TAIWAN SEMICONDUCTOR CO., LTD. AND SUBSIDIARIES ...€¦ · on the amounts presented in its...

TAIWAN SEMICONDUCTOR CO., LTD. AND SUBSIDIARIES

Consolidated Financial Statements

June 30, 2016 and 2015 (With Independent Auditors’ Report Thereon)

Independent Auditors’ Review Report

The Board of Directors TAIWAN SEMICONDUCTOR CO., LTD.: We have reviewed the accompanying consolidated balance sheets of TAIWAN SEMICONDUCTOR CO., LTD. and its subsidiaries as of June 30, 2016 and 2015, and the related consolidated statements of comprehensive income for the three months and the six months ended June 30, 2016 and 2015, and the related consolidated statements of changes in stockholders’ equity and cash flows for the six months ended June 30, 2016 and 2015. These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to issue an opinion on these consolidated financial statements based on our reviews. We did not review the financial statements of TSC Auto ID Technology Ltd., and our opinion on the amounts presented in its financial statements were based on the reports of other Certified Public Accountants. The total assets of the subsidiaries recognized were $4,609,070 thousand and $2,836,954 thousand, constituting 39.55% and 30.75% of the consolidated total assets as of June 30, 2016, and 2015, respectively; and the net operating revenues of the subsidiaries recognized were $922,112 thousand, $745,474 thousand, $1,620,083 thousand, and $315,791 thousand, constituting 41.78%, 38.49%, 39.00% , and 35.28% of the consolidated net operating revenues for the three months and the six months ended June 30, 2016, and 2015,respectively. Except as explained in the following paragraph, our reviews were made in accordance with Statement of Auditing Standards No. 36 – “Review of Financial Statements” in the Republic of China. A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with the generally accepted auditing standards in the Republic of China, the objective of which is the expression of an opinion regarding the consolidated financial statements taken as a whole. Accordingly, we do not express such an opinion. The accompanying consolidated financial statement included certain non-significant consolidated subsidiaries under equity method, whose statements reflect the total assets of $1,781,702 thousand and $1,593,571 thousand, constituting 15.29% and 17.27% of the consolidated assets; and the total liabilities of $96,289 thousand and $86,737 thousand, constituting 1.77% and 2.59% of the consolidated liabilities as of June 30, 2016 and 2015, respectively; as well as the total comprehensive income of $11,351 thousand, $22,153 thousand, $25,918 thousand, and $29,724 thousand, constituting 5.50%, 11.23%, 6.49%, and 7.91% of the consolidated comprehensive income for the three months and the six months ended June 30, 2016 and 2015, respectively. These amounts and the information were based solely on the unreviewed financial statements of these companies as of June 30, 2016 and 2015.

The accompanying consolidated financial statements are intended only to present the consolidated financial position, results of operations and consolidated cash flows in accordance with the Regulations Governing the Preparation of Financial Report by Securities Issuers and IAS 34 Interim Financial Reporting as endorsed by the Financial Supervisory Commission in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to review such financial statements are those generally accepted and applied in the Republic of China. The auditors’ report and the accompanying financial statements are the English translation of the Chinese version prepared and used in the Republic of China. If there is any conflict between, or any difference in the interpretation of, the English and Chinese language auditors’ report and financial statements, the Chinese version shall prevail.

Based on our reviews and the reviews of other CPAs, except for the effect of such adjustments, if any, as might have been determined to be necessary had the financial statements of the consolidated subsidiaries been reviewed by independent accountants, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with the “Regulations Governing the Preparation of Financial Reports” by Securities Issuers and International Accounting Standards No. 34 “Interim Financial Reporting” endorsed by Financial Supervisory Commission of the Republic of China. KPMG CPA: Mei, Yuan-Chen

Hsu, Yu-Feng Taipei, Taiwan, R.O.C August 10, 2016

See accompanying notes to consolidated financial statements.


Consolidated Balance Sheets

June 30, 2016, and December 31 and June 30, 2015 (expressed in thousands of New Taiwan dollars)

June 30, 2016 December 31, 2015 June 30, 2015

Assets Amount % Amount % Amount % Current assets: Cash and cash equivalents (note 6(a)) $ 2,785,043 24 3,723,343 35 2,549,827 28 Financial asset at fair value through profit or loss – current (note

6(b)) 440,036 4 343,982 3 446,071 5 Notes receivable, net (note 6(c)) 39,750 - 22,997 - 24,347 - Accounts receivable, net (note 6(c)) 1,814,677 16 1,671,938 16 1,596,278 18 Other receivables 42,872 - 45,578 - 72,887 1 Current tax assets 4,978 - 1,582 - 5,656 - Inventories (note 6(d)) 1,480,480 13 1,180,325 11 1,146,777 12 Prepaid expenses 233,277 2 204,269 2 183,920 2

Other financial assets-current(note 6(b)) 145,275 1 164,838 2 - - 6,986,388 60 7,358,852 69 6,025,763 66Non-current assets: Financial assets at cost-non-current (note 6(b)) 956 - 956 - - - Property, plant and equipment (note 6(f)) 3,008,544 26 3,009,403 28 3,065,493 33 Intangible asset (note 6(g)and(r)) 1,534,641 13 16,043 - 17,862 - Deferred tax assets 59,391 1 45,569 - 39,626 - Other financial assets – non-current (note6(b)) 20,070 - 20,010 - 18,170 - Other non-current assets 44,659 1 295,931 3 58,586 1 4,668,261 40 3,388,912 31 3,199,737 34 Total assets $ 11,654,649 100 10,747,764 100 9,225,500 100

June 30, 2016 December 31, 2015 June 30, 2015 Liabilities and Stockholders’ Equity Amount % Amount % Amount % Current liabilities: Short-term borrowings (note 6(h)) $ 435,713 4 460,313 4 327,740 4 Financial liabilities at fair value through profit or loss – current

(note 6(b)) 6,662 - 9,521 - 5,802 - Notes payable 10,352 - 14,134 - 10,643 - Accounts payable 1,163,808 10 1,031,264 10 1,087,493 12 Other payables 652,673 5 519,695 5 447,052 5 Dividends payable 821,377 7 - - 658,942 7 Current tax liabilities 253,845 2 209,375 2 167,329 2 Long-term borrowings due within one year (note 6(i)) 106,507 1 - - - - Capital lease liabilities – current 19,412 - 18,993 - 18,610 - Other current liabilities 51,059 - 35,623 - 25,172 - 3,521,408 29 2,298,918 21 2,748,783 30Non-current liabilities: Bonds payable (note 6(j)) 1,159,977 10 1,152,134 11 - - Long-term borrowings (note 6(i)) 74,232 1 - - - - Employee benefits (note 6(l)) 46,994 - 46,740 - 42,787 - Deferred tax liabilities 273,960 2 299,084 3 255,173 3 Capital lease liabilities – non-current 295,713 3 301,195 3 306,468 3 Deferred revenue– non-current 53,632 - 1,243 - - - Deposits received 2,035 - 2,089 - 2,089 - 1,906,543 16 1,802,494 17 606,517 6 Total liabilities 5,427,951 45 4,101,412 30 3,355,300 36Stockholders’ equity attributable to parent (note 6(n)): Common stock 2,403,026 21 2,400,143 22 2,388,108 26 Capital surplus 926,544 8 883,908 8 880,263 10 Retained earnings: Legal reserve 532,814 5 456,213 4 456,213 5 Special reserve 302,150 3 302,150 3 302,150 3 Unappropriated earnings 1,178,383 10 1,505,547 15 1,028,234 11 2,013,347 18 2,263,910 22 1,786,597 19 Other stockholders’ equity 11,854 - 100,866 1 67,566 1 Treasury stock (269,762) (2) (194,289) (2) (194,289) (2) Total Stockholders’ equity attributable to parent 5,085,009 45 5,454,538 51 4,928,245 54 Non-controlling interests 1,141,689 10 1,191,814 11 941,955 10 Total stockholders’ equity 6,226,698 55 6,646,352 62 5,870,200 64Total liabilities and stockholders’ equity $ 11,654,649 100 10,747,764 100 9,225,500 100



Consolidated Statements of Comprehensive Income

For the Three Months and the Six Months ended June 30, 2016 and 2015 (expressed in thousands of New Taiwan dollars, except for earnings per common share)

For the Three Months ended June 30 For the Six Months ended June 30 2016 2015 2016 2015 Amount % Amount % Amount % Amount % Sales revenue $ 2,242,247 102 1,950,360 101 4,201,676 101 3,755,135 101Less: Sales returns and allowances 35,079 2 13,529 1 47,986 1 25,107 1Net sales revenue 2,207,168 100 1,936,831 100 4,153,690 100 3,730,028 100Cost of goods sold (note 6(d)) 1,390,618 63 1,281,872 66 2,643,986 64 2,456,529 66Gross profit 816,550 37 654,959 34 1,509,704 36 1,273,499 34Operating expenses: Selling 256,102 11 166,269 9 473,605 11 327,721 9 Administrative 108,229 5 98,290 5 204,306 5 180,917 5 Research and development 58,421 3 51,629 3 112,632 3 90,203 2 422,752 19 316,188 17 790,543 19 598,841 16

