SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934

For the month of March 2011

Taiwan Semiconductor Manufacturing Company Ltd.

(Translation of Registrant’s Name Into English)

No. 8, Li-Hsin Rd. 6,
Hsinchu Science Park,
Taiwan
(Address of Principal Executive Offices)

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

Form 20-F þ Form 40-F o

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

Yes o No þ

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

 

 

Taiwan Semiconductor Manufacturing Company Limited

Financial Statements for the
Years Ended December 31, 2010 and 2009 and
Independent Auditors’ Report

INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Shareholders
Taiwan Semiconductor Manufacturing Company Limited

We have audited the accompanying balance sheets of Taiwan Semiconductor Manufacturing Company Limited as of December 31, 2010 and 2009, and the related statements of income, changes in shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Taiwan Semiconductor Manufacturing Company Limited as of December 31, 2010 and 2009, and the results of its operations and its cash flows for the years then ended in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, requirements of the Business Accounting Law and Guidelines Governing Business Accounting with respect to financial accounting standards, and accounting principles generally accepted in the Republic of China.

As discussed in Note 3 to the financial statements, effective January 1, 2009, Taiwan Semiconductor Manufacturing Company Limited adopted the newly revised Statement of Financial Accounting Standards No. 10, “Accounting for Inventories.”

We have also audited, in accordance with the Rules Governing the Audit of Financial Statements by Certified Public Accountants and auditing standards generally accepted in the Republic of China, the consolidated financial statements of Taiwan Semiconductor Manufacturing Company Limited and subsidiaries as of and for the year ended December 31, 2010 on which we have issued an unqualified opinion and as of and for the year ended December 31, 2009 on which we have issued an unqualified opinion with an explanatory paragraph relating to the adoption of the newly revised Statement of Financial Accounting Standards No. 10, “Accounting for Inventories.”

January 24, 2011

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 jurisdiction. 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.

Taiwan Semiconductor Manufacturing Company Limited

BALANCE SHEETS
DECEMBER 31, 2010 AND 2009
(In Thousands of New Taiwan Dollars, Except Par Value)

		2010								2009
		Amount				%				Amount				%
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Notes 2 and 4)		$	109,511,130				15			$	117,043,543				20
Financial assets at fair value through profit or loss (Notes 2, 5 and 23)			—				—				181,743				—
Available-for-sale financial assets (Notes 2, 6 and 23)			3,918,274				—				—				—
Held-to-maturity financial assets (Notes 2, 7 and 23)			4,796,589				1				9,944,843				2
Receivables from related parties (Note 24)			25,733,974				4				22,541,773				4
Notes and accounts receivable			22,250,905				3				19,884,520				3
Allowance for doubtful receivables (Notes 2 and 8)			(488,000	)			—				(431,000	)			—
Allowance for sales returns and others (Notes 2 and 8)			(7,341,444	)			(1	)			(8,583,632	)			(1	)
Other receivables from related parties (Note 24)			1,302,281				—				246,003				—
Other financial assets (Note 25)			418,206				—				1,104,072				—
Inventories (Notes 2, 3 and 9)			25,646,348				4				18,830,216				3
Deferred income tax assets (Notes 2 and 18)			5,133,775				1				4,063,410				1
Prepaid expenses and other current assets			1,352,244				—				1,006,046				—
Total current assets			192,234,282				27				185,831,537				32
LONG-TERM INVESTMENTS (Notes 2, 6, 7, 10, 11 and 23)
Investments accounted for using equity method			114,977,174				17				104,660,098				18
Available-for-sale financial assets			1,033,049				—				1,046,672				1
Held-to-maturity financial assets			1,405,698				—				12,219,055				2
Financial assets carried at cost			497,835				—				501,988				—
Total long-term investments			117,913,756				17				118,427,813				21
PROPERTY, PLANT AND EQUIPMENT (Notes 2, 12 and 24)
Cost
Buildings			128,646,942				18				124,522,047				22
Machinery and equipment			852,733,592				122				713,426,126				123
Office equipment			11,730,537				2				10,781,099				2
			993,111,071				142				848,729,272				147
Accumulated depreciation			(706,605,445	)			(101	)			(627,764,323	)			(109	)
Advance payments and construction in progress			80,348,673				11				33,786,577				6
Net property, plant and equipment			366,854,299				52				254,751,526				44
INTANGIBLE ASSETS
Goodwill (Note 2)			1,567,756				—				1,567,756				—
Deferred charges, net (Notes 2 and 13)			5,456,427				1				5,891,685				1
Total intangible assets			7,024,183				1				7,459,441				1
OTHER ASSETS
Deferred income tax assets (Notes 2 and 18)			7,154,266				1				7,763,643				1
Refundable deposits			8,638,749				2				2,698,116				1
Others (Notes 2 and 24)			1,420,131				—				494,546				—
Total other assets			17,213,146				3				10,956,305				2
TOTAL		$	701,239,666				100			$	577,426,622				100

