% from Japan. By end product application, 15% of TSMC’s net revenue came from the computer sector, 54% from communications, 10% from consumer products, and 21% from industrial and standard products. Differentiation TSMC’s leadership position is based on three defining strengths Meanwhile, increasing innovations in the consumer sector have also and a business strategy rooted in the Company’s heritage. TSMC encouraged new usage models, such as integration of touch sensing, distinguishes itself from the competition through its technology motion recognition, high-resolution and 3D display. Besides the need leadership, manufacturing excellence and customer trust. for advanced technologies, specialty technologies such as CMOS Image Sensor (CIS), High-Voltage (HV) drivers, embedded memory, As a technology leader, TSMC is consistently first among dedicated micro-controller and MEMS are becoming prominent requirements. foundries to develop next-generation leading-edge technologies. With its comprehensive technology portfolio, TSMC will be able to capitalize on these trends. Tablets As a fast-growing application, tablets are increasing their contributions to foundry segment revenue. Led by major OEMs and China tablet makers, around 256 million tablets were shipped in 2013 compared with 165 million units in 2012. The strong sales momentum will continue in 2014, driven by increasing penetration The Company has also established its technology leadership on more mature technology nodes by applying the lessons learned on leading-edge technology development to push its specialty technologies to more advanced process nodes. Beyond process technology, TSMC has established front-end and back-end integration capabilities that result in faster time-to-production and creates the best power, performance and area sweet spot. TSMC has gained manufacturing acclaim for its industry-leading To address challenges inherent in the electronic product life cycle management, and is extending its leadership through the Open Innovation Platform® and Grand Alliance initiatives. The TSMC Open Innovation Platform® initiative hastens the pace of innovation amongst the semiconductor design community, its ecosystem and increased competition from other semiconductor manufacturing companies, TSMC continually strengthens its core competitiveness and deploys both short-term and long-term technology and business development plans to meet Return on Investment (ROI) and growth partners and TSMC’s IP, design implementation and design for objectives. manufacturing capabilities, process technology and backend services. A key element is a set of ecosystem interfaces and collaborative components initiated and supported by TSMC that more efficiently ● Short-term Semiconductor Business Development Plan 1. Substantially ramp the business and sustain advanced technology empower innovation throughout the supply chain and that drive market share through increased capacity investment. the creation and sharing of newly-created revenue and profits. 2. Maintain mainstream technology market share by expanding The TSMC Grand Alliance is one of the most powerful forces for business into new customers and market segments with innovation in the semiconductor industry, bringing together our off-the-shelf technologies. customers, electronic design automation (EDA) partners, IP partners, 3. Further expand TSMC’s business and service infrastructure into and key equipment and materials suppliers at a new, higher level of emerging and developing markets. collaboration. Its objectives are to help our customers, the alliance members and ourselves win business and stay competitive. ● Long-term Semiconductor Business Development Plan 1. Continue developing leading edge technologies consistent with The foundation for customer trust is a commitment TSMC made Moore’s law. when it first opened for business over a quarter of a century ago: 2. Broaden specialty business contributions by further developing to never compete with our customers. As a result, TSMC has never derivative technologies. owned nor marketed a single semiconductor product design, but 3. Provide more integrated services, beginning with technology rather has focused all of its resources on becoming the dedicated definition and design tool preparation then extending through manufacturing resource of choice for the semiconductor industry. wafer processing to complete backend services. Strategy TSMC is confident that its differentiating strengths will enable it to leverage the foundry segment’s attractive growth opportunities. TSMC has invested heavily in leading-edge 20nm and 16nm FinFET technologies, which are in volume production and risk production, respectively. The Company has also invested heavily in the 10nm process node that is currently in technology development. We maintain our technology leadership by collaborating in the technology development process through early engagement and technology definition that provides a smooth transition for our advanced technology customers. At the same time, the Company maintains its leadership in specialty technologies by broadening its offerings and pushing them to more advanced process nodes. Numerous other efforts are also underway to ensure manufacturing excellence through product grade enhancements and manufacturing technology innovation. 010 011 2.3 Organization 2.3.1 Organization Chart Audit Committee Compensation Committee Shareholders’ Meeting Board of Directors, Chairman, Vice Chairman 2.3.2 Major Corporate Functions Quality and Reliability Operations ● Quality and reliability management, customer service ● Product development, manufacturing technology, mainstream fabs, 300mm fabs, affiliate fabs, and back-end technology and service Information Technology 02/28/2014 Human Resources ● Technology system integration, business system integration, IT infrastructure and communication service, IT security and quality ● Human resources management and organizational development ● Proprietary information protection (PIP) and physical security management management Asia Materials Management and Risk Management ● Purchasing, warehousing, import and export, logistics support, environmental protection, industrial safety, occupational health, ● Sales operations, market development, field technical support and and risk management service for Asia customers Europe ● Technical marketing, field technical support and service for Europe customers North America Research and Development ● Advanced and specialty technology development, exploratory research and advanced development, design and technology platform development Finance and Spokesperson ● Corporate finance, accounting, corporate communication, financial strategy and analysis, and corporate spokesperson Research and Development Co-CEO Office Finance and Spokesperson Legal Internal Audit service for North America customers ● Sales operations, market development, field technical support and Operations, Human Resources Asia, Europe, North America, Business Development, Corporate Planning Organization, Quality and Reliability, Information Technology, Materials Management and Risk Management Business Development Legal ● Developing semiconductor foundry business in mobile computing, computer, consumer electronics, communication and industrial related products, identifying new applications and markets, and solidifying customer relationship, brand management, embedded flash business, CIS business ● Corporate legal affairs, litigation, commercial transactions, patents and other intellectual property management, compliance and regulatory work Internal Audit ● Internal control risk monitoring and independent assessment of Corporate Planning Organization Compliance ● Operation resources planning, production and demand planning, business process integration, corporate pricing and market analysis and forecast 012 013 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 125,137,914 % 0.48% 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 Former CEO, TSMC 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% 34,472,675 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 Director, National Culture and Arts Foundation, R.O.C. As of 02/28/2014 Selected Current Positions at TSMC and Other Companies None Chairman of: - TSMC China Company Ltd. - Global Unichip Corp. Vice Chairman, Vanguard International Semiconductor Corp. Director of: - TSMC Solar Ltd. - TSMC Solid State Lighting Ltd. 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) - - - - Director Rick Tsai (Resigned on 01/27/2014) (Note 3) 06/12/2012 06/11/2015 06/03/2003 33,665,046 0.13% 31,877,046 0.12% Independent Director Sir Peter Leahy Bonfield 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 Independent Director Stan Shih 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. Chairman, Acer Inc. Group Chairman, iD SoftCapital Director of: - 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. Director, Public Television Service Foundation, R.O.C. 014 (Continued) 015 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 Spouse & Minor Shareholding Shares - - % - - Shares - - % - - Shares - - % - - Independent Director Kok-Choo Chen 06/12/2012 06/11/2015 06/09/2011 - - - - 5,120 0.00% 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. Top 10 Shareholders Not Applicable Note 2: Mr. Johnsee Lee was appointed as the representative of National Development Fund on August 6, 2010. Note 3: Dr. Rick Tsai resigned as a director of TSMC effective January 27, 2014 and thereafter as directors and executives of TSMC’s subsidiaries. The shareholdings of himself and his spouse and minor were not disclosed after that date. 016 Selected Current Positions at TSMC and Other Companies Chairman, J. C. Penney Company Inc. None None 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, The University of Chicago, 1952 Ph.D. in Economics, The University of Chicago, 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, Sun Yat-Sen University L.L.D., Lingnan University Hon. Dr. of Business Adm, The Hong Kong University of Science and Technology Honorary Professor of Fudan, Guangxi, Hainan, Nankai, Shandong, Remin, Huazhong University of Science and Technology, Graduate University of Management of Chinese Academy of Sciences, Sun Yat-Sen Universities and City University of Hong Kong Assistant Professor, MIT, 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 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 National Culture and Arts Foundation, R.O.C. Director of Republic of China Female Cancer Foundation, R.O.C. 017 2.4.2 Remuneration Paid to Directors (Note 1) Unit: NT$ thousands Base Compensation (A) Severance Pay and Pensions (B) (Note 5) Compensation to Directors (C) Allowances (D) (Note 7) Director’s Remuneration Total Remuneration (A+B+C+D) as a % of 2013 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 8) Severance Pay and Pensions (F) (Note 5) Employee Profit Sharing (G) (Note 9) Exercisable Employee Stock Options (H) (Note 10) Granted Employee Restricted Stock (I) (Note 11) Total Compensation (A+B+C+D+E+F+G) as a % of 2013 Net Income (Note 12) From TSMC From All Consolidated Entities From TSMC From All Consolidated Entities From TSMC (Note 6) 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) 31,352 31,352 775 775 104,136 104,136 4,090 4,090 0.07% 0.07% 89,110 109,547 - 650 89,067 - 89,067 - - - - - 0.17% 0.18% 2,720 Title/Name Chairman Morris Chang (Note 2 & 3) Vice Chairman F.C. Tseng Director Rick Tsai (Note 4) 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 National 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: Effective November 12, 2013, Chairman and Chief Executive Officer Dr. Morris Chang retired as Chief Executive Officer. Executive Vice Presidents and Co-Chief Operating Officers Drs. Mark Liu and C.C. Wei assumed the role as Co-Chief Executive Officers. Note 3: No “Compensation to Directors“ was paid to Dr. Morris Chang before November 12, 2013. Note 4: Dr. Rick Tsai resigned as a director of TSMC effective January 27, 2014 and thereafter as directors and executives of TSMC’s subsidiaries. Note 5: Pensions funded according to applicable law. Note 6: TSMC Board adopted a proposal that includes 2013 compensation to TSMC’s directors in the amount of NT$104,136 thousand at its meeting on February 18, 2014. Note 7: The above-mentioned figures include expenses for Company cars and gasoline reimbursement, but do not include compensation paid to Company drivers (totaled NT$4,855 thousand). Note 8: The above-mentioned figures include the employees’ cash bonuses distributed in May, August, November 2013 and February 2014. Note 9: 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 24, 2014. Note 10: Represents the number of cumulative employee stock options exercisable as of the date of this Annual Report. Note 11: TSMC did not issue employee restricted stock in 2013, and as of the date of this Annual Report. Note 12: Total remuneration and compensation paid to TSMC’s directors in 2012 was NT$370,823 thousand, accounting for 0.22% of 2012 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 2013 Under NT$2,000,000 NT$2,000,000 ~ NT$4,999,999 None None Rick Tsai None None 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 F.C. Tseng NT$30,000,000 ~ NT$49,999,999 None NT$50,000,000 ~ NT$99,999,999 Morris Chang Over NT$100,000,000 Total None 9 F.C. Tseng, Rick Tsai F.C. Tseng None None Morris Chang 9 018 019 2.5 Management Team 2.5.1 Information Regarding Management Team Title Name (Note 1) President and Co-Chief Executive Officer Mark Liu (Note 3) On-board Date (Note 2) Shareholding Spouse & Minor Shareholding % Shareholding 11/15/1993 13,012,114 0.05% - % - President and Co-Chief Executive Officer C.C. Wei (Note 3) 02/01/1998 8,460,207 0.03% 261 0.00% Senior Vice President and Chief Information Officer Information Technology, Materials Management and Risk Management Stephen T. Tso Senior Vice President and General Counsel Legal Richard Thurston Senior Vice President, Chief Financial Officer and Spokesperson Finance Lora Ho Senior Vice President Research and Development Wei-Jen Lo (Note 4) Senior Vice President of TSMC and President of TSMC North America Rick Cassidy (Note 4) Vice President Operations/Affiliate Fabs M.C. Tzeng Vice President and 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 Operations/Mainstream Fabs and Manufacturing Technology J.K. Lin 12/16/1996 13,845,064 0.05% 01/02/2002 857,602 0.00% - - - - 06/01/1999 6,381,080 0.02% 110,268 0.00% 07/01/2004 1,600,127 0.01% 11/14/1997 - - 01/01/1987 7,592,595 0.03% 06/02/1997 4,368,831 0.02% - - - - - - - - 01/01/1987 7,428,122 0.03% 2,194,107 0.01% 03/01/2000 2,051,180 0.01% 1,103,253 0.00% 01/01/1987 12,498,018 0.05% 1,618,036 0.01% 020 TSMC Shareholding by Nominee Arrangement (Shares) Education & Selected Past Positions - - - - - - - - - - - - Ph.D., Electrical Engineering & Computer Science, University of California, Berkeley, U.S. Executive Vice President and Co-Chief Operating Officer, TSMC Senior Vice President, Operations, TSMC Senior Vice President, Advanced Technology Business, TSMC Vice President, South Site Operation, TSMC President, Worldwide Semiconductor Manufacturing Corp. Ph.D., Electrical Engineering, Yale University, U.S. Executive Vice President and Co-Chief Operating Officer, TSMC Senior Vice President, 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. Selected Current Positions at Other Companies Director, TSMC affiliate Managers Who are Spouses or within Second-degree Relative of Consanguinity to Each Other Title None Name None Relation None As of 02/28/2014 None None None None Director, TSMC subsidiary None None None Director, TSMC subsidiaries Director, TSMC affiliate None None None Master, Business Administration, National Taiwan University, Taiwan Senior Director, Accounting, TSMC Vice President & CFO, TI-Acer Semiconductor Manufacturing Corp. Director and/or Supervisor, TSMC subsidiaries Director, TSMC affiliates President, TSMC subsidiaries None None None Ph.D., Solid State Physics and Surface Chemistry, University of California, Berkeley, U.S. Vice President, Research and Development, TSMC Vice President, Operations/ Manufacturing Technology, TSMC Vice President, Advanced Technology Business, TSMC Vice President, Operation II, TSMC Director, Advanced Technology Development and CTM Plant Manager, Intel Bachelor, Engineering Technology, United States Military Academy at West Point, U.S. Vice President of TSMC North America Account Management Master, Applied Chemistry, Chungyuan University, Taiwan Vice President, Mainstream Technology Business, TSMC Senior Director, Fab 2 Operation, TSMC - 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 and 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. Bachelor, Science, National Changhua University of Education, Taiwan Senior Director, Mainstream Fabs, TSMC None None None None Director, TSMC North America None None None Director, TSMC subsidiaries Department Manager M.J. Tzeng Siblings None None None Director, TSMC affiliates None None None None None None None None None None None None (Continued) 021 Title Name (Note 1) 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 Vice President Business Development Been-Jon Woo (Note 5) On-board Date (Note 2) Shareholding Spouse & Minor Shareholding % Shareholding 02/11/1987 2,553,947 0.01% 160,844 % 0.00% 10/01/2003 800,709 0.00% - - 04/26/2000 2,777,746 0.01% 1,024,933 0.00% 11/14/1994 1,000,419 0.00% - - 12/15/1997 652,532 0.00% 60,802 0.00% 04/30/2009 115,000 0.00% 42,000 0.00% TSMC Shareholding by Nominee Arrangement (Shares) Education & Selected Past Positions Selected Current Positions at Other Companies - - - - - - 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, U.S. Senior Director, Nanopatterning Technology Division, TSMC Ph.D., Electrical Engineering, University of California, Los Angeles, U.S. Senior Director, R&D Platform I Division, TSMC Ph.D., Electrical Engineering, Syracuse University, U.S. Senior Director, Design and Technology Platform, TSMC Ph.D., Chemistry, University of Southern California, U.S. Director of Business Development, TSMC Vice President of R&D, Grace Semiconductor Manufacturing Corp. Director of Technology Integration, Intel Corp. None None None None Director, TSMC subsidiaries Director, TSMC affiliate President, TSMC subsidiaries None Managers Who are Spouses or within Second-degree Relative of Consanguinity to Each Other Title Manager Name J.J. Wang Relation Siblings Manager Thomas T. Sun Siblings None None None None None None None None None None None None Note 1: - Effective November 12, 2013, Chairman and Chief Executive Officer Dr. Morris Chang retired as Chief Executive Officer. Executive Vice Presidents and Co-Chief Operating Officers Drs. Mark Liu and C.C. Wei assumed the role as Co-Chief Executive Officers. - Executive Vice President and Co-Chief Operating Officer Dr. Shang-yi Chiang voluntarily retired, effective November 1, 2013. - Senior Vice President of Worldwide Sales and Marketing Mr. Jason C.S. Chen resigned as the Executive Officer, effective November 23, 2013. Note 2: On-board date means the official date joining TSMC. Note 3: Executive Vice Presidents and Co-Chief Operating Officers Drs. Mark Liu and C.C. Wei were appointed as President and Co-Chief Executive Officer, effective November 12, 2013. Note 4: Dr. Wei-Jen Lo and Mr. Rick Cassidy were promoted to Senior Vice President, effective February 18, 2014. Note 5: Dr. Been-Jon Woo was promoted to Vice President, effective November 12, 2013. 022 023 2.5.2 Compensation Paid to CEO, President and Vice Presidents (Note 1) Salary (A) Severance Pay and Pensions (B) (Note 9) Bonuses and Allowances (C) (Note 10) From TSMC From All Consolidated Entities From TSMC From All Consolidated Entities From TSMC From All Consolidated Entities Employee Profit Sharing (D) (Note 11) Total Compensation as a % of 2013 Net Income (A, B, C, D) (Note 12) Exercisable Employee Stock Options (K shares) (Note 13) Exercisable Employee Restricted Stock (K shares) (Note 14) 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 Received from Non-consolidated Affiliates 80,452 129,718 7,223 7,639 537,609 581,574 484,811 - 484,811 - 0.59% 0.64% - - - - 106 Unit: NT$ thousands Title Chairman President and Co-Chief Executive Officer President and Co-Chief Executive Officer Executive Vice President and Co-Chief Operating Officer Senior Vice President and Chief Information Officer Information Technology, Materials Management and Risk Management Senior Vice President and General Counsel Legal Senior Vice President, Chief Financial Officer and Spokesperson Finance Senior Vice President Worldwide Sales and Marketing Senior Vice President Research and Development Senior Vice President of TSMC and President of TSMC North America Vice President Operations/Affiliate Fabs Vice President and Chief Technology Officer Research and Development Vice President Operations/Product Development Vice President Quality and Reliability President of TSMC China 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 Vice President Business Development Name Morris Chang (Note 2) Mark Liu (Note 3) C.C. Wei (Note 3) Shang-yi Chiang (Note 4) Stephen T. Tso Richard Thurston Lora Ho Jason C.S. Chen (Note 5) Wei-Jen Lo (Note 6) Rick Cassidy (Note 6) M.C. Tzeng Jack Sun Y.P. Chin N.S. Tsai L.C. Tu (Note 7) J.K. Lin J.K. Wang Irene Sun Burn J. Lin Y.J. Mii Cliff Hou Been-Jon Woo (Note 8) Note 1: Compensation Policy: The cash compensation and profit sharing paid to Chief Executive Officer 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: Effective November 12, 2013, Chairman and Chief Executive Officer Dr. Morris Chang retired as Chief Executive Officer. Executive Vice Presidents and Co-Chief Operating Officers Drs. Mark Liu and C.C. Wei assumed the role as Co-Chief Executive Officers. Note 3: Executive Vice Presidents and Co-Chief Operating Officers Drs. Mark Liu and C.C. Wei were appointed as President and Co-Chief Executive Officer, effective November 12, 2013. Note 4: Executive Vice President and Co-Chief Operating Officer Dr. Shang-yi Chiang voluntarily retired, effective November 1, 2013. Note 5: Senior Vice President of Worldwide Sales and Marketing Mr. Jason C.S. Chen resigned as the Executive Officer, effective November 23, 2013. Note 6: Dr. Wei-Jen Lo and Mr. Rick Cassidy were promoted to Senior Vice President, effective February 18, 2014. Note 7: Vice President of Human Resources Mr. L.C. Tu was appointed as President of TSMC China, effective March 15, 2013. Note 8: Dr. Been-Jon Woo was promoted to Vice President, effective November 12, 2013. Note 9: Pensions funded according to applicable law. Note 10: The above-mentioned figures include the expense for the employees’ cash bonuses distributed in May, August, November 2013 and February 2014, Company cars and gasoline reimbursement, but does not include compensation paid to Company drivers (totaled NT$5,851 thousand). Note 11: 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 24, 2014. Note 12: Total compensation paid to TSMC’s Chief Executive Officer and Executive Officers in 2012 was NT$1,261,465 thousand, accounting for 0.76% of 2012 net income. Note 13: Represents cumulative employee stock options exercisable as of the date of this Annual Report. Note 14: TSMC did not issue employee restricted stock in 2013, and as of the date of this Annual Report. Compensation Paid to CEO, President and Vice Presidents 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 From TSMC Rick Cassidy Been-Jon Woo L.C. Tu None 2013 From All Consolidated Entities and Non-consolidated Affiliates None Been-Jon Woo L.C. Tu None NT$15,000,000 ~ NT$29,999,999 Jason C.S. Chen, Cliff Hou Jason C.S. Chen, Cliff Hou NT$30,000,000 ~ NT$49,999,999 NT$50,000,000 ~ NT$99,999,999 M.C. Tzeng, Y.P. Chin, N.S. Tsai, J.K. Lin, Irene Sun, Burn J. Lin, Y.J. Mii, J.K. Wang Mark Liu, C.C. Wei, Shang-yi Chiang, Stephen T. Tso, Richard Thurston, Lora Ho, Wei-Jen Lo, Jack Sun M.C. Tzeng, Y.P. Chin, N.S. Tsai, J.K. Lin, Irene Sun, Burn J. Lin, Y.J. Mii, J.K. Wang Mark Liu, C.C. Wei, Shang-yi Chiang, Stephen T. Tso, Richard Thurston, Lora Ho, Wei-Jen Lo, Jack Sun, Rick Cassidy Over NT$100,000,000 Total Morris Chang 22 Morris Chang 22 024 025 Stock (Fair Market Value) Cash Total Employee Profit Sharing Total Employee Profit Sharing Paid to Management Team as a % of 2013 Net Income - 484,811 484,811 0.26% 2.5.3 Employee Profit Sharing Granted to Management Team (Note 1) Unit: NT$ thousands Title Chairman President and Co-Chief Executive Officer President and Co-Chief Executive Officer Executive Vice President and Co-Chief Operating Officer Senior Vice President and Chief Information Officer Information Technology, Materials Management and Risk Management Senior Vice President and General Counsel Legal Senior Vice President, Chief Financial Officer and Spokesperson Finance Senior Vice President Worldwide Sales and Marketing Senior Vice President Research and Development Senior Vice President of TSMC and President of TSMC North America Vice President Operations/Affiliate Fabs Vice President and Chief Technology Officer Research and Development Vice President Operations/Product Development Vice President Quality and Reliability President of TSMC China 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 Vice President Business Development Name Morris Chang (Note 2) Mark Liu (Note 3) C.C. Wei (Note 3) Shang-yi Chiang (Note 4) Stephen T. Tso Richard Thurston Lora Ho Jason C.S. Chen (Note 5) Wei-Jen Lo (Note 6) Rick Cassidy (Note 6) M.C. Tzeng Jack Sun Y.P. Chin N.S. Tsai L.C. Tu (Note 7) J.K. Lin J.K. Wang Irene Sun Burn J. Lin Y.J. Mii Cliff Hou Been-Jon Woo (Note 8) 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 24, 2014. Note 2: Effective November 12, 2013, Chairman and Chief Executive Officer Dr. Morris Chang retired as Chief Executive Officer. Executive Vice Presidents and Co-Chief Operating Officers Drs. Mark Liu and C.C. Wei assumed the role as Co-Chief Executive Officers. Note 3: Executive Vice Presidents and Co-Chief Operating Officers Drs. Mark Liu and C.C. Wei were appointed as President and Co-Chief Executive Officer, effective November 12, 2013. Note 4: Executive Vice President and Co-Chief Operating Officer Dr. Shang-yi Chiang voluntarily retired, effective November 1, 2013. Note 5: Senior Vice President of Worldwide Sales and Marketing Mr. Jason C.S. Chen resigned as the Executive Officer, effective November 23, 2013. Note 6: Dr. Wei-Jen Lo and Mr. Rick Cassidy were promoted to Senior Vice President, effective February 18, 2014. Note 7: Vice President of Human Resources Mr. L.C. Tu was appointed as President of TSMC China, effective March 15, 2013. Note 8: Dr. Been-Jon Woo was promoted to Vice President, effective November 12, 2013. 026 027 3. Corporate Governance TSMC acts upon the principles of operational transparency and respect for shareholder rights. Over half of our Board of Directors is made up of Independent Directors. 3.1 Overview TSMC advocates and acts upon the principles of operational transparency and respect for shareholder rights. We believe that one basis for successful corporate governance is a sound and effective Board of Directors. In line with this principle, the TSMC Board delegates various responsibilities and authority to two Board Committees, Audit Committee and Compensation Committee. Each Committee has a written charter approved by the Board. Each Committee’s chairperson regularly reports to the Board on the activities and actions of the relevant committee. The Audit Committee and Compensation Committee consist solely of independent directors. 2013 Corporate Governance Awards 028 029 OrganizationAwardsFinanceAsiaAsia’s Best Managed Companies in Hong Kong, Korea and TaiwanBest Managed Company - Ranked No.1 in TaiwanBest Corporate Governance Company - Ranked No.1 in TaiwanEUROMONEYAsia Best Managed Companies - IT/software/technologyIR Magazine2013 Greater China Awards - Best corporate governance and disclosureBARRON’STop 100 World´s Most Respected CompaniesCommonWealth MagazineMost Admired Company - Ranked No.1 in TaiwanR.O.C. Securities & Futures Institute10th Information Disclosure of Public Companies Ranking - Ranked A+3.2 Board of Directors Board Structure 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 TSMC’s Board of Directors consists of nineNote distinguished members with a great breadth of experience as world-class business leaders or management also reviews the Company’s business strategies with the Board, and updates TSMC’s Board on the progress of those scholars. TSMC relies on them for their diverse knowledge, personal strategies, obtaining Board guidance as appropriate. perspectives, and solid business judgment. Five of the nine members are independent directors: former British Telecommunications Chief The third duty of the Board of Directors is to evaluate the Executive Officer, Sir Peter Bonfield; Acer Inc. Chairman, Mr. Stan management’s performance and to dismiss officers of the Company Shih; former Texas Instruments Inc. Chairman of the Board, Mr. when necessary. TSMC’s management has maintained a healthy and Thomas J. Engibous; Professor of Princeton University, Gregory C. functional communication with the Board of Directors, has been Chow; and advisor to the Taiwan Executive Yuan and the Taipei devoted in executing guidance of the Board, and is dedicated in City Government, Ms. Kok-Choo Chen. The number of Independent running the business operations, all to achieve the best interests for Directors is more than 50% of the total number of Directors. TSMC shareholders. Note: TSMC’s Board of Directors originally consisted of nine directors. Directors’ Compensation Since Dr. Rick Tsai resigned as a director of TSMC effective January 27, 2014, currently the number of Directors is eight. Board Responsibilities 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’ Under the leadership of Chairman Morris Chang, TSMC’s Board of compensation declined from 1% of TSMC’s distributable earnings to Directors takes a serious and forthright approach to its duties and is a 0.3%, before being capped to no more than 0.3% of its distributable dedicated, competent and independent Board. compensation. In addition, directors who also serve as executive officers of the Company are not entitled to receive any director In the spirit of Chairman Chang’s approach to corporate governance, compensation. a board of directors’ primary duty is to supervise. The Board should supervise the Company’s: compliance with relevant laws and regulations; financial transparency; timely disclosure of material information, and maintaining of the highest integrity within the Company. TSMC’s Board of Directors strives to perform these responsibilities through the Audit Committee and the Compensation Committee, the hiring of a financial expert for the Audit Committee, and coordination with the Internal Audit department. 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 1) 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 - 1 3 - - - - - - Name/Criteria Morris Chang Chairman F.C. Tseng Vice Chairman Johnsee Lee Director Rick Tsai (Note 2) 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 1: 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. Note 2: Dr. Rick Tsai resigned as a director of TSMC, effective January 27, 2014. 3.2.1 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; fraud investigation 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. Under R.O.C. law, the membership of the 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 Commission. The Audit Committee annually conducts self-evaluation to assess the Committee’s performance and identify areas for further attention. 030 031 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 Dr. Morris Chang, the Chairman of the Board of Directors, convened four regular meetings in 2013. The directors’ attendance status is as follows: Committee Charter is available on TSMC’s corporate website. 3.2.2 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. Title Chairman Vice Chairman Director Director Independent Director Independent Director Independent Director Independent Director Independent Director Name Morris Chang F.C. Tseng Na tional 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 4 4 4 4 4 4 3 4 4 - - - - - - 1 - - 100% 100% 100% 100% 100% 100% 75% 100% 100% None None None None None None None None None Annotations: 1. There were no written or otherwise recorded resolutions on which an independent director had a dissenting opinion or qualified opinion in 2013. 2. Recusals of Directors due to conflicts of interests in 2013: Directors recused themselves from the discussion and voting of their compensation resolutions. 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. 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 Audit Committee Meeting Status 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) Sir Peter Bonfield, Chairman of the Audit Committee, convened four regular meetings in 2013. 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 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 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. 3.2.3 Directors and Committees Members’ Attendance Each Director is expected to attend every Board meeting and the committees meeting on which he or she serves. In 2013, the average Board Meeting attendance rate was 97% and the attendance rate for the Audit Committee and Compensation Committee’s Meetings were 95%. materials with management. Title Chair Member Member Member Member Financial Expert Name Sir Peter Leahy Bonfield Stan Shih Thomas J. Engibous Gregory C. Chow Kok-Choo Chen J.C. Lobbezoo Attendance in Person By Proxy Attendance Rate in Person (%) Notes 4 4 3 4 4 4 - - 1 - - - 100% 100% 75% 100% 100% 100% None None None None None 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 2013. 2. There were no recusals of independent directors due to conflicts of interests in 2013. 3. Descriptions of the communications between the independent directors, the internal auditors, and the independent auditors in 2013 (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 2013, 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 2013, the Company’s independent auditors did not report any irregularity. The communication channel between the Audit Committee and the independent auditors functioned well. Compensation Committee Meeting Status Mr. Stan Shih, Chairman of the Compensation Committee, convened four regular meetings in 2013. 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 3 4 4 - - 1 - - 100% 100% 75% 100% 100% None None None None None Annotation: 1. There was no recommendation of the Compensation Committee which was not adopted or was modified by the Board of Directors in 2013. 2. There were no written or otherwise recorded resolutions on which a member of the Compensation Committee had a dissenting opinion or qualified opinion. 032 033 3.3 Major Resolutions of Shareholders’ Meeting and Board Meetings 3.4 Taiwan Corporate Governance Implementation as Required by the Taiwan Financial Supervisory 3.3.1 Major Resolutions of Shareholders’ Meeting and Implementation Status Commission TSMC’s 2013 Annual Shareholders’ Meeting was held in Hsinchu, Taiwan on June 11, 2013. At the meeting, shareholders present in person or Item Implementation Status by proxy approved the following resolutions: (1) The 2012 Business Report and Financial Statements; (2) The distribution of 2012 profits; (3) The revisions to the following internal rules: ● Procedures for Acquisition or Disposal of Assets ● Procedures for Lending Funds to Other Parties ● Procedures for Endorsement and Guarantee Implementation Status All of the resolutions of the Shareholders’ Meeting have been fully implemented in accordance with the resolutions. 3.3.2 Major Resolutions of Board Meetings During the 2013 calendar year, and as of the date of this Annual Report, major resolutions approved at Board meetings are summarized below: (1) Regular Board Meeting of February 4 & 5, 2013: ● approving 2012 business report and financial statements; ● approving distribution of 2012 profits, and cash dividends, employee cash bonus and employee profit sharing; ● approving capital appropriations of US$2,714.76 million; ● approving R&D capital appropriation of US$103.6 million; ● approving the provision of a loan guarantee to wholly-owned subsidiary TSMC Global for its issuance of US dollar-denominated senior unsecured corporate bonds for an amount not to exceed US$1.5 billion; and ● convening the 2013 Annual Shareholders’ Meeting. (2) Regular Board Meeting of May 13 & 14, 2013: ● approving capital appropriations of US$4,901.9 million (including R&D capital appropriation); and ● approving the issuance of an unsecured straight corporate bond in the domestic market for an amount not exceeding NT$45 billion. (3) Regular Board Meeting of August 12 & 13, 2013: ● approving capital appropriations of US$1.925 billion; and ● approving R&D capital appropriation of US$37.8 million. (4) Regular Board Meeting of November 11 & 12, 2013: ● approving capital appropriations of US$829.2 million; ● approving R&D capital appropriation and sustaining capital appropriation totaling US$178.4 million; ● approving the appointment of Drs. Mark Liu and C.C. Wei (in alphabetical order) as President and Co-Chief Executive Officer of TSMC. The Presidents and the Co-Chief Executive Officers shall report to and perform such duties as designated by the Chairman of the Board. After such appointment, Finance and Legal organizations continue to report to the Chairman; ● approving the promotion of Dr. Been-Jon Woo as Vice President; and ● approving the revision of TSMC’s “Procedure of Retirement“ and set the mandatory retirement age to 67. (5) Regular Board Meeting of February 17 & 18, 2014: ● approving 2013 business report and financial statements; ● approving distribution of 2013 profits, and cash dividends, employee cash bonus and employee profit sharing; ● approving capital appropriations of US$257.1 million (including upgrading specialty technology capacity, R&D capital investments and sustaining capital expenditures); ● approving the promotion of Mr. Rick Cassidy and Dr. Wei-Jen Lo as Senior Vice President; and ● convening the 2014 Annual Shareholders’ Meeting. 3.3.3 Major Issues of Record or Written Statements Made by Any Director Dissenting to Important Resolutions Passed by the Board of Directors during the 2013 Calendar Year and as of the Date of this Annual Report: None. Non-implementation and Its Reason(s) None 1. Shareholding Structure and 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“. 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 28-43 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 28-43 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 71-74 of this Annual Report. (2) Status of investor relations, supplier relations and rights of stakeholders: Please refer to “7. Corporate Social Responsibility“ on page 92-109 of this Annual Report. (3) Directors’ training records: Please refer to page 36 of this Annual Report for details. (4) Status of Risk Management Policies and Risk Evaluation Measures: Please refer to “6.2 Risk Management“ on page 81-91 of this Annual Report. (5) Status of Customer Relations Policies: Please refer to “5.4 Customer Trust“ on page 69-71 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 recognitions in 2013: FinancialAsia honored TSMC with its “Best Corporate Governance Company – Ranked No.1 in Taiwan“; IR Magazine honored TSMC with its “2013 Greater China Awards - Best corporate governance and disclosure“; CommonWealth Magazine honored TSMC with its “Most Admired Company in Taiwan“; Securities & Futures Institute’s 10th Information Disclosure of Public Companies Ranking ranked TSMC “A+“. 034 035 Continuing Education/Training of Directors in 2013 Name Date Host by Training/Speech Title Morris Chang (Note) 12/05 National Science Council Science and Technology Development Council Speech: International Technical Cooperation and Talents Exchange Strategy Forum F.C. Tseng 05/09 Securities & Future Institute Directors and Supervisors Practice Advanced Seminar: Strategy and Key Performance Indicators Stan Shih (Note) Kok-Choo Chen Johnsee Lee 07/30 09/10 11/04 04/30 05/10 06/21 The American Chamber of Commerce in Taipei Speech: Wangdao & Corporate Social Responsibility Asia Pacific City Summit, APCS Speech: Wangdao and Social Enterprise The Institute of Internal Auditors, R.O.C. Taiwan Corporate Governance Association Council for Economic Planning and Development Speech: Wangdao Governance Functions of Compensation Committee Free Economic Pilot Zones Forum National Development Fund, Executive Yuan Directors and Supervisors Practice Seminar – Principle on the Recusal of Conflict of Interest for Government Functionary Duration 1 hour 3 hours 1 hour 3.5 hours 1 hour 3 hours 2.5 hours 3 hours ● 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 ● 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. In order to continue to build an environment of innovation, technology leadership, and sustainable profitable growth, the Code requires that we must promote business relationships founded upon an unwavering respect for the intellectual property rights, proprietary information and trade 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 for many years to come. 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 and documents filed by the Company with securities authorities and in all TSMC public communications and disclosures. 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 such as: Code Administration and Disciplinary Action - Conflict-free Minerals - Taiwan “Personal Information Protection Act“ - Fraud Detection Procedures Note: Selected speeches on corporate governance and related topics. Continuing Education/Training of Management in 2013 Name/Title Jessica Chou Director, Accounting Division John Liang Director, Internal Audit Date 06/18 06/18 09/10 09/13 12/16 12/20 Host by Training Accounting Research and Development Foundation The Risk, Legal Responsibility, and Awareness of Economic Crime in Judicial Cases, from The Perspective of Chief Accounting Officer The Law and Practice of Contest Over Corporate Control Introduction of “Illustrative International Financial Reporting Standards (IFRS)“ The Case Study of Significant Economic Crime and Related Legal Responsibilities The Institute of Internal Auditors, R.O.C. Accounting Research and Development Foundation Audit Practice of Enterprise Bribery Major Financial Fraud and Legal Risk Duration 3 hours 3 hours 3 hours 3 hours 6 hours 6 hours Compliance Activities Prevention Detection Enhancement - Employee declaration - Employee education - Continuing promotion - Stakeholder promotion/cooperation - Internal auditor - Internal/external hotline - Administrative discipline/legal action - Monitor and analyze outcomes - Propose improved procedures - Implement enhanced management system In addition, various training programs and speech presentations were also provided by TSMC’s Legal Organization for Management and the Code. TSMC expects our customers, suppliers, vendors, advisors and others with which we come into contact to understand and respect the All employees, officers and managers must comply with the Code and the other Company policies, procedures, and regulations based on the relevant divisions, such as: ● Insider Trading ● Protecting of TSMC’s Trade Secrets ● PIP and Handling “Indirect Customers“ ● New Export Control Enhancement 3.5 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. 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 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 online training on various topics on ethics, including the requirements to prevent bribery and to protect our intellectual property. Our intranet subsidiaries, and this Code requires that each employee bears a heavy personal responsibility to preserve and to protect TSMC’s ethical values and website posts various guidelines and informative articles on ethics and honorable business conduct. We also require our stakeholders such as our reputation and to comply with various applicable laws and regulations. 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; 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 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. 036 037 The internal auditors of TSMC regularly audit the compliance by the Company, our vendors, suppliers, and customers, of relevant rules and regulations. Item Implementation Status Non-implementation and Its Reason(s) None TSMC Internal Audit assists the Board of Directors and Management in inspecting and reviewing whether TSMC’s internal control system is adequate and effective in its design and operation to ensure that: ● Financial, managerial, and operating information is accurate, reliable, and timely. ● Legislative or regulatory issues impacting the organization are recognized and addressed properly. ● Employee’s actions are in compliance with policies, standards, procedures, and applicable laws and regulations. ● Resources are acquired economically, used efficiently, and adequately protected. To achieve the above objectives, Internal Audit submits an annual audit plan incorporating the regulatory compliance audit projects to the Board of Directors for approval. Subsequent to the audits, Internal Audit reports the audit findings along with issue follow-up to the Board and Management on a regular basis. 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 violations of our ethical standards. For example, in 2013, there are two ongoing legal actions filed by the Company against former employees for misappropriation of the Company’s intellectual property and violating other ethics rules. Additionally, the Company took severe disciplinary action against 7 employees who committed major violations of our Proprietary Information Protection (“PIP“) rules, and terminated 1 employee for violating other ethics rules. 3.5.1 Taiwan Corporate Conduct and Ethics Implementation as Required by the Taiwan Financial Supervisory Commission 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 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. Non-implementation and Its Reason(s) None (Continued) 2. Corporate Conduct and Ethics Compliance Practice (1) The company shall prevent doing business with whomever 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 conflicts 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 newly hired 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 an 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. 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 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, in 2013, there are two ongoing legal actions filed by the Company against former employees for misappropriation of the Company’s intellectual property and violating other ethics rules. Additionally, the Company took severe disciplinary action against 7 employees who committed major violations of our Proprietary Information Protection (“PIP“) rules and terminated 1 employee for violating other ethics rules. 4. Information Disclosure (1) To set up a corporate website that publishes information relating to company’s corporate conduct and ethics. Our intranet website posts various guidelines and informative articles on ethics and honorable business conduct for employees’ reference (in both Chinese and English). None (2) Other information disclosure channels (e.g. maintaining an English website, designating personnel to handle information collection and disclosure) TSMC discloses the relevant information in its’ Annual Report and Corporate Responsibility Report which are available in TSMC external website (http://www. tsmc.com, in both Chinese and English) 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“) which requires that all employees, officers and board members comply with the Code and the other Company policies, procedures and regulations based on the Code. For details on the implementation of TSMC’s Corporate Conduct and Ethics, please refer to “3.5 Code of Ethics and Business Conduct“ on page 36-39 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 “3.5 Code of Ethics and Business Conduct“ on page 36-39 of this Annual Report. 038 039 3.6 Regulatory Compliance TSMC is committed to conducting business honestly and ethically. This commitment to integrity, our most basic and most important core value, has been the cornerstone of TSMC’s robust compliance efforts, which is comprised of legislation monitoring, compliance policies, training and an open reporting environment. TSMC operates in many countries. Therefore, in order to achieve compliance with governing legislation, applicable laws, regulations and regulatory expectations, we closely monitor domestic and foreign government policies and regulatory developments that could have a material impact on TSMC’s business and financial operations. We are add summaries of recent international antitrust investigations, enforcement trend and court rulings. In combination with promotional campaigns, we have successfully raised awareness of improper behavior associated with antitrust laws in 2013. ● Live seminars are also offered for a variety of topics related to: Anti-bribery/corruption; Anti-harassment and discrimination; PIP; Insider Trading; Export Control; Financial Reporting; Contract Management; Intellectual Property; Conflict-free Minerals; and Privacy Law. A series of Export Control courses was introduced in 2013 to give an overview to TSMC’s export management system (“EMS“) and to introduce TSMC’s updated export control policy. The above courses are mandatory to managers and certain employees depending on the nature of the business activities they also a proactive advocate for local legislative and regulatory reform perform. and have achieved remarkable results in strengthening trade secret protection in Taiwan. TSMC is increasingly dedicated to identifying regulatory issues and will continue to be involved in advocating public policy changes that foster a positive and fair business environment. In addition to TSMC’s Code of Ethics and Business Conduct, TSMC has also established policies, guidelines and procedures in other policy areas, including: Anti-bribery/corruption, Anti-harassment/ discrimination, Antitrust (unfair competition), Environment, Export Control, Financial Reporting/Internal Controls, Insider Trading, Intellectual Property, Proprietary Information Protection (“PIP“), Privacy, Record Retention and Disposal, as well as procuring raw materials from socially responsible sources (“Conflict-free Minerals“). With respect to PIP, it is one of the six key corporate strategies of TSMC (as announced in June 2010). TSMC and its employees are expected to comply with all laws and regulations that govern our businesses. Training is a major component of our compliance program, conducted throughout the year to refresh TSMC’s employees’ commitment to ethical conduct, and to get updated information on any changes to the law. Highlights of our compliance training program include the following: ● 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 Antitrust, Anti-harassment, Insider Trading, Export Control Management, PIP, to name just a few. The Antitrust course addresses common elements in antitrust and competition law that apply in the major jurisdictions in which we operate. It was updated in 2013 to ● As directed by our General Counsel, members of TSMC’s legal team regularly attend outside training in Taiwan and abroad to receive legal updates and stay current with new laws and regulatory developments. External legal professionals and industry experts are constantly invited to lecture on new areas of knowledge and the latest developments on industry-specific compliance matters. Licensed lawyers, including the General Counsel, maintain compliance with continuing legal education requirements of their licensing jurisdictions. ● To enhance compliance and risk management for our subsidiaries and affiliates, we regularly hold compliance meetings with them to ensure that all of our subsidiaries and affiliates (as appropriate) are aligned with the compliance standards of TSMC headquarters. In addition to the above programs, a variety of resources and compliance campaigns are made available to our employees. For example, compliance education and articles on different topics are published regularly on TSMC’s Legal Organization website. Furthermore, employees can familiarize themselves with TSMC’s internal policies through easy access to our intranet channels. To ensure that our conduct meets the highest legal and ethical standards, TSMC provides multiple resources for reporting business conduct concerns. We encourage employees to report suspected wrongdoing within the organization or any parties with whom we do business. The system is also open to external reporting. Auditing employees for PIP policy compliance is conducted regularly to ensure protection of TSMC’s proprietary information, including information that suppliers, customers and others have entrusted to us. Disciplinary actions are taken against employees who have violated the policy. Below is a summary of the Number of Reported Incidents: Incidents Submitted to the Ombudsman System (Note 1) Incidents Submitted to the Audit Committee Whistleblower System Incidents Reported to the “Hotline“ which were treated as plausible Sexual Harassment Investigation Committee which were found after investigations PIP Violations which resulted in warnings (Note 2) which resulted in dismissals Note 1: There is no case for ethics, finance and accounting matters. Note 2: More than one-third of the cases reported were for minor errors or noncompliance with our PIP Policy. 3.6.1 Major Accomplishments FY 2012 FY 2013 20 - 8 3 6 - 108 104 4 35 - 19 1 7 5 84 84 - In 2013, TSMC’s excellence in regulatory compliance achieved several major accomplishments, including: ● In addition to rigorously fulfilling our obligations to regulatory compliance matters, TSMC has discharged its civic duties as a responsible corporate citizen by advising the local government on law and policy reform. TSMC regularly urged the Government to amend any outdated laws and regulations, which may be inconsistent with global practice to improve our investment environment and economic development. For example, after Taiwan’s legislature accepted TSMC’s advice of imposing criminal liability on trade secret misappropriation in 2012, TSMC continued to be a strong advocate for heightening trade secret protection in 2013. We have been working closely with the relevant authorities, and provided our recommendations to subsequent reinforcement of relevant laws and regulations. ● Throughout 2013, TSMC offered a wide range of education courses on various compliance topics, including 19 topics via on-line education and 36 topics via live seminars. These courses were developed and conducted by compliance and legal professionals. TSMC will regularly review and update our training programs and identify additional areas of training if necessary. ● In order to prevent any unauthorized export of controlled items, a formal system, namely EMS, has existed for a number of years and continuously updated and sustained to reinforce TSMC’s internal compliance measures, which measures are taken to ensure compliance by TSMC and all of its subsidiaries with all applicable regulations covering the export of information, technologies, products, materials and equipment. TSMC’s EMS allows TSMC to streamline its complicated SHTC (Strategic High-Tech Commodities) export process and creates efficiency for both TSMC and its customers. TSMC’s EMS was certified in September 2012 by the Bureau of Foreign Trade, the Taiwan regulator, as a qualified ICP (Internal Control Program) exporter. The successful implementation of TSMC’s EMS also earned recognition by Dutch export control authority as best in class during its audit of TSMC’s European subsidiary in March 2013. ● To reflect and reinforce TSMC’s values of integrity, globalization, caring for employees and shareholders, and being a good corporate citizen, TSMC took measures to comply with the Personal Information Protection Act of Taiwan that became effective in 2012. We prepared a privacy policy that provides TSMC and its worldwide subsidiaries with global standards for handling personal data and respecting personal privacy in the workplace. Furthermore, to educate TSMC individuals about the restrictions and procedures applicable to handling personal data and respecting personal privacy in the workplace, TSMC rolled out several privacy awareness initiatives. For example, TSMC developed a variety of training programs, including seminars, in-person training programs, and e-learning courses, which describe the policies and guidelines for individuals to follow when handling personal data. Through its assertive privacy promotional campaigns, TSMC is dedicated to bring awareness of the issues surrounding data protection and privacy to its employees and to create a culture whereby an individual’s personal data and privacy are protected and handled in line with global standards. 040 041 3.7 Internal Control System Execution Status 3.8 Status of Personnel Responsible for the Company’s Financial and Business Operation Taiwan Semiconductor Manufacturing Company Limited Statement of Internal Control System 3.8.1 Resignation or Dismissal of Chairman, President, and Heads of Accounting, Finance, Internal Audit and R&D during the 2013 Calendar Year and as of the Date of this Annual Report Title Name Date Effective Date Resigned/Dismissed Reasons for Resignation or Dismissal Date: February 18, 2014 Chairman & CEO Morris Chang 12/10/1986 11/12/2013 (retired as CEO of TSMC) 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 2013: 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, 2013, 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 2013 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. 7. This Statement has been passed by the Board of Directors in their meeting held on February 18, 2014, with none of the eight attending directors expressing dissenting opinions, and the remainder all affirming the content of this Statement. Taiwan Semiconductor Manufacturing Company Limited Morris Chang, Chairman Mark Liu, President and Co-Chief Executive Officer C.C. Wei President and Co-Chief Executive Officer The Board of Directors approved the appointment of Drs. Mark Liu and C. C. Wei (in alphabetical order) as President and Co-Chief Executive Officer of TSMC at its meeting of November 12, 2013. Dr. Morris Chang remains as the Chairman of TSMC. The Presidents and the Co-Chief Executive Officers shall report to and perform such duties as designated by the Chairman of the Board. Finance and Legal organizations will continue to report to the Chairman. Dr. Chiang departs his position to enjoy retirement life, but will continue to serve as advisor to the Chairman of TSMC, sit in on Board of Directors’ meetings, and take on other special assignments from time to time. Executive Vice President and Co-Chief Operating Officer Shang-yi Chiang 11/10/2009 11/01/2013 3.8.2 Certification Details of Employees Whose Jobs are Related to the Release of the Company’s Financial Information Certification Certified Public Accountants (CPA) US Certified Public Accountants (US CPA) The Chartered Institute of Management Accountants (CIMA) 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) Certification in Risk Management Assurance (CRMA) Certified Information Systems Auditor (CISA) BS7799/ISO 27001 Lead Auditor Number of Employees Internal Audit 2 2 - 10 - - - - 4 3 3 1 Finance 28 12 1 5 1 2 1 1 - - - - 3.9 Information Regarding TSMC’s Independent Auditor 3.9.1 Audit Fees Unit: NT$ thousands Accounting Firm Deloitte & Touche 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 Yi-Hsin Kao, Hung-Wen Huang, and others 69,369 - 235 - 3,354 3,589 V Note Note 1 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 IFRS adoption project. 3.9.2 Due to relevant regulatory requirements on rotation, Deloitte & Touche has rotated audit partners for TSMC in 2013. 3.9.3 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 2013. 3.10 Material Information Management Procedure TSMC has established relevant procedures for managing and disclosing material information. The responsible departments regularly remind all officers and employees about the need to comply with these procedures and other applicable regulations when they become aware of any potential material information and the possible need to publicly disclose such information. To ensure that our employees, managers and board directors are aware of and comply with these relevant regulations, TSMC has also established an “Insider Trading Policy“. To reduce the risk of insider trading, on-line training programs and live seminars are conducted regularly. In addition, employees can familiarize themselves with relevant internal policies and training articles by easily accessing TSMC’s intranet website. 042 043 4. Capital and Shares 4.1 Capital and Shares 4.1.1 Capitalization Unit: Share/NT$ Month/ Year Issue Price (Per Share) Authorized Share Capital Capital Stock Shares Amount Shares Amount Sources of Capital Remark Capital Increase by Assets Other than Cash 03/2013 10 28,050,000,000 280,500,000,000 25,924,435,668 259,244,356,680 Exercise of Employee Stock None Options: NT$23,880,900 06/2013 09/2013 11/2013 10 28,050,000,000 280,500,000,000 25,928,232,685 259,282,326,850 Exercise of Employee Stock None Options: NT$37,970,170 10 28,050,000,000 280,500,000,000 25,928,305,829 259,283,058,290 Exercise of Employee Stock None Options: NT$731,440 10 28,050,000,000 280,500,000,000 25,928,390,990 259,283,909,900 Exercise of Employee Stock None Options: NT$851,610 As of 02/28/2014 Date of Approval & Approval Document No. 03/11/2013 Yuan Shang Tzu No.1020007200 06/06/2013 Yuan Shang Tzu No.1020016352 09/03/2013 Yuan Shang Tzu No.1020026632 11/29/2013 Yuan Shang Tzu No.1020037052 As of 02/28/2014 Total Authorized Share Capital Issued Shares Listed Non-listed Total Unissued Shares 25,929,049,937 - 25,929,049,937 2,120,950,063 28,050,000,000 4.1.2 Capital and Shares Unit: Share Type of Stock Common Stock Shelf Registration: None. 90% of TSMC’s share capital comes from self-generated funds. 044 045 4.1.3 Composition of Shareholders Common Share Type of Shareholders Government Agencies Financial Institutions Other Juridical Persons Foreign Institutions & Natural Persons Domestic Natural Persons Number of Shareholders 10 234 1,023 3,341 359,899 As of 07/09/2013 (last record date) Total 364,507 4.1.4 Major Shareholders Common Share Shareholders ADR-Taiwan Semiconductor Manufacturing Company, Ltd. National Development Fund, Executive Yuan Shareholding 1,653,712,458 738,531,978 1,127,435,779 20,023,387,265 2,385,238,349 25,928,305,829 JPMorgan Chase Bank N.A. Taipei Branch in custody for Saudi Arabian Monetary Agency Holding Percentage (%) 6.38% 2.85% 4.35% 77.22% 9.20% 100.00% Government of Singapore Distribution Profile of Share Ownership Common Share Shareholder Ownership (Unit: Share) Number of Shareholders 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. 171,105 130,752 28,306 11,294 4,922 5,565 2,644 1,621 3,222 1,702 1,096 430 258 205 1,385 364,507 Ownership 38,623,504 284,996,435 200,375,733 136,512,854 85,892,113 134,811,854 91,015,467 72,830,364 223,963,582 234,597,317 308,623,163 209,759,142 181,133,766 184,443,995 23,540,726,540 25,928,305,829 As of 07/09/2013 (last record date) Ownership (%) 0.15% 1.10% 0.77% 0.53% 0.33% 0.52% 0.35% 0.28% 0.86% 0.90% 1.19% 0.81% 0.70% 0.71% 90.80% 100.00% 046 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 JPMorgan Chase Bank N.A. Taipei Branch in custody for Norges Bank iShares MSCI Emerging Markets Index Fund Vanguard Emerging Markets Stock Index Fund, a Series of Vanguard International Equity Index Funds JPMorgan Chase Bank, N.A., Taipei Branch in Custody for Stichting Depositary APG Emerging Markets Equity Pool Total Shares Owned 5,456,754,818 1,653,709,980 854,162,727 540,394,959 425,265,136 329,478,439 274,910,515 246,339,000 235,633,845 232,312,361 As of 07/09/2013 (last record date) Ownership (%) 21.05% 6.38% 3.29% 2.08% 1.64% 1.27% 1.06% 0.95% 0.91% 0.90% 4.1.5 Net Change in Shareholding and Shares Pledged by Directors, Management and Shareholders with 10% Shareholdings or More Unit: Share Title Name Chairman Morris Chang Vice Chairman F.C. Tseng Director National Development Fund, Executive Yuan Representative: Johnsee Lee Director Rick Tsai (Note 2) 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 President and Co-Chief Executive Officer Mark Liu (Note 3) President and Co-Chief Executive Officer C.C. Wei (Note 3) Executive Vice President and Co-Chief Operating Officer Shang-yi Chiang (Note 4) Senior Vice President and Chief Information Officer Information Technology, Materials Management and Risk Management Stephen T. Tso Senior Vice President and General Counsel Legal Richard Thurston Senior Vice President, Chief Financial Officer and Spokesperson Finance Lora Ho 2013 01/01/2014 ～ 02/28/2014 Net Change in Shareholding Net Change in Shares Pledged (Note 1) - (190,000) - - (930,000) - - - - - (125,000) 276,882 (50,000) (570,000) (12,290) - - - - - - - - - - - - - - - - - Net Change in Shareholding 2,000,000 - - - (50,000) - - - - - (25,000) - N/A (140,000) - - Net Change in Shares Pledged (Note 1) - - - - - - - - - - - - N/A - - - (Continued) 047 01/01/2014 ～ 02/28/2014 4.1.6 Stock Trade with Related Party: None. Net Change in Shares Pledged (Note 1) Net Change in Shareholding Net Change in Shares Pledged (Note 1) 4.1.7 Stock Pledge with Related Party: None. Title Name Senior Vice President Worldwide Sales and Marketing Jason C.S. Chen (Note 5) Senior Vice President Research and Development Wei-Jen Lo (Note 6) Senior Vice President of TSMC and President of TSMC North America Rick Cassidy (Note 6) Vice President Operations/Affiliate Fabs M.C. Tzeng Vice President and 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 Human Resources L.C. Tu (Note 7) 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 Vice President Business Development Been-Jon Woo (Note 8) 2013 Net Change in Shareholding (105,000) (381,000) - (26,000) (34,000) (175,000) - (24,000) (9,000) - (179,000) (244,000) - (100,000) 20,000 - - - - - - - - - - - - - - - N/A (8,000) - - - (17,000) - N/A - - (70,000) - - - 15,000 N/A - - - - - - N/A - - - - - - - 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: Dr. Rick Tsai resigned as a director of TSMC, effective January 27, 2014. His shareholding was not disclosed after that date. Note 3: Executive Vice Presidents and Co-Chief Operating Officers Drs. Mark Liu and C.C. Wei were appointed as President and Co-Chief Executive Officer, effective November 12, 2013. Note 4: Executive Vice President and Co-Chief Operating Officer Dr. Shang-yi Chiang voluntarily retired, effective November 1, 2013. His shareholding was not disclosed after that date. Note 5: Senior Vice President of Worldwide Sales and Marketing Mr. Jason C.S. Chen resigned as the Executive Officer, effective November 23, 2013. His shareholding was not disclosed after that date. Note 6: Dr. Wei-Jen Lo and Mr. Rick Cassidy were promoted to Senior Vice President, effective February 18, 2014. Note 7: Vice President of Human Resources Mr. L.C. Tu was appointed as President of TSMC China, effective March 15, 2013. His shareholding was not disclosed after that date. Note 8: Dr. Been-Jon Woo was promoted to Vice President, effective November 12, 2013. Her shareholding was disclosed starting from that date. 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 07/09/2013 (last record date) Name and Relationship between TSMC’s Shareholders Shares % Shares ADR-Taiwan Semiconductor Manufacturing Company, Ltd. 5,456,754,818 21.05% National Development Fund, Executive Yuan Representative: Johnsee Lee 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 JPMorgan Chase Bank N.A. Taipei Branch in custody for Norges Bank iShares MSCI Emerging Markets Index Fund Vanguard Emerging Markets Stock Index Fund, a Series of Vanguard International Equity Index Funds JPMorgan Chase Bank, N.A., Taipei Branch in Custody for Stichting Depositary APG Emerging Markets Equity Pool 1,653,709,980 6.38% - - 854,162,727 3.29% 540,394,959 425,265,136 2.08% 1.64% 329,478,439 1.27% 274,910,515 1.06% 246,339,000 235,633,845 0.95% 0.91% 232,312,361 0.90% 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 None None N/A None None None None None None None None None None None None Ownership by TSMC (1) Ownership by Directors, Managers and Directly/Indirectly Owned Subsidiaries (2) Total Ownership (1) + (2) As of 12/31/2013 Shares % Shares 4.1.9 Long-term Investment Ownership Long-term Investment Equity Method: TSMC Partners, Ltd. TSMC Global Ltd. TSMC North America TSMC Europe B.V. TSMC Japan Limited TSMC Korea Limited TSMC China Company Limited TSMC Guang Neng Investment, Ltd. TSMC Solar Ltd. TSMC Solid State Lighting Ltd. Systems on Silicon Manufacturing Co. Pte. Ltd. Vanguard International Semiconductor Corp. Xintec Inc. Global UniChip Corporation Emerging Alliance Fund, L.P. Shares 988,268,244 1,284 11,000,000 200 6,000 80,000 Not Applicable (Note 1) Not Applicable (Note 1) 1,118,000,000 554,674,437 313,603 628,223,493 94,950,005 46,687,859 % 100% 100% 100% 100% 100% 100% 100% 100% 98.58% 92.32% 38.79% 39.36% 40.16% 34.84% - - - - - - Not Applicable (Note 1) Not Applicable (Note 1) - - - - - - - - 6,749,800 9,181,173 - 0.60% 1.53% - 278,100,295 17.42% (Note 2) - - 988,268,244 1,284 11,000,000 200 6,000 80,000 Not Applicable (Note 1) Not Applicable (Note 1) 1,124,479,800 563,855,610 313,603 906,323,788 94,950,005 46,687,859 Not Applicable (Note 1) Not Applicable (Note 1) - - - - % 100% 100% 100% 100% 100% 100% 100% 100% 99.18% 93.85% 38.79% 56.78% 40.16% 34.84% 99.50% 98.00% 98.98% VentureTech Alliance Fund II, L.P. Not Applicable (Note 1) 98.00% Not Applicable (Note 1) Not Applicable (Note 1) 99.50% Not Applicable (Note 1) VentureTech Alliance Fund III, L.P. Not Applicable (Note 1) 50.35% Not Applicable (Note 1) 48.63% 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 17.17% while other Directors and Management hold 0.25%. 048 049 4.1.10 Share Information 4.1.11 Dividend Policy TSMC’s earnings per share increased 13.3% in 2013 to NT$7.26 per share. The following table details TSMC’s net worth, earnings, dividends and TSMC’s profits may be distributed by way of cash dividend and/or stock dividend. The preferred method of distributing profits is by way of an market price per common share, as well as other data regarding return on investment. Net Worth, Earnings, Dividends, and Market Price Per Common Share Unit: NT$, except for weighted average shares and return on investment ratios 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. TSMC has distributed cash dividends every year to its shareholders since 2004 and maintained dividends per share (DPS) at NT$3.0 every year since 2007. TSMC intends to maintain a stable dividend policy, and will consider raising DPS when the free cash flow significantly exceeds NT$3.0 per share. 2013 01/01/2014 ~ 02/28/2014 4.1.12 Distribution of Profit 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 2012 99.20 74.30 84.08 27.79 24.79 115.50 94.40 104.09 32.69 (Note 5) Weighted Average Shares (thousand shares) 25,927,936 25,929,603 Diluted Earnings Per Share 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 for shareholders’ approval 6.41 3.00 - 13.12 28.03 4% 7.26 (Note 5) 3.00 (Note 5) - (Note 5) (Note 5) (Note 5) 108.50 100.50 105.34 - - - - - - - - - The Board adopted a proposal for 2013 profit distribution at its meeting on February 18, 2013. The proposal will be effected according to the relevant regulations, upon the approval of shareholders at the Annual Shareholders’ Meeting on June 24, 2014. 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 2014 Annual Shareholders’ Meeting, was recorded as a charge to earnings of approximately 6.7% of net income in year 2013; compensation to directors was expensed based on the 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 24, 2014. 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 2013 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 2013 which have been expensed under the Company’s income statements are listed below: －NT$12,634,664,804 distributed employees’ cash bonus －NT$12,634,664,804 employees’ cash profit sharing to be distributed after 2014 Annual Shareholders’ Meeting －NT$104,136,580 directors’ compensation 2012 Directors’ Compensation and Employee Profit Sharing 77,785,851,420 Directors’ Compensation (Cash) Employee’s Cash Profit Sharing Total Board Resolution (02/05/2013) Actual Result (Note) Amount (NT$) 71,351,700 11,115,239,772 11,186,591,472 Amount (NT$) 71,351,700 10,859,687,110 10,931,038,810 Note: The above Directors’ Compensation and Employee’s Cash Profit Sharing were expensed under the Company’s 2012 income statements and the same amounts were approved by the Board of Directors at its meeting on February 5, 2013. The Employee’s Cash Profit Sharing was distributed after the approval of the same by shareholders at 2013 Annual Shareholders’ Meeting on June 11, 2013. Due to employee turnover, Employee’s Cash Profit Sharing in the amount of NT$255,552,662 was undistributed, and related expense was reversed in 2013. 4.1.13 Impact to 2014 Business Performance and EPS Resulting from Stock Dividend Distribution: Not applicable. 4.1.14 Buyback of Common Stock: None. 050 051 4.2 Issuance of Corporate Bonds 4.2.1 Corporate Bonds NTD Corporate Bonds As of 02/28/2014 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) Domestic Unsecured Bond (102-2) Domestic Unsecured Bond (102-3) Domestic Unsecured Bond (102-4) Issuance Issuing Date Denomination Offering Price Total Amount Coupon 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. 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. 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. 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. Tenor and Maturity Date Tranche A: 5 years Maturity: 09/28/2016 Tranche B: 7 years Maturity: 09/28/2018 Tranche A: 5 years Maturity: 01/11/2017 Tranche B: 7 years Maturity: 01/11/2019 Tranche A: 5 years Maturity: 08/02/2017 Tranche B: 7 years Maturity: 08/02/2019 Tranche A: 5 years Maturity: 09/26/2017 Tranche B: 7 years Maturity: 09/26/2019 10/09/2012 NT$10,000,000 Par 01/04/2013 NT$10,000,000 Par 02/06/2013 NT$10,000,000 Par 07/16/2013 NT$10,000,000 Par 08/09/2013 NT$10,000,000 Par 09/25/2013 NT$10,000,000 Par NT$4,400,000,000 NT$23,600,000,000 NT$21,400,000,000 NT$13,700,000,000 NT$12,500,000,000 NT$15,000,000,000 1.53% p.a. Tranche A: 1.23% p.a. Tranche B: 1.35% p.a. Tranche C: 1.49% p.a. Tranche A: 1.23% p.a. Tranche B: 1.38% p.a. Tranche C: 1.50% p.a. Tranche A: 1.50% p.a. Tranche B: 1.70% p.a. Tranche A: 1.34% p.a. Tranche B: 1.52% p.a. Tenor: 10 years Maturity: 10/09/2022 Tranche A: 5 years Maturity: 01/04/2018 Tranche B: 7 years Maturity: 01/04/2020 Tranche C: 10 years Maturity: 01/04/2023 Tranche A: 5 years Maturity: 02/06/2018 Tranche B: 7 years Maturity: 02/06/2020 Tranche C: 10 years Maturity: 02/06/2023 Tranche A: 7 years Maturity: 07/16/2020 Tranche B: 10 years Maturity: 07/16/2023 Tranche A: 4 years Maturity: 08/09/2017 Tranche B: 6 years Maturity: 08/09/2019 Tranche A: 1.35% p.a. Tranche B: 1.45% p.a. Tranche C: 1.60% p.a. Tranche D: 1.85% p.a. Tranche E: 2.05% p.a. Tranche F: 2.10% p.a. Tranche A: 3 years Maturity: 09/25/2016 Tranche B: 4 years Maturity: 09/25/2017 Tranche C: 5.5 years Maturity: 03/25/2019 Tranche D: 7.5 years Maturity: 03/25/2021 Tranche E: 9.5 years Maturity: 03/25/2023 Tranche F: 10 years Maturity: 09/25/2023 None Guarantor Trustee Underwriter Legal Counsel Auditor Repayment Outstanding Redemption or Early Repayment Clause Covenants Credit Rating None None None None None None None None 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 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 Not Applicable Modern Law Office Deloitte & Touche Bullet Not Applicable Modern Law Office Deloitte & Touche Bullet Not Applicable Modern Law Office Deloitte & Touche Bullet Not Applicable Modern Law Office Deloitte & Touche Bullet 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 NT$21,700,000,000 NT$4,400,000,000 NT$23,600,000,000 NT$21,400,000,000 NT$13,700,000,000 NT$12,500,000,000 NT$15,000,000,000 None None None None None None None None None None None None None None None None None None 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) twAAA (Taiwan Ratings Corporation, 05/16/2013) twAAA (Taiwan Ratings Corporation, 07/15/2013) twAAA (Taiwan Ratings Corporation, 08/06/2013) None Not Applicable None Not Applicable None Not Applicable None Not Applicable None Not Applicable None Not Applicable None Not Applicable None Not Applicable None Not Applicable None None None None None None None None None None None None None None None None None None 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 USD Corporate Bonds Issuance Issuing Date Denomination Listing Offering Price Total Amount Coupon Tenor and Maturity Date Guarantor Trustee Underwriter Senior Unsecured Notes (Note) 04/03/2013 US$200,000 and integral multiples of US$1,000 in excess thereof Singapore Exchange 2016 Notes: 99.988% 2018 Notes: 99.933% US$1,500,000,000 2016 Notes: 0.950% p.a. 2018 Notes: 1.625% p.a. 2016 Notes: 3 years Maturity: 04/03/2016 2018 Notes: 5 years Maturity: 04/03/2018 TSMC Citicorp International Limited Goldman Sachs International As of 02/28/2014 Legal Advisor Auditor Repayment Outstanding Jones Day Maples and Calder Deloitte & Touche Bullet US$1,500,000,000 Redemption or Early Repayment Clause At issuer’s option Covenants Credit Rating Limitations on (1) liens and (2) sale and leaseback transactions A1 (Moody’s Investors Service, 03/15/2013) A+ (Standard & Poor’s Rating Services, 03/15/2013) Conversion Right None Other Rights of Bondholders Amount of Converted or Exchanged Common Shares, ADRs or Other Securities Dilution Effect and Other Adverse Effects on Existing Shareholders (Continued) Custodian Not Applicable None None Note: Issued by TSMC’s wholly-owned subsidiary, TSMC Global Ltd., and unconditionally and irrevocably guaranteed by TSMC. 052 053 4.2.2 Convertible Bond: None. 4.2.3 Exchangeable Bond: None. 4.2.4 Shelf Registration: None. 4.2.5 Bond with Warrants: None. 4.3 Preferred Shares 4.3.1 Preferred Share: None. 4.3.2 Preferred Share with Warrants: None. 4.4 Issuance of American Depositary Shares Issuing Date 10/08/1997 11/20/1998 01/12/1999 - 01/14/1999 07/15/1999 08/23/1999 - 09/09/1999 02/22/2000 - 03/08/2000 04/17/2000 06/07/2000 - 06/15/2000 05/14/2001 - 06/11/2001 06/12/2001 11/27/2001 02/07/2002 - 02/08/2002 11/21/2002 - 12/19/2002 07/14/2003 - 07/21/2003 11/14/2003 08/10/2005 - 09/08/2005 05/23/2007 Issuance and Listing NYSE NYSE NYSE NYSE NYSE NYSE NYSE NYSE NYSE NYSE NYSE NYSE NYSE NYSE NYSE NYSE NYSE Total Amount (US$) 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 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 (Pursuant to ADR Conversion Sale Program) TSMC Common Shares from Selling Shareholders TSMC Common Shares from Selling Shareholders TSMC Common Shares from Selling Shareholders Common Shares Represented 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 Rights and Obligations of ADS 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 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 and Maintenance Terms and Conditions in the Deposit Agreement and 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 (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 See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details Closing Price Per ADS (US$) 2013 01/01/2014 - 02/28/2014 High Low Average High Low Average 19.66 15.75 17.55 18.15 16.46 17.36 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 dividends 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 were 45%, 23%, 28%, 40%, 10%, 8%, 14.08668%, 4.99971%, 2.99903%, 0.49991%, 0.50417% and 0.49998%, respectively. As of February 28, 2014, total number of outstanding ADSs was 1,077,494,287 after 70,340,918 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 fees and accountant fees were borne by TSMC. 054 055 4.5 Status of Employee Stock Option Plan 4.5.1 Issuance of Employee Stock Options ESOP Granted Approval Date by The Securities & Futures Bureau 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 Third Grant 06/25/2002 11/08/2002 1,085,000 0.00583% 10 years 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 Eighth Grant Ninth Grant As of 02/28/2014 10/29/2003 05/11/2004 11,167,817 0.05510% 10 years 10/29/2003 08/11/2004 135,300 0.00058% 10 years 01/06/2005 05/17/2005 10,742,350 0.04620% 10 years 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 - NT$53.0 NT$25.6 0.00000% 1,416,203 45,875,186 - NT$51.0 NT$24.6 0.00000% 7,584,554 174,820,504 - NT$41.6 NT$20.2 0.00000% 24,838,979 849,375,434 - NT$58.5 NT$28.3 0.00000% 583,111 29,807,359 - NT$66.5 NT$50.1 0.00000% 15,416 744,182 - NT$63.5 NT$47.8 0.00000% 10,143,247 449,012,664 201,281 NT$57.5 NT$43.2 0.00078% 128,014 4,982,968 - NT$43.8 NT$38.0 0.00000% 7,087,842 371,734,875 1,129,240 NT$54.3 NT$47.2 0.00436% Dilution to Shareholders’ Equity is limited Dilution to Shareholders’ Equity is limited Dilution to Shareholders’ Equity is limited Dilution to Shareholders’ Equity is limited Dilution to Shareholders’ Equity is limited Dilution to Shareholders’ Equity is limited Dilution to Shareholders’ Equity is limited Dilution to Shareholders’ Equity is limited Dilution to Shareholders’ Equity is limited 056 057 4.5.2 Employee Stock Options Granted to Management Team and to Top 10 Employees Title Name Number of Options Granted (Note 6) % of Shares Exercisable to Outstanding Common Shares Exercised Unexercised Shares Exercised Exercise Price Per Share Value of Shares Exercised (NT$) % of Shares Exercised to Outstanding Common Shares Shares Unexercised Adjusted Grant Price Per Share Value of Shares Unexercised (NT$) As of 02/28/2014 % of Shares Unexercised to Outstanding Common Shares Officers Chairman President and Co-Chief Executive Officer President and Co-Chief Executive Officer Morris Chang (Note 1 & 2) Mark Liu (Note 1 & 3) C.C. Wei (Note 1 & 3) Senior Vice President and Chief Information Officer Stephen T. Tso (Note 1) Senior Vice President and General Counsel Senior Vice President of TSMC and President of TSMC North America Richard Thurston (Note 1) Rick Cassidy (Note 4) Vice President and Chief Technology Officer President of TSMC China Employees Vice President Vice President Director Director Sr. Vice President of TSMC North America Sr. Vice President of TSMC North America Sr. Vice President of TSMC North America Vice President of TSMC North America President of WaferTech Director of WaferTech Director of WaferTech Deputy Fab Manager of WaferTech Jack Sun (Note 1) L.C. Tu (Note 1 & 5) J.K. Lin (Note 1) Burn J. Lin (Note 1) Jessica Chou Lie-Szu Juang Pan-Wei Lai Bradford Paulsen 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% - - - 0.00000% 7,674,288 0.02960% 7,232,603 43.7 316,303,631 0.02789% 441,685 47.2 20,847,555 0.00170% 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: Effective November 12, 2013, Chairman and Chief Executive Officer Dr. Morris Chang retired as Chief Executive Officer. Executive Vice Presidents and Co-Chief Operating Officers Drs. Mark Liu and C.C. Wei assumed the role as Co-Chief Executive Officers. Note 3: Executive Vice Presidents and Co-Chief Operating Officers Drs. Mark Liu and C.C. Wei were appointed as President and Co-Chief Executive Officer, effective November 12, 2013. Note 4: Mr. Rick Cassidy was promoted to Senior Vice President, effective February 18, 2014. Note 5: Vice President of Human Resources Mr. L.C. Tu was appointed as President of TSMC China, effective March 15, 2013. Note 6: Number of options granted includes the additional shares due to stock dividends distributed in 2004, 2005, 2006, 2007, 2008 and 2009. 4.6 Status of Employee Restricted Stock TSMC did not issue employee restricted stock in 2013, 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 neither issued new shares in connection with mergers or acquisitions during 2013, nor as of the date of this Annual Report. 4.8 Financing Plans and Implementation: Not applicable. 058 059 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 specialty wafer production processes and unparalleled manufacturing efficiency. TSMC strives to provide the best overall value to its customers, and the success of TSMC’s business is manifested in the success of its customers. 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 productivity and product quality. In May 2009, TSMC established the New Businesses organization to explore non-foundry related business opportunities. In August 2011, the New Businesses organization was formally separated from the main TSMC organization as two subsidiaries, TSMC Solid State Lighting Ltd. and TSMC Solar Ltd., responsible for solid state lighting and solar business activities, respectively. 5.1.2 Customer Applications TSMC manufactured more than 8,600 different products for over 440 different customers in 2013. These chips are used across the entire spectrum of electronic applications, including computers and peripherals, information appliances, wired and wireless communications systems, automotive and industrial equipment, consumer electronics such as DVDs, digital TVs, game consoles, digital still cameras (DSCs), and many other applications. The rapid evolution of end products drives our customers to utilize TSMC’s innovative technologies and services, while at the same time spurring TSMC’s own development of technology. As always, success depends on leading rather than following industry trends. TSMC manufactured over 8,600 products for over 440 customers in 2013. TSMC significantly outgrew the semiconductor market in 25 of the last 27 years since its founding. 