Operating income 393,798 18 338,771 17 719,161 17 674,658 18Non-operating income and expenses: Finance expense (11,758) - (5,226) - (24,080) - (10,601) - Interest revenue 6,984 - 7,128 - 14,913 - 11,047 - Other income 8,708 - 4,923 - 13,547 - 10,803 - Gains on disposal of investments 45 - 106 - 120 - 503 - Foreign exchange gains (losses) 7,813 - 3,584 - 1,538 - (37,531) (1) Gains (losses) on disposal of property, plant, and equipment 644 - (646) - (965) - (12,396) - Gains (losses) on financial assets (liabilities) at fair value

through profit (loss) (4,522) - (3,050) - 11,140 - 2,448 - Miscellaneous disbursements (4,760) - (1,698) - (7,107) - (2,336) - 3,154 - 5,121 - 9,106 - (38,063) (1)Income before income tax 396,952 18 343,892 17 728,267 17 636,595 17Income tax expense (note 6(m)) 122,838 6 104,197 5 211,994 5 180,114 5

Consolidated net income 274,114 12 239,695 12 516,273 12 456,481 12Other comprehensive income: Items that may be reclassified subsequently to profit or loss

Exchange differences on translation of foreign subsidiaries, before income tax (69,674) (3) (43,302) (2) (126,241) (3) (83,458) (2)

Income tax relating to components that may be reclassified to profit or loss in subsequent periods 2,060 - 855 - 9,075 - 2,623 -

Other comprehensive income, net of tax (67,614) (3) (42,447) (2) (117,166) (3) (80,835) (2)Comprehensive income $ 206,500 9 197,248 10 399,107 9 375,646 10Net income attributable to: Owners of the parent $ 172,476 7 132,527 6 350,193 8 285,057 7 Non-controlling interests 101,638 5 107,168 6 166,080 4 171,424 5 $ 274,114 12 239,695 12 516,273 12 456,481 12Comprehensive income attributable to: Owners of the parent $ 111,350 5 92,716 5 261,181 6 212,304 6 Non-controlling interests 95,150 4 104,532 5 137,926 3 163,342 4 $ 206,500 9 197,248 10 399,107 9 375,646 10Basic earnings per common share (note 6(q)) $ 0.74 0.60 1.51 1.23Diluted earnings per common share (note 6(q)) $ 0.74 0.56 1.49 1.21



Consolidated Statements of Changes in Stockholders’ Equity

For the Six Months ended June 30, 2016 and 2015 (expressed in thousands of New Taiwan dollars)

Stockholders’ equity attributable to Owners of the parent

Other

stockholder’s

Retained earnings equity Total equity

Common stock

Capital surplus

Legal reserve

Special reserve

Unappropriated earnings

Accumulated translationadjustment

Treasury stock

attributable to Owners of

the parent

Non-controlling

interests

Total stockholders’

equity Balance as of January 1, 2015 $ 2,436,143 962,403 396,505 302,150 1,292,929 140,319 (247,383) 5,283,066 971,369 6,254,435 Net income - - - - 285,057 - - 285,057 171,424 456,481 Other comprehensive income - - - - - (72,753) - (72,753) (8,082) (80,835) Total comprehensive income - - - - 285,057 (72,753) - 212,304 163,342 375,646 Purchase of treasury stock - - - - - - (42,009) (42,009) - (42,009) Retirement of treasury share (50,000) (99,215) - - (12,422) - 161,637 - - - Appropriation of earnings: - - - - - - - - - - Provision of legal reserve - - 59,708 - (59,708) - - - - - Cash dividends - - - - (477,622) - - (477,622) - (477,622) Subsidiaries’ purchase of treasury stock - - - - - - (66,534) (66,534) - (66,534) Adjustments of capital surplus for company’s cash - 15,400

dividends received by subsidiaries - 15,400 - - - - - 15,400 - 15,400 Share-based payment – employee stock options - 654 - - - - - 654 - 654 Employee stock options exercised 1,965 524 - - - - - 2,489 - 2,489 Changes in the number of affiliates using equity method - 497 - - - - - 497 - 497 Changes in non-controlling interests - - - - - - - - (192,756) (192,756) Balance as of June 30, 2015 $ 2,388,108 880,263 456,213 302,150 1,028,234 67,566 (194,289) 4,928,245 941,955 5,870,200 Balance as of January 1, 2016 $ 2,400,143 883,908 456,213 302,150 1,505,547 100,866 (194,289) 5,454,538 1,191,814 6,646,352 Net income - - - - 350,193 - - 350,193 166,080 516,273 Other comprehensive income - - - - - (89,012) - (89,012) (28,154) (117,166) Total comprehensive income - - - - 350,193 (89,012) - 261,181 137,926 399,107 Subsidiaries’ purchase of treasury stock - - - - - - (75,473) (75,473) - (75,473) Appropriation of earnings: - - - - - - - - - - Provision of legal reserve - - 76,061 - (76,061) - - - - - Cash dividends - - - - (600,756) - - (600,756) - (600,756) Adjustments of capital surplus for company’s cash

dividends received by subsidiaries - 24,250 - - - - - 24,250 - 24,250 Share-based payment – employee stock options - 194 - - - - - 194 - 194 Employee stock options exercised 2,883 527 - - - - - 3,410 - 3,410 Changes in the number of affiliates using equity method - 17,665 - - - - - 17,665 - 17,665 Changes in non-controlling interests - - - - - - - - (188,051) (188,051) Balance as of June 30, 2016 $ 2,403,026 926,544 532,814 302,150 1,178,383 11,854 (269,762) 5,085,009 1,141,689 6,226,698



Consolidated Statements of Cash Flows

For the Six Months ended June 30, 2016 and 2015 (expressed in thousands of New Taiwan dollars)

For the Six Months ended June 30 2016 2015 Cash flows from operating activities: Income before income tax $ 728,267 636,595 Adjustments: Adjustments for the non-cash effects of items of incomes and expenses: Depreciation expense 155,393 152,918 Amortization expense 25,192 3,097 Bad debt expense 1,012 373 Net gains on financial assets or liabilities at fair value through profit or loss (11,140) (2,448) Interest expense 22,963 9,699 Interest income (14,913) (11,047) Share-based payments 194 654 Losses on disposal of property, plant, and equipment 965 12,396 Disposal gains on investments (120) (503) Reversal of impairment gain on non-financial assets (32) (377) Others 17,665 497 Total adjustments for the non-cash effects of items of incomes and expenses 197,179 165,259 Net changes in operating assets and liabilities: Net changes in operating assets:

Increase in financial assets at fair value through profit or loss (87,653) (299,257) Increase in notes receivable (16,753) (3,929) Increase in accounts receivable (143,751) (85,034) Decrease in other receivable 2,574 3,100 Increase in inventories (300,155) (39,181) Decrease (increase) in prepayments (27,161) 4,377 Decrease (increase) in other financial assets 488 (737) Total net change in operating assets (572,411) (420,661) Net changes in operating liabilities: Increase (decrease) in notes payable (3,782) 2,224 Increase in accounts payable 132,544 142,105 Increase in other payable 379,734 109,652 Increase in other current liabilities 15,555 51 Increase in provisions 254 938 Increase in deferred revenue 52,389 - Total net change in operating liabilities 576,694 254,970 Total net change in operating assets and liabilities 4,283 (165,691) Total adjustments 201,462 (432) Cash inflows from operating activities 929,729 636,163 Interest received 15,045 11,035 Income taxes paid (208,866) (155,880) Net cash provided by operating activities 735,908 491,318 Cash flows from investing activities: Acquisition of subsidiaries (1,410,945) - Acquisition of property, plant, and equipment (175,438) (66,103)

Disposal of property, plant, and equipment 1,352 2,032 Acquisition of intangible assets (53,674) (1,471) Decrease in other financial assets 16,363 -

Decrease (increase) in other non-current assets 264,818 (2,939) Increase in prepayment for equipment (18,763) (10,710) Net cash used in investing activities (1,376,287) (79,191) Cash flows from financing activities: Increase (decrease) in short-term loans (22,291) 42,890 Proceeds from Long-term Borrowing 359,250 - Repayments in long-term Borrowing (176,359) (94,300) Increase (decrease) in deposits received (63) 2,089 Decrease in capital lease liabilities (12,851) (12,726) Employee stock option exercised 3,410 2,489 Purchase of treasury stock (75,473) (108,543) Interest paid (9,218) (1,701) Change in non-controlling interests (188,051) (192,756) Net cash used in financing activities (121,646) (362,558) Effect of exchange rate changes (176,275) (54,692) Net decrease in cash and cash equivalents (938,300) (5,123) Cash and cash equivalents, beginning of period 3,723,343 2,554,950 Cash and cash equivalents, end of period $ 2,785,043 2,549,827

(Continued)

TAIWAN SEMICONDUCTOR CO., LTD.AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2016 and 2015 (amounts expressed in thousands of New Taiwan dollars, unless otherwise specified)

1. Organization and Principal Activities TAIWAN SEMICONDUCTOR CO., LTD. (the Company) was incorporated in January 1979 under the Company Act of the Republic of China. Its major business activities are the manufacture and sale of rectifiers and bar code printers. The Company’s common stock has been officially listed and traded on the GreTai Securities Market starting from February 2000. In order to improve operating efficiency and industry competitiveness from specialization, the Company restructured its business and organization. The Company separated its bar code printer business unit from itself and transferred it to establish TSC Auto ID Technology Co., Ltd. (TSC Auto ID). The board of directors’ meeting approved August 1, 2007, as the date of record of the split. The Company and its subsidiaries are referred to as the Group. The Group primarily is involved in the manufacture and sale of rectifier and bar code printers.