		2010								2009
		Amount				%				Amount				%
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Short-term loans (Note 14)		$	30,908,637				4			$	—				—
Financial liabilities at fair value through profit or loss (Notes 2, 5 and 23)			7,834				—				—				—
Accounts payable			10,559,283				2				9,678,849				2
Payables to related parties (Note 24)			2,574,450				—				2,039,342				—
Income tax payable (Notes 2 and 18)			7,108,869				1				8,761,120				2
Salary and bonus payable			5,287,751				1				8,677,299				1
Accrued profit sharing to employees and bonus to directors (Notes 2 and 20)			10,959,469				2				6,771,338				1
Payables to contractors and equipment suppliers			41,992,198				6				28,756,884				5
Accrued expenses and other current liabilities (Notes 16 and 23)			8,623,769				1				7,886,263				1
Total current liabilities			118,022,260				17				72,571,095				12
LONG-TERM LIABILITIES
Bonds payable (Notes 15 and 23)			4,500,000				—				4,500,000				1
Other long-term payables (Notes 16 and 23)			—				—				416,390				—
Total long-term liabilities			4,500,000				—				4,916,390				1
OTHER LIABILITIES
Accrued pension cost (Notes 2 and 17)			3,824,601				1				3,807,176				1
Guarantee deposits (Note 27)			747,887				—				1,001,376				—
Deferred credits (Notes 2 and 24)			—				—				47,873				—
Total other liabilities			4,572,488				1				4,856,425				1
Total liabilities			127,094,748				18				82,343,910				14
CAPITAL STOCK — NT$10 PAR VALUE (Note 20)
Authorized: 28,050,000 thousand shares
Issued: 25,910,078 thousand shares in 2010
25,902,706 thousand shares in 2009			259,100,787				37				259,027,066				45
CAPITAL SURPLUS (Notes 2 and 20)			55,698,434				8				55,486,010				10
RETAINED EARNINGS (Note 20)
Appropriated as legal capital reserve			86,239,494				12				77,317,710				13
Appropriated as special capital reserve			1,313,047				—				—				—
Unappropriated earnings			178,227,030				26				104,564,972				18
			265,779,571				38				181,882,682				31
OTHERS (Notes 2 and 23)
Cumulative translation adjustments			(6,543,163	)			(1	)			(1,766,667	)			—
Unrealized gain on financial instruments			109,289				—				453,621				—
			(6,433,874	)			(1	)			(1,313,046	)			—
Total shareholders’ equity			574,144,918				82				495,082,712				86
TOTAL		$	701,239,666				100			$	577,426,622				100

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

(With Deloitte & Touche audit report dated January 24, 2011)

Taiwan Semiconductor Manufacturing Company Limited

STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(In Thousands of New Taiwan Dollars, Except Earnings Per Share)

		2010								2009
		Amount				%				Amount				%
GROSS SALES (Notes 2 and 24)		$	418,666,448							$	299,471,214
SALES RETURNS AND ALLOWANCES (Notes 2 and 8)			11,703,136								13,728,346
NET SALES			406,963,312				100				285,742,868				100
COST OF SALES (Notes 3, 9, 19 and 24)			209,921,268				52				159,106,619				56
GROSS PROFIT			197,042,044				48				126,636,249				44
UNREALIZED GROSS PROFIT FROM AFFILIATES (Note 2)			52,742				—				160,279				—
REALIZED GROSS PROFIT			196,989,302				48				126,475,970				44
OPERATING EXPENSES (Notes 19 and 24)
Research and development			27,623,299				7				19,688,032				7
General and administrative			11,681,756				3				10,238,131				3
Marketing			2,837,739				—				2,027,454				1
Total operating expenses			42,142,794				10				31,953,617				11
INCOME FROM OPERATIONS			154,846,508				38				94,522,353				33
NON-OPERATING INCOME AND GAINS
Equity in earnings of equity method investees, net (Notes 2 and 10)			7,111,443				2				—				—
Settlement income (Note 27)			6,939,764				2				1,464,915				1
Interest income			764,027				—				1,117,374				—
Technical service income (Notes 24 and 27)			446,746				—				375,118				—
Valuation gain on financial instruments, net (Notes 2, 5 and 23)			312,862				—				587,151				—
Others (Notes 2 and 24)			333,126				—				576,951				—
Total non-operating income and gains			15,907,968				4				4,121,509				1