060 061 5.1.3 Consolidated Shipments and Net Revenue in 2013 and 2012 Unit: Shipments (8-inch equivalent wafers) / Net Revenue (NT$ thousands) 2013 2012 Wafer Domestic (Note 1) Export Others (Note 2) Domestic (Note 1) Total Export Domestic (Note 1) Export Note 1: Domestic means sales to Taiwan. Note 2: Others majorly include revenue associated with mask making, design, and royalty income. 5.1.4 Production in 2013 and 2012 Unit: Capacity / Output (8-inch equivalent wafers) / Amount (NT$ thousands) Year 2013 2012 Note: Starting 2013, TSMC no longer includes SSMC's capacity in this capacity tables. 5.2 Technology Leadership 5.2.1 R&D Organization and Investment Shipments 2,810,456 12,855,511 N/A N/A 2,810,456 12,855,511 Wafers Capacity 16,446,779 14,832,671 Net Revenue 79,982,833 480,702,380 5,118,245 31,220,739 85,101,078 511,923,119 Shipments 2,392,978 11,651,318 N/A N/A 2,392,978 11,651,318 Output 15,197,701 13,643,678 Net Revenue 65,782,349 397,188,087 4,764,100 39,010,698 70,546,449 436,198,785 Amount 301,305,826 267,104,646 In 2013, TSMC continued to invest in R&D with total R&D expenditure Amount: NT$ thousands amounting to 8% of revenue, a level that equals or exceeds the R&D investment of many other high technology leaders. Along with the increase in budget, R&D staffing increased by 11%. TSMC recognizes that the technology challenge required to extend Moore’s Law, the business law behind CMOS scaling, is becoming increasingly complex. The efforts of the R&D organization are focused on enabling the Company to continuously offer its customers first-to-market, leading edge technologies and design solutions that R&D Expenditures 2012 2013 01/01/2014~ 02/28/2014 7,726,273 40,383,195 48,118,165 contribute to their product success in today’s complex and challenging market environment. In 2013 the R&D organization met these challenges by introducing into manufacture the industry-leading 20nm technology. The 16nm technology, which is the first integrated technology platform to make use of 3D FinFET transistors, has also met its development goals and is now in risk production. The R&D organization continues to strengthen the pipeline of technology innovations that are required to maintain technology leadership. The 10nm technology advanced development was completed, and entered full development, while the 7nm technology is in the early development stage. In addition to CMOS logic, TSMC conducts research and development on a wide range of other semiconductor technologies that provide the functionality our customers require for mobile SoC and other applications. Highlights achieved in 2013 include: production ramp of the CoWoSTM (Chip on Wafer on Substrate) 3D packaging technology; extension of the 28nm technology for RF and embedded flash technologies; the first industry introduction of the BCD power technology into a 12-inch fab environment and, manufacturing readiness of TSMC’s first wide band gap Gallium Nitride (GaN) semiconductor technology for high frequency power applications. TSMC maintains a network of important external R&D partnerships and alliances with world-class research institutions such as IMEC, the respected European R&D consortium, where TSMC is a core partner. TSMC also provides funding for nanotechnology research at leading universities worldwide to promote innovation and the advancement of nanoelectronic technology. In 2013, TSMC announced the formation of collaborative research centers with National Taiwan University and National Chiao Tung University in Taiwan, and anticipates announcing the establishment of additional research centers in Taiwan in 2014. 5.2.2 R&D Accomplishments in 2013 R&D Highlights ● 28nm Technology TSMC delivered the world’s first 28nm High-k/Metal Gate triple gate oxide technology (28HPT). This technology provides 10% faster speed compared to the 28HPM technology while keeping the same leakage power. 28HPT is qualified for production in both Fab 12 and Fab 15 with equivalent yield to 28HPM. Several new techniques were introduced during 2013 to enable the successful launch of 10nm development. While the immersion lithography process will be extended to the 10nm node, the double patterning technique that was developed for the 20nm and 16nm nodes is insufficient to meet 10nm requirements. Multiple patterning becomes essential to enable high yield manufacturing. To further stretch the patterning capability of optical lithography, significant learning in material processing, image modeling, and defect control has been achieved to make the 10nm process viable. ● 20nm Technology TSMC’s 20nm technology was successfully qualified for volume manufacture. ● 16nm Technology The 16nm technology features FinFET transistors with a third generation High-k/Metal Gate process, a fifth generation of transistor strain process, and advanced 193nm lithography. FinFET transistors offer substantial power reduction at the same chip performance compared to transistors built with the traditional planar structure, which is essential for advanced mobile applications. In 2013, the R&D organization successfully verified the process development test vehicle (TV1R), provided customers with version 1.0 design kits (design rules and SPICE models) and offered two public cyber shuttles. More than 10 customers and IP vendors took the shuttles and verified their IP. The 16nm technology has completed manufacturing qualification with good yield. ● 10nm Technology 2013 saw the introduction of 10nm technology into development. The 10nm technology will offer substantial power reduction for the same chip performance compared to earlier technology generations. Development activities in 2014 will focus on manufacturing baseline process setup, yield learning, transistor performance improvement, and reliability evaluation. TSMC plans to enter 10nm risk production in 2015 and volume production in 2016. ● Lithography 2013 was a productive year in 16nm lithography development with the technology reaching the risk production stage. Several novel patterning techniques were developed for 48nm pitch Fin patterning. These techniques overcame the challenge of high aspect ratio topography of 3D device structures. Besides patterning challenges, defect reduction on the high aspect ratio topography also required special engineering efforts. Several key solutions were developed in 2013, such as improvement in tool and process recipe co-optimization, and enhanced defect-monitoring methodology. The development of optimum automation and Advanced Process Control systems, including enhanced tool control and stability, resulted in significant reduction of rework rate and cycle time, helping to drive faster learning in both defect reduction and yield improvement. In 2013, TSMC took delivery of a NXE3300 extreme ultraviolet (EUV) scanner, and exposed its first wafers after successful installation. While we see a clear advantage in process simplification by the use of EUV as opposed to multiple patterning with optical immersion lithography, insufficient power of the EUV light source is our major concern. Multiple e-beam direct-write lithography (MEB DW) not only has the potential for economical imaging critical layers, but it also may offer cost reduction potential for non-critical layers and 450-mm wafers. It is being developed to meet the need of 7nm node imaging and beyond. A TSMC team from the design, CMOS, MEMS, and packaging areas is jointly developing and fabricating the digital pattern generation (DPG) module for the Reflective E-Beam Lithography (REBL) system of KLA-Tencor. The first DPG test chip, which was a collaborative effort between TSMC and KLA-Tencor, was taped out in the third quarter of 2013. ● Mask Technology Mask technology is an integral part of our advanced lithography. In 2013, we completed the development of mask technology for the 16nm node and made solid progress on development for the 10nm node. In the meantime, continued progress is being made on the mask technology for EUV lithography. Working with suppliers, we continue to drive down counts of native defects on mask blanks. In addition TSMC continues to work with several industrial consortia in developing the infrastructure of EUV mask technology. Integrated Interconnect and Packaging ● 3D IC TSMC achieved a new industry landmark in 2013 with the ramp up to volume production of a new turnkey system integration solution called CoWoSTM. The CoWoSTM solution is integrated with TSMC’s advanced silicon technologies to provide customers with alternatives for system level integration compared to the traditional SoC approach. The technology has passed customer product qualifications with 28nm FPGA products. At 20nm, development continues and we expect customer tape outs in the first half of 2014. We successfully demonstrated 3D IC stacking of an application processor and wide I/O DRAM in 28HPM technology through transistor stacking (TTS) TSV technology, and completed 16nm TSV process development. 062 063 ● Advanced Package Development TSMC offers a wide variety of lead-free flip chip packaging technologies. In 2013, TSMC qualified for manufacture at 20nm technology. 0.18μm Complementary Bipolar Complementary MOS (CBCMOS) time-to-market for highly integrated circuits, in 2013 TSMC also extended its IP quality program (TSMC9000) to allow IP audits to The 3D IC Reference Flow is an extension of our previously announced CoWoSTM Reference Flow that addresses true 3D chip stacking. The 3D IC flow provides a complete solution for through-silicon via (TSV) TSMC developed and transferred to manufacturing a first generation Given the ever-increasing need for first-time silicon success and early an innovative Bump-on-Trace (BoT) packaging technology with an ultra-fine pitch (80μm) copper (Cu) bump that is suitable for mobile/ handheld devices. Additionally, lead-free flip chip packaging was enhanced for ultra large die size (≥600mm2) for high performance applications (GPU/CPU/FPGA/Networking Processor). ● Advanced Interconnect Development of low resistance Cu and low capacitance dielectric ● Power IC/BCD Technology/Panel Drivers TSMC released the 0.13BCD technology, the first BCD technology be performed either at TSMC or at TSMC-certified laboratories. The modeling, power integrity, thermal analysis, chip-package-board extended IP quality program currently includes standard interface IP switching noise analysis, and design for test (DFT) for memory such as MIPI, HDMI and LVDS. Further IP types will be included in the integration through a Wide IO interface. These tools allow customers to be implemented in a 12-inch fab. The R&D team also completed upcoming year. TSMC also donated its IP Tag format to the industry to fully explore the new system integration opportunities made development and qualified for manufacture the wide band gap material GaN in a high electron mobility transistor (HEMT) to extend IP quality tracking coverage beyond our IP Alliance partners. possible by 3D IC technology. To help customers plan new product tape-outs incorporating TSMC configuration for high power, high frequency applications. The 55HV certified IP, the OIP ecosystem now features a portal to connect 5.2.5 Intellectual Property technology was qualified targeting high quality mobile displays, while customers to an ecosystem of more than 40 solution providers. continued to be the primary focus in 2013. At the 16nm node, C015HV was released targeted at the large panel market. TSMC has a novel dielectric scheme has been developed that reduces the also developed a 0.18μm HV embedded flash technology for touch capacitance between copper lines. For the 10nm node and beyond, panel applications. we have developed a new spacer-patterning scheme that allows copper line width and spacing to be reduced and minimizes signal delay. The effective resistivity of copper lines developed ● Micro-electromechanical Systems (MEMS) Technology A variety of products were qualified for manufacturing ramp in with these advanced processes is highly competitive and is lower 2013, including products aimed at: giga-level pixel display density; than that projected by the International Technology Roadmap for BioMEMS applications such human genome sequencing; second Semiconductors (ITRS). generation motion sensor products; and high-resolution noise cancellation microphones. Advanced Transistor Research The increased performance and lower power requirements of advanced logic technologies require constant innovation in transistor architecture and materials. TSMC is at the forefront of research in these areas, with particular focus on non-silicon channel materials such as germanium and III-V compounds because of their desirable performance and power characteristics. As an example of the progress being made in this area, our research team recently announced at the 2013 International Electron Devices Meeting world record-breaking transistor performance for both Germanium (Ge) channel PMOS FinFET and Indium Arsenide (InAs) (III-V) channel NMOS. New concepts of transistor structures employing innovative nanotechnology are also under intensive investigation. Specialty Technologies TSMC offers a broad mix of technologies to address the wide range of applications that customers are engaged in. The Company enhanced its SoC roadmap to address the needs of specialty applications in mixed-signal, RF markets, high voltage power management IC, high voltage IC’s for display, MEMS and embedded memory. ● Mixed Signal/Radio Frequency (MS/RF) Technology TSMC has successfully verified customer products in the 28nm technology for RF CMOS applications (28LP-RF) that are aimed at next generation RF transceivers (e.g. 4G LTE). Higher performance analog and RF solutions are also in development at the 20nm node. ● Flash/Embedded Flash Technology TSMC achieved several important milestones in embedded flash technologies. At the more mature 65nm/55nm node, NOR based cell technologies including 1-T cell and Split-Gate cell successfully completed customer qualification. At the 40nm node, the split-gate cell technology has been shipped for both automotive and consumer applications. Embedded flash development for the 28LP and 28HPM platforms is underway for low leakage applications such as smartcard, MCU and Automobile. 5.2.3 Technology Platform TSMC provides our customers with advanced technology platforms that include the comprehensive design infrastructure required to optimize design productivity and cycle time. These include: design flows for electronic design automation (EDA); silicon-proven IP building blocks, such as libraries; and simulation and verification design kits, i.e., process design kits (PDK) and technology files. To ensure the OIP ecosystem delivers to our customers the highest quality design experience with newly introduced technologies, TSMC has collaborated with our EDA partners to certify EDA tool readiness. In particular, since 16nm is the first FinFET technology for our customers, TSMC and ecosystem partners improved the tool certification process to cover point tool enhancement as well as integrated, cross-tool certification using an advanced CPU core as the vehicle (EDA tool certification results can be found on TSMC-Online). A strong portfolio of intellectual property rights strengthens TSMC’s technology leadership and protects our advanced and leading edge technologies. In 2013, TSMC received a record breaking 940 U.S. 5.2.4 Design Enablement TSMC’s technology platforms provide a solid foundation for design patents, as well as 500+ issued patents in Taiwan and the PRC, and enablement. Customers can design directly using the Company’s other patents issued in various other countries. In 2013, TSMC ranked internally developed IP and tools, or using those that are available via #35 in the “Top 50“ U.S. patent grants. TSMC’s patent portfolio now our OIP partners. Tech File and PDK TSMC provides a broad range of process design kits (PDK) for digital logic, mix-signal, radio frequency (RF), high-voltage driver, CMOS Image Sensor (CIS) and embedded flash technologies across a range of technology nodes from 0.5μm to 16nm. In addition, TSMC provides technology files for: DRC; LVS; RC extraction; automatic place and route; and a layout editor to ensure process technology information is accurately represented in EDA tools. There are more than 100,000 customer downloads of these files every year. Library and IP TSMC and its alliance partners offer our customers a rich portfolio of reusable IP, which are essential building blocks for many circuit designs. In 2013, over 60% of new tape-outs at TSMC adopted one or more libraries or IP from TSMC and/or our IP partners. In 2013, TSMC expanded its library and silicon IP portfolio to contain more than 6,300 items, a 16% increase over 2012. Design Methodology and Flow In 2013 TSMC addressed the critical design challenges associated with the new 16nm FinFET technology for digital and SoC applications, as well as 3D IC chip stacking technology by announcing the readiness of reference flows through our Open Innovation Platform® (OIP) collaboration. The 16nm reference flow features FinFET-specific design solutions and methodologies for performance, power, and area optimization. The flow covers place-and-route, RC extraction, timing analysis, electromigration, IR-drop, and physical verification. In addition, it includes analysis capability for layout-dependent-effects (LDE) and voltage-dependent rule checking (VDRC) to improve custom design accuracy and productivity. exceeds 20,000 patents worldwide (including 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, operations, 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. We have worked continuously to improve the quality of our intellectual property portfolio and to reduce the costs of maintaining it. We plan to continue investing in our intellectual property portfolio and intellectual property management system to ensure that we protect our technology leadership and receive maximum business value from our intellectual property rights. 5.2.6 TSMC University Collaboration Programs TSMC University Research Centers in Taiwan TSMC has significantly expanded its interaction with universities in Taiwan with the establishment of several new research centers located at the nation’s most prestigious universities. The mission of these centers is twofold: to increase the number of highly qualified students who are suitable for employment at TSMC, and to inspire university professors to initiate research programs that focus on the frontiers of semiconductor device, process and materials technology; semiconductor manufacturing and engineering science; and specialty technologies of relevance to the semiconductor industry. Two of these research centers were established in 2013 at National Taiwan University and National Chiao Tung University, and two additional centers will be established at National Cheng Kung University and 064 065 National Tsing Hua University in 2014. These centers are funded structures, strained-layer CMOS, high mobility materials and novel 3D jointly by governmental agencies together with a commitment from IC devices. These studies of the fundamental physics of nanometer TSMC of several hundred million Taiwan dollars and in-kind university CMOS transistors are core aspects of our efforts to improve the shuttles. In 2013, about three hundred high caliber students across understanding and guide the design of transistors at advanced Electronics, Physics, Materials Engineering, Chemistry, Chemical nodes. The findings of these studies are being applied to ensure our Engineering and Mechanical Engineering disciplines joined the continued industry leadership at the 28nm and 20nm nodes and to research centers. TSMC University Shuttle Program The TSMC University Shuttle Program was established to provide professors at leading research universities worldwide with access to the advanced silicon process technologies that are needed to research and develop innovative circuit design concepts. This program links motivated professors and graduate students with enthusiastic managers at TSMC with the goals of promoting excellence in the development of advanced silicon design technologies, and the nurturing of new generations of engineering talent in the semiconductor field. The program provides access to silicon process technologies including the 65nm and 40nm nodes for digital, analog/mixed-signal circuits and RF design, and the 0.11μm/0.18μm process nodes for micro-electromechanical system designs. Select research projects utilize the 28nm technology node. Participants in the TSMC University Shuttle Program include major university research groups in the U.S.: M.I.T.; Stanford University; UC Berkeley; UCLA; University of Texas at Austin; and University of Michigan. In Taiwan, participants are: National Taiwan University; National Chiao Tung University; and National Tsing Hua University. Other participants include: Tsing Hua University in Beijing; The Hong Kong University of Science and Technology; and Singapore’s Nanyang Technological University. extend our leadership to the 10nm and 7nm nodes. One of TSMC’s goals is to extend Moore’s Law through both innovative in-house work and by collaborating with industry leaders and academia. We seek to push the envelope in finding cost-effective technologies and manufacturing solutions. TSMC intends to continue working closely with international consortia and lithography equipment suppliers to ensure the timely development of 193nm high-NA scanner technology, EUV lithography, and multiple- e-beam direct-write technologies. These technologies are increasingly important to TSMC’s process development efforts at the 10nm, 7nm, and smaller nodes. Similarly, TSMC continues to work with mask writing, inspection, and repair equipment suppliers to develop viable mask-making technology to help ensure that the Company maintains its leadership position in mask quality and cycle time and continues to meet aggressive R&D, prototyping, and production requirements. With a highly competent and dedicated R&D team and its unwavering commitment to innovation, TSMC is confident of its ability to deliver the best and most cost-effective SoC technologies for its customers, thereby supporting the Company’s business growth and profitability. TSMC R&D Future Major Project Summary TSMC’s University Shuttle Program participants recognize the importance of the program in allowing their graduate students to Project Name Description Risk Production (Estimated Target Schedule) implement exciting designs ranging from: low-power memories; analog-to-digital converters; and advanced radio-frequency and mixed-signal bio-medical systems. This is truly a “win-win“ collaboration. In 2013, TSMC received specific letters of appreciation from professors at M.I.T., Stanford University, UC Berkeley, UCLA, University of Michigan, National Taiwan University and National Chiao Tung University. 5.2.7 Future R&D Plans In light of the significant accomplishments of TSMC’s advanced technologies in 2013, the Company plans to continue to grow its R&D investments. The Company plans to reinforce its exploratory development work on new transistors and technologies, such as 3D 10nm logic platform technology and applications 3rd generation FinFET technology for both digital and analog products 2015 7nm logic platform technology and applications 3D IC CMOS platform technology for SoC 2017 Cost-effective solution with better form factor and performance for SIP 2014 ~ 2016 Next-generation lithography EUV and multiple e-beam to extend Moore’s Law 2014 ~ 2019 Long-term research Special SoC technology (including new NVM, MEMS, RF, analog) and 5nm transistors 2014 ~ 2019 The above plans accounted for roughly 70% of the total R&D budget in 2014. The total R&D budget is currently estimated to be around 8% of 2014 revenue. 5.3 Manufacturing Excellence 5.3.3 Precision and Lean Operations 5.3.1 GIGAFABTM Facilities TSMC’s 12-inch fabs are a key part of its manufacturing strategy. TSMC currently operates three 12-inch GIGAFABTM facilities – Fab 12, Fab 14, and Fab 15 – the combined capacity of which reached 4,619,000 12-inch wafers in 2013. Production within these three facilities supports 0.13μm, 90nm, 65nm, 40nm, 28nm, and 20nm process technologies, and their sub-nodes. Part of the capacity is reserved for research and development work and currently supports 16nm, 10nm and beyond technology development. TSMC has developed a centralized fab manufacturing management for the customers’ benefit of consistent quality and reliability performance, greater flexibility of demand fluctuations, faster yield learning and time-to-volume, and minimized costly product re-qualification. It enabled Fab 15 to fast ramp 28nm capacity from 50,000 to around 100,000 wafers output per month in 2013 to satisfy customers’ demand. 5.3.2 Engineering Performance Optimization Highly sophisticated information technology (IT) solutions, such as advanced equipment control, fault detection and diagnosis, engineering big data mining, and centralized operation platforms, are implemented to optimize TSMC equipment, process and yield performance. They also improve production efficiency, effectiveness, and engineering capability via information integration, workflow optimization and automation. Advanced analytical methods identify critical equipment and process parameters that are linked to device performance. Methodologies such as virtual metrology, yield dissection and management integrate Advanced Process Control (APC), Fault Detection Classification (FDC), Statistical Process Control (SPC), and Circuit Probe data in order to optimize equipment performance to match device performance. Accurate modeling and control at each process stage drives intelligent module loop control. The process control hierarchy dispatched via sophisticated computer-integrated manufacturing systems enables optimization from equipment to end product, which achieves precision and lean operation in a high product mix semiconductor manufacturing environment. TSMC’s unique manufacturing infrastructure is tailored for a high product mix foundry environment. Following its commitment to manufacturing excellence, TSMC has equipped a sophisticated scheduling and dispatching system, implemented industry-leading automated materials handling systems, and employed Lean Manufacturing approaches to provide customers with on-time-delivery and best-in-class cycle time. Real-time equipment performance and productivity monitoring, analysis, diagnosis and control minimize production interruption and maximize cost effectiveness. 5.3.4 450mm Wafer Manufacturing Transition TSMC joined the Global 450mm Consortium (G450C) located in the College of Nanoscale Science and Engineering (CNSE) of New York University at Albany, New York. The consortium includes five IC makers and CNSE (which represents New York State and provides the clean room facility), as well as key 450mm tool suppliers as associate members. Currently, TSMC has 16 experienced employees working in the consortium. TSMC has assumed the Operation General Manager position in the consortium and commits to lead the industry for a cost-effective 450mm transition. The clean room of G450C in Albany has been ready for tool installation since the first quarter of 2013. Most of the tools will be installed by 2015. Besides 450mm tool readiness, TSMC is also developing novel 450mm operations to bring the maximum value of semiconductor wafer fabrication to customers, including advanced quality and the most competitive cycle time in advanced technology. 450mm will be a new era of semiconductor manufacturing with new manufacturing capability advanced from today’s leading edge technology. 5.3.5 Raw Materials and Supply Chain Risk Management In 2013, TSMC continued Supply Chain Risk Management review meetings periodically with business teams to proactively identify and manage risk of supply capacity insufficiency and supply chain interruption. TSMC also worked with its suppliers to enhance the performance of quality, delivery, risk management, and to support green procurement, environmental protection and safety. 066 067 Raw Materials Supply Major Materials Major Suppliers Market Status Procurement Strategy Raw Wafers F.S.T. S.E.H. Siltronic SUMCO SunEdison These five suppliers together provide over 90% of the world’s wafer supply. ● TSMC’s suppliers of silicon wafers are required to pass stringent quality certification procedures. Each supplier has multiple manufacturing sites in order to meet customer demand, including plants in North America, Asia, and Europe. ● 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. These seven 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. 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. Chemicals Litho Materials Gases Slurry, Pad, Disk Air Products ATMI BASF Dow SAFC KANTO-PPC MGC AZ Dow JSR Nissan Shin-Etsu Chemical Sumitomo T.O.K. Air Liquide Air Products Linde Taiyo Nippon Sanso Air Products Asahi Glass Cabot Microelectronics Dow Chemical Fujifilm Planar Solutions Fujimi Hitachi Chemical Kinik 3M Suppliers Accounted for at Least 10% of Annual Consolidated Net Procurement Unit: NT$ thousands Supplier VIS Company A Company B Company C Others Total Net Procurement 2013 2012 Procurement Amount As % of 2013 Total Net Procurement Relation to TSMC Procurement Amount As % of 2012 Total Net Procurement Relation to TSMC 6,993,964 4,925,966 4,812,417 4,401,215 20,773,685 41,907,247 17% Investee accounted for using equity method 12% None 11% None 11% None 49% 100% 4,475,674 6,708,942 5,846,449 3,954,602 20,394,725 41,380,392 11% Investee accounted for using equity method 16% None 14% None 9% None 50% 100% ● TSMC conducts periodic audits of the suppliers’ quality assurance systems to ensure that they meet TSMC’s standards. 2013. 5.3.6 Quality and Reliability A characteristic of TSMC’s industry reputation is its commitment to providing customers with the best quality wafers and service for their products. Quality and Reliability (Q&R) services aim to achieve “quality on demand“ to fulfill customers’ needs regarding time-to-market, reliable quality, and market competition over a broad range of products. Q&R technical services assist customers in the technology development and product design stage to design-in their product reliability requirements. Since 2008, Q&R has worked with R&D to successfully establish and implement new qualification methodology for High-k/Metal Gate (HKMG) as well as for FinFET structures in 2013. Q&R had been collaborating with SEMI, the Semiconductor Equipment and Material International, to establish an IC Quality Committee since May 2012 in order to enhance product quality of the semiconductor supply chain. For backend technology development, Q&R worked with R&D and the Backend Technology and Service Division to complete the Cu Bump technology development and production transfer of both CuBoL (Copper Bump on Lead) and CuBoT (Copper Bump on Trace) as lead free bump solutions for fine bump pitch products. To extend product package reliability validation, Q&R established in-house system-level temperature cycling, bending, drop and vibration test capabilities in In 2013, Q&R completed a new audit of incoming material suppliers for advanced technology. Q&R also implemented innovative statistical matching methodologies to achieve the goal of enlarging the manufacturing window with better quality control. The scope of the methodology includes facility, metrology and process tools, wafer acceptance test (WAT) data and reliability performance. Since 2011, Q&R tightened the post-fab outgoing visual inspection criteria for wafer quality improvement to AQL 0.4% from AQL 0.65%. To sustain production quality, and to minimize risk to customers when deviations occur, manufacturing quality monitoring and event management span all critical stages – from raw material supply, In compliance with the electronic industry’s lead-free and green IC package policy, Q&R qualified and released lead-free bumping to satisfy customer demands, and made lead-free bump package possible for 0.13μm, 45nm, 40nm, 28nm and 20-SoC technology products by collaborating with the major outsource assembly and testing subcontractors. This enabled TSMC customers to introduce and ramp lead-free products with excellent assembly quality. In 2013, TSMC Q&R ramped wafer-level Chip Scale Package (CSP) to 21K per month and lead-free to 60K per month without major quality issues. For mainstream technologies, Q&R qualified ultra, extreme low leakage and high endurance embedded Flash IP, IPD (Integrated Passive Device), hybrid of Copper, and Copper-Aluminum technology with customers. Q&R continues to build reliability testing and monitoring to ensure excellent manufacturing quality of specialty technologies on automotive, high-voltage products, CMOS image sensors and embedded-Flash memory products. TSMC Q&R is also responsible for leading the Company towards the ultimate goal of zero-defect production through the use of continuous improvement programs. Periodic customer feedback indicates that products shipped from TSMC have consistently met or exceeded their field quality and reliability requirements. In 2013, a third-party audit verified the effectiveness of the TSMC quality management system in compliance with ISO/TS 16949:2009 and IECQ QC 080000:2012 certificates requirements. 5.4 Customer Trust 5.4.1 Customers TSMC’s worldwide customers have diverse product specialties and excellent performance records in various segments of the semiconductor industry. Fabless customers include: Advanced Micro Devices, Inc., Broadcom Corporation, Marvell Semiconductor Inc., MediaTek Inc., NVIDIA Corporation, OmniVision Technologies and Qualcomm Inc. IDM customers include: Analog Devices Inc., STMicroelectronics and Texas Instruments Inc. etc. Customer Service mask making, and real-time in-process monitoring, to bumping, wafer sort and reliability performance. Advanced failure and materials TSMC believes that providing superior customer service is critical to enhancing customer satisfaction and loyalty, which is very important analysis techniques are also developed and effectively deployed in to retaining existing customers, attracting new customers, and process development, customer product development and product strengthening customer relationships. With a dedicated customer manufacturing. In recent years, due to continuous shrinking of device features, laboratory tools have been adapted to complement traditional metrology tools that have run into their physical limits. 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, mask making, Furthermore, state-of-the-art materials analysis, chemical analysis and manufacturing, and backend to achieve optimum experience for fault isolation equipment are continuously being added to support our customers and, in return, to gain customer’s trust and sustain development activities of the 20nm, 16nm and 10nm technology Company profitability. nodes. 068 069 To facilitate customer interaction and information access on a real-time basis, TSMC-Online services offer a suite of web-based applications that ● The foundry segment’s earliest and most comprehensive EDA TSMC Workforce Structure provide a more active role in design, engineering, and logistics collaborations. Customers have 24-hour a day, seven-day-a-week access to critical certification program delivering timely design tool enhancement information and are able to subscribe customized reports through TSMC-Online services. Design Collaboration focuses on content availability required by new process technologies; and and accessibility, with close attention to complete, accurate, and current information at each level of the wafer design life cycle. Engineering ● The foundry segment’s largest, most comprehensive and robust Collaboration includes online access to engineering lots, wafer yields, wafer acceptance test (WAT) analysis, and quality reliability data. Logistics silicon-proven intellectual properties (IPs) and library portfolio; and 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 of our customers’ needs are appropriately understood, TSMC conducts an annual customer satisfaction survey (ACSS) with most active customers, either by web or interview, through an independent consultancy. Complementary with the survey, quarterly business reviews (QBRs) are also conducted by the customer service team so that customers can give feedback to TSMC on a regular basis. Through both surveys and intensive interaction with customers by our account teams, TSMC is able to maintain close touch with customers for better service and collaboration. Customer feedback is routinely reviewed and considered by executives and then developed into appropriate improvement plans, all-in-all becoming an integral part of the customer satisfaction process with a complete closed loop. TSMC has maintained a focus on customer survey data as one of our key indicators of corporate performance – not just of past performance, but also as a leading indicator of future performance. TSMC has acted on the belief that customer 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 Revenue Unit: NT$ thousands Customer Customer A Others Total Net Revenue 2013 2012 Net Revenue As % of 2013 Total Net Revenue Relation to TSMC 130,563,982 466,460,215 597,024,197 22% None 78% 100% Net Revenue 85,880,132 420,865,102 506,745,234 As % of 2012 Total Net Revenue Relation to TSMC 17% None 83% 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. OIP is a key part of the TSMC Grand Alliance. 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 IP, 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: ● Comprehensive design ecosystem alliance programs covering market-leading EDA, library, IPs, and design service partners. TSMC’s OIP Alliance consists of 28 electronic design automation (EDA) partners, 41 IP partners, and 25 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 the needed design infrastructure with timely enhancement of EDA 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 2013, TSMC hosted an OIP Ecosystem Forum at the San Jose Convention Center in California, with keynote addresses Job Total Gender Education 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) 12/31/2012 (Note 1) 12/31/2013 (Note 2) 02/28/2014 (Note 2) 3,865 15,844 3,079 16,479 39,267 55.5% 44.5% 3.6% 34.5% 25.9% 12.9% 4,078 17,205 3,236 15,964 40,483 57.5% 42.5% 4.0% 37.4% 25.8% 11.9% 4,105 17,225 3,277 16,156 40,763 57.5% 42.5% 4.0% 37.2% 26.1% 11.8% 23.1% 20.9% 20.8% 33.2 6.2 33.5 6.6 33.6 6.7 Note 1: On a consolidated basis and includes employees of our non-wholly owned subsidiaries, Xintec Inc. and Mutual-Pak Technology Co., Ltd., since 2012. from TSMC executives as well as OIP ecosystem partners. The forum Note 2: The data shown no longer includes Xintec Inc, as Xintec Inc. was deconsolidated in June 2013. was well attended by both customers and ecosystem partners and demonstrated the value of collaboration through OIP to nurture 5.5.2 Recruitment innovations. TSMC is an equal employment opportunity employer, and its practices center on the principles of open-and-fair recruitment. The TSMC’s OIP Partner Management Portal facilitates communication Company evaluates all candidates according to their qualification as with our ecosystem partners for efficient business productivity. related to the requirement of each position, rather than race, gender, This portal is designed with an intuitive interface and can be linked age, religion, nationality, or political affiliation. directly from TSMC-Online. 5.5 Employees 5.5.1 Human Capital Although facing a softer global economy, TSMC’s continuous growth requires constant talent sourcing and recruitment activities to support its business. The Company recruited over 3,300 managers, professionals, and administrative staffs, as well as over 1,300 Human capital is one of the most important assets of TSMC. assistants and technicians in 2013. The Company is committed to providing quality jobs with good compensation, challenging work, and comfortable work environment In addition, the Company, through its University Program Office, for its employees, and it is dedicated to foster a dynamic and fun established two university-level research centers in National Taiwan work environment. In 2013, TSMC was named the “Most Admired University (NTU) and National Chiao Tung University (NCTU) in 2013. Company in Taiwan” by CommonWealth Magazine for the 17th Two other centers with National Cheng Kung University and National consecutive year. Tsing Hua University will be established in 2014. The mission of the centers is two-fold: to develop top graduate students for future At the end of 2013, TSMC and its subsidiaries had over 40,483 employment and encourage selected academics to consolidate employees worldwide, including 4,078 managers, 17,205 different research domains under one umbrella for more effective professionals, 3,236 assistants, and 15,964 technicians. The following synergy. TSMC provides hundred of millions of NT dollars in seed table summarized TSMC workforce at the end of February, 2014: money for leveraging funding from the National Science Council. In 2013, the two centers in NTU and NCTU sponsored more than 50 faculty and 250 students across the fields of Electronics, Material Engineering, Physics, Chemistry, Chemical Engineering and Mechanical Engineering. These centers also help advance novel or innovative academic semiconductor research. 070 071 In order to cultivate a young talent pipeline for recruitment both ● Direct Labor (DL) Training: enables employees of the production locally and around the world, TSMC deploys a number of recruiting line in acquiring the knowledge, skills and attitudes they need to activities and university programs, including Joint Development perform their jobs well and to pass the certification for operating Programs, University Shuttle Program, Summer Internship, Job Fairs equipment. Training includes DL Skill Training, Technician TSMC’s commitment in providing employees with a sustainable career with its continuous growth, as well as its unceasing efforts as an advocate for employees’ work-life balance, has earned it the aforementioned “Most Admired Company in Taiwan“ awarded by in Taiwan, U.S., Singapore and India, as well as a series of Fresh “Train-the-Trainer” Training, and Manufacturing Leader Training. CommonWealth Magazine. Graduate Career Symposium for soon-to-be graduates. 5.5.3 People Development subsidized when taking external short-term courses, credit courses implements programs to enhance their well-being, benefit, Apart from internal training resources, our employees are also To enrich employees’ work experience, the Company continuously ● 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 for employees. In 2013, TSMC employees continued to be recognized through a host of prestigious external awards, including National Outstanding Managers Award, Outstanding Young Engineer Award, National Model Worker Award, and National Industrial Innovation Award. TSMC is committed to cultivating a continuous and diversified learning environment. Under this mission, the Company initiated “TSMC Employee Training and Education Procedure” to ensure the and degrees. 5.5.4 Compensation Company’s and individuals’ development objectives can be achieved TSMC provides a diversified compensation program that is competitive recognition, rewards and communication. The various initiatives include the following: Employee Benefit Programs Employee Communication through internal and external training resources. externally, fair internally, and adapted locally. TSMC upholds the ● Diverse employee welfare programs: including 77 hobby clubs, 52 Based on the nature of the individual’s job, work performance develop, motivate and reward talented employees. With excellent and career development path, the Company provides employees a operating performance, employment at TSMC entitles employees to a philosophy of sharing wealth with employees in order to attract, retain, speeches covering diverse topics (in 2013), Sports Day, and Family Day. In addition, holiday bonuses, marriage bonuses, condolence allowances and emergency subsidies are also available to cater for comprehensive network of learning resources, including on-the-job comprehensive compensation and benefits program above the industry employees’ needs. training, classroom training, e-learning, coaching, mentoring, and job average. rotation. ● Convenient on-site services: cafeterias, dry-cleaning, convenience stores, travel, banking, housing, and commuting assistance are For each employee, a tailor-made Individual Development Plan (IDP) employee cash bonus based on quarterly business results, and ● Comprehensive health enhancement programs: physical care and is provided. employee profit sharing when the Company distributes its profit each psychological consultation services. Five free counseling sessions TSMC’s compensation program includes a monthly salary, an accessible for employees in the fabs. The Company provides employees with a wide range of on-site year. general, professional, and management training programs. In The purpose of the employee cash bonus and profit sharing programs addition to engaging external experts as trainers, hundreds of TSMC is to reward employee contributions appropriately, to encourage are offered to TSMC employees on an annual basis, with extension available depending on the individual’s needs. Other programs include weight control, medical check-up, smoking secession, exercise promotion campaign, massage service, abdominal and employees are trained as qualified instructors to deliver their valuable employees to work consistently toward ensuring the success of TSMC, neck x-ray, female care, blood donation, liver disease prevention, as know-how in internal training courses. In 2013, TSMC conducted and to link employees’ interests with those of TSMC’s shareholders. well as seminars to raise awareness of personal health. 1,549 internal training sessions, which translated to a company-wide The Company determines the amount of the cash bonus and profit ● Premium Sports Center: a variety of workout facilities available to all total of nearly 890,000 training hours with the participation of over sharing based on operating results and industry practice in the employees and their families, as well as exercise sessions conducted 530,000 attendees. Employees on average attended over 22 hours of Republic of China. The amount and form of the employee cash by professional instructors. training and the total training expenses reached NT$83 million. bonus and profit sharing are determined by the Board of Directors TSMC’s training programs include: based on the Compensation Committee’s recommendation, and the employee profit sharing is subject to shareholders’ approval at the ● Flexible Preschool Service: the childcare service, operated to meet employees’ work schedules, is available in a total of three fabs in Hsinchu and Tainan. ● New Employee Training: includes basic training and job orientation Annual Shareholders’ Meeting. Individual awards are based on each for new employees. Furthermore, newcomers’ managers and the employee’s job responsibility, contribution and performance. Employee Recognition Company’s well-established Buddy System are in place to support the newcomers in their assimilation process. In addition to providing employees of TSMC’s overseas subsidiaries ● General Training: refers to training required by government with a locally competitive base salary, the Company grants annual regulations and/or Company policies, as well as trainings on general bonuses as a part of total compensation. The annual bonuses are subjects for all employees or employees of different job functions. granted in line with local regulations, market practices, and the Such training includes subjects of industry-specific safety, workplace overall operating performance of each subsidiary, to encourage health and safety, quality, fab emergency response, languages, and employees’ commitment and development within the Company. personal effectiveness. ● Professional/Functional Training: provides technical and professional 5.5.5 Employee Satisfaction TSMC sponsors various internal 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 award programs include: ● TSMC Medal of Honor, presented exclusively by the Chairman, recognizes those who contribute to the Company’s business training required by different functions within the Company. TSMC offers training courses on equipment engineering, process engineering, accounting, information technology, and so forth. ● Management Training: programs are tailored to the needs of managers at all levels, including new, experienced, and senior managers; optional courses are also available. TSMC is committed to providing quality jobs with good performance significantly. compensation, challenging work, and comfortable work environment ● TSMC Academy recognizes outstanding TSMC scientists and for its employees, and it is dedicated to foster a dynamic and fun engineers whose individual technical capabilities make significant work environment. The Company encourages employees to maintain contributions to the Company. a healthy and well-balanced life, apart from their time spent working. ● Outstanding Engineer Award for each fab and Total Quality Excellence Award recognize employees’ continuous efforts in creating value for the Company. 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. To ensure that employees’ opinions and voices are heard, and their issues are addressed effectively, impartial submission mechanisms, including quarterly labor-management communication meetings, are in place to provide timely support. 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. In 2013 and as of the date of this Annual Report, there had been no loss resulting from labor disputes. A host of two-way communication channels are leveraged to maintain the unobstructed flow of information between the managers and the employees, including: ● Regular communication meetings are held for the various levels of managers and employees. ● Periodic employee satisfaction surveys are conducted, with follow-up actions based on the survey findings. ● The corporate intranet, myTSMC: the website features Chairman’s Talk, corporate messages, Executive interviews, and other activities of interest to employees. ● eSilicon Garden: the website hosting TSMC’s internal electronic publication is updated on a bi-weekly basis with inspirational content featuring outstanding teams and individuals, as well as major activities of the Company. ● Complaints regarding major management, financial, and auditing issues are handled by the following channels with high level of confidentiality: - The independent Audit Committee; and - Ombudsman system led by an appointed Vice President. ● Employee Opinion Box provides a channel for employees to express their opinions regarding their work and the overall work environment. ● Fab Caring Circle in each fab takes care of the issues related to employees’ work and personal life. In 2013, the system dedicated mainly to the direct labors (DL) of the Company won the CSR Award presented by GlobalView Magazine with its quality and effective services. 072 073 Employees TSMC Internal Communication Structure Face-to-Face Meeting ● Functional/Work Unit/Skip-Level Announcement Fab/Functional Activity Employee Portal Employee Survey HR Area Service Team Communication Meeting by Request eSilicon Garden Announcement Company-Wide Activity Employee Assistance Program ● Wellness Center ● Counseling Service ● EWC Emergency Assistance Employee Voice Channels ● Ombudsman System ● Internal Audit Committee ● Sexual Harassment Inv estigation Committee ● Employee Opinion Box ● Fab Caring Circle ● Dadicated Line & SMS Managers of All Levels Human Resources System / Committee Chair Board of Directors and Management Team 5.5.6 Retention From the employee’s initial adaptation to professional and career development, TSMC works proactively to retain outstanding employees through good compensation and through an innovative, challenging and fun work environment. All these efforts contributed to a healthy turnover rate of 5.3% for 2013. 5.5.7 Retirement Policy TSMC’s retirement policy is set according to the Labor Standards Act and Labor Pension Act of the Republic of China. With the Company’s sound financial system, TSMC ensures employees a solid pension contribution and payments, which encourages employees to set long-term career plans and raises their commitment to TSMC. 5.6 Material Contracts Shareholders Agreement 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. Manufacturing, License, and Technology Transfer Agreement Term of Agreement: 04/01/2004 - 03/31/2006, automatically renewable for successive one-year terms until and unless both parties decide otherwise by mutual consent in writing Contracting Party: Vanguard International Semiconductor Corporation (VIS) Summary: VIS reserves certain capacity to manufacture TSMC products on mutually agreed terms. TSMC may also transfer certain technologies to VIS, for which it will in return receive royalties from VIS. Investment Agreement and Shareholder Agreement Term of Investment Agreement: Effective as of 08/05/2012 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. Research and Development Funding Agreement Term of Agreement: 10/31/2012 - 12/31/2017 Contracting Party: ASML Holding N.V. (ASML) Summary: TSMC shall provide EUR276 million to ASML’s research and development programs from 2013 to 2017. Note: TSMC is not currently party to any other material contract, other than contracts entered into in the ordinary course of its business. The Company’s “Significant Contingent Liabilities and Unrecognized Commitments“ are disclosed in Annual Report (II), Financial Information, page 51. 074 075 6. Financial Highlights 6.1 Financial Status and Operating Results 6.1.1 Financial Status Consolidated Unit: NT$ thousands Item Current Assets Long-term Investments (Note 1) Property, Plant and Equipment Intangible Assets Other Assets (Note 2) Total Assets Current Liabilities Noncurrent Liabilities Total Liabilities Capital Stock Capital Surplus Retained Earnings Equity Attributable to Shareholders of the Parent Total Equity 2013 358,486,654 89,183,810 792,665,913 11,490,383 11,228,217 1,263,054,977 189,777,934 225,501,958 415,279,892 259,286,171 55,858,626 518,193,152 847,508,255 847,775,085 2012 250,325,436 65,717,240 617,562,188 10,959,569 16,790,075 961,354,508 148,473,947 89,786,655 238,260,602 259,244,357 55,675,340 408,411,468 720,550,680 723,093,906 Difference 108,161,218 23,466,570 175,103,725 530,814 (5,561,858) 301,700,469 41,303,987 135,715,303 177,019,290 41,814 183,286 109,781,684 126,957,575 124,681,179 % 43% 36% 28% 5% -33% 31% 28% 151% 74% 0% 0% 27% 18% 17% Note 1: Long-term investments consist of noncurrent available-for-sale financial assets, financial assets carried at cost and investments accounted for using equity method. Note 2: Other assets consist of deferred income tax assets, refundable deposits, and other noncurrent assets. ● Analysis of Deviation over 20% The increase in current assets was mainly due to increase in cash and cash equivalents in 2013. The increase in long-term investments was mainly due to increase in fair value of available-for-sale financial assets in 2013. The increase in property, plant and equipment was mainly due to acquisition of advanced technology equipment during 2013. The decrease in other assets was mainly due to decrease in deferred income tax assets. The increase in total assets was mainly due to increase in cash and cash equivalents and property, plant and equipment. The increase in current liabilities was mainly due to increase in payables to contractors and equipment suppliers and income tax payable, partially offset by decrease in short-term loans. The increase in noncurrent liabilities was mainly due to issuance of corporate bonds of NT$130.8 billion in 2013. The increase in total liabilities was mainly due to increase in noncurrent liabilities. The increase in retained earnings was mainly due to net income of 2013, partially offset by distribution of 2012 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. In 2013, net income registered a record level of NT$188.1 billion with EPS of NT$7.26. 076 077 Unconsolidated Unit: NT$ thousands Item Current Assets Long-term Investments (Note 1) Property, Plant and Equipment Intangible Assets Other Assets (Note 2) Total Assets Current Liabilities Noncurrent Liabilities Total Liabilities Capital Stock Capital Surplus Retained Earnings Total Equity 2013 257,623,763 165,545,159 770,443,494 7,069,456 7,897,131 1,208,579,003 187,195,744 173,875,004 361,070,748 259,286,171 55,858,626 518,193,152 847,508,255 2012 205,819,614 139,634,200 586,636,036 6,449,837 13,597,966 952,137,653 144,528,616 87,058,357 231,586,973 259,244,357 55,675,340 408,411,468 720,550,680 Difference 51,804,149 25,910,959 183,807,458 619,619 (5,700,835) 256,441,350 42,667,128 86,816,647 129,483,775 41,814 183,286 109,781,684 126,957,575 % 25% 19% 31% 10% -42% 27% 30% 100% 56% 0% 0% 27% 18% Note 1: Long-term investments consist of financial assets carried at cost and investments accounted for using equity method. Note 2: Other assets consist of deferred income tax assets, refundable deposits, and other noncurrent assets ● Analysis of Deviation over 20% The increase in current assets was mainly due to increase in cash and cash equivalents in 2013. The increase in property, plant and equipment was mainly due to acquisition of advanced technology equipment during 2013. The decrease in other assets was mainly due to decrease in deferred income tax assets. The increase in total assets was mainly due to increase in cash and cash equivalents and property, plant and equipment. The increase in current liabilities was mainly due to increase in payables to contractors and equipment suppliers and income tax payable, partially offset by decrease in short-term loans. The increase in noncurrent liabilities was mainly due to issuance of corporate bonds of NT$86.2 billion in 2013. The increase in total liabilities was mainly due to increase in noncurrent liabilities. The increase in retained earnings was mainly due to net income of 2013, partially offset by distribution of 2012 earnings. ● Major Impact on Financial Position The above deviations had no major impact on TSMC’s financial position. ● Future Plan on Financial Position: Not applicable. 6.1.2 Financial Performance Consolidated Unit: NT$ thousands Item Net Revenue Cost of Revenue Gross Profit before Unrealized Gross Profit on Sales to Associates Unrealized Gross Profit on Sales to Associates Gross Profit Operating Expenses Other Operating Income and Expenses, Net Income from Operations Non-operating Income and Gains Income before Income Tax Income Tax Expenses Net Income Other Comprehensive Income, Net of Income Tax Total Comprehensive Income for the Year Total Net Income Attributable to Shareholders of the Parent Total Comprehensive Income Attributable to Shareholders of the Parent Note: NM stands for non-meaningful. 2013 597,024,197 316,057,820 280,966,377 (20,870) 280,945,507 71,563,234 47,090 209,429,363 6,057,759 215,487,122 27,468,185 188,018,937 16,352,248 204,371,185 188,146,790 204,505,782 2012 506,745,234 262,583,098 244,162,136 (25,029) 244,137,107 62,510,875 (449,364) 181,176,868 499,588 181,676,456 15,552,654 166,123,802 4,252,632 170,376,434 166,318,286 170,521,543 Difference 90,278,963 53,474,722 36,804,241 4,159 36,808,400 9,052,359 496,454 28,252,495 5,558,171 33,810,666 11,915,531 21,895,135 12,099,616 33,994,751 21,828,504 33,984,239 % 18% 20% 15% -17% 15% 14% NM (Note) 16% 1113% 19% 77% 13% 285% 20% 13% 20% ● Analysis of Deviation over 20% Increase in cost of revenue: The increase was mainly due to higher sales. Increase in other operating income and expenses, net: The increase was mainly due to impairment loss related to property, plant and equipment recognized in 2012. Increase in non-operating income and gains: The increase was primarily due to increase in earnings of equity method investees, lower impairment loss of financial assets recognized in 2013, partially offset by higher interest expenses for corporate bonds in 2013. Increase in income tax expenses: The increase was mainly due to higher taxable income, the AMT tax rate changed from 10% to 12% and increase in income tax on unappropriated earnings. Increase in other comprehensive income, net of income tax: The increase was mainly due to exchange rate differences arising from translation of foreign operations and the increase in fair value of available-for-sale financial assets in 2013. Increase in total comprehensive income and total comprehensive income attributable to shareholders of the parent: The increase was mainly due to higher net income and other comprehensive income in 2013. ● Sales Volume Forecast and Related Information For additional details, please refer to “1. Letter to Shareholders” on pages 2-5 of this Annual Report. ● Major Impact on Financial Performance The above deviations had no major impact on TSMC’s financial performance. ● Future Plan on Financial Performance: Not applicable. Unconsolidated Unit: NT$ thousands Item Net Revenue Cost of Revenue Gross Profit before Unrealized Gross Profit on Sales to Subsidiaries and Associates Unrealized Gross Profit on Sales to Subsidiaries and Associates Gross Profit Operating Expenses Other Operating Income and Expenses, Net Income from Operations Non-operating Income and Gains Income before Income Tax Income Tax Expenses Net Income Other Comprehensive Income, Net of Income Tax Total Comprehensive Income for the Year 2013 591,087,600 319,407,163 271,680,437 (35,577) 271,644,860 66,924,354 (66,614) 204,653,892 11,062,658 215,716,550 27,569,760 188,146,790 16,358,992 204,505,782 2012 500,369,525 265,494,185 234,875,340 (25,029) 234,850,311 57,481,083 (549,087) 176,820,141 6,932,246 183,752,387 17,434,101 166,318,286 4,203,257 170,521,543 Difference 90,718,075 53,912,978 36,805,097 (10,548) 36,794,549 9,443,271 482,473 27,833,751 4,130,412 31,964,163 10,135,659 21,828,504 12,155,735 33,984,239 % 18% 20% 16% 42% 16% 16% -88% 16% 60% 17% 58% 13% 289% 20% ● Analysis of Deviation over 20% Increase in cost of revenue: The increase was mainly due to higher sales. Increase in unrealized gross profit on sales to subsidiaries and associates: The increase was mainly due to higher sales to subsidiaries and associates in the fourth quarter 2013. Decrease in other operating income and expenses, net: The decrease was mainly due to property, plant and equipment impairment loss during 2012. Increase in non-operating income and gains: The increase was primarily due to increase in earnings of equity method, less impairment loss of financial assets recognized in 2013, partially offset by higher interest expenses for corporate bonds in 2013. Increase in income tax expenses: The increase was mainly due to higher taxable income, the AMT tax rate changed from 10% to 12% and income tax on unappropriated earnings. Increase in other comprehensive income, net of income tax: The increase was mainly due to exchange rate differences arising from translation of foreign operations and the increase in other comprehensive income of subsidiaries and associates in 2013. Increase in total comprehensive income: The increase was mainly due to higher net income and other comprehensive income in 2013. 078 079 ● Sales Volume Forecast and Related Information For additional details, please refer to “1. Letter to Shareholders” on pages 2-5 of this Annual Report. ● Major Impact on Financial Performance The above deviations had no major impact on TSMC’s financial performance. ● Future Plan on Financial Performance: Not applicable. 6.1.3 Cash Flow Consolidated Unit: NT$ thousands Cash Balance 12/31/2012 Net Cash Provided by Operating Activities in 2013 Net Cash Used in Investing and Financing Activities in 2013 Cash Balance 12/31/2013 Remedy for Liquidity Shortfall Investment Plan Financing Plan 143,410,588 347,383,537 (248,098,678) 242,695,447 None None ● Analysis of Cash Flow NT$347.4 billion net cash generated by operating activities: mainly from net income and depreciation/amortization. NT$281.1 billion net cash used in investing activities: primarily for capital expenditures. NT$33 billion net cash generated by financing activities: mainly from issuance of corporate bonds, partially offset by payment of cash dividends and decrease in short-term loans. ● Remedial Actions for Liquidity Shortfall: As a result of positive operating cash flows and cash on-hand, remedial actions are not required. ● Cash Flow Projection for Next Year: Not applicable. Unconsolidated Unit: NT$ thousands Cash Balance 12/31/2012 Net Cash Provided by Operating Activities in 2013 Net Cash Used in Investing and Financing Activities in 2013 Cash Balance 12/31/2013 Remedy for Liquidity Shortfall Investment Plan Financing Plan 109,150,810 335,283,326 (297,995,368) 146,438,768 None None ● Analysis of Cash Flow NT$335.3 billion net cash generated by operating activities: mainly from net income and depreciation/amortization. NT$284.4 billion net cash used in investing activities: primarily for capital expenditures. NT$13.6 billion net cash used in financing activities: mainly from payment of cash dividends and decrease in short-term loans, partially offset by issuance of corporate bonds. ● Remedial Actions for Liquidity Shortfall: As a result of positive operating cash flows and cash on-hand, remedial actions are not required. ● Cash Flow Projection for Next Year: Not applicable. 6.1.4 Major Capital Expenditures and Impact on Financial and Business Unit: NT$ thousands Plan Actual or Planned Source of Capital Total Amount as of 12/31/2013 Actual Use of Capital 2013 2012 Production Facilities, R&D and Production Equipment Others Total Cash flow generated from operations and issuance of corporate bonds 527,715,597 283,822,265 243,893,332 Cash flow generated from operations 6,016,537 533,732,134 3,772,508 287,594,773 2,244,029 246,137,361 Based on capital expenditures listed above and projected for 2014, it is estimated that TSMC’s annual production capacity will increase by approximately 1.64 million 8-inch equivalent wafers in 2014. 6.1.5 Long-term Investment Policy and Results 6.2.1 Risk Management (RM) Organization Chart TSMC’s long-term investments, accounted for under the equity method, were all made for strategic purposes. However, when an investment is no longer of strategic value, it may be considered a financial investment. In 2013, the investment gain from these investments amounted to NT$9,530,933 thousand (NT$3,972,031 thousand on a consolidated basis), increasing significantly compared to 2012 mainly due to the high growth of mobile computing products and the recovery of solar market. For future investments, TSMC 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 operates an 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 the appropriate management of risks by TSMC on behalf of all stakeholders. A Risk MAP that considers likelihood and impact severity is applied for identifying and prioritizing corporate risks. Various risk treatment strategies are also adopted in response to identified corporate risks. 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 enhance supply chain resilience capability through effectively manage the risks faced by its suppliers. As a result of those efforts, there was no interruption in TSMC’s supply lines in 2013. As TSMC continued to expand production capacity with advanced technology in 2013, seismic protection engineering design, risk treatment practices and green factory projects were initiated and implemented, beginning in the design phase for all new fabs. Audit Committee CEO RM Steering Committee Materials Management and Risk Management RM Working Committee RM Program ● RM Steering Committee Reports to Audit Committee; Is composed of functional heads; Reviews risk control progress; and Identifies and approves the prioritized risk lists. ● RM Working Committee Is composed of representatives from each function; Periodically reviews risk control associated with business or manufacturing process changes; Aligns functional ERM activities; and, Follows up the risk control action plan ● RM Program Coordinates the RM Working Committee activities; Facilitates functional risk management activities; Initiates cross function communication for risk mitigation; and, Consolidates ERM reports into the RM Steering Committee 6.2.2 Strategic Risks Risks Associated with Changes in Technology and Industry ● Industry Developments The electronics industries and semiconductor market are cyclical and subject to significant, and often rapid, increases and decreases in product demand. TSMC’s semiconductor foundry business is affected by the market conditions of the highly cyclical electronics and semiconductor industries in which most of its customers operate. Variations in order levels from customers result in volatility in the Company’s revenues and earnings. 080 081 From time to time, the electronics and semiconductor industries products. Any significant decrease in the demand for any one of have experienced significant, and sometimes prolonged, periods of these products may decrease the demand for such other products downturns and overcapacity. Because TSMC is, and will continue to as well as overall global semiconductor foundry services, including be, dependent on the requirements of electronics and semiconductor TSMC’s services, and may adversely affect the Company’s revenues. companies for its services, periods of downturn and overcapacity Further, a significant portion of TSMC’s operating costs is fixed in the general electronics and semiconductor industries could lead because the Company owns most of its manufacturing capacities. to reduced demand for overall semiconductor foundry services, In general, these costs do not decline when customer demand or including TSMC’s services. If TSMC cannot take appropriate actions TSMC’s capacity utilization rates drop, and thus declines in customer such as reducing its costs to sufficiently offset declines in demand, demand, among other factors, may significantly decrease margins. the Company’s revenues, margins and earnings will suffer during Conversely, as product demand rises and factory utilization increases, periods of downturn and overcapacity. Furthermore, due to the the fixed costs are spread over increased output, which can improve increasingly complex technological nature of our foundry services, the TSMC’s margins. Additionally, the historical and current trend amount of our accounting provisions may also need to be provided of declining average selling prices of end-use applications places and adjusted for potential sales returns and allowances to customers downward pressure on the prices of the components that go into that may adversely affect the results of our operations. such applications. If the average selling prices of end-use applications ● Changes in Technology The semiconductor industry and its technologies are constantly changing. TSMC competes by developing process technologies using continue to decrease, the pricing pressure on components produced by the Company may lead to a reduction of TSMC’s revenues, margin and earnings. increasingly advanced nodes and with manufacturing products Risks Associated with Competition with more functions. TSMC also competes by developing new derivative technologies. If TSMC does not anticipate these changes in technologies or fails to rapidly develop new and innovative technologies, or if the Company’s competitors unforeseeably gain sudden access to additional technologies, TSMC may not be able to provide foundry services on competitive terms. In addition, TSMC’s customers have significantly decreased the time in which their products or services are launched into the market. If TSMC is unable to meet these shorter product times-to-market, TSMC risks losing these customers. These factors have also been intensified by the shift of the global technology market to consumer driven products such as mobile devices, and increasing concentration of customers and competition (all further discussed among these risk factors). These challenges also place greater demands on its research and development capabilities. If TSMC is unable to innovate new technologies that meet the demands of its customers or overcome the above factors, its revenues may decline significantly. Although TSMC has concentrated on maintaining a competitive edge in research and development, if TSMC fails to achieve advances in technologies or processes, or to obtain access to advanced technologies or processes developed by others, it may become less competitive. Regarding the response measures for the above-mentioned risks, please refer to “2.2.4 TSMC Position, Differentiation and Strategy” on pages 10-11 of this Annual Report. Risks Associated with Decrease in Demand and Average Selling Price A vast majority of the Company’s revenue is derived from customers who use TSMC’s services in communication devices, personal The markets for our foundry services are highly competitive. We compete with other foundry service providers, as well as 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 competitive activities may decrease TSMC’s customer base, TSMC’s average selling prices, or both. For example, over the past few years, TSMC has seen the rise of certain companies with the capability of providing foundry services. These companies are committed to trying to attract TSMC’s customers. If TSMC is unable to compete with any and each of these new competitors with better technologies and manufacturing capacity and capabilities, it risks losing customers to these new contenders. The Company competes primarily on the basis of process technology, manufacturing quality and service. The level of competition differs according to the process technology involved. For example, in more mature technologies, competitors tend to be more numerous and specialized. Some companies compete with TSMC in selected geographic regions or in application end markets. In recent years, substantial investments have been made by others to establish new pure-play foundry companies in mainland China and elsewhere, or to spin off the manufacturing operations of integrated device manufacturers (IDMs) and transform them into a pure-play foundry computers, consumer electronics products and industrial/standard company. Risks Associated with Changes in the Government Policies and Regulatory Environment TSMC management closely monitors all domestic and foreign governmental policies and regulations that might impact TSMC’s business and financial operations. As of February 28, 2014, the following changes or developments in governmental policies and regulations may influence the Company’s business operations: The Taiwan Financial Supervisory Commission (FSC) requires listed companies, starting from January 1, 2013, to prepare their consolidated financial statements in accordance with Taiwan’s “Guidelines Governing the Preparation of Financial Reports by 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. Other than the above laws and regulations, it is not expected that other governmental policies or regulatory changes would materially impact TSMC’s operations and financial condition. 6.2.3 Operational Risks Securities Issuers“ (the “Financial Reporting Guideline“) and the Risks Associated with Capacity Expansion following FSC endorsed standards and interpretations: “International TSMC performs long-term market demand forecasts to estimate Financial Reporting Standards,“ “International Accounting Standards,“ and relevant Interpretations (collectively, “Taiwan-IFRSs“). TSMC has already prepared its 2013 annual and interim consolidated financial statements in accordance with the Financial Reporting Guideline and Taiwan-IFRSs. The Taiwan “National Health Insurance Act“ was amended in January 2011, to create an obligation for employers and employees to pay an extra 2% “supplementary premium,“ effective from January 1, 2013. TSMC pays such extra 2% “supplementary premium“ when TSMC distributes employees’ profit sharing and variable bonus. 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%. TSMC has evaluated the impact of these amendments on its financial statements and implemented such amendments according to the relevant laws. The “Labor Safety and Health Act“ of Taiwan was amended and renamed as the “Occupational Safety and Health Act“ in July, 2013. Highlights of the amendment include: expanding the applicability of the Act to employees of all occupations; building a comprehensive occupational disease prevention system; strengthening the protection of the mental and physical health of workers; stipulating maternity protection and employment equality; and requiring high-risk business to regularly implement safety assessments. TSMC over the years has been consistently maintaining a robust safe and healthy work environment and protective measures in place, and will continue to maintain the safety and health of its workplace 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“ and “Energy Tax Act“). Though the “Greenhouse Gas Reduction Act“ has not been passed, TSMC 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. During periods of continued decline in demand, our operating facilities may not be able to absorb and complete in a timely manner outstanding orders re-directed from shuttered facilities. Recently, TSMC has been adding capacity to its 12-inch wafer fabs in the Hsinchu Science Park, Southern Taiwan Science Park and Central Taiwan Science Park, based on our market demand forecasts taking into account the demand forecasts of our customers. As a result, the total monthly capacity of the Company’s 12-inch wafer fabs was increased from 366,800 wafers as of December 31, 2012 to 414,700 wafers as of December 31, 2013. Expansion and modification of the Company’s production facilities will, among other factors, increase TSMC’s costs. For example, the Company will need to purchase additional equipment, train personnel to operate the new equipment, or hire additional personnel. If TSMC cannot increase its net revenue accordingly, in order to offset these higher costs, TSMC’s financial performance may be adversely affected. TSMC has established systems and processes to evaluate and forecast 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. 082 083 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 60% and 62% of net revenue in 2012 and 2013, respectively, and the Company’s largest customer accounted for approximately 17% and 22% of net revenue in 2012 and 2013, respectively. To reduce the supply chain risk and to manage the cost actively, TSMC is committing resources toward developing new supply terms it considers reasonable or at all. The lack of necessary licenses In June 2010, Keranos, LLC. filed a complaint in the U.S. District could expose TSMC to claims for damages and/or injunctions from Court for the Eastern District of Texas alleging that TSMC, TSMC sources. In addition, the Company encourages its suppliers to reduce third parties, as well as claims for indemnification by its customers North America, and several other leading technology companies their supply chain risk by decentralizing production plants, and to intensify their cost competitiveness by moving their production site to Taiwan from high-cost areas. The Company believes this benefits in instances where it has contractually agreed to indemnify its infringe three expired U.S. patents. In response, TSMC, TSMC North customers against damages resulting from infringement claims. America, and several co-defendants in the Texas case filed a lawsuit against Keranos in the U.S. District Court for the Northern District both suppliers and TSMC. Moreover, the Company continually refines TSMC has received, from time-to-time, communications from third of California in November 2010, seeking a judgment declaring that its planning system and monitors its inventory and replenishment on parties asserting that its technologies, manufacturing processes, they did not infringe the asserted patents, and that those patents are a daily basis so as to sustain an optimal level at rational cost. the design of the integrated circuits made by TSMC or the use by invalid. These two litigations have been consolidated into a single 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 customers who are successfully exploiting this new business model paradigm. ● Equipment The Company’s operations and ongoing expansion plans depend on its ability to obtain an appropriate amount of equipment and related services from a limited number of suppliers in a market its customers of semiconductors made by TSMC may infringe upon lawsuit in the U.S. District Court for the Eastern District of Texas. In their patents or other intellectual property rights. Because of the February 2014, the Court entered a final judgment in favor of TSMC, nature of the industry, the Company may continue to receive such dismissing all of Keranos’ claims against TSMC with prejudice. communications in the future. In some instances, these disputes have resulted in litigation. Recently, there has been a notable increase in In December 2010, Ziptronix, Inc. filed a complaint in the U.S. District Also, in order to respond to the new business model paradigm, TSMC has seen the nature of its customers’ business models change. For example, there is a growing trend toward the rise of system houses that operate in a manner that makes their products and services more marketable to the changing consumer market. The loss of, or significant curtailment of, purchases by one or more of the Company’s top customers, including curtailment due to increased competitive pressures, industrial consolidation, a change in their designs, or change in their manufacturing sourcing policies, or practices of these customers, or the timing of customer or distributor inventory adjustments, or change in its major customers’ business models may adversely affect TSMC’s results of operations and financial condition. We will keep a close watch on these trends and work closely with our customers to respond to these changes and to strengthen our market position. that is characterized from time to time by limited supply and long the number of claims or lawsuits initiated by certain patent assertion Court for the Northern District of California accusing TSMC, TSMC delivery cycles. During such times, supplier-specific or industry-wide entities and these entities are also becoming more aggressive in their North America and one other company of infringing several U.S. lead times for delivery can be as long as six months or more. To better manage its supply chain, the Company has implemented various business models and risk management contingencies with suppliers to shorten the procurement lead time. TSMC also provides its projected demand for various items to many of its equipment suppliers to help them plan their production in advance. The Company has purchased used tools and continues to seek opportunities to acquire relevant used tools. Further, the growing complexities especially in next-generation lithographic technologies may delay the timely availability of the equipment and parts needed to exploit time sensitive business opportunities and also increase the market price for such equipment and parts. If TSMC is unable to obtain equipment in a timely manner to fulfill its customers’ monetary demands and requests for court-issued injunctions. Such patents. The outcome cannot be determined at this time. lawsuits or claims may increase TSMC’s cost of doing business and may potentially be extremely disruptive if the plaintiffs succeed in In December 2013, Tela Innovations, Inc. filed complaints in the U.S. blocking the trade of its products and services. If TSMC fails to obtain District Court for the District of Delaware and in the United States or maintain certain government, technologies or intellectual property International Trade Commission accusing TSMC and TSMC North licenses and, if litigation related to alleged intellectual property matters occurs, it could prevent it from manufacturing or selling particular products or applying particular technologies, which could America of infringing one U.S. patent. The Delaware case had been stayed since February 2014. In January 2014, TSMC filed a lawsuit in the U.S. District Court for the District of North California against reduce its opportunities to generate revenues. Tela for trade secret misappropriation and breach of contract. The outcome cannot be determined at this time. TSMC has taken other measures to minimize potential loss of shareholder value arising from intellectual property claims and Other than the matters described above, TSMC was not involved in litigation filed against the Company. These measures include: any other material litigation in 2013 and are not currently involved in orders, or at a reasonable cost, its financial condition and results of obtaining licenses from certain semiconductor and other technology any material litigation. operations could be negatively impacted. companies; timely securing of intellectual property rights for Risks Associated with Intellectual Property Rights business; aggressively defending against frivolous litigation; and As of the date of this Annual Report, there were no such risks for defensive and/or offensive protection of TSMC technology and Risks Associated with Mergers and Acquisitions Risks Associated with Purchase Concentration The Company’s ability to compete successfully and to achieve ● Raw Materials TSMC’s production operations require that it obtain adequate supplies of raw materials, such as silicon wafers, gases, chemicals and photoresist, on a timely basis. In the past, shortages in the supply of some materials, whether by specific vendors or by the semiconductor industry generally, have resulted in occasional industry-wide price adjustments and delivery delays. Also, since TSMC procures some of its raw materials from sole-source suppliers, there is a risk that its need for such raw materials may not be met when needed or that back-up supplies may not be readily available. The Company’s revenue and earnings could decline if it is unable to obtain adequate supplies of the necessary raw materials in a timely manner or if there are significant increases in the costs of raw materials that it cannot pass on to its customers. future growth will depend in part on the continued strength of its intellectual property portfolio. While TSMC actively obtain, preserve, enforces, defend and protects its intellectual property rights, there can be no assurance that its efforts will be adequate to prevent the misappropriation or improper use of its proprietary technologies, trade secrets, software or know-how. Also, the Company cannot assure that, as its business or business models expand into new areas, or otherwise, it will be able to develop independently the acquiring or licensing strategic intellectual property rights necessary TSMC. 