The R.O.C. Company Law, the R.O.C. Act for Establishment and Administration of Science Parks and the R.O.C. Securities and Exchange Law provide that any change in the issued share capital of a public company, such as us, requires the approval of its board of directors, (or, for capital reduction, a resolution of its shareholders meeting), an amendment to its articles of incorporation (if such change also involves a change in the authorized share capital) and the approval of, or the registration with, the R.O.C. Financial Supervisory Commission and the Ministry of Economic Affairs or the Science Park Administration (as applicable).

There are no provisions under either R.O.C. law or the deposit agreement under which holders of ADSs would be required to forfeit the common shares represented by ADSs.

Dividends and Distributions

An R.O.C. company is generally not permitted to distribute dividends or to make any other distributions to shareholders in respect of any year for which it did not have either earnings or retained earnings (excluding reserves). In addition, before distributing a dividend to shareholders following the end of a fiscal year, the company must recover any past losses, pay all outstanding taxes and set aside in a legal reserve, until such time as its legal reserve equals its paid-in capital, 10% of its net income for that fiscal year (less any past losses and outstanding tax), and may set aside a special reserve. Our articles of incorporation provide that at least one percent of the net distributable income for that fiscal year be distributed as a bonus to employees and that not more than 0.3 percent of the net distributable income for that fiscal year may be distributed as a bonus to directors. Under our articles of incorporation, directors who also serve as executive officers are not entitled to any director bonuses. Prior to 2004, it has been our practice in each of the past years to pay all of employee bonuses in the form of stock. In 2004, we paid 20% of the bonus in the form of cash, and in 2005, 2006, 2007, 2008 and 2009, we paid 50% of the bonus in the form of cash. In 2011 and 2012, we paid 100% of the bonus in the form of cash. Effective in 2008, both bonus to directors and employees became expense items under the company’s income statements. In 2009, half of the employee profit sharing was paid in stock, for which, the number of shares was determined based on the closing price of TSMC common shares the day before TSMC’s annual shareholders’ meeting. Subject to compliance with these requirements, a company may pay dividends or make other distributions from its accumulated earnings or reserves as permitted by the R.O.C. Company Law as set forth below.

At the annual general meeting of our shareholders, the board of directors submits to the shareholders for their approval our financial statements for the preceding fiscal year and any proposal for the distribution of a dividend or the making of any other distribution to shareholders from our earnings or retained earnings (subject to compliance with the requirements described above) at the end of the preceding fiscal year. All common shares outstanding and fully paid as of the relevant record date are entitled to share equally in any dividend or other distribution so approved. Dividends may be distributed in cash, in the form of common shares or a combination thereof, as determined by the shareholders at the meeting.

In addition to permitting dividends to be paid out of earnings or retained earnings, the R.O.C. Company Law permits us to make distributions to our shareholders in cash or in the form of ~~additional~~ common shares ~~by capitalizing reserves (including~~from capital surplus and the legal ~~reserve and some other reserves).~~reserve. However, ~~the capitalized portion payable~~dividend distribution out of our legal reserve ~~is limited to 50% of the total accumulated legal reserve and this capitalization~~ can only be effected when the accumulated legal reserve exceeds ~~50%~~25% of our paid-in capital.

For information as to R.O.C. taxes on dividends and distributions, see “— Taxation — R.O.C. Taxation”.

Preemptive Rights and Issues of Additional Common Shares

Under the R.O.C. Company Law, when a public company such as us issues new shares of common stock for cash, 10% to 15% of the issue must be offered to its employees. The remaining new shares must be offered to existing shareholders in a preemptive rights offering, subject to a requirement under the R.O.C. Securities and Exchange Law that at least 10% of these issuances must be offered to the public. This percentage can be increased by a resolution passed at a shareholders’ meeting, thereby limiting or waiving the preemptive rights of existing shareholders. The preemptive rights provisions do not apply ~~to:~~to limited circumstances, such as:

issuance of new shares upon conversion of convertible bonds; and

	•		~~offerings by shareholders of outstanding shares; and~~

	•		offerings of new shares through a private placement approved at a shareholders’ meeting.

Authorized but unissued shares of any class may be issued at such times and, subject to the above-mentioned provisions of the R.O.C. Company Law and the R.O.C. Securities and Exchange Law, upon such terms as the board of directors may determine. The shares with respect to which preemptive rights have been waived may be freely offered, subject to compliance with applicable R.O.C. law.

Meetings of Shareholders

Meetings of our shareholders may be general meetings or special meetings. General meetings of shareholders are generally held in Hsinchu, Taiwan, within six months after the end of each fiscal year. Special meetings of shareholders may be convened by resolution of the board of directors whenever it deems necessary, or under certain circumstances, by shareholders or the audit committee. For a public company such as us, notice in writing of shareholders’ meetings, stating the place, time and purpose thereof, must be sent to each shareholder at least thirty days (in the case of general meetings) and fifteen days (in the case of special meetings) prior to the date set for each meeting.

Voting Rights

A holder of common shares has one vote for each common share. Except as otherwise provided by law, a resolution may be adopted by the holders of a simple majority of the total issued and outstanding common shares represented at a shareholders’ meeting at which a majority of the holders of the total issued and outstanding common shares are present. The election of directors at a shareholders’ meeting is by cumulative ~~voting, except as otherwise prescribed by the articles of incorporation.~~voting. Directors are nominated by our shareholders on the shareholders’ meeting at which ballots for these elections are cast. Moreover, as authorized under the R.O.C. Company Law, we have adopted a nomination procedure for election of our independent directors in our articles of incorporation. According to our articles of incorporation, ballots for the election of directors and independent directors are cast separately.

The R.O.C. Company Law also provides that in order to approve certain major corporate actions, including (i) any amendment to the articles of incorporation (which is required for, among other actions, any increase in authorized share capital), (ii) execution, modification or termination of any contracts regarding leasing of all business or joint operations or mandate of the company’s business to other persons, (iii) the dissolution, amalgamation or spin-off of a company or the transfer of the whole or an important part of its business or its properties or the taking over of the whole of the business or properties of any other company which would have a significant impact on the acquiring company’s operations or (iv) the removal of directors or supervisors or the distribution of any stock dividend, a meeting of the shareholders must be convened with a quorum of holders of at least two-thirds of all issued and outstanding shares of common stock at which the holders of at least a majority of the common stock represented at the meeting vote in favor thereof. However, in the case of a publicly held company such as us, such a resolution may be adopted by the holders of at least two-thirds of the shares of common stock represented at a meeting of shareholders at which holders of at least a majority of the issued and outstanding shares of common stock are present.

A shareholder may be represented at a shareholders’ meeting by proxy. A valid proxy must be delivered to us at least five days prior to the commencement of the shareholders’ meeting.

Holders of ADSs will not have the right to exercise voting rights with respect to the common shares represented thereby, except as described in “— Voting of Deposited Securities”.

Other Rights of Shareholders

Under the R.O.C. Company Law, dissenting shareholders are entitled to appraisal rights in the event of amalgamation, spin-off or certain other major corporate actions. A dissenting shareholder may request us to redeem all of the shares owned by that shareholder at a fair price to be determined by mutual agreement or a court order if agreement cannot be reached. A shareholder may exercise these appraisal rights by serving written notice on us prior to the related shareholders’ meeting and by raising an objection at the shareholders’ meeting. In addition to appraisal rights, any shareholder has the right to sue for the annulment of any resolution adopted at a shareholders’ meeting where the procedures were legally defective within thirty days after the date of such shareholders’ meeting. One or more shareholders who have held more than three percent of the issued and outstanding shares for over a year may require audit committee to bring a derivative action against a director for that director’s liability to us as a result of that director’s unlawful actions or failure to act. In addition, one or more shareholders who have held more than three percent of our issued and outstanding shares for over a year may require the board of directors to convene a special shareholders’ meeting by sending a written request to the board of directors.

The R.O.C. Company Law has been amended to allow shareholder(s) holding 1% or more of the total issued shares of a company to, during the period of time prescribed by the company, submit one proposal in writing containing no more than three hundred words (Chinese characters) for discussion at the general meeting of shareholders. In addition, if a company adopts a nomination procedure for election of directors or supervisors in its articles of incorporation, shareholders representing 1% or more of the total issued shares of such company may submit a candidate list in writing to the company along with relevant information and supporting documents.

Register of Shareholders and Record Dates

Our share registrar, Chinatrust Commercial Bank, maintains the register of our shareholders at its office in Taipei, ~~Taiwan, and enters transfers of the common shares in the register upon presentation of, among other documents, the certificates in respect of the common shares transferred.~~Taiwan. Under the R.O.C. Company Law, the transfer of common shares in registered form is effected by endorsement of the transferor’s and transferee’s seals on the share certificates and delivery of the related share certificates. In order to assert shareholders’ rights against us, however, the transferee must have his name and address registered on the register of shareholders. Shareholders are required to file their respective specimen signatures or seals with us. The settlement of trading in the common shares is ~~normally~~ carried out on the book-entry system maintained by the Taiwan Depository & Clearing Corporation.