(Continued)

Taiwan Semiconductor Manufacturing Company Limited

STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(In Thousands of New Taiwan Dollars, Except Earnings Per Share)

		2010								2009
		Amount				%				Amount				%
NON-OPERATING EXPENSES AND LOSSES
Loss on disposal of property, plant and equipment (Note 2)		$	838,750				—			$	58,242				—
Interest expense			214,641				—				142,026				—
Casualty loss (Note 9)			190,992				—				—				—
Foreign exchange loss, net (Note 2)			58,737				—				630,455				—
Equity in losses of equity method investees, net (Notes 2 and 10)			—				—				2,695,720				1
Others (Note 2)			161,152				—				136,397				—
Total non-operating expenses and losses			1,464,272				—				3,662,840				1
INCOME BEFORE INCOME TAX			169,290,204				42				94,981,022				33
INCOME TAX EXPENSE (Notes 2 and 18)			7,685,195				2				5,763,186				2
NET INCOME		$	161,605,009				40			$	89,217,836				31

		2010								2009
		Before				After				Before				After
		Income				Income				Income				Income
		Tax				Tax				Tax				Tax
EARNINGS PER SHARE (NT$, Note 22)
Basic earnings per share		$	6.53			$	6.24			$	3.68			$	3.45
Diluted earnings per share		$	6.53			$	6.23			$	3.67			$	3.44

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

(With Deloitte & Touche audit report dated January 24, 2011)

(Concluded)

Taiwan Semiconductor Manufacturing Company Limited

STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(In Thousands of New Taiwan Dollars, Except Dividends Per Share)

																														Others
																																		Unrealized
		Capital Stock — Common Stock												Retained Earnings																Cumulative				Gain (Loss) on				Total
		Shares												Legal Capital				Special Capital				Unappropriated								Translation				Financial				Shareholders’
		(In Thousands)				Amount				Capital Surplus				Reserve				Reserve				Earnings				Total				Adjustments				Instruments				Equity
BALANCE, JANUARY 1, 2009			25,625,437			$	256,254,373			$	49,875,255			$	67,324,393			$	391,857			$	102,337,417			$	170,053,667			$	481,158			$	(287,342	)		$	476,377,111
Appropriations of prior year’s earnings
Legal capital reserve			—				—				—				9,993,317				—				(9,993,317	)			—				—				—				—
Reversal of special capital reserve			—				—				—				—				(391,857	)			391,857				—				—				—				—
Cash dividends to shareholders — NT$3.00 per share			—				—				—				—				—				(76,876,312	)			(76,876,312	)			—				—				(76,876,312	)
Stock dividends to shareholders — NT$0.02 per share			51,251				512,509				—				—				—				(512,509	)			(512,509	)			—				—				—
Profit sharing to employees — in stock			141,870				1,418,699				6,076,289				—				—				—				—				—				—				7,494,988
Capital surplus transferred to capital stock			76,876				768,763				(768,763	)			—				—				—				—				—				—				—
Net income in 2009			—				—				—				—				—				89,217,836				89,217,836				—				—				89,217,836
Adjustment arising from changes in percentage of ownership in equity method investees			—				—				115,418				—				—				—				—				—				—				115,418
Translation adjustments			—				—				—				—				—				—				—				(2,247,825	)			—				(2,247,825	)
Issuance of stock from exercising employee stock options			7,272				72,722				187,811				—				—				—				—				—				—				260,533
Valuation gain on available-for-sale financial assets			—				—				—				—				—				—				—				—				14,014				14,014
Net change in shareholders’ equity from equity method investees			—				—				—				—				—				—				—				—				726,949				726,949
BALANCE, DECEMBER 31, 2009			25,902,706				259,027,066				55,486,010				77,317,710				—				104,564,972				181,882,682				(1,766,667	)			453,621				495,082,712
Appropriations of prior year’s earnings
Legal capital reserve			—				—				—				8,921,784				—				(8,921,784	)			—				—				—				—
Special capital reserve			—				—				—				—				1,313,047				(1,313,047	)			—				—				—				—
Cash dividends to shareholders — NT$3.00 per share			—				—				—				—				—				(77,708,120	)			(77,708,120	)			—				—				(77,708,120	)
Net income in 2010			—				—				—				—				—				161,605,009				161,605,009				—				—				161,605,009
Adjustment arising from changes in percentage of ownership in equity method investees			—				—				(17,885	)			—				—				—				—				—				—				(17,885	)
Translation adjustments			—				—				—				—				—				—				—				(4,776,496	)			—				(4,776,496	)
Issuance of stock from exercising employee stock options			7,372				73,721				171,103				—				—				—				—				—				—				244,824
Valuation loss on available-for-sale financial assets			—				—				—				—				—				—				—				—				(441,978	)			(441,978	)
Net change in shareholders’ equity from equity method investees			—				—				59,206				—				—				—				—				—				97,646				156,852
BALANCE, DECEMBER 31, 2010			25,910,078			$	259,100,787			$	55,698,434			$	86,239,494			$	1,313,047			$	178,227,030			$	265,779,571			$	(6,543,163	)		$	109,289			$	574,144,918