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 technologies, trade secrets, patents, software or know-how necessary or other intellectual property rights of others. In some instances, to conduct its business or that it can do so without unknowingly infringing the intellectual property rights of others. As a result, TSMC may have to rely increasingly on licensed technologies and patent licenses from others. To the extent that the Company relies on licenses from others, there can be no assurance that it will be able to obtain any or all of the necessary licenses in the future on 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. Risks Associated with Recruiting and Retaining Qualified Personnel The Company depends on the continued services and contributions of its executive officers, skilled technical personnel, personnel of other expertise and direct labors. TSMC’s business could suffer if it loses, 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. However, no such incident has happened to TSMC as of the date of this annual report. 084 085 TSMC provides a varied and competitive compensation programs, TSMC took the first prize in the Occupational Health category for 6.2.4 Financial Risks and is generous in sharing the Company’s long-term business the GlobalViews Magazine Corporate Social Responsibility Award, achievements with its employees. Furthermore, in order to attract was ranked number one in net profit and profitability in the China and retain talents, the Company is dedicated to providing a timely Credit Information Service poll of major corporations in Taiwan, distribution of employees’ cash bonus from its profits. TSMC believes and also ranked first in the Business Next Magazine “Infotech 100“ that by rewarding employees’ hard work in a timely fashion, it not for Taiwan and Asia. TSMC was one of Barron’s Magazine’s “Top only encourages employees to contribute consistently to ensure the 100 World’s Most Respected Companies“ in 2013, and received the success of the Company, but also links their interests with those of “Best-Managed Company in Asia,“ “Best Corporate Governance, TSMC’s shareholders. Taiwan,“ and “Best Corporate Social Responsibility, Taiwan“ Awards Future R&D Plans and Expected R&D Spending For additional details, please refer to “5.2.7 Future R&D Plans“ on page 66 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 was honored with awards for its achievements in operations, corporate governance, innovation, profit growth, investor relations, and corporate social responsibility and other fields in 2013, further strengthening the Company’s public reputation. In addition to being selected as a component of the Dow Jones Sustainability Index (DJSI) for a 13th consecutive year, TSMC was also recognized by DJSI as the Semiconductors and Semiconductor Equipment Industry Group Leader. TSMC is the first Taiwan company, and one of just four Asian companies, to win the highest score out of its industry peers in the DJSI’s 24 industry groups. In addition, in 2013 TSMC received the R.O.C. Executive Yuan National Sustainable Development Award, National Industrial Innovation Award, Environmental Protection Administration (EPA) National Enterprise Environmental Protection Award, the EPA Energy Conservation and Carbon Reduction Action Mark, the Science Park Low-Carbon Enterprise Achievement Award, the Science Park Labor Health and Safety Achievement Award, and the Taiwan Institute for Sustainable Energy 2013 Taiwan Corporate Sustainability Award. TSMC was also recognized as the Most Admired Company in Taiwan by CommonWealth Magazine, won the CommonWealth Corporate Citizenship Award, and placed number one in the magazine’s ranking of the most profitable manufacturing companies in Taiwan. from FinanceAsia. TSMC has always endeavored to act as a positive force in society, and maintains 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, TSMC maintains an Emergency Response Procedure Manual, and health and safety supervisors for each fab hold meetings of the “Environment, Health, and Safety Technical Board“ every month. In addition, relevant departments hold regular drills and continuously improve their emergency response and notification procedures. At the same time, TSMC has established communications criteria for all types of stakeholders, and the Public Relations Department is responsible for external communications. In the event of emergencies, rapid deployment of emergency response reduces casualties and minimizes impact on the surrounding environment, company property, and manufacturing operations. The Public Relations Department’s involvement at the first stage of response also ensures smooth channels of communications to maintain the Company’s image. Risks Associated with Change in Management The Board of Directors approved the appointment of Drs. Mark Liu and C.C. Wei (in alphabetical order) as President and Co-Chief Executive Officer of TSMC at its meeting of November 12, 2013. Dr. Morris Chang remains as the Chairman of TSMC. The Presidents and the Co-Chief Executive Officers shall report to and perform such duties as designated by the Chairman of the Board. Finance and Legal organizations will continue to report to the Chairman. Internal Management of Economic Risks ● 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 More than 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 2013, 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 2013 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. in the expectation of inflation or deflation. Both high inflation and deflation adversely affect an economy, at both the macro and micro levels, by reducing economic efficiency, disrupting saving and investment decisions and reducing the efficiency of the market prices as a mechanism to allocate resources. Such fluctuations may negatively affect the costs of TSMC’s operations and the business operations of its customers who may be forced to plan their purchases of TSMC’s goods and services within an uncertain macro and micro economy. Therefore, the demand for TSMC’s products and services could unexpectedly fluctuate severely in accordance with market and consumer expectations of inflation or deflation. 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 continued ability to obtain sufficient external financing is subject to a variety of uncertainties, including: ● its future financial condition, results of operations and cash flow; ● general market conditions for financing activities; ● market conditions for financing activities of semiconductor companies; and, ● social, economic, financial, political and other conditions in Taiwan and elsewhere. Sufficient external financing may not be available to the Company on a timely basis, on reasonable market terms, or at all. As a result, TSMC may be forced to curtail its expansion and modification plans or delay the deployment of new or expanded services until it obtains such financing. 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 Risks Associated with High-risk/high-leveraged Investment; Lending, Endorsements, and Guarantees for Other Parties; and Financial Derivative Transactions Shares (ADSs) and of any cash dividends paid in NT dollars on TSMC’s TSMC did not make high-risk or high-leveraged financial investments common shares represented by ADSs. ● Inflation and Deflation The world economy is becoming more vulnerable to sudden during 2013 and up to the date of this report. TSMC provided a guarantee to TSMC Global, a wholly-owned subsidiary of TSMC, for its issuance of US dollar-denominated senior unsecured corporate bonds of US$1,500 million in April 2013. As of February 28, 2014, unexpected fluctuations in inflationary and deflationary market TSMC had an intercompany loan of US$100 million arranged among expectations and conditions. For example, certain structural changes the Company’s subsidiaries, which was in compliance with relevant that resulted from the global financial crisis in 2008~2009 and rules and regulations. EU sovereign debt crises, such as highly accommodative monetary policies by major central banks worldwide, may cause variations 086 087 The financial transactions of a “derivative“ nature that TSMC entered purchases, assets purchases, licensing of major intellectual property manufacturing fabs in Taiwan have also been TOSHMS (Taiwan Company maintains many overlapping risk prevention and protection into were strictly for hedging purposes and not for any trading or rights, joint investments or research and development projects, Occupational Safety and Health Management System) certified. The systems, as well as comprehensive fire and casualty insurance, speculative purpose. For more information, please refer to pages outright mergers and acquisitions, private equity transactions and new fabs will also acquire the above certificates within 18 months including insurance for loss of property and loss of profit resulting 27 and 28 of the Annual Report section (II), Financial Information. other similar transactions. Any such investment will incur risks, which after volume production. The fair market value of our trading and available-for-sale financial may result in losses if not carefully managed. Any such loss resulting from business interruption, TSMC’s risk management and insurance coverage may not be sufficient to cover all of the Company’s securities are subject to prevailing market conditions and may from such investments may result in significant impairment charges, The Company pays special attention to preparedness for emergencies potential losses. If any of TSMC’s fabs or vendor facilities were fluctuate from TSMC’s carrying value from time to time, which may lower profit margin and ultimately lower distributable earnings. or disasters, such as typhoons, floods, droughts caused by climate to be damaged, or cease operations as a result of an explosion, impact the returns of those securities. change, earthquakes, environmental contamination, large-scale fire or environmental influences, it could reduce the Company’s Risks Associated with Impairment Charges product returns, service disruption of IT systems, strikes, pandemics manufacturing capacity and may cause it to lose important To control various types of financial transactions, the Company has established internal policies and procedures based on sound financial and business practices, all in compliance with the relevant rules and 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 Taiwan-IFRSs, TSMC is required to evaluate its investments, tangible 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 Taiwan-IFRSs to evaluate goodwill for impairment at least on an annual basis or more frequently whenever triggering events or changes in circumstances indicate that goodwill may be impaired and the carrying value may not be recoverable. For example, TSMC holds investments in certain publicly listed and private companies, some of which have incurred From time to time, TSMC has made or will make a series of strategic certain impairment charges disclosed in the “Financial Information” investments that serve two major purposes. First, some of TSMC’s of Annual Report (II), pages 28-30. major strategic investments were, or will be, made to help the Company open new sources of revenues and innovate alternative The determination of an impairment charge at any given time is business models that target to generate additional shareholders’ based on the expected results of the Company’s operations over a value going forward in the future. For example, in order to help number of years subsequent to that time. As a result, an impairment the Company grow into next generation business areas, TSMC has charge is more likely to occur during a period when the Company’s invested to develop potential businesses in solid state lighting, operating results are otherwise already depressed. solar power and other renewable sources of energy. The Company believes these investments into these areas will generate new sources TSMC has established the process and system to closely monitor and of revenues as a gradual transition into consuming cleaner sources assess the risk of any impairment charge. However, the management of power is generally expected. For further information on these is unable to estimate the extent or timing of any impairment charge investments, please refer to “8. Subsidiary Information and Other for future years, or whether such impairment charge required may Special Notes“ on pages 110-115 of this Annual Report. Second, have a material adverse effect on the Company’s net income. some of TSMC’s significant strategic investments were, or will be, made to help the Company grow its existing business by augmenting 6.2.5 Hazardous Risks key technology development. For example, to accelerate the development of next-generation lithographic technology, in August 2012, TSMC, along with other major technology firms, 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 (450mm) lithography tools. Under the agreement with ASML, TSMC invested EUR838 million to acquire 5% of ASML’s equity and has committed EUR276 million, to be spread over five years, toward ASML’s research and development program. As a result, the Company is exposed to share price fluctuations arising from its investment in ASML. In the future, TSMC may make more strategic investments in various forms, whether through stock TSMC maintains a comprehensive risk management system dedicated to the conservation of natural resources, the safety of people, and the protection of property. In order to effectively handle emergencies and natural disasters at each facility, management has developed comprehensive plans and procedures that focus on risk prevention, emergency response, crisis management, and business continuity. TSMC has adopted local and international standards for Environmental, Safety and Health (ESH) management. All TSMC manufacturing fabs have been ISO 14001 certified (Environmental Management System), OHSAS 18001 certified (Occupational Health and Safety Management System) and QC 080000 certified (Hazardous Substance Process Management System). All (such as H1N1 influenza), and sudden and unexpected disruptions customers, thereby having a potentially adverse and material to the supply of raw materials or water, electricity, and other public impact on TSMC’s financial performance. In addition to periodic fire utilities. TSMC has established a company-wide task force dedicated protection system inspection and firefighting drills, the Company has to managing the risk of water shortage that might arise due to also carried out a corporate-wide fire risk mitigation project focused climate change. This task force keeps watch on the external supply on management and hardware improvements. and internal demand for water. Cross-company consolidations and external collaborations with public agencies are also ongoing in the Changes may cause unpredictable interruption to production. In industrial parks to ensure and sustain a stable water supply. order to reduce such uncertainty, TSMC has adopted a number TSMC has further strengthened its business continuity plans, which design, procurement and construction of facilities, to operation and of standards to maintain operational continuity, ranging from include periodic risk assessment, risk mitigation, and implementation decommission. through the establishment of emergency task forces when necessary, combined with the preparation of a thorough analysis of the 6.2.6 Risks Associated with Climate Change and Non- 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 2013, 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 emergency response drills, enhancing tool anchorage or seismic isolation facilities, training and preparedness for tool salvage, and has improved TSMC business continuity procedures with reference to ISO 22301 business continuity management. TSMC and many of its suppliers use highly combustible and toxic materials in its manufacturing processes and are therefore subject to the risk of loss arising from explosion, fire, or environmental influences which cannot be completely eliminated. Although the compliance with Environmental and Climate Related Laws and Regulations, and Other International Laws, Regulations and Accords The manufacturing, assembling and testing of our products require the use of metals, chemicals and materials that are subject to environmental, climate-related, health and safety and humanitarian, conflict-free sourcing laws, regulations and guidelines issued worldwide. For example, the U.S. SEC implemented the final rule mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act to require companies to publicly disclose their use of conflict minerals (i.e. Gold, Cassiterite, Coltan and Wolframite) that originated in the Democratic Republic of the Congo (DRC) or an adjoining country. The final applicable legal rule as well as non-binding guidelines on conflict minerals imposes substantial supply chain verification requirements in the event that conflict minerals originates from the Democratic Republic of the Congo, adjoining countries or any geographic territory that may be specified by the relevant authorities at a future date. These new rules and verification requirements, which apply to our activities in 2013 and beyond, impose additional costs on us and on our suppliers and may limit the sources or increase the prices of materials used in our products. Further, if we are unable to certify that our products are conflict free under applicable law or non-binding guidelines or if we are unable to comply with any material provisions of such laws or guidelines, we may face challenges with our customers that place us at a significant competitive disadvantage, and our goodwill and 088 089 reputation may be irreparably damaged. Often times, our customers Any of the above contingencies resulting from the actual and have imposed upon us legally non-binding conditions or guidelines potential impact of local or international laws and regulations, as well ● Conflict Minerals Risk Control For additional details, please refer to the section of “Supplier and ● Since 2005, TSMC has been participating in an annual survey held by the nonprofit Carbon Disclosure Project (CDP), which includes on sourcing conflict minerals that exceed those imposed under as international accords on environmental or climate change, could Contractor Management” of “7.2.3 Safety and Health” on pages GHG emission and reduction information for all TSMC fabs, relevant legal requirements. For example, many of our customers harm the Company’s business and operational results by increasing 102-104 of this Annual Report. have been asking us to apply the OECD Due Diligence Guidance expenses or requiring TSMC to alter its manufacturing, assembly and for Responsible Supply Chains of Minerals in Conflict-Affected and test processes. High-Risk Areas. These guidelines while legally non-binding may ● Climate Disaster Risk Control Abnormal climate caused by the greenhouse effect has increased the subsidiaries, joint ventures, and overseas offices. ● Since 2006, TSMC follows the ISO 14064-1 standard to conduct a GHG inventory and acquire verification by an accreditation agency every year. TSMC also voluntarily reports GHG inventory data to impose requirements that well exceed those mandated by applicable Increasing climate change and environmental concerns could affect frequency and severity of climate disasters – storms, floods, drought, the Taiwan Environmental Protection Administration (EPA) and the law. If we agree to apply these guidelines as requested by our the results of our operations if any of our customers request that we and water shortages – causing considerable impacts on business Taiwan Semiconductor Industry Association (TSIA). customers, there is the risk that the prices we charge for our products provide products and services that exceed any existing standard(s) of and services will increase (to reflect the added cost in complying with environmental compliance. For example, TSMC has been working on such conditions or guidelines), resulting in the loss of actual and an on-going basis with our suppliers, customers, and several industry potential customers. Conversely, any failure on our part to comply consortia to develop and provide products that are compliant with with such customer-imposed legally non-binding conditions or the European Union Restriction of Hazardous Substances Directive guidelines may result in us suffering significant competitive harms (RoHS). Even though TSMC is entitled to rely on various exemptions such as the loss of actual or potential customers that will likely have a under RoHS, some of our customers may request that we provide material adverse impact on our financial statements. products that exceed the legal standard set by RoHS without using any of the exemptions still permitted under RoHS. If TSMC is operations and supply chains. TSMC believes that climate change control should take into account both mitigation and adaption, 6.2.7 Other Risks and this requires cooperation between industry and government to reduce risk. To ensure electricity and raw water supplies, therefore, in addition to water-saving measures at our own facilities and those of our upstream and downstream partners, TSMC participates in the Taiwan Science Park Industrial Union Experts Committee platform, and is actively involved in regular meetings with Taipower Company and the Taiwan Water Corporation to discuss supply and allocation Although TSMC may be eligible for various exemptions and/or unable to offer such products or offer products that are compliant, for response issues. extensions of time for compliance, our failure to comply with any of but are not as reliable due to the lack of reasonably available these applicable laws or regulations could result in: alternative technologies or materials, it may lose market share to our ● significant penalties and legal liabilities, such as the denial of import competitors. permits; ● the temporary or permanent suspension of production of the Further, energy costs in general could increase significantly due to affected products; climate change and other regulations. Therefore, TSMC’s energy costs ● unfavorable alterations in our manufacturing, fabrication and may increase significantly if utility or power companies pass on their assembly and test processes; costs, either fully or partially, such as those associated with carbon ● loss of actual or potential sales contracts in case we are unable to taxes, emission caps and carbon credit trading programs. satisfy the conditions regarding conflict-free minerals sourcing laws or requirements by our customers; and ● restrictions on our operations or sales TSMC believes that climate change should be regarded as an important corporate risk, which must be controlled to improve our competitiveness. Climate change risks include legal risk, physical risk Existing and future environmental and climate related laws and and other risks. TSMC’s control measures are as follows: regulations as well as applicable international accords to which TSMC are subject, could also require it, among other things, to do the following: (a) purchase, use or install expensive pollution control, ● Climate Regulatory Risk Control The greenhouse gas (GHG) control regulations and agreements of reduction or remediation equipment; (b) implement climate change countries around the world are becoming more and more stringent. ● Other Climate Risk Controls Climate change is a concern to the global supply chain, necessitating energy conservation, carbon reduction, and disaster prevention. For example, The Electronic Industry Citizenship Coalition (EICC) has also required members’ suppliers to disclose GHG emissions information. TSMC not only discloses its own GHG emissions information each year, but it also assists and requires its suppliers to establish a GHG inventory system and conduct reduction programs. TSMC’s suppliers are required by TSMC to submit GHG emissions and reduction information as an important index of sustainability scoring in its procurement strategy. To mitigate risks resulting from climate change, TSMC continues to actively carry out energy conservation measures, and voluntary perfluorinated compounds (PFC) emission reduction projects and conducting GHG inventory and verification every year. TSMC has publicly disclosed climate change information every year through the mitigation programs and “abatement or reduction of greenhouse Enterprises are legally required to regularly disclose GHG-related following channels: gas emissions“ programs, or “carbon credit trading“ programs; (c) information, and also limit GHG emissions. The cost of production, modify our product designs and manufacturing processes, or incur including materials and energy, may also grow along with future ● TSMC has disclosed GHG emissions and reduction-related information for evaluation by the Dow Jones Sustainability Index other significant expenses associated with such laws and regulations legal requirements such as carbon or energy taxes. TSMC continues every year since 2001. such as obtaining substitute raw materials or chemicals that may cost to monitor legislative trends and communicate with various more or be less available for our operations. It is unclear whether governments through industrial organizations and associations to set such necessary actions would affect the reliability or efficiency of our reasonable and feasible legal requirements. ● TSMC’s GHG-related information has been disclosed in its CSR report on the Company website annually since 2008. TSMC also provides information to customers and investors upon request. products and services. 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 6.38% of TSMC’s outstanding shares as of February 28, 2014, has from time to time in the past sold our shares in the form of ADSs in several transactions. Currently no shareholder owns 10% or more of TSMC’s total outstanding shares. Other Material Risks During 2013 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. 090 091 7. Corporate Social Responsibility TSMC was named Semiconductors and Semiconductor Industry Group Leader by Dow Jones Sustainability Index in 2013. 7.1 Overview CSR Guidelines TSMC believes a company’s corporate social responsibility is to uplift society. As an important part of the technology industry, looking to the future, we not only aim to maintain our leadership in worldwide competition and promote Taiwan’s globalization and economic growth, but we will also 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. 4. We practice good corporate governance, and balance the interests of shareholders, employees, and all stakeholders in the Company. 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 do our part to control 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 care for our communities over the long term. 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. 092 093 The following table shows TSMC’s view of CSR. TSMC’s social responsibility is to “uplift society“, and on the vertical axis are matters that TSMC 2013 CSR Awards and Recognitions considers its responsibilities. The horizontal axis lists areas where TSMC believes its values can affect society. Corporate Social Responsibility: Uplift Society Category Overall CSR 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 CSR Management Approach ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ TSMC’s decision-making and operations in corporate social responsibility (CSR) are led by the Company’s Chief Financial Officer, who was appointed by the Chairman to act as an overall coordinator for the entire Company’s CSR activities. To better carry out and coordinate sustainability efforts, the Company founded the “Corporate Social Responsibility Committee“ in 2011, which brings together representatives from all of TSMC’s CSR-related business segments, including Customer Service, Human Resources, Investor Relations, the Legal Department, Material and Supply Chain Management, Operations, Public Relations, Quality and Reliability, R&D, Risk Management, the Environment, Safety & Hygiene Department, the independent TSMC Education & Culture Foundation and the TSMC Volunteer Association. Since 2012, CSR has been a topic on TSMC’s Board meeting agenda. Annual CSR performance is reported to the Board. The CSR Committee holds quarterly meetings to discuss related topics, led by the CFO and the President of the Volunteer Program. The quarterly CSR meeting systematically and effectively carries out our corporate social responsibilities by following a “Plan-Do-Check-Act“ cycle to regularly review interaction with stakeholders and the issues that concern them, discuss progress in CSR activities and set future plans. Through close cooperation between organizations, CSR is now an integral part of TSMC’s daily operations. DJSI Industry Group Leader In 2013, TSMC was recognized by the Dow Jones Sustainability Indexes (DJSI) as the Semiconductors and Semiconductor Equipment Industry Group Leader, setting a milestone for the Company’s achievements in sustainability and corporate social responsibility. TSMC is the first Taiwan company, and one of just four Asian companies, to win the highest score out of its industry peers in the DJSI’s 24 industry groups, made up of 59 industries and the 2,500 largest companies in the world. Moreover, TSMC is one of only two semiconductor companies chosen as index components for 13 consecutive years. Organization Awards and Recognitions Dow Jones Sustainability Index (DJSI) Goldman Sachs CommonWealth Magazine ● First Taiwan company to be recognized as the DJSI Semiconductors and Semiconductor Equipment “Industry Group Leader“ (i.e. the company with the highest sustainability score out of its industry peers in the DJSI’s 24 industry groups, made up of 59 industries and the 2,500 largest companies in the world) ● RobecoSAM Sustainability Award “Gold Class“ ● Membership in the Dow Jones Sustainability World Index for a 13th consecutive year ● Membership on the GS SUSTAIN Focus List, which incorporates 59 global industry leaders ● Most Admired Company Rank No.1 in Taiwan ● Excellence in Corporate Social Responsibility Award Globalviews Magazine ● Excellence in Corporate Social Responsibility, Occupational Health First Prize Taiwan Institute for Sustainable Energy ● Award for Corporate Sustainability Reports - Excellent for Manufacturing Industry ● Model Award for Corporate Sustainability Development Performances - Category of Transparency and Integrity FinanceAsia ● Best Corporate Social Responsibility - Ranked No.2 in Taiwan R.O.C. Ministry of Culture “Wenxin Award” for the 10th consecutive year Economy, Governance Institutional Investor IR Magazine EUROMONEY FinanceAsia Global IR Awards International Law Office ● Best CEO (Technology/Semiconductors) - 1st Place (buy-side) ● Best CEO (Technology/Semiconductors) - 1st Place (sell-side) ● Best CFO (Technology/Semiconductors) - 1st Place (buy-side) ● Best CFO (Technology/Semiconductors) - 2nd Place (sell-side) ● Best IR Team (Technology/Semiconductors) - 1st Place (buy-side) ● Best IR Team (Technology/Semiconductors) - 1st Place (sell-side) ● Best IR Professional (Technology/Semiconductors) - 1st Place (buy-side) ● Best IR Professional (Technology/Semiconductors) - 1st Place (sell-side) ● Best corporate governance and disclosure ● Best overall IR by a Taiwanese company ● Best IRO - Taiwan ● Asia Best Managed Companies 2013 - IT/software/technology ● Asia’s Best Managed Companies: Hong Kong, Korea and Taiwan ● Best Managed Company - Ranked No.1 in Taiwan ● Best Corporate Governance Company - Ranked No.1 in Taiwan ● Best CEO - Ranked No.1 in Taiwan ● Best CFO - Ranked No.2 in Taiwan ● Most Committed to a strong Dividend Policy - Ranked No.1 in Taiwan ● Best Investor Relations - Ranked No.1 in Taiwan ● Global Top 50 Gold: Ranked No.12 ● Asia-Pacific Counsel Awards 2013 - General Counsel of the Year R.O.C. Securities & Futures Institute ● 10th Information Disclosure of Public Companies Ranking - Ranked A+ Environment, Safety and Wellness U.S. Green Building Council Leadership in Energy and Environmental Design (LEED) certification ● “Gold” certification in LEED-Existing Building: Operation and Maintenance (LEED-EB O&M) - Fab 14 Phase 1 Office Building, Fab 14 Phase 1/2 Manufacturing Facility ● “Gold” certification in LEED - NB - Fab 12 Phase 6 Manufacturing Facility, Fab 15 Phase 1/2 Manufacturing Facility Note: Up to the end of 2013, TSMC received 11 U.S. LEED certifications (1 “Platinum” class, 10 “Gold” class) R.O.C. Ministry of the Interior “Ecology, Energy Saving, Waste Reduction and Health (EEWH)” certification ● Diamond class “Green Building” certification - Fab 12 Phase 6 Manufacturing Facility, Fab 14 Phase 3 Office Building Note: Up to the end of 2013, TSMC received 1 Taiwan EEWH Diamond class “Intelligent Green Building,” 6 R.O.C. Ministry of Economic Affairs Industrial Development Bureau ISO 50001 Energy Management System certification R.O.C. Environmental Protection Administration R.O.C. Ministry of Economic Affairs Hsinchu Science Park Administration Southern Taiwan Science Park Administration Taiwan EEWH Diamond class “Green Building” certifications. ● “Green Factory Label” - Fab 12 Phase 5 Fab 12 Phase 6, Fab 15 ● “Annual Enterprise Environmental Protection Award” - Fab 15 ● “Energy Conservation and Carbon Reduction Action Mark” - Fab 6, Fab 8, Fab 12 Phase 6, Advanced Backend Fab 2 ● “Excellence in Toxic Substance Management Award” - Fab 14B ● “Enterprise Green Procurement Award” - Headquarter ● “Excellence in Carbon Reduction Award” - Fab 8, Fab 12 Phase 4/5 ● “Water Conservation Award” - Fab 3, Fab 12 Phase 4/5, Fab 15 ● “National Sustainable Development Award” - Fab 3 ● “Low Carbon Enterprise Award” - Fab 12 Phase 6 ● “Excellence in Environmental Protection” - Fab 12 Phase 1/2 ● “Excellence in Labor Safety and Hygiene Award” - Fab 3 and Fab 12A (Note) ● “Excellence in Environmental Protection” - Fab 14A Hsinchu County Environmental Protection Bureau ● “Enterprise Green Procurement Award” - Fab 2 and 5 ● “Mobile Pollution Sources Control” - Fab 2 and 5 Hsinchu City Environmental Protection Bureau ● “Mobile Pollution Sources Control” - Fab 12 Phase 1/2 ● “Environmental Education Award” - Fab 12 Phase 1/2 Employees Council of Labor Affairs, Executive Yuan ● Large Enterprise Award of National TrainQuali Prize (NTQP) Health Promotion Administration, Ministry of Health and Welfare ● Health Management Award ● Healthy Weight Management Award ● Pioneering Weight Management Award GlobalView Magazine ● First place in CSR Award for Workplace Health Note: Fab 12A includes Fab 12 Phase 1/2/3. 094 095 7.2 Environmental, Safety and Health (ESH) Management 2014, TSMC has three fabs – Fab 12 Phase 4/5/6, Fab 14 Phase 3/4 and Fab 15 – that earned the ISO 50001 certifications. Other TSMC fabs also implement energy management measures consistent with TSMC believes its environmental, safety and health practices must ISO 50001. not only comply with legal requirements, but also measure up to or exceed recognized international practices. TSMC’s ESH policy aims to reach the goals of “zero incident“ and “sustainable development,“ and to make TSMC a world-class company in environmental, safety and health management. The Company’s strategies for reaching these goals are to comply with regulations, promote safety and health, strengthen recycling and pollution prevention, manage ESH risks, instill an ESH culture, establish a green supply chain, and fulfill its related corporate social responsibilities. All TSMC manufacturing facilities have received ISO 14001:2004 certification for environmental management systems and OHSAS 18001:2007 certification for occupational safety and health management systems. All fabs in Taiwan have also been TOSHMS (Taiwan Occupational Safety and Health Management System) certified since 2009. TSMC strives for continuous improvement and actively seeks to enhance pollution prevention, power and resource conservation, waste reduction, safety and health management, fire and explosion prevention and minimize the impact of other risks, such as climate change, earthquakes, in order to reduce the overall environmental, safety and health risk. In 2006, in order to meet regulatory and customer needs for the management of hazardous materials, TSMC began to adopt the IECQ QC 080000 Hazardous Substance Process Management (HSPM) System. All TSMC manufacturing facilities have been QC 080000 certified since 2007. By practicing QC 080000, TSMC ensures that its products comply with regulatory and customer requirements, including the European Union’s Restriction of Hazardous Substances (RoHS) Directive, EU Registration, Evaluation, Authorization and Restriction of Chemicals (REACH), the Montreal Protocol on substances that deplete the ozone layer, the halogen free in TSMC regularly communicates with suppliers and contractors regarding environmental, safety and health issues and encourages them to improve their ESH performance. In line with this policy, TSMC uses priority work management and self-management to govern work performed by contractors. TSMC requires contractors performing high-risk operations to complete certification for technicians, and to establish their own OHSAS 18001 safety and health management system before bidding on contracts. This self-management is aimed at increasing the sense of responsibility of TSMC’s contractors, with the goal of promoting safety awareness and technical improvement for all contractors in the industry. TSMC collaborates with suppliers to improve the sustainability of the Company’s supply chain regarding ESH-related issues such as carbon and water footprinting, and conflict mineral management. TSMC not only performs on-site ESH audits at its suppliers manufacturing sites, but also proactively assists them with improving ESH performance. Reducing the carbon and water footprints of TSMC’s supply chain is essential to the Company’s green supply chain ideals. Since 2009, TSMC has required suppliers to set up their carbon inventory procedures. Since 2010, TSMC collaborated with selected suppliers to set up product carbon footprints and has received PAS2050 certifications for 6-inch, 8-inch and 12-inch finished wafer. TSMC also monitors potential water shortages in the supply chain and investigates the supply chain’s water inventory. TSMC is also preparing to work with suppliers on water footprinting and conservation plans. The ESH management programs of TSMC suppliers are tied to a sustainability index that includes three components: the Green Index, the Social Index and the Risk Index. The “Green Index“ includes environmental management systems, regulatory compliance, hazardous substance management, conflict electronic products initiative, and Perfluorooctane Sulfonates (PFOS) mineral investigation, greenhouse gas inventory, carbon footprinting, restriction standards. Since 2011, TSMC adopted ISO 50001 Energy Management System for the continuous improvement of energy conservation. TSMC Fab 12 Phase 4 data center is Taiwan’s first facility to earn the ISO 50001 certification for a high density computing data center. As of early water footprinting and other green activities. The “Social Index“ includes labor and ethical conduct and participation in social activities. Both of the “Green“ and “Social“ indexes are consistent with the Electronic Industry Citizenship Coalition (EICC) code of conduct. The “Risk Index“ includes safety and health management, fire prevention, natural disaster mitigation, IT interruption recovery, transportation reliability, supply chain management, pandemic response planning and a business continuity plan. This sustainability index is applied to TSMC’s critical suppliers. 7.2.1 Environmental Protection Greenhouse Gas (GHG) Emission Reduction TSMC is an active participant in international environmental regulatory and protection programs. TSMC achieved its voluntary PFC emissions reduction goal as per its commitment to the World Semiconductor Council (WSC) and the Taiwan Environmental Protection Administration (EPA) in 2010. In 2005, TSMC was Taiwan’s first semiconductor company to make a complete inventory of its GHG emissions and to gain ISO 14064 certification for its processes and outputs. The purpose of the inventory was to serve as a baseline reference for TSMC’s strategy to reduce GHG emissions, to meet future domestic regulatory requirements, and to prepare for carbon trading and corporate carbon asset management. All TSMC facilities conduct an annual GHG. The inventory result shows that the major direct GHG emissions are perfluorinated compounds (PFCs), which are used in the semiconductor manufacturing process. The primary indirect GHG emission is electricity consumption. TSMC is taking measures to reduce its emission of GHGs. TSMC endorsed a memorandum of understanding between the Taiwan Semiconductor Industry Association, the Taiwan EPA, and the WSC, whereby TSMC committed to reducing PFC emissions to 10% below the average of 1997 and 1999 by 2010, a commitment that it was proud to achieve. This emissions target remains fixed as TSMC continues to grow and expand its manufacturing facilities. TSMC is active in WSC’s activities to set up a global voluntary PFC emissions reduction goal for the next 10 years, and has 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. In 2013, according to the “EPA Early Actions for Carbon Credit of Greenhouse Gases Reduction“ 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. Air and Water Pollution Control 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 around the clock and tracks system effectiveness to ensure the quality of emitted air and discharged water. To make the most effective use of Taiwan’s limited water resources, all TSMC fabs make an effort to increase water reclamation rates by adjusting the water usage of manufacturing equipment and improving wastewater reclamation systems. New fabs are able to reclaim more than 85% of process water, meeting or exceeding the standards of the each Science Park Administration and outperforming most semiconductor fabs around the world. TSMC also strives to reduce non-manufacturing-related water consumption, including water used in air conditioning systems, sanitary facilities, cleaning, landscaping and kitchens. TSMC uses an intranet website to collect and measure water recycling volumes company wide. Since water resources are inherently local, TSMC shares its water saving experiences with other semiconductor companies through the Association of Science-Based Industrial Park to promote water conservation. At the same time, TSMC collaborates with the Science Park Administrations to assist small facilities in each Science Park with water resource management in order to achieve the Science Park’s goals and ensure a long-term balance of supply and demand. Waste Management and Recycling regulation, TSMC applied for the recognition of greenhouse reduction that committed to the WSC and EPA, and has received carbon credits TSMC has established a designated unit responsible for waste recycling and disposal. To meet the goal of sustainable resource from 2005 to 2011. Those carbon credits can be used to offset utilization, TSMC’s first priority is to reduce process waste before greenhouse gas emissions of new manufacturing facilities regulated considering recycling or disposal. TSMC carefully selects waste by Environmental Impact Assessment (EIA) Act. It will mitigate climate disposal and recycling contractors and performs annual audits of change risk to support the Company’s sustainable operation. certification documents, site operations and transportation routes to ensure the legal and proper disposal of waste. TSMC achieved a 92.41% waste recycling rate in 2013, surpassing its goal of 90%. The Company’s landfill rate has remained at less than 1% since 2008. 096 097 Environmental Accounting Other Environmental Protection Programs Environmental Compliance Record The purpose of TSMC’s environmental accounting system is to identify and calculate environmental costs for internal management. At the same TSMC conducts “Product Life Cycle Assessments“ (Product LCA), As of, 2014, TSMC had not received any environmental penalties or time, we can also evaluate the cost reduction or economic benefits of environmental protection programs so as to promote economically efficient collecting and analyzing data from the entire semiconductor fines during or related to 2013 and early 2014. programs. With environmental costs expected to continue growing, environmental accounting can help us manage more effectively. TSMC’s manufacturing chain from raw materials suppliers to finished environmental accounting measures define the various environmental costs and set up independent environmental account codes, then provide products, including statistics for such items as energy, raw 7.2.2 Green Products 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 2013, 92 environmental projects were completed and the total benefits including waste recycling are more than NT$1,451 million. 2013 Environmental Cost of TSMC Fabs in Taiwan Unit: NT$ thousands Classification 1. Direct Cost for Reducing Environmental Impact Description Investment Expense (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) 3. Other Environment-related Costs Total (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 4,303,659 1,904,749 - 306,030 3,139,691 106,175 426,887 190,105 - - 6,514,438 3,862,858 2013 Environmental Efficiency of TSMC Fabs in Taiwan Unit: NT$ thousands Category Description 1. Cost Saving of Environmental Protection Energy saving: completed 35 projects Projects Water saving: completed 11 projects Waste reduction: completed 5 projects Material reduction: completed 41 projects 2. Real Income of Industrial Waste Recycling Recycling of used chemicals, wafers, targets, batteries, lamps, packaging materials, paper cardboard, metals, plastics, and other wastes Total Efficiency 665,300 95,900 10,100 499,000 181,000 1,451,300 material consumption, and pollution. The Product LCA study has established “Eco-Profiles“ for all TSMC fabs and helps the Company to meet 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. TSMC also maintains “green procurement“ procedures, requiring raw materials suppliers to declare that the materials they supply to TSMC TSMC collaborates with upstream material suppliers and downstream assembly and testing service providers to reduce environmental impact. We reduce the resources and energy consumed for each unit of production to provide more advanced, efficient and ecologically sound products. In addition to helping customers design low-power, high-performance products to reduce resource consumption over the product’s life cycle, TSMC implements clean manufacturing practices that provide additional “green value“ to our customers and our other do not contain any prohibited substances. This ensures that products manufactured by TSMC comply with customer requirements and the stakeholders. 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. In 2013, TSMC received the Best Green Procurement Company Award from Taiwan EPA. 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 continues to upgrade existing office buildings to comply with the LEED standard each year. From 2008 to 2013, eleven of TSMC’s fabs and office buildings achieved LEED certifications (one Platinum, ten Gold class). Six of them also won Taiwan’s EEWH Diamond class certification. 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 2013, more than 6,297 visitors from 159 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“. TSMC received Taiwan’s first “Green Factory Label“ from the government and four labels in total for Fab 12 Phase 4, Fab 14 Phase 3, Fab 14 Phase 4, and Fab 12 Phase 5. TSMC-manufactured ICs are used in a broad variety of applications covering various segments of the computer, communications, consumer, industrial and other electronics markets. Through our manufacturing technologies, our customers’ designs are realized and incorporated into peoples’ lives. These chips make significant contributions to the progress of modern society. TSMC works hard to achieve profitable growth while providing products that add environmental and social value. We have listed below several examples of how TSMC-manufactured products significantly contribute to society and the environment. Environmental Contribution by TSMC Foundry Services 1. Providing New Process Technology to Achieve Lower Power Consumption ● The continuous development of TSMC’s advanced semiconductor process technologies follows Moore’s law, which holds that process technology moves forward one generation every 24 months. In each new generation circuitry line widths shrink, making circuits smaller and lowering the energy and raw materials consumed per unit area. At the same time, the smaller IC die size consumes less power. TSMC’s 28nm technology, for example, can accommodate approximately four times the number of electronic components as the 55nm technology. ICs made with 28nm technology in active or standby mode consume roughly one third the power of 55nm products, according to our internal test results. The Company continuously provides process simplification and new design methodology based upon its manufacturing excellence to help customers reduce design and process waste. 098 099 ● TSMC continues to lead the foundry segment in technology, having achieved volume production at the 28nm node. TSMC’s 28nm processes include 28nm High Performance (28HP), 28nm High Performance Low Power (28HPL), 28nm Low Power (28LP), and 28nm High Performance Mobile Computing (28HPM). Customer 28nm production tape-outs are more than double the number of 40nm customer tape-outs. The TSMC 28nm process also has surpassed the previous generation’s production ramp and product yield at the same point in time due, in part, to closer and earlier collaboration with customers. TSMC will continue to encourage customer designs that result in the most advanced, energy-saving, and environmentally friendly products. ● TSMC quickly ramped its 28nm technology in 2013. The 28nm contribution to revenue grew significantly from 12% in 2012 to 30% in 2013, representing approximately NT$180 billion, or US$6 billion. This reflects the fact that TSMC’s advanced manufacturing process technology helps the Company achieve both profitable growth and energy savings. 28nm Contribution to Total Revenue Unit: % 2009 - 2010 - 2011 1 2012 12 2013 30 ● TSMC continues to deliver performance-per-watt scaling in its 20nm SoC and 16nm FinFET process technologies. With energy-efficient transistors and interconnects, the 20nm SoC process can reduce total power consumption of the 28nm process by one third, and by migrating from planar to FinFET technology, the 16nm FinFET process can further reduce total power consumption to about 40% of 28nm technology. The 20nm SoC process was qualified in 2013 and produced first silicon success on multiple customer production tape-outs. The 16nm FinFET process entered risk production in 2013. Die Size Cross-Technology Comparison Die size is shrinking as line width shrinks 1 0.53 0.48 0.25 0.13 0.12 55nm 45nm 40nm 28nm 20SoC 16FF Total Power Consumption Cross- Technology Comparison 1 0.6 0.3 0.2 0.12 N55LP (1.2V) N40LP (1.1V) N28HPM (0.9V) N20SoC (0.9 V) N16FF (0.8 V) 2. Manufacturing Power Management ICs with the Highest Social Contribution by TSMC Foundry Services Efficiency ● TSMC’s leading manufacturing technology helps its customers design and manufacture green products. Power management ICs are the most notably green IC products. Power management ICs are the key components that regulate power consumption in all electronic devices. TSMC’s analog power technology research and development team uses 6-inch and 8-inch wafer fabs to develop Bipolar-CMOS-DMOS and Ultra-High Voltage technology, producing industry-leading power management chips with more stable and efficient power supplies and lower energy consumption for broad-based applications in the consumer, communication, and computer markets. ● TSMC also provides power-efficient design platforms. Customers use these platforms to develop energy-saving products. ● Power management ICs generate material revenue to TSMC’s industrial market segment. In 2013, TSMC’s HV/Power technologies collectively shipped more than 1.3 million customer wafers. In total, the Power management ICs manufactured by TSMC for our customers accounted for more than one-third of global computer, communication and consumer (3C) systems. HV/Power Technologies Shipments Unit: 8-inch equivalent wafer 2009 >400K 2010 >700K 2011 >800K 2012 2013 >1,000K >1,300K 1. Providing Mobile and Wireless Chips that Enhance Mobility and Convenience ● The rapid growth of smartphones and tablets in recent years reflects strong demand for mobile devices. Mobile devices offer remarkable convenience and TSMC contributes significant value to these devices. For example: (1) new process technology helps chips provide faster computing speeds in a smaller die area, leading to smaller form factors for these electronic devices. In addition, SoC technology integrates more functions into one chip, reducing the total number of chips in electronic devices, which also leads to a smaller system form factor; (2) new process technology helps chips consume less energy. People can therefore use mobile devices for a longer period of time, increasing their convenience; and (3) with more convenient wireless connectivity, such as 3G/4G and WLAN/ Bluetooth, people communicate more efficiently with each other, can “work anytime and anywhere,“ significantly improving the mobility of modern society. ● Mobile-related products, such as Baseband, RF Transceiver, AP (Application Processors), WLAN (Wireless Local Area network), NFC (Near Field Communication), Bluetooth, GPS (Global Positioning System) and others, represent more than 36% of TSMC annual revenue, reaching more than NT$213 billion or US$7.2 billion in revenue in 2013. TSMC’s growth in recent years was largely driven by the growing global demand for these mobile IC products. Contribution of Mobile-related Products to TSMC Total Revenue 3. Green Manufacturing that Lowers Energy Consumption ● TSMC continues to develop manufacturing technologies that Unit: % provide more advanced and efficient manufacturing services. Improvements reduce per-unit energy consumption, resource consumption and pollutant generation. They also lower energy consumption and reduce pollution during product use. To see the total energy savings benefits realized through TSMC’s green manufacturing, please refer to page 98, “Environmental Accounting“. 2009 25 2010 27 2011 31 2012 33 2013 36 2. Enhancing Human Health and Safety with MEMS (Micro Electro Mechanical Systems) ● TSMC-manufactured ICs are widely used in medical treatment and health care applications. Through the Company’s advanced manufacturing technology, more and more IC products are providing major contributions to modern medicine. Customers’ MEMS products are used in a number of advanced medical treatments. MEMS are also widely used in preventative health care, such as early warning systems that limit the number of injuries to the elderly resulting from falls, systems that detect physiology changes, car safety system and other applications that greatly enhance human health and safety. 100 101 7.2.3 Safety and Health 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. TSMC believes that employees’ physical and mental health is not only fundamental to maintaining normal business operations but also part of a corporation’s responsibility. In 2013, TSMC collaborated with government and academia to hold the third Labor Health Forum. The theme of the 2013 forum is “industry, government, and university collaboration to improve occupational health,“ a response to the new Occupational Safety and Health Act signed in July, 2013. This legislation introduces new requirements in corporate occupational health risk management and also strengthens corporate responsibility to protect the physical and mental health of employees. The Labor Health Forum was founded in 2011 by TSMC and the NTU College of Public Health for the business community to discuss occupational health issues, and has become a major annual event in this field for enterprises in Taiwan. In 2013, China Steel Corp., CPC Corp., LCY Chemical Corp., Uni-President Enterprises, and Chimei Innolux Corp. were invited to join as co-sponsors of the event. We specially added the form of a “global citizen café,“ a brainstorming session between business, universities, and government to discuss how to collaborate and adopt the most up-to-date knowledge and methods in occupational health, and fulfill the spirit of the Occupational Health and Safety Act. Through enthusiastic discussion, the six participating industries each collected points of consensus to serve as guidelines for future action in occupational health. TSMC also developed occupational management tools tailored for TSMC by industry-academic cooperation, including the promotion of personnel stress management and the measurement of radio frequency (RF) exposure to wireless network antennas and mobile phone in the offices. TSMC offers annual employee health examinations and consultation services as well as on-site clinics and a performs regular drills designed to minimize harm to employees and employee leave due to illness and, at the same time, develops a property, as well as the impact on society and the environment in the continuous plan to address manpower shortages as well as minimize event of a disaster. business impact. ● Working Environment Measurement TSMC conducts workplace hazard assessment and interventions to ● Emergency Response The planning and execution of an effective emergency response dental clinic for a better access to medical assistance. provide a comfortable and safe workplace to Company employees. requires big-picture thinking, continuous improvement and practice TSMC also requires employees to use personal protective equipment drills. TSMC’s emergency response plans include procedures for rapid In order to avoid infectious disease epidemics, TSMC has established (PPE) to prevent hazard exposures. response to accidents and disaster recovery as well as establishing company-level prevention committees and procedures for emergency response procedures for potential disasters. response to infectious diseases outbreak. As office work is primarily performed on computers, TSMC launched Working Environment and Employee Safety Protection and desks to meet the needs of taller or shorter employees. Whenever and evacuation drills. TSMC’s Tainan-site fabs initiated quarterly spot an office ergonomics program to adjust the height of office chairs All TSMC fabs conduct major annual emergency response exercises TSMC’s ESH policy is focused on 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 standards, as well as mitigating ESH-related risks when building or rebuilding facilities, TSMC also maintains procedures governing new 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 New Tools and New Chemical Substances TSMC, as a technology leader in the worldwide semiconductor industry, operates many diversified process tools and new chemicals in the R&D stage. Before using those new tools and new chemicals, they are reviewed carefully by the “New tools and new Chemical Review Committee”. The purpose is to ensure that new tools are compliant with semiconductor industry’s safety standards (such as SEMI S2) and that new chemicals’ environmental, safety and health concerns can be well controlled, including engineering controls, application 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 new employees of significantly above or below-average height enter drills, which have been recognized as good practices. TSMC’s on-site the Company, the assessment and intervention will be initiated service contractors also participate in emergency response planning proactively by site ESH professionals. and exercises to ensure cooperation in handling accidents and to effectively minimize any damage caused by disasters. TSMC requires that all new tools meet SEMI-S8 requirements and that appropriate supplementary control measures be taken to In addition to the regular emergency response drills held by reduce ergonomic risk. Moreover, TSMC endeavors to automate engineering and facilities departments each quarter, the Company’s 300mm front-opening unified pod (FOUP) transportation to prevent laboratory, canteen, dormitory, and shuttle bus personnel also hold accumulative damage caused by long-term manual handling emergency response drills to prepare for events such as earthquakes, of 300mm FOUPs. TSMC 300mm fabs have achieved 99.9% in chemical leakage, ammonia release, fires and automobile accidents. automatic transportation control. TSMC performs semi-annual workplace environment assessments of physical and chemical hazards, including CO2 concentration, illumination, noise, and hazardous chemical substances regulated by ● 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 domestic laws. When abnormal measurements or events happen, site TSMC Employee Assistance Program (EAP) provides free individual ESH professionals will conduct onsite observation and interventions counseling sessions, group sharing, workshops, and mental to ensure exposure risk acceptable. TSMC also conducts Indoor Air assessment, as well as lectures on personal and family issues to take Quality Program to set up indoor air quality standard, measurement, care of employees’ well-being. and control measures to continuously provide a safer and more comfortable workplace. Health promotion activities for employees include fitness programs, women’s health care programs, mother’s rooms, body weight control ● Emerging Infectious Disease Response TSMC has a dedicated corporate ESH organization which monitors programs, sleep problem management, massage and chiropractic services, hepatitis and flu vaccinations, and health lectures. TSMC emerging infectious diseases around the world, assesses any potential believes employees who are physically and mentally fit can enjoy a impact on the workplace and provides a strategic response plan. In better quality of life and be more productive. previous outbreaks (such as SARS in 2003 and the H1N1 influenza outbreak in 2009), TSMC convened the Corporate Influenza Response Supplier and Contractor Management 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 ● Supplier Management As a means of enhancing its supply chain management, TSMC is committed to communicating with and encouraging its contractors and suppliers to improve their quality, cost effectiveness, delivery performance and sustainability on environmental protection, safety 102 103 and health. By means of communication between senior managers, and require suppliers to improve and expand their disclosure to fulfill Palace Museum, Taipei Fine Arts Museum, National Taiwan Science being the most important stage for the youth of Taiwan to inspire site audits and experience sharing, TSMC collaborates with major regulatory and customer requirements. Education Center, National Museum of Natural Science and National their interest and talents to literacy, in addition to the writing suppliers and contractors to enhance partnership and ensure continual improvement for better performance and increased joint 7.3 TSMC Education and Culture Foundation contributions to society. Contractors performing high-risk activities must lay out clearly defined safety precautions and preventative measures. In addition, contractors working on high-risk engineering projects must establish OHSAS 18001 systems and the workers must successfully complete work skill training. ● Supply Chain Sustainability TSMC has been working together with our suppliers in several fields of sustainable development, such as greening our supply chain, carbon management for climate change, mitigation of fire risk, ESH management and business continuity plans for natural disasters. In 2013, TSMC announced our sustainability standard for suppliers through benchmarking with EICC Code of Conduct standard as operating principles and encouraged our suppliers to create sustainable value in these fields. To enhance the supply chain sustainability and partnership with our suppliers, TSMC also shared its experience and practice to assist suppliers in the field of anti-quake engineering, hazardous chemical management etc. TSMC is subject to the new U.S. SEC disclosure rule on conflict minerals released under Rule 13p-1 of the U.S. Securities Exchange Act of 1934. As a recognized global leader in the hi-tech supply-chain, we at TSMC acknowledge our corporate social responsibility to procure our minerals from conflict-free areas. TSMC is one of the strongest supporters of the Electronic Industry Citizenship Coalition (EICC) and the Global e-Sustainability Initiative (GeSI), which will help our suppliers source conflict-free materials. TSMC in general supports the humanitarian and ethical principles contained in the OECD’s Model Supply Chain Policy for a Responsible Global Supply Chain of Minerals from Conflict-Affected and High Risk Areas issued in 2011. The Company encourages suppliers to source from facilities or smelters that have received a “conflict-free“ designation by a recognized industry group, such as the EICC, and also requires suppliers to disclose information on smelters and mines in 2013. TSMC adopts and follows global semiconductor industry The TSMC Education and Culture Foundation, established in 1998 to coordinate the Company’s sponsorship as part of its efforts in corporate social responsibility, devotes its resources towards education, promotion of art and culture events, community building, and the employee volunteer program. In 2013, the TSMC Foundation contributed over NT$73.5 million to its long-term projects of promoting education, culture, and arts. In 2013, the Foundation infused more resources in science education. In addition to supporting a long-term science educational project, The Foundation for the first time in 2013 sponsored the Center for the Advancement of Science Education at National Taiwan University (CASE) to hold “TSMC Cup – Competition of Scientific Story Telling,“ which target young people aged 15 to 18 nationwide in order to inspire their interest for science, and to train short talks by incorporating the four major capacities of listening, speaking, reading and writing into this innovative contest. In continuing to promote arts and Chinese Culture, the TSMC Foundation sponsored the National Symphony Orchestra to produce the stage version of Wagner’s Die Walküre for the very first time in Taiwan. Following “The Analects of Confucius“ and “The Writings of Chung-tzu,“ Professor Hsin Yih-yun, invited by the Foundation, launched the broadcasting program “Mo-tzu in Hsin’s View“ to lead the audience to understand Mo-tzu’s philosophy. TSMC’s six-year consecutive support of the broadcasting program shows the commitment and endeavors toward the Classical Chinese Philosophy. Aside from financial sponsorships of culture and educational projects, the TSMC Foundation supports TSMC Volunteer Society, organizing employees to devote themselves to the caring of the underprivileged of the communities. Commitment to Education – Supporting Educational Programs to Target the Needs at Different Age Levels conflict minerals procurement practices such as sourcing from the Talents are essential to the development of the society. As a leader same suppliers used by other semiconductor companies. To date, of Taiwan’s knowledge-based industry, TSMC regards cultivating TSMC is conflict-free for gold, tantalum, tin and tungsten because according to the results of our reasonable inquiry into the country talented people for society as a core responsibility. Thus the TSMC Foundation tailors various programs to target a whole range of of origin of these minerals as defined under relevant law, TSMC has education needs at different age levels. not used any of these conflict minerals from the Democratic Republic of Congo and/or its surrounding countries. It is TSMC’s goal to strive At the primary-school level, the TSMC Foundation is concerned about use tantalum, tin, tungsten and gold in our products that are DRC the unbalanced development between urban and rural education. To conflict-free. TSMC will continue to renew its supplier survey annually bridge the urban-rural gap, the “TSMC Aesthetic Tour“ and “TSMC Science Tour“ takes children from remote townships to visit National Science and Technology Museum. Over the last 11years, more than competition and lectures, the activity also created the special 87,000 students from remote townships have participated in the tour editorial pages of United Daily for the former winners, who were to cultivate their appreciation of art and experience the charisma of invited to create new works, showing their talents and progress. The science. The Foundation also continued to support CommonWealth sixth “TSMC Youth Calligraphy Contest“ held three workshops at Magazine’s highly successful “Hope Reading Project“. Through three high schools to inspire students to appreciate the beauty and the project, the Foundation offers 200 primary schools of remote cultural richness of calligraphy. The Foundation arranged the former townships 20,000 books every year. By providing 190,000 good winners and the calligraphy devotees to visit Taiwan Calligraphy books with children in remote and underprivileged areas of Taiwan master Professor Chung-Kao Du. Professor Du, who shared his since 2004, the Foundation hopes to promote literacy and inspire 50-year experience of calligraphic writings with the participants and interest in reading among these children so that they will have the encouraged them to keep on pursuing the art of calligraphy. opportunity to open the window of hope. In addition to sponsoring these activities, the TSMC Foundation supports the Taipei Fine Arts At the college and society level, the TSMC Foundation held the 2nd Museum’s expansion of the “TSMC Children’s Art Education Center,“ TSMC Literature Award to encourage under-40-year-old writers to due for completion and inauguration in 2014. The center will be an create Chinese novels between 60,000 words and 80,000 words. important cradle for cultivating children’s art appreciation. Winners not only received big cash prizes but also a contract with the book publisher, INK. This competition offers young writers At the high school level, to enhance teenagers’ full development an excellent forum to showcase their talent and opportunity to to knowledge of science and humanity, the Foundation supported be published, underscoring TSMC’s commitment to supporting and organized scientific camps, contests, and humanity activities. In literature. The TSMC Foundation continued “TSMC Scholarship“ to 2013, the TSMC Foundation for the first time sponsored the Center support and encourage underprivileged students attending National for the Advancement of Science Education at National Taiwan Tsing Hua University and National Central University. Also, the University to hold “TSMC Cup – Competition of Scientific Story Foundation continued to endow chair professorships to enhance Telling“. Racing through the different stages of the Competition, academic research of Taiwan universities. students will cultivate the capacity of logical thinking, argumentation and presentation skills. Together with the dynamics of teamwork, the Competition provides a complete scientific experience and training, and gained overwhelmingly responses from teachers and students. In 2013, 188 teams across the nation participated. The Foundation also continued to support three science talent camps – Wu Chien-Shiung Science Camp, Wu Ta-Yu Science Camp and Madame Curie Senior High School Chemistry Camps – to provide talented students with the opportunity to hold discussions with world-class scientists with the goal of inspiring students and helping them realize their potential. “Senior High School Academic Train,“ organized by National Tsing hua University, invited professors from the University to introduce senior high school students to the latest knowledge of technology and common knowledge for daily life and science. The courses will be held in 12 senior high schools located in northern, central, southern, eastern and Kinmen areas. The TSMC Foundation also collaborates with the Wu Chien-Shiung Foundation to work on “Lifting the Ability of High School Physics Experiments,“ providing professional development for 282 science teachers. In the humanities, “the TSMC Youth Literature Award“ has for 10 years encouraged talented young writers to create new works. AS Promotion of Arts and Culture – Sponsoring Taiwan Arts Groups and Promoting the Chinese Classics The TSMC Education and Culture Foundation has, for years, devoted its efforts to promoting Taiwan Art Groups. In 2013, the TSMC Foundation supported National Symphony Orchestra to produce the stage version of Wagner’s Die Walküre for the very first time in Taiwan. Under the leadership of Maestro Shao-Chia Lü, Die Walküre gathered together the prestigious director Hans-Peter Lehmann, who for years has served as assistant director at the Bayreuth Festival Theatre, along with Taiwan art groups and top vocal singers from Taiwan and abroad, all of whom showed marvelous creativity and performance levels. The production indeed set a milestone of Taiwan Opera Performing Art history. In addition to support Taiwan Art Groups, the TSMC Foundation commits to promote Chinese Traditional Classics in the long term. Through presenting lectures, producing broadcasting programs and publishing audio books, the Foundation relives the Classics and enables audiences to easily understand traditional Chinese philosophy and wisdom. Among these projects, since 2008 the Foundation and IC broadcasting company collaborated to invite Professor Hsin 104 105 Yih-yun to produce the Chinese Classics broadcasting program, sees the duo go head-to-head on stage, charming and enchanting TSMC-affiliated companies, including Vanguard, VisEra, Xintec, TSMC Energy Saving Volunteer Program which are extremely popular and gained huge attention from Chinese the audience with a variety of classical pieces. The foundation, during and Global Unichip. The docents’ enthusiasm and professionalism audiences all over the world. Following The Analects by Confucius the three-month Art Festival, arranged in total over 40 activities, from were highly praised by visitors; the group has continuously been and The Writings of Chuang-tzu, in 2013, Professor Hsin introduced concerts, traditional operas and lectures, to family-oriented activities, recognized as the “Outstanding Volunteer Team“ by the National Mo-tzu, whose thought was as important as Confucius’ at Chinese attracting more than 25,000 people from local communities. Museum of Science. Spring and Autumn Period. Through Professor Hsin Yih-yun’s rich knowledge and vivid examples, Professor Hsin delivered Mo-tzu’s 7.4 TSMC Volunteer Program philosophy of promoting diligent and thrifty and comprehensive love to the public. Noting the importance of preserving historic sites, the 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. The Foundation also donated NT$10,000,000 to the revitalization of Dr. Sun Yun-suan’s residence, in memory of Dr. Sun Yun-suan, who was former premier and known for his contribution to the economic development of Taiwan. Community Building by Arts – Organizing Hsinchu Arts Festival to Cultivate the Public’s Art Appreciation The foundation has long played the role of “fine art planter“ and hopes to spread the seeds of fine art to the community through continuous art activities. At TSMC’s site communities, Hsinchu, Taichung and Tainan, the Foundation annually organizes “Hsinchu Arts Festival“ to present a broad spectrum of performances for the inhabitants’ interests in art. Presented annually for the past 11 years, “Hsinchu Arts Festival“ has become a main art event gaining a huge nationwide attention. International artists presented by the Festival include Cho-liang Lin, Midori, Ann-Sophie Mutter, Shlomo Mintz, Yun-di Li, Kun Woo Paik, Garrick Ohlsson, Jean-Yves Thibaudet and Sir James Galway. The Festival also gathered the Chinese theatre masters, including Pai Hsien-yung, Wu Hsing-kuo, Wei Hai-ming, and Li Bao-chun, to present phenomenal performances at the communities. During 2013, the Foundation again invited the most prestigious artists to join the Festival, such as the winner of 2010 International Chopin Piano Competition, the Russian pianist Yulianna A. Avdeeva, who fascinated the Hsinchu classical music lovers with her great technique and depth of music interpretation. The classical new star, British violinist Charlie Siem, played Sarasate’s Zigeunerweisen and Hubay’s Carman Fantasy etc. The wonderful concert fascinated the students of National Cheng Kung University at Tainan. For an audience of more than 6,000, the Festival arranged an interactive concert, the Piano Battle, at Taichung Outdoor Arena. The Piano Battle, organized and performed by Paul Cibiss and Andreas Kern, Corporate social responsibility is an integral part of TSMC’s culture since its founding. TSMC Foundation launched the first employee volunteer program, Volunteer Docent Program, in 2003 as a channel through which the Company’s most valuable asset, high-tech professional employees, give to the society. TSMC Volunteer Program is dedicated to promoting education and culture, providing aid for the underprivileged, advocating energy saving, and caring for the community. Now, employees and their family members can take part in a variety of programs as follows: ● TSMC Volunteer Docent Program ● TSMC Book Reading Volunteer Program ● TSMC Energy-saving Volunteer Program ● TSMC Community Volunteer Program ● TSMC Ecology Volunteer Program ● TSMC Fab/Division Volunteer Program (2013 new initiative) TSMC Volunteer Docent Program An important way through which a corporation can serve and return to the community in which it operates is to share its expertise. The spread of knowledge furthers people’s understanding of their environment and may inspire the future generations and bring forth change in society. To promote science education and to enhance people’s understanding of the IC industry, TSMC made a donation to the National Museum of Natural Science in Taichung in 1997 to set up an exhibition hall – The World of the Integrated Circuits. In 2003 and 2011, TSMC sponsored the renovation of the hall, adding interactive displays that explain semiconductor principles, the development of integrated circuits, and the important role IC industry plays in one’s daily life. In 2004, TSMC Foundation started to recruit employees and their family members to serve as volunteer docents at the exhibition hall on weekends and holiday. As many as 194 people volunteered in 2004. Youth volunteers were added in 2006, allowing employees to invite their children (high school and above) to join the Volunteer Docent Program. In 2007, the program was expanded to recruit new blood from When “The World of Semiconductor“ exhibition opened in 2011, TSMC recruited around 500 volunteers as tour guides for visitors on weekends and holidays. In 2013, the number grew to 935 volunteers, translating to a dedication of 10,752 service hours. As of December 2013, the cumulative service hour totaled to more than 58,152 hours. TSMC Book Reading Volunteer Program With global warming and the depletion of limited natural resources and fuel, saving energy has become a critical issue for both individuals and corporations around the world. In 2008, TSMC recruited employees with expertise in energy conservation to start the Energy Saving Volunteer Program, and since, the Company has been providing schools in the Hsinchu and Tainan areas with professional consulting service. The team helps to come up with plans for schools to improve power efficiency and reduce carbon emissions. Beginning with 25 TSMC employees, the Energy Saving Volunteer Program initially served only neighborhood schools. Two high schools in Hsinchu were chosen, and a team was sent to each school to assist in lowering water, electricity and telecommunication bills, as well as TSMC believes the future hope and competitiveness of Taiwan lie improving environmental safety and air-conditioning. After assessing in children of the next generation, and education is the key to the the facilities, collecting data, and evaluating power efficiency, the development of these children. Hoping to help reduce the disparity teams proposed energy-saving plans and ways to reduce carbon of educational resources between rural and urban schools, TSMC emissions to the schools. Foundation has been sponsoring the “Hope Reading Program“ organized by CommonWealth Magazine since 2004. Besides The Energy Saving Volunteers not only endeavor to save energy donating 20,000 books annually to 200 schools in remote and rural for the Company and Taiwan but also wish to do what they can to areas, the Foundation recruited employees and their family members preserve the earth. The program expanded its service to Taichung in to form volunteer teams and read to underprivileged children of 2011 to fulfill its promise: “Where TSMC is, its volunteers will be“. remote areas in hope of sparking their interest in reading. In 2013, these volunteers input 1,000 hours in Hsinchu, Taichung, In 2004, 49 volunteers joined the Program and started serving two elementary schools in the remote townships in Hsinchu. Now, more TSMC Community Volunteer Program Tainan and Penghu areas. than 100 people travel to the remote schools to read stories to the children on a regular basis. With increased numbers of participants, the program was extended to Tainan in 2006. Currently, volunteers serve in five schools, encouraging children to read and make use of the books donated through the Hope Reading Program. The selfless service of Book Reading Volunteer Program participants is greatly valued by the schools and the children. This program has become a great model frequently reported by the mass media, which helps to spread the spirit of encouraging reading through reading aloud. In 2012, TSMC expanded its service scope to eight schools from five. Today, 465 volunteers read books with children in Hsinchu, Taichung and Tainan. They have served for nine consecutive years and will continue to help pave the road leading to a brighter future for the underprivileged children. In 2013, volunteers dedicated 6,678 hours to read books for children. As of December 2013, the cumulative service hour is more than 30,478 hours. When the TSMC Community Volunteer Program started recruiting employees, its 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 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, Typhoon Morakot Project Team became the Community Volunteer Program in 2010, aiming to reach out to the ones in need. Both the elderly and children are the joint focus of TSMC Community Volunteers partly because Taiwan is an aging society with more than two million people over the age of 65, among whom one fifth need nursing care. Moreover, with the rapid changes in society, it is critical for children – the future of the country – to build their characters at an early age. It is especially important for children of dysfunctional families to have productive interactions and experience the warmth, care and company of others. 