The R.O.C. Company Law permits us to set a record date and close the register of shareholders for a specified period in order for us to determine the shareholders or pledgees that are entitled to certain rights pertaining to common shares by giving advance public notice. Under the R.O.C. Company Law, our register of shareholders should be closed for a period of sixty days, thirty days and five days immediately before each general meeting of shareholders, special meeting of shareholders and record date of dividend distribution, respectively.

Annual Financial Statements

Under the R.O.C. Company Law, ten days before the general meeting of shareholders, our annual financial statements must be available at our principal office in Hsinchu for inspection by the shareholders.

Acquisition of Common Shares by Us

With minor exceptions, we may not acquire our common shares under the R.O.C. Company Law. However, under the R.O.C. Securities and Exchange Law, we may, by a board resolution adopted by majority consent at a meeting with two-thirds of our directors present, purchase our common shares on the Taiwan Stock Exchange or by a tender offer, in accordance with the procedures prescribed by the R.O.C. Financial Supervisory Commission, for the following purposes: (i) to transfer shares to our employees; (ii) to satisfy our obligations to provide our common shares upon exercise or conversion of any warrants, convertible bonds or convertible preferred shares; and (iii) if necessary, to maintain our credit and our shareholders’ equity (such as for the purpose of supporting the trading price of our common shares during market dislocations), provided that the common shares so purchased shall be cancelled thereafter.

We are not allowed to purchase more than ten percent of our total issued and outstanding common shares. In addition, we may not spend more than the aggregate amount of our retained earnings, premium from issuing stock and the realized portion of the capital reserve to purchase our common shares.

We may not pledge or hypothecate any purchased common shares. In addition, we may not exercise any shareholders’ rights attached to such common shares. In the event that we purchase our common shares on the Taiwan Stock Exchange, our affiliates, directors, managers and their respective spouses, minor children and nominees are prohibited from selling any of our common shares during the period in which we purchase our common shares.

In addition, effective from November 14, 2001 under the revised R.O.C. Company Law, our subsidiaries may not acquire our shares. This restriction does not, however, affect any of our shares acquired by our subsidiaries prior to November 14, 2001.

Liquidation Rights

In the event of our liquidation, the assets remaining after payment of all debts, liquidation expenses, taxes and distributions to holders of preferred shares, if any, will be distributed pro rata to our shareholders in accordance with the R.O.C. Company Law.

Transaction Restrictions

The R.O.C. Securities and Exchange Law (i) requires each director, supervisor, manager or shareholder holding more than ten percent of the shares of a public company to report the amount of that person’s shareholding to that company and (ii) limits the number of shares that can be sold or transferred on the Taiwan Stock Exchange or on the Over-the-Counter (GreTai) Securities Market by that person per day.

Material Contracts

On December 9, 2009, we entered into a Share Subscription Agreement with Motech Industries Inc. (“Motech”) under which we subscribed through a private placement for new shares of Motech. The total consideration for such shares is approximately NT$6.2 billion (US$193 million). After the subscription of such shares, we became its largest shareholder with a 20% stake. In addition, please see “Item 7. Major Shareholders and Related Party Transactions — Related Party Transactions” for a summary of contracts with certain of our related parties and note 4 to our consolidated financial statements regarding certain of our significant commitments and contingencies.

On November 9, 2009, we settled our action brought in the California State Court against Semiconductor Manufacturing International Corporation (“SMIC”) in 2006 related to SMIC’s misappropriation of TSMC’s trade secrets and its breach of the 2005 settlement agreement between the two companies. Pursuant to the new settlement agreement, the parties ~~have agreed to the entry of~~entered a stipulated judgment in favor of TSMC in the California action and to the dismissal of the SMIC appeal against the Beijing Higher Court’s finding in favor of TSMC. The new settlement agreement and the stipulated judgment also require SMIC to: (a) make cash payments to TSMC totaling US$200 million, which are in addition to the US$135 million previously paid to TSMC under the 2005 settlement agreement; and (b) conditional upon relevant government regulatory approvals, to issue to TSMC a total of 1,789,493,218 common shares of SMIC (representing about 8% of SMIC’s total shares outstanding as of December 31, 2009) and a three-year warrant to purchase 695,914,030 SMIC common shares (subject to adjustment) at HK$1.30 per share (subject to adjustment). Both parties also agreed to terminate the patent cross-licensing agreement signed in 2005. ~~For detailed discussion, please see “Item 8. Financial Information — Legal Proceedings”.~~

On July 5, 2010, we acquired the above mentioned common shares.
We joined the Customer Co-Investment Program of ASML Holding N.V. (“ASML”) and entered into an investment agreement in August 2012. The agreement includes an investment of EUR838 million to acquire 5% of ASML’s equity with a lock-up period of 2.5 years. Both parties also signed a research and development funding agreement under which we will provide EUR277 million to ASML’s research and development programs from 2013 to 2017.

Foreign Investment in the R.O.C.

Historically, foreign investment in the R.O.C. securities market has been restricted. Since 1983, the R.O.C. government has periodically enacted legislation and adopted regulations to permit foreign investment in the R.O.C. securities market.

On September 30, 2003, the Executive Yuan approved an amendment to Regulations Governing Investment in Securities by Overseas Chinese and Foreign National, or the Regulations, which took effect on October 2, 2003. According to the Regulations, the R.O.C. Financial Supervisory Commission abolished the mechanism of the so-called “qualified foreign institutional investors” and “general foreign investors” as stipulated in the Regulations before the amendment.

Under the Regulations, foreign investors are classified as either “onshore foreign investors” or “offshore foreign investors” according to their respective geographical location. Both onshore and offshore foreign investors are allowed to invest in R.O.C. securities after they register with the Taiwan Stock Exchange. The Regulations further classify foreign investors into foreign institutional investors and foreign individual investors. “Foreign institutional investors” refer to those investors incorporated and registered in accordance with foreign laws outside of the R.O.C. (i.e., offshore foreign institutional investors) or their branches set up and recognized within the R.O.C. (i.e., onshore foreign institutional investors). Offshore overseas Chinese and foreign individual investors may be subject to a maximum investment ceiling that will be separately determined by the R.O.C. Financial Supervisory Commission after consultation with the Central Bank of the Republic of China (Taiwan). Currently, there is no maximum investment ceiling for offshore overseas Chinese and foreign individual investors. On the other hand, foreign institutional investors are not subject to any ceiling for investment in the R.O.C. securities market.

Except for certain specified industries, such as telecommunications, investments in R.O.C.-listed companies by foreign investors are not subject to individual or aggregate foreign ownership limits. Custodians for foreign investors are required to submit to the Central Bank of the Republic of China (Taiwan) and the Taiwan Stock Exchange a monthly report of trading activities and status of assets under custody and other matters. Capital remitted to the R.O.C. under these guidelines may be remitted out of the R.O.C. at any time after the date the capital is remitted to the R.O.C. Capital gains and income on investments may be remitted out of the R.O.C. at any time.

Foreign investors (other than foreign investors who have registered with the Taiwan Stock Exchange for making investments in the R.O.C. securities market) who wish to make direct investments in the shares of R.O.C. companies are required to submit a foreign investment approval application to the Investment Commission of the R.O.C. Ministry of Economic Affairs or other applicable government authority. The Investment Commission or such other government authority reviews each foreign investment approval application and approves or disapproves each application after consultation with other governmental agencies (such as the Central Bank of the Republic of China (Taiwan) and the R.O.C. Financial Supervisory Commission).

Under current R.O.C. law, any non-R.O.C. person possessing a foreign investment approval may repatriate annual net profits, interest and cash dividends attributable to the approved investment. Stock dividends attributable to this investment, investment capital and capital gains attributable to this investment may be repatriated by the non-R.O.C. person possessing a foreign investment approval after approvals of the Investment Commission or other government authorities have been obtained.

In addition to the general restriction against direct investment by non-R.O.C. persons in securities of R.O.C. companies, non-R.O.C. persons (except in certain limited cases) are currently prohibited from investing in certain industries in the R.O.C. pursuant to a “negative list”, as amended by the Executive Yuan. The prohibition on foreign investment in the prohibited industries specified in the negative list is absolute in the absence of a specific exemption from the application of the negative list. Pursuant to the negative list, certain other industries are restricted so that non-R.O.C. persons (except in limited cases) may invest in these industries only up to a specified level and with the specific approval of the relevant competent authority that is responsible for enforcing the relevant legislation that the negative list is intended to implement.