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

(With Deloitte & Touche audit report dated January 24, 2011)

Taiwan Semiconductor Manufacturing Company Limited

STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(In Thousands of New Taiwan Dollars)

		2010				2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	161,605,009			$	89,217,836
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			83,366,121				74,327,868
Unrealized gross profit from affiliates			52,742				160,279
Amortization of premium/discount of financial assets			18,611				6,322
Gain on disposal of available-for-sale financial assets, net			—				(37,370	)
Gain on held-to-maturity financial assets redeemed by the issuer			—				(16,091	)
Loss on disposal of financial assets carried at cost			1,263				97
Equity in losses (earnings) of equity method investees, net			(7,111,443	)			2,695,720
Cash dividends received from equity method investees			422,490				1,402,592
Loss (gain) on disposal of property, plant and equipment and other assets, net			761,298				(138,613	)
Settlement income from receiving equity securities			(4,434,364	)			—
Deferred income tax			(373,253	)			(1,678,381	)
Changes in operating assets and liabilities:
Decrease (increase) in:
Financial assets and liabilities at fair value through profit or loss			189,577				(222,901	)
Receivables from related parties			(3,192,201	)			(10,813,569	)
Notes and accounts receivable			(2,366,385	)			(8,443,344	)
Allowance for doubtful receivables			57,000				(5,746	)
Allowance for sales returns and others			(1,242,188	)			2,715,050
Other receivables from related parties			85,830				235,470
Other financial assets			904,157				(392,317	)
Inventories			(6,816,132	)			(6,022,280	)
Prepaid expenses and other current assets			(445,797	)			290,470
Increase (decrease) in:
Accounts payable			624,608				4,925,758
Payables to related parties			535,108				836,992
Income tax payable			(1,652,251	)			(461,691	)
Salary and bonus payable			(3,389,548	)			7,075,402
Accrued profit sharing to employees and bonus to directors			4,188,131				(881,731	)
Accrued expenses and other current liabilities			265,241				1,259,544
Accrued pension cost			17,425				97,167
Deferred credits			(47,873	)			(230,487	)
Net cash provided by operating activities			222,023,176				155,902,046

(Continued)

Taiwan Semiconductor Manufacturing Company Limited

STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(In Thousands of New Taiwan Dollars)

		2010				2009
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of:
Property, plant and equipment		$	(182,335,032	)		$	(86,970,843	)
Held-to-maturity financial assets			—				(10,803,805	)
Investments accounted for using equity method			(8,262,519	)			(320,443	)
Financial assets carried at cost			(480	)			(1,411	)
Proceeds from disposal or redemption of:
Available-for-sale financial assets			—				1,037,370
Held-to-maturity financial assets			15,943,000				6,293,000
Financial assets carried at cost			3,370				18,828
Property, plant and equipment and other assets			387,735				71,850
Proceeds from return of capital by investees			—				27,753
Increase in deferred charges			(1,538,301	)			(1,347,228	)
Decrease (increase) in refundable deposits			(5,940,633	)			21,621
Increase in other assets			(1,004,581	)			—
Net cash used in investing activities			(182,747,441	)			(91,973,308	)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in short-term loans			30,908,637				—
Repayment of bonds payable			—				(8,000,000	)
Decrease in guarantee deposits			(253,489	)			(477,776	)
Proceeds from exercise of employee stock options			244,824				260,533
Cash dividends			(77,708,120	)			(76,876,312	)
Net cash used in financing activities			(46,808,148	)			(85,093,555	)
NET DECREASE IN CASH AND CASH EQUIVALENTS			(7,532,413	)			(21,164,817	)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR			117,043,543				138,208,360
CASH AND CASH EQUIVALENTS, END OF YEAR		$	109,511,130			$	117,043,543
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid		$	200,892			$	351,803
Income tax paid		$	9,640,396			$	7,791,196
INVESTING ACTIVITIES AFFECTING BOTH CASH AND NON-CASH ITEMS
Acquisition of property, plant and equipment		$	195,950,918			$	108,592,471
Increase in payables to contractors and equipment suppliers			(13,491,140	)			(21,620,819	)
Nonmonetary exchange trade-out price			(124,746	)			(809	)
Cash paid		$	182,335,032			$	86,970,843