106 107 and veterans to create art works such as rock-painting. The veterans volunteered to maintain the Hsinchu venue of The National Lantern Item Implementation Status The TSMC Community Volunteer Program mainly serves the elderly at Hsinchu Veterans Home and the children at St. Teresa Children ● Environmental Protection The Company is dedicated to protecting the environment of Taiwan Center. At Hsinchu Veterans Home, art workshops allow volunteers in collaboration with charities. For instance, TSMC employees get to enjoy the beauty of art; volunteers and veterans get to Festival 2013. In addition, invited by TSMC volunteers, students of understand each other more through chatting. At St. Teresa Children Jinshan Elementary School participated in the street cleaning activity Center, volunteers conduct one-on-one companionship. During the as one of their graduating events. The activity not only contributed monthly family day at the Center, volunteers spend a wonderful to the community, but also helped plant the seed of environmental weekend going on an outing with the children or reading to them in protection in the mind of the younger generation. the Center. Two Holiday Volunteer activities were held in 2013. In July, TSMC ● Energy Consumption Reduction With the long-term collaboration between TSMC’s fabs in Tainan and Community Volunteers invited the elderly and children they served Zengwum Dam, the Company organized interactive and interesting to “Window on China“ theme park and spent a wonderful Saturday field trips for students from the schools near downstream of the together. In December, the volunteers held the second holiday activity watershed to promote the idea of water consumption reduction. for the year at Hsinchu City Zoo. During this event, a roundtable Through interactive learning activities, the students realized the banquet was held for the elderly and children to celebrate an early importance of water saving. Chinese New Year. In 2013, there were 349 volunteers. The elderly, the children, and the volunteers are closely linked with one another Despite high competition in the technology industry, the Company through regular activities. 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 donated their time to environmental protection never forgets to cherish the environment. With the summoning of Volunteer Club’s President, Mrs. Sophie Shu-fen Chang, seminars concerning energy consumption and power reduction were held to share the knowledge and technology of the green buildings and energy saving accomplishments. Through those efforts, the Company hopes to root the green power deeply into the minds of other service at ecology parks in Taichung and Tainan. Volunteers were corporations. trained as ecology docents to share natural ecology concepts with school children and the public visiting the two parks. ● Hsinchu Fab 12B ecology park docent: In 2013, a new venue was added to provide docent service. With 88 employees joining the group, the Company invited more than 120 students and teachers from four elementary schools to visit TSMC’s ecology park in Hsinchu. ● Taichung Fab 15 ecology park docent: In 2013, 92 employees joined the group, and the Company invited more than 150 students and teachers from five elementary schools to visit TSMC’s ecology park in Taichung. ● Caring for the Disadvantaged Charity bazaars and group-buying were held in fabs from time to time and, in the belief that even a small donation will make a difference, the accumulated profits were donated to charities. Furthermore, when the employees saw people in need, such as solitary elders, destitute children, and economically disadvantaged individuals, they called for enthusiastic support from their fellow employees to repair and maintain the old houses of the ones in need, provided daily suppliers and necessities, and offered warm accompany. Employees of the Company are devoted to give a hand to helpless people for them to move toward a brighter future with ● Tainan Jacana ecology education park docent: TSMC Volunteer dignity. Program recruited 134 employees and their family members to serve as volunteer docents at the Jacana ecology education park on weekends and holidays. TSMC Fab/Division Volunteer Program With the enthusiastic support from Senior Managers, TSMC employees are dedicated to give to the society in return. Employees have devoted to various welfare activities on the Fab/Division level for causes such as environment protection, promotion of energy consumption reduction, and caring of the disadvantaged. 7.5 Social Responsibility Implementation Status as Required by the Taiwan Financial Supervisory Commission Non-implementation and Its Reason(s) None 1. Implementation of Corporate Governance (1) Corporate social responsibility policy and performance evaluation (1) Please refer to “7. Corporate Social Responsibility“ on pages 92-109 of this Annual Report. (2) Dedicated organization for the promotion and execution of corporate social (2) Please refer to “7. Corporate Social Responsibility” on pages 92-109 of this responsibility Annual Report. (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 “3.5 Code of Ethics and Business Conduct“ on pages 36-39 of this Annual Report. 2. Sustainable Environment Development (1) Commitment to improving resources utilization and the use of renewable Please refer to “7.2.1 Environmental Protection“ on pages 97-99 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 gr eenhouse 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 pages 71-74 of this Annual Report. None (2) Safety and health in working environment, and the condition for providing (2) Please refer to “7.2.3 Safety and Health“ on pages 102-104 of this Annual periodical safety and health training to employees Report. (3) Mechanism of periodical communication with employees, and reasonable (3) Please refer to “5.5 Employees“ on pages 71-74 of this Annual Report. notice measures regarding significant operational changes which might cause significant impacts to employees. (4) Disclosure of consumer rights policy, and official channel for consumer (4) Please refer to “5.4 Customer Trust“ on pages 69-71 of this Annual Report. complaints (5) Collaboration with suppliers (5) Please refer to “Supply Chain Sustainability” in “7. Corporate Social Responsibility” on page 104 of this Annual Report. (6) Participation in community development and charities through commercial (6) Please refer to “7. Corporate Social Responsibility“ on pages 92-109 of this activities, donations, volunteers or other free professional services Annual Report. 4. Enhancement of Information Disclosure (1) Disclosure of corporate social responsibility related information with significance and reliability. (2) Published corporate responsibility report and disclosure of implementation of corporate social responsibility TSMC has published “Corporate 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 follows the ten principles of corporate social responsibility set by the Chairman, Dr. Morris Chang. For our corporate social responsibility operational status, please refer to “7. Corporate Social Responsibility“ on pages 92-109 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 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 Responsibility Report is compliant with the requirements of Global Reporting Initiative (GRI) G3.1 level A+ and AA1000AS:2008 standard. 108 109 8. Subsidiary Information and Other Special Notes TSMC is the world’s largest dedicated semiconductor foundry with capacity of 16.45 million 8-inch equivalent wafers in 2013. 8.1 Subsidiaries 8.1.1 TSMC Subsidiaries Chart 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% Emerging Alliance Fund, L.P. Shareholding: 99.5% Taiwan Semiconductor Manufacturing Company Limited As of 12/31/2013 WaferTech, LLC Shareholding: 100% 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% VentureTech Alliance Fund II, L.P. Shareholding: 98% Mutual-Pak Technology Co., Ltd. Shareholding: 58.33% VentureTech Alliance Fund III, L.P. Shareholding: 50.35% Growth Fund Limited Shareholding: 100% TSMC Solar Ltd. Shareholding: 98.58% VentureTech Alliance Fund III, L.P. Shareholding: 48.63% 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: 92.32% TSMC Lighting North America, Inc. Shareholding: 100% TSMC Guang Neng Investment, Ltd. Shareholding: 100% TSMC Solar Ltd. Shareholding: 0.46% TSMC Solid State Lighting Ltd. Shareholding: 0.90% 110 111 8.1.2 Business Scope of TSMC and Its Subsidiaries 8.1.4 Shareholders in Common of TSMC and Its Subsidiaries with Deemed Control and Subordination: None. TSMC and its subsidiaries strive to provide the best foundry services in the industry. Subsldlarles in North America, Europe, Japan, China, and South Korea are dedicated to servicing TSMC customers worldwide. WaferTech in the United States and TSMC China provide additional 8-inch wafer capacity. Other subsidiaries support the Company’s core foundry business with related services such as design service and invest in start-up companies involved in design, manufacturing, and other related businesses in the semiconductor industry. Beginning in 2010, certain TSMC’s subsidiaries also engage in researching, developing, designing, manufacturing and selling of solid state lighting devices and related products and 8.1.5 Rosters of Directors, Supervisors, and Presidents of TSMC’s Subsidiaries Unit: NT$(USD/EUR), except shareholding Company Title Name systems, and solar-related technologies and products. 8.1.3 TSMC Subsidiaries Unit: NT(USD, EUR, JPY, KRW, RMB, CAD)$ thousands TSMC North America As of 12/31/2013 TSMC Europe B.V. Company Date of Incorporation Place of Registration Capital Stock Business Activities TSMC North America Jan. 18, 1988 San Jose, California, U.S. US$ 11,000 Selling and marketing of integrated circuits and semiconductor devices TSMC Europe B.V. TSMC Japan Limited TSMC Korea Limited TSMC China Company Limited Mar. 04, 1994 Sep. 10, 1997 May 02, 2006 Aug. 04, 2003 TSMC Technology, Inc. Feb. 20, 1996 InveStar Semiconductor Development Fund, Inc. Sep. 10, 1996 InveStar Semiconductor Development Fund, Inc. (II) LDC. TSMC Development, Inc. WaferTech, LLC Aug. 25, 2000 Feb. 16, 1996 Jun. 03, 1996 Amsterdam, The Netherlands Yokohama, Japan Seoul, Korea Shanghai, China Delaware, U.S. Cayman Islands Cayman Islands Delaware, U.S. Washington, U.S. EUR JPY KRW RMB US$ US$ US$ US$ US$ 100 Marketing and engineering supporting activities 300,000 Marketing activities 400,000 Customer service and technical supporting activities 4,502,080 Manufacturing and selling of integrated circuits at the order of and pursuant to product design specifications provided by customers 0.001 Engineering support activities 811 Investing in new start-up technology companies 14,578 Investing in new start-up technology companies 0.001 Investment activities 80,000 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. 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 May 28, 2007 Jul. 13, 2006 Mar. 22, 2006 Jan. 10, 2001 Feb. 27, 2004 Mar. 25, 2006 May 30, 2007 Apr. 25, 2007 Aug. 16, 2011 Sep. 03, 2010 Sep. 29, 2010 Dec. 17, 2010 Ontario, Canada Tortola, British Virgin Islands Taipei, Taiwan Cayman Islands Cayman Islands Cayman Islands Cayman Islands Delaware, U.S. CAD US$ NT$ US$ US$ US$ US$ 2,434 Engineering support activities 1,284,000 Investment activities 268,184 Manufacturing and selling of electronic parts and researching, developing and testing of RFID 24,155 Investing in new start-up technology companies 14,511 Investing in new start-up technology companies 115,679 Investing in new start-up technology companies 2,130 Investing in new start-up technology companies N/A Investing in new start-up technology companies Taichung, Taiwan NT$ 11,341,000 Researching, developing, designing, manufacturing and selling renewable energy and energy saving related technologies and products TSMC Solid State Lighting Ltd. Aug. 16, 2011 Hsinchu, Taiwan NT$ 6,008,000 Delaware, U.S. Amsterdam, the Netherlands Hamburg, Germany US$ EUR EUR 1 Selling and marketing of solar related products TSMC Partners, Ltd. 100 100 Investing in solar related business Selling of solar related products and providing customer service Researching, developing, designing, manufacturing and selling solid state lighting devices and related applications products and systems TSMC Design Technology Canada Inc. TSMC Lighting North America, Inc. Sep. 03, 2010 Delaware, U.S. TSMC Guang Neng Investment, Ltd. Jan. 19, 2012 Taipei, Taiwan US$ NT$ 1 Selling and marketing of solid state lighting related products 150,000 Investment activities 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 Director Director President 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 Dick Thurston Rick Cassidy Rick Cassidy Wendell Huang Maria Marced Maria Marced Chih-Chun Tsai Makoto Onodera Lora Ho Makoto Onodera Shing-Wha Lin Chih-Chun Tsai Wendell Huang F.C. Tseng M.C. Tzeng L.C. Tu Lora Ho L.C. Tu 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 Cormac Michael O’Connell Richard Thurston Cliff Hou 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 As of 12/31/2013 % (Investment Holding%) - - - 100% - - - 100% - - - - 100% - - - 100% - - - - - (100%) - - - - 100% - 97.09% - 97.09% - - - 100% - - - 100% - - - 100% - - - - 100% (Continued) 112 113 Company TSMC Global, Ltd. 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 Director Director 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 Name Lora Ho Richard Thurston Hsu-Tung Chen Lewis Hwang Representative of VentureTech Alliance Fund III, L.P.: Juine-Kai Tseng Wei-Pong Lin Lewis Hwang None None None None None Rick Tsai (Note 1) F.C. Tseng Richard Thurston Lora Ho Ying-Chen Chao Lora Ho Richard Thurston Rick Tsai (Note 2) Lora Ho Richard Thurston Rick Tsai (Note 3) Lora Ho Richard Thurston Stephen McKenery Ying-Chen Chao Rick Tsai (Note 1) F.C. Tseng Richard Thurston Lora Ho Jacob Tarn (Note 4) Lora Ho Richard Thurston Rick Tsai (Note 5) Lora Ho Richard Thurston Shareholding Shares (Investment Amount) % (Investment Holding%) - - TSMC holds 1,284 shares 1,107,010 shares 2,508,000 shares 15,643,347 shares 30,000 shares 2,508,000 shares (TSMC’s investment US$24,034,590) (TSMC’s investment US$14,221,019) (TSMC’s investment US$58,240,732) (TSMC Solar Ltd.’s investment US$56,250,001) (VentureTech Alliance Fund III, L.P.’s investment US$2,130,000) None - - - - TSMC holds 1,118,000,000 shares TSMC Guang Neng Investment, Ltd. holds 5,249,800 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 - - - - TSMC holds 554,674,437 shares TSMC Guang Neng Investment, Ltd. holds 5,435,878 shares 2,457,415 shares - - - TSMC Solid State Lighting Ltd. holds 1,000 shares - - (TSMC’s investment NT$150,000,000) - - 100% 4.13% 9.35% 58.33% 0.11% 9.35% (99.50%) (98.00%) (50.35%) (48.63%) (100%) (100%) - - - - 98.58% 0.46% 0.11% - - - 100% - - 100% - - - - - 100% - - - - 92.32% 0.90% 0.41% - - - 100% - - 100% Note 1: Dr. Rick Tsai resigned as a director on January 27, 2014, succeeded by Dr. Stephen T. Tso. Note 2: Dr. Rick Tsai resigned as President on January 27, 2014, succeeded by Mr. Ying-Chen Chao. Note 3: Dr. Rick Tsai resigned as a director on January 27, 2014. Note 4: Dr. Jacob Tarn resigned as President on February 20, 2014, succeeded by Mr. C.H. Chen. Note 5: Dr. Rick Tsai resigned as President on January 27, 2014, succeeded by Mr. C.H. Chen. TSMC Technology, Inc. InveStar Semiconductor Development Fund, Inc. InveStar Semiconductor Development Fund, Inc. (II) LDC TSMC Development, Inc. WaferTech, LLC TSMC Partners, Ltd. 8.1.6 Operational Highlights of TSMC Subsidiaries (Note) Unit: NT$ thousands, except EPS ($) Company Capital Stock Assets Liabilities Net Worth Net Revenue TSMC North America TSMC Europe B.V. TSMC Japan Limited TSMC Korea Limited 327,800 59,095,156 55,331,962 3,763,194 418,065,923 4,100 85,020 11,320 389,587 171,807 31,714 98,749 47,045 2,239 290,838 124,762 29,475 446,714 237,267 20,993 Income (Loss) from Operation 97,185 47,317 10,791 1,925 TSMC China Company Limited 22,015,171 26,389,517 2,362,958 24,026,559 17,047,495 4,917,422 5,192,936 As of 12/31/2013 Net Income (Loss) Basic Earnings (Loss) Per Share 468,309 37,659 4,717 1,296 42.57 188,294.17 786.16 16.20 N/A 0.03 24,153 528,148 297,024 141,177 41,168 386,971 255,857 852,391 226,292 40,590 191,163 37,518 3,751,830.90 190,339 234.84 434,412 333,283 1,098 332,185 97,291 73,178 73,175 5.02 0.03 20,614,259 - 20,614,259 2,384,000 8,515,086 808,506 7,706,580 29,450,394 42,862,161 - 42,862,161 TSMC Design Technology Canada Inc. 68,197 169,884 27,116 142,768 TSMC Global Ltd. 38,263,200 115,161,390 50,207,901 64,953,489 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 North America, Inc. TSMC Lighting North America, Inc. TSMC Solar Europe B.V. TSMC Solar Europe GmbH TSMC Solar Ltd. TSMC Solid State Lighting Ltd. TSMC Guang Neng Investment, Ltd. 268,184 719,830 432,435 3,447,244 63,474 - 30 30 4,100 4,100 11,341,000 6,008,000 150,000 98,622 145,652 450,222 888,020 18,075 - 22,608 2,980 89,407 124,034 7,213,235 3,008,574 86,412 59,017 - 5,817 298 - - 14,303 107 211 38,171 2,635,931 674,396 1,250 39,605 145,652 444,405 887,722 18,075 - 8,305 2,873 89,196 85,863 4,577,304 2,334,178 85,162 2,612,431 8,495,239 3,516,600 217,842 928,232 60,934 13,413 84,352 37,833 - - 2,611,740 2,512,407 3,516,560 19,804 (107,256) (18,454) 4,025 32,391 2,593,196 259,319,585.23 2,558,757 3,516,560 15,493 8.71 3.56 6.74 (172,392) (134,261.45) (19,129) (10,806) (3,662) (0.71) N/A N/A N/A N/A N/A (1,510,174) (1,510,174) (3,286) - (1,839) - 439 (37,126) (36,733) (36,732.98) - - 151,344 259,158 178,335 - (65) (282) (51,325) (65) (93,795) (93,917) (65.19) (468,973.40) (469,587.03) (962,460) (1,530,526) (1,671,706) (1,659,745) (106) (22,899) (1.35) (2.76) N/A Note: Foreign exchange rates for balance sheet amounts are as follows: $1 USD = $29.800 NT, $1 EUR = $41.00.NT, $1 JPY = $0.2834 NT, $1 RMB = $4.89 NT, $1 KRW = $0.0283NT, $1 CAD = $28.02 NT Foreign exchange rates for income statement amounts are as follows: $1 USD = $29.675 NT, $1 EUR = $39.54 NT, $1 JPY = $0.3068 NT, $1 RMB = $4.83 NT, $1 KRW = $0.0272 NT, $1 CAD = $28.89 NT 8.2 Status of TSMC Common Shares and ADRs Acquired, Disposed of, and Held by Subsidiaries: None. 8.3 Special Notes 8.3.1 Private Placement Securities in 2013 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 2013 and as of the Date of this Annual Report The competent authorities fined a minor fine totaling NT$27,433 for very few isolated incidents of administrative errors. TSMC has been implementing relevant remedial measures. 8.3.3 Any Events in 2013 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. 114 115 CONTACT INFORMATION Corporate Headquarters & Fab 12A 8, Li-Hsin Rd. 6, Hsinchu Science Park, Hsinchu 300-78, Taiwan, R.O.C. Tel: 886-3-5636688 Fax: 886-3-5637000 R&D Center & Fab 12B 168, Park Ave. II, Hsinchu Science Park, Hsinchu 300-75, Taiwan, R.O.C. Tel: 886-3-5636688 FAX: 886-3-6687827 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 Fab 3 9, Creation Rd. 1, Hsinchu Science Park, Hsinchu 300-77, Taiwan, R.O.C. Tel: 886-3-5636688 Fax: 886-3-5781548 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 Fab 8 25, Li-Hsin Rd., Hsinchu Science Park, Hsinchu 300-78, Taiwan, R.O.C. Tel: 886-3-5636688 Fax: 886-3-5662051 Fab 14A 1-1, Nan-Ke North Rd., Tainan Science Park, Tainan 741-44, Taiwan R.O.C. Tel: 886-6-5056688 Fax: 886-6-5051262 Fab 14B 17, Nan-Ke 9th Rd., Tainan Science Park, Tainan 741-44, Taiwan, R.O.C. Tel: 886-6-5056688 Fax: 886-6-5055217 Fab 15 1, Keya Rd. 6., Cental Taiwan Science Park, 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 Europe B.V. World Trade Center, Zuidplein 60, 1077 XV Amsterdam The Netherlands Tel: 31-20-3059900 Fax: 31-20-3059911 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 TSMC China Company Limited 4000, Wen Xiang Road, Songjiang, Shanghai, China Postcode: 201616 Tel: 86-21-57768000 Fax: 86-21-57762525 Copyright © 2014 by Taiwan Semiconductor Manufacturing Company, Ltd. All rights reserved. TSMC Korea Limited 15F, AnnJay Tower, 718-2, Yeoksam-dong, Gangnam-gu Seoul 135-080, Korea Tel: 82-2-20511688 Fax: 82-2-20511669 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 TSMC Design Technology Canada Inc. 535 Legget Dr., Suite 600, Kanata, ON K2K 3B8, Canada Tel: 613-576-1990 Fax: 613-576-1999 TSMC Spokesperson Name: Lora Ho Title: Senior Vice President & CFO Tel: 886-3-5054602 Fax: 886-3-5637000 Email: cyhsu@tsmc.com Deputy Spokesperson/Corporate Communications Name: Elizabeth Sun Title: Director, TSMC Corporate Communication Division Tel: 886-3-5682085 Fax: 886-3-5637000 Email: elizabeth_sun@tsmc.com Auditors Company: Deloitte & Touche Auditors: Yi-Hsin Kao, Hung-Wen 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 CONTACT INFORMATION Corporate Headquarters & Fab 12A 8, Li-Hsin Rd. 6, Hsinchu Science Park, Hsinchu 300-78, Taiwan, R.O.C. Tel: 886-3-5636688 Fax: 886-3-5637000 TSMC North America 2585 Junction Avenue, San Jose, CA 95134, U.S.A. Tel: 1-408-3828000 Fax: 1-408-3828008 R&D Center & Fab 12B 168, Park Ave. II, Hsinchu Science Park, Hsinchu 300-75, Taiwan, R.O.C. Tel: 886-3-5636688 FAX: 886-3-6687827 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 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 Fab 8 25, Li-Hsin Rd., Hsinchu Science Park, Hsinchu 300-78, Taiwan, R.O.C. Tel: 886-3-5636688 Fax: 886-3-5662051 Fab 14A 1-1, Nan-Ke North Rd., Tainan Science Park, Tainan 741-44, Taiwan R.O.C. Tel: 886-6-5056688 Fax: 886-6-5051262 Fab 14B 17, Nan-Ke 9th Rd., Tainan Science Park, Tainan 741-44, Taiwan, R.O.C. Tel: 886-6-5056688 Fax: 886-6-5055217 Fab 15 1, Keya Rd. 6., Cental Taiwan Science Park, Taichung 428-82, Taiwan R.O.C. Tel: 886-4-27026688 Fax: 886-4-25607548 TSMC China Company Limited 4000, Wen Xiang Road, Songjiang, Shanghai, China Postcode: 201616 Tel: 86-21-57768000 Fax: 86-21-57762525 TSMC Korea Limited 15F, AnnJay Tower, 718-2, Yeoksam-dong, Gangnam-gu Seoul 135-080, Korea Tel: 82-2-20511688 Fax: 82-2-20511669 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 TSMC Design Technology Canada Inc. 535 Legget Dr., Suite 600, Kanata, ON K2K 3B8, Canada Tel: 613-576-1990 Fax: 613-576-1999 TSMC Spokesperson Name: Lora Ho Title: Senior Vice President & CFO Tel: 886-3-5054602 Fax: 886-3-5637000 Email: cyhsu@tsmc.com Copyright © 2014 by Taiwan Semiconductor Manufacturing Company, Ltd. All rights reserved. Deputy Spokesperson/Corporate Communications Name: Elizabeth Sun Title: Director, TSMC Corporate Communication Division Tel: 886-3-5682085 Fax: 886-3-5637000 Email: elizabeth_sun@tsmc.com Auditors Company: Deloitte & Touche Auditors: Yi-Hsin Kao, Hung-Wen 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 TABLE OF CONTENTS 1. Condensed Balance Sheet 2. Condensed Statement of Comprehensive Income / Condensed Statement of Income 3. Financial Analysis 4. Auditors’ Opinions from 2009 to 2013 5. Audit Committee’s Review Report 6. Financial Difficulties 7. Consolidated Financial Statements for the Years Ended December 31, 2013 and 2012 and Independent Auditors’ Report 8. Parent Company Only Financial Statements for the Years Ended December 31, 2013 and 2012 and Independent Auditors’ Report 2 3 6 10 10 10 10 72 1. Condensed Balance Sheet 1.1 Condensed Balance Sheet from 2012 to 2013 (Consolidated) 1.2 Condensed Balance Sheet from 2009 to 2011 (Consolidated) - Unit: NT$ thousands ROC GAAP Item Current Assets Long-term Investments (Note 1) Property, Plant and Equipment Intangible Assets Other Assets (Note 2) Total Assets Current Liabilities Before Distribution After Distribution Noncurrent Liabilities Total Liabilities Before Distribution After Distribution Equity Attributable to Shareholders of the Parent Capital Stock Capital Surplus Retained Earnings Before Distribution After Distribution Others Equity Attributable to Shareholders of the Parent Before Distribution After Distribution Noncontrolling Interests Total Equity Before Distribution After Distribution 2012 250,325,436 65,717,240 617,562,188 10,959,569 16,790,075 961,354,508 148,473,947 226,247,254 89,786,655 238,260,602 316,033,909 259,244,357 55,675,340 408,411,468 330,638,161 (2,780,485) 720,550,680 642,777,373 2,543,226 723,093,906 645,320,599 2013 358,486,654 89,183,810 792,665,913 11,490,383 11,228,217 1,263,054,977 189,777,934 (Note 3) 225,501,958 415,279,892 (Note 3) 259,286,171 55,858,626 518,193,152 (Note 3) 14,170,306 847,508,255 (Note 3) 266,830 847,775,085 (Note 3) Note 1: Long-term investments consists of noncurrent available-for-sale financial assets, financial assets carried at cost and investments accounted for using equity method. Note 2: Other assets consists of deferred income tax assets, refundable deposits, and other noncurrent assets. Note 3: Pending for shareholders’ approval. Item Current Assets Long-term Investments Fixed Assets Other Assets Total Assets Current Liabilities Before Distribution After Distribution Long-term Liabilities Other Liabilities Total Liabilities Before Distribution After Distribution Capital Stock Capital Surplus Retained Earnings Before Distribution After Distribution Cumulative Transaction Adjustments Unrealized Gain/Loss on Financial Instruments Equity Attributable to Shareholders of the Parent Before Distribution After Distribution Minority Interests Total Equity Before Distribution After Distribution 2009 259,803,748 37,845,503 273,674,787 23,372,182 594,696,220 79,133,288 156,841,408 11,388,479 5,125,905 95,647,672 173,355,792 259,027,066 55,486,010 181,882,682 104,174,562 (1,766,667) 453,621 495,082,712 417,374,592 3,965,836 499,048,548 421,340,428 2010 261,519,317 39,775,528 388,444,023 29,190,036 718,928,904 123,191,113 200,921,349 12,050,755 4,982,631 140,224,499 217,954,735 259,100,787 55,698,434 265,779,571 188,049,335 (6,543,163) 109,289 574,144,918 496,414,682 4,559,487 578,704,405 500,974,169 Unit: NT$ thousands 2011 225,260,396 34,458,504 490,374,916 24,171,126 774,264,942 117,006,687 194,755,355 20,458,493 4,756,211 142,221,391 219,970,059 259,162,226 55,846,357 322,191,155 244,442,487 (6,433,369) (1,172,855) 629,593,514 551,844,846 2,450,037 632,043,551 554,294,883 2 1.3 Condensed Balance Sheet from 2012 to 2013 (Unconsolidated) 1.4 Condensed Balance Sheet from 2009 to 2011 (Unconsolidated) - Unit: NT$ thousands ROC GAAP Item Current Assets Long-term Investments (Note 1) Property, Plant and Equipment Intangible Assets Other Assets (Note 2) Total Assets Current Liabilities Before Distribution After Distribution Noncurrent Liabilities Total Liabilities Before Distribution After Distribution Equity Capital Stock Capital Surplus Retained Earnings Before Distribution After Distribution Others Total Equity Before Distribution After Distribution 2012 205,819,614 139,634,200 586,636,036 6,449,837 13,597,966 952,137,653 144,528,616 222,301,923 87,058,357 231,586,973 309,360,280 259,244,357 55,675,340 408,411,468 330,638,161 (2,780,485) 720,550,680 642,777,373 Note 1: Long-term investments consists of financial assets carried at cost and investments accounted for using equity method. Note 2: Other assets consists of intangible assets, deferred income tax assets, refundable deposits, and other noncurrent assets. Note 3: Pending for shareholders’ approval. 2013 257,623,763 165,545,159 770,443,494 7,069,456 7,897,131 1,208,579,003 187,195,744 (Note 3) 173,875,004 361,070,748 (Note 3) 259,286,171 55,858,626 518,193,152 (Note 3) 14,170,306 847,508,255 (Note 3) Item Current Assets Long-term Investments Fixed Assets Other Assets Total Assets Current Liabilities Before Distribution After Distribution Long-term Liabilities Other Liabilities Total Liabilities Before Distribution After Distribution Capital Stock Capital Surplus Retained Earnings Before Distribution After Distribution Cumulative Transaction Adjustments Unrealized Gain/Loss on Financial Instruments Total Equity Before Distribution After Distribution 2009 185,831,537 118,427,813 254,751,526 18,415,746 577,426,622 72,571,095 150,279,215 4,916,390 4,856,425 82,343,910 160,052,030 259,027,066 55,486,010 181,882,682 104,174,562 (1,766,667) 453,621 495,082,712 417,374,592 2010 192,234,282 117,913,756 366,854,299 24,237,329 701,239,666 118,022,260 195,752,496 4,500,000 4,572,488 127,094,748 204,824,984 259,100,787 55,698,434 265,779,571 188,049,335 (6,543,163) 109,289 574,144,918 496,414,682 Unit: NT$ thousands 2011 158,563,352 129,400,844 454,373,533 19,070,145 761,407,874 109,514,430 187,263,098 18,000,000 4,299,930 131,814,360 209,563,028 259,162,226 55,846,357 322,191,155 244,442,487 (6,433,369) (1,172,855) 629,593,514 551,844,846 3 2. Condensed Statement of Comprehensive Income / Condensed Statement of Income 2.1 Condensed Statement of Comprehensive Income from 2012 to 2013 2.2 Condensed Statement of Income from 2009 to 2011 (Consolidated) - (Consolidated) Item Net Revenue Gross Profit Income from Operations Non-operating Income and Expenses Income before Income Tax Net Income Other Comprehensive Income for the Year, Net of Income Tax Total Comprehensive Income for the Year Net Income (Loss) Attributable to: Shareholders of the Parent Noncontrolling Interests Total Comprehensive Income (Loss) Attributable to: Shareholders of the Parent Noncontrolling Interests Basic Earnings Per Share * Based on weighted average shares outstanding in each year Unit: NT$ thousands (Except EPS:NT$) Unit: NT$ thousands (Except EPS: NT$) ROC GAAP 2012 506,745,234 244,137,107 181,176,868 499,588 181,676,456 166,123,802 4,252,632 170,376,434 166,318,286 (194,484) 170,521,543 (145,109) 6.42* 2013 597,024,197 280,945,507 209,429,363 6,057,759 215,487,122 188,018,937 16,352,248 204,371,185 188,146,790 (127,853) 204,505,782 (134,597) 7.26* Item Net Sales Gross Profit Income from Operations Non-operating Income and Gains Non-operating Expenses and Losses Interest Revenue Interest Expense Income before Income Tax Net Income Net Income Attributable to Shareholders of the Parent Basic Earnings Per Share * Based on weighted average shares outstanding in each year 2009 295,742,239 129,328,611 91,961,886 5,653,548 2,152,787 2,600,925 391,479 95,462,647 89,466,223 89,217,836 3.45* 2010 419,537,911 207,053,591 159,175,335 13,136,072 2,041,012 1,665,193 425,356 170,270,395 162,281,930 161,605,009 6.24* 2011 427,080,645 194,069,228 141,557,418 5,358,527 1,768,268 1,479,514 626,725 145,147,677 134,453,260 134,201,279 5.18* 4 2.3 Condensed Statement of Comprehensive Income from 2012 to 2013 2.4 Condensed Statement of Income from 2009 to 2011 (Unconsolidated) (Unconsolidated) Item Net Revenue Gross Profit Income from Operations Non-operating Income and Expenses Income before Income Tax Net Income Other Comprehensive Income for the Year, Net of Income Tax Total Comprehensive Income for the Year Basic Earnings Per Share * Based on weighted average shares outstanding in each year Unit: NT$ thousands (Except EPS: NT$) Unit: NT$ thousands (Except EPS: NT$) - ROC GAAP 2012 500,369,525 234,850,311 176,820,141 6,932,246 183,752,387 166,318,286 4,203,257 170,521,543 6.42* 2013 591,087,600 271,644,860 204,653,892 11,062,658 215,716,550 188,146,790 16,358,992 204,505,782 Item Net Sales Gross Profit Income from Operations Non-operating Income and Gains Non-operating Expenses and Losses Interest Revenue Interest Expense Income before Income Tax 7.26* Net Income Basic Earnings Per Share * Based on weighted average shares outstanding in each year 2009 285,742,868 126,475,970 94,522,353 4,121,509 3,662,840 1,117,374 142,026 94,981,022 89,217,836 3.45* 2010 406,963,312 196,989,302 154,846,508 15,907,968 1,464,272 764,027 214,641 169,290,204 161,605,009 6.24* 2011 418,245,493 185,560,865 138,905,763 7,287,046 1,484,965 697,196 445,887 144,707,844 134,201,279 5.18* 5 3. Financial Analysis 3.1 Financial Analysis from 2012 to 2013 (Consolidated) Capital Structure Analysis Debts Ratio (%) Long-term Fund to Property, Plant and Equipment (%) Liquidity Analysis Current Ratio (%) Quick Ratio (%) Times Interest Earned (Times) Operating Performance Analysis Average Collection Turnover (Times) Days Sales Outstanding Average Inventory Turnover (Times) Average Inventory Turnover Days Average Payment Turnover (Times) Property, Plant and Equipment Turnover (Times) Total Assets Turnover (Times) Profitability Analysis Return on Total Assets (%) Return on Equity Attributable to Shareholders of the Parent (%) Operating Income to Paid-in Capital Ratio (%) Pre-tax Income to Paid-in Capital Ratio (%) Net Margin (%) Basic Earnings Per Share (NT$) Diluted Earnings Per Share (NT$) 2012 24.78 131.63 168.60 142.39 177.92 9.64 37.86 8.38 43.56 19.38 0.91 0.58 19.19 24.68 69.89 70.08 32.78 6.42 6.41 2013 32.88 135.40 188.90 168.57 82.41 9.11 40.06 8.39 43.49 20.01 0.85 0.54 17.11 24.00 80.77 83.11 31.49 7.26 7.26 *Glossary 1. Capital Structure Analysis (1) Debt Ratio = Total Liabilities / Total Assets (2) Long-term Fund to Property, Plant and Equipment Ratio = (Shareholders’ Equity + Noncurrent Liabilities) / Net Property, Plant and Equipment 2. Liquidity Analysis (1) Current Ratio = Current Assets / Current Liabilities (2) Quick Ratio = (Current Assets - Inventories - Prepaid Expenses) / Current Liabilities (3) Times Interest Earned = Earnings before Interest and Taxes / Interest Expenses 3. Operating Performance Analysis (1) Average Collection Turnover = Net Sales / Average Trade Receivables (2) Days Sales Outstanding = 365 / Average Collection Turnover (3) Average Inventory Turnover = Cost of Sales / Average Inventory (4) Average Inventory Turnover Days = 365 / Average Inventory Turnover (5) Average Payment Turnover = Cost of Sales / Average Trade Payables (6) Property, Plant and Equipment Turnover = Net Sales / Average Net Property, Plant and Equipment (7) Total Assets Turnover = Net Sales / Average Total Assets 4. Profitability Analysis (1) Return on Total Assets = (Net Income + Interest Expenses * (1 - Effective Tax Rate)) / Average Total Assets (2) Return on Equity attributable to Shareholders of the Parent = Net Income Attributable to Shareholders of the Parent / Average Equity Attributable to Shareholders of the Parent (3) Operating Income to Paid-in Capital Ratio= Operating Income / Paid-in Capital (4) Pre-tax Income to Paid-in Capital Ratio = Income before Tax / Paid-in Capital (5) Net Margin = Net Income / Net Sales (6) Earnings Per Share = (Net income attributable to Shareholders of the Parent - Preferred Stock Dividend) / Weighted Average Number of Shares Outstanding 5. Cash Flow (1) Cash Flow Ratio = Net Cash Provided by Operating Activities / Current Liabilities (2) Cash Flow Adequacy Ratio = Five-year Sum of Cash from Operations / Five-year Sum of Capital Expenditures, Inventory Additions, and Cash Dividend (3) Cash Flow Reinvestment Ratio = (Cash Provided by Operating Activities - Cash Dividends) / (Gross Property, Plant and Equipment + Long-term Investments + Other Noncurrent Assets + Working Capital) 6. Leverage (1) Operating Leverage = (Net Sales - Variable Cost) / Income from Operations (2) Financial Leverage = Income from Operations / (Income from Operations - Interest Expenses) Cash Flow Cash Flow Ratio (%) 191.93 183.05 Leverage Industry Specific Key Performance Indicator Cash Flow Adequacy Ratio (%) (Note 1) Cash Flow Reinvestment Ratio (%) Operating Leverage Financial Leverage Billing Utilization Rate (%) (Note 2) Advanced Technologies (40/45-nanometer and below) Percentage of Wafer Sales (%) Sales Growth (%) Net Income Growth (%) 94.71 11.46 2.32 1.01 91 39 18.7 (Note 3) 23.9 (Note 3) 88.35 12.16 2.40 1.01 91 50 17.82 13.12 Analysis of deviation of 2013 vs. 2012 over 20%: 1. The debt ratio increased by 33% as a result of increase in bonds payable. 2. The times interest earned decreased by 54%, primarily due to increase in interest expense. Note 1: 2008-2011 operating cash flow are based on ROC GAAP. Note 2: Capacity includes wafers committed by Vanguard and SSMC. Note 3: 2011 net sales and net income are based on ROC GAAP. 6 3.2 Financial Analysis from 2009 to 2011 (Consolidated) - ROC GAAP Capital Structure Analysis Debts Ratio (%) Long-term Fund to Fixed Assets (%) Liquidity Analysis Current Ratio (%) Operating Performance Analysis Quick Ratio (%) Times Interest Earned (Times) 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) Profitability Analysis 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$) Diluted Earnings Per Share (NT$) Cash Flow Cash Flow Ratio (%) Leverage Industry Specific Key Performance Indicator Cash Flow Adequacy Ratio (%) Cash Flow Reinvestment Ratio (%) Operating Leverage Financial Leverage Billing Utilization Rate (%) (Note) Advanced Technologies (40/45-nanometer and below) Percentage of Wafer Sales (%) Sales Growth (%) Net Income Growth (%) Note: Capacity includes wafers committed by VIS and SSMC. 2009 16.08 186.51 328.31 300.15 244.85 10.78 33.86 9.30 39.25 18.77 1.14 0.51 15.57 18.37 35.50 36.85 30.25 3.45 3.44 202.15 126.39 6.90 2.53 1.00 75 4 -11.2 -10.7 2010 19.50 152.08 212.29 187.57 401.30 10.57 34.54 8.62 42.36 17.23 1.27 0.64 24.77 30.23 61.43 65.72 38.68 6.24 6.23 186.28 113.91 11.13 2.12 1.00 101 17 41.9 81.1 2011 18.37 133.06 192.52 170.06 229.27 10.06 36.29 8.75 41.70 18.77 0.97 0.57 18.08 22.30 54.62 56.01 31.48 5.18 5.18 211.60 101.93 11.12 2.50 1.00 91 26 1.8 -17.0 *Glossary 1. Capital Structure Analysis (1) Debt Ratio = Total Liabilities / Total Assets (2) Long-term Fund to Fixed Assets Ratio = (Shareholders’ Equity + Long-term Liabilities) / Net Fixed Assets 2. Liquidity Analysis (1) Current Ratio = Current Assets / Current Liabilities (2) Quick Ratio = (Current Assets - Inventories - Prepaid Expenses) / Current Liabilities (3) Times Interest Earned = Earnings before Interest and Taxes / Interest Expenses 3. Operating Performance Analysis (1) Average Collection Turnover = Net Sales / Average Trade Receivables (2) Days Sales Outstanding = 365 / Average Collection Turnover (3) Average Inventory Turnover = Cost of Sales / Average Inventory (4) Average Inventory Turnover Days = 365 / Average Inventory Turnover (5) Average Payment Turnover = Cost of Sales / Average Trade Payables (6) Fixed Assets Turnover = Net Sales / Average Net Fixed Assets (7) Total Assets Turnover = Net Sales / Average Total Assets 4. Profitability Analysis (1) Return on Total Assets = (Net Income + Interest Expenses * (1 - Effective Tax Rate)) / Average Total Assets (2) Return on Equity = Net Income / Average Shareholders’ Equity (3) Operating Income to Paid-in Capital Ratio = Operating Income / Paid-in Capital (4) Pre-tax Income to Paid-in Capital Ratio = Income before Tax / Paid-in Capital (5) Net Margin = Net Income / Net Sales (6) Earnings Per Share = (Net Income - Preferred Stock Dividend) / Weighted Average Number of Shares Outstanding 5. Cash Flow (1) Cash Flow Ratio = Net Cash Provided by Operating Activities / Current Liabilities (2) Cash Flow Adequacy Ratio = Five-year Sum of Cash from Operations / Five-year Sum of Capital Expenditures, Inventory Additions, and Cash Dividend (3) Cash Flow Reinvestment Ratio = (Cash Provided by Operating Activities - Cash Dividends) / (Gross Fixed Assets + Long-term Investments + Other Assets + 6. Leverage Working Capital) (1) Operating Leverage = (Net Sales - Variable Cost) / Income from Operations (2) Financial Leverage = Income from Operations / (Income from Operations - Interest Expenses) 7 3.3 Financial Analysis from 2012 to 2013 (Unconsolidated) Capital Structure Analysis Debt Ratio (%) Long-term fund to Property, Plant and Equipment Ratio (%) Liquidity Analysis 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) Property, Plant and Equipment Turnover (Times) Total Assets Turnover (Times) Profitability Analysis 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$) Diluted Earnings Per Share (NT$) Cash Flow Cash Flow Ratio (%) Leverage Cash Flow Adequacy Ratio (%) (Note) Cash Flow Reinvestment Ratio (%) Operating Leverage Financial Leverage Analysis of deviation of 2013 vs. 2012 over 20%: 1. The debt ratio increased by 23% as a result of increase in bonds payable. 2. The times interest earned decreased by 47%, primarily due to increase in interest expense. Note: 2008-2011 operating cash flow are based on ROC GAAP. 2012 24.32 137.67 142.41 117.49 195.42 9.87 36.98 9.13 39.97 18.22 0.96 0.58 19.45 24.68 68.21 70.88 33.24 6.42 6.41 189.88 93.23 11.36 2.37 1.01 2013 29.88 132.57 137.62 118.35 104.10 9.26 39.40 9.06 40.30 18.55 0.87 0.55 17.58 24.00 78.93 83.20 31.83 7.26 7.26 179.11 86.78 12.32 2.46 1.01 *Glossary 1. Capital Structure Analysis (1) Debt Ratio = Total Liabilities / Total Assets (2) Long-term Fund to Property, Plant and Equipment Ratio = (Shareholders’ Equity + Noncurrent Liabilities) / Net Property, Plant and Equipment 2. Liquidity Analysis (1) Current Ratio = Current Assets / Current Liabilities (2) Quick Ratio = (Current Assets - Inventories - Prepaid Expenses) / Current Liabilities (3) Times Interest Earned = Earnings before Interest and Taxes / Interest Expenses 3. Operating Performance Analysis (1) Average Collection Turnover = Net Sales / Average Trade Receivables (2) Days Sales Outstanding = 365 / Average Collection Turnover (3) Average Inventory Turnover = Cost of Sales / Average Inventory (4) Average Inventory Turnover Days = 365 / Average Inventory Turnover (5) Average Payment Turnover = Cost of Sales / Average Trade Payables (6) Property, Plant and Equipment Turnover = Net Sales / Average Net Property, Plant and Equipment (7) Total Assets Turnover = Net Sales / Average Total Assets 4. Profitability Analysis (1) Return on Total Assets = (Net Income + Interest Expenses * (1 - Effective Tax Rate)) / Average Total Assets (2) Return on Equity = Net Income / Average Shareholders’ Equity (3) Operating Income to Paid-in Capital Ratio= Operating Income / Paid-in Capital (4) Pre-tax Income to Paid-in Capital Ratio = Income before Tax / Paid-in Capital (5) Net Margin = Net Income / Net Sales (6) Earnings Per Share = (Net Income - Preferred Stock Dividend) /Weighted Average Number of Shares Outstanding 5. Cash Flow (1) Cash Flow Ratio = Net Cash Provided by Operating Activities / Current Liabilities (2) Cash Flow Adequacy Ratio = Five-year Sum of Cash from Operations / Five-year Sum of Capital Expenditures, Inventory Additions, and Cash Dividend (3) Cash Flow Reinvestment Ratio = (Cash Provided by Operating Activities - Cash Dividends) / (Gross Property, Plant and Equipment + Long-term Investments + Other Noncurrent Assets + Working Capital) 6. Leverage (1) Operating Leverage = (Net Sales - Variable Cost) / Income from Operations (2) Financial Leverage = Income from Operations / (Income from Operations - Interest Expenses) 8 3.4 Financial Analysis from 2009 to 2011 (Unconsolidated) - ROC GAAP Capital Structure Analysis Debt Ratio (%) Long-term Fund to Fixed Assets Ratio (%) Liquidity Analysis Current Ratio (%) Operating Performance Analysis Quick Ratio (%) Times Interest Earned (Times) 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) Profitability Analysis 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$) Diluted Earnings Per Share (NT$) Cash Flow Cash Flow Ratio (%) Leverage Cash Flow Adequacy Ratio (%) Cash Flow Reinvestment Ratio (%) Operating Leverage Financial Leverage 2009 14.26 196.27 256.07 228.94 669.76 11.17 32.66 10.06 36.29 18.46 1.21 0.51 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 1.31 0.64 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 1.02 0.57 18.40 22.30 53.60 55.84 32.09 5.18 5.18 217.99 99.13 11.07 2.54 1.00 *Glossary 1. Capital Structure Analysis (1) Debt Ratio = Total Liabilities / Total Assets (2) Long-term Fund to Fixed Assets Ratio = (Shareholders’ Equity + Long-term Liabilities) / Net Fixed Assets 2. Liquidity Analysis (1) Current Ratio = Current Assets / Current Liabilities (2) Quick Ratio = (Current Assets - Inventories - Prepaid Expenses) / Current Liabilities (3) Times Interest Earned = Earnings before Interest and Taxes / Interest Expenses 3. Operating Performance Analysis (1) Average Collection Turnover = Net Sales / Average Trade Receivables (2) Days Sales Outstanding = 365 / Average Collection Turnover (3) Average Inventory Turnover = Cost of Sales / Average Inventory (4) Average Inventory Turnover Days = 365 / Average Inventory Turnover (5) Average Payment Turnover = Cost of Sales / Average Trade Payables (6) Fixed Assets Turnover = Net Sales / Average Net Fixed Assets (7) Total Assets Turnover = Net Sales / Average Total Assets 4. Profitability Analysis (1) Return on Total Assets = (Net Income + Interest Expenses * (1 - Effective Tax Rate)) / Average Total Assets (2) Return on Equity = Net Income / Average Shareholders’ Equity (3) Operating Income to Paid-in Capital Ratio = Operating Income / Paid-in Capital (4) Pre-tax Income to Paid-in Capital Ratio = Income before Tax / Paid-in Capital (5) Net Margin = Net Income / Net Sales (6) Earnings Per Share = (Net Income - Preferred Stock Dividend) / Weighted Average Number of Shares Outstanding 5. Cash Flow (1) Cash Flow Ratio = Net Cash Provided by Operating Activities / Current Liabilities (2) Cash Flow Adequacy Ratio = Five-year Sum of Cash from Operations / Five-year Sum of Capital Expenditures, Inventory Additions, and Cash Dividend (3) Cash Flow Reinvestment Ratio = (Cash Provided by Operating Activities - Cash Dividends) / (Gross Fixed Assets + Long-term Investments + Other Assets + 6. Leverage Working Capital) (1) Operating Leverage = (Net Sales - Variable Cost) / Income from Operations (2) Financial Leverage = Income from Operations / (Income from Operations - Interest Expenses) 9 4. Auditors' Opinions from 2009 to 2013 7. Consolidated Financial Statements for the Years Ended December 31, 2013 and 2012 and Independent Auditors’ Report CPA Audit Opinion Year 2009 2010 2011 2012 2013 Hung-Peng Lin, Shu-Chieh Huang Hung-Peng Lin, Shu-Chieh Huang Hung-Peng Lin, Shu-Chieh Huang Hung-Peng Lin, Shu-Chieh Huang Yi-Hsin Kao, Hung-Wen 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 Review Report An Unqualified Opinion with explanatory paragraph referring to adoption of new accounting standards REPRESENTATION LETTER An Unqualified Opinion An Unqualified Opinion An Unqualified Opinion An Unqualified Opinion 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, 2013, under the Criteria Governing the Preparation of Affiliation Reports, Consolidated Business Reports and Consolidated Financial Statements of Affiliated Enterprises are the same as those included in the consolidated financial statements prepared in conformity with the International Accounting Standard 27, “Consolidated and Separate 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. The Board of Directors has prepared the Company’s 2013 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. Very truly yours, Taiwan Semiconductor Manufacturing Company Limited By Taiwan Semiconductor Manufacturing Company Limited Chairman of the Audit Committee: Sir Peter Leahy Bonfield Morris Chang Chairman February 18, 2014 February 18, 2014 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 2013 and as of the date of this Annual Report: None 10 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, 2013 and 2012 and January 1, 2012 and the related consolidated statements of comprehensive income, changes in equity and cash flows for the years ended December 31, 2013 and 2012. 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, 2013 and 2012 and January 1, 2012, 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, the International Financial Reporting Standards, International Accounting Standards, interpretation as well as related guidance translated by Accounting Research and Development Foundation endorsed by the Financial Supervisory Commission of the Republic of China with the effective dates. 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 parent company only financial statements of Taiwan Semiconductor Manufacturing Company Limited as of and for the years ended December 31, 2013 and 2012 on which we have issued an unqualified opinion. February 18, 2014 11 Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries CONSOLIDATED BALANCE SHEETS (In Thousands of New Taiwan Dollars) ASSETS CURRENT ASSETS December 31, 2013 December 31, 2012 January 1, 2012 Amount % Amount % Amount Cash and cash equivalents (Note 6) Financial assets at fair value through profit or loss (Note 7) Available-for-sale financial assets (Note 8) Held-to-maturity financial assets (Note 9) Notes and accounts receivable, net (Note 11) Receivables from related parties (Note 37) Other receivables from related parties (Note 37) Inventories (Notes 5 and 12) Other financial assets (Note 38) Other current assets (Note 17) $ 242,695,447 90,353 760,793 1,795,949 71,649,926 291,708 221,576 37,494,893 501,785 2,984,224 19 $ 143,410,588 39,554 2,410,635 5,056,973 57,777,586 353,811 185,550 37,830,498 473,833 2,786,408 - - - 6 - - 3 - - 15 $ 143,472,277 15,360 3,308,770 3,825,680 45,830,288 185,764 122,292 24,840,582 617,142 2,174,014 - - 1 6 - - 4 - - Total current assets 358,486,654 28 250,325,436 26 224,392,169 NONCURRENT ASSETS Available-for-sale financial assets (Note 8) Held-to-maturity financial assets (Note 9) Financial assets carried at cost (Note 13) Investments accounted for using equity method (Notes 5 and 14) Property, plant and equipment (Notes 5 and 15) Intangible assets (Notes 5 and 16) Deferred income tax assets (Notes 5 and 31) Refundable deposits (Note 37) Other noncurrent assets (Note 17) Total noncurrent assets 58,721,959 - 2,145,591 28,316,260 792,665,913 11,490,383 7,239,609 2,519,031 1,469,577 904,568,323 5 - - 2 63 1 1 - - 72 38,751,245 - 3,605,077 23,360,918 617,562,188 10,959,569 13,128,219 2,426,712 1,235,144 711,029,072 4 - - 3 64 1 2 - - 74 - 5,243,167 4,315,005 24,886,931 490,422,153 10,861,563 13,604,218 4,518,863 1,306,746 555,158,646 % 18 - - 1 6 - - 3 - - 28 - 1 1 3 63 1 2 1 - 72 LIABILITIES AND EQUITY CURRENT LIABILITIES December 31, 2013 December 31, 2012 January 1, 2012 Amount % Amount % Amount % Short-term loans (Note 18) Financial liabilities at fair value through profit or loss (Note 7) Hedging derivative financial liabilities (Note 10) Accounts payable Payables to related parties (Note 37) Salary and bonus payable Accrued profit sharing to employees and bonus to directors and $ 15,645,000 33,750 - 14,670,260 1,688,456 8,330,956 1 $ 34,714,929 15,625 - - - 14,490,429 1 748,613 - 7,535,296 1 4 $ 25,926,528 13,742 - 232 - 10,530,487 2 1,328,521 - 6,148,499 1 supervisors (Note 24) Payables to contractors and equipment suppliers Income tax payable (Note 31) Provisions (Notes 5 and 19) Accrued expenses and other current liabilities (Notes 15 and 22) Current portion of bonds payable and long-term bank loans (Notes 20 and 21) 12,738,801 89,810,160 22,563,286 7,603,781 16,693,484 - 1 7 2 1 1 - 11,186,591 44,831,798 15,635,594 6,038,003 13,148,944 128,125 1 5 2 - 1 - 9,081,293 35,540,526 10,656,124 5,068,263 13,218,235 4,562,500 3 - - 1 - 1 1 5 1 1 2 1 Total current liabilities 189,777,934 15 148,473,947 16 122,074,950 16 NONCURRENT LIABILITIES Hedging derivative financial liabilities (Note 10) Bonds payable (Note 20) Long-term bank loans (Note 21) Provisions (Note 19) Other long-term payables (Note 22) Obligations under finance leases (Note 15) Accrued pension cost (Notes 5 and 23) Guarantee deposits Others Total noncurrent liabilities Total liabilities EQUITY ATTRIBUTABLE TO SHAREHOLDERS OF THE PARENT Capital stock (Note 24) Capital surplus (Note 24) Retained earnings (Note 24) Appropriated as legal capital reserve Appropriated as special capital reserve Unappropriated earnings Others (Note 24) 5,481,616 210,767,625 40,000 10,452 36,000 776,230 7,589,926 151,660 648,449 225,501,958 415,279,892 259,286,171 55,858,626 132,436,003 2,785,741 382,971,408 518,193,152 14,170,306 Equity attributable to shareholders of the parent 847,508,255 NONCONTROLLING INTERESTS (Note 24) Total equity 266,830 847,775,085 - 17 - - - - 1 - - 18 33 21 4 11 - 30 41 1 67 - 67 - 80,000,000 1,359,375 4,891 54,000 748,115 6,921,234 203,890 495,150 89,786,655 - 8 - - - - 1 - - 9 - 18,000,000 1,587,500 2,889 - 870,993 6,241,024 443,983 400,831 27,547,220 - 3 - - - - 1 - - 4 238,260,602 25 149,622,170 20 259,244,357 55,675,340 115,820,123 7,606,224 284,985,121 408,411,468 (2,780,485) 720,550,680 2,543,226 723,093,906 27 6 12 1 29 42 - 75 - 75 259,162,226 55,471,662 102,399,995 6,433,874 211,630,458 320,464,327 (7,606,219) 627,491,996 2,436,649 629,928,645 33 7 13 1 27 41 (1) 80 - 80 TOTAL $ 1,263,054,977 100 $ 961,354,508 100 $ 779,550,815 100 TOTAL $ 1,263,054,977 100 $ 961,354,508 100 $ 779,550,815 100 The accompanying notes are an integral part of the consolidated financial statements. 12 Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In Thousands of New Taiwan Dollars, Except Earnings Per Share) NET REVENUE (Notes 5, 26, 37 and 42) $ 597,024,197 100 $ 506,745,234 2013 Amount % 2012 Amount COST OF REVENUE (Notes 12, 33 and 37) GROSS PROFIT BEFORE UNREALIZED GROSS PROFIT ON SALES TO ASSOCIATES UNREALIZED GROSS PROFIT ON SALES TO ASSOCIATES GROSS PROFIT OPERATING EXPENSES (Notes 5, 33 and 37) Research and development General and administrative Marketing Total operating expenses OTHER OPERATING INCOME AND EXPENSES, NET (Notes 27 and 33) INCOME FROM OPERATIONS (Note 42) NON-OPERATING INCOME AND EXPENSES Share of profits of associates and joint venture (Notes 14 and 42) Other income (Note 28) Foreign exchange gain, net Finance costs (Notes 10 and 29) Other gains and losses (Notes 30 and 37) Total non-operating income and expenses INCOME BEFORE INCOME TAX INCOME TAX EXPENSE (Notes 31 and 42) NET INCOME 316,057,820 280,966,377 (20,870) 280,945,507 48,118,165 18,928,544 4,516,525 71,563,234 47,090 209,429,363 3,972,031 2,342,123 285,460 (2,646,776) 2,104,921 6,057,759 215,487,122 27,468,185 188,018,937 53 47 - 47 8 3 1 12 - 35 1 - - - - 1 36 5 31 262,583,098 244,162,136 (25,029) 244,137,107 40,383,195 17,631,694 4,495,986 62,510,875 (449,364) 181,176,868 2,073,729 1,716,093 582,498 (1,020,422) (2,852,310) 499,588 181,676,456 15,552,654 166,123,802 % 100 52 48 - 48 8 3 1 12 - 36 - - - - - - 36 3 33 (Continued) 2013 Amount % 2012 Amount OTHER COMPREHENSIVE INCOME (LOSS) (Notes 10, 14, 23, 24 and 31) Exchange differences arising on translation of foreign operations Changes in fair value of available-for-sale financial assets Cash flow hedges Share of other comprehensive income (loss) of associates and joint venture Actuarial loss from defined benefit plans Income tax benefit (expense) related to components of other comprehensive income $ 3,668,509 13,290,385 - (59,740) (662,074) 115,168 Other comprehensive income for the year, net of income tax 16,352,248 1 2 - - - - 3 $ (4,322,697) 9,534,269 232 53,748 (685,978) (326,942) 4,252,632 TOTAL COMPREHENSIVE INCOME FOR THE YEAR $ 204,371,185 34 $ 170,376,434 NET INCOME (LOSS) ATTRIBUTABLE TO: Shareholders of the parent Noncontrolling interests TOTAL COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO: Shareholders of the parent Noncontrolling interests $ 188,146,790 (127,853) $ 188,018,937 $ 204,505,782 (134,597) $ 204,371,185 31 - 31 34 - 34 $ 166,318,286 (194,484) $ 166,123,802 $ 170,521,543 (145,109) $ 170,376,434 % (1) 2 - - - - 1 34 33 - 33 34 - 34 EARNINGS PER SHARE (NT$, Note 32) Basic earnings per share Diluted earnings per share 2013 2012 Income Attributable to Shareholders of the Parent Income Attributable to Shareholders of the Parent $ 7.26 $ 7.26 $ 6.42 $ 6.41 The accompanying notes are an integral part of the consolidated financial statements (Concluded) 13 Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (In Thousands of New Taiwan Dollars, Except Dividends Per Share) Equity Attributable to Shareholders of the Parent Capital Stock - Common Stock Retained Earnings Shares (In Thousands) Capital Surplus Amount Legal Capital Reserve Special Capital Reserve Unappropriated Earnings Total Foreign Currency Translation Reserve Others Unrealized Gain/Loss from Available- for-sale Financial Assets Cash Flow Hedges Reserve Total Noncontrolling Interests Total Total Equity BALANCE, JANUARY 1, 2012 25,916,222 $ 259,162,226 $ 55,471,662 $ 102,399,995 $ 6,433,874 $ 211,630,458 $ 320,464,327 $ (6,433,364) $ (1,172,762) $ (93) $ (7,606,219) $ 627,491,996 $ 2,436,649 $ 629,928,645 Appropriations of prior year’s earnings Legal capital reserve Special capital reserve Cash dividends to shareholders - NT$3.00 per share Total Net income in 2012 Other comprehensive income in 2012, net of income tax Total comprehensive income in 2012 Issuance of stock from exercise of employee stock options Stock option compensation cost of subsidiary Adjustments to share of changes in equity of associates and joint venture Adjustments arising from changes in percentage of ownership in subsidiaries Increase in noncontrolling interests - - - - - - - - - - - - - - - - - - - - - 8,213 82,131 160,357 - - - - - - - - - 2,588 40,733 - 13,420,128 - - 13,420,128 - 1,172,350 - 1,172,350 (13,420,128) (1,172,350) (77,748,668) (92,341,146) - - (77,748,668) (77,748,668) 166,318,286 166,318,286 - - - - - - - - - - - - - - - - - - - - - - - - - - (622,477) (622,477) (4,320,442) 9,146,083 165,695,809 165,695,809 (4,320,442) 9,146,083 - - - - - - - - - - - - - - - - - - - - BALANCE, DECEMBER 31, 2012 25,924,435 259,244,357 55,675,340 115,820,123 7,606,224 284,985,121 408,411,468 (10,753,806) 7,973,321 Appropriations of prior year’s earnings Legal capital reserve Reversal of special capital reserve Cash dividends to shareholders - NT$3.00 per share Total Net income in 2013 - - - - - - - - - - - - - - - 16,615,880 - - 16,615,880 - (4,820,483) - (4,820,483) (16,615,880) 4,820,483 (77,773,307) (89,568,704) - - (77,773,307) (77,773,307) - - 188,146,790 188,146,790 - - - - - - - - - - 14 - - - - - 93 93 - - - - - - - - - - - - - - - - - - (77,748,668) (77,748,668) - - - - - - (77,748,668) (77,748,668) 166,318,286 (194,484) 166,123,802 4,825,734 4,203,257 49,375 4,252,632 4,825,734 170,521,543 (145,109) 170,376,434 - - - - - 242,488 - 242,488 - 6,219 6,219 2,588 - 2,588 40,733 (40,733) - - 286,200 286,200 (2,780,485) 720,550,680 2,543,226 723,093,906 - - - - - - - (77,773,307) (77,773,307) - - - - - - (77,773,307) (77,773,307) 188,146,790 (127,853) 188,018,937 (Continued) Equity Attributable to Shareholders of the Parent Capital Stock - Common Stock Retained Earnings Shares (In Thousands) Capital Surplus Amount Legal Capital Reserve Special Capital Reserve Unappropriated Earnings Total Foreign Currency Translation Reserve Others Unrealized Gain/Loss from Available- for-sale Financial Assets Cash Flow Hedges Reserve Total Noncontrolling Interests Total Total Equity Other comprehensive income in 2013, net of income tax - $ - $ - $ - $ - $ (591,799) $ (591,799) $ 3,613,444 $ 13,337,460 $ (113) $ 16,950,791 $ 16,358,992 $ (6,744) $ 16,352,248 Total comprehensive income in 2013 - - - Issuance of stock from exercise of employee stock options 4,182 41,814 82,756 Stock option compensation cost of subsidiary Adjustments to share of changes in equity of associates and joint venture Adjustments arising from changes in percentage of ownership in subsidiaries Increase in noncontrolling interests Effect of deconsolidation of subsidiary - - - - - - - - - - - 38,084 62,446 - - - - - - - - - - - - - - - - 187,554,991 187,554,991 3,613,444 13,337,460 (113) 16,950,791 204,505,782 (134,597) 204,371,185 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 124,570 - 124,570 - 5,312 5,312 38,084 - 38,084 62,446 (62,446) - - - 188,488 188,488 (2,273,153) (2,273,153) BALANCE, DECEMBER 31, 2013 25,928,617 $ 259,286,171 $ 55,858,626 $ 132,436,003 $ 2,785,741 $ 382,971,408 $ 518,193,152 $ (7,140,362) $ 21,310,781 $ (113) $ 14,170,306 $ 847,508,255 $ 266,830 $ 847,775,085 The accompanying notes are an integral part of the consolidated financial statements. (Concluded) 15 Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands of New Taiwan Dollars) 2013 2012 2013 2012 CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax Adjustments for: $ 215,487,122 $ 181,676,456 Depreciation expense Amortization expense Stock option compensation cost of subsidiary Finance costs Share of profits of associates and joint venture Interest income Gain on disposal of property, plant and equipment and intangible assets, net Impairment loss on property, plant and equipment 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 Loss (gain) on disposal of investments in associates Gain on deconsolidation of subsidiary Unrealized gross profit on sales to associates Loss (gain) on foreign exchange, net Dividend income Income from receipt of equity securities in settlement of trade receivables Loss on hedging instruments Gain on arising from changes in fair value of available-for-sale financial assets in hedge effective portion Changes in operating assets and liabilities: Derivative financial instruments Notes and accounts receivable, net Receivables from related parties Other receivables from related parties Inventories Other financial assets Other current assets Accounts payable Payables to related parties Salary and bonus payable Accrued profit sharing to employees and bonus to directors and supervisors Accrued expenses and other current liabilities Provisions Accrued pension cost Cash generated from operations Income taxes paid 153,979,847 2,202,022 5,312 2,646,776 (3,972,031) (1,835,980) (48,848) - 352,214 (1,267,086) (44,721) 733 (293,578) 20,870 317,547 (506,143) (9,977) 5,602,779 (5,071,118) (32,189) (14,131,066) (204,278) 50,589 122,472 18,578 (312,251) 346,401 850,094 883,925 1,552,210 3,531,017 1,595,810 9,554 361,846,606 (14,463,069) 129,168,514 2,180,775 6,219 1,020,422 (2,073,729) (1,645,036) (103) 444,505 4,231,602 (399,598) (141,491) (4,977) - 25,029 (3,219,144) (71,057) (886) - - (22,311) (11,947,191) (168,047) (63,258) (12,989,916) 53,182 648,051 3,656,358 (605,182) 1,386,797 2,105,298 2,051,785 977,901 (5,769) 296,275,199 (11,312,039) 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 Other assets Costs from entering into hedging transactions Interest received Other dividends received Dividends received from associates Refundable deposits paid Refundable deposits refunded Net cash outflow from deconsolidation of subsidiary (Note 34) $ 2,418,578 5,145,850 67,986 173,554 - (143,982) 1,790,725 506,143 2,141,881 (98,888) 113,399 (979,910) $ 964,367 2,711,440 353,656 157,484 26,688 - 1,719,026 71,057 2,088,472 (517,162) 2,609,313 - Net cash used in investing activities (281,054,215) (269,317,707) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of bonds Repayment of bonds Increase (decrease) in short-term loans Increase in long-term bank loans Repayment of long-term bank loans Repayment of other long-term payables Interest paid Guarantee deposits received Guarantee deposits refunded Decrease in obligations under finance leases Proceeds from exercise of employee stock options Cash dividends Increase in noncontrolling interests 130,844,821 - (19,636,240) 690,000 (62,500) (853,788) (1,330,886) 41,519 (113,087) (27,796) 124,570 (77,773,307) 202,619 62,000,000 (4,500,000) 9,747,094 50,000 (212,500) (2,367,866) (736,607) 15,671 (255,764) (108,863) 242,488 (77,748,668) 286,200 Net cash generated by (used in) financing activities 32,105,925 (13,588,815) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 849,612 (2,118,327) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 99,284,859 (61,689) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 143,410,588 143,472,277 Net cash generated by operating activities 347,383,537 284,963,160 CASH AND CASH EQUIVALENTS, END OF YEAR $ 242,695,447 $ 143,410,588 CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of: Available-for-sale financial assets Held-to-maturity financial assets Financial assets carried at cost Property, plant and equipment Intangible assets 16 The accompanying notes are an integral part of the consolidated financial statements. (Concluded) (21,303) (1,795,949) (27,165) (287,594,773) (2,750,361) (31,525,876) - (56,512) (246,137,361) (1,782,299) (Continued) Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (Amounts in Thousands of New Taiwan Dollars, Unless Specified Otherwise) 1. GENERAL Taiwan Semiconductor Manufacturing Company Limited (TSMC), a Republic of China (R.O.C.) corporation, was incorporated on February 21, 1987. TSMC is a dedicated foundry in the semiconductor industry which engages mainly in the manufacturing, selling, packaging, testing and computer-aided design of integrated circuits and other semiconductor devices and the manufacturing of masks. On September 5, 1994, TSMC’s shares were listed on the Taiwan Stock Exchange (TWSE). On October 8, 1997, TSMC listed some of its shares of stock on the New York Stock Exchange (NYSE) in the form of American Depositary Shares (ADSs). The address of its registered office and principal place of business is No. 8, Li-Hsin Rd. 6, Hsinchu Science Park, Taiwan. The principal operating activities and operating segments information of TSMC and its subsidiaries (collectively as the “Company”) are described in Notes 4 and 42. 2. THE AUTHORIZATION OF FINANCIAL STATEMENTS The accompanying consolidated financial statements were approved and authorized for issue by the Board of Directors on February 18, 2014. 3. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSs) On May 14, 2009, the Financial Supervisory Commission (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) endorsed by the FSC with the effective dates (collectively, “Taiwan-IFRSs”.) a. New and revised standards, amendments and interpretations in issue but not yet effective As of the date that the accompanying consolidated financial statements were authorized for issue, the new, revised or amended IFRSs, IASs, interpretations and related guidance in issue but not yet adopted by the Company as well as the effective dates issued by the International Accounting Standards Board (IASB), are stated as follows; however, the initial adoption to the following standards and interpretations is still subject to the effective date to be published by the FSC except that the standards and interpretation included in the 2013 Taiwan-IFRSs version should be adopted by the Company starting 2015. New, Revised or Amended Standards and Interpretations Effective Date Issued by IASB (Note) Included in the 2013 Taiwan-IFRSs version Amendments to IFRSs Improvements to IFRSs 2009 - Amendment to IAS 39 Amendment to IAS 39 Embedded Derivatives January 1, 2009 or January 1, 2010 Effective in fiscal year ended on or after June Improvements to IFRSs 2010 Annual Improvements to IFRSs 2009 - 2011 Cycle Amendments to IFRS 1 Limited Exemption from Comparative IFRS 7 Disclosures for First - time Adopters Amendments to IFRS 1 Severe Hyperinflation and Removal of Fixed Dates for First - time Adopters Amendments to IFRS 1 Government Loans Amendment to IFRS 7 Disclosures - offsetting Financial Assets and Financial Liabilities Amendment to IFRS 7 Disclosures - Transfers of Financial Assets IFRS 10 Consolidated Financial Statements IFRS 11 Joint Arrangements IFRS 12 Disclosure of Interests in Other Entities Amendments to IFRS 10, IFRS 11 and IFRS 12 Consolidated financial Statements, Joint Arrangements, and Disclosure of Interests in Other Entities: Transition Guidance Amendments to IFRS 10, IFRS 12 and IAS 27 Investment Entities IFRS 13 Fair Value Measurement Amendment to IAS 1 Presentation of Items of Other Comprehensive Income Amendment to IAS 12 Deferred Tax: Recovery of Underlying Assets Amendment to IAS 19 Employee Benefits Amendment to IAS 27 Separate Financial Statements Amendment to IAS 28 Investments in Associates and Joint Ventures Amendment to IAS 32 Offsetting of Financial Assets and Financial Liabilities IFRIC 20 Stripping Costs in the Production Phase of A Surface Mine Not included in the 2013 Taiwan-IFRSs version 30, 2009 July 1, 2010 or January 1, 2011 January 1, 2013 July 1, 2010 July 1, 2011 January 1, 2013 January 1, 2013 July 1, 2011 January 1, 2013 January 1, 2013 January 1, 2013 January 1, 2013 January 1, 2014 January 1, 2013 July 1, 2012 January 1, 2012 January 1, 2013 January 1, 2013 January 1, 2013 January 1, 2014 January 1, 2013 Annual Improvements to IFRSs 2010 - 2012 Cycle July 1, 2014 or transactions on or after July 1, Annual Improvements to IFRSs 2011 - 2013 Cycle IFRS 9 Financial Instruments Amendments to IFRS 9 and IFRS 7 Mandatory Effective Date and Transition Disclosure IFRS 14 Regulatory Deferral Accounts Amendment to IAS 19 Defined Benefit Plans: Employee Contributions Amendment to IAS 36 Recoverable Amount Disclosures for Non-Financial Assets Amendment to IAS 39 Novation of Derivatives and Continuation of Hedge Accounting IFRIC 21 Levies 2014 July 1, 2014 Not yet determined Not yet determined January 1, 2016 July 1, 2014 January 1, 2014 January 1, 2014 January 1, 2014 Note: The aforementioned new, revised or amended standards or interpretations are effective after fiscal year beginning on or after the effective dates, unless specified otherwise. 17 b. Significant changes in accounting policy resulted from new and revised standards, amendments and 3) IFRS 13, “Fair Value Measurement” interpretations in issue but not yet effective Except for the following items, the Company believes that the adoption of aforementioned standards or interpretations will not have a significant effect on the Company’s accounting policies. 1) IFRS 9, “Financial Instruments” Under IFRS 9, all recognized financial assets currently in the scope of IAS 39, “Financial Instruments: Recognition and Measurement,” will be subsequently measured at either the amortized cost or the fair value. If the objective of the Company’s business model is to hold the financial asset to collect the contractual cash flows which are solely for payments of principal and interest on the principal amount outstanding, such assets are measured at the amortized cost. All other financial assets must be measured at the fair value through profit or loss as of the end of the reporting period. The main change in IFRS 9 is the increase of the eligibility of hedge accounting. It allows reporters to reflect risk management activities in the financial statements more closely as it provides more opportunities to apply hedge accounting. A fundamental difference to IAS 39 is that IFRS 9 (a) increases the scope of hedged items eligible for hedge accounting. For example, the risk components of non-financial items may be designated as hedging accounting; (b) revises a new way to account for the gain or loss recognition arising from hedging derivative financial instruments, which results in a less volatility in profit or loss; and (c) is necessary for there to be an economic relationship between the hedged item and hedging instrument instead of performing the retrospective hedge effectiveness testing. The amendment to IFRS 9 issued by IASB introduces the new hedge accounting model and removed the original mandatory effective date of January 1, 2015 (on and after). IASB will reconsider the appropriate effective date once the standard is complete with a new impairment model and the finalization of any limited amendments to classification and measurement. IFRS 13 establishes a single source of guidance for fair value measurements and disclosures about fair value measurements. It defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements. The disclosure requirements in IFRS 13 are more extensive than those required in the current standards. For example, quantitative and qualitative disclosures based on the three-level fair value hierarchy currently required for financial instruments only will be extended by IFRS 13 to cover all assets and liabilities within its scope. 4) Amendments to IAS 1, “Presentation of Items of Other Comprehensive Income” The amendments to IAS 1 introduce a new disclosure terminology for other comprehensive income, which require additional disclosures in other comprehensive income. The items of other comprehensive income will be grouped into two categories: (a) items that will not be reclassified subsequently to profit or loss; and (b) items that will be reclassified subsequently to profit or loss when specific conditions are met. In addition, income tax on items of other comprehensive income is also required to be allocated on the same basis. The Company expects the aforementioned amendments will change the Company’s presentation on the statement of comprehensive income. 5) Amendments to IAS 19, “Employee Benefits” The amendments to IAS 19 change the accounting for defined benefit plans, which require the Company to recognize changes in defined benefit obligations or assets, to disclose the components of the defined benefit costs, to eliminate the corridor approach and to accelerate the recognition of past service cost. According to the amendments, all actuarial gains and losses will be recognized immediately through other comprehensive income; the past service cost, on the other hand, will be expensed immediately when it incurs and no longer be amortized over the average period before vested on a straight-line basis. In addition, the amendment also requires a broader disclosure in defined benefit plans. 2) IFRS 12, “Disclosure of Interests in Other Entities” 6) Amendments to IAS 36, “Recoverable Amount Disclosures for Non-Financial Assets” IFRS 12 is a standard that requires a broader disclosure in an entity’s interests in subsidiaries, joint arrangements, associates and unconsolidated entities. The objective of IFRS 12 is to specify the disclosure information provided by the entity that enables the users of financial statements in evaluating the nature of, and risks associated with, its interests in other entities and the effects of those interests on the entity’s financial assets and liabilities, as well as the involvement of the owners of noncontrolling interests towards the entity. The Company expects the application of IFRS 12 will result in more extensive disclosures of interests in other entities in the financial statements. The amendments to IAS 36 clarify that the Company is only required to disclose the recoverable amount in the year of impairment accrual or reversal. Moreover, if the recoverable amount of impaired assets is based on fair value less costs of disposal, the Company should also disclose the discount rate used. The Company expects the aforementioned amendments will result in a broader disclosure of recoverable amount for non-financial assets. c. Impact of the application of the new and revised standards, amendments and interpretations in issue but not yet effective on the consolidated financial statements of the Company 18 As of the date that the accompanying consolidated financial statements were approved and authorized for issue, the Company continues in evaluating the impact on its financial position and financial performance as a result of the initial adoption of the above standards or interpretations. The related impact will be disclosed when the Company completes the evaluation. Income and expenses of subsidiaries acquired or disposed of are included in the consolidated statement of comprehensive income from the effective date of acquisition and up to the effective date of disposal, as appropriate. Total comprehensive income of subsidiaries is attributed to the shareholders of the parent and to the noncontrolling interests even if this results in the noncontrolling interests having a deficit balance. 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements are the first Taiwan-IFRSs annual consolidated financial statements prepared for the year ended December 31, 2013. The Company’s date of transition to Taiwan-IFRSs is January 1, 2012, and the effect of the transition to Taiwan-IFRSs is disclosed in Note 43. 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: Statement of Compliance The accompanying consolidated financial statements have been prepared in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, the IFRSs, IASs, interpretations as well as related guidance translated by the ARDF endorsed by the FSC with the effective dates. Basis of Preparation The accompanying consolidated financial statements have been prepared on the historical cost basis except for financial instruments that are measured at fair values, as explained in the accounting policies below. Historical cost is generally based on the fair value of the consideration given in exchange for the assets. The opening balance sheet at the date of transition is prepared in accordance with the recognition and measurement required by IFRS 1. According to IFRS 1, the Company is required to apply each effective IFRS retrospectively in its opening balance sheet at the date of transition to Taiwan-IFRSs; except for optional exemptions and mandatory exceptions to such retrospective application provided under IFRS 1. The main optional exemptions the Company adopted are described in Note 43. Basis of Consolidation The basis for the consolidated financial statements The consolidated financial statements incorporate the financial statements of TSMC and entities controlled by TSMC (its subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by the Company. All intra-group transactions, balances, income and expenses are eliminated in full on consolidation. Changes in the Company’s ownership interests in subsidiaries that do not result in the Company losing control over the subsidiaries are accounted for as equity transactions. The carrying amounts of the Company’s interests and the noncontrolling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the noncontrolling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity and attributed to shareholders of the parent. When the Company loses control of a subsidiary, a gain or loss is recognized in profit or loss and is calculated as the difference between: a. the aggregate of the fair value of consideration received and the fair value of any retained interest at the date when control is lost; and b. the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiary and any noncontrolling interest. The Company shall account for all amounts recognized in other comprehensive income in relation to the subsidiary on the same basis as would be required if the Company had directly disposed of the related assets and liabilities. The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the cost on initial recognition of an investment in an associate. 19 The subsidiaries in the consolidated financial statements The detail information of the subsidiaries at the end of reporting period was as follows: Name of Investor Name of Investee Main Businesses and Products TSMC TSMC North America TSMC Japan Limited (TSMC Japan) TSMC Partners, Ltd. (TSMC Partners) Selling and marketing of integrated circuits and semiconductor devices Marketing activities Investing in companies involved in the design, manufacture, and other related business in the semiconductor industry TSMC Korea Limited (TSMC Korea) TSMC Europe B.V. (TSMC Europe) TSMC Global, Ltd. (TSMC Global) TSMC China Company Limited (TSMC China) Customer service and technical supporting activities Marketing and engineering supporting activities Investment activities Manufacturing and selling of integrated circuits at the order of and pursuant to product design VentureTech Alliance Fund III, L.P. (VTAF III) VentureTech Alliance Fund II, L.P. (VTAF II) Emerging Alliance Fund, L.P. (Emerging Alliance) specifications provided by customers Investing in new start-up technology companies Investing in new start-up technology companies Investing in new start-up technology companies Establishment and Operating Location San Jose, California, U.S.A. Yokohama, Japan Tortola, British Virgin Islands Seoul, Korea Amsterdam, the Netherlands Tortola, British Virgin Islands Shanghai, China Cayman Islands Cayman Islands Cayman Islands Xintec Inc. (Xintec) TSMC Solid State Lighting Ltd. (TSMC SSL) Wafer level chip size packaging service Engaged in researching, developing, designing, manufacturing and selling solid state lighting devices and Taoyuan, Taiwan Hsin-Chu, Taiwan related applications products and systems TSMC Solar Ltd. (TSMC Solar) Engaged in researching, developing, designing, manufacturing and selling renewable energy and saving Tai-Chung, Taiwan related technologies and products Percentage of Ownership December 31, 2013 December 31, 2012 January 1, 2012 Note 100% 100% 100% 100% 100% 100% 100% 50% 98% 99.5% b) 92% 99% 100% 100% 100% 100% 100% 100% 100% 50% 98% 99.5% 40% 95% 99% 100% 100% 100% 100% 100% 100% 100% 53% 98% 99.5% 40% 100% 100% - a) - a) a) - - - - a) - TSMC and TSMC GN aggregately have a controlling interest of 93% in TSMC SSL. TSMC and TSMC GN aggregately have a controlling interest of 99% in TSMC Solar. TSMC Guang Neng Investment, Ltd. Investment activities (TSMC GN) TSMC Partners TSMC Design Technology Canada Inc. Engineering support activities (TSMC Canada) TSMC Technology, Inc. (TSMC Technology) TSMC Development, Inc. (TSMC Development) InveStar Semiconductor Development Fund, Engineering support activities Investment activities Investing in new start-up technology companies Inc. (ISDF) InveStar Semiconductor Development Fund, Investing in new start-up technology companies Inc. (II) LDC. (ISDF II) Taipei, Taiwan 100% 100% - - Ontario, Canada Delaware, U.S.A. Delaware, U.S.A. Cayman Islands Cayman Islands 100% 100% 100% 97% 97% 100% 100% 100% 97% 97% 100% 100% 100% 97% 97% a) a) - a) a) TSMC Development WaferTech, LLC (WaferTech) Manufacturing, selling, testing and computer-aided designing of integrated circuits and other Washington, U.S.A. 100% 100% 100% - semiconductor devices VTAF III VTAF III, VTAF II and Emerging Alliance Mutual-Pak Technology Co., Ltd. (Mutual-Pak) Growth Fund Limited (Growth Fund) VentureTech Alliance Holdings, LLC (VTA 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 Taipei, Taiwan Cayman Islands Delaware, U.S.A. 58% 100% 100% 58% 100% 100% 57% 100% 100% a) a) a) Holdings) TSMC SSL TSMC Lighting North America, Inc. (TSMC Selling and marketing of solid state lighting related products Delaware, U.S.A. 100% 100% 100% a) Lighting NA) TSMC Solar TSMC Solar North America, Inc. Selling and marketing of solar related products (TSMC Solar NA) TSMC Solar Europe B.V. (TSMC Solar Europe) VentureTech Alliance Fund III, L.P. (VTAF III) Investing in solar related business Investing in new start-up technology companies Delaware, U.S.A. Amsterdam, the Netherlands Cayman Islands TSMC Solar Europe TSMC Solar Europe GmbH Selling of solar related products and providing customer service Hamburg, Germany 100% 100% 49% 100% 100% 100% 49% 100% 100% 100% 46% 100% a) a) - a) Note a: This is an immaterial subsidiary for which the consolidated financial statements are not audited by the Company’s independent accountants. Note b: TSMC has no power to govern the financial and operating policies of Xintec starting June 2013 due to the loss of power to cast the majority of votes at meetings of the Board of Directors. As a result, Xintec is no longer consolidated and is accounted for using the equity method. Please refer to Note 34. 20 Foreign Currencies The financial statements of each individual consolidated entity were expressed in the currency which reflected its primary economic environment (functional currency). The functional currency of TSMC and presentation currency of the consolidated financial statements are both New Taiwan Dollars (NT$). In preparing the consolidated financial statement, the operating results and financial positions of each consolidated entity are translated into NT$. In preparing the financial statements of each individual consolidated entity, transactions in currencies other than the entity’s functional currency (foreign currencies) are recognized at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Such exchange differences are recognized in profit or loss in the year in which they arise. Non-monetary items measured at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Exchange differences arising on the retranslation of non-monetary items are included in profit or loss for the year except for exchange differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognized directly in other comprehensive income, in which case, the exchange differences are also recognized directly in other comprehensive income. Non-monetary items that are measured in terms of historical cost in foreign currencies are not retranslated. For the purposes of presenting consolidated financial statements, the assets and liabilities of the Company’s foreign operations are translated into NT$ using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for the period. Exchange differences arising, if any, are recognized in other comprehensive income and accumulated in equity (attributed to noncontrolling interests as appropriate). Classification of Current and Noncurrent Assets and Liabilities Current assets are assets held for trading purposes and assets expected to be converted to cash, sold or consumed within one year from the end of the reporting period. Current liabilities are obligations incurred for trading purposes and obligations expected to be settled within one year from the end of the reporting period. Assets and liabilities that are not classified as current are noncurrent assets and liabilities, respectively. Cash Equivalents Cash equivalents, for the purpose of meeting short-term cash commitments, consist of highly liquid time deposits and investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss. Fair value is determined in the manner described in Note 36. Financial Assets Financial assets are classified into the following specified categories: Financial assets “at fair value through profit or loss” (FVTPL), “held-to-maturity” financial assets, “available-for-sale” financial assets and “loans and receivables”. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular way purchases or sales of financial assets are recognized and derecognized on a settlement date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. Financial assets at fair value through profit or loss Derivative financial instruments that do not meet the criteria for hedge accounting are stated at fair value, with any gains or losses arising on remeasurement recognized in profit or loss. Held-to-maturity financial assets Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity dates that the Company has the positive intent and ability to hold to maturity. Subsequent to initial recognition, held-to-maturity financial assets are measured at amortized cost using the effective interest method less any impairment. Available-for-sale financial assets Available-for-sale financial assets are non-derivative financial assets that are either designated as available-for-sale or are not classified as (a) loans and receivables, (b) held-to-maturity financial assets or (c) financial assets at fair value through profit or loss. Stocks and money market funds held by the Company that are traded in an active market are classified as available-for-sale financial assets and are stated at fair value at the end of each reporting period. Interest income from available-for-sale monetary financial assets and dividends on available-for-sale equity investments are recognized in profit or loss. Other changes in the carrying amount of available-for-sale financial assets are recognized in other comprehensive income. When the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously recognized in other comprehensive income is reclassified to profit or loss. Financial Instruments Financial assets and liabilities shall be recognized when the Company becomes a party to the contractual provisions of the instruments. Dividends on available-for-sale equity instruments are recognized in profit or loss when the Company’s right to receive the dividends is established. Financial assets and liabilities are initially recognized at fair values. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of Available-for-sale equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are measured at cost less any identified impairment losses at the end of each reporting period. Such equity instruments are subsequently remeasured at fair value when their fair value can be reliably measured, and the difference between the carrying amount and fair value is recognized in profit or loss or other comprehensive income. 21 Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables including cash and cash equivalents, notes and accounts receivable and other receivables are measured at amortized cost using the effective interest method, less any impairment, except for those loans and receivables with immaterial discounted effect. Derecognition of financial assets The Company derecognizes a financial asset only when the contractual rights to the cash flows from the financial asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the financial asset to another entity. Impairment of financial assets Financial assets, other than those carried at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Those financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial assets, their estimated future cash flows have been affected. For financial assets carried at amortized cost, such as trade receivables, assets that are assessed not to be impaired individually are, in addition, assessed for impairment on a collective basis. The Company assesses the collectability of receivables by performing the account aging analysis and examining current trends in the credit quality of its customers. For financial assets carried at amortized cost, the amount of the impairment loss is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate. For financial assets measured at amortized cost, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment loss was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the financial assets at the date the impairment loss is reversed does not exceed what the amortized cost would have been had the impairment loss not been recognized. When an available-for-sale financial asset is considered to be impaired, cumulative gains or losses previously recognized in other comprehensive income are reclassified to profit or loss in the year. In respect of available-for-sale equity instruments, impairment losses previously recognized in profit or loss are not reversed through profit or loss. Any increase in fair value subsequent to the recognition of an impairment loss is recognized in other comprehensive income and accumulated under the heading of unrealized gains or losses from available-for-sale financial assets. For financial assets carried at cost, the amount of the impairment loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss will not be reversed in subsequent periods. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. On derecognition of a financial asset in its entirety, the difference between the financial asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognized in other comprehensive income and accumulated in equity is recognized in profit or loss. Financial Liabilities and Equity Instruments Classification as debt or equity Debt and equity instruments issued by the Company are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument. Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Company are recognized at the proceeds received, net of direct issue costs. Financial liabilities Financial liabilities are subsequently measured either at amortized cost using effective interest method or at FVTPL. Financial liabilities measured at FVTPL are derivative financial instruments that do not meet the criteria for hedge accounting, and they are stated at fair value, with any gains or losses arising on remeasurement recognized in profit or loss. Financial liabilities other than those held for trading purposes and designated as at FVTPL are subsequently measured at amortized cost at the end of each reporting period. Derecognition of financial liabilities The Company derecognizes financial liabilities when, and only when, the Company’s obligations are discharged, cancelled or they expire. The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable is recognized in profit or loss. Derivative Financial Instruments The Company enters into a variety of derivative financial instruments to manage its market risk exposure to foreign exchange rate, interest rate and equity price fluctuation, including forward exchange contracts, cross currency swap contracts, interest rate swaps and forward stock contracts. Derivative financial instruments are initially recognized at fair value at the date the derivative contracts are entered into and are subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is recognized in profit or loss immediately unless the derivative financial instrument is 22 designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship. Any excess of the Company’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognized immediately in profit or loss. Changes in the fair value of derivative financial instruments that are designated and qualify as fair value hedges are recognized in profit or loss immediately, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The effective portion of changes in the fair value of derivative financial instruments that are designated and qualify as cash flow hedges is recognized in other comprehensive income and accumulated under the heading of cash flow hedges reserve. Amounts previously recognized in other comprehensive income and accumulated in equity are reclassified to profit or loss in the period when the hedged item is recognized in profit or loss. Inventories Inventories are stated at the lower of cost or net realizable value. Inventories are recorded at standard cost and adjusted to approximate weighted-average cost at the end of the reporting period. Net realizable value represents the estimated selling price of inventories less all estimated costs of completion and costs necessary to make the sale. Investments Accounted for Using Equity Method Investments accounted for using the equity method include investments in associates and interests in joint ventures. An associate is an entity over which the Company has significant influence and that is neither a subsidiary nor a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. A joint venture is a contractual arrangement whereby the Company and other parties undertake an economic activity that is subject to joint control (i.e. when the strategic financial and operating policy decisions relating to the activities of the joint venture require the unanimous consent of the parties sharing control). Joint venture arrangements that involve the establishment of a separate entity in which each venturer has an interest are referred to as jointly controlled entities. The operating results and assets and liabilities of associates and jointly controlled entities are incorporated in these consolidated financial statements using the equity method of accounting. Under the equity method, an investment in an associate or a jointly controlled entity is initially recognized in the consolidated statement of financial position at cost and adjusted thereafter to recognize the Company’s share of profit or loss and other comprehensive income of the associate and jointly controlled entity as well as the distribution received. The Company also recognized its share in the changes in the associates and jointly controlled entity. Any excess of the cost of acquisition over the Company’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities of an associate or a jointly controlled entity recognized at the date of acquisition is recognized as goodwill, which is included within the carrying amount of the investment. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount. Any impairment loss recognized forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognized to the extent that the recoverable amount of the investment subsequently increases. The Company discontinues the use of the equity method from the date when the Company ceases to have significant influence over an associate. When the Company retains an interest in the former associate, the Group measures the retained interest at fair value at that date. The difference between the carrying amount of the associate at the date the equity method was discontinued, and the fair value of any retained interest and any proceeds from disposing of a part interest in the associate is included in the determination of the gain or loss on disposal of the associate. In addition, the Company shall account for all amounts recognized in other comprehensive income in relation to that associate on the same basis as would be required if the associate had directly disposed of the related assets or liabilities. When the Company subscribes to additional shares in an associate or jointly controlled entity at a percentage different from its existing ownership percentage, the resulting carrying amount of the investment differs from the amount of the Company’s proportionate interest in the net assets of the associate or jointly controlled entity. The Company records such a difference as an adjustment to investments with the corresponding amount charged or credited to capital surplus. If the Company’s ownership interest is reduced due to the additional subscription to the shares of associate or joint controlled entity by other investors, the proportionate amount of the gains or losses previously recognized in other comprehensive income in relation to that associate or jointly controlled entity shall be reclassified to profit or loss on the same basis as would be required if the associate or jointly controlled entity had directly disposed of the related assets or liabilities. When a consolidated entity transacts with an associate or a joint controlled entity, profits and losses resulting from the transactions with the associate or jointly controlled entity are recognized in the Company’ consolidated financial statements only to the extent of interests in the associate or jointly controlled entity that are not owned by the Company. Property, Plant and Equipment Property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment. Costs include any incremental costs that are directly attributable to the construction or acquisition of the item of property, plant and equipment. Properties in the course of construction for production, supply or administrative purposes are carried at cost, less any recognized impairment loss. Such properties are classified to the appropriate categories of property, plant and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use. 23 Depreciation is recognized so as to write off the cost of the assets less their residual values over their useful lives, and it is computed using the straight-line method over the following estimated useful lives: land improvements - 20 years; buildings - 10 to 20 years; machinery and equipment - 3 to 5 years; office equipment - 3 to 15 years; and leased assets - 20 years. The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimates accounted for on a prospective basis. Land is not depreciated. Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets. However, when there is no reasonable certainty that ownership will be obtained by the end of the lease term, assets are depreciated over the shorter of the lease term and their useful lives. An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the assets. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in profit or loss. Leases Leases are classified as finance lease whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. The Company as lessor Rental income from operating leases is recognized on a straight-line basis over the term of the relevant lease. The Company as lessee Assets held under finance lease are initially recognized as assets of the Company at the fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the consolidated balance sheet as an obligation under finance lease. Lease payments are apportioned between finance expense and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Operating lease payments are recognized as an expense on a straight-line basis over the lease term. Intangible Assets Goodwill Goodwill arising on an acquisition of a business is carried at cost as established at the date of acquisition of the business less accumulated impairment losses, if any. Other intangible assets Other separately acquired intangible assets with finite useful lives are carried at cost less accumulated amortization and accumulated impairment losses. Amortization is recognized using the straight-line method over the following estimated useful lives: Technology license fees - the estimated life of the technology or the term of the technology transfer contract; software and system design costs - 2 to 5 years; patent and others - the economic life or contract period. The estimated useful life and amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Impairment of Tangible and Intangible Assets Goodwill Goodwill is not amortized and instead is tested for impairment annually, or more frequently when there is an indication that the cash generating unit may be impaired. For the purpose of impairment testing, goodwill is allocated to each of the Company’s cash-generating units or groups of cash-generating units that are expected to benefit from the synergies of the combination. If the recoverable amount of a cash-generating unit is less than its carrying amount, the difference is allocated first to reduce the carrying amount of any goodwill allocated to such cash generating unit and then to the other assets of the cash generating unit pro rata based on the carrying amount of each asset in the cash generating unit. Any impairment loss for goodwill is recognized directly in profit or loss. An impairment loss recognized for goodwill is not reversed in subsequent periods. Other tangible and intangible assets At the end of each reporting period, the Company reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. When it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs. When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, the carrying amount of the asset or cash-generating unit is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss. 24 When an impairment loss subsequently reverses, the carrying amount of the asset or a cash-generating unit is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset or cash-generating unit in prior years. A reversal of an impairment loss is recognized immediately in profit or loss. Provision Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that the Company will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. Revenue Recognition Revenue is measured at the fair value of the consideration received or receivable. Revenue is reduced for estimated customer returns, rebates and other similar allowances. Sale of goods Revenue from the sale of goods is recognized when the goods are delivered and titles have passed, at which time all the following conditions are satisfied: ● The Company has transferred to the buyer the significant risks and rewards of ownership of the goods; ● The Company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; ● The amount of revenue can be measured reliably; ● It is probable that the economic benefits associated with the transaction will flow to the Company; and ● The costs incurred or to be incurred in respect of the transaction can be measured reliably. In principle, payment term granted to customers is due 30 days from the invoice date or 30 days from the end of the month of when the invoice is issued. Due to the short term nature of the receivables from sale of goods with the immaterial discounted effect, the Company measures them at the original invoice amounts without discounting. Royalties, dividend and interest income Revenue from royalties is recognized on an accrual basis in accordance with the substance of the relevant agreement (provided that it is probable that the economic benefits will flow to the Company and the amount of revenue can be measured reliably). Dividend income from investments is recognized when the shareholder’s right to receive payment has been established, provided that it is probable that the economic benefits will flow to the Group and the amount of income can be measured reliably. Interest income from a financial asset is recognized when it is probable that the economic benefits will flow to the Company and the amount of income can be measured reliably. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable. Retirement Benefits For defined contribution retirement benefit plans, payments to the benefit plan are recognized as an expense when the employees have rendered service entitling them to the contribution. For defined benefit retirement benefit plans, the cost of providing benefit is recognized based on actuarial calculations. For defined benefit retirement benefit plans, the cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial calculations being carried out at year end. Actuarial gains and losses are reported in retained earnings in the period that they are recognized as other comprehensive income. Share-based Payment Arrangements The Company elected to take the optional exemption under IFRS 1 for the share-based payment transactions granted and vested before the date of transition to Taiwan-IFRSs. There were no stock options granted prior to but unvested at the date of transition. Please refer to the description in Note 43 b. The compensation costs of employee stock options that were granted after January 1, 2012 are measured at the fair value of the stock options at the grant date. The fair value of the stock option granted determined at the grant date of the stock options is expensed on a straight-line basis over the vesting period, based on the Company’s estimate of the number of stock options that will eventually vest, with a corresponding increase in capital surplus - employee stock option. The estimate is revised if subsequent information indicates that the number of stock options expected to vest differs from original estimates. Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. Current tax Income tax on unappropriated earnings (excluding earnings from foreign consolidated subsidiaries) at a rate of 10% is expensed in the year the shareholders approved the appropriation of earnings which is the year subsequent to the year the earnings are generated. Adjustments of prior years’ tax liabilities are added to or deducted from the current year’s tax provision. 25 Deferred tax Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences, net operating loss carryforwards and unused tax credits to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized. Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries and associates, and interests in joint ventures, except where the Company is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the deferred tax asset to be recovered. The deferred tax assets which originally not recognized is also reviewed at the end of each reporting period and recognized to the extent that it is probable that sufficient taxable profits will be available to allow all or part of the deferred tax asset to be recovered. Deferred tax liabilities and assets are measured at the tax rates that are expected to apply in the year in which the liability is settled or the asset is realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Company expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Current and deferred tax for the year Current and deferred tax are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income or directly in equity, in which case, the current and deferred tax are also recognized in other comprehensive income or directly in equity, respectively. 5. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION AND UNCERTAINTY In the application of the Company’s accounting policies, which are described in Note 4, the directors are required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the estimate is revised if the revision affects only that year, or in the year of the revision and future years if the revision affects both current and future years. The following are the critical judgments, apart from those involving estimations, that the directors have made in the process of applying the Company’s accounting policies and that have the most significant effect on the amounts recognized in the consolidated financial statements. Revenue Recognition The Company recognizes revenue when the conditions described in Note 4 are satisfied. The Company also records a provision for estimated future returns and other allowances in the same period the related revenue is recorded. Provision for estimated sales returns and other allowances is generally made and adjusted at a specific percentage based on historical experience and any known factors that would significantly affect the allowance, and our management periodically reviews the adequacy of the percentage used. Impairment of Tangible and Intangible Assets Other than Goodwill In the process of evaluating the potential impairment of tangible and intangible assets other than goodwill, the Company is required to make subjective judgments in determining the independent cash flows, useful lives, expected future revenue and expenses related to the specific asset groups with the consideration of the nature of semiconductor industry. Any changes in these estimates based on changed economic conditions or business strategies could result in significant impairment charges or reversal in future years. Impairment of Goodwill The assessment of impairment of goodwill requires the Company to make subjective judgment to determine the identified cash-generating units, allocate the goodwill to relevant cash-generating units and estimate the recoverable amount of relevant cash-generating units. Impairment Assessment on Investment Using Equity Method The Company assesses the impairment of investments accounted for using the equity method whenever triggering events or changes in circumstances indicate that an investment may be impaired and carrying value may not be recoverable. The Company measures the impairment based on a projected future cash flow of the investees, including the underlying assumptions of sales growth rate and capacity utilization rate formulated by such investees’ internal management team. The Company also takes into account market conditions and the relevant industry trends to ensure the reasonableness of such assumptions. Realization of Deferred Income Tax Assets Deferred tax assets are recognized to the extent that it is probable that future taxable profits will be available against which those deferred tax assets can be utilized. Assessment of the realization of the deferred tax assets requires the Company’s subjective judgment and estimate, including the future revenue growth and profitability, tax holidays, the amount of tax credits can be utilized and feasible tax planning strategies. Any changes in the global economic environment, the industry trends and relevant laws and regulations could result in significant adjustments to the deferred tax assets. 26 Valuation of Inventory Inventories are stated at the lower of cost or net realizable value, and the Company use judgment and estimate to determine the net realizable value of inventory at the end of each reporting period. The Company entered into derivative contracts 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. Due to the rapid technological changes, the Company estimates the net realizable value of inventory for obsolescence and unmarketable items at the end of reporting period and then writes down the cost of inventories to net realizable value. The net realizable value of the inventory is mainly determined based on assumptions of future demand within a specific time horizon. Recognition and Measurement of Defined Benefit Plans Accrued pension liabilities and the resulting pension expenses under defined benefit pension plans are calculated using the Projected Unit Credit Method. Actuarial assumptions comprise the discount rate, rate of employee turnover, and long-term average future salary increase. Changes in economic circumstances and market conditions will affect these assumptions and may have a material impact on the amount of the expense and the liability. 6. CASH AND CASH EQUIVALENTS Cash and deposits in banks Repurchase agreements collateralized by short-term commercial paper Repurchase agreements collateralized by corporate bonds Repurchase agreements collateralized by government bonds December 31, 2013 December 31, 2012 January 1, 2012 $ 238,014,580 $ 140,072,294 $ 139,637,363 2,395,644 1,809,344 475,879 349,341 2,691,042 297,911 - - 3,834,914 $ 242,695,447 $ 143,410,588 $ 143,472,277 7. FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS Outstanding forward exchange contracts consisted of the following: December 31, 2013 Sell NT$/Buy EUR Sell NT$/Buy US$ Sell US$/Buy EUR Sell US$/Buy JPY Sell US$/Buy RMB December 31, 2012 Sell NT$/Buy EUR Sell NT$/Buy US$ Sell NT$/Buy JPY Sell US$/Buy NT$ Sell US$/Buy RMB January 1, 2012 Sell EUR/Buy NT$ Sell NT$/Buy US$ Sell RMB/Buy US$ Sell US$/Buy EUR Sell US$/Buy JPY Sell US$/Buy NT$ Maturity Date Contract Amount (In Thousands) January 2014 January 2014 January 2014 January 2014 January 2014 to February 2014 NT$4,514,314/EUR110,000 NT$683,749/US$22,800 US$340,134/EUR248,000 US$341,023/JPY35,754,801 US$138,000/RMB841,492 January 2013 January 2013 January 2013 January 2013 to March 2013 January 2013 NT$9,417,062/EUR246,000 NT$590,403/US$20,400 NT$44,110/JPY130,000 US$13,700/NT$398,239 US$20,000/RMB124,735 January 2012 January 2012 to February 2012 January 2012 January 2012 January 2012 January 2012 to February 2012 EUR38,600/NT$1,528,206 NT$163,491/US$5,400 RMB1,118,705/US$177,000 US$2,082/EUR1,591 US$3,335/JPY259,830 US$16,900/NT$510,122 Derivative financial assets Forward exchange contracts Cross currency swap contracts Derivative financial liabilities Forward exchange contracts Cross currency swap contracts December 31, 2013 December 31, 2012 January 1, 2012 Outstanding cross currency swap contracts consisted of the following: $ 90,353 - $ 38,607 947 $ 15,360 - $ 90,353 $ 39,554 $ 15,360 $ 29,573 4,177 $ 12,174 3,451 $ 13,623 119 $ 33,750 $ 15,625 $ 13,742 Maturity Date December 31, 2013 Contract Amount (In Thousands) Range of Interest Rates Paid Range of Interest Rates Received January 2014 NT$1,639,215/US$55,080 - 1.03%-2.00% December 31, 2012 January 2013 January 2013 January 1, 2012 January 2012 NT$1,083,139/US$37,280 US$275,000/NT$7,986,190 - 0.14%-0.17% NT$420,431/US$13,880 - 0.06% - 0.48% 27 8. AVAILABLE-FOR-SALE FINANCIAL ASSETS Publicly traded stocks Money market funds December 31, 2013 December 31, 2012 January 1, 2012 $ 59,481,569 1,183 $ 41,160,437 1,443 $ 3,306,248 2,522 The Company’s investments in publicly traded stocks are exposed to the risk of market price fluctuations. Accordingly, the Company entered into stock forward contracts to sell shares at a contracted price in a specific future period in order to hedge the fair value risk caused by changes in equity prices. The outstanding stock forward contracts consisted of the following: $ 59,482,752 $ 41,161,880 $ 3,308,770 Contract Amount (In Thousands) Contract Price Current portion Noncurrent portion $ 760,793 58,721,959 $ 2,410,635 38,751,245 $ 3,308,770 - $ 59,482,752 $ 41,161,880 $ 3,308,770 December 31, 2013 NT$37,431,626 (US$1,256,095) Determined by the specific percentage of spot price on the trade date In October 2012, the Company acquired 5% of the outstanding equity of ASML Holding N.V. (ASML) for EUR837,816 thousand with a lock-up period of 2.5 years starting from the acquisition date. (Note 40e) In the second quarter of 2012, the Company recognized an impairment loss on some of the foreign publicly traded stocks in the amount of NT$2,677,529 thousand due to the significant decline in fair value. In addition, the Company’s long-term bank loans bear floating interest rates; therefore, changes in the market interest rate may cause future cash flows to be volatile. Accordingly, the Company entered into an interest rate swap contract in order to hedge cash flow risk caused by floating interest rates. The interest rate swap contract of the Company was due in August 2012. The contract information was as follows: Contract Amount (In Thousands) Maturity Date Range of Interest Rates Paid Range of Interest Rates Received 9. HELD-TO-MATURITY FINANCIAL ASSETS January 1, 2012 Commercial paper Corporate bonds Government bonds Current portion Noncurrent portion December 31, 2013 December 31, 2012 January 1, 2012 $ 1,795,949 - - $ - 5,056,973 - $ - 8,614,527 454,320 $ 1,795,949 $ 5,056,973 $ 9,068,847 $ 1,795,949 - $ 5,056,973 - $ 3,825,680 5,243,167 $ 1,795,949 $ 5,056,973 $ 9,068,847 10. HEDGING DERIVATIVE FINANCIAL INSTRUMENTS NT$80,000 August 31, 2012 1.38% 0.63%-0.86% For the year ended December 31, 2012, the amount recognized in other comprehensive income and accumulated under the heading of cash flow hedges reserve from the above interest rate swap contract amounted to a net gain of NT$5 thousand; the amount reclassified from equity and recognized as a loss from the above interest rate swap contract amounted to a net loss of NT$227 thousand, which was included under finance costs in the consolidated statements of comprehensive income. 11. NOTES AND ACCOUNTS RECEIVABLE, NET Notes and accounts receivable Allowance for doubtful receivables $ 72,136,514 (486,588) $ 58,257,798 (480,212) $ 46,321,240 (490,952) December 31, 2013 December 31, 2012 January 1, 2012 December 31, 2013 December 31, 2012 January 1, 2012 Notes and accounts receivable, net $ 71,649,926 $ 57,777,586 $ 45,830,288 Financial liabilities Current Cash flow hedges Interest rate swap contracts $ - $ - $ 232 Financial liabilities Noncurrent Fair value hedges Stock forward contracts $ 5,481,616 $ - $ - In principle, the payment term granted to customers is due 30 days from the invoice date or 30 days from the end of the month of when the invoice is issued. The allowance for doubtful receivables is assessed by reference to the collectability of receivables by performing the account aging analysis, historical experience and current financial condition of customers. 28 Except for those impaired, for the rest of the notes and accounts receivable, the account aging analysis at the end of the reporting period is summarized in the following table. Notes and accounts receivable include amounts that are past due but for which the Company has not recognized a specific allowance for doubtful receivables after the assessment since there has not been a significant change in the credit quality of its customers and the amounts are still considered recoverable. Aging analysis of notes and accounts receivable, net Neither past due nor impaired Past due but not impaired Past due within 30 days December 31, 2013 December 31, 2012 January 1, 2012 $ 64,112,564 $ 47,528,952 $ 39,362,390 7,537,362 10,248,634 6,467,898 $ 71,649,926 $ 57,777,586 $ 45,830,288 12. INVENTORIES Finished goods Work in process Raw materials Supplies and spare parts December 31, 2013 December 31, 2012 January 1, 2012 $ 7,245,209 26,033,625 2,435,269 1,780,790 $ 6,244,824 25,713,217 3,864,105 2,008,352 $ 3,347,849 17,940,960 1,808,615 1,743,158 $ 37,494,893 $ 37,830,498 $ 24,840,582 Write-down of inventories to net realizable value in the amount of NT$664,662 thousand and NT$1,558,915 thousand, respectively, were included in the cost of revenue for the years ended December 31, 2013 and 2012. Movements of the allowance for doubtful receivables 13. FINANCIAL ASSETS CARRIED AT COST Balance, beginning of year Provision Write-off Effect of deconsolidation of subsidiary Effect of exchange rate changes Years Ended December 31 2013 2012 $ 480,212 9,436 - (3,157) 97 $ 490,952 450 (11,083) - (107) Balance, end of year $ 486,588 $ 480,212 Aging analysis of accounts receivable that is individually determined to be impaired Not past due Past due 1-30 days Past due 31-60 days Past due 61-120 days Past due over 121 days December 31, 2013 December 31, 2012 January 1, 2012 $ 38 276 80 158 7,824 $ 160,354 2,863 - - 3,157 $ 81,017 24,351 4,684 - 9,769 $ 8,376 $ 166,374 $ 119,821 The Company held bank guarantees and other credit enhancements as collateral for certain impaired accounts receivables. As of December 31, 2013 and 2012 and January 1, 2012, the amount of the bank guarantee and other credit enhancements were US$11 thousand, US$1,000 thousand and US$2,962 thousand, respectively. Non-publicly traded stocks Mutual funds $ 1,865,078 280,513 $ 3,314,713 290,364 $ 4,004,314 310,691 December 31, 2013 December 31, 2012 January 1, 2012 $ 2,145,591 $ 3,605,077 $ 4,315,005 Since there is a wide range of estimated fair values of the Company’s investments in non-publicly traded stocks, the Company concludes that the fair value cannot be reliably measured and therefore should be measured at the cost less any impairment. The Company recognized impairment loss on financial assets carried at cost in the amount of NT$1,538,888 thousand and NT$367,399 thousand for the years ended December 31, 2013 and 2012, respectively. 14. INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD Investments accounted for using the equity method consisted of the following: Associates Jointly controlled entities $ 24,823,807 3,492,453 $ 20,325,277 3,035,641 $ 22,033,567 2,853,364 December 31, 2013 December 31, 2012 January 1, 2012 $ 28,316,260 $ 23,360,918 $ 24,886,931 29 a. Investments in associates Associates consisted of the following: Name of Associate Principal Activities Place of Incorporation and Operation Carrying Amount % of Ownership and Voting Rights Held by the Company December 31, 2013 December 31, 2012 January 1, 2012 December 31, 2013 December 31, 2012 January 1, 2012 Research, design, development, manufacture, packaging, testing and sale of memory integrated circuits, LSI, VLSI and related parts Hsinchu, Taiwan $ 10,556,348 $ 9,406,597 $ 8,985,340 Vanguard International Semiconductor Corporation (VIS) Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) Motech Industries, Inc. (Motech) Xintec Global Unichip Corporation (GUC) Fabrication and supply of integrated circuits Singapore Manufacturing and sales of solar cells, crystalline silicon solar Taipei, Taiwan cell, and test and measurement instruments and design and construction of solar power systems Wafer level chip size packaging service Researching, developing, manufacturing, testing and marketing of integrated circuits Taoyuan, Taiwan Hsinchu, Taiwan Mcube Inc. (Mcube) Research, development, and sale of micro-semiconductor device Delaware, U.S.A. 7,457,733 3,887,462 1,866,123 1,056,141 - 6,710,956 2,992,899 - 1,214,825 - 6,289,429 5,609,002 - 1,149,796 - $ 24,823,807 $ 20,325,277 $ 22,033,567 39% 39% 20% 40% 35% - 40% 39% 20% - 35% 25% 39% 39% 20% - 35% 25% In the fourth quarter of 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. Subsequently, as the recoverable amount of the aforementioned investments was higher than its carrying amount, the impairment loss of NT$1,186,674 thousand recognized in prior year was reversed in the fourth quarter of 2013. Total assets Total liabilities Net assets December 31, 2013 December 31, 2012 January 1, 2012 $ 96,689,523 (28,141,625) $ 82,348,735 (21,683,504) $ 87,282,437 (20,948,855) $ 68,547,898 $ 60,665,231 $ 66,333,582 Since TSMC did not participate in Mcube’s issuance of new shares in the third quarter of 2013, the Company’s percentage of ownership in Mcube decreased to 18%. As a result, the Company evaluated and concluded that the Company did not exercise significant influence over Mcube. Therefore Mcube is no longer accounted for using the equity method. Further, such investment was reclassified to financial assets carried at cost. The Company also measured the fair value of retained interest in Mcube when the significant influence was lost, which has no difference with the carrying amount; accordingly, the Company did not recognize any gain or loss. TSMC has no power to govern the financial and operating policies of Xintec starting June 2013 due to the loss of power to cast the majority of votes at meetings of the Board of Directors. As a result, Xintec is no longer consolidated and is accounted for using the equity method. Please refer to Note 34. The summarized financial information in respect of the Company’s associates is set out below. The summarized financial information below represents amounts shown in the associates’ financial statements prepared in accordance with IFRSs, IASs, interpretations as well as related guidance translated by the ARDF endorsed by the FSC with the effective dates, which is also adjusted by the Company using the equity method of accounting. The Company’s share of net assets of associates $ 24,823,807 $ 20,325,277 $ 22,033,567 Net revenue Net income Other comprehensive income (loss) The Company’s share of profits of associates The Company’s share of other comprehensive income (loss) of Years Ended December 31 2013 2012 $ 67,752,079 $ 8,325,722 $ 168,081 $ 3,518,495 $ 55,746,115 $ 175,900 $ (24,553) $ 1,456,645 associates $ 18,554 $ (39,238) The market prices of the investments accounted for using the equity method in publicly traded stocks calculated by the closing price at the end of the reporting period are summarized as follows: Name of Associate December 31, 2013 December 31, 2012 January 1, 2012 VIS Motech GUC $ 22,239,112 $ 5,345,015 $ 3,454,902 $ 12,658,703 $ 2,383,824 $ 4,692,130 $ 6,627,758 $ 4,645,176 $ 4,645,442 30 b. Investments in jointly controlled entities Jointly controlled entities consisted of the following: Name of Jointly Controlled Entity Principal Activities Place of Incorporation and Operation Carrying Amount % of Ownership and Voting Rights Held by the Company December 31, 2013 December 31, 2012 January 1, 2012 December 31, 2013 December 31, 2012 January 1, 2012 VisEra Holding Company (VisEra Holding) Investing in companies involved in the design, manufacturing and other related businesses in the semiconductor industry Cayman Islands $ 3,492,453 $ 3,035,641 $ 2,853,364 49% 49% 49% The summarized financial information in respect of the Company’s jointly controlled entity is set out below. The summarized financial information below represents amounts shown in the jointly controlled entity’s financial statements prepared in accordance with IFRSs, IASs, interpretations as well as related guidance translated by the ARDF endorsed by the FSC with the effective dates, which is also adjusted by the Company using the equity method of accounting. Current assets Noncurrent assets Current liabilities Noncurrent liabilities December 31, 2013 December 31, 2012 January 1, 2012 $ 2,335,612 $ 1,564,485 $ 407,184 $ 460 $ 1,887,122 $ 1,780,903 $ 631,803 $ 581 $ 1,616,916 $ 1,732,247 $ 495,066 $ 733 Years Ended December 31 2013 2012 Net revenue Income from operations Net income Other comprehensive income (loss) Total comprehensive income Income tax expense The Company’s share of profits of joint venture The Company’s share of other comprehensive income (loss) of joint venture $ 1,801,619 $ 474,787 $ 453,536 $ (78,294) $ 375,242 $ 64,311 $ 453,536 $ (78,294) $ 1,869,049 $ 522,486 $ 617,084 $ 92,986 $ 710,070 $ 135,247 $ 617,084 $ 92,986 15. PROPERTY, PLANT AND EQUIPMENT Land and land improvements Buildings Machinery and equipment Office equipment Assets under finance leases Equipment under installation and construction in progress December 31, 2013 December 31, 2012 January 1, 2012 $ 3,582,717 103,948,570 404,706,105 7,836,261 418,467 272,173,793 $ 1,159,755 85,610,120 404,382,298 6,907,376 438,663 119,063,976 $ 1,185,573 71,915,740 294,814,381 5,148,538 493,945 116,863,976 $ 792,665,913 $ 617,562,188 $ 490,422,153 31 Cost Land and land improvements Buildings Machinery and equipment Office equipment Assets under finance leases Accumulated depreciation and impairment Land improvements Buildings Machinery and equipment Office equipment Assets under finance leases Equipment under installation and construction in progress Cost Land and land improvements Buildings Machinery and equipment Office equipment Assets under finance leases Accumulated depreciation and impairment Land improvements Buildings Machinery and equipment Office equipment Assets under finance leases Equipment under installation and construction in progress Balance, Beginning of Year Additions Disposals Reclassification Effect of Deconsolidation of Subsidiary Effect of Exchange Rate Changes Balance, End of Year Year Ended December 31, 2013 $ 1,527,124 197,411,851 1,279,893,177 20,067,943 766,732 1,499,666,827 $ 3,212,000 31,869,046 140,223,121 3,791,109 - $ 179,095,276 $ - - (2,925,145) (788,080) - $ (3,713,225) $ - 3,797 360 - - $ 4,157 $ (772,029) (986,205) (5,630,854) (1,055,809) - $ (8,444,897) $ 19,814 884,247 2,359,135 46,869 37,698 $ 3,347,763 $ 3,986,909 229,182,736 1,413,919,794 22,062,032 804,430 1,669,955,901 367,369 111,801,731 875,510,879 13,160,567 328,069 1,001,168,615 119,063,976 $ 27,069 13,183,558 138,314,235 2,413,652 41,333 $ 153,979,847 $ 154,706,858 $ - - (2,809,185) (786,464) - $ (3,595,649) $ - $ - - - - - $ - $ - $ - (226,908) (3,656,326) (599,483) - $ (4,482,717) $ (1,632,860) $9,754 475,785 1,854,086 37,499 16,561 $ 2,393,685 $ 35,819 404,192 125,234,166 1,009,213,689 14,225,771 385,963 1,149,463,781 272,173,793 $ 617,562,188 $ 792,665,913 Balance, Beginning of Year Additions Disposals Impairment Reclassification Effect of Exchange Rate Changes Balance, End of Year Year Ended December 31, 2012 $ 1,541,128 172,997,391 1,057,926,529 17,041,306 791,480 1,250,297,834 $ 18,500 25,183,927 226,497,664 3,680,707 - $ 255,380,798 $ - (54,456) (2,104,900) (563,454) - $ (2,722,810) $ - - - - - $ - $ - (11,074) 11,040 34 - $ - $ (32,504) (703,937) (2,437,156) (90,650) (24,748) $ (3,288,995) $ 1,527,124 197,411,851 1,279,893,177 20,067,943 766,732 1,499,666,827 355,555 101,081,651 763,112,148 11,892,768 297,535 876,739,657 116,863,976 $ 26,983 11,154,790 116,070,821 1,875,785 40,135 $ 129,168,514 $ 2,308,355 $ - (44,354) (1,966,751) (555,485) - $ (2,566,590) $ - $ - - 422,323 22,182 - $444,505 $ - $ - (164) 158 6 - $ - $ (8,525) $ (15,169) (390,192) (2,127,820) (74,689) (9,601) $ (2,617,471) $ (99,830) 367,369 111,801,731 875,510,879 13,160,567 328,069 1,001,168,615 119,063,976 $ 490,422,153 $ 617,562,188 32 The significant part of the Company’s buildings includes main plants, mechanical and electrical power equipment and clean rooms, and the related depreciation is calculated using the estimated useful lives of 20 years, 10 years and 10 years, respectively. For the year ended December 31, 2012, the Company recognized impairment loss of NT$444,505 thousand related to property, plant and equipment of the foundry reportable segment since the carrying amount of some of property, plant and equipment is expected to be unrecoverable. The Company entered into agreements to lease buildings from December 2003 to November 2018 that qualify as finance leases. Future minimum lease gross payments were as follows: 16. INTANGIBLE ASSETS December 31, 2013 December 31, 2012 January 1, 2012 Goodwill Technology license fees Software and system design costs Patent and others $ 5,627,517 1,103,161 3,647,670 1,112,035 $ 5,523,707 1,461,893 2,968,942 1,005,027 $ 5,693,999 1,682,892 2,366,483 1,118,189 $ 11,490,383 $ 10,959,569 $ 10,861,563 Year Ended December 31, 2013 Balance, Beginning of Year Additions Disposals Reclassification Effect of Deconsolidation of Subsidiary Effect of Exchange Rate Changes Balance, End of Year December 31, 2013 December 31, 2012 January 1, 2012 Cost Minimum lease payments Not later than 1 year Later than 1 year and not later than 5 years Later than five years Less: Future finance expenses $ 28,376 850,703 - 879,079 94,040 $ 27,042 108,168 729,566 864,776 108,471 $ - 223,296 780,962 1,004,258 133,265 Present value of minimum lease payments $ 785,039 $ 756,305 $ 870,993 Present value of minimum lease payments Not later than 1 year Later than 1 year and not later than 5 years Later than five years $ 27,684 757,355 - $ 26,382 100,821 629,102 $ - 213,411 657,582 $ 785,039 $ 756,305 $ 870,993 Current portion Noncurrent portion $ 8,809 776,230 $ 8,190 748,115 $ - 870,993 $ 785,039 $ 756,305 $ 870,993 There was no capitalization of borrowing costs for the year ended December 31, 2013. During the year ended December 31, 2012, the Company capitalized the borrowing costs directly attributable to the acquisition or construction of property, plant and equipment. For the year ended December 31, 2012, the amount of capitalized borrowing costs was NT$6,442 thousand and the capitalized interest rate was 1.08%-1.20%. Goodwill Technology license fees Software and system design costs Patent and others Accumulated amortization Technology license fees Software and system design costs Patent and others $ 5,523,707 $ - $ - $ - $ - (113,340) 4,590,548 (29,564) - - 15,095,421 3,094,664 28,304,340 2,140,675 578,901 (25,335) (42,089) $ 2,719,576 $ (41,795) $ (39,662) $ (180,764) (111,105) 101,007 (18,246) (23,549) $ 103,810 (2,816) $ 5,627,517 4,444,828 5,395 20,462 $ 126,851 17,086,805 3,729,396 30,888,546 $ 3,128,655 $ 282,414 $ - $ - $ (66,587) $ (2,815) $ 3,341,667 1,344,339 575,269 (12,661) (25,195) $ 2,202,022 $ (41,523) $ (5,941) $ (104,443) (17,974) (23,549) (5,941) - 12,126,479 2,089,637 17,344,771 $ 10,959,569 4,893 1,199 $ 3,277 13,439,135 2,617,361 19,398,163 $ 11,490,383 Year Ended December 31, 2012 Additions Disposals Reclassification Balance, Beginning of Year Effect of Exchange Rate Changes Balance, End of Year Cost Goodwill Technology license fees Software and system design costs Patent and others Accumulated amortization Technology license fees Software and system design costs Patent and others $ 5,693,999 $ - $ - $ - $ (170,292) (2,227) (4,861) (3,663) $ 2,253,722 $ (141,227) $ 200,106 $ (181,043) 4,370,173 13,438,579 2,670,031 26,172,782 31,022 1,795,360 427,340 - (48,193) (93,034) 191,580 (85,464) 93,990 $ 442,467 $ - $ - $ (1,093) (4,365) (538) $ 2,180,775 $ (141,227) $ - $ (5,996) 1,143,493 594,815 (48,193) (93,034) (36,552) 36,552 2,687,281 11,072,096 1,551,842 15,311,219 $ 10,861,563 $ 5,523,707 4,590,548 15,095,421 3,094,664 28,304,340 3,128,655 12,126,479 2,089,637 17,344,771 $ 10,959,569 33 The Company’s goodwill has been tested for impairment at the end of the annual reporting period and the recoverable amount is determined based on the value in use. The value in use was calculated based on the cash flow forecast from the financial budgets covering the future five-year period, and the Company used annual discount rate of 8.50% and 9.00% in its test of impairment as of December 31, 2013 and 2012, respectively, to reflect the relevant specific risk in the cash-generating unit. For the years ended December 31, 2013 and 2012, the Company did not recognize any impairment loss on goodwill. Year ended December 31, 2013 Balance, beginning of year Provision made Payment Effect of deconsolidation of subsidiary Effect of exchange rate changes Sales Returns and Allowances Warranties Total $ 6,038,003 6,633,290 (5,042,752) (37,748) 12,988 $ 4,891 6,162 (890) - 289 $ 6,042,894 6,639,452 (5,043,642) (37,748) 13,277 17. OTHER ASSETS Tax receivable Prepaid expenses Long-term receivable Others Current portion Noncurrent portion 18. SHORT-TERM LOANS Unsecured loans Amount Original loan content US$ (in thousands) Annual interest rate Maturity date 19. PROVISIONS December 31, 2013 December 31, 2012 January 1, 2012 $ 1,781,376 1,081,957 820,000 770,468 $ 1,565,104 1,080,236 767,800 608,412 $ 708,891 1,436,416 785,400 550,053 $ 4,453,801 $ 4,021,552 $ 3,480,760 $ 2,984,224 1,469,577 $ 2,786,408 1,235,144 $ 2,174,014 1,306,746 $ 4,453,801 $ 4,021,552 $ 3,480,760 December 31, 2013 December 31, 2012 January 1, 2012 Balance, end of year $ 7,603,781 $ 10,452 $ 7,614,233 Year ended December 31, 2012 Balance, beginning of year Provision made Payment Effect of exchange rate changes $ 5,068,263 7,187,023 (6,211,170) (6,113) $ 2,889 2,048 - (46) $ 5,071,152 7,189,071 (6,211,170) (6,159) Balance, end of year $ 6,038,003 $ 4,891 $ 6,042,894 Provisions for sales returns and allowances are estimated based on historical experience, management judgment, and any known factors that would significantly affect the returns and allowances, and are recognized as a reduction of revenue in the same year of the related product sales. The provision for warranties represents the present value of the Company’s best estimate of the future outflow of the economic benefits that will be required under the Company’s obligations for warranties. The estimate has been made on the basis of historical warranty trends of business and may vary as a result of new materials, altered manufacturing processes or other events affecting product quality. $ 15,645,000 $ 34,714,929 $ 25,926,528 20. BONDS PAYABLE $ 525,000 0.38%-0.42% Due in January 2014 $ 1,195,500 0.39%-0.58% Due in January 2013 $ 856,000 0.45%-1.00% Due by February 2012 Domestic unsecured bonds Overseas unsecured bonds Less: Discounts on bonds payable Total Current portion Noncurrent portion December 31, 2013 December 31, 2012 January 1, 2012 $ 166,200,000 44,700,000 210,900,000 132,375 $ 80,000,000 - 80,000,000 - $ 22,500,000 - 22,500,000 - $ 210,767,625 $ 80,000,000 $ 22,500,000 $ - 210,767,625 $ - 80,000,000 $ 4,500,000 18,000,000 $ 210,767,625 $ 80,000,000 $ 22,500,000 Sales returns and allowances Warranties $ 7,603,781 10,452 $ 6,038,003 4,891 $ 5,068,263 2,889 December 31, 2013 December 31, 2012 January 1, 2012 $ 7,614,233 $ 6,042,894 $ 5,071,152 Current portion Noncurrent portion $ 7,603,781 10,452 $ 6,038,003 4,891 $ 5,068,263 2,889 $ 7,614,233 $ 6,042,894 $ 5,071,152 34 The major terms of domestic unsecured bonds are as follows: 21. LONG-TERM BANK LOANS Issuance Tranche Issuance Period Total Amount Coupon Rate Repayment and Interest Payment 100-1 100-2 101-1 101-2 101-3 101-4 102-1 102-2 102-3 102-4 Domestic 5th A B A B A B A B - A B C A B C A B A B A B C D E F C September 2011 to September 2016 $ 10,500,000 1.40% Bullet repayment; interest payable September 2011 to September 2018 January 2012 to January 2017 January 2012 to January 2019 August 2012 to August 2017 August 2012 to August 2019 September 2012 to September 2017 September 2012 to September 2019 October 2012 to October 2022 January 2013 to January 2018 January 2013 to January 2020 January 2013 to January 2023 February 2013 to February 2018 February 2013 to February 2020 February 2013 to February 2023 July 2013 to July 2020 July 2013 to July 2023 August 2013 to August 2017 August 2013 to August 2019 September 2013 to September 2016 September 2013 to September 2017 September 2013 to March 2019 7,500,000 10,000,000 7,000,000 9,900,000 9,000,000 12,700,000 9,000,000 4,400,000 10,600,000 10,000,000 3,000,000 6,200,000 11,600,000 3,600,000 10,200,000 3,500,000 4,000,000 8,500,000 1,500,000 1,500,000 1,400,000 September 2013 to March 2021 September 2013 to March 2023 September 2013 to September 2023 2,600,000 5,400,000 2,600,000 1.63% 1.29% 1.46% 1.28% 1.40% 1.28% 1.39% 1.53% 1.23% 1.35% 1.49% 1.23% 1.38% 1.50% 1.50% 1.70% 1.34% 1.52% 1.35% 1.45% 1.60% 1.85% 2.05% 2.10% annually 〃 〃 〃 〃 〃 〃 〃 〃 〃 〃 〃 〃 〃 〃 〃 〃 〃 〃 〃 〃 Bullet repayment; interest payable annually (interest for the six months prior to maturity will accrue on the basis of actual days and be repayable at maturity) 〃 〃 Bullet repayment; interest payable annually Bank loans for working capital: Repayable from April 2016 in 16 quarterly installments, annual interest rate at 3.63% in 2013 $ 40,000 $ - $ - December 31, 2013 December 31, 2012 January 1, 2012 Repayable in full in one lump sum payment in June 2016, however, reflective of a prepayment of NT$100,000 thousand in September 2012, annual interest rate at 1.08%-1.21% in 2012 Repayable in full in one lump sum payment in March 2015, however, reflective of a prepayment of NT$50,000 thousand in August 2012, annual interest rate at 1.16%-1.18% in 2012 Repayable from July 2012 in 16 quarterly installments, annual interest rate at 1.21%-1.24% in 2012 Repayable from September 2012 in 16 quarterly installments, annual interest rate at 1.21%-1.24% in 2012 Repayable from October 2013 in 16 quarterly installments, annual interest rate at 1.23%-1.24% in 2012 Current portion Noncurrent portion - - - - - 550,000 650,000 450,000 262,500 175,000 50,000 500,000 300,000 200,000 - $ 40,000 $ 1,487,500 $ 1,650,000 $ - 40,000 $ 128,125 1,359,375 $ 62,500 1,587,500 $ 40,000 $ 1,487,500 $ 1,650,000 As of December 31, 2013, in relation to the deconsolidation of Xintec in June 2013 (refer to Note 34), long-term bank loans of Xintec have been derecognized. 22. OTHER LONG-TERM PAYABLES January 2002 to January 2012 4,500,000 3.00% 〃 December 31, 2013 December 31, 2012 January 1, 2012 The major terms of foreign unsecured bonds are as follows: Issuance Period Total Amount (US$ in Thousands) Coupon Rate Repayment and Interest Payment April 2013 to April 2016 April 2013 to April 2018 $ 350,000 1,150,000 0.95% 1.625% Bullet repayment; interest payable semi-annually 〃 Payables for software and system design costs Payables for acquisition of property, plant and equipment Payables for technology transfer $ 54,000 - - $ 113,000 825,447 29,038 $ - 3,399,855 - Current portion (classified under accrued expenses and other current liabilities) Noncurrent portion $ 54,000 $ 967,485 $ 3,399,855 $ 18,000 36,000 $ 913,485 54,000 $ 3,399,855 - $ 54,000 $ 967,485 $ 3,399,855 TSMC entered into an agreement with a counterparty in 2003 whereby TSMC China purchased in 2004 certain property, plant and equipment. The obligations under the aforementioned agreement were fully paid in July 2013. 35 23. RETIREMENT BENEFIT PLANS a. Defined contribution plans The plan under the Labor Pension Act (the “Act”) is deemed a defined contribution plan. Pursuant to the Act, TSMC, 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 Technology, TSMC Solar NA and TSMC Solar Europe GmbH also make monthly contributions at certain percentages of the basic salary of their employees. Accordingly, the Company recognized expenses of NT$1,590,414 thousand and NT$1,403,507 thousand in the consolidated statements of comprehensive income for the years ended December 31, 2013 and 2012, respectively. b. Defined benefit plans TSMC, 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. TSMC revised its defined benefit plan in the fourth quarter of 2013 to set the employee’s mandatory retirement age. Such plan changes have reflected in the actuarial results as of December 31, 2013. The actuarial valuations of plan assets and the present value of the defined benefit obligation were carried out by qualified actuaries. The principal assumptions of the actuarial valuation were as follows: Discount rate Future salary rate increase Expected rate of return on plan assets Measurement Date December 31, 2013 December 31, 2012 January 1, 2012 2.15% 3.00% 1.25% 1.50%-1.75% 2.00%-3.00% 1.75%-2.00% 1.75% 2.50%-3.00% 2.00% The pension costs of the defined benefit plans recognized in profit or loss were as follows: Current service cost Interest cost Expected return on plan assets Past service cost Years Ended December 31 2013 2012 $ 134,762 175,563 (67,324) (7,240) $ 235,761 $ 129,217 160,018 (63,279) (7,239) $ 218,717 The pension costs of the aforementioned defined benefit plans were recognized in profit or loss by the following categories: Cost of revenue Research and development expenses General and administrative expenses Marketing expenses Years Ended December 31 2013 2012 $ 152,512 60,864 18,080 4,305 $ 137,857 57,536 18,923 4,401 $ 235,761 $ 218,717 For the years ended December 31, 2013 and 2012, the pre-tax actuarial loss recognized in other comprehensive income were NT$662,074 thousand and NT$685,978 thousand, respectively. As of December 31, 2013 and 2012, the pre-tax accumulated actuarial loss recognized in other comprehensive income were NT$1,348,052 thousand and NT$685,978 thousand, respectively. The amounts arising from the defined benefit obligation of the Company in the consolidated balance sheets were as follows: Present value of defined benefit obligation Fair value of plan assets Funded status Unrecognized prior service cost December 31, 2013 December 31, 2012 January 1, 2012 $ 10,329,510 (3,527,847) 6,801,663 788,263 $ 10,133,361 (3,352,567) 6,780,794 140,440 $ 9,214,125 (3,120,665) 6,093,460 147,564 Accrued pension cost $ 7,589,926 $ 6,921,234 $ 6,241,024 Movements in the present value of the defined benefit obligation were as follows: Balance, beginning of year Current service cost Interest cost Effect of plan changes Benefits paid from plan assets Benefits paid directly by the Company Actuarial loss Effect of deconsolidation of subsidiary Years Ended December 31 2013 2012 $ 10,133,361 134,762 175,563 (655,179) (50,508) (7,011) 638,071 (39,549) $ 9,214,125 129,217 160,018 - (26,119) - 656,120 - Balance, end of year $ 10,329,510 $ 10,133,361 36 Movements in the fair value of the plan assets were as follows: Balance, beginning of year Expected return on plan assets Actuarial loss Contributions from employer Benefits paid Effect of deconsolidation of subsidiary Years Ended December 31 2013 2012 $ 3,352,567 67,324 (24,003) 219,062 (50,508) (36,595) $ 3,120,665 63,279 (29,858) 224,600 (26,119) - 24. EQUITY a. Capital stock Authorized shares (in thousands) Authorized capital Issued and paid shares (in thousands) Issued capital December 31, 2013 December 31, 2012 January 1, 2012 28,050,000 $ 280,500,000 25,928,617 $ 259,286,171 28,050,000 $ 280,500,000 25,924,435 $ 259,244,357 28,050,000 $ 280,500,000 25,916,222 $ 259,162,226 Balance, end of year $ 3,527,847 $ 3,352,567 A holder of issued common shares with par value of NT$10 per share is entitled to vote and to receive dividends. The percentage of the fair value of the plan assets by major categories at the end of reporting period was as follows: Cash Equity instruments Debt instruments Fair Value of Plan Assets (%) December 31, 2013 December 31, 2012 January 1, 2012 23 45 32 100 25 38 37 100 24 41 35 100 The overall expected rate of return on plan assets was based on the historical return trends, analysts’ predictions of the market over the life of related obligation, reference to the performance of the Funds operated by the Committee and the consideration of the effect that the minimum return should not be less than the average interest rate on a two-year time deposit published by the local banks. For the years ended December 31, 2013 and 2012, the actual return on plan assets were NT$43,321 thousand and NT$33,421 thousand, respectively. The Company elects to disclose the historical information of experience adjustments from the adoption of Taiwan-IFRSs, which is as follows: Experience adjustments on plan liabilities Experience adjustments on plan assets $ 1,294,538 $ (24,003) $ 396,616 $ (29,858) $ - $ - December 31, 2013 December 31, 2012 January 1, 2012 The Company expects to make contributions of NT$223,524 thousand to the defined benefit plans in the next year starting from December 31, 2013. The authorized shares include 500,000 thousand shares allocated for the exercise of employee stock options. As of December 31, 2013, 1,082,959 thousand ADSs of TSMC were traded on the NYSE. The number of common shares represented by the ADSs was 5,414,794 thousand shares (one ADS represents five common shares). b. Capital surplus Additional paid-in capital From merger From convertible bonds From differences between equity purchase price and carrying amount arising from acquisition or disposal of subsidiaries From share of changes in equities of associates and joint venture Donations December 31, 2013 December 31, 2012 January 1, 2012 $ 24,017,363 22,804,510 8,892,847 $ 23,934,607 22,804,510 8,892,847 $ 23,774,250 22,804,510 8,892,847 100,827 43,024 55 40,733 2,588 55 - - 55 $ 55,858,626 $ 55,675,340 $ 55,471,662 Under the Company Law, 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, the surplus from treasury stock transactions and the differences between equity purchase price and carrying amount arising from acquisition or disposal of subsidiaries) may be used to offset a deficit; in addition, when the Company has no deficit, such capital surplus may be distributed as cash dividends or stock dividends up to a certain percentage of TSMC’s paid-in capital. 37 c. Retained earnings and dividend policy 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: 1) Legal capital reserve at 10% of the profits left over, until the accumulated legal capital reserve equals TSMC’s paid-in capital; 2) Special capital reserve in accordance with relevant laws or regulations or as requested by the authorities in charge; 3) 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; 4) Any balance left over shall be allocated according to the resolution of the shareholders’ meeting. TSMC’s Articles of Incorporation also provide that profits of TSMC may be distributed by way of cash dividend and/or stock dividend. However, distribution of profits shall be made preferably by way of cash dividend. Distribution of profits may also be made by way of stock dividend; provided that the ratio for stock dividend shall not exceed 50% of the total distribution. Any appropriations of the profits are subject to shareholders’ approval in the following year. TSMC accrued profit sharing to employees based on certain percentage of net income during the period, which amounted to NT$12,634,665 thousand and NT$11,115,240 thousand for the years ended December 31, 2013 and 2012, respectively. Bonuses to members of the Board of Directors were expensed based on estimated amount payable. If the actual amounts subsequently approved by the shareholders differ from the amounts estimated, the differences are recorded in the year such bonuses are approved by the shareholders as a change in accounting estimate. If profit sharing approved for distribution to employees is in the form of common shares, the number of shares is determined by dividing the amount of profit sharing by the closing price (after considering the effect of dividends) of the shares on the day preceding the shareholders’ meeting. The appropriation for legal capital reserve shall be made until the reserve equals the Company’s paid-in capital. The reserve may be used to offset a deficit, or be distributed as dividends in cash or stocks for the portion in excess of 25% of the paid-in capital if the Company incurs no loss. Pursuant to existing regulations, the Company is required to set aside additional special capital reserve equivalent to the net debit balance of the other components of stockholders’ equity, such as the accumulated balance of foreign currency translation reserve, unrealized valuation gain/loss on available-for-sale financial assets, gain/loss from changes in fair value of hedging instruments in cash flow hedges, etc. For the subsequent decrease in the deduction amount to stockholders’ equity, any special reserve appropriated may be reversed to the extent that the net debit balance reverses. 38 The appropriations of 2012 and 2011 earnings have been approved by TSMC’s shareholders in its meetings held on June 11, 2013 and on June 12, 2012, respectively. The appropriations and dividends per share were as follows: Appropriation of Earnings Dividends Per Share (NT$) For Fiscal Year 2012 For Fiscal Year 2011 For Fiscal Year 2012 For Fiscal Year 2011 Legal capital reserve Special capital reserve Cash dividends to shareholders $ 16,615,880 (4,820,483) 77,773,307 $ 13,420,128 1,172,350 77,748,668 $ 89,568,704 $ 92,341,146 $ 3.00 $ 3.00 TSMC’s profit sharing to employees and bonus to members of the Board of Directors in the amounts of NT$11,115,240 thousand and NT$71,351 thousand in cash for 2012, respectively, and profit sharing to employees and bonus to members of the Board of Directors in the amounts of NT$8,990,026 thousand and NT$62,324 thousand in cash for 2011, respectively, had been approved by the shareholders in its meetings held on June 11, 2013 and June 12, 2012, respectively. The aforementioned approved amount is the same as the one approved by the Board of Directors in its meetings held on February 5, 2013 and February 14, 2012, respectively, and the same amount had been charged against earnings for the years ended December 31, 2012 and 2011, respectively. The appropriations of earnings, payment of profit sharing to employees and bonus to members of the Board of Directors for the year ended December 31, 2012 approved by the Board of Directors of TSMC were based on the financial statements for the year ended December 31, 2012 prepared under the R.O.C. GAAP and in accordance with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers issued by the FSC before amendment. TSMC’s appropriations of earnings for 2013 had been approved in the meeting of the Board of Directors held on February 18, 2014. The appropriations and dividends per share were as follows: Legal capital reserve Special capital reserve Cash dividends to shareholders Appropriation of Earnings Dividends Per Share (NT$) For Fiscal Year 2013 For Fiscal Year 2013 $ 18,814,679 (2,785,741) 77,785,851 $ 93,814,789 $ 3.00 The Board of Directors of TSMC also approved the profit sharing to employees and bonus to members of the Board of Directors in the amounts of NT$12,634,665 thousand and NT$104,136 thousand in cash for payment in 2013, respectively. There is no significant difference between the aforementioned approved amounts and the amounts charged against earnings of 2013. The appropriations of earnings, profit sharing to employees and bonus to members of the Board of Directors for 2013 are to be presented for approval in the TSMC’s shareholders’ meeting to be held on June 24, 2014 (expected). The information about the appropriations of TSMC’s profit sharing to employees and bonus to members of the Board of Directors is available at the Market Observation Post System website. The exchange differences arising on translation of foreign operation’s net assets from its functional currency to TSMC’s presentation currency are recognized directly in other comprehensive income and also accumulated in the foreign currency translation reserve. 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. d. Others Changes in others were as follows: Year Ended December 31, 2013 Foreign Currency Translation Reserve Unrealized Gain/Loss from Available-for-sale Financial Assets Cash Flow Hedges Reserve Total Balance, beginning of year $ (10,753,806) $ 7,973,321 $ - $ (2,780,485) Unrealized gain/loss on available-for-sale financial assets represents the cumulative gains or losses arising from the fair value measurement on available-for-sale financial assets that are recognized in other comprehensive income, excluding the amounts recognized in profit or loss for the effective portion from changes in fair value of the hedging instruments. When those available-for-sale financial assets have been disposed of or are determined to be impaired subsequently, the related cumulative gains or losses in other comprehensive income are reclassified to profit or loss. The cash flow hedges reserve represents the cumulative effective portion of gains or losses arising on changes in fair value of the hedging instruments entered into as cash flow hedges. The cumulative gain or loss arising on changes in fair value of the hedging instruments that are recognized and accumulated in cash flow hedges reserve will be reclassified to profit or loss only when the hedge transaction affects profit or loss. Exchange differences arising on translation of foreign operations Changes in fair value of available-for-sale financial assets Cumulative (gain)/loss reclassified to profit or loss upon disposal of available-for-sale financial assets Share of other comprehensive income of associates and joint venture The proportionate share of other comprehensive income/losses reclassified to profit or loss upon partial disposal of associates Income tax effect Balance, end of year 3,667,657 - - - 14,554,695 (1,256,281) - - - 3,667,657 14,554,695 (1,256,281) e. Noncontrolling interests Years Ended December 31 2013 2012 (54,989) 2,551 (113) (52,551) Balance, beginning of year $ 2,543,226 $ 2,436,649 776 - (44) 36,539 - - 732 36,539 $ (7,140,362) $ 21,310,781 $ (113) $ 14,170,306 Year Ended December 31, 2012 Foreign Currency Translation Reserve Unrealized Gain/Loss from Available-for-sale Financial Assets Cash Flow Hedges Reserve Total Share of noncontrolling interests Net loss Exchange differences arising on translation of foreign operations Changes in fair value of available-for-sale financial assets Cumulative (gain)/loss reclassified to profit or loss upon disposal of available-for-sale financial assets Changes in fair value of hedging instruments for cash flow hedges Changes in fair value of hedging instruments for cash flow hedges reclassified to profit or loss Stock option compensation cost of subsidiary Share of other comprehensive income of associates and joint venture The proportionate share of other comprehensive income/losses reclassified to profit or loss upon partial disposal of associates Actuarial gain/loss from defined benefit plans Income tax expense related to actuarial gain/loss from defined benefit (4,375,597) plans Adjustments arising from changes in percentage of ownership in subsidiaries Increase in noncontrolling interests Effect of deconsolidation of subsidiary (127,853) 852 2,776 (10,805) - - 5,312 177 1 299 (44) (62,446) 188,488 (2,273,153) (194,484) 52,900 1,077 (4,741) 3 136 6,219 - - - - (40,733) 286,200 - Balance, beginning of year $ (6,433,364) $ (1,172,762) $ (93) $ (7,606,219) Exchange differences arising on translation of foreign operations Changes in fair value of hedging instruments for cash flow hedges Changes in fair value of hedging instruments for cash flow hedges reclassified to profit or loss Changes in fair value of available-for-sale financial assets Cumulative loss reclassified to profit or loss upon impairment of available-for-sale financial assets Cumulative (gain)/loss reclassified to profit or loss upon disposal of available-for-sale financial assets Share of other comprehensive income of associates and joint venture Income tax effect (4,375,597) - - - - - 55,155 - - - - 7,255,261 2,677,529 (394,857) 17,450 (409,300) - 2 91 - - - - - 2 91 7,255,261 2,677,529 (394,857) 72,605 (409,300) Balance, end of year $ (10,753,806) $ 7,973,321 $ - $ (2,780,485) Balance, end of year $ 266,830 $ 2,543,226 25. SHARE-BASED PAYMENT a. Optional exemption from applying IFRS 2 “Share-based Payment” (IFRS 2) The Company elected to take the optional exemption from applying IFRS 2 retrospectively for shared-based payment transactions granted and vested before January 1, 2012. The plans are described as follows: 39 TSMC’s Employee Stock Option Plans, consisting of the TSMC 2004 Plan, TSMC 2003 Plan and TSMC 2002 Plan, were approved by the Securities and Futures Bureau (SFB) on January 6, 2005, October 29, 2003 and June 25, 2002, respectively. The maximum number of stock 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 stock option eligible to subscribe for one common share of TSMC when exercised. The stock 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 stock 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 stock options are granted at an exercise price equal to the closing price of TSMC’s common shares quoted on the TWSE on the grant date. Stock options of the plans that had never been granted or had been granted but subsequently canceled had expired as of December 31, 2013. Information about TSMC’s outstanding stock options for the years ended December 31, 2013 and 2012 was as follows: Number of Stock Options (In Thousands) Weighted-average Exercise Price (NT$) Year ended December 31, 2013 Balance, beginning of year Stock options exercised Balance, end of year Year ended December 31, 2012 Balance, beginning of year Stock options exercised Stock options canceled Balance, end of year 5,945 (4,182) 1,763 14,293 (8,213) (135) 5,945 $ 34.6 29.8 45.9 $ 31.4 29.5 34.6 34.6 The numbers of outstanding stock options and exercise prices have been adjusted to reflect the distribution of earnings by TSMC in accordance with the plans. Information about TSMC’s outstanding stock options was as follows: December 31, 2013 December 31, 2012 January 1, 2012 Range of Exercise Price (NT$) Weighted-average Remaining Contractual Life (Years) Range of Exercise Price (NT$) Weighted-average Remaining Contractual Life (Years) Range of Exercise Price (NT$) Weighted-average Remaining Contractual Life (Years) $43.2-$47.2 1.0 $20.2-$28.3 $38.0-$50.1 0.4 2.0 $20.9-$29.3 $38.0-$50.1 1.2 2.9 As of December 31, 2013, all of the above outstanding stock options were exercisable. b. Application of IFRS 2 The Company applied IFRS 2 for the following plans as the shared-based payment transactions were granted and vested on or after January 1, 2012. The plans are described as follows: The Board of Directors of TSMC SSL approved on December 18, 2012 and November 21, 2011 the issuance of new shares and allocated 17,000 thousand shares and 17,175 thousand shares for 2013 and 2012 stock option plan, respectively, for their employees to subscribe to, according to the Company Law. The aforementioned stock options were fully vested on the grant date. Information about TSMC SSL’s employee stock options related to the aforementioned new shares issued was as follows: Number of Stock Options (In Thousands) Weighted-average Exercise Price (NT$) Year ended December 31, 2013 Balance, beginning of year Stock options granted Stock options exercised Balance, end of year Year ended December 31, 2012 Balance, beginning of year Stock options granted Stock options exercised Balance, end of year - 17,000 (17,000) - - 17,175 (17,175) - $ - 10.0 10.0 - $ - 10.0 10.0 - The grant dates of aforementioned stock options were April 10, 2013 and January 9, 2012, respectively. TSMC SSL used the Black-Scholes model to determine the fair value of the stock options. The valuation assumptions were as follows: Valuation assumptions: Stock price on grant date (NT$/share) Exercise price (NT$/share) Expected volatility Expected life Risk free interest rate 2013 Stock Option Plan 2012 Stock Option Plan $ 4.6 $ 10.0 51.68% 31 days 0.60% $ 8.9 $ 10.0 40.32% 40 days 0.76% The stock price of TSMC SSL on grant date was determined based on the cost approach. The expected volatility was calculated using the historical rate of return based on the TWSE Optoelectronic Index. The fair value of the aforementioned stock options was close to nil, and accordingly, no compensation cost was recognized. 40 The Board of Directors of TSMC Solar approved on November 21, 2011 the issuance of new shares and allocated 12,341 thousand shares for stock option plan for their employees to subscribe to, according to the Company Law. The aforementioned stock options were fully vested on the grant date. 27. OTHER OPERATING INCOME AND EXPENSES, NET Information about TSMC Solar’s employee stock options related to the aforementioned new shares issued was as follows: Income (expenses) of rental assets Rental income Depreciation of rental assets Number of Stock Options (In Thousands) Weighted-average Exercise Price (NT$) Year ended December 31, 2012 Balance, beginning of year Stock options granted Stock options exercised Balance, end of year - 12,341 (12,341) - $ - 10.0 10.0 Gain on disposal of property, plant and equipment and intangible assets, net Impairment loss on property, plant and equipment Income from receipt of equity securities in settlement of trade receivables - 28. OTHER INCOME The grant date of aforementioned stock options was January 9, 2012. TSMC Solar used the Black-Scholes model to determine the fair value of the stock options. The valuation assumptions were as follows: Valuation assumptions: Stock price on grant date (NT$/share) Exercise price (NT$/share) Expected volatility Expected life Risk free interest rate $ 9.0 $ 10.0 40.32% 40 days 0.76% Interest income Bank deposits Available-for-sale financial assets Held-to-maturity financial assets Dividend income The stock price of TSMC Solar 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. 29. FINANCE COSTS The fair value of the aforementioned stock optionswas close to nil, and accordingly, no compensation cost was recognized. 26. NET REVENUE The analysis of the Company’s net revenue was as follows: Net revenue from sale of goods Net revenue from royalties Years Ended December 31 2013 2012 $ 596,516,949 507,248 $ 506,248,580 496,654 $ 597,024,197 $ 506,745,234 Interest expense Corporate bonds Bank loans Finance leases Others Loss reclassified to profit or loss arising from effective portion for cash flow hedges Capitalized interest Years Ended December 31 2013 2012 $ 13,385 (25,120) (11,735) $ 808 (6,656) (5,848) 48,848 - 9,977 103 (444,505) 886 $ 47,090 $ (449,364) Years Ended December 31 2013 2012 $ 1,808,239 5,328 22,413 1,835,980 506,143 $ 1,513,025 5,964 126,047 1,645,036 71,057 $ 2,342,123 $ 1,716,093 Years Ended December 31 2013 2012 $ 2,501,820 110,716 19,539 14,701 2,646,776 $ 758,204 200,907 20,773 46,753 1,026,637 - - 227 (6,442) $ 2,646,776 $ 1,020,422 41 30. OTHER GAINS AND LOSSES A reconciliation of income before income tax and income tax expense recognized in profit or loss was as follows: Gain on disposal of financial assets, net Available-for-sale financial assets Financial assets carried at cost Gain on deconsolidation of subsidiary Settlement income Other gains Net gain (loss) on financial instruments at FVTPL Held for trading Impairment loss reversal (accrual) of financial assets Available-for-sale financial assets Financial assets carried at cost Investment accounted for using equity method Fair value hedges Loss from hedging instruments Gain arising from changes in fair value of available-for-sale financial assets in hedge effective portion Other losses 31. INCOME TAX a. Income tax expense recognized in profit or loss Years Ended December 31 2013 2012 $ 1,267,086 44,721 293,578 899,745 394,330 $ 399,598 141,491 - 883,845 504,880 196,711 - (1,538,888) 1,186,674 (5,602,779) 5,071,118 (107,375) (252,530) (2,677,529) (367,399) (1,186,674) - - (297,992) Years Ended December 31 2013 2012 Income before tax $ 215,487,122 $ 181,676,456 Income tax expense at the statutory rate Tax effect of adjusting items: Nondeductible (deductible) items in determining taxable income Tax-exempt income Additional income tax on unappropriated earnings Effect of tax rate changes on deferred income tax The origination and reversal of temporary differences Income tax credits Remeasurement of investment tax credits Remeasurement of operating loss carryforward Current income tax expense Income tax adjustments on prior years Other income tax adjustments $ 38,458,611 $ 34,085,426 (1,417,976) (8,612,025) 7,659,010 - 674,231 (3,136,942) (3,460,886) (1,663,527) 28,500,496 (1,021,688) (10,623) (3,011,224) (9,830,280) 4,193,497 (543,611) (865,386) (2,828,300) (4,215,165) (1,688,735) 15,296,222 55,313 201,119 $ 2,104,921 $ (2,852,310) Income tax expense recognized in profit or loss $ 27,468,185 $ 15,552,654 For the years ended December 31, 2013 and 2012, the Company applied a tax rate of 17% for entities subject to the Income Tax Law of the Republic of China; for other jurisdictions, the Company measures taxes by using the applicable tax rate for each individual jurisdiction. Income tax expense consisted of the following: b. Income tax expense recognized in other comprehensive income Current income tax expense (benefit) Current tax expense recognized in the current year Income tax adjustments on prior years Other income tax adjustments Deferred income tax expense (benefit) Effect of tax rate changes The origination and reversal of temporary differences Investment tax credits and operating loss carryforward Years Ended December 31 2013 2012 $ 22,501,143 (1,021,688) (10,623) 21,468,832 $ 15,201,438 55,313 201,119 15,457,870 - 674,231 5,325,122 5,999,353 (543,611) (865,386) 1,503,781 94,784 Income tax expense recognized in profit or loss $ 27,468,185 $ 15,552,654 Deferred income tax expense (benefit) Related to unrealized gain/loss on available-for-sale financial assets Related to actuarial gain/loss from defined benefit plans $ (36,539) (78,629) $ 409,300 (82,358) $ (115,168) $ 326,942 Years Ended December 31 2013 2012 c. Deferred income tax balance The analysis of deferred income tax in the consolidated balance sheets was as follows: Investment tax credits Temporary differences Depreciation Provision for sales returns and allowance Accrued pension cost Available-for-sale financial assets Unrealized loss on inventories Goodwill from business combination Deferred compensation cost Others Operating loss carryforward December 31, 2013 December 31, 2012 January 1, 2012 $ 1,955,980 $ 7,324,263 $ 9,869,024 644,824 900,354 908,022 6,154 438,423 373,682 267,416 684,585 1,060,169 1,502,736 717,889 824,052 224,618 404,656 329,766 132,286 624,609 1,043,344 2,056,421 494,914 618,336 308,929 2,757 - 101,639 131,424 20,774 $ 7,239,609 $ 13,128,219 $ 13,604,218 42 Year Ended December 31, 2013 Investment tax credits Temporary differences Depreciation Provision for sales returns and allowance Accrued pension cost Available-for-sale financial assets Unrealized loss on inventory Goodwill from business combination Deferred compensation cost Others Operating loss carryforward Deferred income tax assets Year Ended December 31, 2012 Investment tax credits Temporary differences Depreciation Provision for sales returns and allowance Accrued pension cost Available-for-sale financial assets Unrealized loss on inventory Goodwill from business combination Deferred compensation cost Others Operating loss carryforward Deferred income tax assets Balance, Beginning of Year Recognized in Profit or Loss Other Comprehensive Income Effect of Deconsolidation of Subsidiary Effect of Exchange Rate Changes Balance, End of Year $ 7,324,263 $ (5,348,982) $ - $ (19,301) $ - $ 1,955,980 1,502,736 717,889 824,052 224,618 404,656 329,766 132,286 624,609 1,043,344 (865,021) 188,198 5,813 (255,003) 32,665 35,115 131,107 52,895 23,860 - - 78,629 36,539 - - - - - (15,387) (6,417) (472) - - - - (3,987) (32,910) 22,496 684 - - 1,102 8,801 4,023 11,068 25,875 644,824 900,354 908,022 6,154 438,423 373,682 267,416 684,585 1,060,169 $ 13,128,219 $ (5,999,353) $ 115,168 $ (78,474) $ 74,049 $ 7,239,609 $ 9,869,024 $ (2,544,761) $ - $ - $ - $ 7,324,263 2,056,421 494,914 618,336 308,929 2,757 - 101,639 131,424 20,774 (545,820) 223,435 123,358 324,989 402,707 335,921 35,492 508,915 1,040,980 - - 82,358 (409,300) - - - - - - - - - - - - (7,865) (460) - - (808) (6,155) (4,845) (15,730) (18,410) 1,502,736 717,889 824,052 224,618 404,656 329,766 132,286 624,609 1,043,344 $ 13,604,218 $ (94,784) $ (326,942) $ - $ (54,273) $ 13,128,219 d. The investment tax credits, operating loss carryforward and deductible temporary differences for which no deferred income tax assets have been recognized in the consolidated financial statements The information of the operating loss carryforward for which no deferred tax assets have been recognized was as follows: The information of the investment tax credits for which no deferred income tax assets have been recognized was as follows: Expiry year 2012 2013 2014 2015 December 31, 2013 December 31, 2012 January 1, 2012 $ - - 3,019,880 - $ - 33,089 5,830,285 22,864 $ 11,254 5,493,620 4,915,861 23,590 $ 3,019,880 $ 5,886,238 $ 10,444,325 Expiry year 2014 - 2018 2019 - 2023 December 31, 2013 December 31, 2012 January 1, 2012 $ 41,894 5,773,037 $ 41,894 5,402,683 $ 41,894 7,558,917 $ 5,814,931 $ 5,444,577 $ 7,600,811 As of December 31, 2013 and 2012 and January 1, 2012, the aggregate deductible temporary differences for which no deferred income tax assets have been recognized amounted to NT$8,673,160 thousand, NT$13,589,292 thousand and NT$14,893,317 thousand, respectively. 