The R.O.C. Financial Supervisory Commission announced on April 30, 2009 the Regulations Governing Mainland Chinese Investors’ Securities Investments (“PRC Regulations”). According to the PRC Regulations, a PRC qualified domestic institutional investor (“QDII”) is allowed to invest in R.O.C. securities (including ~~up to~~less than 10% shareholding of an R.O.C. company listed on Taiwan Stock Exchange or Over-the-Counter (GreTai) Securities Market). ~~There is no assurance that~~Nevertheless, the total investment amount of QDIIs cannot exceed US$500 million. For each QDII, the custodians of such QDIIs must apply with the Taiwan Stock Exchange for the remittance amount for each QDII, which cannot exceed US$100 million, and QDII can only invest in the ~~future, there will not be further restrictions or prohibitions imposed on PRC persons (including QDIIs)~~R.O.C. securities market with the amount approved by the Taiwan Stock Exchange. In addition, QDIIs are currently prohibited from investing in certain industries, and their investment of certain other industries in a given company is restricted to a certain percentage pursuant to a list promulgated by the ~~R.O.C. In addition~~FSC and amended from time to ~~investments permitted under the PRC Regulations,~~time. PRC investors other than QDII are prohibited from making investments in an R.O.C. company listed on the Taiwan Stock Exchange or the Over-the-Counter (GreTai) Securities Market if the investment is less than 10% of the equity interest of such R.O.C. company.

In addition to investments permitted under the ~~general restriction against~~PRC Regulations, PRC investors who wish to make (i) direct investment ~~by PRC investors~~ in ~~securities~~the shares of R.O.C. private companies ~~PRC investors may only invest~~or (ii) investments, individually or aggregately, in ~~certain industries in~~10% or more of the ~~Positive List, as promulgated by~~equity interest of an R.O.C. company listed on the ~~R.O.C. Executive Yuan. In addition,~~Taiwan Stock Exchange or Over-the-Counter (GreTai) Securities Market are required to submit an investment approval application to the Investment Commission of the Ministry of Economic Affairs or other government authority. The Investment Commission or such other government authority reviews Investment Approval application and approves or disapproves each application after consultation with other governmental agencies. Furthermore, PRC investor who wishes to be elected as an R.O.C. company’s director or supervisor shall also submit an investment approval application to the Investment Commission of the ~~R.O.C.~~ Ministry of Economic Affairs or other government authority for approval.

Depositary Receipts

In April 1992, the R.O.C. Financial Supervisory Commission enacted regulations permitting R.O.C. companies with securities listed on the Taiwan Stock Exchange, with the prior approval of the R.O.C. Financial Supervisory Commission, to sponsor the issuance and sale to foreign investors of depositary receipts. Depositary receipts represent deposited shares of R.O.C. companies. In December 1994, the R.O.C. Financial Supervisory Commission allowed companies whose shares are traded on the R.O.C. Over-the-Counter (GreTai) Securities Market or listed on the Taiwan Stock Exchange, upon approval of the R.O.C. Financial Supervisory Commission, to sponsor the issuance and sale of depositary receipts.

Our deposit agreement has been amended and restated on November 16, 2007 to: (i) make our ADSs eligible for the direct registration system, as required by the New York Stock Exchange, by providing that ADSs may be certificated or uncertificated securities, (ii) enable the distribution of our reports by electronic means and (iii) reflect changes in R.O.C. laws in connection with the nomination of candidates for independent directors, for voting at the meeting of the shareholders. A copy of our amended and restated deposit agreement has been filed under the cover of Form F-6 on November 16, 2007.

A holder of depositary receipts (other than citizens of the PRC and entities organized under the laws of the PRC save for ~~QDII)~~QDII or those which otherwise obtain the approval of the Investment Commission of the Ministry of Economic Affairs) may request the depositary to either cause the underlying shares to be sold in the R.O.C. and to distribute the sale proceeds to the holder or to withdraw from the depositary receipt facility the shares represented by the depositary receipts to the extent permitted under the deposit agreement (for depositary receipts representing existing shares, immediately after the issuance of the depositary receipts; and for depositary receipts representing new shares, in practice four to seven business days after the issuance of the depositary receipts) and transfer the shares to the holder.

We, or the foreign depositary bank, may not increase the number of depositary receipts by depositing shares in a depositary receipt facility or issuing additional depositary receipts against these deposits without specific R.O.C. Financial Supervisory Commission approval, except in limited circumstances. These circumstances include issuances of additional depositary receipts in connection with:

dividends or free distributions of shares;

	•		~~dividends on or free distributions of shares;~~

	•		~~the exercise by holders of existing depositary receipts of their pre-emptive rights in connection with capital increases for cash; or~~

	•		if permitted under the deposit agreement and custody agreement, the deposit of common shares purchased by any person directly or through a depositary bank on the Taiwan Stock Exchange or the Over-the-Counter (GreTai) Securities Market (as applicable) or held by such person for deposit in the depositary receipt facility.

the exercise by holders of existing depositary receipts of their pre-emptive rights in connection with capital increases for cash; or

if permitted under the deposit agreement and custody agreement, the deposit of common shares purchased by any person directly or through a depositary bank on the Taiwan Stock Exchange or the Over-the-Counter (GreTai) Securities Market (as applicable) or held by such person for deposit in the depositary receipt facility.

However, the total number of deposited shares outstanding after an issuance under the circumstances described in the third clause above may not exceed the number of deposited shares previously approved by the R.O.C. Financial Supervisory Commission plus any depositary receipts created under the circumstances described in the first two clauses above. Issuances of additional depositary receipts under the circumstances described in the third clause above will be permitted to the extent that previously issued depositary receipts have been canceled and the underlying shares have been withdrawn from the depositary receipt facility.

Under current R.O.C. law, a non-R.O.C. holder of ADSs who withdraws and holds the underlying shares must register with the Taiwan Stock Exchange and appoint an eligible local agent to:

open a securities trading account with a local securities brokerage firm;

	•		~~open a securities trading account with a local securities brokerage firm;~~

	•		~~remit funds; and~~

	•		~~exercise rights on securities and perform other matters as may be designated by the holder.~~

remit funds; and

exercise rights on securities and perform other matters as may be designated by the holder.

Under existing R.O.C. laws and regulations, without this account, holders of ADSs that withdraw and hold the common shares represented by the ADSs would not be able to hold or subsequently transfer the common shares, whether on the Taiwan Stock Exchange or otherwise. In addition, a withdrawing non-R.O.C. holder must appoint a local bank to act as custodian for handling confirmation and settlement of trades, safekeeping of securities and cash proceeds and reporting of information.

Holders of ADSs who are non-R.O.C. persons withdrawing common shares represented by ADSs are required under current R.O.C. law and regulations to appoint an agent in the R.O.C. for filing tax returns and making tax payments. This agent, a “tax guarantor”, must meet certain qualifications set by the R.O.C. Ministry of Finance and, upon appointment, becomes a guarantor of the withdrawing holder’s R.O.C. tax payment obligations. In addition, under current R.O.C. law, repatriation of profits by a non-R.O.C. withdrawing holder is subject to the submission of evidence of the appointment of a tax guarantor to, and approval thereof by, the tax authority, or submission of tax clearance certificates or submission of evidencing documents issued by such agent (so long as the capital gains from securities transactions are exempt from R.O.C. income tax).

Under existing R.O.C. laws and regulations relating to foreign exchange control, a depositary may, without obtaining further approvals from the Central Bank of the Republic of China (Taiwan) or any other governmental authority or agency of the R.O.C., convert NT dollars into other currencies, including U.S. dollars, in respect of the following: proceeds of the sale of shares represented by depositary receipts, proceeds of the sale of shares received as stock dividends and deposited into the depositary receipt facility and any cash dividends or cash distributions received. In addition, a depositary, also without any of these approvals, may convert inward remittances of payments into NT dollars for purchases of underlying shares for deposit into the depositary receipt facility against the creation of additional depositary receipts. A depositary may be required to obtain foreign exchange approval from the Central Bank of the Republic of China (Taiwan) on a payment-by-payment basis for conversion from NT dollars into other currencies relating to the sale of subscription rights for new shares. Proceeds from the sale of any underlying shares by holders of depositary receipts withdrawn from the depositary receipt facility may be converted into other currencies without obtaining Central Bank of the Republic of China (Taiwan) approval. Proceeds from the sale of the underlying shares withdrawn from the depositary receipt facility may be used for reinvestment in the Taiwan Stock Exchange or the Over-the-Counter (GreTai) Securities Market, subject to compliance with applicable laws and regulations.

Direct Share Offerings

Since 1997, the R.O.C. government has amended regulations to permit R.O.C. companies listed on the Taiwan Stock Exchange or Over-the-Counter (GreTai) Securities Market to issue shares directly (not through depositary receipt facility) overseas.

Overseas Corporate Bonds

Since 1989, the R.O.C. Financial Supervisory Commission has approved a series of overseas bonds issued by R.O.C. companies listed on the Taiwan Stock Exchange or the Over-the-Counter (GreTai) Securities Market in offerings outside the R.O.C. Under current R.O.C. law, these overseas corporate bonds can be:

converted by bondholders, other than citizens of the PRC and entities organized under the laws of the PRC save for QDII or those that have obtained the approval of the Investment Commission of the Ministry of Economic Affairs, into shares of R.O.C. companies; or

subject to R.O.C. Financial Supervisory Commission approval, converted into depositary receipts issued by the same R.O.C. company or by the issuing company of the exchange shares, in the case of exchangeable bonds.