(Continued)

Taiwan Semiconductor Manufacturing Company Limited

STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(In Thousands of New Taiwan Dollars)

		2010				2009
Disposal of property, plant and equipment and other assets		$	1,872,880			$	64,390
Decrease (increase) in other receivables from related parties			(1,142,108	)			8,269
Increase in other financial assets			(218,291	)			—
Nonmonetary exchange trade-out price			(124,746	)			(809	)
Cash received		$	387,735			$	71,850
NON-CASH FINANCING ACTIVITIES
Current portion of other long-term payables (under accrued expenses and other current liabilities)		$	718,637			$	769,144

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

(With Deloitte & Touche audit report dated January 24, 2011)

(Concluded)

Taiwan Semiconductor Manufacturing Company Limited

NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Amounts in Thousands of New Taiwan Dollars, Unless Specified Otherwise)

 

1.		GENERAL
		Taiwan Semiconductor Manufacturing Company Limited (the “Company” or “TSMC”), a Republic of China (R.O.C.) corporation, was incorporated on February 21, 1987. The Company is a dedicated foundry in the semiconductor industry which engages mainly in the manufacturing, selling, packaging, testing and computer-aided design of integrated circuits and other semiconductor devices and the manufacturing of masks. Beginning in 2010, the Company also engages in the researching, developing, designing, manufacturing and selling of LED lighting devices and related applications products and systems, and renewable energy and efficiency related technologies and products. On September 5, 1994, its shares were listed on the Taiwan Stock Exchange (TSE). On October 8, 1997, TSMC listed some of its shares of stock on the New York Stock Exchange (NYSE) in the form of American Depositary Shares (ADSs).
		As of December 31, 2010 and 2009, the Company had 33,232 and 22,292 employees, respectively.

 

2.		SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
		The financial statements are presented in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, Business Accounting Law, Guidelines Governing Business Accounting, and accounting principles generally accepted in the R.O.C.
		For the convenience of readers, the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the R.O.C. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language financial statements shall prevail.
		Significant accounting policies are summarized as follows:
		Use of Estimates
		The preparation of financial statements in conformity with the aforementioned guidelines, law and principles requires management to make reasonable assumptions and estimates of matters that are inherently uncertain. The actual results may differ from management’s estimates.
		Classification of Current and Noncurrent Assets and Liabilities
		Current assets are assets held for trading purposes and assets expected to be converted to cash, sold or consumed within one year from the balance sheet date. Current liabilities are obligations incurred for trading purposes and obligations expected to be settled within one year from the balance sheet date. Assets and liabilities that are not classified as current are noncurrent assets and liabilities, respectively.
		Cash Equivalents
		Repurchase agreements collateralized by government bonds acquired with maturities of less than three months from the date of purchase are classified as cash equivalents. The carrying amount approximates fair value due to their short term nature.