2. Approval date and procedures of the interim consolidated financial statements

These consolidated financial statements were authorized for issuance by the board of directors on August 10, 2016

3. New standards and interpretations adopted (a) Impact of the International Financial Reporting Standards (“IFRSs”) endorsed by the Financial

Supervisory Commission, R.O.C. ("FSC") but not yet in effect

According to Ruling No. 1050026834 issued on July 18, 2016 by the FSC, public entities are required to conform to the IFRSs which were issued by the International Accounting Standards Board (IASB) before January 1, 2016, and were endorsed by the FSC on January 1, 2017 (excluding IFRS 9 "Financial Instruments", IFRS 15 "Revenue from Contracts with Customers", and others which have yet to be approved by the FSC in order for them to take effect) in preparing their financial statements. The related new standards, interpretations and amendments are as follows:

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(Continued)

New, Revised or Amended Standards and Interpretations

Effective date

per IASB

Amendments to IFRS 10, IFRS 12 and IAS 28 "Investment Entities:

Applying the Consolidation Exception"

January 1, 2016

Amendments to IFRS 11 "Accounting for Acquisitions of Interests in

Joint Operations"

January 1, 2016

IFRS 14 "Regulatory Deferral Accounts" January 1, 2016

Amendment to IAS 1 "Disclosure Initiative" January 1, 2016

Amendments to IAS 16 and IAS 38 "Clarification of Acceptable Methods

of Depreciation and Amortization"

January 1, 2016

Amendments to IAS 16 and IAS 41 "Agriculture: Bearer Plants" January 1, 2016

Amendments to IAS 19 "Defined Benefit Plans: Employee Contributions" July 1, 2014

Amendment to IAS 27 "Equity Method in Separate Financial Statements" January 1, 2016

Amendments to IAS 36 "Recoverable Amount Disclosures for

Non-Financial Assets"

January 1, 2014

Amendments to IAS 39 "Novation of Derivatives and Continuation of

Hedge Accounting"

January 1, 2014

Annual improvements cycles 2010-2012 and 2011-2013 July 1, 2014

Annual improvements cycle 2012-2014 January 1, 2016

IFRIC 21 "Levies" January 1, 2014

The Group assessed that the initial application of the above IFRSs would not have any material impact on its consolidated financial statements. i) IFRIC 21 "Levies"

This Interpretation addresses the accounting for a liability to pay a levy if that liability is within the scope of IAS 37 "Provisions, Contingent Liabilities and Contingent Assets". According to the new Interpretation, the obligating event that gives rise to a liability to pay a levy is the activity that triggers the payment of the levy, as identified by the legislation.

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(Continued)

ii) Amendments to IAS 36 "Recoverable Amount Disclosures for Non-Financial Assets"

The amendments to IAS 36 requires the Group to disclose the fair value hierarchy and valuation assumptions if an assets or CGU’s recoverable amount has been determined on the basis of fair value, less, costs of disposal. The Group will increase the relevant disclosures in accordance with this new standard.

(b) Newly released or amended standards and interpretations not yet endorsed by the FSC

A summary of the new standards and amendments issued by the IASB but not yet endorsed by the FSC as of the end of reporting date is as follows:

New, Revised or Amended Standards and Interpretations

Effective date per

IASB

IFRS 9 "Financial Instruments" January 1, 2018

Amendments to IFRS 10 and IAS 28 "Sale or Contribution of Assets

Between an Investor and Its Associate or Joint Venture"

Effective date to be

determined by IASB

IFRS 15 "Revenue from Contracts with Customers" January 1, 2018

IFRS 16 "Leases" January 1, 2019

Amendment to IFRS 2 "Clarifications of Classification and

Measurement of Share-based Payment Transactions"

January 1, 2018

Amendment to IFRS 15 "Clarifications of IFRS 15" January 1, 2018

Amendment to IAS 7 "Disclosure Initiative" January 1, 2017

Amendment to IAS 12 "Recognition of Deferred Tax Assets for

Unrealized Losses"

January 1, 2017

The above the standards and amendments will have no significant impact on the consolidated financial statements of the Group.

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(Continued)

4. Significant accounting policies (a) Statement of Compliance

These consolidated interim financial statements have been prepared in accordance with the Regulations Governing the Preparation of Financial Reports by Securities Issuers (hereinafter referred to the Regulations) and the guidelines of International Accounting Standard 34 Interim Financial Reporting (“IAS 34”) which are endorsed by FSC. These interim financial statements do not include all of the information required by the Regulations and the International Financial Reporting Standards, International Accounting Standards, IFRIC Interpretations and SIC Interpretations endorsed by the FSC (hereinafter referred to the IFRSs endorsed by the FSC) for full annual financial statements. Except as described in the following paragraphs, the significant accounting policies in the preparation of the accompanying interim consolidated financial statements are applied consistently to the consolidated financial statement for the year ended December 31, 2015. For other related information, please refer to the consolidated financial statements for the year ended December 31, 2015.

(b) Basis of Consolidation

i) List of subsidiaries in the consolidated financial statements

Shareholding

Name of investor Name of subsidiary Principal activityJune 30,

2016 December 31,

2015 June 30,

2015 The Company Ever Energetic Int'l Ltd.

(Ever Energetic) Holding company and general import and export business

100.00% 100.00% 100.00%

The Company Ever Winner Int'l Co., Ltd. (Ever Winner)

Holding company and general import and export business

100.00% 100.00% 100.00%

The Company Skyrise Int'l Ltd. (Skyrise) Holding company and general import and export business

100.00% 100.00% 100.00%

The Company Taiwan Semiconductor Europe GmbH (TSCE)

General import and export business 100.00% 100.00% 100.00%

The Company Taiwan Semiconductor Japan Ltd. (TSCJ)

Trading of rectifiers 100.00% 100.00% 100.00%

The Company Taiwan Semiconductor (H.K.) Co., Ltd. (TSCH)

Holding company and trading of rectifiers

25.22% 25.22% 25.22%

The Company TSC Auto ID Technology Co., Ltd. (TSC Auto ID)

Manufacture and sale of bar code printers

36.46% 36.78% 36.88%

Ever Energetic Taiwan Semiconductor (H.K.) Co., Ltd. (TSCH)

Holding company and trading of rectifiers

36.96% 36.96% 36.96%

Ever Energetic TSC America, Inc. (TSCA) Trading of rectifiers 75.00% 75.00% 75.00%Ever Winner Taiwan Semiconductor

(H.K.) Co., Ltd. (TSCH) Trading of rectifiers 37.82% 37.82% 37.82%

Ever Winner TSC America, Inc. (TSCA) Trading of rectifiers 25.00% 25.00% 25.00%Ever Winner Shanghai Great

Technology Trading Co., Ltd. (TSCC)

Trading of rectifiers 100.00% 100.00% 100.00%

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(Continued)

Shareholding

Name of investor Name of subsidiary Principal activityJune 30,

2016 December 31,

2015 June 30,

2015 TSCH Yangxin Everwell

Electronic Co., Ltd. (Yangxin Everwell)

Manufacture and sale of rectifiers

100.00% 100.00% 100.00%

TSCH Tianjin Everwell Technology Co., Ltd. (Tianjin Everwell)

Manufacture and sale of wafers

100.00% 100.00% 100.00%

TSC Auto ID TSC Auto ID Technology EMEA GmbH (TSCAE)

Trading of bar code printers and other parts

100.00% 100.00% 100.00%

TSC Auto ID TSC Auto ID (H.K.) Ltd. (TSC HK)

Holding company and general import and export business

100.00% 100.00% 100.00%

TSC Auto ID TSC Auto Technology America Inc. (TSCAA)


100.00% 100.00% 100.00%

TSC Auto ID Printronix Auto ID Technology Co., Ltd.(Printronix AD)


100.00% 100.00% -

TSC Auto ID &TSCAA

Printronix Auto ID Technology Co., Ltd.(PTNX US)


100.00% - -

TSCAE TSC Auto ID Technology ME, Ltd. FZE (TSCAD)


100.00% 100.00% 100.00%

TSCAE TSC Auto ID Technology Spain, S.L. (TSCAS)


100.00% 100.00% 100.00%

TSC HK Tianjin TSC Auto ID Technology Co., Ltd. (TTSC)

Manufacture and sale of bar code printers and other parts

100.00% 100.00% 100.00%

TSC HK Shenzhen Printronix Auto

ID Technology Co., Ltd. (SPTNX)

Sale of bar code printers and other parts

100.00% - -

ii) Unlisted subsidiaries in the consolidated financial statements: None.

(c) Employee benefits

Pension cost for an interim period is calculated on a year-to-date basis by using the actuarially determined pension cost rate at the end of the prior financial year, adjusted for significant market fluctuations since that time and for significant curtailments, settlements, or other significant one-off events.

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(d) Income Taxes

Tax expense in the interim financial statements is measured and disclosed according to paragraph B12 of IAS 34 “Interim financial reporting”. Income tax expense for the period is estimated by multiplying the pretax income for the interim reporting period using the effective annual tax rate as forecasted by the management. This is fully recognized as income tax expense for the current period.