The relevant regulations also permit public issuing companies to issue corporate debt in offerings outside the R.O.C. Proceeds from the sale of the shares converted from overseas convertible bonds may be used for reinvestment in securities listed on the Taiwan Stock Exchange or traded on the Over-the-Counter (GreTai) Securities Market, subject to compliance with applicable laws and regulations.

Exchange Controls in the R.O.C.

The Foreign Exchange Control Statute and regulations provide that all foreign exchange transactions must be executed by banks designated to handle such business by the R.O.C. Financial Supervisory Commission and by the Central Bank of the Republic of China (Taiwan). Current regulations favor trade-related foreign exchange transactions. Consequently, foreign currency earned from exports of merchandise and services may now be retained and used freely by exporters, and all foreign currency needed for the importation of merchandise and services may be purchased freely from the designated foreign exchange banks.

Trade aside, R.O.C. companies and resident individuals may, without foreign exchange approval, remit to and from the R.O.C. foreign currency of up to US$50 million (or its equivalent) and US$5 million (or its equivalent), respectively, in each calendar year. Furthermore, any remittance of foreign currency into the R.O.C. by a R.O.C. company or resident individual in a year will be offset by the amount remitted out of R.O.C. by such company or individual (as applicable) within its annual quota and will not use up its annual inward remittance quota to the extent of such offset. The above limits apply to remittances involving a conversion of NT dollars to a foreign currency and vice versa. A requirement is also imposed on all enterprises to register medium- and long-term foreign debt with the Central Bank of the Republic of China (Taiwan).

In addition, foreign persons may, subject to certain requirements, but without foreign exchange approval of the Central Bank of the Republic of China (Taiwan), remit outside and into the R.O.C. foreign currencies of up to US$100,000 (or its equivalent) for each remittance. The above limit applies to remittances involving a conversion of NT dollars to a foreign currency and vice versa. The above limit does not, however, apply to the conversion of NT dollars into other currencies, including U.S. dollars, in respect of the proceeds of sale of any underlying shares withdrawn from a depositary receipt facility.

Voting of Deposited Securities

Holders may direct the exercise of voting rights with respect to the common shares represented by the ADSs only in accordance with the provisions of the deposit agreement as described below and applicable R.O.C. law. See “Item 3. Key Information — Risk Factors — Risks Relating to Ownership of ADSs — Your voting rights as a holder of ADSs will be limited”.

Except as described below, the holders will not be able to exercise the voting rights attaching to the common shares represented by the ADSs on an individual basis. According to provisions of the R.O.C. Company Law, a shareholder’s voting rights attached to shares in an R.O.C. company must, as to all matters subject to a vote of shareholders (other than the election of directors) be exercised as to all shares held by such shareholder in the same manner. Accordingly,deposit agreement, the voting rights attaching to the common shares represented by ADSs must be exercised as to all matters subject to a vote of shareholders by the depositary bank or its nominee, who represents all holders of ADSs, collectively in the same manner, except in the case of an election of directors. Directors are elected by cumulative voting unless our articles of incorporation stipulate otherwise.

In the deposit agreement, the holders will appoint the depositary bank as their representative to exercise the voting rights with respect to the common shares represented by the ADSs.

We will provide the depositary bank with copies (including English translations) of notices of meetings of our shareholders and the agenda of these meetings, including an indication of the number of directors to be elected if an election of directors is to be held at the meeting. The depositary bank has agreed to request and we will, therefore, also provide a list of the candidates who have expressed their intention to run for an election of directors. The depositary bank will mail these materials, together with a voting instruction form to holders as soon as practicable after the depositary bank receives the materials from us. In order to validly exercise its voting rights, the holder of ADSs must complete, sign and return to the depositary bank the voting instruction form by a date specified by the depositary bank. Additional or different candidates may be nominated at the meeting of the shareholders other than those proposed in the list provided by us and after the depositary bank has mailed the voting instruction form to the holders. If such change were to occur, the depositary bank may calculate the votes according to procedures not inconsistent with the provisions of the deposit agreement, but shall not exercise any discretion regarding the holders’ voting rights and if the depositary bank elects to develop such procedures, it has agreed to do so in a manner so as to give effect, to the extent practicable, to the instructions received from the holders.

Subject to the provisions described in the second succeeding paragraph, which will apply to the election of directors done by means of cumulative voting, if persons together holding at least 51% of the ADSs outstanding at the relevant record date instruct the depositary bank to vote in the same manner in respect of one or more resolutions to be proposed at the meeting (other than the election of directors), the depositary bank will notify the instructions to the chairman of our board of directors or a person he may designate. The depositary bank will appoint the chairman or his designated person to serve as the voting representative of the depositary bank or its nominee and the holders. The voting representative will attend such meeting and vote all the common shares represented by ADSs to be voted in the manner so instructed by such holders in relation to such resolution or resolutions.

If, for any reason, the depositary bank has not by the date specified by it received instructions from persons together holding at least 51% of all the ADSs outstanding at the relevant record date to vote in the same manner in respect of any resolution specified in the agenda for the meeting (other than the election of directors), then the holders will be deemed to have instructed the depositary bank or its nominee to authorize and appoint the voting representative as the representative of the depositary bank and the holders to attend such meeting and vote all the common shares represented by all ADSs as the voting representative deems appropriate with respect to such resolution or resolutions, which may not be in your interests; provided, however, that the depositary bank or its nominee will not give any such authorization and appointment unless it has received an opinion of R.O.C. counsel addressed to the depositary bank and in form and substance satisfactory to the depositary bank, at its sole expense, to the effect that, under R.O.C. law (i) the deposit agreement is valid, binding and enforceable against us and the holders and (ii) the depositary bank will not be deemed to be authorized to exercise any discretion when voting in accordance with the deposit agreement and will not be subject to any potential liability for losses arising from such voting. We and the depositary bank will take such actions, including amendment of the provisions of the deposit agreement relating to voting of common shares, as we deem appropriate to endeavor to provide for the exercise of voting rights attached to the common shares represented by all ADSs at shareholders’ meetings in a manner consistent with applicable R.O.C. law.

The depositary bank will notify the voting representative of the instructions for the election of directors received from holders and appoint the voting representative as the representative of the depositary bank and the ~~owners~~holders to attend such meeting and vote the common shares represented by ADSs as to which the depositary bank has received instructions from holders for the election of directors, subject to any restrictions imposed by R.O.C. law and our articles of incorporation. Holders who by the date specified by the depositary bank have not delivered instructions to the depositary bank will be deemed to have instructed the depositary bank to authorize and appoint the voting representative as the representative of the depositary bank or its nominee and the holders to attend such meeting and vote all the common shares represented by ADSs as to which the depositary bank has not received instructions from the holders for the election of directors as the voting representative deems appropriate, which may not be in your best interests. Candidates standing for election as representatives of a shareholder may be replaced by such shareholder prior to the meeting of the shareholders, and the votes cast by the holders for such candidates shall be counted as votes for their replacements.

By accepting and continuing to hold ADSs or any interest therein, the holders will be deemed to have agreed to the voting provisions set forth in the deposit agreement, as such provisions may be amended from time to time to comply with applicable R.O.C. law.

There can be no assurance that the holders will receive notice of shareholders’ meetings sufficiently prior to the date established by the depositary bank for receipt of instructions to enable you to give voting instructions before the cutoff date.

Moreover, in accordance with the deposit agreement, as further amended and restated as of November 16, 2007 and pursuant to R.O.C. Company Law, holders that individually or together with other holders hold at least 51% of the ADSs outstanding at the relevant record date are entitled to submit each year one written proposal for voting at the general meeting of shareholders; provided, that (i) such proposal is in Chinese language and does not exceed 300 Chinese characters, (ii) such proposal is submitted to the depositary bank at least two business days prior to the expiry of the relevant submission period, which shall be publicly announced by us each year in a report on Form 6-K filed with the Securities Exchange Commission prior to the commencement of the 60 days closed period for general meetings of shareholders, (iii) such proposal is accompanied by a written certificate to the depositary bank, in the form required by the depository bank, certifying that such proposal is being submitted by holders that individually or together with other holders hold at least 51% of the ADSs outstanding at the date of the submission and, if the date of the submission is on or after the relevant record date, also certifying that the holders who submitted the proposal held at least 51% of the ADSs outstanding as of the relevant record date, (iv) if the date of the submission is prior to the relevant record date, the holders who submitted the proposal must also provide, within five business days after the relevant record date, a second written certificate to the depositary bank, in the form required by the depositary bank, certifying that the holders who submitted the proposal continued to hold at least 51% of the ADSs outstanding at the relevant record date, (v) such proposal is accompanied by a joint and several irrevocable undertaking of all submitting holders to pay all fees and expenses incurred in relation to the submission (including the costs and expenses of the depositary bank or its agent to attend the general meeting of the shareholders) as such fees and expenses may be reasonably determined and documented by the depositary bank or us, and (vi) such proposal shall only be voted upon at the general meeting of shareholders if such proposal is accepted by our board of directors as eligible in accordance with applicable law for consideration at a shareholders meeting.