		Financial Assets/Liabilities at Fair Value Through Profit or Loss
		Derivatives that do not meet the criteria for hedge accounting are initially recognized at fair value, with transaction costs expensed as incurred. The derivatives are remeasured at fair value subsequently with changes in fair value recognized in earnings. A regular way purchase or sale of financial assets is accounted for using settlement date accounting.
		Fair value is estimated using valuation techniques incorporating estimates and assumptions that are consistent with prevailing market conditions. When the fair value is positive, the derivative is recognized as a financial asset; when the fair value is negative, the derivative is recognized as a financial liability.
		Available-for-sale Financial Assets
		Available-for-sale financial assets are initially recognized at fair value plus transaction costs that are directly attributable to the acquisition. Changes in fair value from subsequent remeasurement are reported as a separate component of shareholders’ equity. The corresponding accumulated gains or losses are recognized in earnings when the financial asset is derecognized from the balance sheet. A regular way purchase or sale of financial assets is accounted for using settlement date accounting.
		The fair value of overseas publicly traded stock is determined using the closing prices at the end of the year. The fair value of debt securities is determined using the average of bid and asked prices at the end of the year.
		Any difference between the initial carrying amount of a debt security and the amount due at maturity is amortized using the effective interest method, with the amortization recognized in earnings.
		If there is objective evidence which indicates that a financial asset is impaired, a loss is recognized. If, in a subsequent period, the amount of the impairment loss decreases, for equity securities, the previously recognized impairment loss is reversed to the extent of the decrease and recorded as an adjustment to shareholders’ equity; for debt securities, the amount of the decrease is recognized in earnings, provided that the decrease is clearly attributable to an event which occurred after the impairment loss was recognized.
		Held-to-maturity Financial Assets
		Debt securities for which the Company has a positive intention and ability to hold to maturity are categorized as held-to-maturity financial assets and are carried at amortized cost. Those financial assets are initially recognized at fair value plus transaction costs that are directly attributable to the acquisition. Gains or losses are recognized at the time of derecognition, impairment or amortization. A regular way purchase or sale of financial assets is accounted for using settlement date accounting.
		If there is objective evidence which indicates that a financial asset is impaired, a loss is recognized. If, in a subsequent period, the amount of the impairment loss decreases and the decrease is clearly attributable to an event which occurred after the impairment loss was recognized, the previously recognized impairment loss is reversed to the extent of the decrease. The reversal may not result in a carrying amount that exceeds the amortized cost that would have been determined as if no impairment loss had been recognized.
		Allowance for Doubtful Receivables
		An allowance for doubtful receivables is provided based on a review of the collectability of receivables. The Company determines the amount of the allowance for doubtful receivables with a charge of 1% of the amount of outstanding receivables considering the account aging analysis and current trends in the credit quality of its customers.

		Revenue Recognition and Allowance for Sales Returns and Others
		The Company recognizes revenue when evidence of an arrangement exists, the rewards of ownership and significant risk of the goods has been transferred to the buyer, price is fixed or determinable, and collectability is reasonably assured. Provisions for estimated sales returns and other allowances are recorded in the year the related revenue is recognized, based on historical experience, management’s judgment, and any known factors that would significantly affect the allowance.
		Sales prices are determined using fair value taking into account related sales discounts agreed to by the Company and its customers. Sales agreements typically provide that payment is due 30 days from invoice date for a majority of the customers and 30 to 45 days after the end of the month in which sales occur for some customers. Since the receivables from sales are collectible within one year and such transactions are frequent, fair value of the receivables is equivalent to the nominal amount of the cash to be received.
		Inventories
		Inventories are recorded at standard cost and adjusted to approximate weighted-average cost on the balance sheet date.
		Prior to January 1, 2009, inventories were stated at the lower of cost or market value. Any write-down was made on a total-inventory basis. Market value represented replacement cost for raw materials, supplies and spare parts and net realizable value for work in process and finished goods.
		As stated in Note 3, effective January 1, 2009, inventories are stated at the lower of cost or net realizable value. Inventory write-downs are made on an item-by-item basis, except where it may be appropriate to group similar or related items. Net realizable value is the estimated selling price of inventories less all estimated costs of completion and necessary selling costs.
		Investments Accounted for Using Equity Method
		Investments in companies wherein the Company exercises significant influence over the operating and financial policy decisions are accounted for using the equity method. The Company’s share of the net income or net loss of an investee is recognized in the “equity in earnings/losses of equity method investees, net” account. The cost of an investment shall be analyzed and the cost of investment in excess of the fair value of identifiable net assets acquired, representing goodwill, shall not be amortized. If the fair value of identifiable net assets acquired exceeds the cost of investment, the excess shall be proportionately allocated as reductions to fair values of non-current assets (except for financial assets other than investments accounted for using the equity method and deferred income tax assets). When an indication of impairment is identified, the carrying amount of the investment is reduced, with the related impairment loss recognized in earnings.
		When the Company subscribes for additional investee’s shares at a percentage different from its existing ownership percentage, the resulting carrying amount of the investment in the investee differs from the amount of the Company’s share of the investee’s equity. The Company records such a difference as an adjustment to long-term investments with the corresponding amount charged or credited to capital surplus.
		Gains or losses on sales from the Company to equity method investees are deferred in proportion to the Company’s ownership percentages in the investees until such gains or losses are realized through transactions with third parties. The entire amount of the gains or losses on sales to investees over which the Company has a controlling interest is deferred until such gains or losses are realized through subsequent sales of the related products to third parties. Gains or losses on sales from equity method investees to the Company are deferred in proportion to the Company’s ownership percentages in the investees until they are realized through transactions with third parties. Gains or losses on sales between equity method investees over each of which the Company has control are deferred in proportion to the Company’s weighted-average ownership percentage in the investee which records gains or losses. In transactions between equity method investees over either or both of which the Company has no control, gains or losses on sales are