Deferred income taxes are determined based on the differences between the financial statements and the tax basis of assets and liabilities using the enacted tax rates in effect during the years in which the differences are expected to reverse.

(e) Business combination

The Group bought out an existing of company in the first quarter of 2016 and gained control over it. Hence, the Group applied the business combination accounting policy on its financial statements on January 1, 2016. Goodwill is measure at the consideration transferred, less, the amounts of identifiable assets acquired and liabilities assumed (generally at fair value) at the acquirement date. All transaction costs relating to a business combination are recognized immediately as expenses when incurred, except for the issuance of debt or equity instruments. In a business combination achieved in stages, the Group shall re-measure its previously held equity interest in the acquiree at its acquisition- date fair value and recognize the resulting gain or loss, if any, in profit or loss. In the prior reporting periods, the Group may have recognized the changes in the value of its equity interest in the acquiree in other comprehensive income. If so, the amount that was recognized in other comprehensive income shall be recognized on the same basis as would be required if the Group had disposed directly of the previously held equity interest. If the disposal of the equity interest required a reclassification to profit or loss, such and amount shall be reclassified to profit or loss. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group shall report in its financial statements the provisional amounts for the items for which the accounting is incomplete. During the measurement period, the Group shall retrospectively adjust the provisional amounts recognized at the acquisition date, or recognize the additional assets or liabilities to reflect the new information obtained about the facts and circumstances that existed as of the acquisition date. The measurement period shall not exceed one year from the acquisition date.

7



(Continued)

5. Significant accounting assumptions and judgments, and major sources of estimation uncertainty

The preparation of the consolidated quarterly financial statements in conformity with IFRSs (in accordance with IAS 34 “Interim financial reporting” and approved by the FSC) requires management to make judgments, estimates and assumptions that affect the application of the accounting policies and the reported amount of assets, liabilities, income and expenses. Actual results may differ from these estimates. In the preparation of the consolidated quarterly financial statements, the major sources of accounting assumptions, judgments and estimation uncertainty are consistent with the 2015 annual financial statements prepared under IFRSs (approved by the FSC).

6. Significant Account Disclosures

Except as described in the following paragraphs, there were no significant changes with those disclosed in the 2015 annual consolidated financial statements. Pleases refer to the 2015 annual consolidated financial statements. (a) Cash and cash equivalents

June 30,

2016 December 31,

2015 June 30,

2015 Cash on hand $ 810 893 676Checking and savings accounts 2,211,670 2,847,642 1,849,454Time deposits 372,563 534,808 479,697Guaranteed deposit with short-term rate 200,000 340,000 220,000 $ 2,785,043 3,723,343 2,549,827

(b) Financial instruments

i) The financial instruments held by the Company were as follows:

June 30, 2016

December 31, 2015

June 30, 2015

Current:

Financial assets at fair value through profit or loss

Open-end funds $ 431,084 340,592 440,257Forward exchange contracts 8,473 2,671 5,814Convertible bonds embedded derivative 479 719 -

$ 440,036 343,982 446,071

8



(Continued)

June 30, 2016

December 31, 2015

June 30, 2015

Other financial assets:

Trust account $ 96,852 - - Structure time deposit 48,450 49,950 - Pledge time deposit - 114,888 - $ 145,275 164,838 -

Financial assets at cost – non-current: Shares of unlisted companies $ 956 956 -

Current:

Financial liabilities at fair value through profit or loss

Forward exchange contracts $ 5,880 9,521 5,802Foreign exchange option 782 - - $ 6,662 9,521 5,802Other financial assets:

Refundable deposits $ 20,070 20,010 18,170

Please refer to note 6(s) for the disclosures of credit risk exposures, currency risk exposures, and interest rate risk exposures. Please refer to note 8 for details on mortgaged and pledged assets.

ii) The Company uses derivative financial instruments to hedge certain foreign exchange exposures arising from its operating activities. The Company held the following derivative financial instruments presented as held-for-trading financial assets (liabilities):

June 30, 2016

Contract amount Currency Contract period

Selling/buying forward USD 12,500 /CNH 82,272 USD to CNH 2016.07~2016.10

Selling/buying forward EUR 2,200 /USD 2,475 EUR to USD 2016.07~2016.12

Selling/buying forward USD 1,500 /TWD 48,799 USD to TWD 2016.07~2016.08

Selling/buying forward EUR 4,627 /TWD 157,843 EUR to TWD 2016.07~2017.01


Foreign exchange option USD 900 /TWD 29,340 USD to TWD 2016.07

Foreign exchange option EUR 1,000 /USD 1,174 EUR to USD 2016.07~2016.12

9



(Continued)

December 31, 2015





Selling/buying forward EUR 200 /USD 229 EUR to USD 2016.01

June 30, 2015





Selling/buying forward USD 1,913 /TWD 59,332 USD to TWD 2015.07~2015.09


iii) Trust account

TSC Auto ID deposited USD$ 3,000 in trust account on settlement date for acquisition arrangement of contingent consideration. Please refer to note 6(r).

iv) Financial assets carried at cost held by the Company are those that do not have a quoted

market price in an active market and whose fair value cannot be reliably measured and, as a result, are measured at cost.

(c) Notes and accounts receivable, net

June 30, 2016

December 31, 2015

June 30, 2015

Notes receivable $ 40,148 23,395 24,745 Accounts receivable 1,865,447 1,718,678 1,640,728 Less: allowance for doubtful accounts (26,763) (25,717) (23,099)

allowance for sales returns and discounts (24,405) (21,421) (21,749) $ 1,854,427 1,694,935 1,620,625

10



(Continued)

The Group’s overdue, but not yet impaired, notes and accounts receivable aging analysis are as follows: June 30,

2016December 31,

2015 June 30,

2015 1~3 months overdue $ 229,861 188,125 187,264 4~6 months overdue 24,664 7,395 3,044 7~9 months overdue 375 586 1,018 10~12 months overdue 3,092 1,185 - Over a year overdue 2,585 2,104 1,998 $ 260,577 199,395 193,324 The movement in the provision for impairment with respect to notes and accounts receivable of the Group: Collectively

assessed impairment

As of January 1, 2016 $ 25,717 Impairment loss recognized 1,012 Effect of movement in exchange rates 34 As of June 30, 2016 $ 26,763 Collectively

assessed impairment

As of January 1, 2015 $ 22,917 Impairment loss recognized 373 Effect of movement in exchange rates (191) As of June 30, 2015 $ 23,099 The recognition of allowance for doubtful account is base on the current economic circumstances, customers’ historical payment behavior, and extensive analysis of the customers’ creditability.

11



(Continued)

(d) Inventories

June 30, 2016

December 31, 2015

June 30, 2015

Finished goods $ 694,769 650,784 636,993 Less: provisions for obsolescence and

devaluation (29,843) (43,309) (45,199) 664,926 607,475 591,794 Work in process 353,900 224,462 247,692 Less: provisions for obsolescence and

devaluation (15,897) (20,010) (20,875) 338,003 204,452 226,817 Raw material and supplies 407,712 343,567 283,887 Less: provisions for obsolescence and

devaluation (10,997) (11,454) (13,069) 396,715 332,113 270,818 Inventories in transit 80,836 36,285 57,348 $ 1,480,480 1,180,325 1,146,777 Raw material, consumables and changes in finished goods, and work in progress recognized as cost of sales amounted to $1,409,638, $1,286,406, $2,661,287, and $2,454,908 from April 1 to June 30, 2016 and 2015, and from January 1 to June 30, 2016 and 2015, respectively. The write-down of inventories to net realizable value amounting to $1,621 was included in the cost of goods sold for the six-month ended June 30, 2015. The write off of valuation allowance due to obsolescence of inventories resulted in a reduction in the cost of goods sold amounting to $19,020, $4,534, and $17,301 from April 1, 2016 and 2015 to June 30, 2016 and 2015, and for the three-month and the six-month ended June 30, 2016, respectively.

As of June 30, 2016 and June 30 and December 31, 2015, none of the inventories of the Group were pledged as collateral.

12



(Continued)

(e) The significant non-controlling interests of subsidiaries The subsidiaries’ non-controlling interests that have significant effect on the Group were as follows: Percentage of non-controlling

interests on ownership interests and voting rights

Name of subsidiary Country

June 30, 2016

December 31, 2015

June 30, 2015

TSC Auto ID Technology Co., Ltd.