Taxation

~~Taxation~~

R.O.C. Taxation

The following is a general summary of the principal R.O.C. tax consequences of the ownership and disposition of ADSs representing common shares to a non-resident individual or entity. It applies only to a holder that is:

	•—		an individual who is not an R.O.C. citizen, who owns ADSs and who is not physically present in the R.O.C. for 183 days or more during any calendar ~~year;~~year (a “Non-ROC Individual Holder”); or

•—

a corporation or a non-corporate body that is organized under the laws of a jurisdiction other than the R.O.C. for profit-making purposes and has no fixed place of business or other permanent establishment in the R.O.C. (a “Non-ROC Entity Holder”).

Holders of ADSs are urged to consult their own tax advisors as to the particular R.O.C. tax consequences of owning the ADSs which may affect them.

Dividends. Dividends declared by us out of our retained earnings and distributed to the holders are subject to R.O.C. withholding tax, currently at the rate of 20%, on the amount of the distribution in the case of cash dividends or on the par value of the common shares in the case of stock dividends. However, a 10% R.O.C. retained earnings tax paid by us on our undistributed after-tax earnings, if any, would provide a credit of up to 10% of the gross amount of any dividends declared out of those earnings that would reduce the 20% R.O.C. tax imposed on those distributions.

Distribution of common shares declared by us out of our capital reserves is not subject to R.O.C. withholding tax.

Capital Gains. ~~Under R.O.C. law, capital~~Capital gains ~~on transactions in~~realized from the sale or disposal of the common shares on or before December 31, 2012 are ~~currently~~exempt from R.O.C. income tax under Article 4-1 of the R.O.C. Income Tax Act. Starting from January 1, 2013, Non-R.O.C. Entity Holders remain exempt from income ~~tax. In addition, transfers~~tax on capital gains from the sale or disposal of ~~ADSs~~the common shares. However, Non-R.O.C. Individual Holders are ~~not regarded as a sale of an R.O.C. security and, as a result, any gains on such transactions are not~~now subject to R.O.C. income ~~tax.~~

tax on capital gains from the sale or disposal of the common shares. Capital loss incurred therefrom can be deducted from capital gains in calculating the net capital gain and income tax liability, but cannot be carried forward to subsequent years. Capital gains are taxed at a flat rate of 15%. In addition, only 50% of the net capital gains are subject to income tax if the Non-R.O.C. Individual Holder has held the common shares for one year or longer. As a result, the tax agent of each Non-R.O.C. Individual Holder should pay the income tax payable, if any, and file an income tax return in May 2014 for the capital gains that the Non-R.O.C. Individual Holder generates in year 2013.

Subscription Rights. Distributions of statutory subscription rights for common shares in compliance with R.O.C. law are not subject to any R.O.C. tax. Proceeds derived from sales of statutory subscription rights evidenced by securities are exempted from income tax but are subject to securities transaction tax at the rate of 0.3% of the gross amount received. Non-R.O.C. Entity Holders remain exempt, after January 1, 2013, from income tax on capital gains from the sale of statutory subscription rights evidenced by securities. However, Non-R.O.C. Individual Holders are now subject to R.O.C. income tax on capital gains from such sale. Proceeds derived from sales of statutory subscription rights that are not evidenced by securities are subject to capital gains tax at the rate of 20%.

Subject to compliance with R.O.C. law, we, at our sole discretion, can determine whether statutory subscription rights shall be evidenced by issuance of securities.

Securities Transaction Tax. A securities transaction tax, at the rate of 0.3% of the sales proceeds, will be withheld upon a sale of common shares in the R.O.C. Transfers of ADSs are not subject to R.O.C. securities transaction tax. Withdrawal of common shares from the deposit facility is not subject to R.O.C. securities transaction tax.

Estate and Gift Tax. R.O.C. estate tax is payable on any property within the R.O.C. of a deceased who is an individual, and R.O.C. gift tax is payable on any property within the R.O.C. donated by an individual. Estate tax and Gift tax are currently payable at the rate of 10%. Under R.O.C. estate and gift tax laws, common shares issued by R.O.C. companies are deemed located in the R.O.C. regardless of the location of the holder. It is unclear whether a holder of ADSs will be considered to hold common shares for this purpose.

Tax Treaty. The R.O.C. does not have a double taxation treaty with the United States. On the other hand, the R.O.C. has double taxation treaties with Indonesia, Singapore, South Africa, Australia, Vietnam, New Zealand, Malaysia, Macedonia, Israel, Gambia, The Netherlands, the United Kingdom, Senegal, Sweden, Belgium, Denmark, Paraguay, Hungary, France, Swaziland, India, Slovakia, Switzerland, Germany and ~~Denmark~~Thailand which may limit the rate of R.O.C. withholding tax on dividends paid with respect to common shares in R.O.C. companies. The ADS holders may be considered to hold common shares for the purposes of these treaties. Accordingly, if the holders may otherwise be entitled to the benefits of the relevant income tax treaty, the holders should consult their tax advisors concerning their eligibility for the benefits with respect to the ADSs.

United States Federal Income Taxation

This section discusses the material United States federal income tax consequences to U.S. holders (as defined below) of owning and disposing of our common shares or ADSs. It applies to you only if you hold your common shares or ADSs as capital assets for tax purposes. This section does not apply to you if you are a member of a special class of holders subject to special rules, including:

	•—		dealers or traders in ~~securities;~~securities or foreign currencies;

•—

banks and certain other financial institutions;

—

brokers;

	—		traders in securities that elect to use a mark-to-market method of accounting for their securities holdings;

	•—		tax-exempt ~~organizations;~~organizations, retirement plans, individual retirement accounts and other tax-deferred accounts;

	•—		life insurance companies;

	•—		persons liable for alternative minimum tax;

	•—		persons that actually or constructively own 10% or more of our voting stock;

•—
persons that hold common shares or ADSs as part of a straddle or a hedging or conversion ~~transaction;~~ or integrated transaction for tax purposes;

•—

persons who are former citizens or former long-term residents of the United States, or

—

persons whose functional currency is not the U.S. dollar.

This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations, published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis. In addition, this section is based in part upon the representations of the depositary and the assumption that each obligation in the Deposit Agreement and any related agreement will be performed in accordance with its terms. In general, for United States federal income tax purposes, if you hold ADRs evidencing ADSs, you will be treated as the owner of the shares represented by those ADSs. Exchanges of shares for ADRs, and ADRs for shares, generally will not be subject to United States federal income tax.

Further, this section is based on the depositary’s representation that it will not, by reason of existing Taiwanese legal and regulatory limitations applicable to depositary receipt programs, engage in the issuance of ADRs prior to the receipt of shares or the release of shares prior to the cancellation of ADRs (“pre-release transactions”). The depositary has not represented that it will not engage in pre-release transactions if such Taiwanese legal and regulatory limitations change. If the depositary engages in such pre-release transactions, there may be material adverse United States federal income tax consequences to holders of ADRs.

You are a U.S. holder if you are a beneficial owner of common shares or ADSs and you are:

	•—		a citizen or resident of the United States;

	•—		a domestic corporation, or other entity subject to United States federal income tax as a domestic corporation;

	•—		an estate whose income is subject to United States federal income tax regardless of its source; or

•—

a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the trust.

If a partnership (including for this purpose any entity treated as a partnership for United States federal income tax purposes) is a beneficial owner of the common shares or ADSs, the United States tax treatment of a partner in the partnership generally will depend on the status of the partner and the activities of the partnership. A holder of the common shares or ADSs that is a partnership and partners in such a partnership should consult their own tax advisors concerning the United States federal income tax consequences of purchasing, owning and disposing of common shares or ADSs.

We urge you to consult your own tax advisor regarding the United States federal, state and local, non-U.S. and other tax consequences of owning and disposing of common shares or ADSs in your particular circumstances.