		deferred in proportion to the multiplication of the Company’s weighted-average ownership percentages in the investees. Such gains or losses are recorded until they are realized through transactions with third parties.
		If an investee’s functional currency is a foreign currency, differences will result from the translation of the investee’s financial statements into the reporting currency of the Company. Such differences are charged or credited to cumulative translation adjustments, a separate component of shareholders’ equity.
		Financial Assets Carried at Cost
		Investments for which the Company does not exercise significant influence and that do not have a quoted market price in an active market and whose fair value cannot be reliably measured, such as non-publicly traded stocks and mutual funds, are carried at their original cost. The costs of non-publicly traded stocks and mutual funds are determined using the weighted-average method. If there is objective evidence which indicates that a financial asset is impaired, a loss is recognized. A subsequent reversal of such impairment loss is not allowed.
		Cash dividends are recognized as investment income upon resolution of shareholders of an investee but are accounted for as a reduction to the original cost of investment if such dividends are declared on the earnings of the investee attributable to the period prior to the purchase of the investment. Stock dividends are recorded as an increase in the number of shares held and do not affect investment income. The cost per share is recalculated based on the new total number of shares.
		Property, Plant and Equipment and Assets Leased to Others
		Property, plant and equipment and assets leased to others are stated at cost less accumulated depreciation. When an indication of impairment is identified, any excess of the carrying amount of an asset over its recoverable amount is recognized as a loss. If the recoverable amount increases in a subsequent period, the amount previously recognized as impairment would be reversed and recognized as a gain. However, the adjusted amount may not exceed the carrying amount that would have been determined, net of depreciation, as if no impairment loss had been recognized. Significant additions, renewals and betterments incurred during the construction period are capitalized. Maintenance and repairs are expensed as incurred.
		Depreciation is computed using the straight-line method over the following estimated service lives: buildings — 10 to 20 years; machinery and equipment — 5 years; and office equipment — 3 to 5 years.
		Upon sale or disposal of property, plant and equipment and assets leased to others, the related cost and accumulated depreciation are deducted from the corresponding accounts, with any gain or loss recorded as non-operating gains or losses in the year of sale or disposal.
		Intangible Assets
		Goodwill represents the excess of the consideration paid for acquisition over the fair value of identifiable net assets acquired. Goodwill is no longer amortized and instead is tested for impairment annually. If an event occurs or circumstances change which indicate that the fair value of goodwill is more likely than not below its carrying amount, an impairment loss is recognized. A subsequent reversal of such impairment loss is not allowed.
		Deferred charges consist of technology license fees, software and system design costs and patent and others. The amounts are amortized over the following periods: Technology license fees — the estimated life of the technology or the term of the technology transfer contract; software and system design costs — 3 years; patent and others — the economic life or contract period. When an indication of impairment is identified, any excess of the carrying amount of an asset over its recoverable amount is recognized as a loss. If the recoverable amount increases in a subsequent period, the previously recognized impairment loss would be reversed and recognized as a gain. However, the adjusted amount may not exceed the carrying