(TSC Auto ID) Taiwan 63.54% 63.22% 63.12% The financial statement of TSC Auto ID has been prepared in accordance with the IFRSs endorsed by the FSC. The summary of financial information for TSC Auto ID was as follows. This financial information is disclosed in the amounts before the elimination on transactions between the Group. The summary of financial information: June 30,

2016 December 31,

2015 June 30,

2015 Current assets $ 2,400,254 2,890,300 1,925,782 Non-current assets 2,610,702 1,194,102 911,172 Current liabilities (1,670,014) (815,550) (1,135,248)Non-current liabilities (1,479,614) (1,347,954) (181,469)Net assets $ 1,861,328 1,920,898 1,520,237 Non-controlling interests $ 1,141,689 1,191,814 941,955

For the Three Months Ended

June 30 For the Six Months Ended

June 30 2016 2015 2016 2015 Sales revenue $ 922,112 745,474 1,620,083 1,315,791Net income $ 159,959 169,780 261,827 271,585Other comprehensive income (39,418) (33,046) (10,527) (29,983)Comprehensive income $ 120,541 136,734 251,300 241,602Net income attributable to non-

controlling interests $ 101,638 107,165 166,080 171,424Comprehensive income

attributable to non-controlling interests $ 95,150 104,532 137,926 163,342

13



(Continued)

For the Three Months Ended June 30

For the Six Months Ended June 30

2016 2015 2016 2015 Cash flows from operating

activities $ 106,325 328,188Cash flows from investing

activities (1,305,136) (99,421)Cash flows from financing

activities 158,441 (42,344)Effect of exchange rate changes 6,262 (9,529)Net increase (decrease) in cash and

cash equivalents

$ (1,034,108) 176,894

(f) Property, plant and equipment

LandBuilding and construction

Machinery and other

equipmentLease

property Under

construction Total Carrying amount: Balance at January 1, 2016 $ 478,532 1,175,619 1,035,463 319,789 - 3,009,403 Balance at June 30, 2016 $ 478,532 1,142,313 1,067,910 319,789 - 3,008,544 Balance at January 1, 2015 $ 478,532 1,099,043 1,181,432 319,789 1,904 3,080,700 Balance at June 30, 2015 $ 478,532 1,194,447 1,072,725 319,789 - 3,065,493

i) For the six months ended June 30, 2016 and 2015, there were no significant additions,

disposal, impairment loss, or reversal gain on property, plant and equipment. Please refer to note 12 for the details of depreciation on property, plant and equipment, and to the consolidated financial statements for the year ended December 31, 2015 for other related information.

ii) Leased assets

The Group signed land lease agreements with the Ministry of Economic Affairs in Taiwan to lease land in the Letzer Industrial Park for the construction of plants. The leases are over a period of 20 years, and rent is paid every 3 months. Rent is calculated as the land’s assessed price multiplied by its annual rent rate. The assessed price is adjusted yearly according to the consumer price index, and the annual rental rate is based on the mid/long-term capital loan interest rate as prescribed by the Executive Yuan and recalculated every half-year. The lease deposit is equivalent to 3-6 times the monthly rent at the inception of the lease. At any time during the lease, the Group may purchase the leased land at the pre-determined price. The rent already paid during the lease may be used to offset the purchase price; therefore, the Group classifies the lease under capital lease.

14



(Continued)

The Group provided bank certificates of deposit and security deposits as lease guarantee. The land valuation and annual lease rate should be adjusted periodically. As of June 30, 2016 and 2015, the leasehold land cost was revised as $319,789.

iii) Pledged as collateral

Please refer to note 8 for disclosures on property, plant and equipment pledged as collateral.

iv) Interest capitalized

Interest capitalized for purchasing property, plant and equipment for the six months ended June 30, 2016 and 2015, amounted to $107 and $110, respectively. The interest capitalization rates were 3.00%.

(g) Intangible assets

Goodwill Acquired

special technology

Customer relationship Patent Software

Trademarks rights Total

Cost : Balance at 1 January, 2016 $ - - - - 36,984 135 37,119Additions - - - 50,607 3,067 - 53,674Acquisition through business

combinations (note6(r)) 1,178,385 154,560 218,400 - - - 1,551,345

Sales of assets - - - - (532) - (532)Effect of movement in exchange rates (46,469) (6,095) (8,612) - (300) - (61,476)Balance at June 30, 2016 $ 1,131,916 148,465 209,788 50,607 39,219 135 1,580,130Balance at January 1, 2015 $ - - - - 35,848 135 35,983Additions - - - - 1,471 - 1,471Effect of movement in exchange rates - - - - (353) - (353)Balance at June 30, 2015 $ - - - - 36,966 135 37,101Accumulated amortization: Balance at January 1, 2016 $ - - - - 20,983 93 21,076Amortization for the year - 6,243 12,603 3,163 3,173 10 25,192Sales of assets - - - - (532) - (532)Effect of movement in exchange rates - (57) (115) - (75) - (247)Balance at June 30, 2016 $ - 6,186 12,488 3,163 23,549 103 45,489 Balance at January 1, 2015 $ - - - - 16,217 71 16,288Amortization for the year - - - - 3,086 11 3,097Effect of movement in exchange rates - - - - (146) - (146)Balance at June 30, 2015 $ - - - - 19,157 82 19,239Carrying value: Balance at January 1, 2016 $ 16,001 42 16,043Balance at June 30, 2016 $ 1,131,916 142,279 197,300 47,444 15,670 32 1,534,641Balance at January 1, 2015 $ 19,631 64 19,695Balance at June 30, 2015 $ 17,809 53 17,862

15



(Continued)

Amortization is recognized on a straight-line basis over the estimated useful lives of intangible assets: Acquired special technology patent 10 years Customer relationship 7 years Patent 10 years Software 3~10 years Trademarks rights 6 years

(h) Short term borrowings

June 30, 2016

December 31, 2015

June 30, 2015

Secured loans $ 145,238 114,888 - Credit loans - 50,000 - Import loans 290,475 295,425 327,740 $ 435,713 460,313 327,740Interest rate range (%) 1.10%~1.95% 1.00%~1.44% 0.72%~1.50%

Please refer to note 6(s) for the disclosures of interest rate risk exposures, currency risk exposures, and liquidity risk exposures. Please refer to notes 8 and 9 for details on mortgaged and pledged assets.

(i) Long term borrowings

June 30,

2016 December 31,

2015 June 30,

2015 Secured bank loan $ 180,739 - - Less: Current portion of long-term

borrowings (106,507) - - $ 74,232 - - Interest rate range (%) 2.45% - % - %

Please refer to note 6(s) for the disclosures of interest rate risk exposures, currency risk exposures, and liquidity risk exposures. Please refer to note 8 for details on time deposits, mortgaged and pledged assets.

16



(Continued)

(j) Bonds payable

June 30,

2016 December 31,

2015 June 30,

2015 Unsecure Convertible $ 1,159,977 1,1521,34 -

On December 31, 2015, TSC Auto ID issued three-year unsecured bonds (the first tranche) with no interest. The bonds had an aggregate face value of $1,200,000 thousand, with each unit having a face value of NT$100 thousand, the offering price was 100.2% of the face value, and its conversion period is from February 1, 2016 to December 31, 2018. The conversion price was $342.8 per share on issuance date, therefore; the conversion price have to be adjusted according to the Anti-dilution policy after the issuance date. After the adjustment, the conversion price amounted to $340.3 per share on June 30, 2016.

Within the period between one month after the issuance date and 40 days before the last convertible date, if (i) the closing price of TSC Auto IDs common shares on the TWSE for a period of 30 consecutive trading days before redemption has been at least 30% of the conversion price in effect on each such trading day, or (ii) in the event that at least 90% of the principal amount of the bonds originally outstanding has been redeemed, TSC Auto ID may redeem all bonds at face value by cash.

The convertible bonds include assets, liabilities and equity. The equity components were accounted for by TSC Auto ID as paid-in capital – redemption right. The effective interest rate is 1.36%.

June 30,

2016

Convertible bonds issued (less the transaction costs of

$5,280) $ 1,197,120 Equity components( less the net of income tax effects of

$35 and transaction costs of $205) (46,603) Asset components (less the net of income tax effects of

$1 and transaction costs of $3) 719 Deferred tax assets 898 Issuance date of liability components (less the net of

income tax effects of $864 and transaction costs of $5,078) 1,152,134

Interest (the effective interest rate is 1.36 %.) 7,843 Balance on June 30,2016, liability components $ 1,159,977

17



(Continued)

(k) Lease For the six months ended June 30, 2016 and 2015, there were no significant additions in contract of operating and finance lease. Please refer to the consolidated financial statements for the year ended December 31, 2015 for other related information.

(l) Employee benefits

i) Defined benefit plans

Management believes that there were no material market volatility, no material reimbursement and settlement or other material one-time events. As a result, the pension cost in the accompanying interim consolidated financial statements was measured and disclosed according to the actuarial report as of December 31, 2015 and 2014. The pension expenses recognized in profit or loss for the Group were as follows: For the Three Months Ended


June 30 2016 2015 2016 2015 Cost of goods sold $ 269 260 539 525Selling expense 110 97 220 181Administrative expense 287 279 575 556Research and development

expense 69 62 137 128 $ 735 698 1,471 1,390

ii) Defined contribution plans

The Group allocates 6% of each employee’s monthly wages to the labor pension personal account at the Bureau of Labor Insurance in accordance with the provisions of the Labor Pension Act. Under this defined contribution plan, the Group contributes a fixed amount to the Bureau of Labor Insurance without additional legal or constructive obligations. For the three months and the six months ended June 30, 2016 and 2015, the Group’s pension costs under the defined contribution method were $6,095, $6,130, $13,569, and $12,048, respectively. Payment was made to the Bureau of Labor Insurance. The pension cost of foreign subsidiaries recognized in accordance with the local defined contribution method amounted to $13,438, $12,398, $27,344, and $25,365 for the three months and the six months ended June 30, 2016 and 2015, respectively.