Taxation of Dividends

Subject to the passive foreign investment company, or PFIC, rules discussed below, if you are a U.S. holder, the gross amount of any dividend we pay in respect of your common shares or ADSs out of our current or accumulated earnings and profits (as determined for United States federal income tax purposes) including the amount of any R.O.C. tax withheld reduced by any credit against such withholding tax on account of the 10% retained earnings tax imposed on us, is subject to United States federal income taxation. Because we do not intend to calculate our earnings and profits under U.S. federal income tax principles, a U.S. Holder should expect that any distribution made by us to such holder will generally be treated as a dividend. If you are a noncorporate U.S. holder, under existing law any dividends paid to you in taxable years beginning before January 1, ~~2011~~2013 that constitute qualified dividend income will be taxable to you at a maximum tax rate of 15% provided that you hold the common shares or ADSs for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and meet other holding period requirements. Dividends we pay with respect to the common shares or ADSs will be qualified dividend income provided that, in the year that you receive the dividend, the common shares or ADSs are readily tradable on an established securities market in the United States. The dividend is taxable to you when you, in the case of common shares, or the Depositary, in the case of ADSs, ~~receives~~receive the dividend actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from other United States corporations. The amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the NT Dollar payments made, determined at the spot NT Dollar/U.S. dollar rate on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date you include the dividend payment in income to the date you convert the payment into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. The gain or loss generally will be income or loss from sources within the United States for foreign tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits, as determined for United States federal income tax purposes, will be treated as a non-taxable return of capital to the extent of your basis in the common shares or ADSs and thereafter as capital gain.

Subject to generally applicable limitations and restrictions, the R.O.C. taxes withheld from dividend distributions and paid over to the R.O.C. (reduced by any credit against such withholding tax on account of the 10% retained earnings tax) will be eligible for credit against your U.S. federal income tax liabilities. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the maximum 15% tax rate. Dividends will be income from sources outside the United States. Dividends ~~paid in taxable years beginning after December 31, 2006~~ will, depending on your circumstances, be “passive” or “general” income which, in either case, is treated separately from other types of income for purposes of computing the foreign tax credit allowable to you. The rules applicable to the United States foreign tax credit are complex, and we urge you to consult your own tax adviser concerning the availability of the credit in your particular circumstances.

Pro rata distributions of common shares by us to holders of common shares or ADSs will generally not be subject to U.S. federal income tax. Accordingly, such distributions will generally not give rise to U.S. federal income against which the R.O.C. tax imposed on such distributions may be credited. Any such R.O.C. tax will generally only be creditable against a U.S. holder’s U.S. federal income tax liability with respect to general limitation income and not against passive ~~income, in the case of taxable years beginning after December 31, 2006.~~

income.

In the event that the ex-dividend date on The New York Stock Exchange or other securities exchange or market for a dividend or distribution that gives rise to R.O.C. withholding tax is after the record date for such dividend or distribution (during which period such ADSs may trade with “due bills”), a purchaser of ADSs during the period from the record date to the ex-dividend date likely would not be entitled to a foreign tax credit for R.O.C. taxes paid in respect of such ADSs even if (i) the purchaser receives the equivalent of such dividend or distribution on the relevant distribution date, and (ii) an amount equivalent to the applicable R.O.C. withholding tax is withheld therefrom or otherwise charged to the account of such purchaser.

Taxation of Capital Gains

Subject to the PFIC rules discussed below, if you are a U.S. holder and you sell or otherwise dispose of your common shares or ADSs, you will recognize capital gain or loss for United States federal income tax purposes equal to the difference between the U.S. dollar value of the amount that you realize and your tax basis, determined in U.S. dollars, in your common shares or ADSs. Capital gain of a noncorporate U.S. holder that is recognized in taxable years beginning before January 1, ~~2011~~2013 is generally taxed under existing law at a maximum rate of 15% where the property is held more than one year. The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.

Medicare Tax

For taxable years beginning after December 31, 2012, a United States person that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from such tax, is subject to a 3.8% tax on the lesser of (1) the United States person’s “net investment income” for the relevant taxable year and (2) the excess of the United States person’s modified adjusted gross income for the taxable year over a certain threshold (which in the case of individuals will be between $125,000 and $250,000, depending on the individual’s circumstances). A holder’s net investment income will generally include its gross dividend income and its net gains from the disposition of ADSs, unless such dividends or net gains are derived in the ordinary course of the conduct of a trade or business (other than a trade or business that consists of certain passive or trading activities). If you are a United States person that is an individual, estate or trust, you are urged to consult your tax advisors regarding the applicability of the Medicare tax to your income and gains in respect of your investment in the ADSs.

Passive Foreign Investment Company Rules

We believe that common shares and ADSs should not be treated as stock of a PFIC for United States federal income tax purposes for the current taxable year and for future taxable years, but this conclusion is a factual determination that is made annually, based on the categories and amounts of income that we earn and the categories and valuation of our assets (including goodwill) for each taxable year, and thus may be subject to change. Accordingly, no assurance can be given that the Company will not be considered by the U.S. Internal Revenue Service to be a PFIC in the current or future years.

In general, if you are a U.S. holder, we will be a PFIC with respect to you if for any taxable year in which you held our common shares or ADSs:

	•—		at least 75% of our gross income for the taxable year is passive income; or

•—

at least 50% of the value, determined on the basis of a quarterly average, of our assets is attributable to assets that produce or are held for the production of passive income.

Passive income generally includes dividends, interest, royalties, rents (other than certain rents and royalties derived in the active conduct of a trade or business), annuities and gains from assets that produce passive income. If a foreign corporation owns directly or indirectly at least 25% by value of the stock of another corporation, the foreign corporation is treated for purposes of the PFIC tests as owning its proportionate share of the assets of the other corporation, and as receiving directly its proportionate share of the other corporation’s income.

If we are treated as a PFIC, and you are a U.S. holder that does not make a mark-to-market election, as described below, you will be subject to special rules with respect to:

	•—		any gain you realize on the sale or other disposition of your common shares or ADSs; and

•—

any excess distribution that we make to you (generally, any distributions to you during a single taxable year that are greater than 125% of the average annual distributions received by you in respect of the common shares or ADSs during the three preceding taxable years or, if shorter, your holding period for the common shares or ADSs).

Under these rules:

	•—		the gain or excess distribution will be allocated ratably over your holding period for the common shares or ADSs,

	•—		the amount allocated to the taxable year in which you realized the gain or excess distribution will be taxed as ordinary income,

	•—		the amount allocated to each prior year, with certain exceptions, will be taxed at the highest tax rate in effect for that year, and

•—

the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such year.

Special rules apply for calculating the amount of the foreign tax credit with respect to excess distributions by a PFIC.

If you own common shares or ADSs in a PFIC that are treated as marketable stock, you may make a mark-to-market election. If you make this election, you will not be subject to the PFIC rules described above. Instead, in general, you will include as ordinary income each year the excess, if any, of the fair market value of your common shares or ADSs at the end of the taxable year over your adjusted basis in your common shares or ADSs. These amounts of ordinary income will not be eligible for the favorable tax rates applicable to qualified dividend income or long-term capital gains. You will also be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted basis of your common shares or ADSs over their fair market value at the end of the taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). Your basis in the common shares or ADSs will be adjusted to reflect any such income or loss amounts. Your gain, if any, recognized upon the sale of your common shares or ADSs will be taxed as ordinary income.

Also, where a company that is a PFIC meets certain reporting requirements, a U.S. holder could avoid certain adverse PFIC consequences described herein by making a “qualified electing fund” (“QEF”) election to be taxed currently on its proportionate share of the PFIC’s ordinary income and net capital gains. U.S. holders will not be able to treat the Company as a QEF if the Company does not prepare the information that U.S. holders would need to make a QEF election.

We do not intend to prepare or provide the information that would enable U.S. Holders to make a QEF election.

In addition, notwithstanding any election you make with regard to the common shares or ADSs, dividends that you receive from us will not constitute qualified dividend income to you if we are a PFIC either in the taxable year of the distribution or the preceding taxable year. Moreover, your common shares or ADSs will be treated as stock in a PFIC if we were a PFIC at any time during your holding period in your shares or ADSs, even if we are not currently a PFIC. For purposes of this rule, if you make a mark-to-market election with respect to your shares or ADSs, you will be treated as having a new holding period in your shares or ADSs beginning on the first day of the first taxable year beginning after the last taxable year for which the mark-to-market election applies. Dividends that you receive that do not constitute qualified dividend income are not eligible for taxation at the 15% maximum rate applicable to qualified dividend income. Instead, you must include the gross amount of any such dividend paid by us out of our accumulated earnings and profits (as determined for United States federal income tax purposes) in your gross income, and it will be subject to tax at rates applicable to ordinary income as well as the special rules provided with respect to excess distributions, if applicable, as described above.

If you own common shares or ADSs during any year that we are a PFIC with respect to you, you must file Internal Revenue Service Form 8621.

The rules dealing with PFICs and with the QEF and mark-to-market elections are very complex and are affected by various factors in addition to those described above, including the Company’s ownership of any non-U.S. subsidiaries. As a result, U.S. holders are urged to consult their own tax advisors concerning the PFIC rules.