43 e. Unused investment tax credits, operating loss carryforward and tax-exemption information All of TSMC’s earnings generated prior to December 31, 1997 have been appropriated. As of December 31, 2013, investment tax credits of TSMC and TSMC SSL consisted of the following: h. Income tax examination Law/Statute Item Remaining Creditable Amount Expiry Year Statute for Upgrading Industries Purchase of machinery and equipment $ 4,493,509 482,351 2014 2015 The tax authorities have examined income tax returns of TSMC through 2010. All investment tax credit adjustments assessed by the tax authorities have been recognized accordingly. $ 4,975,860 32. EARNINGS PER SHARE As of December 31, 2013, operating loss carryforward of TSMC Solar, TSMC SSL, Mutual-Pak and WaferTech consisted of the following: Years Ended December 31 2013 2012 Remaining Creditable Amount Basic EPS Diluted EPS $ 7.26 $ 7.26 $ 6.42 $ 6.41 Remaining Creditable Amount Expiry Year 2014 - 2018 2019 - 2023 $ 41,894 9,052,631 $ 9,094,525 EPS is computed as follows: As of December 31, 2013, the profits generated from the following projects of TSMC are exempt from income tax for a five-year period: Construction and expansion of 2005 by TSMC Construction and expansion of 2006 by TSMC Construction and expansion of 2007 by TSMC Tax-exemption Period 2010 to 2014 2011 to 2015 2014 to 2018 f. The information of unrecognized deferred income tax liabilities associated with investments As of December 31, 2013 and 2012 and January 1, 2012, the aggregate taxable temporary differences associated with investments in subsidiaries not unrecognized as deferred income tax liabilities amounted to NT$28,035,340 thousand, NT$20,516,999 thousand and NT$15,074,593 thousand, respectively. g. Integrated income tax information Balance of the Imputation Credit Account - TSMC $ 15,242,724 $ 8,130,060 $ 4,003,228 December 31, 2013 December 31, 2012 January 1, 2012 Year ended December 31, 2013 Basic EPS Net income available to common shareholders of the parent Effect of dilutive potential common shares Diluted EPS Net income available to common shareholders of the parent (including effect of dilutive potential common shares) Year ended December 31, 2012 Basic EPS Net income available to common shareholders of the parent Effect of dilutive potential common shares Diluted EPS Net income available to common shareholders of the parent (including effect of dilutive potential common shares) Amounts (Numerator) Number of Shares (Denominator) (In Thousands) EPS (NT$) $ 188,146,790 - 25,927,778 1,825 $ 7.26 $ 188,146,790 25,929,603 $ 7.26 $ 166,318,286 - 25,920,735 7,201 $ 6.42 $ 166,318,286 25,927,936 $ 6.41 The estimated and actual creditable ratio for distribution of TSMC’s earnings of 2013 and 2012 were 9.80% and 7.75 %, respectively. Under the Rule No.10204562810 issued by the Ministry of Finance, when calculating the creditable ratio in the year of first-time adoption of Taiwan-IFRSs, the Company has included the adjustments to retained earnings from the effect of transition to Taiwan-IFRSs in the accumulated unappropriated earnings. 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. 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 end of the reporting period. Such dilutive effect of the potential shares needs to be included in the calculation of diluted EPS until profit sharing to employees to be settled in the form of common stocks are approved by the shareholders in the following year. 44 June 30, 2013 $ 979,910 564,364 213,133 110,766 5,595,040 164,311 (1,571,289) (291,715) (1,940,625) (27,472) $ 3,796,423 Six Months Ended June 30, 2013 $ 1,816,848 3,796,423 (2,273,153) 1,523,270 $ 293,578 33. ADDITIONAL INFORMATION OF EXPENSES BY NATURE b. Analysis of assets and liabilities over which the Company lost control Net income included the following items: a. Depreciation of property, plant and equipment Recognized in cost of revenue Recognized in operating expenses Recognized in other operating income and expenses b. Amortization of intangible assets Recognized in cost of revenue Recognized in operating expenses Years Ended December 31 2013 2012 $ 141,002,263 12,952,464 25,120 $ 118,313,581 10,848,277 6,656 $ 153,979,847 $ 129,168,514 $ 1,154,698 1,047,324 $ 1,344,819 835,956 $ 2,202,022 $ 2,180,775 Current assets Cash and cash equivalents Accounts receivable Inventories Others Noncurrent assets Property, plant and equipment Others Current liabilities Accounts payable Others Noncurrent liabilities Loans Others Net assets deconsolidated c. Research and development costs expensed as incurred $ 48,118,165 $ 40,383,195 c. Gain on deconsolidation of subsidiary d. Employee benefits expenses Post-employment benefits (Note 23) Defined contribution plans Defined benefit plans Equity-settled share-based payments Other employee benefits Employee benefits expense summarized by function Recognized in cost of revenue Recognized in operating expenses $ 1,590,414 235,761 1,826,175 5,312 65,514,082 $ 1,403,507 218,717 1,622,224 6,219 59,668,232 $ 67,345,569 $ 61,296,675 $ 40,245,628 27,099,941 $ 35,561,523 25,735,152 $ 67,345,569 $ 61,296,675 34. DECONSOLIDATION OF SUBSIDIARY Starting June 2013, the Company has no power to govern the financial and operating policies of Xintec due to the loss of power to cast the majority of votes at meetings of the Board of Directors; accordingly, the Company derecognized related assets, liabilities and noncontrolling interests of Xintec. a. Consideration received The Company did not receive any consideration in the deconsolidation of Xintec. Fair value of interest retained Less: Carrying amount of interest retained Net assets deconsolidated Noncontrolling interests Gain on deconsolidation of subsidiary Gain on deconsolidation of subsidiary was included in other gains and losses for the year ended December 31, 2013. d. Net cash outflow arising from deconsolidation of the subsidiary The balance of cash and cash equivalents deconsolidated 35. CAPITAL MANAGEMENT Six Months Ended June 30, 2013 $ 979,910 The Company requires significant amounts of capital to build and expand its production facilities and acquire additional equipment. In consideration of the industry dynamics, the Company manages its capital in a manner to ensure that it has sufficient and necessary financial resources to fund its working capital needs, capital asset purchases, research and development activities, dividend payments, debt service requirements and other business requirements associated with its existing operations over the next 12 months. 45 36. FINANCIAL INSTRUMENTS a. Categories of financial instruments Financial assets FVTPL Held for trading derivatives Available-for-sale financial assets (Note) Held-to-maturity financial assets Loans and receivables Cash and cash equivalents Notes and accounts receivables (including related parties) Other receivables Refundable deposits Financial liabilities FVTPL December 31, 2013 December 31, 2012 January 1, 2012 $ 90,353 61,628,343 1,795,949 $ 39,554 44,766,957 5,056,973 $ 15,360 7,623,775 9,068,847 242,695,447 143,410,588 143,472,277 71,941,634 1,422,795 2,519,031 58,131,397 1,307,473 2,426,712 46,016,052 1,403,694 4,518,863 $ 382,093,552 $ 255,139,654 $ 212,118,868 Held for trading derivatives $ 33,750 $ 15,625 $ 13,742 Derivative financial instruments in designated hedge accounting relationships Amortized cost Short-term loans Accounts payable (including related parties) Payables to contractors and equipment suppliers Accrued expenses and other current liabilities Bonds payable Long-term bank loans Other long-term payables Guarantee deposits Note: Including financial assets carried at cost. b. Financial risk management objectives 5,481,616 15,645,000 16,358,716 89,810,160 13,649,615 210,767,625 40,000 54,000 151,660 - 34,714,929 15,239,042 44,831,798 9,316,232 80,000,000 1,487,500 967,485 203,890 232 25,926,528 11,859,008 35,540,526 7,796,538 22,500,000 1,650,000 3,399,855 443,983 $ 351,992,142 $ 186,776,501 $ 109,130,412 The Company seeks to ensure sufficient cost-efficient funding readily available when needed. The Company manages its exposure to foreign currency risk, interest rate risk, equity price risk, credit risk and liquidity risk with the objective to reduce the potentially adverse effects the market uncertainties may have on its financial performance. The plans for material treasury activities are reviewed by Audit Committees and/or Board of Directors in accordance with procedures required by relevant regulations or internal controls. During the implementation of such plans, Corporate Treasury function must comply with certain treasury procedures that provide guiding principles for overall financial risk management and segregation of duties. Foreign currency risk Most of the Company’s operating activities are denominated in foreign currencies. Consequently, the Company is exposed to foreign currency risk. To protect against reductions in value and the volatility of future cash flows caused by changes in foreign exchange rates, the Company utilizes derivative financial instruments, including currency forward contracts and cross currency swaps, to hedge its currency exposure. These instruments help to reduce, but do not eliminate, the impact of foreign currency exchange rate movements. The Company also holds short-term borrowings in foreign currencies in proportion to its expected future cash flows. This allows foreign-currency-denominated borrowings to be serviced with expected future cash flows and provides a partial hedge against transaction translation exposure. The Company’s sensitivity analysis to foreign currency risk mainly focuses on the foreign currency monetary items at the end of the reporting period. Assuming an unfavorable 10% movement in the levels of foreign exchanges against the New Taiwan dollar, the net income for the years ended December 31, 2013 and 2012 would have decreased by NT$171,961 thousand and NT$719,882 thousand, respectively, after taking into consideration of the hedging contracts and the hedged items. Interest rate risk The Company is exposed to interest rate risk arising from borrowing at both fixed and floating interest rates. All of the Company’s long-term bonds have fixed interest rates and are measured at amortized cost. As such, changes in interest rates would not affect the future cash flows. On the other hand, because interest rates of the Company’s long-term bank loans are floating, changes in interest rates would affect the future cash flows but not the fair value. To reduce the cash flow risk caused by floating interest rates, the Company utilized an interest rate swap contract to partially hedge its exposure. Assuming the amount of floating interest rate bank loans at the end of the reporting period had been outstanding for the entire period and all other variables were held constant, a hypothetical increase in interest rates of 100 basis point (1%) would have resulted in an increase in the interest expense, net of tax, by approximately NT$332 thousand and NT$12,346 thousand for the years ended December 31, 2013 and 2012, respectively. Other price risk The Company is exposed to equity price risk arising from available-for-sale equity investments. To reduce the equity price risk, the Company utilized some stock forward contracts to partially hedge its exposure. Assuming a hypothetical decrease of 5% in equity prices of the equity investments at the end of the reporting period, the net income for the years ended December 31, 2013 and 2012 would have been unaffected as they were classified as available-for-sale; however, the other comprehensive income for the years ended December 31, 2013 and 2012 would have decreased by NT$931,881 thousand and NT$2,217,457 thousand, respectively. c. Market risk d. Credit risk management The Company is exposed to the market risks arising from changes in foreign exchange rates, interest rates and the prices in equity investments, and utilizes some derivative financial instruments to reduce the related risks. Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Company. The Company is exposed to credit risk from operating activities, primarily trade receivables, and from financing activities, primarily deposits, fixed-income investments and other 46 financial instruments with banks. Credit risk is managed separately for business related and financial related exposures. As of the end of the reporting period, the Company’s maximum credit risk exposure is mainly from the carrying amount of financial assets recognized in the consolidated balance sheet. Business related credit risk The Company has considerable trade receivables outstanding with its customers worldwide. A substantial majority of the Company’s outstanding trade receivables are not covered by collateral or credit insurance. While the Company has procedures to monitor and limit exposure to credit risk on trade receivables, there can be no assurance such procedures will effectively limit its credit risk and avoid losses. This risk is heightened during periods when economic conditions worsen. As of December 31, 2013 and 2012 and January 1, 2012, the Company’s ten largest customers accounted for 68%, 68% and 64% of accounts receivable, respectively. The Company believes the concentration of credit risk is insignificant for the remaining accounts receivable. Financial credit risk The Company regularly monitors and reviews the transaction limit applied to counterparties and adjusts the concentration limit according to market conditions and the credit standing of the counterparties. The Company mitigates its exposure by selecting counterparties with investment-grade credit ratings. e. Liquidity risk management The objective of liquidity risk management is to ensure the Company has sufficient liquidity to fund its business requirements associated with existing operations over the next 12 months. The Company manages its liquidity risk by maintaining adequate cash and banking facilities. As of December 31, 2013 and 2012 and January 1, 2012, the unused of financing facilities of the Company amounted to NT$76,689,543 thousand, NT$53,422,331 thousand and NT$63,708,014 thousand, respectively. The table below summarizes the maturity profile of the Company’s financial liabilities based on contractual undiscounted payments, including principles and interests. Derivative financial instruments Forward exchange contracts Outflows Inflows Cross currency swap contracts Outflows Inflows Stock forward contracts Outflows Inflows December 31, 2012 Non-derivative financial liabilities Short-term loans Accounts payable (including related parties) Payables to contractors and equipment suppliers Accrued expenses and other current liabilities Bonds payable Long-term bank loans Other long-term payables Obligations under finance leases Guarantee deposits Derivative financial instruments Forward exchange contracts Outflows Inflows Less Than 1 Year 2-3 Years 4-5 Years 5+ Years Total Cross currency swap contracts Outflows Inflows Less Than 1 Year 2-3 Years 4-5 Years 5+ Years Total $ 29,608,952 (29,605,246) 3,706 $ - - - $ - - - $ - - - $ 29,608,952 (29,605,246) 3,706 1,639,215 (1,641,384) (2,169) - - - - - - 37,431,626 (37,431,626) - - - - - - - - - - - - - 1,639,215 (1,641,384) (2,169) 37,431,626 (37,431,626) - $ 138,550,767 $ 28,643,574 $ 101,645,863 $ 94,372,849 $ 363,213,053 $ 34,721,003 $ - $ - $ - $ 34,721,003 15,239,042 44,831,798 9,316,232 1,108,150 146,571 913,485 27,042 - 106,303,323 11,030,154 (11,059,396) (29,242) 9,068,589 (9,068,727) (138) - - - 2,216,300 745,174 36,000 54,084 203,890 3,255,448 - - - 44,911,191 637,580 18,000 54,084 - 45,620,855 - - - 37,834,474 - - 729,566 - 38,564,040 15,239,042 44,831,798 9,316,232 86,070,115 1,529,325 967,485 864,776 203,890 193,743,666 - - - - - - - - - - - - - - - - - - 11,030,154 (11,059,396) (29,242) 9,068,589 (9,068,727) (138) December 31, 2013 Non-derivative financial liabilities Short-term loans Accounts payable (including related parties) Payables to contractors and equipment suppliers Accrued expenses and other current liabilities Bonds payable Long-term bank loans Other long-term payables Obligations under finance leases Guarantee deposits $ 15,646,783 $ - $ - $ - $ 15,646,783 $ 106,273,943 $ 3,255,448 $ 45,620,855 $ 38,564,040 $ 193,714,286 16,358,716 89,810,160 13,649,615 3,036,130 1,450 18,000 28,376 - 138,549,230 - - - 28,388,887 10,275 36,000 56,752 151,660 28,643,574 - - - 100,830,341 21,571 - 793,951 - 101,645,863 - - - 94,360,103 12,746 - - - 94,372,849 16,358,716 89,810,160 13,649,615 226,615,461 46,042 54,000 879,079 151,660 363,211,516 (Continued) January 1, 2012 Non-derivative financial liabilities Short-term loans Accounts payable (including related parties) Payables to contractors and equipment suppliers Accrued expenses and other current liabilities Bonds payable $ 25,933,177 $ - $ - $ - $ 25,933,177 11,859,008 35,540,526 7,796,538 4,775,081 - - - - - - - 538,500 - 11,000,933 - 7,713,258 11,859,008 35,540,526 7,796,538 24,027,772 (Continued) 47 Long-term bank loans Other long-term payables Obligations under finance leases Guarantee deposits Derivative financial instruments Forward exchange contracts Outflows Inflows Cross currency swap contracts Outflows Inflows Interest rate swap contracts Outflows Inflows Less Than 1 Year 2-3 Years 4-5 Years 5+ Years Total $ 79,558 3,399,855 - - 89,383,743 $ 778,190 - 167,472 443,983 1,928,145 $ 849,021 - 55,824 - 11,905,778 $ - - 780,962 - 8,494,220 $ 1,706,769 3,399,855 1,004,258 443,983 111,711,886 7,736,197 (7,726,584) 9,613 420,431 (420,397) 34 706 (442) 264 - - - - - - - - - - - - - - - - - - - - - - - - - - - 7,736,197 (7,726,584) 9,613 420,431 (420,397) 34 706 (442) 264 2) Fair value measurements recognized in the consolidated balance sheets The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable: ● Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities; ● Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and ● Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). December 31, 2013 Level 1 Level 2 Level 3 Total Financial assets at FVTPL $ 89,393,654 $ 1,928,145 $ 11,905,778 $ 8,494,220 $ 111,721,797 Derivative financial instruments $ - $ 90,353 $ - $ 90,353 (Concluded) Available-for-sale financial assets f. Fair value of financial instruments 1) Fair value of financial instruments carried at amortized cost Publicly traded stocks Money market funds $ 59,481,569 1,183 $ - - $ - - $ 59,481,569 1,183 $ 59,482,752 $ - $ - $ 59,482,752 Except as detailed in the following table, the Company considers that the carrying amounts of financial assets and financial liabilities recognized in the consolidated financial statements approximate their fair values. Financial liabilities at FVTPL Derivative financial instruments $ - $ 33,750 $ - $ 33,750 December 31, 2013 December 31, 2012 January 1, 2012 Hedging derivative financial liabilities Carrying Amount Fair Value Carrying Amount Fair Value Carrying Amount Fair Value Stock forward contract $ - $ 5,481,616 $ - $ 5,481,616 Financial assets Held-to-maturity financial assets Commercial paper Corporate bonds Government bonds Financial liabilities Measured at amortized cost Bonds payable $ 1,795,949 - - $ 1,795,612 - - $ - 5,056,973 - $ - 5,066,363 - $ - 8,614,527 454,320 $ - 8,674,016 454,047 December 31, 2012 Level 1 Level 2 Level 3 Total Financial assets at FVTPL Derivative financial instruments $ - $ 39,554 $ - $ 39,554 Available-for-sale financial assets 210,767,625 208,649,668 80,000,000 80,343,413 22,500,000 22,597,115 Publicly traded stocks Money market funds $ 41,160,437 1,443 $ - - $ - - $ 41,160,437 1,443 $ 41,161,880 $ - $ - $ 41,161,880 Financial liabilities at FVTPL Derivative financial instruments $ - $ 15,625 $ - $ 15,625 48 Financial assets at FVTPL Level 1 Level 2 Level 3 Total Derivative financial instruments $ - $ 15,360 $ - $ 15,360 Intercompany balances and transactions between TSMC and its subsidiaries, which are related parties of TSMC, have been eliminated upon consolidation; therefore those items are not disclosed in this note. The following is a summary of transactions between the Company and other related parties: January 1, 2012 37. RELATED PARTY TRANSACTIONS Available-for-sale financial assets Publicly traded stocks Money market funds $ 3,306,248 2,522 $ - - $ - - $ 3,306,248 2,522 $ 3,308,770 $ - $ - $ 3,308,770 Financial liabilities at FVTPL Derivative financial instruments $ - $ 13,742 $ - $ 13,742 Hedging derivative financial liabilities Interest rate swap contract $ - $ 232 $ - $ 232 There were no transfers between Level 1 and 2 for the years ended December 31, 2013 and 2012, respectively. There were no purchases and disposals for assets on Level 3 for the years ended December 31, 2013 and 2012, respectively. a. Net Revenue Related Party Categories Associates Joint venture b. Purchases Related Party Categories Associates Net Revenue from Sale of Goods Net Revenue from Royalties Years Ended December 31 Years Ended December 31 2013 2012 2013 2012 $ 4,093,031 1,677 $ 5,307,621 3,410 $ 497,020 - $ 479,239 - $ 4,094,708 $ 5,311,031 $ 497,020 $ 479,239 Years Ended December 31 2013 2012 $ 10,052,359 $ 8,114,307 3) Valuation techniques and assumptions used in fair value measurement c. Receivables from related parties The fair values of financial assets and financial liabilities are determined as follows: December 31, 2013 December 31, 2012 January 1, 2012 ● The fair values of financial assets and financial liabilities with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market prices (includes publicly traded stocks and money market funds). ● Forward exchange contracts and cross currency swap contracts are measured using quoted forward exchange rates and yield curves derived from quoted interest rates matching maturities of the contracts; interest rate swaps are measured at the present value of future cash flows estimated and discounted based on the applicable yield curves derived from quoted interest rates; and stock forward contracts are measured at the difference between the present value of stock forward price discounted based on the applicable yield curve derived from quoted interest rates and the stock spot price. ● The fair values of other financial assets and financial liabilities are determined in accordance with generally accepted pricing models based on discounted cash flow analysis. Related Party Categories Associates Joint venture d. Payables to related parties Related Party Categories Associates Joint venture $ 291,376 332 $ 353,652 159 $ 185,552 212 $ 291,708 $ 353,811 $ 185,764 December 31, 2013 December 31, 2012 January 1, 2012 $ 1,687,239 1,217 $ 746,532 2,081 $ 1,325,791 2,730 $ 1,688,456 $ 748,613 $ 1,328,521 49 e. Acquisition of property, plant and equipment and intangible assets Related Party Categories Associates Joint venture Purchase Price Years Ended December 31 2013 2012 $ 21,135 - $ 47,051 1,224 $ 21,135 $ 48,275 f. Disposal of property, plant and equipment Years Ended December 31, 2013 Years Ended December 31, 2012 Proceeds Gains (Losses) Proceeds Gains (Losses) Related Party Categories Associates Joint venture Related Party Categories Associates Joint venture Other Receivables from Related Parties December 31, 2013 December 31, 2012 January 1, 2012 $ 221,576 - $ 185,550 - $ 121,767 525 $ 221,576 $ 185,550 $ 122,292 Refundable Deposits December 31, 2013 December 31, 2012 January 1, 2012 $ 5,813 - $ 5,813 4 $ - - $ 5,813 $ 5,817 $ - Related Party Categories Associates Joint venture Related Party Categories Associates Joint venture g. Others Related Party Categories Associates Joint venture Related Party Categories Associates 50 $ 69,683 - $ 6,146 948 $ 20,380 9,000 $ (132) 213 $ 69,683 $ 7,094 $ 29,380 $ 81 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, price and terms were determined in accordance with mutual agreements. Deferred Gains (Losses) from Disposal of Property,Plant and Equipment December 31, 2013 December 31, 2012 January 1, 2012 The Company leased machinery and equipment from Xintec. The lease terms and prices were determined in accordance with mutual agreements. The rental expense was paid quarterly and the related expense was classified under manufacturing expenses. $ - - $ (7,806) 948 $ - - $ - $ (6,858) $ - The Company deferred the disposal gain/loss derived from sales of property, plant and equipment to related parties (transactions with associates and joint venture), and then recognized such gain/loss over the depreciable lives of the disposed assets. Manufacturing Expenses Research and Development Expenses The compensation to directors and other key management personnel were as follows: h. Compensation of key management personnel Years Ended December 31 Years Ended December 31 2013 2012 2013 2012 $ 934,480 6,582 $ 8,347 15,544 $ 903 6,340 $ 4,644 8,911 $ 941,062 $ 23,891 $ 7,243 $ 13,555 Short-term employee benefits Post-employment benefits $ 1,356,119 9,064 $ 1,417,358 3,896 $ 1,365,183 $ 1,421,254 Years Ended December 31 2013 2012 The compensation to directors and other key management personnel were determined by the Compensation Committee of TSMC in accordance with the individual performance and the market trends. Non-operating Income Years Ended December 31 2013 2012 38. PLEDGED ASSETS $ - $ 6,046 The Company provided certificate of deposits recorded in other financial assets as collateral mainly for building lease agreements. As of December 31, 2013 and 2012 and January 1, 2012, the aforementioned other financial assets amounted to NT$120,566 thousand, NT$119,710 thousand and NT$121,140 thousand, respectively. 39. SIGNIFICANT OPERATING LEASE ARRANGEMENTS c. In June 2010, Keranos, LLC. filed a complaint in the U.S. District Court for the Eastern District of Texas The Company leases several parcels of land, factory and office premises from the Science Park Administration and entered into lease agreements for its office premises and certain office equipment located in the United States, Europe, Japan, Shanghai and Taiwan. These operating leases expire between January 2014 and December 2032 and can be renewed upon expiration. The Company expensed the lease payments as follows: Minimum lease payments $ 902,439 $ 689,198 Years Ended December 31 2013 2012 Future minimum lease payments under the above non-cancellable operating leases are as follows: Not later than 1 year Later than 1 year and not later than 5 years Later than 5 years $ 859,070 3,053,029 5,534,848 $ 693,758 2,478,443 4,221,524 $ 627,882 2,258,302 3,870,728 December 31, 2013 December 31, 2012 January 1, 2012 $ 9,446,947 $ 7,393,725 $ 6,756,912 40. SIGNIFICANT CONTINGENT LIABILITIES AND UNRECOGNIZED COMMITMENTS Significant contingent liabilities and unrecognized commitments of the Company as of the end of the reporting period, excluding those disclosed in other notes, were as follows: a. Under a technical cooperation agreement with Industrial Technology Research Institute, the R.O.C. Government or its designee approved by TSMC can use up to 35% of TSMC’s capacity provided 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. In 2013 and 2012, the R.O.C. Government did not involve such right. 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, in September 2006, Philips spun-off its semiconductor subsidiary which was renamed as NXP B.V. Further, 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 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 falls below a specific percentage of its capacity, the defaulting party is required to compensate SSMC for all related unavoidable costs. There was no default from the aforementioned commitment as of December 31, 2013. 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 lawsuit in the U.S. District Court for the Eastern District of Texas. The outcome cannot be determined and the Company cannot make a reliable estimate of the contingent liability at this time. d. 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 and the Company cannot make a reliable estimate of the contingent liability at this time. e. 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 on October 31, 2012. Both parties also signed the research and development funding agreement whereby TSMC shall provide EUR276,000 thousand to ASML’s research and development programs from 2013 to 2017. For the year ended December 31, 2013, TSMC paid EUR55,078 thousand to ASML under the research and development funding agreement. f. In December 2013, Tela Innovations, Inc. filed complaints in the U.S. District Court for the District of Delaware and in the United States International Trade Commission accusing TSMC and TSMC North America of infringing one U.S. patent. In January 2014, TSMC filed a lawsuit against Tela for trade secret misappropriation and breach of contract. The outcome cannot be determined and the Company cannot make a reliable estimate of the contingent liability at this time. g. Amounts available under unused letters of credit as of December 31, 2013 and 2012 and January 1, 2012 were NT$89,400 thousand, NT$99,671 thousand and NT$263,880 thousand, respectively. 41. EXCHANGE RATE INFORMATION OF FOREIGN-CURRENCY FINANCIAL ASSETS AND LIABILITIES The significant financial assets and liabilities denominated in foreign currencies were as follows: Foreign Currencies (In Thousands) Exchange Rate (Note) Carrying Amount December 31, 2013 Financial assets Monetary items USD EUR JPY Non-monetary items HKD $ 2,756,090 451,162 41,386,551 168,334 29.800 41.00 0.2834 3.84 $ 82,131,493 18,497,657 11,728,949 646,402 (Continued) 51 Financial liabilities Monetary items USD EUR JPY December 31, 2012 Financial assets Monetary items USD EUR JPY Non-monetary items HKD Financial liabilities Monetary items USD EUR JPY January 1, 2012 Financial assets Monetary items USD EUR JPY Non-monetary items HKD Financial liabilities Monetary items USD EUR JPY Foreign Currencies (In Thousands) Exchange Rate (Note) Carrying Amount The Company uses the income from operations as the measurement for segment profit and the basis of performance assessment. There was no material differences between the accounting policies of the operating segment and the accounting policies described in Note 4. $ 2,026,958 811,202 71,931,749 29.800 41.00 0.2834 $ 60,403,358 33,259,299 20,385,458 b. Segment revenue and operating results Year ended December 31, 2013 Foundry Others Elimination Total 2,442,184 117,535 35,381,976 492,014 29.038 38.39-38.49 0.3352-0.3364 3.75 2,388,832 245,481 43,292,238 29.038 38.39-38.49 0.3352-0.3364 1,566,212 125,490 33,242,609 671,060 30.288 39.18-39.27 0.3897-0.3906 3.90 1,772,583 109,782 35,364,089 30.288 39.18-39.27 0.3897-0.3906 70,916,125 4,512,154 11,860,041 1,845,053 69,366,903 9,424,022 14,511,562 47,437,429 4,927,977 12,954,665 2,617,134 53,688,005 4,311,133 13,781,403 (Concluded) Net revenue from external customers Net revenue from sales among intersegments Income (loss) from operations Share of profits of associates and joint venture Income tax expense $ 596,615,439 - 212,156,627 4,280,780 27,468,185 $ 408,758 33,215 (2,727,264) (308,749) - $ - (33,215) - - - $ 597,024,197 - 209,429,363 3,972,031 27,468,185 Year ended December 31, 2012 Net revenue from external customers Net revenue from sales among intersegments Income (loss) from operations Share of profits of associates and joint venture Income tax expense c. Geographic information Taiwan United States Asia Europe Others 506,594,586 - 183,794,638 3,470,406 15,553,242 150,648 14,678 (2,617,770) (1,396,677) (588) - (14,678) - - - 506,745,234 - 181,176,868 2,073,729 15,552,654 Years Ended December 31 Net Revenue from External Customers Non-current Assets 2013 2012 2013 2012 $ 74,150,318 423,265,839 56,533,399 41,229,682 1,844,959 $ 68,150,152 343,707,672 46,687,358 46,429,835 1,770,217 $ 783,173,768 7,691,023 14,743,733 17,349 - $ 603,844,829 7,699,344 18,196,790 15,938 - $ 597,024,197 $ 506,745,234 $ 805,625,873 $ 629,756,901 The Company categorized the net revenue based on the country in which the customer is headquartered. Non-current assets include property, plant and equipment, intangible assets and other noncurrent assets. d. Production information Production Wafer Others Years Ended December 31 2013 2012 $ 560,685,213 36,338,984 $ 462,970,436 43,774,798 $ 597,024,197 $ 506,745,234 Note: Exchange rate represents the number of N.T. dollars for which one foreign currency could be exchanged. 42. OPERATING SEGMENTS INFORMATION a. Operating segments 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, designing, manufacturing and selling of solid state lighting devices and renewable energy and efficiency related technologies and products. 52 e. Major customers representing at least 10% of net revenue 1) Reconciliation of consolidated balance sheet as of December 31, 2012 Customer A Years Ended December 31 2013 Amount $ 130,563,982 2012 Amount $ 85,880,132 % 22 % 17 43. FIRST-TIME ADOPTION OF TAIWAN-IFRSs a. Basis of preparation for financial information under Taiwan-IFRSs The Company prepares consolidated financial statements for the year ended December 31, 2013 under Taiwan-IFRSs. As the basis of the preparation, the Company not only follows the significant accounting policies stated in Note 4 but also applies IFRS 1. b. Exemptions from IFRS 1 IFRS 1 establishes the procedures for the Company’s first consolidated financial statements prepared in accordance with Taiwan-IFRSs. According to IFRS 1, the Company is required to determine the accounting policies under Taiwan-IFRSs and retrospectively apply those accounting policies in its opening balance sheet at the date of transition to Taiwan-IFRSs; except for optional exemptions and mandatory exceptions to such retrospective application provided under IFRS 1. The main optional exemptions the Company adopted are summarized as follows: 1) Business combinations. The Company elected not to apply IFRS 3, “Business Combinations,” retrospectively to business combinations that occurred before January 1, 2012. Therefore, in the opening balance sheet, the amount of goodwill generated from past business combinations was the same as the carrying amount of goodwill under R.O.C. GAAP as of January 1, 2012. 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. R.O.C. GAAP Effect of Transition to Taiwan-IFRSs Taiwan-IFRSs Amount Recognition and Measurement Difference Presentation Difference Amount Item $ 143,410,588 $ - $ - $ 143,410,588 Cash and cash equivalents Item Current assets Cash and cash equivalents Financial assets at fair value through profit or loss Available-for-sale financial assets 39,554 2,410,635 Held-to-maturity financial assets 5,056,973 Notes and accounts receivable 58,257,798 Receivables from related parties 353,811 Allowance for doubtful (480,212) receivables Allowance for sales returns and (6,038,003) others Other receivables from related 185,550 parties Other financial assets Inventories Deferred income tax assets Prepaid expenses and other current assets Total current assets Long-term investments 473,833 37,830,498 8,001,202 2,786,408 252,288,635 - - - - - - - - - - - - - - - - 39,554 Financial assets at fair value through profit or loss 2,410,635 Available-for-sale financial assets 5,056,973 Held-to-maturity financial assets (480,212) 57,777,586 Notes and accounts receivable, net - 353,811 Receivables from related parties 480,212 6,038,003 - - - - - 185,550 Other receivables from - - (8,001,202) - related parties 473,833 Other financial assets 37,830,498 Inventories - - 2,786,408 Other current assets (1,963,199) 250,325,436 Total current assets Investments accounted for using 23,430,020 (69,102) equity method Available-for-sale financial 38,751,245 - 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 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) - - 351,002 - - 351,002 - - - - 32,742 - 23,360,918 Investments accounted e) for using equity method 38,751,245 Available-for-sale financial assets 3,605,077 Financial assets carried at cost 65,717,240 617,562,188 Property, plant and equipment 10,959,569 Intangible assets 8,001,202 - (32,742) 7,968,460 13,128,219 Deferred income tax assets 2,426,712 Refundable deposits 1,235,144 Other noncurrent assets 16,790,075 Note a) b) c) b), d) c) 3) Share-based payment. The Company elected to take the optional exemption from applying IFRS 2 retrospectively for the shared-based payment transactions granted and vested before January 1, 2012. Total $ 955,034,605 $ 281,900 $ 6,038,003 $ 961,354,508 Total c. Effect of transition to Taiwan-IFRSs After transition to Taiwan-IFRSs, the effect on the Company’s consolidated balance sheets as of December 31, 2012 and January 1, 2012 (the transition date) as well as the consolidated statements of comprehensive income for the year ended December 31, 2012, is stated as follows: Current liabilities Short-term loans Financial liabilities at fair value through profit or loss 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 $ 34,714,929 $ - $ - $ 34,714,929 Short-term loans 15,625 14,490,429 748,613 15,635,594 7,535,296 11,186,591 44,831,798 - - - - - - - - - - - - - - 15,625 Financial liabilities at fair value through profit or loss 14,490,429 Accounts payable 748,613 Payables to related parties 15,635,594 Income tax payable 7,535,296 Salary and bonus payable 11,186,591 Accrued profit sharing to employees and bonus to directors and supervisors 44,831,798 Payables to contractors and equipment suppliers (Continued) 53 R.O.C. GAAP Effect of Transition to Taiwan-IFRSs Taiwan-IFRSs Item Amount Recognition and Measurement Difference Presentation Difference Amount Item Accrued expenses and other $ 13,148,944 $ - $ - $ 13,148,944 Accrued expenses and other current liabilities Current portion of bonds payable and long-term bank loans 128,125 - Total current liabilities - 142,435,944 Long-term liabilities Bonds payable Long-term bank loans Other long-term payables Obligations under capital leases 80,000,000 1,359,375 54,000 748,115 Total long-term liabilities 82,161,490 - - - - - - - - - current liabilities 128,125 Current portion of bonds payable and long-term bank loans 6,038,003 6,038,003 6,038,003 Provisions a) 148,473,947 Total current liabilities - - - - - 80,000,000 Bonds payable 1,359,375 Long-term bank loans 54,000 Other long-term payables 748,115 Obligations under finance leases 82,161,490 3,979,541 203,890 - 500,041 4,683,472 229,280,906 2,941,693 - - - 2,941,693 2,941,693 - - 4,891 (4,891) - 6,038,003 6,921,234 Accrued pension cost 203,890 Guarantee deposits 4,891 Provisions 495,150 Others 7,625,165 238,260,602 Total 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 259,244,357 56,137,809 - (462,469) Appropriated as legal capital 115,820,123 reserve Appropriated as special 7,606,224 - - capital reserve Unappropriated earnings 287,174,942 410,601,289 (2,189,821) (2,189,821) Others Cumulative translation (10,753,763) adjustments Net loss not recognized as (5,299) pension cost Unrealized gain/loss on financial instruments 7,973,321 (43) 5,299 - Equity attributable to shareholders of the parent Minority interests Total shareholders’ equity (2,785,741) 723,197,714 5,256 (2,647,034) 2,555,985 725,753,699 (12,759) (2,659,793) d) e) - - - - - - - - - - - - - 259,244,357 Capital stock 55,675,340 Capital surplus Retained earnings 115,820,123 Appropriated as legal capital reserve 7,606,224 Appropriated as special capital Reserve 284,985,121 Unappropriated earnings 408,411,468 d), e) (10,753,806) Foreign currency translation e) reserve - - d), e) 7,973,321 Unrealized gain/loss from available-for- sale financial assets (2,780,485) 720,550,680 Equity attributable to shareholders of the parent 2,543,226 Noncontrolling interests d) 723,093,906 Total equity Total $ 955,034,605 $ 281,900 $ 6,038,003 $ 961,354,508 Total (Concluded) 54 2) Reconciliation of consolidated balance sheet as of January 1, 2012 Note R.O.C. GAAP Effect of Transition to Taiwan-IFRSs Taiwan-IFRSs Amount Recognition and Measurement Difference Presentation Difference Amount Item $ 143,472,277 $ - $ - $ 143,472,277 Cash and cash equivalents Item Current assets Cash and cash equivalents Financial assets at fair value through profit or loss Available-for-sale financial assets 15,360 3,308,770 Held-to-maturity financial 3,825,680 assets Notes and accounts receivable 46,321,240 Receivables from related parties 185,764 Allowance for doubtful (490,952) receivables Allowance for sales returns and (5,068,263) others Other receivables from related 122,292 - - - - - - - - - - - 15,360 Financial assets at fair value through profit or loss 3,308,770 Available-for-sale financial assets 3,825,680 Held-to-maturity financial assets (490,952) 45,830,288 Notes and accounts - 490,952 5,068,263 receivable, net 185,764 Receivables from related Parties - - - - - 122,292 Other receivables from parties Other financial assets Inventories Deferred income tax assets Prepaid expenses and other current assets Total current assets Long-term investments 617,142 24,840,582 5,936,490 2,174,014 - - - - - - (5,936,490) - related parties 617,142 Other financial assets 24,840,582 Inventories - - 2,174,014 Other current asset 225,260,396 - (868,227) 224,392,169 Total current assets Investments accounted for using 24,900,332 (13,401) equity method Held-to-maturity financial assets 5,243,167 - 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 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) - - 231,011 - - 231,011 - - - - 47,237 - 24,886,931 Investments accounted for e) using equity method 5,243,167 Held-to-maturity financial assets 4,315,005 Financial assets carried at cost 34,445,103 490,422,153 Property, plant and equipment 10,861,563 Intangible assets 5,936,490 - (47,237) 5,889,253 13,604,218 Deferred income tax assets 4,518,863 Refundable deposits 1,306,746 Other noncurrent assets 19,429,827 Total $ 774,264,942 $ 217,610 $ 5,068,263 $ 779,550,815 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 $ 25,926,528 $ - $ - $ 25,926,528 Short-term loans 13,742 232 10,530,487 1,328,521 10,656,124 6,148,499 9,081,293 - - - - - - - - - - - - - - 13,742 Financial liabilities at fair value through profit or loss 232 Hedging derivative financial liabilities 10,530,487 Accounts payable 1,328,521 Payables to related parties 10,656,124 Income tax payable 6,148,499 Salary and bonus payable 9,081,293 Accrued profit sharing to employees and bonus to directors and supervisors (Continued) Note a) b) c) b), d) c) R.O.C. GAAP Effect of Transition to Taiwan-IFRSs Taiwan-IFRSs Amount Recognition and Measurement Difference Presentation Difference Amount Item $ 35,540,526 $ - $ - $ 35,540,526 Payables to contractors 3) Reconciliation of consolidated statement of comprehensive income for the year ended December 31, Note 2012 R.O.C. GAAP Effect of Transition to Taiwan- IFRSs Taiwan-IFRSs a) d) e) Item Payables to contractors and equipment suppliers Accrued expenses and other current liabilities 13,218,235 Current portion of bonds 4,562,500 payable and long-term bank loans - Total current liabilities Long-term liabilities Bonds payable Long-term bank loans Obligations under capital leases - 117,006,687 18,000,000 1,587,500 870,993 Total long-term liabilities 20,458,493 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 - - and equipment suppliers 13,218,235 Accrued expenses and other current liabilities 4,562,500 Current portion of bonds payable and long-term bank loans 5,068,263 5,068,263 5,068,263 Provisions 122,074,950 Total current liabilities - - - - 18,000,000 Bonds payable 1,587,500 Long-term bank loans 870,993 Obligations under finance leases 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 - - 2,889 (2,889) - 5,068,263 6,241,024 Accrued pension cost 443,983 Guarantee deposits 2,889 Provisions 400,831 Others 7,088,727 149,622,170 Total liabilities 259,162,226 55,846,357 - (374,695) Appropriated as legal capital 102,399,995 reserve Appropriated as special 6,433,874 - - capital reserve Unappropriated earnings 213,357,286 322,191,155 (1,726,828) (1,726,828) Others Cumulative translation (6,433,369) adjustments Unrealized gain/loss on financial instruments - Equity attributable to shareholders of the parent Minority interests Total shareholders’ equity (1,172,855) 5 - - (7,606,224) 629,593,514 - 5 (2,101,518) 2,450,037 632,043,551 (13,388) (2,114,906) - - - - - - - 93 (93) - - - - 259,162,226 Capital stock 55,471,662 Capital surplus Retained earnings 102,399,995 Appropriated as legal capital reserve 6,433,874 Appropriated as special capital reserve 211,630,458 Unappropriated earnings 320,464,327 (6,433,364) Foreign currency translation e) reserve (1,172,762) Unrealized gain/loss from available-for-sale financial assets (93) Cash flow hedges reserve (7,606,219) 627,491,996 Equity attributable to shareholders of the parent 2,436,649 Noncontrolling interests d) 629,928,645 Total equity Total $ 774,264,942 $ 217,610 $ 5,068,263 $ 779,550,815 Total (Concluded) Unrealized gross profit from (25,029) - - Item Net sales Cost of sales Gross profit before affiliates elimination 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 Settlement income Foreign exchange gain, net Gain on settlement and disposal of financial assets, net Technical service income Others - - gains 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 Total non-operating expenses and losses Income before income tax Income tax expense Amount Recognition and Measurement Difference Presentation Difference Amount Item $ 506,248,580 $ - $ 496,654 $ 506,745,234 Net revenue 262,628,681 243,619,899 (45,583) 45,583 - 496,654 262,583,098 Cost of revenue 244,162,136 Gross profit before unrealized gross profit on sales to associates (25,029) Unrealized gross profit on sales to associates 243,594,870 45,583 496,654 244,137,107 Gross profit 40,402,138 17,638,088 4,497,451 62,537,677 - (18,943) (6,394) (1,465) (26,802) - - - - - (449,364) 40,383,195 Research and development 17,631,694 General and administrative 4,495,986 Marketing 62,510,875 (449,364) Other operating income and expenses, net 181,057,193 72,385 47,290 181,176,868 Income from operations 2,028,611 45,118 - 2,073,729 Share of profits of associates 1,645,036 883,845 582,498 541,089 496,654 604,304 - - 6,782,037 4,231,602 1,020,422 444,505 31,816 556,909 6,285,254 - - - - - - - 4,977 50,095 - - - - - - (1,645,036) (883,845) - (541,089) (496,654) (604,304) 1,716,093 (2,857,287) (5,312,122) (4,231,602) - (444,505) (31,816) (556,909) (5,264,832) and joint venture - - - - 582,498 Foreign exchange gain, net - - - - - - 1,716,093 Other income (2,852,310) Other gains and losses 1,520,010 - - 1,020,422 Finance costs - - - - - 1,020,422 - 181,553,976 15,590,287 122,480 (37,633) - - 181,676,456 Income before income tax 15,552,654 Income tax expense Note f) d) d) d) d) f) e) f) f) f) f) f) f) e), f) f) f) f) f) d) d), e) Total non-operating income and (Continued) 55 R.O.C. GAAP Effect of Transition to Taiwan- IFRSs Taiwan-IFRSs Item Amount Recognition and Measurement Difference Presentation Difference Amount Item Net income $ 165,963,689 $ 160,113 $ - $ 166,123,802 Net income (4,322,697) Exchange differences arising on translation of foreign operations 9,534,269 Changes in fair value of available-for-sale financial assets 232 Cash flow hedges 53,748 Share of other comprehensive e) income of associates and joint venture (685,978) Actuarial loss from defined (326,942) benefit plans Income tax expense related to components of other comprehensive income 4,252,632 Other comprehensive income for the year, net of income tax d) d) $ 170,376,434 Total comprehensive income for the year (Concluded) 4) Significant reconciliation differences in consolidated statements of cash flows for the year ended December 31, 2012 The Company prepared the statement of cash flows using the indirect method under R.O.C. GAAP, in which the interest received is not required to be disclosed separately; instead, the interest received and the interest paid are included within the operating activities in the statement of cash flows. However, according to IAS No. 7, “Statement of Cash Flows,” for the year ended December 31, 2012, the interest received of NT$1,719,026 thousand should be disclosed separately in the investing activities; and the interest paid of NT$736,607 thousand should be disclosed in the financing activities based on their nature, respectively. Except for the above differences, there are no other significant differences between R.O.C. GAAP and Taiwan-IFRSs in the consolidated statement of cash flows. 56 d. Notes to the reconciliation of the significant differences: Note 1) 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 year the related revenue is recognized based on historical experience. The corresponding allowance for sales returns and others is presented as a reduction in accounts receivable. Under Taiwan-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 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. 2) Classifications of deferred income tax asset/liability and valuation allowance Under R.O.C. GAAP, a deferred tax asset and liability is classified as current or noncurrent in accordance with the classification of its related asset or liability. However, if a deferred income tax asset or liability does not relate to an asset or liability in the financial statements, it is classified as either current or noncurrent based on the expected length of time before it is realized or settled. Under Taiwan-IFRSs, a deferred tax asset and liability is classified as noncurrent 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 noncurrent assets were NT$8,001,202 thousand and NT$5,936,490 thousand, respectively. 3) The classification of assets leased to others and idle assets Under R.O.C. GAAP, assets leased to others and idle assets are classified under other assets. Under Taiwan-IFRSs, the aforementioned items are classified as property, plant and equipment according to their nature. In accordance with IAS No. 40, “Investment Property,” investment properties are defined as properties held to earn rentals or for capital appreciation; however, the Company’s assets leased to others are mainly housing facilities leased to employees and manufacturing facilities leased to suppliers. The housing facilities leased to employees are not classified as investment properties; and manufacturing facilities leased to suppliers are not considered as investment properties since they cannot be sold separately and comprise only an insignificant portion of the entire facility. As of December 31, 2012 and January 1, 2012, the amounts reclassified from assets leased to others and idle assets to property, plant and equipment were NT$32,742 thousand and NT$47,237 thousand, respectively. 4) Employee benefits The Company had recognized the pension cost and retirement benefit obligation under its defined benefit plans based on actuarial valuations performed in conformity with R.O.C. GAAP. Under Taiwan-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 such actuarial gains and losses. When using the corridor approach, actuarial gains and losses is 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. For the year ended December 31, 2012, total actuarial gains and losses were also recognized to other comprehensive income in accordance with actuarial valuation carried out in 2012. In addition, under R.O.C. GAAP, a minimum pension liability should be recognized in the balance sheet. If the accrued pension cost is less than the minimum pension liability, the difference should be recognized as an additional liability. Under Taiwan-IFRSs, there is no aforementioned requirement to recognize minimum pension liability. As of December 31, 2012 and January 1, 2012, accrued pension cost of the Company was adjusted 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; noncontrolling interests were adjusted for a decrease of NT$12,759 thousand and NT$13,388 thousand, respectively. As of December 31, 2012, net loss not recognized as pension cost was adjusted for a decrease of NT$4,416 thousand. For the year ended December 31, 2012, pension cost and income tax expense of the Company were adjusted for a decrease of NT$72,385 thousand and NT$37,633 thousand, respectively; actuarial loss from defined benefit plans and income tax benefit related to components of other comprehensive income were recognized in the amount of NT$685,978 thousand and NT$82,358 thousand, respectively. 5) Investments accounted for using the equity method The Company has evaluated significant differences between current accounting policies and Taiwan-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 investor subscribes to additional shares of associates and joint ventures that is disproportionate to its existing ownership percentage and results in a decrease in the investor’s ownership percentage in the associate and joint venture, the resulting carrying amount of the investment differs from the amount of the investor’s share in the equity of the associates and joint venture. Under R.O.C. GAAP, the investor records such a difference as an adjustment to the carrying amount of the investment with the corresponding amount charged or credited to capital surplus. Under Taiwan-IFRSs, such a difference is still adjusted to carrying amount of the investment and capital surplus. If the investor’s ownership interest in an associate and joint venture decreases, the proportionate amount of the gains or losses previously recognized in other comprehensive income in relation to that associate and joint venture shall be reclassified to profit or loss on the same basis as would be required if the associate and joint venture had directly disposed of the related assets or liabilities. 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; foreign currency translation reserve 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 a decrease of NT$18,905 thousand for the year ended December 31, 2012, respectively; other gains and losses was adjusted for a gain of NT$4,977 thousand for the year ended December 31, 2012. 6) The reclassification of line items in the consolidated statement of comprehensive income In accordance with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers before its amendment due to the adoption of Taiwan-IFRSs, income from operations in the consolidated income statement only includes net revenue, cost of revenue and operating expenses. Under Taiwan-IFRSs, based on the nature of operating transactions, technical service income is reclassified under net revenue; 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 income and expenses, which are included in income from operations. 57 Under Taiwan-IFRSs, based on the nature of operating transactions, for the year ended December 31, 2012, the Company reclassified technical service income of NT$496,654 thousand to net revenue, 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 income and expenses. In addition, interest income of NT$1,645,036 thousand and dividend income of NT$71,057 thousand were also reclassified to other income; settlement income of NT$883,845 thousand, net gain on 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 loss of financial assets of NT$4,231,602 thousand as well as others of NT$297,992 thousand (under non-operating expenses and losses) were reclassified to other gains and losses for the year ended December 31, 2012. k. Names, locations, and related information of investees over which TSMC exercises significant influence: Please see Table 9 attached; l. 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, income (losses) of the investee, share of profits/losses of investee, ending balance, amount received as dividends from the investee, and the limitation on investee: Please see Table 10 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 8 attached. 44. ADDITIONAL DISCLOSURES Following are the additional disclosures required by the SFB for TSMC: a. Financings provided: Please see Table 1 attached; b. Endorsement/guarantee provided: Please see Table 2 attached; c. Marketable securities held (excluding investments in subsidiaries, associates and jointly controlled entities): Please see Table 3 attached; d. Marketable securities acquired and disposed of at costs or prices of at least NT$300 million or 20% of the paid-in capital: Please see Table 4 attached; e. Acquisition of individual real estate properties at costs of at least NT$300 million or 20% of the paid-in capital: Please see Table 5 attached; f. Disposal of individual real estate properties at prices of at least NT$300 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 6 attached; h. Receivables from related parties amounting to at least NT$100 million or 20% of the paid-in capital: Please see Table 7 attached; i. Information about the derivative financial instruments transaction: Please see Notes 7 and 10; j. Others: The business relationship between the parent and the subsidiaries and between each subsidiary, and significant transactions between them: Please see Table 8 attached; 58 TABLE 1 Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries FINANCINGS PROVIDED FOR THE YEAR ENDED DECEMBER 31, 2013 (Amounts in Thousands of New Taiwan Dollars, Unless Specified Otherwise) No. Financing Company Counter- party Financial Statement Account Related Party 1 TSMC Partners TSMC China TSMC Solar TSMC SSL TSMC Solar TSMC SSL 2 TSMC Development Other receivables from related parties Other receivables from related parties Other receivables from related parties Other receivables from related parties Other receivables from related parties Yes Yes Yes Yes Yes Maximum Balance for the Period (US$ in Thousands) (Note 3) $ 3,874,000 (US$ 130,000) 2,682,000 (US$ 90,000) 1,788,000 (US$ 60,000) 2,384,000 (US$ 80,000) 2,682,000 (US$ 90,000) Ending Balance (US$ in Thousands) (Note 3) Amount Actually Drawn (US$ in Thousands) Interest Rate Nature for Financing Transaction Amounts Reason for Financing Allowance for Bad Debt Collateral Item Value $ - $ - 2,682,000 (US$ 90,000) 1,788,000 (US$ 60,000) 2,100,900 (US$ 70,500) 298,000 (US$ 10,000) - The need for short- term financing 0.37%- 0.3805% The need for short- term financing 0.37% The need for short- term financing - - - - - - The need for short- term financing The need for short- term financing $ - Purchase equipment $ - - - - - Operating capital Operating capital Operating capital Operating capital - - - - - - - - - $ - - - - - Financing Limits for Each Borrowing Company $ 42,862,161 (Note 1) 17,144,864 (Note 1) 17,144,864 (Note 1) 6,503,905 (Notes 1 and 4) 6,503,905 (Notes 1 and 4) Financing Company’s Total Financing Amount Limits (Note 2) $ 42,862,161 42,862,161 42,862,161 16,259,762 (Note 4) 16,259,762 (Note 4) 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. The above restriction does not apply to the offshore subsidiaries whose voting shares are 100% owned, directly or indirectly, by TSMC (offshore 100% owned subsidiaries) or the subsidiaries whose voting shares are 90% and up owned, directly or indirectly, by TSMC (90% and up owned subsidiaries). However, the respective lending limit for offshore 100% owned subsidiaries shall not exceed the net worth of TSMC Partners and TSMC Development, respectively, and the aggregate amounts lendable to 90% and up owned subsidiaries and the total amount lendable to one such borrower in 90% and up owned subsidiaries shall not exceed forty percent (40%) of the net worth of TSMC Partners and TSMC Development, respectively. Note 2: The total amount available for lending purpose shall not exceed the net worth of TSMC Partners and TSMC Development, respectively. Note 3: The maximum balance for the period and ending balance represent the amounts approved by the Board of Directors. Note 4: The amount was determined based on the audited financial statements in accordance with local accounting principles. 59 TABLE 2 Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries ENDORSEMENTS/GUARANTEES PROVIDED FOR THE YEAR ENDED DECEMBER 31, 2013 (Amounts in Thousands of New Taiwan Dollars, Unless Specified Otherwise) No. Endorsement/ Guarantee Provider Name Guaranteed Party Nature of Relationship Limits on Endorsement/ Guarantee Amount Provided to Each Guaranteed Party (Notes 1 and 2) Maximum Balance for the Period (US$ in Thousands) (Note 3) Ending Balance (US$ in Thousands) (Note 3) Amount Actually Drawn (US$ in Thousands) Amount of Endorsement/ Guarantee Collateralized by Properties Ratio of Accumulated Endorsement/ Guarantee to Net Equity per Latest Financial Statements Maximum Endorsement/ Guarantee Amount Allowable (Note 2) Guarantee Provided by Parent Company Guarantee Provided by A Subsidiary Guarantee Provided to Subsidiaries in Mainland China 0 TSMC TSMC Global Subsidiary $ 211,877,064 $ 44,700,000 (US$ 1,500,000) $ 44,700,000 (US$ 1,500,000) $ 44,700,000 (US$ 1,500,000) $ - 5.3% $ 211,877,064 Yes No No Note 1: The total amount of the guarantee provided by TSMC to any individual entity shall not exceed ten percent (10%) of TSMC’s net worth, or the net worth of such entity. However, subsidiaries whose voting shares are 100% owned, directly or indirectly, by TSMC are not subject to the above restrictions after the approval of the Board of Directors. Note 2: The total amount of guarantee shall not exceed twenty-five percent (25%) of TSMC’s net worth. Note 3: The maximum balance for the period and ending balance represent the amounts approved by the Board of Directors. 60 TABLE 3 Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries MARKETABLE SECURITIES HELD DECEMBER 31, 2013 (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, 2013 Shares/Units (In Thousands) Carrying Value (Foreign Currencies in Thousands) Percentage of Ownership (%) Fair Value (Foreign Currencies in Thousands) Note TSMC Commercial paper CPC Corporation, Taiwan Taiwan Power Company Stock Semiconductor Manufacturing International Corporation United Industrial Gases Co., Ltd. Shin-Etsu Handotai Taiwan Co., Ltd. W.K. Technology Fund IV Fund Horizon Ventures Fund Crimson Asia Capital TSMC Global Stock ASML Money market fund Ssga Cash Mgmt Global Offshore TSMC North America TSMC Partners Stock Spansion Inc. Stock Mcube Emerging Alliance ISDF ISDF II Fund Shanghai Walden Venture Capital Enterprise Common stock Global Investment Holding Inc. RichWave Technology Corp. Preferred stock Next IO, Inc. QST Holdings, LLC Preferred stock Sonics, Inc. Common stock Alchip Technologies Limited Sonics, Inc. Goyatek Technology, Corp. - - - - - - - - - - - - - - - - - - - - - Held-to-maturity financial assets 〃 100 80 $ 998,018 797,931 N/A N/A $ 997,608 798,004 Available-for-sale financial assets Financial assets carried at cost 〃 〃 Financial assets carried at cost 〃 275,957 21,230 10,500 4,000 - - 646,402 193,584 105,000 39,280 78,303 53,211 1 10 7 2 12 1 Note 1 646,402 437,105 340,108 34,919 78,303 53,211 Available-for-sale financial assets 20,993 US$ 1,970,536 5 US$ 1,970,536 Note 2 Available-for-sale financial assets 40 US$ 40 N/A US$ 40 Available-for-sale financial assets 274 US$ 3,799 - US$ 3,799 Financial assets carried at cost 6,333 - 17 - Financial assets carried at cost - US$ 5,000 6 US$ 5,000 Financial assets carried at cost 〃 11,124 4,074 US$ 3,065 US$ 1,545 6 10 US$ 3,065 US$ 1,545 Financial assets carried at cost 〃 8 - - US$ 141 Financial assets carried at cost 230 US$ 497 Financial assets carried at cost 〃 〃 7,520 278 745 US$ 3,664 US$ 10 US$ 163 - 4 2 14 3 6 - US$ 141 Note 3 US$ 497 US$ 3,664 US$ 10 US$ 163 (Continued) 61 Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2013 Shares/Units (In Thousands) Carrying Value (Foreign Currencies in Thousands) Percentage of Ownership (%) Fair Value (Foreign Currencies in Thousands) Note VTAF II Preferred stock Sonics, Inc. Common stock Sentelic Aether Systems, Inc. RichWave Technology Corp. Preferred stock 5V Technologies, Inc. Aquantia Cresta Technology Corporation Impinj, Inc. Next IO, Inc. QST Holdings, LLC VTAF III Common stock Accton Wireless Broadband Corp. Preferred stock BridgeLux, Inc. GTBF, Inc. LiquidLeds Lighting Corp. Neoconix, Inc. Powervation, Ltd. Stion Corp. Tilera, Inc. Validity Sensors, Inc. - - - - - - - - - - - - - - - - - - - Note 1: The carrying value represents carrying amount less accumulated impairment of NT$412,901 thousand. Note 2: In October 2012, TSMC Global acquired 5% of the outstanding equity of ASML with a lock-up period of 2.5 years starting from the acquisition date. Note 3: The carrying value represents carrying amount less accumulated impairment of US$500 thousand. Note 4: The carrying value represents carrying amount less accumulated impairment of US$1,219 thousand. Note 5: The carrying value represents carrying amount less accumulated impairment of US$4,672 thousand. Note 6: The carrying value represents carrying amount less accumulated impairment of US$55,474 thousand. Financial assets carried at cost 264 US$ 456 3 US$ 456 Financial assets carried at cost 〃 〃 Financial assets carried at cost 〃 〃 〃 〃 〃 1,806 2,600 1,267 963 4,556 92 711 179 - US$ 2,607 US$ 2,243 US$ 1,036 US$ 2,168 US$ 4,316 US$ 28 US$ 1,100 - US$ 588 8 28 3 3 2 - - 1 13 US$ 2,607 US$ 2,243 US$ 1,036 US$ 2,168 US$ 4,316 US$ 28 US$ 1,100 - US$ 588 Financial assets carried at cost 2,249 US$ 315 6 US$ 315 Financial assets carried at cost 〃 〃 〃 〃 〃 〃 〃 7,522 1,154 1,600 4,147 527 8,152 3,890 11,192 US$ 9,379 US$ 1,500 US$ 800 US$ 170 US$ 8,238 - US$ 3,025 US$ 4,197 3 N/A 11 - 15 15 2 4 US$ 9,379 US$ 1,500 US$ 800 US$ 170 US$ 8,238 - US$ 3,025 US$ 4,197 Note 4 Note 5 Note 6 (Concluded) 62 TABLE 4 Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries MARKETABLE SECURITIES ACQUIRED AND DISPOSED OF AT COSTS OR PRICES OF AT LEAST NT$300 MILLION OR 20% OF THE PAID-IN CAPITAL FOR THE YEAR ENDED DECEMBER 31, 2013 (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 1) 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) Available-for-sale financial - - 1,277,958 $ 1,845,052 - $ - 1,002,001 $ 1,830,424 $ 983,715 $ 846,709 275,957 $ 646,402 TSMC Stock Semiconductor Manufacturing International Corporation TSMC SSL Commercial Paper CPC Corporation, Taiwan Taiwan Power Company TSMC Global Corporate bond Aust + Nz Banking Group assets Investments accounted for using equity method Held-to-maturity financial assets 〃 Held-to-maturity financial assets Commonwealth Bank of Australia 〃 Commonwealth Bank of Australia 〃 〃 Deutsche Bank AG London 〃 JP Morgan Chase + Co. 〃 Westpac Banking Corp. - - - - - - - - - - - - - - - - Note 2 Subsidiary 430,400 2,389,541 124,274 1,242,744 - - - - 100 80 998,018 797,931 - - - - - - - - - 20,000 US$ 19,999 25,000 US$ 25,000 25,000 US$ 25,000 20,000 US$ 19,999 35,000 US$ 35,006 25,000 US$ 25,000 - - - - - - - - - - - - - - 20,000 US$ 20,000 US$ 20,000 25,000 US$ 25,000 US$ 25,000 25,000 US$ 25,000 US$ 25,000 20,000 US$ 20,000 US$ 20,000 35,000 US$ 35,000 US$ 35,000 25,000 US$ 25,000 US$ 25,000 - - US$ 100,000 TSMC Stock Development WaferTech Investments accounted for using equity method Note 3 Subsidiary 293,637 US$ 262,053 Note 1: The ending balance includes the amortization of premium/discount on bonds investments, unrealized gains/losses on financial assets, share of profits/losses of investees and other related adjustment to equity. Note 2: The acquisition is primarily consisted of cash injection. Note 3: The disposal is primarily consisted of capital return. - - - - - - - - - - 554,674 2,154,913 100 80 - - - - - - 998,018 797,931 - - - - - - 293,637 US$ 248,252 63 TABLE 5 Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries ACQUISITION OF INDIVIDUAL REAL ESTATE PROPERTIES AT COSTS OF AT LEAST NT$300 MILLION OR 20% OF THE PAID-IN CAPITAL FOR THE YEAR ENDED DECEMBER 31, 2013 (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 - - - - - - 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 TSMC Land January 3, 2013 $ 2,248,400 By the contract Miaoli County Government January 22, 2013 to August 29, 2013 January 27, 2013 to June 21, 2013 March 3, 2013 to October 25, 2013 April 3, 2013 to May 15, 2013 3,561,600 By the construction progress Fu Tsu Construction Co., Ltd. 4,373,205 By the construction progress Da Cin Construction Co., Ltd. 338,948 By the construction progress I Domain Industrial Co., Ltd. 2,615,744 By the construction progress China Steel Structure May 27, 2013 to June 615,038 By the construction progress 19, 2013 Co., Ltd. Tasa Construction Corporation Fab Fab Fab Fab Fab 64 TABLE 6 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, 2013 (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 % to Total Payment Terms Unit Price (Note) Payment Terms (Note) Associate of the Company’s subsidiary (Note 2) Subsidiary Sales Purchases TSMC TSMC North America GUC VIS Mcube TSMC China WaferTech VIS SSMC Subsidiary Associate Associate Indirect subsidiary Associate Associate TSMC Solar TSMC Solar Europe GmbH Subsidiary TSMC North America GUC Associate of TSMC Amount (Foreign Currencies in Thousands) $ 414,087,565 1,970,934 Purchases/ Sales Sales Sales Sales 69 1 Net 30 days from invoice date Net 30 days from the end of the month of when invoice is issued 195,101 - Net 30 days from the end of the 119,067 16,902,114 8,520,337 6,993,964 3,056,372 - 27 14 11 month of when invoice is issued Net 30 days from invoice date Net 30 days from the end of the month of when invoice is issued Net 30 days from the end of the month of when invoice is issued Net 30 days from the end of the month of when invoice is issued 5 Net 30 days from the end of the month of when invoice is issued 146,866 57 Net 30 days from the end of the month of when invoice is issued 1,714,625 (US$ 57,780) - Net 30 days from invoice date Purchases Purchases Purchases Sales Sales - - - - - - - - - - - - - - - - - - - - Note 1: The sales prices and payment terms to related parties were not significantly different from those of sales to third parties. For other related party transactions, prices and terms were determined in accordance with mutual agreements. Note 2: TSMC Partners, the subsidiary of TSMC, did not exercise significant influence over Mcube starting the third quarter of 2013, and therefore, Mcube is no longer a related party to the Company. Ending Balance (Foreign Currencies in Thousands) $ 52,750,047 219,424 - - (1,509,508) (685,906) (731,587) (382,007) 16,287 71,952 (US$ 2,414) Note % to Total 74 - - - 8 4 4 2 43 - 65 TABLE 7 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, 2013 (Amounts in Thousands of New Taiwan Dollars, Unless Specified Otherwise) Company Name Related Party Nature of Relationships TSMC TSMC North America GUC VIS Subsidiary Associate Associate TSMC Partners TSMC Solar The same parent company TSMC SSL The same parent company TSMC China TSMC Parent company TSMC Technology TSMC Parent company WaferTech TSMC Parent company Ending Balance (Foreign Currencies in Thousands) $ 53,078,207 219,424 105,881 2,102,953 (US$ 70,569) 298,025 (US$ 10,001) 1,509,508 (RMB 308,836) 170,332 (US$ 5,716) 685,906 (US$ 23,017) Turnover Days (Note 1) Overdue Amount Action Taken 41 42 (Note 2) (Note 2) (Note 2) 31 (Note 2) 27 $ 16,627,236 - - - - - - - - - - - - - - - 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. Amounts Received in Subsequent Period Allowance for Bad Debts $ 18,782,230 - - $ - - - - - - - - - - - - - 66 TABLE 8 Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries INTERCOMPANY RELATIONSHIPS AND SIGNIFICANT INTERCOMPANY TRANSACTIONS FOR THE YEAR ENDED DECEMBER 31, 2013 (Amounts in Thousands of New Taiwan Dollars) No. 0 Company Name Counter Party TSMC TSMC North America TSMC China TSMC Japan TSMC Europe TSMC Korea TSMC Technology WaferTech TSMC Canada Xintec Nature of Relationship (Note 1) 1 1 1 1 1 1 1 1 1 Financial Statements Item Net revenue from sale of goods Receivables from related parties Other receivables from related parties Payables to related parties Net revenue from sale of goods Net revenue from royalty Purchases Marketing expenses - commission Disposal of property, plant and equipment Gain on disposal of property, plant and equipment Purchases of property, plant and equipment Other receivables from related parties Payables to related parties 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 Research and development expenses Payables to related parties Net revenue from sale of goods Purchases Other receivables from related parties Payables to related parties Research and development expenses Payables to related parties Manufacturing expenses Research and development expenses Disposal of property, plant and equipment Intercompany Transactions Amount Terms (Note 2) Percentage of Consolidated Net Revenue or Total Assets $ 414,087,565 52,750,047 328,160 7,675 7,798 15,624 16,902,114 89,129 67,174 2,682 100,298 15,409 1,509,508 240,268 37,906 385,931 62,070 55,482 21,609 2,327 826,291 170,332 12,525 8,520,337 3,009 685,906 217,031 17,096 106,290 1,418 26,978 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 69% 4% - - - - 3% - - - - - - - - - - - - - - - - 1% - - - - - - - (Continued) 67 No. 0 1 2 3 4 5 Company Name Counter Party TSMC TSMC SSL TSMC Solar TSMC Solar TSMC Development WaferTech TSMC North America TSMC Technology TSMC Solar TSMC Solar Europe GmbH TSMC SSL TSMC China TSMC Development TSMC Partners TSMC Partners Xintec TSMC Partners Nature of Relationship (Note 1) 1 1 1 1 3 1 3 3 3 3 3 Financial Statements Item Manufacturing expenses Other gains and losses Other receivables from related parties Payables to related parties Manufacturing expenses General and administrative expenses Other gains and losses Purchases of property, plant and equipment Other receivables from related parties Payables to related parties Other receivables from related parties Other receivables from related parties Net revenue from sale of goods Receivables from related parties Finance costs Finance costs Other payables to related parties Other receivables from related parties Disposal of property, plant and equipment Finance costs Intercompany Transactions Amount Terms (Note 2) Percentage of Consolidated Net Revenue or Total Assets $ 12,956 8,550 2,160 3,292 2,822 2,257 10,086 20,201 2,431 14,054 40,485 8,307 146,866 16,287 2,613 2,043 2,102,953 298,025 48,193 2,788 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 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. (Concluded) 68 TABLE 9 Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries NAMES, LOCATIONS, AND RELATED INFORMATION OF INVESTEES OVER WHICH THE COMPANY EXERCISES SIGNIFICANT INFLUENCE FOR THE YEAR ENDED DECEMBER 31, 2013 (Amounts in Thousands of New Taiwan Dollars, Unless Specified Otherwise) Investor Company Investee Company Location Main Businesses and Products Original Investment Amount Balance as of December 31, 2013 December 31, 2013 (Foreign Currencies in Thousands) December 31, 2012 (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) Share of Profits/ Losses of Investee (Note 1) (Foreign Currencies in Thousands) Note TSMC TSMC Global TSMC Partners Tortola, British Virgin Islands Tortola, British Virgin Islands Investment activities Investing in companies involved in the design, $ 42,327,245 $ 42,327,245 31,456,130 31,456,130 1 988,268 VIS Hsin-Chu, Taiwan Research, design, development, manufacture, 13,232,288 13,232,288 628,223 manufacture, and other related business in the semiconductor industry SSMC TSMC Solar Singapore Tai-Chung, Taiwan TSMC North America San Jose, California, U.S.A. packaging, testing and sale of memory integrated circuits, LSI, VLSI and related parts Fabrication and supply of integrated circuits Engaged in researching, developing, designing, manufacturing and selling renewable energy and saving related technologies and products Selling and marketing of integrated circuits and semiconductor devices 5,120,028 11,180,000 5,120,028 11,180,000 314 1,118,000 100 $ 64,953,489 $ (172,392) $ (172,392) 100 Subsidiary 3,516,667 Subsidiary 42,861,788 3,516,560 39 39 99 10,556,348 4,370,988 1,724,819 Associate 7,457,733 4,551,318 5,039,563 (1,554,038) 1,954,847 Associate Subsidiary (1,516,235) 333,718 333,718 11,000 100 3,763,194 468,309 468,309 Subsidiary TSMC SSL Hsin-Chu, Taiwan Engaged in researching, developing, designing, 5,546,744 4,304,000 554,674 Xintec GUC VTAF III VTAF II TSMC Europe Emerging Alliance TSMC Japan TSMC GN TSMC Korea Taoyuan, Taiwan Hsin-Chu, Taiwan Cayman Islands Cayman Islands Amsterdam, the Netherlands Cayman Islands Yokohama, Japan Taipei, Taiwan Seoul, Korea TSMC Solar Motech Taipei, Taiwan manufacturing and selling solid state lighting devices and related applications products and systems Wafer level chip size packaging service Researching, developing, manufacturing, testing and 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 Manufacturing and sales of solar cells, crystalline silicon solar cell, and test and measurement instruments and design and construction of solar power systems 1,357,890 386,568 1,908,912 596,514 15,749 841,757 83,760 150,000 13,656 1,357,890 386,568 1,896,914 704,447 15,749 852,258 83,760 100,000 13,656 94,950 46,688 - - - - 6 - 80 6,228,661 6,228,661 87,480 VTAF III TSMC Solar Europe TSMC Solar NA Cayman Islands Amsterdam, the Netherlands Delaware, U.S.A. Investing in new start-up technology companies Investing in solar related business Selling and marketing of solar related products 1,806,693 504,107 205,772 1,801,918 504,107 205,772 TSMC SSL TSMC Lighting NA Delaware, U.S.A. Selling and marketing of solid state lighting related 3,133 3,133 products TSMC Partners TSMC Development Delaware, U.S.A. Investment activities VisEra Holding Company Cayman Islands Investing in companies involved in the design, TSMC Technology Delaware, U.S.A. manufacturing, and other related businesses in the semiconductor industry Engineering support activities ISDF II Cayman Islands Investing in new start-up technology companies $ 0.03 (US$ 0.001) 1,281,400 (US$ 43,000) $ 0.03 (US$ 0.001) 1,281,400 (US$ 43,000) 0.03 (US$ 0.001) 421,759 (US$ 14,153) 0.03 (US$ 0.001) 421,759 (US$ 14,153) - - 1 1 - 43,000 - 14,153 92 40 35 50 98 100 99.5 100 100 100 20 49 100 100 100 2,154,913 (1,663,137) (1,550,850) Subsidiary 1,866,123 1,056,141 892,439 441,763 290,838 144,924 124,762 85,162 29,475 288,881 289,204 (1,509,593) (3,662) 37,659 (10,806) 4,717 (22,899) 1,296 37,942 Associate 100,746 Associate Subsidiary (151,326) (3,589) Subsidiary 37,659 Subsidiary Subsidiary (10,753) 4,717 Subsidiary Subsidiary 1,296 Subsidiary (22,899) 3,887,462 251,864 Note 2 Associate 597 89,196 8,305 2,873 (1,509,593) (93,795) (36,733) Note 2 Associate Note 2 Subsidiary Note 2 Subsidiary (65) Note 2 Subsidiary 100 $ 20,614,259 (US$ 691,754) 3,492,453 (US$ 117,196) 49 $ 2,593,196 (US$ 87,387) 922,947 (US$ 31,102) 100 97 386,971 (US$ 12,986) 322,518 (US$ 10,823) 37,518 (US$ 1,264) 73,175 (US$ 2,466) Note 2 Subsidiary Note 2 Jointly controlled entity Note 2 Subsidiary Note 2 Subsidiary (Continued) 69 Original Investment Amount Balance as of December 31, 2013 Shares (In Thousands) Percentage of Ownership Carrying Value (Foreign Currencies in Thousands) Net Income (Losses) of the Investee (Foreign Currencies in Thousands) Share of Profits/ Losses of Investee (Note 1) (Foreign Currencies in Thousands) Note 97 $ 248,411 (US$ 8,336) 142,773 (US$ 4,791) 100 $ 190,339 (US$ 6,414) 15,493 (US$ 522) Note 2 Subsidiary Note 2 Subsidiary 100 7,397,902 (US$ 248,252) 2,558,757 (US$ 86,226) Note 2 Subsidiary 58 100 62 31 7 36,404 (US$ 1,222) 18,075 (US$ 607) - (19,129) (US$ 645) (1,839) (US$ 62) - - - - - 100 85,863 (EUR 2,094) (93,917) (EUR 2,375) Note 2 Subsidiary Note 2 Subsidiary Note 2 Subsidiary Note 2 Subsidiary Note 2 Subsidiary Note 2 Subsidiary - 1 21,056 (1,554,038) Note 2 Associate 21,011 (1,663,137) Note 2 Associate (Concluded) Investor Company Investee Company Location Main Businesses and Products ISDF Cayman Islands Investing in new start-up technology companies TSMC Canada Ontario, Canada Engineering support activities TSMC Development WaferTech Washington, U.S.A. Manufacturing, selling, testing and computer-aided designing of integrated circuits and other semiconductor devices VTAF III Mutual-Pak Technology Co., Ltd. Growth Fund Taipei, Taiwan Cayman Islands Manufacturing and selling of electronic parts and researching, developing, and testing of RFID Investing in new start-up technology companies VTA Holdings Delaware, U.S.A. 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 TSMC Solar Europe TSMC Solar Europe GmbH Hamburg, Germany Selling of solar related products and providing customer service December 31, 2013 (Foreign Currencies in Thousands) December 31, 2012 (Foreign Currencies in Thousands) $ 23,453 (US$ 787) 68,540 (US$ 2,300) $ 23,453 (US$ 787) 68,540 (US$ 2,300) 2,384,000 (US$ 80,000) 8,344,000 (US$ 280,000) 155,318 (US$ 5,212) 63,474 (US$ 2,130) - 155,318 (US$ 5,212) 54,534 (US$ 1,830) - - - - - 508,400 (EUR 12,400) 508,400 (EUR 12,400) 787 2,300 293,637 15,643 - - - - - TSMC GN TSMC Solar Tai-Chung, Taiwan Engaged in researching, developing, designing, 52,498 42,945 5,250 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 54,359 34,266 5,436 Note 1: The share of profits/losses of investee includes the effect of unrealized gross profit on intercompany transactions. Note 2: The share of profits/losses of the investee company is not reflected herein as such amount is already included in the share of profits/losses of the investor company. Note 3: Please refer to Table 10 for information on investment in Mainland China. 70 TABLE 10 Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries INFORMATION ON INVESTMENT IN MAINLAND CHINA FOR THE YEAR ENDED DECEMBER 31, 2013 (Amounts in Thousands of New Taiwan Dollars, Unless Specified Otherwise) Investee Company Main Businesses and Products TSMC China Manufacturing 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, 2013 (US$ in Thousands) $ 18,939,667 (US$ 596,000) Investment Flows Outflow Inflow $ - $ - Accumulated Outflow of Investment from Taiwan as of December 31, 2013 (US$ in Thousands) $ 18,939,667 (US$ 596,000) Investee Company Percentage of Ownership Share of Profits/Losses TSMC China 100% $ 5,111,975 (Note 2) Carrying Amount as of December 31, 2013 Accumulated Inward Remittance of Earnings as of December 31, 2013 $ 23,845,371 $ - Accumulated Investment in Mainland China as of December 31, 2013 (US$ in Thousands) Investment Amounts Authorized by Investment Commission, MOEA (US$ in Thousands) Upper Limit on Investment (US$ in Thousands) $ 18,939,667 (US$ 596,000) $ 18,939,667 (US$ 596,000) $ 18,939,667 (US$ 596,000) Note 1: TSMC directly invested US$596,000 thousand in TSMC China. Note 2: Amount was recognized based on the audited financial statements. 71 8. Parent Company Only Financial Statements for the Years Ended December 31, 2013 and 2012 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 parent company only balance sheets of Taiwan Semiconductor Manufacturing Company Limited as of December 31, 2013 and 2012 and January 1, 2012 and the related parent company only statements of comprehensive income for the years ended December 31, 2013 and 2012, as well as the parent company only statements of changes in equity and cash flows for the years ended December 31, 2013 and 2012. These parent company only 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 parent company only financial statements referred to above present fairly, in all material respects, the parent company only financial position of Taiwan Semiconductor Manufacturing Company Limited as of December 31, 2013 and 2012 and January 1, 2012, 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. The statements of major accounting items listed in the parent company only financial statements of Taiwan Semiconductor Manufacturing Company Limited as of and for the year ended December 31, 2013 are presented for the purpose of additional analysis. Such statements have been subjected to the auditing procedures applied in our audits of the financial statements mentioned above. In our opinion, such statements are fairly stated in all material respects in relation to the financial statements as a whole. February 18, 2014 72 Taiwan Semiconductor Manufacturing Company Limited PARENT COMPANY ONLY BALANCE SHEETS (In Thousands of New Taiwan Dollars) ASSETS CURRENT ASSETS December 31, 2013 December 31, 2012 January 1, 2012 Amount % Amount % Amount Cash and cash equivalents (Note 6) Financial assets at fair value through profit or loss (Note 7) Available-for-sale financial assets (Note 8) Held-to-maturity financial assets (Note 9) Notes and accounts receivable, net (Note 10) Receivables from related parties (Note 34) Other receivables from related parties (Note 34) Inventories (Notes 5 and 11) Other financial assets Other current assets (Note 16) $ 146,438,768 64,030 646,402 1,795,949 17,445,877 52,969,803 572,000 35,243,061 61,842 2,386,031 12 $ 109,150,810 38,824 1,845,052 701,146 15,252,394 40,987,444 274,963 35,296,391 175,261 2,097,329 - - - 2 4 - 3 - - 12 $ 85,262,521 14,925 2,617,134 701,136 19,409,266 24,777,534 188,028 22,853,397 122,010 1,725,736 - - - 2 4 - 4 - - Total current assets 257,623,763 21 205,819,614 22 157,671,687 % 11 - 1 - 3 3 - 3 - - 21 LIABILITIES AND EQUITY CURRENT LIABILITIES December 31, 2013 December 31, 2012 January 1, 2012 Amount % Amount % Amount % Short-term loans (Note 17) Financial liabilities at fair value through profit or loss (Note 7) Accounts payable Payables to related parties (Note 34) Accrued profit sharing to employees and bonus to directors (Note 21) Payables to contractors and equipment suppliers Income tax payable (Note 28) Provisions (Notes 5 and 18) Accrued expenses and other current liabilities Current portion of bonds payable (Note 19) $ 15,645,000 25,404 13,628,675 4,183,979 1 $ 34,714,929 6,274 - 13,392,221 1 3,230,342 - 4 $ 25,926,528 - - 9,522,688 1 2,992,582 - 12,738,801 89,555,814 22,567,331 7,217,331 21,633,409 - 1 8 2 1 2 - 11,186,591 44,371,108 15,196,399 5,732,738 16,698,014 - 1 5 1 1 2 - 9,055,704 33,811,970 10,647,797 4,887,879 13,057,161 4,500,000 3 - 1 - 1 5 1 1 2 1 Total current liabilities 187,195,744 16 144,528,616 15 114,402,309 15 NONCURRENT ASSETS Held-to-maturity financial assets (Note 9) Financial assets carried at cost (Note 12) Investments accounted for using equity method (Notes 5 and 13) Property, plant and equipment (Notes 5 and 14) Intangible assets (Notes 5 and 15) Deferred income tax assets (Notes 5 and 28) Refundable deposits Other noncurrent assets (Note 16) Total noncurrent assets - 469,378 165,075,781 770,443,494 7,069,456 4,580,468 2,496,663 820,000 950,955,240 - - 14 64 1 - - - 79 - 483,759 139,150,441 586,636,036 6,449,837 10,318,863 2,394,826 884,277 746,318,039 - - 15 61 1 1 - - 78 702,291 497,835 128,143,256 454,420,770 6,287,000 13,228,485 4,491,735 1,022,349 17 59 1 2 - - - NONCURRENT LIABILITIES - Bonds payable (Note 19) Other long-term payables Accrued pension cost (Notes 5 and 20) Guarantee deposits Total noncurrent liabilities Total liabilities 608,793,721 79 EQUITY ATTRIBUTABLE TO SHAREHOLDERS OF THE PARENT Capital stock (Note 21) Capital surplus (Note 21) Retained earnings (Note 21) Appropriated as legal capital reserve Appropriated as special capital reserve Unappropriated earnings Others (Note 21) Total equity 166,200,000 36,000 7,491,040 147,964 173,875,004 361,070,748 259,286,171 55,858,626 132,436,003 2,785,741 382,971,408 518,193,152 14,170,306 847,508,255 14 - - - 14 30 21 5 11 - 32 43 1 70 80,000,000 54,000 6,805,042 199,315 87,058,357 8 - 1 - 9 18,000,000 - 6,132,071 439,032 24,571,103 2 - 1 - 3 231,586,973 24 138,973,412 18 259,244,357 55,675,340 115,820,123 7,606,224 284,985,121 408,411,468 (2,780,485) 720,550,680 27 6 12 1 30 43 - 76 259,162,226 55,471,662 102,399,995 6,433,874 211,630,458 320,464,327 (7,606,219) 627,491,996 34 7 13 1 28 42 (1) 82 TOTAL $ 1,208,579,003 100 $ 952,137,653 100 $ 766,465,408 100 TOTAL $ 1,208,579,003 100 $ 952,137,653 100 $ 766,465,408 100 The accompanying notes are an integral part of the parent company only financial statements. 