18



(Continued)

(m) Income tax

i) The components of income tax expense for the Group were as follows:



2016 2015 2016 2015 Current tax expense: Current income tax $ 105,989 91,694 240,846 187,728Prior years income tax

adjustment - - 72 - 105,989 91,694 240,918 187,728Deferred income tax: Recognition and reversal

of temporary differences 16,849 12,503 (28,924) (7,614)Total $ 122,838 104,197 211,994 180,114

ii) The amount of income tax recognized in other comprehensive income for the Group were as

follows:



2016 2015 2016 2015 Items that may be reclassified subsequently to profit or loss:

Foreign currency translation differences of foreign operations $ (2,060) (855) (9,075) (2,623)

iii) There was no income tax recognized directly in equity for the three months and six months

ended June 30, 2016 and 2015, respectively. iv) As of June 30, 2016, the income tax returns of the Company through the year 2013 have been

approved by the Tax Authority. The Company has different opinions from the Tax Authority for its 2013 income tax return and has requested for a reexamination. The income tax returns of TSC Auto ID through the year 2013 have been approved by the Tax Authority.

19



(Continued)

v) Related information about the integrated income tax system is as follows:

June 30, 2016

December 31, 2015

June 30, 2015

Unappropriated earnings of 1997 and

before $ 137,861 137,861 150,283 Unappropriated earnings of 1998 and after 1,040,522 1,367,686 877,951 $ 1,178,383 1,505,547 1,028,234 Balance of deductible tax account $ 152,906 93,136 102,567

2015 (actual)

2014 (actual)

Creditable ratio for earnings distribution to ROC residents 12.76 % 10.61 % The above information on the integrated income tax system is in accordance with the provision of Tai-Tsai-Shui No. 10204562810 issued by the Ministry of Finance on October 17, 2013.

vi) Since funds are needed for expanding the overseas operations, the earnings of the Company’s

overseas subsidiaries will not be transferred back in the short run. In accordance with paragraph A39 of IAS 12 “Income Taxes”, the earnings’ book-tax difference should be considered permanent.

(n) Stockholders’ equity

i) Common stocks

In March 2015, the Company retired treasury stocks, and $50,000 of common stock, $99,215 of capital surplus, and $12,422 unappropriated earnings were eliminated. The related registration processes were completed. The Company issued employee stock options. A total of 288.3 and 196.5 applications for stock options were submitted and a total of 288.3 thousand and 196.5 thousand ordinary shares were issued for the six months ended June 30, 2016 and 2015, respectively, with a face value of $10 (dollars) per share. This action resulted in a premium of $527 and $524 when the price exceeds the ordinary share price, and this premium should be recognized as employee stock option premium under retained earnings.

20



(Continued)

As of June 30, 2016, December 31, 2015, and June 30, 2015, the authorized capital amounted to $3,600,000 (including the amount of $100,000 authorized for the issuance of the employee stock options); the Company’s outstanding capital amounted to $2,403,026, $2,400,143, and $2,388,108, respectively, with a par value of $10 (dollars) per share.

ii) Capital surplus

June 30, 2016

December 31, 2015

June 30, 2015

Premium on shares issued above par value $ 407,294 407,924 407,293Conversion premium of convertible

corporate bonds 409,712 409,712 409,712Treasury stock transactions 39,650 15,400 15,400Employee stock options premium 21,036 19,532 12,657Interest compensation payable on

convertible corporate bonds 17,020 17,020 17,020Employee stock options 3,987 4,770 8,831Change in affiliates recognized under equity

method 27,845 10,180 9,350 $ 926,544 883,908 880,263 According to the ROC Company Act, the realized capital surplus may be used to offset a deficit or distributed as cash or stock by the original ownership percentage if there is no accumulated deficit. Capital surplus includes the income derived from the issuance of new shares at a premium and income from donations received by a company. According to the current Securities and Futures Bureau regulations, capitalization of capital surplus cannot exceed a rate of ten percent.

iii) Legal reserve According to the ROC Company Act, the Company must retain 10% of its annual income as a legal reserve until such retention equals the amount of authorized common stock. Legal reserve can only be used to offset an accumulated deficit. If there are earnings at year-end, where legal reserve is distributed by issuing new shares or by cash, only the portion of legal reserve which exceeds 25% of the paid-in capital may be distributed, subject to the approval of the Company’s stockholders.

21



(Continued)

iv) Special reserve According to ROC SFB regulations, an ROC publicly listed company should retain a special reserve equal to any deductions from stockholders’ equity before distribution of earnings. If the aforementioned deduction from stockholders’ equity is reversed, the same amount could be removed from special reserve and transferred to unappropriated earnings. The remaining earnings may be distributed as stockholders’ dividends. The increase in retained earnings occurring before the adoption date due to the first-time adoption of IFRSs amounted to $302,150. In accordance with Ruling No. 1010012865 issued by the Financial Supervisory Commission on April 6, 2012, an increase in retained earnings due to the first-time adoption of IFRSs shall be reclassified as a special earnings reserve during earnings distribution. When the relevant assets are used, disposed of, or reclassified, this special earnings reserve shall be reversed as distributable earnings proportionately. The carrying amount of special earnings reserve amounted to $302,150 on June 30, 2016 and 2015. In accordance with the guidelines of the above Ruling, a portion of current-period earnings and undistributed prior-period earnings shall be reclassified as a special earnings reserve during earnings distribution. The amount to be reclassified should be equal to the difference between the total net current-period reduction of special earnings reserve resulting from the first-time adoption of IFRSs and the carrying amount of other shareholders’ equity as stated above. Similarly, a portion of undistributed prior-period earnings shall be reclassified as a special earnings reserve (which does not qualify for earnings distribution) to account for cumulative changes to other shareholders’ equity pertaining to prior periods due to the first-time adoption of IFRSs. Amounts of subsequent reversals pertaining to the net reduction of other shareholders’ equity shall qualify for additional distributions.

v) Distribution of earnings and dividend policy In accordance with the Company’s articles of incorporation, if there are appropriate earnings at year-end. The after-tax earnings shall first be offset against any deficit, and 10% should be set aside as legal reserve. The appropriation for legal reserve is discontinued when the balance of the legal reverse equals the total authorized capital. Special capital reserve may be appropriated in accordance with relevant laws. The remaining balance of the earnings can be distributed in accordance with a resolution decided during a meeting of the Board of Directors and approved at the Stockholders ’ meeting. According to the stock dividend policy of the Company, in consideration of the future capital needs, operational development, capital needs, international and domestic competiveness, and stockholders’ benefits, cash dividends cannot be lower than 10% of total stock dividends. However, stock dividends, instead of cash dividends, are distributed if the cash dividends per share are less than $0.2 (dollars).

22



(Continued)

The annual shareholders’ meeting on June 13, 2016 and June 18, 2015 resolved to distribute earnings as dividends and remuneration to employees and directors in 2015 and 2014 as follows: 2015 2014 Amount

per share Total

Amount Amount

per share Total

Amount (dollars) (dollars) Dividends distributed to common

shareholders: Cash $ 2.50 600,756 2.00 477,622

Employee bonuses – cash $ 42,990 Directors’ remuneration 5,374 Total $ 48,364 The above distributions were consistent with the Company’s financial reports. Related information is available on the Market Observation Post System website.

vi) Treasury stocks

During the months of December 2014 and January 2015, in accordance with Article 28-2 of the Securities and Exchange Act regulated on December 2014 and January 2015, the Company repurchased 5,000 thousand common shares of stock, with a total value of $161,637, in order to protect the Company’s integrity and shareholders’ equity. As of March 2015, the Company had cancelled this treasury stock, and the Company has registered the change with the relevant authorities. Please refer to the Common stocks description. In accordance with the Securities and Exchange Act, the number of shares of treasury stock shall not exceed 10% of the total shares of common stock issued by the Company. The total carrying amount of treasury stock shall not exceed the total amount of retained earnings plus additional paid-in capital and realized capital surplus. As of June 30, 2016, the Company could repurchase no more than 24,030 thousand shares, with a total value of no more than $2,605,909. The situation stated above did not occur as of June 30, 2016 for the Company. In accordance with Securities and Exchange Act requirements, treasury shares held by the Company should not be pledged, and do not hold shareholder rights before their transfer. As of June 30, 2016, a subsidiary of the Company, TSC Auto ID, held 9,700 thousand shares of the Company with a total value of $269,762, recognized under treasury stock.

23



(Continued)

As of year-end 2016 and 2015, the Company had recognized dividend income received from its TSC Auto ID subsidiary in the amount of $24,250 and $15,400, and the total amount were transferred to capital surplus – treasury stock under the equity method.

vii) Other equity

Foreign exchange differences arising

from foreign operation Balance as of January 1, 2016 $ 100,866 Foreign exchange differences (89,012) Balance as of June 30, 2016 $ 11,854 Balance as of January 1, 2015 $ 140,319 Foreign exchange differences (72,753) Balance as of June 30, 2015 $ (67,566)

(o) The employee bonuses and directors’ remuneration

In accordance with the Company’s articles of incorporation, require that earnings shall first be offset against any deficit, then, a range from 4% to 10% will be distributed as employee remuneration and a maximum of 1% will be allocated as directors’ remuneration. Employees who are entitled to receive the above mentioned employee remuneration, in shares or cash, include the employees of the subsidiaries of the Company who meet certain specific requirements.