Non-U.S. Holders

Except as described in the section titled “Information reporting and backup withholding” below, a non-U.S. holder will not be subject to U.S. federal income or withholding tax on the payment of dividends and the proceeds from the disposition of shares or ADSs unless: such item is effectively connected with the conduct by the non-U.S. holder of a trade or business in the United States and, in the case of a resident of a country which has a treaty with the United States and is eligible for the benefits of the treaty with the United States, such item is attributable to a permanent establishment or, in the case of an individual, a fixed place of business, in the United States; or the non-U.S. holder is an individual who holds the shares or ADSs as a capital asset and is present in the United States for 183 days or more in the taxable year of the disposition, certain other conditions are met, and such non-U.S. holder does not qualify for an exemption. If the first exception applies, the non-U.S. holder generally will be subject to U.S. federal income tax with respect to such item in the same manner as a U.S. holder unless otherwise provided in an applicable income tax treaty; a non-U.S. holder that is a corporation for U.S. federal income tax purposes may also be subject to a branch profits tax with respect to such item at a rate of 30% (or at a reduced rate under an applicable income tax treaty). If the second exception applies, the non-U.S. holder generally will be subject to U.S. federal income tax at a rate of 30% (or at a reduced rate under an applicable income tax treaty) on the amount by which such non-U.S. holder’s capital gains allocable to U.S. sources exceed capital losses allocable to U.S. sources during the taxable year of disposition of the shares or ADSs.

Information reporting and backup withholding

U.S. holders generally are subject to information reporting requirements with respect to dividends paid on shares or ADSs and on the proceeds from the sale, exchange or disposition of shares or ADSs unless the holder is a corporation or otherwise establishes a basis for exemption. In addition, U.S. holders are subject to back-up withholding (currently at 28%) on dividends paid on shares or ADSs, and on the sale, exchange or other disposition of shares or ADSs, unless each such U.S. holder provides a taxpayer identification number and a duly executed IRS Form W-9 or otherwise establishes an exemption. Non-U.S. holders generally are not subject to information reporting or backup withholding with respect to dividends, or the proceeds from the sale, exchange or other disposition of shares or ADSs, provided that each such non-U.S. holder certifies as to its foreign status on the applicable duly executed IRS Form W-8 or otherwise establishes an exemption. Backup withholding is not an additional tax and the amount of any backup withholding will be allowed as a credit against a U.S. holder’s or non-U.S. holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that certain required information is timely furnished to the IRS.

Information with Respect to Foreign Financial Assets

Under recently enacted legislation, individuals that own “specified foreign financial assets” with an aggregate value in excess of $50,000 in taxable years beginning after March 18, 2010 will generally be required to file an information report with respect to such assets with their tax returns. “Specified foreign financial assets” include any financial accounts maintained by foreign financial institutions, as well as any of the following, but only if they are not held in accounts maintained by financial institutions: (i) stocks and securities issued by non-U.S. persons, (ii) financial instruments and contracts held for investment that have non-U.S. issuers or counterparties and (iii) interests in foreign entities. U.S. holders that are individuals are urged to consult their tax advisors regarding the application of this legislation to their ownership of ADSs.

Documents on Display

We are subject to the information requirements of the Securities Exchange Act of 1934, as amended. In accordance with these requirements, we file reports and other information with the Securities and Exchange Commission. These materials, including this annual report and the exhibits thereto, may be inspected and copied at the Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Commission’s Public Reference Room by calling the Commission in the United States at 1-800-SEC-0330. The Commission also maintains a web site at http://www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically with the Commission. In addition, material filed by us can be inspected at the offices of the New York Stock Exchange at 20 Broad Street, New York, New York 10005.

~~ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS~~

ITEM 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Our exposure to financial market risks derives primarily from changes in interest rates and foreign exchange rates. To mitigate these risks, we utilize derivative financial instruments, the application of which, pursuant to our internal guidelines, is for hedging purposes and not for trading or speculative purposes.

Interest Rate Risks:~~Our exposure~~ We are exposed to interest rate risks, ~~relates~~ primarily related to ~~our long-term debt, which is normally assumed to finance our capital expenditures.~~

borrowings for general corporate purposes.

The table below presents annual principal amounts due and related weighted average implied forward interest rates by year of maturity for our debt obligations outstanding as of December 31, ~~2009.~~

As of December 31, 2009
Expected Maturity Dates As of December 31, 2008
2014 and Aggregate Aggregate
2010 2011 2012 2013 thereafter Total Fair Value Total Fair Value
Long-term debt (in millions)
US$ denominated debt
Variable rate US$20 — — — — US$20 US$20 US$20 US$20
Average interest rate 0.89% — — — — 0.89% — 2.89% —
NT$ denominated debt
Variable rate NT$308 NT$276 NT$243 NT$60 — NT$887 NT$887 NT$984 NT$984
Average interest rate 1.18% 1.63% 2.13% 2.52% — 1.67%⁽²⁾ — 1.57%⁽²⁾ —
Fixed rate — — NT$4,500 — — NT$4,500 NT$4,575⁽¹⁾ NT$12,500 NT$12,612⁽¹⁾
Average interest rate — — 3.00% — — 3.00% — 2.84%⁽²⁾ —

2012.


	As of December 31, 2012 Expected Maturity Dates														As of December 31, 2011
	2013		2014		2015		2016		2017 and thereafter		Total		Aggregate Fair Value		Total		Aggregate Fair Value
Long-term debt (in millions)
NT$ denominated debt
Variable rate		NT$128		NT$588		NT$137		NT$625		NT$10		NT$1,488		NT$1,488		NT$1,650		NT$1,650
Average interest rate		1.25%		1.60%		1.47%		1.56%		1.70%		1.54%⁽²⁾				1.52%⁽²⁾		-
Fixed rate		-		-		-		NT$10,500		NT$69,500		NT$80,000		NT$80,343⁽¹⁾		NT$22,500		NT$22,597⁽¹⁾
Average interest rate		-		-		-		1.40%		1.38%		1.39%⁽²⁾		-		1.80%⁽²⁾		-
Interest rate swaps (in millions)
Variable to fixed rate		-		-		-		-		-		-		-		NT$80		NT$(0)
Average pay fixed rate		-		-		-		-		-		-		-		1.38%		-


⁽¹⁾		Represents the then quoted market price.


⁽²⁾		Average interest rates under “Total” are the weighted average ~~of the average~~ interest rates of each year for ~~loan~~loans outstanding.

Foreign Currency Risk:Substantial portions of our revenues and expenses are denominated in currencies other than ~~the~~ NT dollar. As a result, as of December 31, ~~2009, more than 84%~~2012, the majority of our ~~accounts payable~~receivables and payables ~~for purchases of capital goods~~ were denominated in currencies other than ~~the~~ NT dollar, primarily in U.S. ~~dollars,~~dollar, Euro and Japanese ~~yen and Euros. More than 99% of our accounts receivable and receivables from related parties were denominated in non-NT dollars, mainly in U.S. dollars.~~Yen. To protect against reductions in value and the volatility of future cash flows caused by changes in foreign exchange rates, we utilize ~~derivative financial instruments,~~foreign currency denominated debts and offsetting derivatives, including currency forward contracts and cross currency swaps, to hedge our currency exposure. These hedging transactions help to reduce partially, but do not eliminate, the impact of foreign currency exchange rate movements. Based on a sensitivity analysis performed on our financial position as of December 31, 2012, a hypothetical, unfavorable 10% movement in the levels of foreign currency exchange rates relative to the NT dollar, after taking into account hedges and offsetting positions, would have increased our net unrealized losses by NT$887 million.

Our policy is to account for the unrealized gains or losses of these hedging contracts on a mark-to-market rate basis ~~and to realize the gains~~through profit or ~~losses of these contracts when the contracts matured. Effective January 1, 2006, these~~loss. These derivative financial instruments are required under R.O.C. Statement of Financial Accounting Standards No. 34 “Financial Instruments: Recognition and Measurement” to be recognized at fair market value on the balance sheet. Please see note 2426 of our consolidated financial statements for information on the net assets, liabilities and purchase commitments that have been hedged by these derivative transactions.

The table below presents our outstanding financial derivative transactions as of December 31, ~~2009.~~2012. These contracts all ~~have~~had a maturity date of not more than 12 months.