73 2013 Amount % 2012 Amount OTHER COMPREHENSIVE INCOME (LOSS) (Notes 13, 20, 21 and 28) Exchange differences arising on translation of foreign operations Changes in fair value of available-for-sale financial assets Share of other comprehensive income of subsidiaries and associates Actuarial loss from defined benefit plans Income tax benefit (expense) related to components of other comprehensive income $ 3,655,675 (214,935) 13,472,874 (671,774) 117,152 Other comprehensive income for the year, net of income tax 16,358,992 1 - 2 - - 3 $ (4,317,386) 2,407,647 7,118,419 (677,413) (328,010) 4,203,257 TOTAL COMPREHENSIVE INCOME FOR THE YEAR $ 204,505,782 35 $ 170,521,543 EARNINGS PER SHARE (NT$, Note 29) Basic earnings per share Diluted earnings per share $ 7.26 $ 7.26 $ 6.42 $ 6.41 % (1) 1 1 - - 1 34 The accompanying notes are an integral part of the parent company only financial statements. (Concluded) Taiwan Semiconductor Manufacturing Company Limited PARENT COMPANY ONLY STATEMENTS OF COMPREHENSIVE INCOME (In Thousands of New Taiwan Dollars, Except Earnings Per Share) NET REVENUE (Notes 5, 23 and 34) $ 591,087,600 100 $ 500,369,525 2013 Amount % 2012 Amount COST OF REVENUE (Notes 11, 30 and 34) GROSS PROFIT BEFORE UNREALIZED GROSS PROFIT ON SALES TO SUBSIDIARIES AND ASSOCIATES 319,407,163 271,680,437 UNREALIZED GROSS PROFIT ON SALES TO SUBSIDIARIES AND ASSOCIATES (35,577) GROSS PROFIT OPERATING EXPENSES (Notes 5, 30 and 34) Research and development General and administrative Marketing Total operating expenses OTHER OPERATING INCOME AND EXPENSES, NET (Notes 24 and 30) INCOME FROM OPERATIONS NON-OPERATING INCOME AND EXPENSES Share of profits of subsidiaries and associates (Note 13) Other income (Note 25) Foreign exchange gain, net Finance costs (Note 26) Other gains and losses (Notes 27 and 34) Total non-operating income and expenses INCOME BEFORE INCOME TAX INCOME TAX EXPENSE (Note 28) NET INCOME 271,644,860 46,922,471 17,697,411 2,304,472 66,924,354 (66,614) 204,653,892 9,530,933 1,082,426 279,488 (2,092,236) 2,262,047 11,062,658 215,716,550 27,569,760 188,146,790 54 46 - 46 8 3 - 11 - 35 2 - - - - 2 37 5 32 265,494,185 234,875,340 (25,029) 234,850,311 38,769,956 16,324,238 2,386,889 57,481,083 (549,087) 176,820,141 8,175,390 936,903 327,744 (945,114) (1,562,677) 6,932,246 183,752,387 17,434,101 166,318,286 % 100 53 47 - 47 8 3 1 12 - 35 2 - - - - 2 37 4 33 (Continued) 74 Taiwan Semiconductor Manufacturing Company Limited PARENT COMPANY ONLY STATEMENTS OF CHANGES IN EQUITY (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 Foreign Currency Translation Reserve Others Unrealized Gain/Loss from Available- for-sale Financial Assets Cash Flow Hedges Reserve Total Equity Total BALANCE, JANUARY 1, 2012 25,916,222 $ 259,162,226 $ 55,471,662 $ 102,399,995 $ 6,433,874 $ 211,630,458 $ 320,464,327 $ (6,433,364) $ (1,172,762) $ (93) $ (7,606,219) $ 627,491,996 BALANCE, DECEMBER 31, 2012 25,924,435 259,244,357 55,675,340 115,820,123 7,606,224 284,985,121 408,411,468 (10,753,806) 7,973,321 Appropriations of prior year’s earnings Legal capital reserve Special capital reserve Cash dividends to shareholders - NT$3.00 per share Total Net income in 2012 Other comprehensive income in 2012, net of income tax Total comprehensive income in 2012 - - - - - - - - - - - - - - - - - - - - - Issuance of stock from exercise of employee stock options 8,213 82,131 160,357 Adjustments to share of changes in equity of subsidiaries and associates Adjustments arising from changes in percentage of ownership in subsidiaries - - - - 2,588 40,733 Appropriations of prior year’s earnings Legal capital reserve Reversal of special capital reserve Cash dividends to shareholders - NT$3.00 per share Total Net income in 2013 Other comprehensive income in 2013, net of income tax Total comprehensive income in 2013 - - - - - - - - - - - - - - - - - - - - - Issuance of stock from exercise of employee stock options 4,182 41,814 82,756 Adjustments to share of changes in equity of subsidiaries and associates Adjustments arising from changes in percentage of ownership in subsidiaries - - - - 38,084 62,446 13,420,128 - - 13,420,128 - 1,172,350 - 1,172,350 (13,420,128) (1,172,350) (77,748,668) (92,341,146) - - (77,748,668) (77,748,668) 166,318,286 166,318,286 - - - - - - - - - - (622,477) (622,477) (4,320,442) 9,146,083 165,695,809 165,695,809 (4,320,442) 9,146,083 - - - - - - - - - - - - 16,615,880 - - 16,615,880 - (4,820,483) - (4,820,483) (16,615,880) 4,820,483 (77,773,307) (89,568,704) - - (77,773,307) (77,773,307) 188,146,790 188,146,790 - - - - - - - - - - (591,799) (591,799) 3,613,444 13,337,460 187,554,991 187,554,991 3,613,444 13,337,460 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 93 93 - - - - - - - - - (113) (113) - - - - - - - - - - (77,748,668) (77,748,668) 166,318,286 4,825,734 4,203,257 4,825,734 170,521,543 - - - 242,488 2,588 40,733 (2,780,485) 720,550,680 - - - - - - - (77,773,307) (77,773,307) 188,146,790 16,950,791 16,358,992 16,950,791 204,505,782 - - - 124,570 38,084 62,446 BALANCE, DECEMBER 31, 2013 25,928,617 $ 259,286,171 $ 55,858,626 $ 132,436,003 $ 2,785,741 $ 382,971,408 $ 518,193,152 $ (7,140,362) $ 21,310,781 $ (113) $ 14,170,306 $ 847,508,255 The accompanying notes are an integral part of the parent company only financial statements. 75 Taiwan Semiconductor Manufacturing Company Limited PARENT COMPANY ONLY STATEMENTS OF CASH FLOWS (In Thousands of New Taiwan Dollars) 2013 2012 2013 2012 CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax Adjustments for: Depreciation expense Amortization expense Finance costs Share of profits of subsidiaries and associates Interest income Loss on disposal of property, plant and equipment and intangible assets, net Impairment loss on property, plant and equipment Impairment loss of financial assets Gain on disposal of available-for-sale financial assets, net Loss (gain) on disposal of financial assets carried at cost, net Loss (gain) on disposal of investments in associates Gain on deconsolidation of subsidiary Unrealized gross profit on sales to associates Loss (gain) on foreign exchange, net Dividend income Changes in operating assets and liabilities: Derivative financial instruments Notes and accounts receivable, net Receivables from related parties Other receivables from related parties Inventories Other current assets Other financial assets Accounts payable Payables to related parties Accrued profit sharing to employees and bonus to directors Accrued expenses and other current liabilities Provisions Accrued pension cost Cash generated from operations Income taxes paid $ 215,716,550 $ 183,752,387 147,266,825 2,072,926 2,092,236 (9,530,933) (1,011,301) 64,753 - - (846,709) (42,664) 656 (293,578) 35,577 315,098 (71,125) (6,076) (2,193,483) (11,982,359) (257,810) 53,330 (266,929) 68,313 182,965 961,579 1,552,210 4,269,512 1,484,593 14,224 349,648,380 (14,365,054) 122,377,815 2,022,064 945,114 (8,175,390) (867,227) 125,488 418,330 2,677,529 (110,634) 269 (4,977) - 25,029 (3,143,506) (69,676) (17,625) 4,156,872 (16,209,910) (89,347) (12,442,994) (363,366) (18,057) 3,565,949 (67,770) 2,130,887 3,281,875 844,859 (4,442) 284,739,546 (10,312,114) Net cash generated by operating activities 335,283,326 274,427,432 CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of: Held to maturity financial assets Financial assets carried at cost Property, plant and equipment Intangible assets (1,795,949) (2,177) (285,889,575) (2,727,399) - (1,093) (242,063,668) (1,743,043) (Continued) 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 Interest received Other dividends received Dividends received from subsidiaries and associates Refundable deposits paid Refundable deposits refunded $ 1,830,424 700,000 59,222 162,068 1,057,553 71,125 2,151,373 (96,072) 112,204 $ 612,834 700,000 14,900 93,984 834,314 69,676 1,688,878 (508,158) 2,599,560 Net cash used in investing activities (284,367,203) (237,701,816) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of bonds Repayment of bonds Increase (decrease) in short-term loans Interest paid Guarantee deposits received Guarantee deposits refunded Proceeds from exercise of employee stock options Payment of partial acquisition of interests in subsidiaries Proceeds from partial disposal of interests in subsidiaries Cash dividends 86,200,000 - (19,636,240) (1,286,296) 40,729 (111,313) 124,570 (1,357,222) 170,914 (77,773,307) 62,000,000 (4,500,000) 9,747,093 (670,165) 13,038 (249,771) 242,488 (2,259,244) 587,902 (77,748,668) Net cash used in financing activities (13,628,165) (12,837,327) NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 37,287,958 109,150,810 23,888,289 85,262,521 CASH AND CASH EQUIVALENTS, END OF YEAR $ 146,438,768 $ 109,150,810 The accompanying notes are an integral part of the parent company only financial statements (Concluded) 76 Taiwan Semiconductor Manufacturing Company Limited New, Revised or Amended Standards and Interpretations Effective Date Issued by IASB (Note ) NOTES TO PARENT COMPANY ONLY FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (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. On September 5, 1994, the Company’s shares were listed on the Taiwan Stock Exchange (TWSE). On October 8, 1997, the Company listed some of its shares of stock on the New York Stock Exchange (NYSE) in the form of American Depositary Shares (ADSs). The address of its registered office and principal place of business is No. 8, Li-Hsin Rd. 6, Hsinchu Science Park, Taiwan. 2. THE AUTHORIZATION OF FINANCIAL STATEMENTS The accompanying parent company only financial statements were approved and authorized for issue by the Board of Directors on February 18, 2014. 3. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS Amendments to IFRS 1 Government Loans Amendment to IFRS 7 Disclosures-offsetting Financial Assets and Financial Liabilities Amendment to IFRS 7 Disclosures - Transfers of Financial Assets IFRS 11 Joint Arrangements IFRS 12 Disclosure of Interests in Other Entities Amendments to IFRS 10, IFRS 11 and IFRS 12 Consolidated financial Statements, Joint Arrangements, and Disclosure of Interests in Other Entities: Transition Guidance IFRS 13 Fair Value Measurement Amendment to IAS 1 Presentation of Items of Other Comprehensive Income Amendment to IAS 12 Deferred Tax: Recovery of Underlying Assets Amendment to IAS 19 Employee Benefits Amendment to IAS 27 Separate Financial Statements Amendment to IAS 28 Investments in Associates and Joint Ventures Amendment to IAS 32 Offsetting of Financial Assets and Financial Liabilities IFRIC 20 Stripping Costs in the Production Phase of A Surface Mine Not included in the 2013 Taiwan-IFRSs version January 1, 2013 January 1, 2013 July 1, 2011 January 1, 2013 January 1, 2013 January 1, 2013 January 1, 2013 July 1, 2012 January 1, 2012 January 1, 2013 January 1, 2013 January 1, 2013 January 1, 2014 January 1, 2013 Annual Improvements to IFRSs 2010 - 2012 Cycle July 1, 2014 or transactions on or after July 1, Annual Improvements to IFRSs 2011 - 2013 Cycle IFRS 9 Financial Instruments Amendments to IFRS 9 and IFRS 7 Mandatory Effective Date and Transition Disclosure IFRS 14 Regulatory Deferral Accounts Amendment to IAS 19 Defined Benefit Plans: Employee Contributions Amendment to IAS 36 Recoverable Amount Disclosures for Non-Financial Assets Amendment to IAS 39 Novation of Derivatives and Continuation of Hedge Accounting IFRIC 21 Levies 2014 July 1, 2014 Not yet determined Not yet determined January 1, 2016 July 1, 2014 January 1, 2014 January 1, 2014 January 1, 2014 Note: The aforementioned new, revised or amended standards or interpretations are effective after fiscal year beginning on or after the effective (Concluded) a. New and revised standards, amendments and interpretations in issue but not yet effective dates, unless specified otherwise. As of the date that the accompanying parent company only financial statements were authorized for issue, the new, revised or amended International Financial Reporting Standards, International Accounting Standards, interpretations and related guidance in issue but not yet adopted by the Company as well as the effective dates issued by the International Accounting Standards Board (IASB), are stated as follows; however, the initial adoption to the following standards and interpretations is still subject to the effective date to be published by the Financial Supervisory Commission (FSC) except that the standards and interpretation included in the 2013 Taiwan-IFRSs version should be adopted by the Company starting 2015. New, Revised or Amended Standards and Interpretations Effective Date Issued by IASB (Note ) Included in the 2013 Taiwan-IFRSs version Amendments to IFRSs Improvements to IFRSs 2009 - Amendment to IAS 39 Amendment to IAS 39 Embedded Derivatives January 1, 2009 or January 1, 2010 Effective in fiscal year ended on or after June Improvements to IFRSs 2010 Annual Improvements to IFRSs 2009 - 2011 Cycle Amendments to IFRS 1 Limited Exemption from Comparative IFRS 7 Disclosures for First-time Adopters 30, 2009 July 1, 2010 or January 1, 2011 January 1, 2013 July 1, 2010 Amendments to IFRS 1 Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters July 1, 2011 b. Significant changes in accounting policy resulted from new and revised standards, amendments and interpretations in issue but not yet effective Except for the following items, the Company believes that the adoption of aforementioned standards or interpretations will not have a significant effect on the Company’s accounting policies. 1) IFRS 9, “Financial Instruments” Under IFRS 9, all recognized financial assets currently in the scope of IAS 39, “Financial Instruments: Recognition and Measurement,” will be subsequently measured at either the amortized cost or the fair value. If the objective of the Company’s business model is to hold the financial asset to collect the contractual cash flows which are solely for payments of principal and interest on the principal amount outstanding, such assets are measured at the amortized cost. All other financial assets must be measured at the fair value through profit or loss as of the end of the reporting period. 2) IFRS 12, “Disclosure of Interests in Other Entities” (Continued) IFRS 12 is a standard that requires a broader disclosure in an entity’s interests in subsidiaries and associates. 77 3) IFRS 13, “Fair Value Measurement” 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES IFRS 13 establishes a single source of guidance for fair value measurements and disclosures about fair value measurements. It defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements. The disclosure requirements in IFRS 13 are more extensive than those required in the current standards. For example, quantitative and qualitative disclosures based on the three-level fair value hierarchy currently required for financial instruments only will be extended by IFRS 13 to cover all assets and liabilities within its scope. 4) Amendments to IAS 1, “Presentation of Items of Other Comprehensive Income” The amendments to IAS 1 introduce a new disclosure terminology for other comprehensive income, which require additional disclosures in other comprehensive income. The items of other comprehensive income will be grouped into two categories: (a) items that will not be reclassified subsequently to profit or loss; and (b) items that will be reclassified subsequently to profit or loss when specific conditions are met. In addition, income tax on items of other comprehensive income is also required to be allocated on the same basis. The Company expects the aforementioned amendments will change the Company’s presentation on the statement of comprehensive income. 5) Amendments to IAS 19, “Employee Benefits” The amendments to IAS 19 change the accounting for defined benefit plans, which require the Company to recognize changes in defined benefit obligations or assets, to disclose the components of the defined benefit costs, to eliminate the corridor approach and to accelerate the recognition of past service cost. According to the amendments, all actuarial gains and losses will be recognized immediately through other comprehensive income; the past service cost, on the other hand, will be expensed immediately when it incurs and no longer be amortized over the average period before vested on a straight-line basis. In addition, the amendment also requires a broader disclosure in defined benefit plans. 6) Amendments to IAS 36, “Recoverable Amount Disclosures for Non-Financial Assets” The amendments to IAS 36 clarify that the Company is only required to disclose the recoverable amount in the year of impairment accrual or reversal. Moreover, if the recoverable amount of impaired assets is based on fair value less costs of disposal, the Company should also disclose the discount rate used. The Company expects the aforementioned amendments will result in a broader disclosure of recoverable amount for non-financial assets. c. Impact of the application of the new and revised standards, amendments and interpretations in issue but not yet effective on the consolidated financial statements of the Company As of the date that the accompanying parent company only financial statements were approved and authorized for issue, the Company continues in evaluating the impact on its financial position and financial performance as a result of the initial adoption of the above standards or interpretations. The related impact will be disclosed when the Company completes the evaluation. The accompanying parent company only financial statements are the first annual parent company only financial statements prepared in accordance with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers amended on December 22, 2011. For the convenience of readers, the accompanying parent company only 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 parent company only financial statements shall prevail. Statement of Compliance The accompanying parent company only financial statements have been prepared in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers (the “Accounting Standards Used in Preparation of the Parent Company Only Financial Statements”). Basis of Preparation The accompanying parent company only financial statements have been prepared on the historical cost basis except for financial instruments that are measured at fair values, as explained in the accounting policies below. Historical cost is generally based on the fair value of the consideration given in exchange for the assets. When preparing the parent company only financial statements, the Company account for subsidiaries and associates by using the equity method. In order to agree with the amount of net income, other comprehensive income and equity attributable to shareholders of the parent in the consolidated financial statements, the differences of the accounting treatment between the parent company only basis and the consolidated basis are adjusted under the heading of investments accounted for using equity method, share of profits of subsidiaries and associates and share of other comprehensive income of subsidiaries and associates in the parent company only financial statements. Foreign Currencies In preparing the parent company only financial statements, transactions in currencies other than the entity’s functional currency (foreign currencies) are recognized at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Such exchange differences are recognized in profit or loss in the year in which they arise. Non-monetary items measured at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Exchange differences arising on the retranslation of non-monetary items are included in profit or loss for the year except for exchange differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognized directly in other comprehensive income, in which case, the exchange differences are also recognized directly in other comprehensive income. Non-monetary items that are measured in terms of historical cost in foreign currencies are not retranslated. 78 For the purposes of presenting parent company only financial statements, the assets and liabilities of the Company’s foreign operations are translated into NT$ using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for the period. Exchange differences arising, if any, are recognized in other comprehensive income and accumulated in equity. Held-to-maturity financial assets Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity dates that the Company has the positive intent and ability to hold to maturity. Subsequent to initial recognition, held-to-maturity financial assets are measured at amortized cost using the effective interest method less any impairment. Classification of Current and Noncurrent Assets and Liabilities Current assets are assets held for trading purposes and assets expected to be converted to cash, sold or consumed within one year from the end of the reporting period. Current liabilities are obligations incurred for trading purposes and obligations expected to be settled within one year from the end of the reporting period. Assets and liabilities that are not classified as current are noncurrent assets and liabilities, respectively. Cash Equivalents Cash equivalents, for the purpose of meeting short-term cash commitments, consist of highly liquid time deposits and investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Available-for-sale financial assets Available-for-sale financial assets are non-derivative financial assets that are either designated as available-for-sale or are not classified as (a) loans and receivables, (b) held-to-maturity financial assets or (c) financial assets at fair value through profit or loss. Stocks held by the Company that are traded in an active market are classified as available-for-sale financial assets and are stated at fair value at the end of each reporting period. Dividends on available-for-sale equity investments are recognized in profit or loss. Other changes in the carrying amount of available-for-sale financial assets are recognized in other comprehensive income. When the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously recognized in other comprehensive income is reclassified to profit or loss. Financial Instruments Financial assets and liabilities shall be recognized when the Company becomes a party to the contractual provisions of the instruments. Dividends on available-for-sale equity instruments are recognized in profit or loss when the Company’s right to receive the dividends is established. Financial assets and liabilities are initially recognized at fair values. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss. Fair value is determined in the manner described in Note 33. Financial Assets Financial assets are classified into the following specified categories: Financial assets “at fair value through profit or loss” (FVTPL), “held-to-maturity” financial assets, “available-for-sale” financial assets and “loans and receivables”. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular way purchases or sales of financial assets are recognized and derecognized on a settlement date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. Financial assets at fair value through profit or loss Derivative financial instruments that do not meet the criteria for hedge accounting are stated at fair value, with any gains or losses arising on remeasurement recognized in profit or loss. Available-for-sale equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are measured at cost less any identified impairment losses at the end of each reporting period. Such equity instruments are subsequently remeasured at fair value when their fair value can be reliably measured, and the difference between the carrying amount and fair value is recognized in profit or loss or other comprehensive income. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables including cash and cash equivalents, notes and accounts receivable and other receivables are measured at amortized cost using the effective interest method, less any impairment, except for those loans and receivables with immaterial discounted effect. Impairment of financial assets Financial assets, other than those carried at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Those financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial assets, their estimated future cash flows have been affected. For financial assets carried at amortized cost, such as trade receivables, assets that are assessed not to be impaired individually are, in addition, assessed for impairment on a collective basis. The Company assesses the collectability of receivables by performing the account aging analysis and examining current trends in the credit quality of its customers. 79 For financial assets carried at amortized cost, the amount of the impairment loss is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate. Financial liabilities Financial liabilities are subsequently measured either at amortized cost using effective interest method or at FVTPL. For financial assets measured at amortized cost, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was loss recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the financial assets at the date the impairment loss is reversed does not exceed what the amortized cost would have been had the impairment loss not been recognized. When an available-for-sale financial asset is considered to be impaired, cumulative gains or losses previously recognized in other comprehensive income are reclassified to profit or loss in the year. In respect of available-for-sale equity instruments, impairment losses previously recognized in profit or loss are not reversed through profit or loss. Any increase in fair value subsequent to the recognition of an impairment loss is recognized in other comprehensive income and accumulated under the heading of unrealized gains or losses from available-for-sale financial assets. For financial assets carried at cost, the amount of the impairment loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss will not be reversed in subsequent periods. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Derecognition of financial assets The Company derecognizes a financial asset only when the contractual rights to the cash flows from the financial asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the financial asset to another entity. On derecognition of a financial asset in its entirety, the difference between the financial asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognized in other comprehensive income and accumulated in equity is recognized in profit or loss. Financial Liabilities and Equity Instruments Classification as debt or equity Debt and equity instruments issued by the Company are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument. Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Company are recognized at the proceeds received, net of direct issue costs. 80 Financial liabilities measured at FVTPL are derivative financial instruments that do not meet the criteria for hedge accounting, and they are stated at fair value, with any gains or losses arising on remeasurement recognized in profit or loss. Financial liabilities other than those held for trading purposes and designated as at FVTPL are subsequently measured at amortized cost at the end of each reporting period. Derecognition of financial liabilities The Company derecognizes financial liabilities when, and only when, the Company’s obligations are discharged, cancelled or they expire. The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable is recognized in profit or loss. Derivative Financial Instruments The Company enters into a variety of derivative financial instruments to manage its market risk exposure to foreign exchange rate and interest rate, including forward exchange contracts and currency swap contracts. Derivative financial instruments are initially recognized at fair value at the date the derivative contracts are entered into and are subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is recognized in profit or loss immediately. Inventories Inventories are stated at the lower of cost or net realizable value. Inventories are recorded at standard cost and adjusted to approximate weighted-average cost at the end of the reporting period. Net realizable value represents the estimated selling price of inventories less all estimated costs of completion and costs necessary to make the sale. Investments Accounted for Using Equity Method Investments accounted for using the equity method include investments in subsidiaries and associates. Investment in subsidiaries A subsidiary is an entity that is controlled by the Company. Under the equity method, an investment in a subsidiary is initially recognized at cost and adjusted thereafter to recognize the Company’s share of profit or loss and other comprehensive income of the subsidiary as well as the distribution received. The Company also recognized its share in the changes in the equity of subsidiaries. Changes in the Company’s ownership interests in subsidiaries that do not result in the Company losing control over the subsidiaries are accounted for as equity transactions. Any difference between the carrying amount of the subsidiary and the fair value of the consideration paid or received is recognized directly in equity. When the Company loses control of a subsidiary, any retained investment of the former subsidiary is measured at the fair value at that date. A gain or loss is recognized in profit or loss and calculated as the difference between (a) the aggregate of the fair value of consideration received and the fair value of any retained interest at the date when control is lost; and (b) the previous carrying amount of the investments in such subsidiary. In addition, the Company shall account for all amounts previously recognized in other comprehensive income in relation to the subsidiary on the same basis as would be required if the Company had directly disposed of the related assets and liabilities. The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the cost on initial recognition of an investment in an associate. When the Company transacts with its subsidiaries, profits and losses resulting from the transactions with the subsidiaries are recognized in the Company’s parent company only financial statements only to the extent of interests in the subsidiaries that are not owned by the Company. Investment in associates An associate is an entity over which the Company has significant influence and that is neither a subsidiary nor a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. The operating results and assets and liabilities of associates are incorporated in these parent company only financial statements using the equity method of accounting. Under the equity method, an investment in an associate is initially recognized in the statement of financial position at cost and adjusted thereafter to recognize the Company’s share of profit or loss and other comprehensive income of the associate as well as the distribution received. The Company also recognized its share in the changes in the equity of associates. Any excess of the cost of acquisition over the Company’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities of an associate recognized at the date of acquisition is recognized as goodwill, which is included within the carrying amount of the investment. Any excess of the Company’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognized immediately in profit or loss. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount. Any impairment loss recognized forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognized to the extent that the recoverable amount of the investment subsequently increases. When the Company subscribes to additional shares in an associate at a percentage different from its existing ownership percentage, the resulting carrying amount of the investment differs from the amount of the Company’s proportionate interest in the net assets of the associate. The Company records such a difference as an adjustment to investments with the corresponding amount charged or credited to capital surplus. If the Company’s ownership interest is reduced due to the additional subscription to the shares of associate, the proportionate amount of the gains or losses previously recognized in other comprehensive income in relation to that associate shall be reclassified to profit or loss on the same basis as would be required if the associate or jointly controlled entity had directly disposed of the related assets or liabilities. When the Company transacts with an associate, profits and losses resulting from the transactions with the associate are recognized in the Company’ parent company only financial statements only to the extent of interests in the associate that are not owned by the Company. Property, Plant and Equipment Property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment. Costs include any incremental costs that are directly attributable to the construction or acquisition of the item of property, plant and equipment. Properties in the course of construction for production, supply or administrative purposes are carried at cost, less any recognized impairment loss. Such properties are classified to the appropriate categories of property, plant and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use. Depreciation is recognized so as to write off the cost of the assets less their residual values over their useful lives, and it is computed using the straight-line method over the following estimated useful lives: buildings - 10 to 20 years; machinery and equipment - 5 years; and office equipment - 3 to 5 years. The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimates accounted for on a prospective basis. Land is not depreciated. An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the assets. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in profit or loss. Leases Leases are classified as finance lease whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. The Company as lessor Rental income from operating leases is recognized on a straight-line basis over the term of the relevant lease. The Company as lessee Operating lease payments are recognized as an expense on a straight-line basis over the lease term. Intangible Assets Goodwill Goodwill arising on an acquisition of a business is carried at cost as established at the date of acquisition of the business less accumulated impairment losses, if any. Other intangible assets Other separately acquired intangible assets with finite useful lives are carried at cost less accumulated amortization and accumulated impairment losses. Amortization is recognized using the straight-line method over the following estimated useful lives: Technology license fees - the estimated life of the technology or the term of the technology transfer contract; software and system design costs - 3 years; patent and others 81 - the economic life or contract period. The estimated useful life and amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. Impairment of Tangible and Intangible Assets Goodwill Goodwill is not amortized and instead is tested for impairment annually, or more frequently when there is an indication that the cash-generating unit may be impaired. For the purpose of impairment testing, goodwill is allocated to each of the Company’s cash-generating units or groups of cash-generating units that are expected to benefit. If the recoverable amount of a cash-generating unit is less than its carrying amount, the difference is allocated first to reduce the carrying amount of any goodwill allocated to such cash-generating unit and then to the other assets of the cash-generating unit pro rata based on the carrying amount of each asset in the cash-generating unit. Any impairment loss for goodwill is recognized directly in profit or loss. An impairment loss recognized for goodwill is not reversed in subsequent periods. Other tangible and intangible assets At the end of each reporting period, the Company reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. When it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs. When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified. Revenue Recognition Revenue is measured at the fair value of the consideration received or receivable. Revenue is reduced for estimated customer returns, rebates and other similar allowances. Sale of goods Revenue from the sale of goods is recognized when the goods are delivered and titles have passed, at which time all the following conditions are satisfied: ● The Company has transferred to the buyer the significant risks and rewards of ownership of the goods; ● The Company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; ● The amount of revenue can be measured reliably; ● It is probable that the economic benefits associated with the transaction will flow to the Company; and ● The costs incurred or to be incurred in respect of the transaction can be measured reliably. In principle, the payment term granted to customers is due 30 days from the invoice date or 30 days from the end of when the month of the invoice is issued. Due to the short term nature of the receivables from sale of goods with the immaterial discounted effect, the Company measures them at the original invoice amounts without discounting. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. Royalties, dividend and interest income Revenue from royalties is recognized on an accrual basis in accordance with the substance of the relevant agreement (provided that it is probable that the economic benefits will flow to the Company and the amount of revenue can be measured reliably). If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, the carrying amount of the asset or cash-generating unit is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss. Dividend income from investments is recognized when the shareholder’s right to receive payment has been established, provided that it is probable that the economic benefits will flow to the Group and the amount of income can be measured reliably. When an impairment loss subsequently reverses, the carrying amount of the asset or a cash-generating unit is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset or cash-generating unit in prior years. A reversal of an impairment loss is recognized immediately in profit or loss. Provision Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that the Company will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Interest income from a financial asset is recognized when it is probable that the economic benefits will flow to the Company and the amount of income can be measured reliably. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable. Retirement Benefits For defined contribution retirement benefit plans, payments to the benefit plan are recognized as an expense when the employees have rendered service entitling them to the contribution. For defined benefit retirement benefit plans, the cost of providing benefit is recognized based on actuarial calculations. For defined benefit retirement benefit plans, the cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial calculations being carried out at year end. Actuarial gains and losses are reported in retained earnings in the period that they are recognized as other comprehensive income. 82 Share-based Payment Arrangements The Company elected to take the optional exemption according to related guidance for the share-based payment transactions granted and vested before the date of transition to Accounting Standards Used in Preparation of the Parent Company Only Financial Statements. There were no stock options granted prior to but unvested at the date of transition. Please refer to the description in Note 38a. Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. 5. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION AND UNCERTAINTY In the application of the Company’s accounting policies, which are described in Note 4, the directors are required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. Current tax Income tax on unappropriated earnings at a rate of 10% is expensed in the year the shareholders approved the appropriation of earnings which is the year subsequent to the year the earnings are generated. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the estimate is revised if the revision affects only that year, or in the year of the revision and future years if the revision affects both current and future years. Adjustments of prior years’ tax liabilities are added to or deducted from the current year’s tax provision. Deferred tax Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the parent company only financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences and unused tax credits to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized. Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries and associates, except where the Company is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the deferred tax asset to be recovered. The deferred tax assets which originally not recognized is also reviewed at the end of each reporting period and recognized to the extent that it is probable that sufficient taxable profits will be available to allow all or part of the deferred tax asset to be recovered. Deferred tax liabilities and assets are measured at the tax rates that are expected to apply in the year in which the liability is settled or the asset is realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Company expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Current and deferred tax for the year Current and deferred tax are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income or directly in equity, in which case, the current and deferred tax are also recognized in other comprehensive income or directly in equity, respectively. The following are the critical judgments, apart from those involving estimations, that the directors have made in the process of applying the Company’s accounting policies and that have the most significant effect on the amounts recognized in the parent company only financial statements. Revenue Recognition The Company recognizes revenue when the conditions described in Note 4 are satisfied. The Company also records a provision for estimated future returns and other allowances in the same period the related revenue is recorded. Provision for estimated sales returns and other allowances is generally made and adjusted at a specific percentage based on historical experience and any known factors that would significantly affect the allowance, and our management periodically reviews the adequacy of the percentage used. Impairment of Tangible and Intangible Assets Other than Goodwill In the process of evaluating the potential impairment of tangible and intangible assets other than goodwill, the Company is required to make subjective judgments in determining the independent cash flows, useful lives, expected future revenue and expenses related to the specific asset groups with the consideration of the nature of semiconductor industry. Any changes in these estimates based on changed economic conditions or business strategies could result in significant impairment charges or reversal in future years. Impairment of Goodwill The assessment of impairment of goodwill requires the Company to make subjective judgment to determine the identified cash-generating units, allocate the goodwill to relevant cash-generating units and estimate the recoverable amount of relevant cash-generating units. Impairment Assessment on Investment Using Equity Method The Company assesses the impairment of investments accounted for using the equity method whenever triggering events or changes in circumstances indicate that an investment may be impaired and carrying value may not be recoverable. The Company measures the impairment based on a projected future cash flow of the investees, including the underlying assumptions of sales growth rate and capacity utilization rate formulated by such investees’ internal management team. The Company also takes into account market conditions and the relevant industry trends to ensure the reasonableness of such assumptions. Realization of Deferred Income Tax Assets Deferred tax assets are recognized to the extent that it is probable that future taxable profits will be available against which those deferred tax assets can be utilized. Assessment of the realization of the deferred tax 83 assets requires the Company’s subjective judgment and estimate, including the future revenue growth and profitability, tax holidays, the amount of tax credits can be utilized and feasible tax planning strategies. Any changes in the global economic environment, the industry trends and relevant laws and regulations could result in significant adjustments to the deferred tax assets. The Company entered into derivative contracts 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: Valuation of Inventory Inventories are stated at the lower of cost or net realizable value, and the Company use judgment and estimate to determine the net realizable value of inventory at the end of each reporting period. Due to the rapid technological changes, the Company estimates the net realizable value of inventory for obsolescence and unmarketable items at the end of reporting period and then writes down the cost of inventories to net realizable value. The net realizable value of the inventory is mainly determined based on assumptions of future demand within a specific time horizon. Recognition and Measurement of Defined Benefit Plans Accrued pension liabilities and the resulting pension expenses under defined benefit pension plans are calculated using the Projected Unit Credit Method. Actuarial assumptions comprise the discount rate, rate of employee turnover, and long-term average future salary increase. Changes in economic circumstances and market conditions will affect these assumptions and may have a material impact on the amount of the expense and the liability. 6. CASH AND CASH EQUIVALENTS Cash and deposits in banks Repurchase agreements collateralized by short-term commercial paper Repurchase agreements collateralized by corporate bonds Repurchase agreements collateralized by government bonds December 31, 2013 December 31, 2012 January 1, 2012 $ 142,049,643 $ 105,873,048 $ 81,467,607 2,395,644 1,708,603 284,878 349,341 2,660,042 268,379 - - 3,794,914 $ 146,438,768 $ 109,150,810 $ 85,262,521 7. FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS December 31, 2013 Sell NT$/Buy EUR Sell US$/Buy EUR Sell US$/Buy JPY December 31, 2012 Sell NT$/Buy EUR January 1, 2012 Sell EUR/Buy NT$ Maturity Date January 2014 January 2014 January 2014 Contract Amount (In Thousands) NT$4,514,314/EUR110,000 US$340,134/EUR248,000 US$341,023/JPY35,754,801 January 2013 NT$9,417,062/EUR246,000 January 2012 EUR38,600/NT$1,528,206 Outstanding cross currency swap contracts consisted of the following: Maturity Date December 31, 2012 January 2013 Contract Amount (In Thousands) Range of Interest Rates Paid Range of Interest Rates Received US$275,000/ NT$7,986,190 0.14%-0.17% - 8. AVAILABLE-FOR-SALE FINANCIAL ASSETS Available-for-sale financial assets consisted of investments in foreign publicly traded stocks. In the second quarter of 2012, the Company recognized an impairment loss on such investments in the amount of NT$2,677,529 thousand due to the significant decline in fair value. December 31, 2013 December 31, 2012 January 1, 2012 9. HELD-TO-MATURITY FINANCIAL ASSETS $ 64,030 - $ 37,877 947 $ 14,925 - Commercial paper Corporate bonds December 31, 2013 December 31, 2012 January 1, 2012 $ 1,795,949 - $ - 701,146 $ - 1,403,427 $ 64,030 $ 38,824 $ 14,925 $ 1,795,949 $ 701,146 $ 1,403,427 $ 25,404 - $ 3,572 2,702 $ - - $ 25,404 $ 6,274 $ - Current portion Noncurrent portion $ 1,795,949 - $ 701,146 - $ 701,136 702,291 $ 1,795,949 $ 701,146 $ 1,403,427 Derivative financial assets Forward exchange contracts Cross currency swap contracts Derivative financial liabilities Forward exchange contracts Cross currency swap contracts 84 10. NOTES AND ACCOUNTS RECEIVABLE, NET Notes and accounts receivable Allowance for doubtful receivables $ 17,929,379 (483,502) $ 15,726,431 (474,037) $ 19,894,386 (485,120) December 31, 2013 December 31, 2012 January 1, 2012 The Company held bank guarantees and other credit enhancements as collateral for certain impaired accounts receivables. As of December 31, 2013 and 2012 and January 1, 2012, the amount of the bank guarantee and other credit enhancements were US$11 thousand, US$1,000 thousand and US$2,962 thousand, respectively. Notes and accounts receivable, net $ 17,445,877 $ 15,252,394 $ 19,409,266 11. INVENTORIES In principle, the payment term granted to customers is due 30 days from the invoice date or 30 days from the end of the month of when the invoice is issued. The allowance for doubtful receivables is assessed by reference to the collectability of receivables by performing the account aging analysis, historical experience and current financial condition of customers. Finished goods Work in process Raw materials Supplies and spare parts December 31, 2013 December 31, 2012 January 1, 2012 $ 7,049,813 24,857,927 2,208,291 1,127,030 $ 5,936,018 24,442,123 3,666,048 1,252,202 $ 3,250,637 16,971,209 1,593,393 1,038,158 $ 35,243,061 $ 35,296,391 $ 22,853,397 Except for those impaired, for the rest of the notes and accounts receivable, the account aging analysis at the end of the reporting period is summarized in the following table. Notes and accounts receivable include amounts that are past due but for which the Company has not recognized a specific allowance for doubtful receivables after the assessment since there has not been a significant change in the credit quality of its customers and the amounts are still considered recoverable. Write-down of inventories to net realizable value in the amount of NT$526,182 thousand and NT$1,341,041 thousand, respectively, were included in the cost of revenue for the years ended December 31, 2013 and 2012. Aging analysis of notes and accounts receivable, net 12. FINANCIAL ASSETS CARRIED AT COST Neither past due nor impaired Past due but not impaired Past due within 30 days December 31, 2013 December 31, 2012 January 1, 2012 $ 17,119,920 $ 13,984,100 $ 16,975,425 325,957 1,268,294 2,433,841 $ 17,445,877 $ 15,252,394 $ 19,409,266 Non-publicly traded stocks Mutual funds $ 337,864 131,514 $ 338,584 145,175 $ 338,584 159,251 December 31, 2013 December 31, 2012 January 1, 2012 $ 469,378 $ 483,759 $ 497,835 Movements of the allowance for doubtful receivables Balance, beginning of year Provision Write-off Balance, end of year Years Ended December 31 2013 2012 $ 474,037 9,465 - $ 485,120 - (11,083) $ 483,502 $ 474,037 Aging analysis of accounts receivable that is individually determined to be impaired Subsidiaries Associates Not past due Past due 1-30 days Past due 31-60 days Past due 61-120 days Past due over 121 days December 31, 2013 December 31, 2012 January 1, 2012 $ 38 276 80 158 7,824 $ 160,354 2,863 - - - $ 81,017 24,351 4,684 - 6,611 $ 8,376 $ 163,217 $ 116,663 Since there is a wide range of estimated fair values of the Company’s investments in non-publicly traded stocks, the Company concludes that the fair value cannot be reliably measured and therefore should be measured at the cost less any impairment. 13. INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD Investments accounted for using the equity method consisted of the following: December 31, 2013 December 31, 2012 January 1, 2012 $ 144,139,436 20,936,345 $ 121,818,063 17,332,378 $ 111,718,691 16,424,565 $ 165,075,781 $ 139,150,441 $ 128,143,256 85 a. Investments in subsidiaries Subsidiaries consisted of the following: Subsidiaries Principal Activities Place of Incorporation and Operation Carrying Amount % of Ownership and Voting Rights Held by the Company December 31, 2013 December 31, 2012 January 1, 2012 December 31, 2013 December 31, 2012 January 1, 2012 TSMC Global Ltd. (TSMC Global) TSMC Partners, Ltd. (TSMC Partners) Investment activities Investing in companies involved in the design, manufacture, and Tortola, British Virgin Islands Tortola, British Virgin Islands $ 64,953,489 42,861,788 $ 49,954,386 38,635,129 $ 44,071,845 34,986,964 TSMC China Company Limited (TSMC China) other related business in the semiconductor industry Manufacturing and selling of integrated circuits at the order of and pursuant to product design specifications provided by customers Shanghai, China 23,845,371 17,828,683 13,542,181 TSMC Solar Ltd. (TSMC Solar) Engaged in researching, developing, designing, manufacturing Tai-Chung, Taiwan 4,551,318 6,011,397 10,136,237 and selling renewable energy and saving related technologies and products TSMC North America Selling and marketing of integrated circuits and semiconductor San Jose, California, U.S.A. devices TSMC Solid State Lighting Ltd. Engaged in researching, developing, designing, manufacturing Hsin-Chu, Taiwan (TSMC SSL) and selling solid state lighting devices and related applications products and systems VentureTech Alliance Fund III, L.P. Investing in new start-up technology companies Cayman Islands (VTAF III) VentureTech Alliance Fund II, L.P. Investing in new start-up technology companies Cayman Islands (VTAF II) TSMC Europe B.V. (TSMC Europe) Emerging Alliance Fund, L.P. Marketing and engineering supporting activities Investing in new start-up technology companies Amsterdam, the Netherlands Cayman Islands (Emerging Alliance) TSMC Japan Limited (TSMC Japan) TSMC Guang Neng Investment, Ltd. Marketing activities Investment activities (TSMC GN) TSMC Korea Limited (TSMC Korea) Xintec Inc. (Xintec) Customer service and technical supporting activities Wafer level chip size packaging service Yokohama, Japan Taipei, Taiwan Seoul, Korea Taoyuan, Taiwan 3,763,194 2,154,913 892,439 441,763 290,838 144,924 124,762 85,162 29,475 - 3,209,288 2,389,541 2,981,639 1,725,514 1,047,285 1,311,044 563,056 235,761 167,359 142,412 65,007 26,935 1,541,824 762,135 205,171 213,235 161,601 - 23,448 1,597,677 $ 144,139,436 $ 121,818,063 $ 111,718,691 100% 100% 100% 99% 100% 92% 50% 98% 100% 99.5% 100% 100% 100% - 100% 100% 100% 99% 100% 95% 50% 98% 100% 99.5% 100% 100% 100% 40% 100% 100% 100% 100% 100% 100% 53% 98% 100% 99.5% 100% - 100% 40% Starting June 2013, the Company has no power to govern the financial and operating policies of Xintec due to the loss of power to cast the majority of votes at meetings of the Board of Directors, but over which the Company still retains significant influence. Accordingly, Xintec is reclassified as an associate. Please refer to Note 31. 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 May 2013 and 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, 2013, the Company’s percentages of ownership in TSMC SSL and TSMC Solar were 92% and 99%, respectively. 86 b. Investments in associates Associates consisted of the following: Name of Associate Principal Activities Place of Incorporation and Operation Carrying Amount % of Ownership and Voting Rights Held by the Company December 31, 2013 December 31, 2012 January 1, 2012 December 31, 2013 December 31, 2012 January 1, 2012 Vanguard International Semiconductor Corporation (VIS) Research, design, development, manufacture, packaging, testing and sale of memory integrated circuits, LSI, VLSI and related parts Hsinchu, Taiwan $ 10,556,348 $ 9,406,597 $ 8,985,340 Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) Xintec Global Unichip Corporation (GUC) Fabrication and supply of integrated circuits Singapore Wafer level chip size packaging service Researching, developing, manufacturing, testing and marketing Taoyuan, Taiwan Hsinchu, Taiwan of integrated circuits 7,457,733 1,866,123 1,056,141 6,710,956 - 1,214,825 6,289,429 - 1,149,796 $ 20,936,345 $ 17,332,378 $ 16,424,565 39% 39% 40% 35% 40% 39% - 35% 39% 39% - 35% The summarized financial information in respect of the Company’s associates is set out below. The summarized financial information below represents amounts shown in the associates’ financial statements prepared in accordance with the Accounting Standards Used in Preparation of the Parent Company Only Financial Statements, which is also adjusted by the Company using the equity method of accounting. Total assets Total liabilities Net assets December 31, 2013 December 31, 2012 January 1, 2012 $ 62,946,717 (12,103,610) $ 49,240,451 (7,755,433) $ 46,033,229 (6,117,893) $ 50,843,107 $ 41,485,018 $ 39,915,336 The Company’s share of net assets of associates $ 20,936,345 $ 17,332,378 $ 16,424,565 Net revenue Net income Other comprehensive loss The Company’s share of profits of associates The Company’s share of other comprehensive loss of associates Years Ended December 31 2013 2012 $ 46,268,485 $ 9,946,540 $ (4,148) $ 3,827,244 $ (2,190) $ 40,583,794 $ 7,255,006 $ (12,969) $ 2,853,322 $ (8,624) The market prices of the investments accounted for using the equity method in publicly traded stocks calculated by the closing price at the end of the reporting period are summarized as follows: Name of Associate December 31, 2013 December 31, 2012 January 1, 2012 VIS GUC $ 22,239,112 $ 3,454,902 $ 12,658,703 $ 4,692,130 $ 6,627,758 $ 4,645,442 14. PROPERTY, PLANT AND EQUIPMENT December 31, 2013 December 31, 2012 January 1, 2012 Land Buildings Machinery and equipment Office equipment Equipment under installation and construction in progress $ 3,212,000 94,121,508 393,907,564 7,423,200 271,779,222 $ - 73,699,762 388,186,195 5,974,732 118,775,347 $ - 59,268,448 280,093,649 4,242,921 110,815,752 $ 770,443,494 $ 586,636,036 $ 454,420,770 87 Cost Land Buildings Machinery and equipment Office equipment Accumulated depreciation and impairment Buildings Machinery and equipment Office equipment Equipment under installation and construction in progress Cost Buildings Machinery and equipment Office equipment Accumulated depreciation and impairment Buildings Machinery and equipment Office equipment Equipment under installation and construction in progress Balance, Beginning of Year Additions Disposals Reclassification Balance, End of Year Year Ended December 31, 2013 $ - 173,442,106 1,203,400,605 16,683,484 1,393,526,195 $ 3,212,000 31,812,949 139,527,643 3,631,477 $ 178,184,069 $ - - (2,400,908) (508,592) $ (2,909,500) $ - 3,797 - - $ 3,797 $ 3,212,000 205,258,852 1,340,527,340 19,806,369 1,568,804,561 99,742,344 815,214,410 10,708,752 925,665,506 118,775,347 $ 11,395,000 133,688,815 2,183,010 $ 147,266,825 $ 153,007,821 $ - (2,283,449) (508,593) $ (2,792,042) $ (3,946) $ - - - $ - $ - 111,137,344 946,619,776 12,383,169 1,070,140,289 271,779,222 $ 586,636,036 $ 770,443,494 Balance, Beginning of Year Additions Disposals Impairment Reclassification Balance, End of Year Year Ended December 31, 2012 $ 149,620,319 985,232,851 13,824,434 1,148,677,604 $ 23,886,199 219,868,105 3,348,864 $ 247,103,168 $ (53,338) (1,711,425) (489,814) $ (2,254,577) $ - - - $ - $ (11,074) 11,074 - $ - $ 173,442,106 1,203,400,605 16,683,484 1,393,526,195 90,351,871 705,139,202 9,581,513 805,072,586 110,815,752 9,434,868 111,325,894 1,617,053 $ 122,377,815 $ 8,004,900 (44,231) (1,669,180) (489,814) $ (2,203,225) $ (45,305) - 418,330 - $ 418,330 $ - (164) 164 - $ - $ - 99,742,344 815,214,410 10,708,752 925,665,506 118,775,347 $ 454,420,770 $ 586,636,036 The significant part of the Company’s buildings includes main plants, mechanical and electrical power equipment and clean rooms, and the related depreciation is calculated using the estimated useful lives of 20 years, 10 years and 10 years, respectively. For the year ended December 31, 2012, the Company recognized impairment loss of NT$418,330 thousand related to property, plant and equipment of the foundry reportable segment since the carrying amount of some of property, plant and equipment is expected to be unrecoverable. 15. INTANGIBLE ASSETS Goodwill Technology license fees Software and system design costs Patent and others December 31, 2013 December 31, 2012 January 1, 2012 $ 1,567,756 980,685 3,620,028 900,987 $ 1,567,756 1,226,587 2,914,613 740,881 $ 1,567,756 1,617,310 2,316,571 785,363 $ 7,069,456 $ 6,449,837 $ 6,287,000 Cost Goodwill Technology license fees Software and system design costs Patent and others Accumulated amortization Technology license fees Software and system design costs Patent and others Year Ended December 31, 2013 Balance, Beginning of Year Additions Disposals Reclassification Balance, End of Year $ 1,567,756 4,186,558 14,880,058 2,646,738 23,281,110 $ - - 2,130,713 565,901 $ 2,696,614 $ - - (2,373) - $ (2,373) $ - - (110,745) 101,007 $ (9,738) $ 1,567,756 4,186,558 16,897,653 3,313,646 25,965,613 2,959,971 11,965,445 1,905,857 16,831,273 $ 245,902 1,320,222 506,802 $ 2,072,926 $ - (2,101) - $ (2,101) $ - (5,941) - $ (5,941) 3,205,873 13,277,625 2,412,659 18,896,157 $ 6,449,837 $ 7,069,456 88 Cost Goodwill Technology license fees Software and system design costs Patent and others Accumulated amortization Technology license fees Software and system design costs Patent and others Year Ended December 31, 2012 18. PROVISIONS Balance, Beginning of Year Additions Disposals Reclassification Balance, End of Year $ 1,567,756 4,186,558 13,227,136 2,140,805 21,122,255 $ - - 1,772,958 411,943 $ 2,184,901 $ - - (26,046) - $ (26,046) $ - - (93,990) 93,990 $ - $ 1,567,756 4,186,558 14,880,058 2,646,738 23,281,110 Balance, beginning of year Provision made Payment Balance, end of year December 31, 2013 December 31, 2012 $ 5,732,738 6,187,344 (4,702,751) $ 4,887,879 6,825,851 (5,980,992) $ 7,217,331 $ 5,732,738 2,569,248 10,910,565 1,355,442 14,835,255 $ 390,723 1,117,478 513,863 $ 2,022,064 $ - (26,046) - $ (26,046) $ - (36,552) 36,552 $ - 2,959,971 11,965,445 1,905,857 16,831,273 Provisions for sales returns and allowances are estimated based on historical experience, management judgment, and any known factors that would significantly affect the returns and allowances, and are recognized as a reduction of revenue in the same year of the related product sales. $ 6,287,000 $ 6,449,837 19. BONDS PAYABLE The Company’s goodwill has been tested for impairment at the end of the annual reporting period and the recoverable amount is determined based on the value in use. The value in use was calculated based on the cash flow forecast from the financial budgets covering the future five-year period, and the Company used annual discount rate of 8.50% and 9.00% in its test of impairment as of December 31, 2013 and 2012, respectively, to reflect the relevant specific risk in the cash-generating unit. Domestic unsecured bonds $ 166,200,000 $ 80,000,000 $ 22,500,000 December 31, 2013 December 31, 2012 January 1, 2012 Current portion Noncurrent portion $ - 166,200,000 $ - 80,000,000 $ 4,500,000 18,000,000 $ 166,200,000 $ 80,000,000 $ 22,500,000 For the years ended December 31, 2013 and 2012, the Company did not recognize any impairment loss on goodwill. The major terms of domestic unsecured bonds are as follows: 16. OTHER ASSETS Tax receivable Prepaid expenses Long-term receivable Others Current portion Noncurrent portion 17. SHORT-TERM LOANS Unsecured loans Amount Original loan content US$ (in thousands) Annual interest rate Maturity date December 31, 2013 December 31, 2012 January 1, 2012 $ 1,547,706 837,425 820,000 900 $ 1,382,392 714,937 767,800 116,477 $ 569,223 1,156,502 785,400 236,960 $ 3,206,031 $ 2,981,606 $ 2,748,085 $ 2,386,031 820,000 $ 2,097,329 884,277 $ 1,725,736 1,022,349 $ 3,206,031 $ 2,981,606 $ 2,748,085 December 31, 2013 December 31, 2012 January 1, 2012 $ 15,645,000 $ 34,714,929 $ 25,926,528 $ 525,000 0.38%-0.42% Due in January 2014 $ 1,195,500 0.39%-0.58% Due in January 2013 $ 856,000 0.45%-1.00% Due by February 2012 Issuance Tranche Issuance Period Total Amount Coupon Rate Repayment and Interest Payment 100-1 100-2 101-1 101-2 101-3 101-4 102-1 102-2 102-3 102-4 A B A B A B A B - A B C A B C A B A B A B C September 2011 to September 2016 $ 10,500,000 1.40% Bullet repayment; interest payable September 2011 to September 2018 January 2012 to January 2017 January 2012 to January 2019 August 2012 to August 2017 August 2012 to August 2019 September 2012 to September 2017 September 2012 to September 2019 October 2012 to October 2022 January 2013 to January 2018 January 2013 to January 2020 January 2013 to January 2023 February 2013 to February 2018 February 2013 to February 2020 February 2013 to February 2023 July 2013 to July 2020 July 2013 to July 2023 August 2013 to August 2017 August 2013 to August 2019 September 2013 to September 2016 September 2013 to September 2017 September 2013 to March 2019 7,500,000 10,000,000 7,000,000 9,900,000 9,000,000 12,700,000 9,000,000 4,400,000 10,600,000 10,000,000 3,000,000 6,200,000 11,600,000 3,600,000 10,200,000 3,500,000 4,000,000 8,500,000 1,500,000 1,500,000 1,400,000 annually 1.63% 〃 1.29% 〃 1.46% 〃 1.28% 〃 1.40% 〃 1.28% 〃 1.39% 〃 1.53% 〃 1.23% 〃 1.35% 〃 1.49% 〃 1.23% 〃 1.38% 〃 1.50% 〃 1.50% 〃 1.70% 〃 1.34% 〃 1.52% 〃 1.35% 〃 1.45% 〃 1.60% Bullet repayment; interest payable annually (interest for the six months prior to maturity will accrue on the basis of actual days and be repayable at maturity) (Continued) 89 Issuance Tranche Issuance Period Total Amount Coupon Rate Repayment and Interest Payment D September 2013 to March 2021 2,600,000 1.85% Bullet repayment; interest payable The pension costs of the aforementioned defined benefit plans were recognized in profit or loss by the following categories: E F C Domestic 5th September 2013 to March 2023 September 2013 to September 2023 5,400,000 2,600,000 2.05% 〃 2.10% Bullet repayment; interest payable January 2002 to January 2012 4,500,000 3.00% 〃 annually (Concluded) annually (interest for the six months prior to maturity will accrue on the basis of actual days and be repayable at maturity) Cost of revenue Research and development expenses General and administrative expenses Marketing expenses Years Ended December 31 2013 2012 $ 148,787 59,518 16,766 4,037 $ 135,841 56,014 17,877 4,146 $ 229,108 $ 213,878 20. RETIREMENT BENEFIT PLANS a. Defined contribution plans The plan 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. Accordingly, the Company recognized expenses of NT$1,355,947 thousand and NT$1,205,642 thousand in the parent company only statements of comprehensive income for the years ended December 31, 2013 and 2012, respectively. b. Defined benefit plans The Company has 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 Company contributes an amount equal to 2% of salaries paid each month to their respective pension funds (the Funds), which are administered by the Labor Pension Fund Supervisory Committee (the Committee) and deposited in the Committee’s name in the Bank of Taiwan. The Company revised its defined benefit plan in the fourth quarter of 2013 to set the employee’s mandatory retirement age. Such plan changes have reflected in the actuarial results as of December 31, 2013. For the years ended December 31, 2013 and 2012, the pre-tax actuarial loss recognized in other comprehensive income were NT$671,774 thousand and NT$677,413 thousand, respectively. As of December 31, 2013 and 2012, the pre-tax accumulated actuarial loss recognized in other comprehensive income were NT$1,349,187 thousand and NT$677,413 thousand, respectively. The amounts arising from the defined benefit obligation of the Company in the parent company only balance sheets were as follows: Present value of defined benefit obligation Fair value of plan assets Funded status Unrecognized prior service cost December 31, 2013 December 31, 2012 January 1, 2012 $ 10,176,332 (3,471,478) 6,704,854 786,186 $ 9,931,695 (3,264,786) 6,666,909 138,133 $ 9,026,683 (3,039,871) 5,986,812 145,259 Accrued pension cost $ 7,491,040 $ 6,805,042 $ 6,132,071 Movements in the present value of the defined benefit obligation were as follows: The actuarial valuations of plan assets and the present value of the defined benefit obligation were carried out by qualified actuaries. The principal assumptions of the actuarial valuation were as follow: Discount rate Future salary rate increase Expected rate of return on plan assets Measurement Date December 31, 2013 December 31, 2012 January 1, 2012 2.15% 3.00% 1.25% 1.75% 3.00% 2.00% 1.75% 3.00% 2.00% Balance, beginning of year Current service cost Interest cost Benefits paid from plan assets Effect of plan changes Actuarial loss Balance, end of year The pension costs of the defined benefit plans recognized in profit or loss were as follows: Movements in the fair value of the plan assets were as follows: Years Ended December 31 2013 2012 $ 129,749 172,486 (66,001) (7,126) $ 125,895 156,773 (61,664) (7,126) Balance, beginning of year Expected return on plan assets Actuarial loss Contributions from employer Benefits paid from plan assets $ 229,108 $ 213,878 Balance, end of year $ 3,471,478 $ 3,264,786 Years Ended December 31 2013 2012 $ 9,931,695 129,749 172,486 (50,508) (655,179) 648,089 $ 9,026,683 125,895 156,773 (26,119) - 648,463 $ 10,176,332 $ 9,931,695 Years Ended December 31 2013 2012 $ 3,264,786 66,001 (23,685) 214,884 (50,508) $ 3,039,871 61,664 (28,950) 218,320 (26,119) Current service cost Interest cost Expected return on plan assets Past service cost 90 The percentage of the fair value of the plan assets by major categories at the end of reporting period was as follows: b. Capital surplus Cash Equity instruments Debt instruments Fair Value of Plan Assets (%) December 31, 2013 December 31, 2012 January 1, 2012 23 45 32 100 25 38 37 100 24 41 35 100 Additional paid-in capital From merger From convertible bonds From differences between equity purchase price and carrying amount arising from acquisition or disposal of subsidiaries From share of changes in equities of subsidiaries and associates Donations December 31, 2013 December 31, 2012 January 1, 2012 $ 24,017,363 22,804,510 8,892,847 $ 23,934,607 22,804,510 8,892,847 $ 23,774,250 22,804,510 8,892,847 100,827 43,024 55 40,733 2,588 55 - - 55 $ 55,858,626 $ 55,675,340 $ 55,471,662 The overall expected rate of return on plan assets was based on the historical return trends, analysts’ predictions of the market over the life of related obligation, reference to the performance of the Funds operated by the Committee and the consideration of the effect that the minimum return should not be less than the average interest rate on a two-year time deposit published by the local banks. For the years ended December 31, 2013 and 2012, the actual return on plan assets were NT$42,316 thousand and NT$32,714 thousand, respectively. The Company elects to disclose the historical information of experience adjustments from the adoption of Accounting Standards Used in Preparation of Parent Company Only Financial Statements, which is as follows: Experience adjustments on plan liabilities Experience adjustments on plan assets $ 1,298,932 $ (23,685) $ 391,826 $ (28,950) $ - $ - December 31, 2013 December 31, 2012 January 1, 2012 The Company expects to make contributions of NT$221,330 thousand to the defined benefit plans in the next year starting from December 31, 2013. 21. EQUITY a. Capital stock Authorized shares (in thousands) Authorized capital Issued and paid shares (in thousands) Issued capital December 31, 2013 December 31, 2012 January 1, 2012 28,050,000 $ 280,500,000 25,928,617 $ 259,286,171 28,050,000 $ 280,500,000 25,924,435 $ 259,244,357 28,050,000 $ 280,500,000 25,916,222 $ 259,162,226 Under the Company Law, 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, the surplus from treasury stock transactions and the differences between equity purchase price and carrying amount arising from acquisition or disposal of subsidiaries) may be used to offset a deficit; in addition, when the Company has no deficit, such capital surplus may be distributed as cash dividends or stock dividends up to a certain percentage of the Company’s paid-in capital. c. Retained earnings and dividend policy 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: 1) Legal capital reserve at 10% of the profits left over, until the accumulated legal capital reserve equals the Company’s paid-in capital; 2) Special capital reserve in accordance with relevant laws or regulations or as requested by the authorities in charge; 3) 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; A holder of issued common shares with par value of $10 per share is entitled to vote and to receive dividends. 4) Any balance left over shall be allocated according to the resolution of the shareholders’ meeting. The authorized shares include 500,000 thousand shares allocated for the exercise of employee stock options. As of December 31, 2013, 1,082,959 thousand ADSs of the Company were traded on the NYSE. The 5 number of common shares represented by the ADSs was 5,414,794 thousand shares (one ADS represents five common shares). The Company’s Articles of Incorporation also provide that profits of the Company may be distributed by way of cash dividend and/or stock dividend. However, distribution of profits shall be made preferably by way of cash dividend. Distribution of profits may also be made by way of stock dividend; provided that the ratio for stock dividend shall not exceed 50% of the total distribution. Any appropriations of the profits are subject to shareholders’ approval in the following year. The Company accrued profit sharing to employees based on certain percentage of net income during the 91 period, which amounted to NT$12,634,665 thousand and NT$11,115,240 thousand for the years ended December 31, 2013 and 2012, respectively. Bonuses to members of the Board of Directors were expensed based on estimated amount payable. If the actual amounts subsequently approved by the shareholders differ from the amounts estimated, the differences are recorded in the year such bonuses are approved by the shareholders as a change in accounting estimate. If profit sharing approved for distribution to employees is in the form of common shares, the number of shares is determined by dividing the amount of profit sharing by the closing price (after considering the effect of dividends) of the shares on the day preceding the shareholders’ meeting. The appropriation for legal capital reserve shall be made until the reserve equals the Company’s paid-in capital. The reserve may be used to offset a deficit, or be distributed as dividends in cash or stocks for the portion in excess of 25% of the paid-in capital if the Company incurs no loss. Pursuant to existing regulations, the Company is required to set aside additional special capital reserve equivalent to the net debit balance of the other components of stockholders’ equity, such as the accumulated balance of foreign currency translation reserve, unrealized valuation gain/loss on available-for-sale financial assets, gain/loss from changes in fair value of hedging instruments in cash flow hedges, etc. For the subsequent decrease in the deduction amount to stockholders’ equity, any special reserve appropriated may be reversed to the extent that the net debit balance reverses. The appropriations of 2012 and 2011 earnings have been approved by the Company’s shareholders in its meetings held on June 11, 2013 and on June 12, 2012, respectively. The appropriations and dividends per share were as follows: Appropriation of Earnings Dividends Per Share (NT$) For Fiscal Year 2012 For Fiscal Year 2011 For Fiscal Year 2012 For Fiscal Year 2011 The Company’s appropriations of earnings for 2013 had been approved in the meeting of the Board of Directors held on February 18, 2014. The appropriations and dividends per share were as follows: Legal capital reserve Special capital reserve Cash dividends to shareholders Appropriation of Earnings Dividends Per Share (NT$) For Fiscal Year 2013 For Fiscal Year 2013 $ 18,814,679 (2,785,741) 77,785,851 $ 93,814,789 $ 3.00 The Board of Directors of the Company also approved the profit sharing to employees and bonus to members of the Board of Directors in the amounts of NT$12,634,665 thousand and NT$104,136 thousand in cash for payment in 2013, respectively. There is no significant difference between the aforementioned approved amounts and the amounts charged against earnings of 2013. The appropriations of earnings, profit sharing to employees and bonus to members of the Board of Directors for 2013 are to be presented for approval in the TSMC’s shareholders’ meeting to be held on June 24, 2014 (expected). The information about the appropriations of the Company’s profit sharing to employees and bonus to members of the Board of Directors is available at the Market Observation Post System website. 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 the Company on earnings generated since January 1, 1998. Legal capital reserve Special capital reserve Cash dividends to shareholders $ 16,615,880 (4,820,483) 77,773,307 $ 13,420,128 1,172,350 77,748,668 $ 89,568,704 $ 92,341,146 $ 3.00 $ 3.00 d. Others Changes in others were as follows: The Company’s profit sharing to employees and bonus to members of the Board of Directors in the amounts of NT$11,115,240 thousand and NT$71,351 thousand in cash for 2012, respectively, and profit sharing to employees and bonus to members of the Board of Directors in the amounts of NT$8,990,026 thousand and NT$62,324 thousand in cash for 2011, respectively, had been approved by the shareholders in its meeting held on June 11, 2013 and June 12, 2012, respectively. The aforementioned approved amount is the same as the one approved by the Board of Directors in its meetings held on February 5, 2013 and February 14, 2012, respectively, and the same amount had been charged against earnings for the years ended December 31, 2012 and 2011, respectively. The appropriations of earnings, payment of profit sharing to employees and bonus to members of the Board of Directors for the year ended December 31, 2012 approved by the Board of Directors of the Company were based on the financial statements for the year ended December 31, 2012 prepared under the R.O.C. GAAP and in accordance with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers issued by the FSC before amendment. Year Ended December 31, 2013 Foreign Currency Translation Reserve Unrealized Gain/Loss from Available-for- sale Financial Assets Cash Flow Hedges Reserve Total $ (10,753,806) $ 7,973,321 $ - $ (2,780,485) 3,655,675 - - - (1,061,644) 846,709 - - - 3,655,675 (1,061,644) 846,709 (42,930) 13,515,899 (113) 13,472,856 699 - (43) 36,539 - - 656 36,539 $ (7,140,362) $ 21,310,781 $ (113) $ 14,170,306 Balance, beginning of year Exchange differences arising on translation of foreign operations Changes in fair value of available-for-sale financial assets Cumulative (gain)/loss reclassified to profit or loss upon disposal of available-for-sale financial assets Share of other comprehensive income of subsidiaries and associates The proportionate share of other comprehensive income/losses reclassified to profit or loss upon partial disposal of associates Income tax effect Balance, end of year 92 $ (10,753,806) $ 7,973,321 $ - $ (2,780,485) Balance, end of year Year Ended December 31, 2012 Foreign Currency Translation Reserve Unrealized Gain/Loss from Available-for- sale Financial Assets Cash Flow Hedges Reserve Total Balance, beginning of year Exchange differences arising on translation of foreign $ (6,433,364) $ (1,172,762) $ (93) $ (7,606,219) operations (4,317,386) - Changes in fair value of available-for-sale financial assets Cumulative loss reclassified to profit or loss upon impairment of available-for-sale financial assets Cumulative (gain)/loss reclassified to profit or loss upon disposal of available-for-sale financial assets Share of other comprehensive income of subsidiaries and associates Income tax effect Balance, end of year - - - (3,056) - (159,248) 2,677,529 (110,634) 7,147,736 (409,300) - - - - 93 - (4,317,386) (159,248) 2,677,529 (110,634) 7,144,773 (409,300) The exchange differences arising on translation of foreign operation’s net assets from its functional currency to TSMC’s presentation currency are recognized directly in other comprehensive income and also accumulated in the foreign currency translation reserve. Unrealized gain/loss on available-for-sale financial assets represents the cumulative gains or losses arising from the fair value measurement on available-for-sale financial assets that are recognized in other comprehensive income. When those available-for-sale financial assets have been disposed of or are determined to be impaired subsequently, the related cumulative gains or losses in other comprehensive income are reclassified to profit or loss. The cash flow hedges reserve represents the cumulative effective portion of gains or losses arising on changes in fair value of the hedging instruments entered into as cash flow hedges. The cumulative gain or loss arising on changes in fair value of the hedging instruments that are recognized and accumulated in cash flow hedges reserve will be reclassified to profit or loss only when the hedge transaction affects profit or loss. 22. SHARE-BASED PAYMENT The Company elected to take the optional exemption from applying related guidance retrospectively for shared-based payment transactions granted and vested before January 1, 2012. The plans are described as follows: The Company’s Employee Stock Option Plans, consisting of the 2004 Plan, 2003 Plan and 2002 Plan, were approved by the Securities and Futures Bureau (SFB) on January 6, 2005, October 29, 2003 and June 25, 2002, respectively. The maximum number of stock 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 stock option eligible to subscribe for one common share when exercised. The stock 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 stock 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 stock options are granted at an exercise price equal to the closing price of the Company’s common shares quoted on the TWSE on the grant date. Stock options of the plans that had never been granted or had been granted but subsequently canceled had expired as of December 31, 2013. Information about the Company’s outstanding stock options for the years ended December 31, 2013 and 2012 was as follows: Number of Stock Options (In Thousands) Weighted-average Exercise Price (NT$) Year ended December 31, 2013 Balance, beginning of year Stock options exercised Year ended December 31, 2012 Balance, beginning of year Stock options exercised Stock options canceled Balance, end of year 5,945 (4,182) 1,763 14,293 (8,213) (135) 5,945 $ 34.6 29.8 45.9 $ 31.4 29.5 34.6 34.6 The numbers of outstanding stock options and exercise prices have been adjusted to reflect the distribution of earnings by the Company in accordance with the plans. Information about the Company’s outstanding stock options was as follows: December 31, 2013 December 31, 2012 January 1, 2012 Range of Exercise Price (NT$) Weighted-average Remaining Contractual Life (Years) Range of Exercise Price (NT$) Weighted-average Remaining Contractual Life (Years) Range of Exercise Price (NT$) Weighted-average Remaining Contractual Life (Years) $43.2-$47.2 1.0 $20.2-$28.3 $38.0-$50.1 0.4 2.0 $20.9-$29.3 $38.0-$50.1 1.2 2.9 As of December 31, 2013, all of the above outstanding stock options were exercisable. 