		amount that would have been determined, net of amortization, as if no impairment loss had been recognized.
		Expenditures related to research activities and those related to development activities that do not meet the criteria for capitalization are charged to expense when incurred.
		Pension Costs
		For employees who participate in defined contribution pension plans, pension costs are recorded based on the actual contributions made to employees’ individual pension accounts during their service periods. For employees who participate in defined benefit pension plans, pension costs are recorded based on actuarial calculations.
		Income Tax
		The Company applies an inter-period allocation for its income tax whereby deferred income tax assets and liabilities are recognized for the tax effects of temporary differences and unused tax credits. Valuation allowances are provided to the extent, if any, that it is more likely than not that deferred income tax assets will not be realized. A deferred tax asset or liability is classified as current or noncurrent in accordance with the classification of its related asset or liability. However, if a deferred tax asset or liability does not relate to an asset or liability in the financial statements, then it is classified as either current or noncurrent based on the expected length of time before it is realized or settled.
		Any tax credits arising from purchases of machinery, equipment and technology, research and development expenditures, personnel training expenditures, and investments in important technology-based enterprises are recognized using the flow-through method.
		Adjustments of prior years’ tax liabilities are added to or deducted from the current year’s tax provision.
		Income tax on unappropriated earnings at a rate of 10% is expensed in the year of shareholder approval which is the year subsequent to the year the earnings are generated.
		Stock-based Compensation
		Employee stock options that were granted or modified in the period from January 1, 2004 to December 31, 2007 are accounted for by the interpretations issued by the Accounting Research and Development Foundation of the Republic of China. The Company adopted the intrinsic value method and any compensation cost determined using this method is recognized in earnings over the employee vesting period. Employee stock option plans that were granted or modified after December 31, 2007 are accounted for using fair value method in accordance with Statement of Financial Accounting Standards No. 39, “Accounting for Share-based Payment.” The Company did not grant or modify any employee stock options since January 1, 2008.
		Profit Sharing to Employees and Bonus to Directors
		Effective January 1, 2008, the Company adopted Interpretation 2007-052, “Accounting for Bonuses to Employees, Directors and Supervisors,” which requires companies to record profit sharing to employees and bonus to directors as an expense rather than as an appropriation of earnings.
		Foreign-currency Transactions
		Foreign-currency transactions other than derivative contracts are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occur. Exchange gains or losses derived from foreign-currency transactions or monetary assets and liabilities denominated in foreign currencies are recognized in earnings.

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

 

3.		ACCOUNTING CHANGES
		Effective January 1, 2009, the Company adopted the newly revised Statement of Financial Accounting Standards (SFAS) No. 10, “Accounting for Inventories.” The main revisions are (1) inventories are stated at the lower of cost or net realizable value, and inventories are written down to net realizable value on an item-by-item basis except when the grouping of similar or related items is appropriate; (2) unallocated overheads are recognized as expenses in the year in which they are incurred; and (3) abnormal cost, write-downs of inventories and any reversal of write-downs are recorded as cost of sales for the year. Such changes in accounting principle did not have significant effect on the Company’s financial statements for the year ended December 31, 2009.

 

4.

CASH AND CASH EQUIVALENTS

		December 31
		2010				2009
Cash and deposits in banks		$	108,735,942			$	114,023,307
Repurchase agreements collateralized by government bonds			775,188				3,020,236
		$	109,511,130			$	117,043,543

 

5.

FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS

		December 31
		2010				2009
Trading financial assets
Cross currency swap contracts		$	—			$	181,743
Trading financial liabilities
Forward exchange contracts		$	7,834			$	—

		The Company entered into derivative contracts during the years ended December 31, 2010 and 2009 to manage exposures due to fluctuations of foreign exchange rates. The derivative contracts entered into by the Company did not meet the criteria for hedge accounting. Therefore, the Company did not apply hedge accounting treatment for its derivative contracts.
		Outstanding forward exchange contracts consisted of the following:

				Contract Amount
		Maturity Date		(In Thousands)
December 31, 2010
Sell NT$/Buy JPY		January 2011 to February 2011		NT$814,882/JPY2,278,420

Outstanding cross currency swap contracts consisted of the following:

						Range of
		Contract Amount		Range of		Interest Rates
Maturity Date		(In Thousands)		Interest Rates Paid		Received
December 31, 2009
January 2010 to February 2010		US$750,000/NT$24,201,706		0.24%-0.70%		0.00%-0.38%

For the years ended December 31, 2010 and 2009, changes in fair value related to derivative financial instruments recognized in earnings was a net gain of NT$312,862 thousand and NT$587,151 thousand, respectively.

 

6.

AVAILABLE-FOR-SALE FINANCIAL ASSETS

		December 31
		2010				2009
Overseas publicly traded stock		$	3,918,274			$	—
Corporate bonds			1,033,049				1,046,672
			4,951,323				1,046,672
Current portion			(3,918,274	)			—
		$	1,033,049			$	1,046,672

 

7.

HELD-TO-MATURITY FINANCIAL ASSETS

		December 31
		2010				2009
Corporate bonds		$	6,202,287			$	12,266,311
Structured time deposits			—				7,000,000
Government bonds			—				2,897,587
			6,202,287				22,163,898
Current portion			(4,796,589	)			(9,944,843	)
		$	1,405,698			$	12,219,055