The Company estimated its remuneration to employees amounting to $11,250, $11,400, $24,500 and $22,880 for the three months and six months ended June 30, 2016, and 2015, respectively; and the Company estimated its remuneration to directors amounting to $1,885, $1,500, $4,085 and $3,000 for the three months and six months ended June 30, 2016 and 2015, respectively. The estimated amounts mentioned above are based on the net profit before tax of each respective ending period, multiplied by the percentage of the remuneration to employees and directors, as specified in the Company’s article. The estimations are recorded under operation expenses. The differences between the estimated amounts in financial statements and the actual amounts approved by the Board of Directors, if any, shall be accounted for as changes in accounting estimates and recognized as profit or loss in following year.

The remuneration to employees and directors amounted to $57,174 and $9,529, respectively, in 2015. There were no differences between the estimated amounts and the actual amounts approved by the Board of Directors. The related information can be accessed from market observation post system website.

24



(Continued)

(p) Share-based payment

There were no significant changes on share-based payment for the six months ended June 30, 2016 and 2015. Please refer to the 2015 annual consolidated financial statements.

(q) Earnings per share

i) Basic earnings per share



2016 2015 2016 2015 Net income $ 172,476 132,527 350,193 280,057Weighted-average number of

outstanding shares (thousands) 231,901 231,111 232,197 231,129

Basic earnings per share $ 0.74 0.60 1.51 1.23 ii) Diluted earnings per share



2016 2015 2016 2015 Net income $ 172,476 132,527 350,193 280,057Weighted-average number of

outstanding shares (thousands) 231,901 231,111 232,197 231,129

Employee stock options 855 1,511 855 1,511 Employee bonuses 1,293 2,226 1,293 2,226Diluted weighted-average

number of common shares outstanding (thousands) 234,049 234,848 234,345 234,866

Diluted earnings per share $ 0.74 0.56 1.49 1.21

25



(Continued)

(r) Business Combinations

i) Acquisition of subsidiaries

Principal activity acquisition dateShareholding

(％) Consideration

transferred

PTNX US Trading of bar code printers and other parts

January 23, 2016 100 $ 1,574,766

In order to enhance competitiveness, demand and market trend, the board of directors of TSC Auto ID acquired Printronix Auto ID Technology Inc. (PTNX US), formerly Printronix, Inc., and owned 100% of the bar code labeling printers in 2016.

ii) Consideration transferred

PTNX US

Cash $ 1,410,945 Contingent consideration(note (a)) 100,800 Equity instrument issue(note (b)) 63,021 Total $ 1,574,766

a) According to the Acquisition Contract Agreement, PTNX US deposited USD$3,000 to

its trust account on the settlement date. The trust period is calculated based on one year starting from the settlement date. PTNX US shall pay the amount of USD$3,000 to Pioneer Holding Corp (the parent company of Printronix, Inc.) if the contractual terms are met. The payment stated above was calculated based on the fair value of the estimated amount on the acquisition date amounting to USD3,000 (TWD100,800).

b) TSC Auto ID issued 300 thousand shares, with a par value of $10 per share, as a part of

share consideration for acquiring PTNX US. The fair value for ordinary share was determined by the closing price on the acquisition date with the total amount of USD1,875 (TWD63,021).

26



(Continued)

iii) Assets acquired on the acquisition date and liabilities undertaken through fair value

PTNX US

Current assets Inventories $ 38,858 Prepaid expenses 8,116 Non-current assets Property, plant and equipment 7,156 Acquired special technology 154,560 Customer relationship 218,400 Current liabilities product warranty obligations (520) Other payables (6,242) Non-current liabilities Long-term deferred revenue (23,947) $ 396,381

iv) Goodwill arising on acquisition PTNX US

Consideration transferred $ 1,574,766 Less: assumed identifiable assets and liabilities (396,381) Goodwill arising on acquisition $ 1,178,385

Goodwill arising from taking over PTNX US resulting in control premium. The transferred consideration in business combination includes the expected synergies from the combination, the growth of revenue, future market development and the value of PTNX US employees. However, if the transferred consideration does not qualify the intangible assets identification under the recognition terms, it shall not be recognized individually.

v) Net cash flows used in acquisition of subsidiary PTNX US

valuable consideration $ 1,410,945

27



(Continued)

vi) The impact on business performance due to business combination

The business performance from the acquired company on the acquisition date is stated as below: PTNX US Operating revenue $ 156,682 Net income $ 1,997 If the business combination occur at the acquisition date during the accounting period, the operating revenue of the TSC Auto ID would have amounted to $110,849 and $180,953, respectively, and the net income of the TSC Auto ID would have amounted to $7,219 and $4,057 for the three months and the six months ended June 30, 2016, respectively. When business combination had been completed at the acquisition date, the future estimation of operating revenue and net income cannot be applied.

vii) Acquisition of assets TSC Auto ID purchased intellectual property right, inventory, property, plant, and equipment, other assets, less, the related liabilities from Pioneer Holding Corp and its subsidiaries on the acquisition date amounting to USD4,499 (TWD151,168).

(s) Financial Instruments For the six months ended June 30, 2016 and 2015, there were no significant changes in fair value of financial instrument and exposures to credit risk, liquidity risk and market risk, except for the following. Please refer to the consolidated financial statements for the year ended December 31, 2015 for other related information. i) Credit risk

The Group has a wide range of customers and has no significant transactions that only focus on a single customer. Due to the sales dispersion, there is no significant concentration of credit risk on accounts receivable. In order to decrease credit risk, the Group regularly evaluates its customer’s financial condition. The Group does not require its customer to provide any collateral.

28



(Continued)

ii) Market risk

1) Currency risk exposure The Group’s significant exposure to foreign currency risk was as follows:

June 30, 2016 December 31, 2015 June 30, 2015 Exchange

rate Amount (TWD)

Exchange rate

Amount (TWD)

Exchange rate

Amount (TWD)

Financial assets Monetary Items

USD $ 32.275 1,532,010 32.825 1,583,754 30.86 1,357,854EUR 35.89 660,539 35.88 408,138 34.46 203,119JPY 0.3143 155,948 0.2727 124,521 0.2524 119,409

HKD 4.159 465,777 4.235 493,114 3.980 427,678CNY 4.845 1,345,045 4.995 1,217,690 4.973 810,356KRW 0.0280 1,340 0.0280 21,193 0.0277 747

$ 4,160,659 3,848,410 2,919,163Derivative financial

instruments

USD $ 32.275 400 32.825 90 30.86 5,433EUR 35.89 8,073 35.88 2,581 34.46 381

$ 8,473 2,671 5,814Non-monetary items Financial assets at cost-non-current

USD $ 32.275 956 32.825 956 - - Financial liabilities

monetary items USD $ 32.275 556,999 32.825 519,529 30.86 447,983EUR 35.89 22,852 35.88 10,732 34.46 8,826JPY 0.3143 38,562 0.2727 38,675 0.2524 44,884

HKD 4.159 2,284 4.235 4,550 3.980 4,157CNY 4.845 452,174 4.995 446,114 4.973 380,800KRW 0.0280 1,484 0.0280 2,317 0.0277 1,351

$ 1,074,895 1,021,917 880,001Derivative financial

instruments

USD $ 32.275 5,873 32.825 7,377 30.86 111EUR 35.89 789 35.88 2,144 34.46 5,691

$ 6,662 9,521 5,802 The Group’s exposure to foreign currency risk arises from the translation of the foreign currency exchange gains and losses on financial assets and financial liabilities that are denominated in foreign currency.

29



(Continued)

If other variables were held constant, a 3% of appreciation (depreciation) of the TWD against other currencies as of June 30, 2016 and 2015, would have increased or decreased the net profit before tax by $92,656 and $60,935, respectively. As of the three months and six months ended 2016 and 2015, the foreign currency exchange gains (losses), including both realized and unrealized, amounted to $7,813, $3,584, $1,538, and ($37,531), respectively.

2) Interest analysis

The interest rate risk exposure of financial assets and liabilities is disclosed in the note on liquidity risk management. The following sensitivity analysis is based on the exposure to interest rate risk of derivative and non-derivative financial instruments on the reporting date. Regarding the liabilities with variable interest rates, the analysis is on the basis of the assumption that the amount of liabilities outstanding at the reporting date was outstanding throughout the year. The rate of change is expressed as the interest rate increases or decreases by 1% when reporting to management internally, which also represents the Group management’s assessment of the reasonably possible interval of interest rate change. With other variable held constant, if the interest rate had increased or decreased by 1%, the net profit before tax would have increased or decreased by $6,165 and $3,277 for the years ended June 30, 2016 and 2015, respectively.