23. NET REVENUE The analysis of the Company’s net revenue was as follows: Net revenue from sale of goods Net revenue from royalties Years Ended December 31 2013 2012 $ 590,564,728 522,872 $ 499,871,887 497,638 $ 591,087,600 $ 500,369,525 93 24. OTHER OPERATING INCOME AND EXPENSES, NET 27. OTHER GAINS AND LOSSES Income (expenses) of rental assets Rental income Depreciation of rental assets Loss on disposal of property, plant and equipment and intangible assets, net Impairment loss on property, plant and equipment Others Years Ended December 31 2013 2012 $ 13,385 (25,120) (11,735) (64,753) - 9,874 $ 469 (6,656) (6,187) (125,488) (418,330) 918 $ (66,614) $ (549,087) Gain (loss) on disposal of financial assets, net Available-for-sale financial assets Financial assets carried at cost Gain on deconsolidation of subsidiary Settlement income Other gains Net gain (loss) on financial instruments at FVTPL Held for trading Impairment loss of financial assets Available-for-sale financial assets Other losses Years Ended December 31 2013 2012 $ 846,709 42,664 293,578 899,745 138,612 $ 110,634 (269) - 883,845 286,266 54,766 - (14,027) (152,814) (2,677,529) (12,810) $ 2,262,047 $ (1,562,677) Years Ended December 31 2013 2012 $ 22,297,945 (603,321) 19,589 21,714,213 $ 14,609,220 48,609 194,660 14,852,489 - 506,563 5,348,984 5,855,547 (543,611) 588,318 2,536,905 2,581,612 Years Ended December 31 2013 2012 28. INCOME TAX $ 996,995 14,306 1,011,301 71,125 $ 836,580 30,647 867,227 69,676 $ 1,082,426 $ 936,903 a. Income tax expense recognized in profit or loss Income tax expense consisted of the following: Years Ended December 31 2013 2012 $ 1,991,519 99,722 995 $ 758,204 182,040 4,870 Current income tax expense (benefit) Current tax expense recognized in the current year Income tax adjustments on prior years Other income tax adjustments Deferred income tax expense (benefit) Effect of tax rate changes The origination and reversal of temporary differences Investment tax credits $ 2,092,236 $ 945,114 Income tax expense recognized in profit or loss $ 27,569,760 $ 17,434,101 25. OTHER INCOME Interest income Bank deposits Held-to-maturity financial assets Dividend income 26. FINANCE COSTS Interest expense Corporate bonds Bank loans Others 94 A reconciliation of income before income tax and income tax expense recognized in profit or loss was as follows: Years Ended December 31 2013 2012 Year Ended December 31, 2013 Recognized in Balance, Beginning of Year Profit or Loss Other Comprehensive Income Balance, End of Year Income before tax $ 215,716,550 $ 183,752,387 Income tax expense at the statutory rate (17%) Tax effect of adjusting items: Nondeductible (deductible) items in determining taxable income Tax-exempt income Additional income tax on unappropriated earnings Effect of tax rate changes on deferred income tax Income tax credits The origination and reversal of temporary differences Remeasurement of investment tax credits Income tax adjustments on prior years Other income tax adjustments $ 36,671,813 $ 31,237,906 (2,369,323) (7,716,747) 7,659,010 - (3,136,942) 506,563 (3,460,882) 28,153,492 (603,321) 19,589 (2,873,123) (8,360,834) 4,186,013 (543,611) (2,828,300) 588,318 (4,215,537) 17,190,832 48,609 194,660 Income tax expense recognized in profit or loss $ 27,569,760 $ 17,434,101 b. Income tax expense recognized in other comprehensive income Years Ended December 31 2013 2012 Investment tax credits Temporary differences Depreciation Provision for sales returns and allowance Accrued pension cost Available-for-sale financial assets Unrealized loss on inventories Others $ 7,304,964 $ (5,348,984) $ - $ 1,955,980 819,231 687,929 818,502 224,694 359,823 103,720 (452,319) 178,151 1,680 (254,872) 27,404 (6,607) - - 80,613 36,539 - - 366,912 866,080 900,795 6,361 387,227 97,113 Deferred income tax assets $ 10,318,863 $ (5,855,547) $ 117,152 $ 4,580,468 Year Ended December 31, 2012 Investment tax credits Temporary differences Depreciation Provision for sales returns and allowance Accrued pension cost Available-for-sale financial assets Unrealized loss on inventories Others $ 9,841,869 $ (2,536,905) $ - $ 7,304,964 2,044,680 488,788 457,667 308,929 - 86,552 (1,225,449) 199,141 279,545 325,065 359,823 17,168 - - 81,290 (409,300) - - 819,231 687,929 818,502 224,694 359,823 103,720 Deferred income tax expense (benefit) Deferred income tax assets $ 13,228,485 $ (2,581,612) $ (328,010) $ 10,318,863 Related to unrealized gain/loss on available-for-sale financial assets Related to actuarial gain/loss from defined benefit plans $ (36,539) (80,613) $ 409,300 (81,290) $ (117,152) $ 328,010 have been recognized in the parent company only financial statements d. The investment tax credits and deductible temporary differences for which no deferred income tax assets c. Deferred income tax balance The analysis of deferred income tax in the parent company only balance sheets was as follows: The information of the investment tax credits for which no deferred income tax assets have been recognized was as follows: Investment tax credits Temporary differences Depreciation Provision for sales returns and allowance Accrued pension cost Available-for-sale financial assets Unrealized loss on inventories Others December 31, 2013 December 31, 2012 January 1, 2012 $ 1,955,980 $ 7,304,964 $ 9,841,869 Expiry year 2013 2014 366,912 866,080 900,795 6,361 387,227 97,113 819,231 687,929 818,502 224,694 359,823 103,720 2,044,680 488,788 457,667 308,929 - 86,552 $ 4,580,468 $ 10,318,863 $ 13,228,485 December 31, 2013 December 31, 2012 January 1, 2012 $ - 3,015,705 $ - 5,807,110 $ 5,456,991 4,881,100 $ 3,015,705 $ 5,807,110 $ 10,338,091 As of December 31, 2013 and 2012 and January 1, 2012, the aggregate deductible temporary differences for which no deferred income tax assets have been recognized amounted to NT$8,673,160 thousand, NT$13,589,292 thousand and NT$14,893,317 thousand, respectively. 95 e. Unused investment tax credits and tax-exemption information h. Income tax examination As of December 31, 2013, the investment tax credits of the Company consisted of the following: Law/Statute Item Remaining Creditable Amount Expiry Year Statute for Upgrading Industries Purchase of machinery and equipment $ 4,489,334 482,351 2014 2015 $ 4,971,685 The tax authorities have examined income tax returns of the Company through 2010. All investment tax credit adjustments assessed by the tax authorities have been recognized accordingly. 29. EARNINGS PER SHARE As of December 31, 2013, the profits generated from the following projects of the Company are exempt from income tax for a five-year period: Basic EPS Diluted EPS Years Ended December 31 2013 2012 $ 7.26 $ 7.26 $ 6.42 $ 6.41 Amounts (Numerator) Number of Shares (Denominator) (In Thousands) EPS (NT$) EPS is computed as follows: Year ended December 31, 2013 Basic EPS Net income available to common shareholders Effect of dilutive potential common shares $ 188,146,790 - 25,927,778 1,825 $ 7.26 Diluted EPS Net income available to common shareholders (including effect of dilutive potential common shares) Year ended December 31, 2012 Basic EPS $ 188,146,790 25,929,603 $ 7.26 Net income available to common shareholders Effect of dilutive potential common shares $ 166,318,286 - 25,920,735 7,201 $ 6.42 Diluted EPS Net income available to common shareholders (including effect of dilutive potential common shares) $ 166,318,286 25,927,936 $ 6.41 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 end of the reporting period. Such dilutive effect of the potential shares needs to be included in the calculation of diluted EPS until profit sharing to employees to be settled in the form of common stocks are approved by the shareholders in the following year. Construction and expansion of 2005 Construction and expansion of 2006 Construction and expansion of 2007 Tax-exemption Period 2010 to 2014 2011 to 2015 2014 to 2018 f. The information of unrecognized deferred income tax liabilities associated with investments As of December 31, 2013 and 2012 and January 1, 2012, the aggregate taxable temporary differences associated with investments in subsidiaries not unrecognized as deferred income tax liabilities amounted to NT$28,035,340 thousand, NT$20,516,999 thousand and NT$15,074,593 thousand, respectively. g. Integrated income tax information Balance of the Imputation Credit Account $ 15,242,724 $ 8,130,060 $ 4,003,228 December 31, 2013 December 31, 2012 January 1, 2012 The estimated and actual creditable ratio for distribution of the Company’s earnings of 2013 and 2012 were 9.80% and 7.75%, respectively. Under the Rule No.10204562810 issued by the Ministry of Finance, when calculating the creditable ratio in the year of first-time adoption of Accounting Standards Used in Preparation of Parent Company Only Financial Statements, the Company has included the adjustments to retained earnings from the effect of transition to Parent Company Only Financial Statements Accounting Standards in the accumulated unappropriated earnings. 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. All earnings generated prior to December 31, 1997 have been appropriated. 96 30. ADDITIONAL INFORMATION OF EXPENSES BY NATURE 33. FINANCIAL INSTRUMENTS Net income included the following items: a. Categories of financial instruments a. Depreciation of property, plant and equipment Recognized in cost of revenue Recognized in operating expenses Recognized in other operating income and expenses b. Amortization of intangible assets Recognized in cost of revenue Recognized in operating expenses Years Ended December 31 2013 2012 $ 134,545,283 12,696,422 25,120 $ 111,929,312 10,441,847 6,656 $ 147,266,825 $ 122,377,815 $ 1,099,542 973,384 $ 1,273,689 748,375 $ 2,072,926 $ 2,022,064 c. Research and development costs expensed as incurred $ 46,922,471 $ 38,769,956 d. Employee benefits expenses Post-employment benefits (Note 20) Defined contribution plans Defined benefit plans Other employee benefits Employee benefits expense summarized by function Recognized in cost of revenue Recognized in operating expenses $ 58,207,270 $ 52,208,200 Note: Including financial assets carried at cost. $ 1,355,947 229,108 1,585,055 56,622,215 $ 1,205,642 213,878 1,419,520 50,788,680 $ 35,791,556 22,415,714 $ 31,066,533 21,141,667 $ 58,207,270 $ 52,208,200 31. LOSS OF CONTROL IN SUBSIDIARY Starting June 2013, the Company has no power to govern the financial and operating policies of Xintec due to the loss of power to cast the majority of votes at meetings of the Board of Directors, but over which the Company still retains significant influence. Accordingly, Xintec is reclassified as an associate. For more information on deconsolidation of subsidiary, please refer to Note 34 to the consolidated financial statements for the year ended December 31, 2013. Financial assets FVTPL Held for trading derivatives Available-for-sale financial assets (Note) Held-to-maturity financial assets Loans and receivables December 31, 2013 December 31, 2012 January 1, 2012 $ 64,030 1,115,780 1,795,949 $ 38,824 2,328,811 701,146 $ 14,925 3,114,969 1,403,427 Cash and cash equivalents Notes and accounts receivables (including related parties) Other receivables Refundable deposits 146,438,768 70,415,680 1,453,842 2,496,663 109,150,810 56,239,838 1,218,024 2,394,826 85,262,521 44,186,800 1,095,438 4,491,735 $ 223,780,712 $ 172,072,279 $ 139,569,815 Financial liabilities FVTPL Held for trading derivatives Amortized cost Short-term loans Accounts payable (including related parties) Payables to contractors and equipment suppliers Accrued expenses and other current liabilities Bonds payable Other long-term payables Guarantee deposits $ 25,404 $ 6,274 $ - 15,645,000 17,812,654 89,555,814 13,035,795 166,200,000 54,000 147,964 34,714,929 16,622,563 44,371,108 8,689,543 80,000,000 113,000 199,315 25,926,528 12,515,270 33,811,970 7,112,898 22,500,000 - 439,032 $ 302,476,631 $ 184,716,732 $ 102,305,698 b. Financial risk management objectives The Company seeks to ensure sufficient cost-efficient funding readily available when needed. The Company manages its exposure to foreign currency risk, interest rate risk, equity price risk, credit risk and liquidity risk with the objective to reduce the potentially adverse effects the market uncertainties may have on its financial performance. The plans for material treasury activities are reviewed by Audit Committees and/or Board of Directors in accordance with procedures required by relevant regulations or internal controls. During the implementation of such plans, Corporate Treasury function must comply with certain treasury procedures that provide guiding principles for overall financial risk management and segregation of duties. 32. CAPITAL MANAGEMENT c. Market risk The Company requires significant amounts of capital to build and expand its production facilities and acquire additional equipment. In consideration of the industry dynamics, the Company manages its capital in a manner to ensure that it has sufficient and necessary financial resources to fund its working capital needs, capital asset purchases, research and development activities, dividend payments, debt service requirements and other business requirements associated with its existing operations over the next 12 months. The Company is exposed to the market risks arising from changes in foreign exchange rates, interest rates and the prices in equity investments, and utilizes some derivative financial instruments to reduce the related risks. 97 Foreign currency risk Most of the Company’s operating activities are denominated in foreign currencies. Consequently, the Company is exposed to foreign currency risk. To protect against reductions in value and the volatility of future cash flows caused by changes in foreign exchange rates, the Company utilizes derivative financial instruments, including currency forward contracts and cross currency swaps, to hedge its currency exposure. These instruments help to reduce, but do not eliminate, the impact of foreign currency exchange rate movements. As of December 31, 2013 and 2012 and January 1, 2012, the Company’s ten largest customers accounted for 56%, 55% and 59% of accounts receivable, respectively. The Company believes the concentration of credit risk is insignificant for the remaining accounts receivable. Financial credit risk The Company regularly monitors and reviews the transaction limit applied to counterparties and adjusts the concentration limit according to market conditions and the credit standing of the counterparties. The Company mitigates its exposure by selecting counterparties with investment-grade credit ratings. The Company also holds short-term borrowings in foreign currencies in proportion to its expected future cash flows. This allows foreign-currency-denominated borrowings to be serviced with expected future cash flows and provides a partial hedge against transaction translation exposure. e. Liquidity risk management The Company’s sensitivity analysis to foreign currency risk mainly focuses on the foreign currency monetary items at the end of the reporting period. Assuming an unfavorable 10% movement in the levels of foreign exchanges against the New Taiwan dollar, the net income for the years ended December 31, 2013 and 2012 would have decreased by NT$156,590 thousand and NT$707,926 thousand, respectively, after taking into consideration of the hedging contracts and the hedged items. Interest rate risk The Company is exposed to interest rate risk arising from borrowing at fixed interest rates. All of the Company’s long-term bonds have fixed interest rates and are measured at amortized cost. As such, changes in interest rates would not affect the future cash flows. Other price risk The Company is exposed to equity price risk arising from available-for-sale equity investments. Assuming a hypothetical decrease of 5% in equity prices of the equity investments at the end of the reporting period, the net income for the years ended December 31, 2013 and 2012 would have been unaffected as they were classified as available-for-sale; however, the other comprehensive income for the years ended December 31, 2013 and 2012 would have decreased by NT$47,150 thousand and NT$97,492 thousand, respectively. d. Credit risk management Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Company. The Company is exposed to credit risk from operating activities, primarily trade receivables, and from financing activities, primarily deposits, fixed-income investments and other financial instruments with banks. Credit risk is managed separately for business related and financial related exposures. As of the end of the reporting period, the Company’s maximum credit risk exposure is mainly from the carrying amount of financial assets recognized in the parent company only balance sheet. Business related credit risk The Company has considerable trade receivables outstanding with its customers worldwide. A substantial majority of the Company’s outstanding trade receivables are not covered by collateral or credit insurance. While the Company has procedures to monitor and limit exposure to credit risk on trade receivables, there can be no assurance such procedures will effectively limit its credit risk and avoid losses. This risk is heightened during periods when economic conditions worsen. 98 The objective of liquidity risk management is to ensure the Company has sufficient liquidity to fund its business requirements associated with existing operations over the next 12 months. The Company manages its liquidity risk by maintaining adequate cash and banking facilities. As of December 31, 2013 and 2012 and January 1, 2012, the unused of financing facilities of the Company amounted to NT$67,437,805 thousand, NT$46,273,762 thousand and NT$55,424,367 thousand, respectively. The table below summarizes the maturity profile of the Company’s financial liabilities based on contractual undiscounted payments, including principles and interests. Less Than 1 Year 2-3 Years 4-5 Years 5+ Years Total December 31, 2013 Non-derivative financial liabilities Short-term loans Accounts payable (including related parties) Payables to contractors and equipment suppliers Accrued expenses and other current liabilities Bonds payable Other long-term payables Guarantee deposits Derivative financial instruments Forward exchange contracts Outflows Inflows December 31, 2012 Non-derivative financial liabilities $ 15,646,783 17,812,654 $ - - $ - - $ - - $ 15,646,783 17,812,654 89,555,814 - - - 89,555,814 13,035,795 2,380,157 18,000 - 138,449,203 - 16,720,430 36,000 147,964 16,904,394 - 65,859,591 - - 65,859,591 - 94,360,103 - - 94,360,103 13,035,795 179,320,281 54,000 147,964 315,573,291 24,812,803 (24,810,910) 1,893 - - - - - - - - - 24,812,803 (24,810,910) 1,893 $ 138,451,096 $ 16,904,394 $ 65,859,591 $ 94,360,103 $ 315,575,184 Short-term loans Accounts payable (including related parties) $ 34,721,003 16,622,563 $ - - $ - - $ - - $ 34,721,003 16,622,563 (Continued) Payables to contractors and equipment suppliers $ 44,371,108 $ - $ - $ - $ 44,371,108 1) Fair value of financial instruments carried at amortized cost Less Than 1 Year 2-3 Years 4-5 Years 5+ Years Total f. Fair value of financial instruments Accrued expenses and other current liabilities Bonds payable Other long-term payables Guarantee deposits Derivative financial instruments Forward exchange contracts Outflows Inflows Cross currency swap contracts Outflows Inflows January 1, 2012 Non-derivative financial liabilities Short-term loans Accounts payable (including related parties) Payables to contractors and equipment suppliers Accrued expenses and other current liabilities Bonds payable Guarantee deposits Derivative financial instruments Forward exchange contracts Outflows Inflows 8,689,543 1,108,150 59,000 - 105,571,367 - 2,216,300 36,000 199,315 2,451,615 - 44,911,191 18,000 - 44,929,191 - 37,834,474 - - 37,834,474 8,689,543 86,070,115 113,000 199,315 190,786,647 Except as detailed in the following table, the Company considers that the carrying amounts of financial assets and financial liabilities recognized in the parent company only financial statements approximate their fair values. December 31, 2013 December 31, 2012 January 1, 2012 Carrying Amount Fair Value Carrying Amount Fair Value Carrying Amount Fair Value 9,417,062 (9,443,940) (26,878) 7,985,450 (7,986,190) (740) - - - - - - - - - - - - - - - - - - 9,417,062 (9,443,940) (26,878) 7,985,450 (7,986,190) (740) Financial assets Held-to-maturity financial assets Commercial paper Corporate bonds Financial liabilities $ 105,543,749 $ 2,451,615 $ 44,929,191 $ 37,834,474 $ 190,759,029 Measured at amortized cost $ 1,795,949 $ 1,795,612 $ - $ - $ - $ - 1,426,474 1,403,427 701,146 708,973 - - $ 25,933,177 12,515,270 $ - - $ - - $ - - $ 25,933,177 12,515,270 33,811,970 7,112,898 4,775,081 - 84,148,396 1,515,822 (1,528,206) (12,384) - - 538,500 439,032 977,532 - - 33,811,970 - 11,000,933 - 11,000,933 - 7,713,258 - 7,713,258 7,112,898 24,027,772 439,032 103,840,119 - - - - - - - - - 1,515,822 (1,528,206) (12,384) Bonds payable 166,200,000 165,476,545 80,000,000 80,343,413 22,500,000 22,597,115 2) Fair value measurements recognized in the parent company only balance sheets The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable: ● Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities; ● Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and ● Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). December 31, 2013 $ 84,136,012 $ 977,532 $ 11,000,933 $ 7,713,258 $ 103,827,735 Level 1 Level 2 Level 3 Total (Concluded) Financial assets at FVTPL Derivative financial instruments $ - $ 64,030 $ - $ 64,030 Available-for-sale financial assets Publicly traded stocks $ 646,402 $ - $ - $ 646,402 Financial liabilities at FVTPL Derivative financial instruments $ - $ 25,404 $ - $ 25,404 99 Financial assets at FVTPL Level 1 Level 2 Level 3 Total Derivative financial instruments $ - $ 38,824 $ - $ 38,824 The transactions between the Company and its related parties, other than those disclosed in other notes, are summarized as follows: December 31, 2012 34. RELATED PARTY TRANSACTIONS Available-for-sale financial assets a. Net revenue Publicly traded stocks $ 1,845,052 $ - $ - $ 1,845,052 Financial liabilities at FVTPL Derivative financial instruments $ - $ 6,274 $ - $ 6,274 January 1, 2012 Level 1 Level 2 Level 3 Total Financial assets at FVTPL Derivative financial instruments $ - $ 14,925 $ - $ 14,925 Available-for-sale financial assets Publicly traded stocks $ 2,617,134 $ - $ - $ 2,617,134 There were no transfers between Level 1 and 2 for the years ended December 31, 2013 and 2012, respectively. There were no purchases and disposals for assets on Level 3 for the years ended December 31, 2013 and 2012, respectively. Related Party Categories Subsidiaries Associates Associates of the Company’s subsidiaries Joint venture of the Company’s subsidiaries b. Purchases Related Party Categories Subsidiaries Associates Net Revenue from Sale of Goods Net Revenue from Royalties Years Ended December 31 Years Ended December 31 2013 2012 2013 2012 $ 414,108,019 2,167,467 119,067 1,677 $ 416,396,230 $ 326,784,542 4,548,173 - 3,410 $ 331,336,125 $ 15,624 497,020 - - $ 512,644 $ 984 479,239 - - $ 480,223 Years Ended December 31 2013 2012 $ 25,422,634 10,052,170 $ 23,734,561 8,114,307 $ 35,474,804 $ 31,848,868 3) Valuation techniques and assumptions used in fair value measurement c. Receivables from related parties The fair values of financial assets and financial liabilities are determined as follows: Related Party Categories December 31, 2013 December 31, 2012 January 1, 2012 ● The fair values of financial assets and financial liabilities with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market prices (includes publicly traded stocks). ● Forward exchange contracts and cross currency swap contracts are measured using quoted forward exchange rates and yield curves derived from quoted interest rates matching maturities of the contracts. ● The fair values of other financial assets and financial liabilities are determined in accordance with generally accepted pricing models based on discounted cash flow analysis. Subsidiaries Associates Joint venture of the Company’s subsidiaries $ 52,750,047 219,424 332 $ 40,748,905 238,380 159 $ 24,661,104 116,218 212 $ 52,969,803 $ 40,987,444 $ 24,777,534 d. Payables to related parties Related Party Categories December 31, 2013 December 31, 2012 January 1, 2012 Subsidiaries Associates Joint venture of the Company’s subsidiaries $ 2,503,578 1,679,184 1,217 $ 2,485,560 742,705 2,077 $ 1,664,623 1,325,791 2,168 $ 4,183,979 $ 3,230,342 $ 2,992,582 100 e. Acquisition of property, plant and equipment and intangible assets Purchase Price Years Ended December 31 2013 2012 Related Party Categories Marketing Expenses - Commission Non-operating Income Years Ended December 31 Years Ended December 31 2013 2012 2013 2012 Related Party Categories Subsidiaries Associates Joint venture of the Company’s subsidiaries $ 120,499 21,135 - $ 230,532 47,051 1,224 $ 141,634 $ 278,807 Subsidiaries Associates $ 736,937 - $ 716,296 - $ 18,636 - $ 12,292 5,990 $ 736,937 $ 716,296 $ 18,636 $ 18,282 Other Receivables from Related Parties December 31, 2013 December 31, 2012 January 1, 2012 f. Disposal of property, plant and equipment Related Party Categories Related Party Categories Years Ended December 31 2013 2012 Proceeds Gains (Losses) Proceeds Gains (Losses) Subsidiaries Associates Joint venture of the Company’s subsidiaries $ 351,169 220,831 - $ 95,271 179,692 - $ 65,736 121,767 525 $ 572,000 $ 274,963 $ 188,028 Subsidiaries Associates Joint venture of the Company’s subsidiaries $ 94,152 58,265 - $ 2,570 2,787 948 $ 46,951 14,531 9,000 $ (18,697) (132) 213 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, price and terms were determined in accordance with mutual agreements. $ 152,417 $ 6,305 $ 70,482 $ (18,616) Deferred Gains (Losses) from Disposal of Property,Plant and Equipment December 31, 2013 December 31, 2012 January 1, 2012 The Company leased machinery and equipment from Xintec. The lease terms and prices were determined in accordance with mutual agreements. The rental expense was paid quarterly and the related expense was classified under manufacturing expenses. Related Party Categories Subsidiaries Associates Joint venture of the Company’s subsidiaries $ 46,235 - - $ 17,279 (7,806) 948 $ (1,493) - - The Company deferred the disposal gain/loss derived from sales of property, plant and equipment to related parties using equity method, and then recognized such gain/loss over the depreciable lives of the disposed assets. $ 46,235 $ 10,421 $ (1,493) h. Compensation of key management personnel g. Others Related Party Categories Manufacturing Expenses Research and Development Expenses Years Ended December 31 Years Ended December 31 2013 2012 2013 2012 Subsidiaries Associates Joint venture of the Company’s subsidiaries $ 122,068 908,977 5,187 $ 180,998 - 14,586 $ 1,107,059 903 6,340 $ 975,455 4,644 8,254 $ 1,036,232 $ 195,584 $ 1,114,302 $ 988,353 The compensation to directors and other key management personnel were as follows: Short-term employee benefits Post-employment benefits $ 1,242,451 7,998 $ 1,293,052 3,009 $ 1,250,449 $ 1,296,061 Years Ended December 31 2013 2012 The compensation to directors and other key management personnel were determined by the Compensation Committee of the Company in accordance with the individual performance and the market trends. 101 35. SIGNIFICANT OPERATING LEASE ARRANGEMENTS The Company leases several parcels of land from the Science Park Administration. These operating leases expire between February 2014 and December 2032 and can be renewed upon expiration. 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 lawsuit in the U.S. District Court for the Eastern District of Texas. The outcome cannot be determined and the Company cannot make a reliable estimate of the contingent liability at this time. The Company expensed the lease payments as follows: Years Ended December 31 2013 2012 d. 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 and the Company cannot make a reliable estimate of the contingent liability at this time. Minimum lease payments $ 671,371 $ 484,603 Future minimum lease payments under the above non-cancellable operating leases are as follows: Not later than 1 year Later than 1 year and not later than 5 years Later than 5 years $ 666,791 2,426,891 5,110,098 $ 485,963 1,783,197 3,655,825 $ 453,868 1,642,683 3,255,047 December 31, 2013 December 31, 2012 January 1, 2012 $ 8,203,780 $ 5,924,985 $ 5,351,598 36. SIGNIFICANT CONTINGENT LIABILITIES AND UNRECOGNIZED COMMITMENTS Significant contingent liabilities and unrecognized commitments of the Company as of the end of the reporting period, 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 provided 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. In 2013 and 2012, the R.O.C. Government did not involve such right. 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, in September 2006, Philips spun-off its semiconductor subsidiary which was renamed as NXP B.V. Further, 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 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 falls below a specific percentage of its capacity, the defaulting party is required to compensate SSMC for all related unavoidable costs. There was no default from the aforementioned commitment as of December 31, 2013. c. In June 2010, Keranos, LLC. filed a complaint 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 102 e. The Company 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 on October 31, 2012. Both parties also signed the research and development funding agreement whereby the Company shall provide EUR276,000 thousand to ASML’s research and development programs from 2013 to 2017. For the year ended December 31, 2013, the Company paid EUR55,078 thousand to ASML under the research and development funding agreement. f. In December 2013, Tela Innovations, Inc. filed complaints in the U.S. District Court for the District of Delaware and in the United States International Trade Commission accusing the Company and TSMC North America of infringing one U.S. patent. In January 2014, the Company filed a lawsuit against Tela for trade secret misappropriation and breach of contract. The outcome cannot be determined and the Company cannot make a reliable estimate of the contingent liability at this time. g. As of December 31, 2013, the Company provided financial guarantees of NT$44,700,000 thousand to its subsidiary, TSMC Global, in respect of the issuance of unsecured corporate bonds. 37. EXCHANGE RATE INFORMATION OF FOREIGN-CURRENCY FINANCIAL ASSETS AND LIABILITIES The significant financial assets and liabilities denominated in foreign currencies were as follows: Foreign Currencies (In Thousands) Exchange Rate (Note) Carrying Amount December 31, 2013 Financial assets Monetary items USD EUR JPY Non-monetary items HKD Financial liabilities Monetary items USD EUR JPY $ 2,601,226 450,273 41,327,283 168,334 1,926,813 810,174 71,828,809 29.800 41.00 0.2834 3.84 29.800 41.00 0.2834 $ 77,516,527 18,461,200 11,712,152 646,402 57,419,016 33,217,114 20,356,284 (Continued) Foreign Currencies (In Thousands) Exchange Rate (Note) Carrying Amount 1) Business combinations. The Company elected not to apply related guidance retrospectively to business combinations that occurred before January 1, 2012. Therefore, in the opening balance sheet, the amount of goodwill generated from past business combinations was the same as the carrying amount of goodwill under R.O.C. GAAP as of January 1, 2012. $ 65,492,054 4,496,863 11,829,489 1,845,052 2) Employee benefits. The Company elected to recognize all cumulative actuarial gains and losses in retained earnings as of the transition date. In addition, the Company elected to apply the exemption disclosure requirement provided by related guidance, 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. December 31, 2012 Financial assets Monetary items USD EUR JPY Non-monetary items HKD Financial liabilities Monetary items USD EUR JPY January 1, 2012 Financial assets Monetary items USD EUR JPY Non-monetary items HKD Financial liabilities Monetary items USD EUR JPY $ 2,255,391 117,136 35,290,837 492,014 2,171,316 245,237 43,052,403 $ 1,566,212 124,425 33,073,336 671,060 1,626,129 106,931 34,942,421 29.038 38.39 0.3352 3.75 29.038 38.39 0.3352 30.288 39.27 0.3897 3.90 30.288 39.27 0.3897 63,050,668 9,414,653 14,431,165 $ 47,437,444 4,886,187 12,888,679 2,617,134 49,252,192 4,199,185 13,617,061 (Concluded) Note: Exchange rate represents the number of N.T. dollars for which one foreign currency could be exchanged. 38. FIRST-TIME ADOPTION OF PARENT COMPANY ONLY FINANCIAL STATEMENTS ACCOUNTING STANDARDS The transition to Accounting Standards Used in Preparation of the Parent Company Only Financial Statements was on January 1, 2012 (the transition date). The effects on the Company’s parent company only balance sheets as of December 31, 2012 and January 1, 2012 as well as the parent company only statements of comprehensive income for the year ended December 31, 2012, were as follows: a. Exemptions Except for optional exemptions and mandatory exceptions, the Company retrospectively applied Accounting Standards Used in Preparation of the Parent Company Only Financial Statements in its opening balance sheet at the date of transition, January 1, 2012. 3) Share-based payment. The Company elected to take the optional exemption from applying related guidance retrospectively for the shared-based payment transactions granted and vested before the transition date. b. Reconciliation of parent company only balance sheet as of December 31, 2012 R.O.C. GAAP Effect of Transition to Accounting Standards Used in Preparation of the Parent Company Only Financial Statements Accounting Standards Used in Preparation of the Parent Company Only Financial Statements Note Amount Recognition and Measurement Difference Presentation Difference Amount Item $ 109,150,810 $ - $ - $ 109,150,810 Cash and cash equivalents Item Current assets Cash and cash equivalents Financial assets at fair value through profit or loss 38,824 Available-for-sale financial assets 1,845,052 Held-to-maturity financial assets 701,146 Notes and accounts receivable 15,726,431 Receivables from related parties Allowance for doubtful 40,987,444 (474,037) receivables Allowance for sales returns and (5,732,738) 274,963 175,261 35,296,391 7,728,464 2,097,329 207,815,340 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 Financial assets carried at cost Total long-term investments Net property, plant and equipment Intangible assets Other assets Deferred income tax assets Refundable deposits - - - - - - - - - - - - - - - - 38,824 Financial assets at fair value through profit or loss 1,845,052 Available-for-sale financial assets 701,146 Held-to-maturity financial assets (474,037) 15,252,394 Notes and accounts - 474,037 5,732,738 receivable, net 40,987,444 Receivables from related parties - - - - - 274,963 Other receivables from related - - (7,728,464) - parties 175,261 Other financial assets 35,296,391 Inventories - - 2,097,329 Other current assets (1,995,726) 205,819,614 Total current assets a) b) 139,264,161 (113,720) - 139,150,441 Investments accounted for e) 483,759 139,747,920 586,603,294 6,449,837 2,244,947 2,394,826 - (113,720) - - 345,452 - using equity method - - 32,742 - 483,759 Financial assets carried at cost 139,634,200 586,636,036 Property, plant and equipment c) 6,449,837 Intangible assets 7,728,464 - 10,318,863 Deferred income tax assets 2,394,826 Refundable deposits b), d) (Continued) 103 R.O.C. GAAP Effect of Transition to Accounting Standards Used in Preparation of the Parent Company Only Financial Statements Accounting Standards Used in Preparation of the Parent Company Only Financial Statements Amount Recognition and Measurement Difference Presentation Difference Amount Item $ 917,019 $ - $ (32,742) $ 884,277 Other noncurrent assets 7,695,722 13,597,966 5,556,792 345,452 Note c) Item Others Total other assets Total $ 946,173,183 $ 231,732 $ 5,732,738 $ 952,137,653 Total c. Reconciliation of parent company only balance sheet as of January 1, 2012 R.O.C. GAAP Effect of Transition to Accounting Standards Used in Preparation of the Parent Company Only Financial Statements Accounting Standards Used in Preparation of the Parent Company Only Financial Statements Note Amount Recognition and Measurement Difference Presentation Difference Amount Item $ 85,262,521 $ - $ - $ 85,262,521 Cash and cash equivalents $ 34,714,929 $ - $ - $ 34,714,929 Short-term loans Current liabilities Short-term loans Financial liabilities at fair value through profit or loss Accounts payable Payables to related parties Income tax payable Accrued profit sharing to employees and bonus to directors Payables to contractors and equipment suppliers Accrued expenses and other current liabilities - Total current liabilities Long-term liabilities Bonds payable Other long-term payables Total long-term liabilities Other liabilities Accrued pension cost Guarantee deposits Total other liabilities Total liabilities Capital stock Capital surplus Retained earnings 6,274 13,392,221 3,230,342 15,196,399 11,186,591 44,371,108 16,698,014 - 138,795,878 80,000,000 54,000 80,054,000 3,926,276 199,315 4,125,591 222,975,469 259,244,357 56,137,809 - - - - - - - - - - - - 2,878,766 - 2,878,766 2,878,766 - (462,469) - - Appropriated as legal capital 115,820,123 reserve Appropriated as special capital 7,606,224 reserve Unappropriated earnings Others 287,174,942 410,601,289 (2,189,821) (2,189,821) Cumulative translation (10,753,763) adjustments Net loss not recognized as (5,299) pension cost Unrealized gain/loss on financial 7,973,321 instruments (43) 5,299 - Total shareholders’ equity (2,785,741) 723,197,714 5,256 (2,647,034) - - - - - - - 6,274 Financial liabilities at fair value through profit or loss 13,392,221 Accounts payable 3,230,342 Payables to related parties 15,196,399 Income tax payable 11,186,591 Accrued profit sharing to employees and bonus to directors 44,371,108 Payables to contractors and equipment suppliers 16,698,014 Accrued expenses and other current liabilities 5,732,738 5,732,738 5,732,738 Provisions 144,528,616 Total current liabilities - - - 80,000,000 Bonds payable 54,000 Other long-term payables 80,054,000 - - - 5,732,738 - - 6,805,042 Accrued pension cost 199,315 Guarantee deposits 7,004,357 231,586,973 Total liabilities 259,244,357 Capital stock 55,675,340 Capital surplus a) d) e) Retained earnings 115,820,123 Appropriated as legal capital reserve 7,606,224 Appropriated as special capital Reserve 284,985,121 Unappropriated earnings 408,411,468 d), e) (10,753,806) Foreign currency translation reserve - - e) e) 7,973,321 Unrealized gain/loss from available-for-sale financial assets (2,780,485) 720,550,680 Total equity - - - - - - - - - Total $ 946,173,183 $ 231,732 $ 5,732,738 $ 952,137,653 Total (Concluded) 104 Item Current assets Cash and cash equivalents Financial assets at fair value through profit or loss Available-for-sale financial assets 14,925 2,617,134 Held-to-maturity financial 701,136 assets Notes and accounts receivable 19,894,386 Receivables from related parties 24,777,534 Allowance for doubtful (485,120) receivables Allowance for sales returns and (4,887,879) others Other receivables from related 188,028 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 122,010 22,853,397 5,779,544 1,725,736 158,563,352 128,200,718 (57,462) Held-to-maturity financial assets 702,291 - 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 497,835 129,400,844 454,373,533 6,287,000 7,221,824 4,491,735 1,069,586 12,783,145 - (57,462) - - 227,117 - - 227,117 - - - - - - - - - - - - - - - - 14,925 Financial assets at fair value through profit or loss 2,617,134 Available-for-sale financial assets 701,136 Held-to-maturity financial assets (485,120) 19,409,266 Notes and accounts receivable, net - 24,777,534 Receivables from related Parties 485,120 4,887,879 - - - - - 188,028 Other receivables from related - - (5,779,544) - parties 122,010 Other financial assets 22,853,397 Inventories - - 1,725,736 Other current asset (891,665) 157,671,687 Total current assets a) b) - - - - 47,237 - 128,143,256 Investments accounted for e) using equity method 702,291 Held-to-maturity financial assets 497,835 Financial assets carried at cost 129,343,382 454,420,770 Property, plant and equipment c) 6,287,000 Intangible assets 5,779,544 - (47,237) 5,732,307 13,228,485 Deferred income tax assets 4,491,735 Refundable deposits 1,022,349 Other noncurrent assets 18,742,569 b), d) c) Total $ 761,407,874 $ 169,655 $ 4,887,879 $ 766,465,408 Total Current liabilities Short-term loans Accounts payable Payables to related parties Income tax payable Accrued profit sharing to employees and bonus to directors Payables to contractors and equipment suppliers $ 25,926,528 $ - $ - $ 25,926,528 Short-term loans 9,522,688 Accounts payable 2,992,582 Payables to related parties 10,647,797 Income tax payable 9,055,704 Accrued profit sharing to 9,522,688 2,992,582 10,647,797 9,055,704 - - - - - - - - 33,811,970 - - employees and bonus to directors 33,811,970 Payables to contractors and equipment suppliers (Continued) R.O.C. GAAP Effect of Transition to Accounting Standards Used in Preparation of the Parent Company Only Financial Statements Accounting Standards Used in Preparation of the Parent Company Only Financial Statements Note Item Amount Recognition and Measurement Difference Presentation Difference Amount Item Accrued expenses and other $ 13,057,161 $ - $ - $ 13,057,161 Accrued expenses and other current liabilities Current portion of bonds 4,500,000 payable - Total current liabilities Long-term liabilities Bonds payable Other liabilities Accrued pension cost Guarantee deposits Total other liabilities Total liabilities Capital stock Capital surplus Retained earnings - 109,514,430 18,000,000 3,860,898 439,032 4,299,930 131,814,360 259,162,226 55,846,357 - 4,500,000 Current portion of bonds current liabilities 4,887,879 4,887,879 payable 4,887,879 Provisions 114,402,309 Total current liabilities - 18,000,000 Bonds payable - - - - 2,271,173 - 2,271,173 2,271,173 - (374,695) - - - 4,887,879 - - 6,132,071 Accrued pension cost 439,032 Guarantee deposits 6,571,103 138,973,412 Total liabilities 259,162,226 Capital stock 55,471,662 Capital surplus Retained earnings a) d) e) Appropriated as legal capital $ 102,399,995 $ - $ - $ 102,399,995 Appropriated as legal capital reserve Appropriated as special capital 6,433,874 - reserve Unappropriated earnings Others Cumulative translation adjustments 213,357,286 322,191,155 (1,726,828) (1,726,828) (6,433,369) 5 - Unrealized gain/loss on financial (1,172,855) instruments - Total shareholders’ equity - (7,606,224) 629,593,514 - 5 (2,101,518) reserve 6,433,874 Appropriated as special capital reserve 211,630,458 Unappropriated earnings 320,464,327 d), e) (6,433,364) Foreign currency translation e) reserve (1,172,762) Unrealized gain/loss from available-for-sale financial assets (93) Cash flow hedges reserve (7,606,219) 627,491,996 Total equity - - - - 93 (93) - - Total $ 761,407,874 $ 169,655 $ 4,887,879 $ 766,465,408 Total (Concluded) d. Reconciliation of parent company only statement of comprehensive income for the year ended December Unrealized gross profit from (25,029) - - 31, 2012 R.O.C. GAAP Item Net sales Cost of sales Gross profit before affiliates elimination 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 Settlement income - Technical service income Others - - Total non-operating income and gains 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 Total non-operating expenses and losses Income before income tax Income tax expense Effect of Transition to Accounting Standards Used in Preparation of the Parent Company Only Financial Statements Accounting Standards Used in Preparation of the Parent Company Only Financial Statements Note Amount Recognition and Measurement Difference Presentation Difference Amount Item $ 499,871,887 $ - $ 497,638 $ 500,369,525 Net revenue 265,538,540 234,333,347 (44,355) 44,355 - 497,638 265,494,185 Cost of revenue 234,875,340 Gross profit before unrealized gross profit on sales to associates (25,029) Unrealized gross profit on sales to associates 234,308,318 44,355 497,638 234,850,311 Gross profit 38,788,245 16,330,060 2,388,243 57,506,548 - (18,289) (5,822) (1,354) (25,465) - - - - - (549,087) 38,769,956 Research and development 16,324,238 General and administrative 2,386,889 Marketing 57,481,083 (549,087) Other operating income and expenses, net 176,801,770 69,820 (51,449) 176,820,141 Income from operations f) d) d) d) d) f) - 8,175,390 Share of profits of subsidiaries e) 8,127,748 867,227 883,845 - 497,638 811,619 - - 11,188,077 2,677,529 945,114 418,330 146,647 172,279 4,359,899 47,642 - - - - - - 4,977 52,619 - - - - - - (867,227) (883,845) 327,744 (497,638) (811,619) 936,903 (1,567,654) (3,363,336) (2,677,529) - (418,330) (146,647) (172,279) (3,414,785) and associates - - - - 327,744 Foreign exchange gain, net - - - - 936,903 Other income (1,562,677) Other gains and losses 7,877,360 - - 945,114 Finance costs - - - - - - 945,114 183,629,948 17,471,146 122,439 (37,045) - - 183,752,387 Income before income tax 17,434,101 Income tax expense f) f) f) f) f) f) e), f) f) f) f) f) d) (Continued) 105 R.O.C. GAAP Effect of Transition to Accounting Standards Used in Preparation of the Parent Company Only Financial Statements Accounting Standards Used in Preparation of the Parent Company Only Financial Statements Note f. Notes to the reconciliation of the significant differences: 1) Allowance for sales returns and others Item Amount Recognition and Measurement Difference Presentation Difference Amount Item Net income $ 166,158,802 $ 159,484 $ - $ 166,318,286 Net income (4,317,386) Exchange differences arising on translation of foreign operations 2,407,647 Changes in fair value of available-for-sale financial assets 7,118,419 Share of other comprehensive income of subsidiaries and associates (677,413) Actuarial loss from defined (328,010) benefit plans Income tax expense related to components of other comprehensive income e) d) d) 4,203,257 Other comprehensive income for the year, net of income tax $ 170,521,543 Total comprehensive income for the year (Concluded) e. Significant reconciliation differences in statement of cash flows for the year ended December 31, 2012 For the year ended December 31, 2012, the Company partially disposed and acquired its interests in subsidiaries without the loss of control with the cash inflows and cash outflows of NT$587,902 thousand and NT$2,259,244 thousand, respectively. Under R.O.C. GAAP, such cash flows were classified as investing activities. However, under Accounting Standards Used in Preparation of the Parent Company Only Financial Statements, such cash flows were classified as financing activities. The Company prepared the statement of cash flows using the indirect method under R.O.C. GAAP, in which the interest received is not required to be disclosed separately; instead, the interest received and the interest paid are included within the operating activities in the statement of cash flows. However, according to Accounting Standards Used in Preparation of the Parent Company Only Financial Statements for the year ended December 31, 2012, the interest received of NT$834,314 thousand should be disclosed separately in the investing activities; and the interest paid of NT$670,165 thousand should be disclosed in the financing activities based on their nature, respectively. Except for the above differences, there are no other significant differences between R.O.C. GAAP and Accounting Standards Used in Preparation of the Parent Company Only Financial Statements in the parent company only statement of cash flows. Under R.O.C. GAAP, provisions for estimated sales returns and others are recognized as a reduction in revenue in the year the related revenue is recognized based on historical experience. The corresponding allowance for sales returns and others is presented as a reduction in accounts receivable. Under Accounting Standards Used in Preparation of the Parent Company Only Financial Statements, 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 in accordance with the related guidance. As of December 31, 2012 and January 1, 2012, the amounts reclassified from allowance for sales returns and others to provisions were NT$5,732,738 thousand and NT$4,887,879 thousand, respectively. 2) Classifications of deferred income tax asset/liability and valuation allowance Under R.O.C. GAAP, a deferred tax asset and liability is classified as current or noncurrent in accordance with the classification of its related asset or liability. However, if a deferred income tax asset or liability does not relate to an asset or liability in the parent company only financial statements, it is classified as either current or noncurrent based on the expected length of time before it is realized or settled. Under Accounting Standards Used in Preparation of the Parent Company Only Financial Statements, a deferred tax asset and liability is classified as noncurrent 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 the related guidance, 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 noncurrent assets were NT$7,728,464 thousand and NT$5,779,544 thousand, respectively. 3) The classification of assets leased to others and idle assets Under R.O.C. GAAP, assets leased to others and idle assets are classified under other assets. Under Accounting Standards Used in Preparation of the Parent Company Only Financial Statements, the aforementioned items are classified as property, plant and equipment according to their nature. In accordance with the related guidance, investment properties are defined as properties held to earn rentals or for capital appreciation; however, the Company’s assets leased to others are mainly housing facilities leased to employees and manufacturing facilities leased to suppliers. The housing facilities leased to employees are not classified as investment properties; and manufacturing facilities leased to suppliers are not considered as investment properties since they cannot be sold separately and comprise only an insignificant portion of the entire facility. 106 As of December 31, 2012 and January 1, 2012, the amounts reclassified from assets leased to others and idle assets to property, plant and equipment were NT$32,742 thousand and NT$47,237 thousand, respectively. 4) Employee benefits The Company had recognized the pension cost and retirement benefit obligation under its defined benefit plans based on actuarial valuations performed in conformity with R.O.C. GAAP. Under Accounting Standards Used in Preparation of the Parent Company Only Financial Statements, the Company should carry out actuarial valuation on defined benefit obligation in accordance with the related guidance. 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 such actuarial gains and losses. When using the corridor approach, actuarial gains and losses is amortized over the expected average remaining working lives of the participating employees. Under the related guidance, 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 the related guidance and recognized the valuation difference directly to retained earnings. For the year ended December 31, 2012, total actuarial gains and losses were also recognized to other comprehensive income in accordance with actuarial valuation carried out in 2012. In addition, under R.O.C. GAAP, a minimum pension liability should be recognized in the balance sheet. If the accrued pension cost is less than the minimum pension liability, the difference should be recognized as an additional liability. Under Accounting Standards Used in Preparation of the Parent Company Only Financial Statements, there is no aforementioned requirement to recognize minimum pension liability. As of December 31, 2012 and January 1, 2012, accrued pension cost of the Company was adjusted for an increase of NT$2,878,766 thousand and NT$2,271,173 thousand, respectively; deferred income tax assets were adjusted for an increase of NT$345,452 thousand and NT$227,117 thousand, respectively. For the year ended December 31, 2012, pension cost and income tax expense of the Company were adjusted for a decrease of NT$69,820 thousand and NT$37,045 thousand, respectively; actuarial loss from defined benefit plans and income tax benefit related to components of other comprehensive income were recognized in the amount of NT$677,413 thousand and NT$81,290 thousand, respectively. 5) Investments accounted for using the equity method The Company has evaluated significant differences between current accounting policies and Accounting Standards Used in Preparation of the Parent Company Only Financial Statements for the Company’s subsidiaries and associates accounted for using the equity method. The significant difference is mainly due to the adjustment to employee benefits. In addition, if the investor subscribes to additional shares of associates and joint ventures that is disproportionate to its existing ownership percentage and results in a decrease in the investor’s ownership percentage in the associate and joint venture, the resulting carrying amount of the investment differs from the amount of the investor’s share in the equity of the associates and joint venture. Under R.O.C. GAAP, the investor records such a difference as an adjustment to the carrying amount of the investment with the corresponding amount charged or credited to capital surplus. Under Accounting Standards Used in Preparation of the Parent Company Only Financial Statements, such a difference is still adjusted to carrying amount of the investment and capital surplus. If the investor’s ownership interest in an associate and joint venture decreases, the proportionate amount of the gains or losses previously recognized in other comprehensive income in relation to that associate and joint venture shall be reclassified to profit or loss on the same basis as would be required if the associate and joint venture had directly disposed of the related assets or liabilities. 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$113,720 thousand and NT$57,462 thousand, respectively; foreign currency translation reserve 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$5,299 thousand. In addition, equity in earnings of equity method investees and share of other comprehensive income of subsidiaries and associates were adjusted for an increase of NT$47,642 thousand and decrease of NT$26,402 thousand respectively for the year ended December 31, 2012; other gains and losses was adjusted for a gain of NT$4,977 thousand for the year ended December 31, 2012. 6) The reclassification of line items in the parent company only statement of comprehensive income In accordance with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers before its amendment due to the adoption of Accounting Standards Used in Preparation of the Parent Company Only Financial Statements, income from operations in the income statement only includes net revenue, cost of revenue and operating expenses. Under Accounting Standards Used in Preparation of the Parent Company Only Financial Statements, based on the nature of operating transactions, technical service income is reclassified under net revenue; 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 income and expenses, which are included in income from operations. 107 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. Information about the derivative financial instruments transaction: Please see Note 7; j. Names, locations, and related information of investees over which the Company exercises significant influence: Please see Table 7 attached; 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, income (losses) of the investee, share of profits/losses of investee, 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 34. Under Accounting Standards Used in Preparation of the Parent Company Only Financial Statements, based on the nature of operating transactions, for the year ended December 31, 2012, the Company also reclassified technical service income of NT$497,638 thousand to net revenue, rental revenue of NT$469 thousand, net loss on disposal of property, plant and equipment and other assets of NT$125,488 thousand, other income of NT$918 thousand, depreciation of rental assets of NT$6,656 thousand and impairment loss on idle assets of NT$418,330 thousand to other operating income and expenses; other income of NT$327,744 thousand was reclassified to net foreign exchange gain. In addition, interest income of NT$867,227 thousand and dividend income of NT$69,676 thousand were also reclassified to other income; settlement income of NT$883,845 thousand, net gain on disposal of financial assets of NT$110,365 thousand, others of NT$286,266 thousand (under non-operating income and gains), net valuation loss on financial instruments of NT$152,814 thousand, impairment loss of financial assets of NT$2,677,529 thousand as well as others of NT$17,787 thousand (under non-operating expenses and losses) were reclassified to other gains and losses for the year ended December 31, 2012. 39. ADDITIONAL DISCLOSURES a. Financings provided: None; b. Endorsement/guarantee provided: Please see Table 1 attached; c. Marketable securities held (excluding investments in subsidiaries, associates and jointly controlled entities): Please see Table 2 attached; d. Marketable securities acquired and disposed of at costs or prices of at least NT$300 million or 20% of the paid-in capital: Please see Table 3 attached; e. Acquisition of individual real estate properties at costs of at least NT$300 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$300 million or 20% of the paid-in capital: None; g. Total purchases from or sales to related parties of at least NT$100 million or 20% of the paid-in capital: Please see Table 5 attached; 108 TABLE 1 Taiwan Semiconductor Manufacturing Company Limited ENDORSEMENTS/GUARANTEES PROVIDED FOR THE YEAR ENDED DECEMBER 31, 2013 (Amounts in Thousands of New Taiwan Dollars, Unless Specified Otherwise) No. Endorsement/ Guarantee Provider Name Guaranteed Party Nature of Relationship Limits on Endorsement/ Guarantee Amount Provided to Each Guaranteed Party (Notes 1 and 2) Maximum Balance for the Period (US$ in Thousands) (Note 3) Ending Balance (US$ in Thousands) (Note 3) Amount Actually Drawn (US$ in Thousands) Amount of Endorsement/ Guarantee Collateralized by Properties Ratio of Accumulated Endorsement/ Guarantee to Net Equity per Latest Financial Statements Maximum Endorsement/ Guarantee Amount Allowable (Note 2) Guarantee Provided by Parent Company Guarantee Provided by A Subsidiary Guarantee Provided to Subsidiaries in Mainland China 0 The Company TSMC Global Subsidiary $ 211,877,064 $ 44,700,000 (US$ 1,500,000) $ 44,700,000 (US$ 1,500,000) $ 44,700,000 (US$ 1,500,000) $ - 5.3% $ 211,877,064 Yes No No Note 1: The total amount of the guarantee provided by the Company to any individual entity shall not exceed ten percent (10%) of the Company’s net worth, or the net worth of such entity. However, subsidiaries whose voting shares are 100% owned, directly or indirectly, by the Company are not subject to the above restrictions after the approval of the Board of Directors. Note 2: The total amount of guarantee shall not exceed twenty-five percent (25%) of the Company’s net worth. Note 3: The maximum balance for the period and ending balance represent the amounts approved by the Board of Directors. 109 TABLE 2 Taiwan Semiconductor Manufacturing Company Limited MARKETABLE SECURITIES HELD DECEMBER 31, 2013 (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, 2013 Shares/Units (In Thousands) Carrying Value (Foreign Currencies in Thousands) Percentage of Ownership (%) Fair Value (Foreign Currencies in Thousands) Note The Company Commercial paper CPC Corporation, Taiwan Taiwan Power Company Stock Semiconductor Manufacturing International Corporation United Industrial Gases Co., Ltd. Shin-Etsu Handotai Taiwan Co., Ltd. W.K. Technology Fund IV Fund Horizon Ventures Fund Crimson Asia Capital Note: The carrying value represents carrying amount less accumulated impairment of NT$412,901 thousand. - - - - - - - - Held-to-maturity financial assets 〃 100 80 $ 998,018 797,931 N/A N/A $ 997,608 798,004 Available-for-sale financial assets Financial assets carried at cost 〃 〃 Financial assets carried at cost 〃 275,957 21,230 10,500 4,000 - - 646,402 193,584 105,000 39,280 78,303 53,211 1 10 7 2 12 1 Note 646,402 437,105 340,108 34,919 78,303 53,211 110 TABLE 3 Taiwan Semiconductor Manufacturing Company Limited MARKETABLE SECURITIES ACQUIRED AND DISPOSED OF AT COSTS OR PRICES OF AT LEAST NT$300 MILLION OR 20% OF THE PAID-IN CAPITAL FOR THE YEAR ENDED DECEMBER 31, 2013 (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 1) 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) The Company Stock Semiconductor Manufacturing International Corporation TSMC SSL Commercial Paper CPC Corporation, Taiwan Taiwan Power Company Available-for-sale financial - - 1,277,958 $ 1,845,052 - $ - 1,002,001 $ 1,830,424 $ 983,715 $ 846,709 275,957 $ 646,402 assets Investments accounted for using equity method Note 2 Subsidiary 430,400 2,389,541 124,274 1,242,744 Held-to-maturity financial assets 〃 - - - - - - - - 100 80 998,018 797,931 - - - - - - - - - - - - 554,674 2,154,913 100 80 998,018 797,931 Note 1:The ending balance includes unrealized gains/losses on financial assets, share of profits/losses of investees and other related adjustment to equity. Note 2: The acquisition is primarily consisted of cash injection. 111 TABLE 4 Taiwan Semiconductor Manufacturing Company Limited ACQUISITION OF INDIVIDUAL REAL ESTATE PROPERTIES AT COSTS OF AT LEAST NT$300 MILLION OR 20% OF THE PAID-IN CAPITAL FOR THE YEAR ENDED DECEMBER 31, 2013 (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 The Company Land January 3, 2013 $ 2,248,400 By the contract Miaoli County Government Fu Tsu Construction Co., Ltd. 3,561,600 By the construction progress 4,373,205 By the construction progress Da Cin Construction Co., Ltd. 338,948 By the construction progress I Domain Industrial Co., Ltd. 2,615,744 By the construction progress China Steel Structure 615,038 By the construction progress Co., Ltd. Tasa Construction Corporation - - - - - - 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 Fab Fab Fab Fab Fab January 22, 2013 to August 29, 2013 January 27, 2013 to June 21, 2013 March 3, 2013 to October 25, 2013 April 3, 2013 to May 15, 2013 May 27, 2013 to June 19, 2013 112 TABLE 5 Taiwan Semiconductor Manufacturing Company Limited 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, 2013 (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 TSMC TSMC North America GUC VIS Subsidiary Associate Associate Purchases/ Sales Sales Sales Sales Amount (Foreign Currencies in Thousands) $ 414,087,565 1,970,934 69 1 Net 30 days from invoice date Net 30 days from the end of the month of when invoice is issued 195,101 - Net 30 days from the end of the % to Total Payment Terms Unit Price (Note 1) Payment Terms (Note 1) Mcube Inc. (Mcube) TSMC China Associate of the Company’s subsidiary (Note 2) Subsidiary Sales Purchases WaferTech Indirect subsidiary VIS SSMC Associate Associate Purchases Purchases Purchases 119,067 16,902,114 8,520,337 6,993,964 3,056,372 - 27 14 11 month of when invoice is issued Net 30 days from invoice date Net 30 days from the end of the month of when invoice is issued Net 30 days from the end of the month of when invoice is issued Net 30 days from the end of the month of when invoice is issued 5 Net 30 days from the end of the month of when invoice is issued Note 1: The sales prices and payment terms to related parties were not significantly different from those of sales to third parties. For other related party transactions, prices and terms were determined in accordance with mutual agreements. Note 2: TSMC Partners, the subsidiary of the Company, did not exercise significant influence over Mcube starting the third quarter of 2013, and therefore, Mcube is no longer a related party to the Company. - - - - - - - - - - - - - - - - Ending Balance (Foreign Currencies in Thousands) $ 52,750,047 219,424 - - (1,509,508) (685,906) (731,587) (382,007) Note % to Total 74 - - - 8 4 4 2 113 TABLE 6 Taiwan Semiconductor Manufacturing Company Limited RECEIVABLES FROM RELATED PARTIES AMOUNTING TO AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL DECEMBER 31, 2013 (Amounts in Thousands of New Taiwan Dollars, Unless Specified Otherwise) Company Name Related Party Nature of Relationships TSMC TSMC North America GUC VIS Subsidiary Associate Associate Ending Balance (Foreign Currencies in Thousands) $ 53,078,207 219,424 105,881 Turnover Days (Note 1) Overdue Amount Action Taken 41 42 (Note 2) $ 16,627,236 - - - - - Amounts Received in Subsequent Period Allowance for Bad Debts $ 18,782,230 - - $ - - - 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. 114 TABLE 7 Taiwan Semiconductor Manufacturing Company Limited NAMES, LOCATIONS, AND RELATED INFORMATION OF INVESTEES OVER WHICH THE COMPANY EXERCISES SIGNIFICANT INFLUENCE FOR THE YEAR ENDED DECEMBER 31, 2013 (Amounts in Thousands of New Taiwan Dollars, Unless Specified Otherwise) Investor Company Investee Company Location Main Businesses and Products Original Investment Amount Balance as of December 31, 2013 December 31, 2013 (Foreign Currencies in Thousands) December 31, 2012 (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) Share of Profits/ Losses of Investee (Note 1) (Foreign Currencies in Thousands) Note TSMC TSMC Global TSMC Partners Tortola, British Virgin Islands Tortola, British Virgin Islands Investment activities Investing in companies involved in the design, $ 42,327,245 $ 42,327,245 31,456,130 31,456,130 1 988,268 VIS Hsin-Chu, Taiwan Research, design, development, manufacture, 13,232,288 13,232,288 628,223 manufacture, and other related business in the semiconductor industry SSMC TSMC Solar Singapore Tai-Chung, Taiwan TSMC North America San Jose, California, U.S.A. packaging, testing and sale of memory integrated circuits, LSI, VLSI and related parts Fabrication and supply of integrated circuits Engaged in researching, developing, designing, manufacturing and selling renewable energy and saving related technologies and products Selling and marketing of integrated circuits and semiconductor devices 5,120,028 11,180,000 5,120,028 11,180,000 314 1,118,000 100 $ 64,953,489 $ (172,392) $ (172,392) 100 Subsidiary 3,516,667 Subsidiary 42,861,788 3,516,560 39 39 99 10,556,348 4,370,988 1,724,819 Associate 7,457,733 4,551,318 5,039,563 (1,554,038) 1,954,847 Associate Subsidiary (1,516,235) 333,718 333,718 11,000 100 3,763,194 468,309 468,309 Subsidiary TSMC SSL Hsin-Chu, Taiwan Engaged in researching, developing, designing, 5,546,744 4,304,000 554,674 Xintec GUC VTAF III VTAF II TSMC Europe Emerging Alliance TSMC Japan TSMC GN TSMC Korea Taoyuan, Taiwan Hsin-Chu, Taiwan Cayman Islands Cayman Islands Amsterdam, the Netherlands Cayman Islands Yokohama, Japan Taipei, Taiwan Seoul, Korea manufacturing and selling solid state lighting devices and related applications products and systems Wafer level chip size packaging service Researching, developing, manufacturing, testing and 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 1,357,890 386,568 1,908,912 596,514 15,749 841,757 83,760 150,000 13,656 1,357,890 386,568 1,896,914 704,447 15,749 852,258 83,760 100,000 13,656 94,950 46,688 - - - - 6 - 80 92 40 35 50 98 100 99.5 100 100 100 2,154,913 (1,663,137) (1,550,850) Subsidiary 1,866,123 1,056,141 892,439 441,763 290,838 144,924 124,762 85,162 29,475 288,881 289,204 (1,509,593) (3,662) 37,659 (10,806) 4,717 (22,899) 1,296 37,942 Associate 100,746 Associate Subsidiary (151,326) (3,589) Subsidiary 37,659 Subsidiary Subsidiary (10,753) 4,717 Subsidiary Subsidiary 1,296 Subsidiary (22,899) Note 1: The share of profits/losses of investee includes the effect of unrealized gross profit on intercompany transactions. Note 2: Please refer to Table 10 for information on investment in Mainland China. 115 TABLE 8 Taiwan Semiconductor Manufacturing Company Limited INFORMATION ON INVESTMENT IN MAINLAND CHINA FOR THE YEAR ENDED DECEMBER 31, 2013 (Amounts in Thousands of New Taiwan Dollars, Unless Specified Otherwise) Investee Company Main Businesses and Products TSMC China Manufacturing 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, 2013 (US$ in Thousands) $ 18,939,667 (US$ 596,000) Investment Flows Outflow Inflow $ - $ - Accumulated Outflow of Investment from Taiwan as of December 31, 2013 (US$ in Thousands) $ 18,939,667 (US$ 596,000) Investee Company Percentage of Ownership Share of Profits/Losses TSMC China 100% $ 5,111,975 (Note 2) Carrying Amount as of December 31, 2013 Accumulated Inward Remittance of Earnings as of December 31, 2013 $ 23,845,371 $ - Accumulated Investment in Mainland China as of December 31, 2013 (US$ in Thousands) Investment Amounts Authorized by Investment Commission, MOEA (US$ in Thousands) Upper Limit on Investment (US$ in Thousands) $ 18,939,667 (US$ 596,000) $ 18,939,667 (US$ 596,000) $ 18,939,667 (US$ 596,000) Note 1: TSMC directly invested US$596,000 thousand in TSMC China. Note 2: Amount was recognized based on the audited financial statements. 116 THE CONTENTS OF STATEMENTS OF MAJOR ACCOUNTING ITEMS ITEM Major Accounting Items in Assets, Liabilities and Equity Statement of Cash and Cash Equivalents Statement of Notes and Accounts Receivable, Net Statement of Receivables from Related Parties Statement of Inventories Statement of Other Current Assets Statement of Changes in Investments Accounted for Using Equity Method Statement of Changes in Property, Plant and Equipment Statement of Changes in Accumulated Depreciation and Accumulated Impairment of Property, Plant and Equipment Statement of Changes in Intangible Assets Statement of Deferred Income Tax Assets Statement of Short-term Loans Statement of Payables to Related Parties Statement of Payables to Contractors and Equipment Suppliers Statement of Provisions Statement of Accrued Expenses and Other Current Liabilities Statement of Bonds Payable Major Accounting Items in Profit or Loss Statement of Net Revenue Statement of Cost of Revenue Statement of Operating Expenses Statement of Other Operating Income and Expenses, Net Statement of Finance Costs Statement of Labor, Depreciation and Amortization by Function STATEMENT INDEX 1 2 3 4 Note 16 5 Note 14 Note 14 Note 15 Note 28 6 7 8 Note 18 9 10 11 12 13 Note 24 Note 26 14 STATEMENT 1 Taiwan Semiconductor Manufacturing Company Limited STATEMENT OF CASH AND CASH EQUIVALENTS DECEMBER 31, 2013 (In thousands of New Taiwan Dollars) Item Cash Petty cash Cash in banks Checking accounts and demand deposits Foreign currency deposits Time deposits Cash equivalents Description Including US$206,545 thousand @29.800, JPY94 thousand @0.2834, EUR54 thousand @41.00 From 2013.09.25 to 2014.04.30, interest rates at 0.35%-1.10%, including NT$ 105,214,460 thousand, US$5,400 thousand @29.800, JPY40,981,458 thousand @0.2834 and EUR378,338 thousand @41.00 Repurchase agreements collateralized by Expired by 2014.01.23, interest rates at 0.65%-0.70% corporate bonds Repurchase agreements collateralized by Expired by 2014.02.26, interest rates at 0.64%-0.66% short-term commercial paper Repurchase agreements collateralized by Expired by 2014.01.23, interest rates at 0.65%-0.66% government bonds Total Amount $ 530 3,390,420 6,157,302 132,501,391 1,708,603 2,395,644 284,878 $ 146,438,768 117 STATEMENT 2 Taiwan Semiconductor Manufacturing Company Limited STATEMENT 3 Taiwan Semiconductor Manufacturing Company Limited STATEMENT OF NOTES AND ACCOUNTS RECEIVABLE, NET DECEMBER 31, 2013 (In thousands of New Taiwan Dollars) STATEMENT OF RECEIVABLES FROM RELATED PARTIES DECEMBER 31, 2013 (In thousands of New Taiwan Dollars) Amount Client Name $ 2,066,935 TSMC North America 1,380,840 1,185,287 928,011 12,368,306 17,929,379 483,502 $ 17,445,877 Others (Note) Total Note: The amount of individual client included in others does not exceed 5% of the account balance. STATEMENT 4 Taiwan Semiconductor Manufacturing Company Limited STATEMENT OF INVENTORIES DECEMBER 31, 2013 (In thousands of New Taiwan Dollars) Amount $ 52,750,047 219,756 $ 52,969,803 Item Finished goods Work in process Raw materials Supplies and spare parts Total Amount Cost Net Realizable Value $ 7,049,813 $ 14,607,068 24,857,927 2,208,291 1,127,030 68,937,287 2,195,941 1,315,950 $ 35,243,061 $ 87,056,246 Client Name MediaTek Inc. Spreadtrum Communications, Inc. NXP Semiconductors N.V. STMicroelectronics Pte Ltd. Others (Note 1) Less: Allowance for doubtful accounts Total Note 1: The amount of individual client included in others does not exceed 5% of the account balance. Note 2: The accounts receivable past due over one year amounted to NT$20 thousand for which the Company has recognized appropriate allowance for doubtful accounts. 118 STATEMENT 5 Taiwan Semiconductor Manufacturing Company Limited STATEMENT OF CHANGES IN INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD FOR THE YEAR ENDED DECEMBER 31, 2013 (In thousands of New Taiwan Dollars) Balance, January 1, 2013 Additions Decrease Investees Shares (In Thousands) Amount Shares (In Thousands) Amount Shares (In Thousands) Amount Increase (Decrease) in Using the Equity Method Adjustments to Share of Changes in Equity of Subsidiaries and Associates Adjustments Arising from Changes in Percentage of Ownership in Subsidiaries Adjustments Resulting from the Transactions with Subsidiaries and Associates Amount (Note 3) Amount Amount Amount Balance, December 31, 2013 Market Value or Net Assets Value Shares (in Thousands) % Amount Unit Price (NT$) Total Amount Collateral Stocks TSMC Global TSMC Partners VIS SSMC TSMC Solar TSMC North America TSMC SSL Xintec GUC TSMC Europe TSMC Japan TSMC Korea Subtotal Capital TSMC China VTAF III VTAF II Emerging Alliance TSMC GN Subtotal 1 $ 49,954,386 38,635,129 9,406,597 6,710,956 6,011,397 3,209,288 2,389,541 1,541,824 988,268 628,223 314 1,118,000 11,000 430,400 94,950 46,688 - 6 80 1,214,825 235,761 142,412 26,935 119,479,051 - $ - - - - - - - - - - - 1,242,744 124,274 293,578 - (Note 4) - - - - 1,536,322 - - - - - - - - - 17,828,683 1,047,285 563,056 167,359 65,007 19,671,390 - - - - - - 46,945 14,578 2,955 50,000 114,478 - $ - $ 14,999,103 $ - $ - $ - - - - - - - (6) - - - - - - - 4,226,405 1,110,938 746,777 (1,454,686) 553,906 (1,547,898) 28,926 254 - - (2,647) - 70,526 (172) - 38,813 - (2,740) - - 1,967 - - - - - - - - - - - - - - - - - - - - - (38,801) 55,077 (17,650) 2,540 18,664,637 - (34,947) (122,511) (13,456) - (170,914) 6,059,284 (168,451) (13,360) (11,934) (22,723) 5,842,816 44 - - - 38,084 - - - - - - - - - - 67,961 - 1,607 - - (7,122) (5,515) (119,927) - - - (119,933) (42,596) - - - - (42,596) 1 988,268 628,223 314 1,118,000 11,000 554,674 94,950 100 $ 64,953,489 42,861,788 100 10,556,348 39 7,457,733 39 4,551,318 99 3,763,194 100 2,154,913 92 1,866,123 40 46,688 - 6 80 35 100 100 100 1,056,141 290,838 124,762 29,475 139,666,122 35.40 (Note 1) 74.00 (Note 2) - - - - - 100 50 98 99.5 100 23,845,371 892,439 441,763 144,924 85,162 25,409,659 $ 64,953,489 42,862,161 22,239,112 7,243,749 4,512,306 3,763,194 2,154,913 1,669,922 3,454,902 290,838 124,762 29,475 153,298,823 24,026,559 869,955 435,517 144,924 85,162 25,562,117 Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Total $ 139,150,441 $ 1,650,800 $ (170,914) $ 24,507,453 $ 38,084 $ 62,446 $ (162,529) $ 165,075,781 $ 178,860,940 Note 1: The unit price is calculated by closing price of Gre Tai Securities Market as of December 31, 2013. Note 2: The unit price is calculated by closing price of the Taiwan Stock Exchange as of December 31, 2013. Note 3: Including share of profit or loss of subsidiaries and associates, share of other comprehensive income of subsidiaries and associates and cash dividends received from subsidiaries and associates. Note 4: Please refer to Note 31 for gain on deconsolidation of subsidiary. 119 STATEMENT 6 Taiwan Semiconductor Manufacturing Company Limited STATEMENT OF SHORT-TERM LOANS DECEMBER 31, 2013 (In thousands of New Taiwan Dollars) Type Unsecured loans JPMorgan Chase Bank N.A. The Bank Of Nova Scotia Credit Agricole Corporate & Investment Bank BNP Paribas Citibank Taiwan, Limited Citibank Balance, End of Year Contract Period Range of Interest Rates (%) Loan Commitments Collateral Remark $ 4,321,000 3,337,600 2,384,000 2,235,000 1,788,000 1,579,400 2013.12.26-2014.01.07 2013.12.16-2014.01.24 2013.12.16-2014.01.15 2013.12.16-2014.01.06 2013.12.06-2014.01.03 2013.12.06-2014.01.03 $ 15,645,000 0.38 0.38 0.38 0.42 0.40 0.40 US$ 200,000 $ 3,500,000 US$ 100,000 US$ 75,000 US$ 110,000 US$ 395,000 Nil Nil Nil Nil Nil Nil - - - - - - 120 STATEMENT 7 Taiwan Semiconductor Manufacturing Company Limited STATEMENT 9 Taiwan Semiconductor Manufacturing Company Limited STATEMENT OF PAYABLES TO RELATED PARTIES DECEMBER 31, 2013 (In thousands of New Taiwan Dollars) STATEMENT OF ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES DECEMBER 31, 2013 (In thousands of New Taiwan Dollars) Vendor Name TSMC China VIS WaferTech, LLC Xintec SSMC Others (Note) Total Amount Item $ 1,509,508 Salary and bonus payable 731,587 685,906 565,590 382,007 309,381 Utilities Receipts in advance Interest expense Joint development project expenses Others (Note) Amount $ 6,834,181 2,043,803 1,653,999 1,300,609 1,153,472 8,647,345 $ 4,183,979 Total $ 21,633,409 Note: The amount of individual vendor in others does not exceed 5% of the account balance. Note: The amount of each item in others does not exceed 5% of the account balance. STATEMENT 8 Taiwan Semiconductor Manufacturing Company Limited STATEMENT OF PAYABLES TO CONTRACTORS AND EQUIPMENT SUPPLIERS DECEMBER 31, 2013 (In thousands of New Taiwan Dollars) Vendor Name ASML Hong Kong Ltd. Applied Materials South East Asia Pte Ltd. TOKYO Electron Ltd. Others (Note) Total Note: The amount of individual vendor included in others does not exceed 5% of the account balance. Amount $ 31,688,679 15,960,433 7,240,498 34,666,204 $ 89,555,814 121 STATEMENT 10 Taiwan Semiconductor Manufacturing Company Limited STATEMENT OF BONDS PAYABLE DECEMBER 31, 2013 (In thousands of New Taiwan Dollars) Bonds Name Trustee Issuance Date Interest Payment Date Coupon Rate (%) Amount Total Amount Repayment paid Balance, End of Year Unamortized Premiums (Discounts) Carrying Value Repayment Collateral Domestic unsecured bonds-100-1 - A - B Domestic unsecured bonds-100-2 - A - B Domestic unsecured bonds-101-1 - A - B Domestic unsecured bonds-101-2 - A - B Domestic unsecured bonds-101-3 Domestic unsecured bonds-101-4 - A - B - C Domestic unsecured bonds-102-1 - A - B - C Domestic unsecured bonds-102-2 - A - B Domestic unsecured bonds-102-3 - A - B Domestic unsecured bonds-102-4 - A - B - C - D - E - F TOTAL Mega International Commercial Bank Co., Ltd. Mega International Commercial Bank Co., Ltd. 2011.09.28 2011.09.28 Mega International Commercial Bank Co., Ltd. Mega International Commercial Bank Co., Ltd. 2012.01.11 2012.01.11 Mega International Commercial Bank Co., Ltd. Mega International Commercial Bank Co., Ltd. 2012.08.02 2012.08.02 Taipei Fubon Commercial Bank Co., Ltd. Taipei Fubon Commercial Bank Co., Ltd. Taipei Fubon Commercial Bank Co., Ltd. Taipei Fubon Commercial Bank Co., Ltd. Taipei Fubon Commercial Bank Co., Ltd. Taipei Fubon Commercial Bank Co., Ltd. Taipei Fubon Commercial Bank Co., Ltd. Taipei Fubon Commercial Bank Co., Ltd. Taipei Fubon Commercial Bank Co., Ltd. Taipei Fubon Commercial Bank Co., Ltd. Taipei Fubon Commercial Bank Co., Ltd. Taipei Fubon Commercial Bank Co., Ltd. Taipei Fubon Commercial Bank Co., Ltd. Taipei Fubon Commercial Bank Co., Ltd. Taipei Fubon Commercial Bank Co., Ltd. Taipei Fubon Commercial Bank Co., Ltd. Taipei Fubon Commercial Bank Co., Ltd. Taipei Fubon Commercial Bank Co., Ltd. Taipei Fubon Commercial Bank Co., Ltd. 2012.09.26 2012.09.26 2012.10.09 2013.01.04 2013.01.04 2013.01.04 2013.02.06 2013.02.06 2013.02.06 2013.07.16 2013.07.16 2013.08.09 2013.08.09 2013.09.25 2013.09.25 2013.09.25 2013.09.25 2013.09.25 2013.09.25 on 09.28 annually on 09.28 annually on 01.11 annually on 01.11 annually on 08.02 annually on 08.02 annually on 09.26 annually on 09.26 annually on 10.09 annually on 01.04 annually on 01.04 annually on 01.04 annually on 02.06 annually on 02.06 annually on 02.06 annually on 07.16 annually on 07.16 annually on 08.09 annually on 08.09 annually on 09.25 annually on 09.25 annually on 09.25 annually on 09.25 annually on 09.25 annually on 09.25 annually 1.40 1.63 1.29 1.46 1.28 1.40 1.28 1.39 1.53 1.23 1.35 1.49 1.23 1.38 1.50 1.50 1.70 1.34 1.52 1.35 1.45 1.60 1.85 2.05 2.10 $ 10,500,000 7,500,000 $ - - $ 10,500,000 7,500,000 $ - - $ 10,500,000 7,500,000 Bullet repayment Bullet repayment 10,000,000 7,000,000 9,900,000 9,000,000 12,700,000 9,000,000 4,400,000 10,600,000 10,000,000 3,000,000 6,200,000 11,600,000 3,600,000 10,200,000 3,500,000 4,000,000 8,500,000 1,500,000 1,500,000 1,400,000 2,600,000 5,400,000 2,600,000 - - - - - - - - - - - - - - - - - - - - - - - 10,000,000 7,000,000 9,900,000 9,000,000 12,700,000 9,000,000 4,400,000 10,600,000 10,000,000 3,000,000 6,200,000 11,600,000 3,600,000 10,200,000 3,500,000 4,000,000 8,500,000 1,500,000 1,500,000 1,400,000 2,600,000 5,400,000 2,600,000 - - - - - - - - - - - - - - - - - - - - - - - 10,000,000 7,000,000 Bullet repayment Bullet repayment 9,900,000 9,000,000 Bullet repayment Bullet repayment 12,700,000 9,000,000 4,400,000 Bullet repayment Bullet repayment Bullet repayment 10,600,000 10,000,000 3,000,000 Bullet repayment Bullet repayment Bullet repayment 6,200,000 11,600,000 3,600,000 Bullet repayment Bullet repayment Bullet repayment 10,200,000 3,500,000 Bullet repayment Bullet repayment 4,000,000 8,500,000 Bullet repayment Bullet repayment 1,500,000 1,500,000 1,400,000 2,600,000 5,400,000 2,600,000 Bullet repayment Bullet repayment Bullet repayment Bullet repayment Bullet repayment Bullet repayment Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil $ 166,200,000 $ - $ 166,200,000 $ - $ 166,200,000 122 STATEMENT 11 Taiwan Semiconductor Manufacturing Company Limited STATEMENT 13 Taiwan Semiconductor Manufacturing Company Limited STATEMENT OF NET REVENUE FOR THE YEAR ENDED DECEMBER 31, 2013 (In thousands of New Taiwan Dollars) STATEMENT OF OPERATING EXPENSES FOR THE YEAR ENDED DECEMBER 31, 2013 (In thousands of New Taiwan Dollars) Item Sales of goods Wafer Other Royalty Net revenue Note: 8-inch equivalent wafers. Shipments (Piece) (Note) Amount Item Research and Development Expenses General and Administrative Expenses Selling Expenses Payroll and related expense $ 15,998,678 $ 5,021,640 $ 1,395,396 15,664,497 $ 557,314,791 33,249,937 590,564,728 522,872 $ 591,087,600 STATEMENT 12 Taiwan Semiconductor Manufacturing Company Limited Management fees of the Science Park Administration STATEMENT OF COST OF REVENUE FOR THE YEAR ENDED DECEMBER 31, 2013 (In thousands of New Taiwan Dollars) Item Raw materials used Balance, beginning of year Raw material purchased Raw materials, end of year Transferred to manufacturing or operating expenses Others Subtotal Direct labor Manufacturing expenses Manufacturing cost Work in process, beginning of year Work in process, end of year Transferred to manufacturing or operating expenses Cost of finished goods Finished goods, beginning of year Finished goods purchased Finished goods, end of year Transferred to manufacturing or operating expenses Scrapped Subtotal Others Total Amount $ 3,666,048 26,515,240 (2,208,291) (7,359,525) (70,385) 20,543,087 10,581,290 261,349,482 292,473,859 24,442,123 (24,857,927) (5,653,705) 286,404,350 5,936,018 35,468,500 (7,049,813) (3,449,307) (216,998) 317,092,750 2,314,413 $ 319,407,163 Depreciation expense Consumables Repair and maintenance expense Joint development project expenses Utilities Patents Commission Others (Note) Total 11,925,017 6,706,174 2,672,805 2,562,711 819,391 - - - 769,735 61,371 1,863,742 - 1,971,997 1,139,662 893,054 - 6,237,695 5,976,210 1,670 1,718 1,108 - - - - 736,889 167,691 $ 46,922,471 $ 17,697,411 $ 2,304,472 Note: The amount of each item in others does not exceed 5% of the account balance. 123 STATEMENT 14 Taiwan Semiconductor Manufacturing Company Limited STATEMENT OF LABOR, DEPRECIATION AND AMORTIZATION BY FUNCTION FOR THE YEAR ENDED DECEMBER 31, 2013 AND 2012 (In thousands of New Taiwan Dollars) Labor cost Salary and bonus Labor and health insurance Pension Others Year Ended December 31, 2013 Year Ended December 31, 2012 Classified as Cost of Revenue Classified as Operating Expenses Classified as Other Operating Income and Expenses Total Classified as Cost of Revenue Classified as Operating Expenses Classified as Other Operating Income and Expenses Total $ 31,781,705 1,829,180 1,029,341 1,151,330 $ 20,201,521 1,070,653 555,714 587,826 $ - - - - $ 51,983,226 2,899,833 1,585,055 1,739,156 $ 27,681,298 1,509,487 901,762 973,986 $ 19,198,385 920,024 517,758 505,500 $ - - - - $ 46,879,683 2,429,511 1,419,520 1,479,486 $ 35,791,556 $ 22,415,714 $ - $ 58,207,270 $ 31,066,533 $ 21,141,667 $ - $ 52,208,200 Depreciation Amortization $ 134,545,283 $ 1,099,542 $ 12,696,422 $ 973,384 $ 25,120 $ - $ 147,266,825 $ 2,072,926 $ 111,929,312 $ 1,273,689 $ 10,441,847 $ 748,375 $ 6,656 $ - $ 122,377,815 $ 2,022,064 124 

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