3) Other price risk

If the equity price changes, the impact of equity price change to other comprehensive income will be as follow, assuming the analysis is based on the same basis for both years and assuming that all other variables considered in the analysis remain the same: Three months ended June 30, 2016 Three months ended June 30, 2015

Prices of securities at the

reporting date

Other comprehensive

income after tax

Net income

Other comprehensive

income after tax

Net income Increasing 3% $ 3,593 3,654

Decreasing 3% $ (3,593) (3,654)

iii) Fair value of financial instruments

1) Categories and Fair value of financial instruments

The fair value of financial assets and liabilities were as follows (including information on fair value hierarchy, but excluding measurements that have similarities to fair value but are not fair value and those fair value cannot be reliably measured or inputs are unobservable in active markets):

30



(Continued)

June 30, 2016

Carrying amount

Level 1

Level 2

Level 3

total


Non derivative financial assets for trading

$ 431,084

431,084

-

-

431,084

Derivative financial assets 8,952 - 8,952 - 8,952 Subtotal 440,036 431,084 8,952 - 440,036

Deposits and receivables Cash and cash equivalents 2,785,043 - - - - Financial assets at cost 956 - - - - Notes and accounts receivable 1,854,427 - - - - Other receivables 42,872 - - - - Other financial assets 165,345 - - - -

Subtotal 4,848,643 - - - - Total $ 5,288,679 431,084 8,952 - 440,036 Financial liabilities at fair value through profit or loss

Derivative financial liabilities $ 6,662 - 6,662 - 6,662 Financial liabilities at amortized cost through profit or loss

Short-term borrowings 435,713 - - - -

Notes and accounts payable 1,174,160 - - - - Other payables 652,673 - - - - Dividends payable 821,377 - - - - Bonds payable 1,159,977 - - - - Long-term borrowings(including due

within one year) 180,739 - - - - Capital lease liabilities (including

current and non-current) 315,125 - - - - Deposits received 2,035 - - - - Subtotal 4,741,799 - - - - Total $ 4,748,461 - 6,662 - 6,662

31



(Continued)

December 31, 2015

Carrying amount

Level 1

Level 2

Level 3

total



$ 340,592

340,592 - -

340,592


Loans and receivables

Cash and cash equivalents 3,723,343 - - - -

Financial assets at cost 956 - - - -

Notes and accounts receivable 1,694,935 - - - -

Other receivables 45,578 - - - - Other financial assets 184,848 - - - -

Subtotal 5,469,660 - - - - Total $ 5,993,642 340,592 3,390 - 343,982

Financial liabilities at fair value through profit or loss


Short-term borrowings 460,313 - - - - Notes and accounts payable 1,045,398 - - - - Other payables 519,695 - - - - Bond payable 1,152,134 - - - - Capital lease liabilities (including

current and non-current) 320,188 - - - -

Deposit received 2,098 - - - - Subtotal 3,499,826 - - - -

Total $ 3,509,347 - 9,521 - 9,521

32



(Continued)

June 30, 2015

Carrying amount

Level 1

Level 2

Level 3

total



$ 440,257

440,257

-

-

440,257


Deposits and receivables Cash and cash equivalents 2,549,827 - - - - Notes and accounts receivable 1,620,625 - - - - Other receivables 72,887 - - - - Other financial assets 18,170 - - - -

Subtotal 4,261,509 - - - - Total $ 4,707,580 440,257 5,814 - 446,071 Financial liabilities at fair value through profit or loss


Short-term borrowings 327,740 - - - - Notes and accounts payable 1,098,136 - - - - Other payables 447,052 - - - - Dividends payable 658,942 - - - - Capital lease liabilities (including

current and non-current) 325,078 - - - - Deposits received 2,089 - - - -

Subtotal 2,859,037 - - - - Total $ 2,864,839 - 5,802 - 5,802

2) Fair value valuation technique of financial instruments not measured at fair value The Group uses the following methods in determining the fair value

A) The fair value of short-term financial instruments is determined using the carrying

amount on the balance sheet. The carrying amount is a reasonable approximation of fair value since these instruments will mature soon. This method shall apply to cash and cash equivalents, trade and other receivables/payables, current tax assets, and refundable deposits/deposit received.

B) The fair value of financial assets with standard terms and conditions and traded in

active liquid markets is determined with reference to quoted market prices. If the market for a financial instrument is not active, the fair value of derivative financial instruments is determined using a valuation technique, with estimates and assumptions consistent with those used by market participants, which are readily available to the Group.

33



(Continued)

C) The fair value of financial assets at cost was investments in non-public stocks, which cannot be reliably measured and whose fair value cannot be estimated as there is no quoted price in the market.

D) Long-term borrowings and capital lease liabilities were interest-bearing and carried

fixed or floating interest rates. Therefore, the borrowed amount was the fair value. 3) Fair value hierarchy

There were no transfer from one level to another in 2016 and 2015.

(t) Financial risk management

There were no significant changes with purpose and policy of financial risk management for the year ended December 31, 2015.

(u) Capital management

Management believes that there were no changes in the Group’s approach to the targets, policies and procedures in capital management as disclosed in the consolidated financial statements for the year ended December 31, 2015. Also, they believe that for the six months ended June 30, 2015, there were also no changes in the Group’s capital management information. Please refer to the consolidated financial statements for the year ended December 31, 2015 for other related information.

7. Related-party Transactions

(a) Parent company and the ultimate controlling company

The Company is the ultimate controlling party of the Consolidated Company.

(b) Remuneration of key management personnel

The remuneration paid to the key management personnel was as follows: For the Three Months Ended


June 30 2016 2015 2016 2015 Short-term employment benefits $ 26,785 21,993 54,619 45,035 Post-employment benefits 793 705 1,568 1,348 Share-based payments 2,210 126 2,459 252 $ 29,788 22,824 58,646 46,635

34



(Continued)

Please refer to note 6 (p) for explanation related to share-based payment. 8. Pledged Assets

The Group’s assets pledged as collateral are summarized as follows:

Pledged assets Pledged to secure June 30,

2016 December 31,

2015 June 30,

2015 Land Collateral for bank borrowings

and syndicated loan $ 127,283 - -

Buildings and improvements " 67,078 - -Time deposits (recorded in

refundable deposit) Collateral for rental land

9,698 9,698

11,680

Pledged deposits(recorded in other financial assets-current)

Collateral for bank borrowings and syndicated loan 2,006

116,894

-

$ 206,065 126,592 11,680

9. Significant contingent liabilities and unrecognized contractual commitments

(a) The guarantee notes provided by the Group to the banks were as follows:

June 30, 2016

December 31, 2015

June 30, 2015

TWD $ 680,000 520,000 520,000 USD 3,500 9,500 9,500

(b) As of June 30, 2016, the Company has unused letters of credit issued by the Group.

10. Major casualty losses: None. 11. Significant subsequent events: None. 12. Other information

(a) The information on employee benefits, depreciation, and amortization expenses, by function, is summarized as follows:

35



(Continued)

By function

By item

For the Three Months Ended June 30, 2016


Cost of goods sold

Operatingexpenses Total

Cost of goods sold

Operating expenses Total

Employee benefits Salary 142,732 205,134 347,866 108,537 145,589 254,126

Labor and health insurance 10,738 14,030 24,768 13,751 11,994 25,745

Pension 13,849 6,419 20,268 14,162 5,064 19,226 Others 15,024 4,573 19,597 14,522 3,193 17,715Depreciation 68,319 10,662 78,981 67,772 8,194 75,966Amortization 20 12,426 12,446 21 1,517 1,538

By function

By item

For the Six Months Ended June 30, 2016


Cost of goods sold

Operatingexpenses Total

Cost of goods sold

Operating expenses Total

Employee benefits Salary 283,157 379,251 662,408 236,081 276,117 512,198

Labor and health insurance 23,597 27,134 50,731 28,718 23,936 52,654

Pension 29,329 13,055 42,384 28,605 10,198 38,803 Others 30,771 9,064 39,835 29,809 6,714 36,523Depreciation 134,954 20,439 155,393 137,056 15,862 152,918Amortization 41 25,151 25,192 42 3,055 3,097

(b) Operating season

The seasons and business cycles have no effect on the Group’s operating results.

13. Segment Financial Information For the Three Months Ended June 30, 2016

RectifiersBar Code Printers

Adjustments and

eliminations Total Area revenue:

Third-party customers $ 1,285,056 922,112 - 2,207,168Inter-company 1,267,353 - (1,267,353) -

Total revenue $ 2,552,409 922,112 (1,267,353) 2,207,168Reported segment profit and loss $ 409,318 216,414 (228,780) 396,952

36



(Continued)



Adjustments and


Third-party customers $ 1,191,357 745,474 - 1,936,831Inter-company 1,242,085 - (1,242,085) -

Total revenue $ 2,433,442 745,474 (1,242,085) 1,936,831Reported segment profit and loss $ 381,752 236,501 (274,361) 343,892



Adjustments and


Third-party customers $ 2,533,607 1,620,083 - 4,153,690Inter-company 2,464,255 - (2,464,255) -

Total revenue $ 4,997,862 1,620,083 (2,464,255) 4,153,690Reported segment profit and loss $ 828,080 349,808 (449,621) 728,267 For the Six Months Ended June 30, 2015


Adjustments and


Third-party customers $ 2,414,237 1,315,791 - 3,730,028Inter-company 2,499,015 - (2,499,015) -

Total revenue $ 4,913,252 1,315,791 (2,499,015) 3,730,028Reported segment profit and loss $ 708,974 374,734 (447,113) 636,595


Adjustments and

eliminations Total Reported segment assets

June 30, 2016 $ 16,298,855 5,010,956 (9,655,162) 11,654,649December 31, 2015 $ 16,168,822 4,084,402 (9,505,460) 10,747,764June 30, 2015 $ 15,220,321 2,836,954 (8,831,775) 9,225,500

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