Forward
Exchange
Agreements As of December 31, 2009 As of
(in millions) Expected Maturity Dates December 31, 2008
2014 and Aggregate Aggregate
2010 2011 2012 2013 thereafter Total Fair Value⁽¹⁾ Total Fair Value⁽¹⁾
(Sell US$/Buy NT$) Contract amount US$21.3 — — — — US$21.3 NT$4.3 US$138.9 NT$0.4
Average contractual exchange rate (against NT$ dollars) 32.24 — — — — 32.24 — 32.82 —
(Buy NT$/Sell EUR) Contract amount — — — — — — — EUR1.5 NT$(6.5 )
Average contractual exchange rate (against NT$ dollars) — — — — — — — 42.1 —
(Buy JPY/Sell US$) Contract amount — — — — — — — US$0.1 NT$0
Average contractual exchange rate (against US$ dollars) — — — — — — — 90.08 —
(Sell RMB/Buy US$) Contract amount — — — — — — — RMB55 NT$(1.3 )
Average contractual exchange rate (against NT$ dollars) — — — — — — — 6.88 —


Forward Exchange Agreements (in millions)	As of December 31, 2012 Expected Maturity Dates														As of December 31, 2011

	2013		2014		2015		2016		2017 and thereafter		Total		Aggregate Fair Value⁽¹⁾		Total		Aggregate Fair Value⁽¹⁾
(Sell US$/Buy NT$) Contract amount		US$13.7		-		-		-		-		US$13.7		NT$0.4		US$16.9		NT$(1.4)

Average contractual exchange rate (against NT$ dollars)		29.07		-		-		-		-		29.07		-		30.18		-
(Sell NT$/Buy JPY) Contract amount		NT$44.1		-		-		-		-		NT$44.1		NT$(0.4)		-		-

Average contractual exchange rate (against NT$ dollars)		0.34		-		-		-		-		0.34		-		-		-

(Sell RMB/Buy US$) Contract amount		-		-		-		-		-		-		-		RMB1,118.7		NT$(10.9)

Average contractual exchange rate (against RMB)		-		-		-		-		-		-		-		6.32		-
(Sell EUR/Buy US$) Contract amount		-		-		-		-		-		-		-		-		-

Average contractual exchange rate (against US$ dollars)		-		-		-		-		-		-		-		-		-
(Sell EUR/Buy NT$) Contract amount		-		-		-		-		-		-		-		EUR38.6		NT$14.9

Average contractual exchange rate (against NT$ dollars)		-		-		-		-		-		-		-		39.59		-
(Sell US$/Buy EUR) Contract amount		-		-		-		-		-		-		-		US$2.1		NT$(0.9)

Average contractual exchange rate (against US$ dollars)		-		-		-		-		-		-		-		1.31		-
(Sell US$/Buy JPY) Contract amount		-		-		-		-		-		-		-		US$3.3		NT$0.1

Average contractual exchange rate (against Japanese Yen)		-		-		-		-		-		-		-		77.92		-
(Sell NT$/Buy US$) Contract amount		NT$590		-		-		-		-		NT$590		NT$(0.2)		NT$163.5		NT$(0.1)

Average contractual exchange rate (against NT$ dollars)		28.94		-		-		-		-		28.94		-		30.28		-
(Sell US$/Buy RMB) Contract amount		US$20		-		-		-		-		US$20		NT$(7.7)		-		-

Average contractual exchange rate (against Japanese Yen)		6.24		-		-		-		-		6.24		-		-		-
(Sell NT$/Buy EUR) Contract amount		NT$9,417		-		-		-		-		NT$9,417		NT$34.3		-		-

Average contractual exchange rate (against NT$ dollars)		38.28		-		-		-		-		38.28		-		-		-

Cross Currency
Swap
(in millions)
As of December 31, 2012
Expected Maturity Dates As of
December 31, 2011
        2012           2013     2014     2015   2016
  onward           Total         Aggregate
Fair
Value⁽¹⁾         Total         Aggregate
Fair
Value⁽¹⁾
(Sell NT$/Buy US$) Contract amount
NT$1,083.1    -    -    -    -    NT$1,083.1    NT$(0.7)    NT$420.4    NT$(0.1)
Range of interest rate paid
0%    -    -    -    -    0%    -    0%    -
Range of interest rate received
0.06%    -    -    -    -    0.06%    -    0.48%    -
(Sell US$/Buy NT$) Contract amount
US$275    -    -    -    -    US$275    NT$(1.8)    -    -
Range of interest rate paid
0.14%~0.17%    -    -    -    -    0.14%~0.17%    -    -    -
Range of interest rate received
0%    -    -    -    -    0%    -    -    -

Cross Currency
Swap As of December 31, 2009 As of
(in millions) Expected Maturity Dates December 31, 2008
Aggregate Aggregate
2014 Fair Fair
2010 2011 2012 2013 onward Total Value⁽¹⁾ Total Value⁽¹⁾
(Sell US$/Buy NT$) Contract amount US$750 — — — — US$750 NT$181.8 US$307 NT$(35.3 )
Range of interest rate paid 0.24%-0.70 % — — — — 0.24%-0.70 % — 0.54%-5.00 % —
Range of interest rate received 0.00%-0.38 % — — — — 0.00%-0.38 % — 0.00%-3.83 % —


⁽¹⁾		Fair value represents the amount of the receivable from or payable to the counter-parties if the contracts were terminated on the balance sheet date.

Other Market Risk:In addition to our interests in VIS, SSMC, VisEra, Mcube, GUC and Motech, we have made investments in equity securities including convertible bonds issued by private companies related to semiconductor and other technology industries mostly through a number of investment funds. As of December 31, ~~2009,~~2012, the aggregate carrying value of these investments on our balance sheet was NT$~~3,081~~3,605 million (US$96124 million). As of December 31, ~~2009,~~2012, approximately NT$~~2,579~~2,976 million (US$81102 million) of this amount in venture capital investments was made through InveStar Semiconductor Development Fund, and InveStar Semiconductor Development Fund (II), our two 97.1% owned subsidiaries, Emerging Alliance Fund L.P., VentureTech Alliance Fund II, and VentureTech Alliance Fund III, our 99.5%, 98.0% and ~~98.0%~~99.0% respectively owned subsidiaries. The carrying value of these investments in private companies and in the investment funds are subject to fluctuation based on many factors such as prevailing market conditions. Moreover, because most of the investments are unlisted securities, the fair market value may be significantly different from our carrying value. Upon any subsequent sale of our investments, we may not be able to realize our carrying value as of December 31, ~~2009~~2012 or any subsequent date. As of December 31, ~~2009,~~2012, we also had investments in the amount of NT$~~41,246~~46,219 million (US$~~1,291~~1,591 million), ~~including corporate bonds, agency bonds, government bonds, public-traded stocks, corporate issued notes, money market funds, open-end mutual funds, and structured time deposits,~~ of which, NT$~~15,748~~41,162 million (US$~~493~~1,417 million) was classified as available-for-sale which predominantly consists of our investment in ASML shares with a carrying value of NT$38,751 million (US$1,334 million) and NT$~~25,498~~5,057 million (US$~~798~~174 million) was classified as held-to-maturity. We have experienced declines in the value of certain ~~privately held~~ investments ~~and publicly traded securities~~ and recorded an impairment loss of NT$~~913~~3,045 million (US$29105 million) in ~~2009.~~2012. As of December 31, ~~2009,~~2012, our net unrealized ~~gains of NT$454 million (US$14 million)~~gain related to bonds and publicly traded stocks ~~were mainly due to the market rebound in second half of 2009. In addition,~~was NT$~~186~~7,973 million (US$6274 million) ~~of our investments was classified as the trading financial assets.~~

See “Item 3. Key Information — Exchange Rates” for a summary of the movement between the NT dollar and the U.S. dollar during recent years.

~~ITEM 12D. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES~~

ITEM 12D.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Depositary Fees and Charges

Under the terms of the Depository Agreement for the TSMC American Depositary Shares (ADSs), an ADS holder may have to pay the following service fees to the depositary bank:


Service	Fees
~~Service~~		~~Fees~~
Issuance of ADS	Up to US$0.05 (or fractions thereof) per ADS issued

Cancellation of ADS	Up to US$0.05 (or fractions thereof) per ADS cancelled

Distribution of cash proceeds (i.e. upon sale of rights and other entitlements)	Up to US$0.02 per ADS held

Distribution of ADS rights or other free distributions of Stock (excluding stock dividends)	Up to US$0.05 (or fractions thereof) per ADS issued

Depositary fees payable upon the issuance and cancellation of ADSs are typically paid to the depositary bank by the brokers (on behalf of their clients) receiving the newly-issued ADSs from the depositary bank and by the brokers (on behalf of their clients) delivering the ADSs to the depositary bank for cancellation. The brokers in turn charge these transaction fees to their clients.

Depositary Payment

In ~~2009, we received the following payments from~~2012, Citibank, N.A., the Depositary Bank for our ADR ~~program:~~


~~Reimbursement of listing fees (NYSE):~~	~~US$~~	~~500,000~~

~~Reimbursement of proxy process expenses (printing, postage and distribution):~~	~~US$~~	~~352,624~~

~~Total~~	~~US$~~	~~852,624~~

program, made no payment to us.

PART II

~~ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES~~

ITEM 13.

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

~~ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS~~

ITEM 14.

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

None.

~~ITEM 15. CONTROLS AND PROCEDURES~~

ITEM 15.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures.Pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, an evaluation was carried out under the supervision and with the participation of our principal executive and principal financial officers of the effectiveness of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of December 31, ~~2009.~~

2012.
Management’s Annual Report on Internal Control ~~Over~~over Financial Reporting.Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed under the supervision of our principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with R.O.C. GAAP and the required reconciliation to U.S. GAAP. Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with R.O.C. GAAP and the required reconciliation to U.S. GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

As of the end of ~~2009,~~2012, management conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management has determined that our internal control over financial reporting as of December 31, ~~2009~~2012 is effective.

Our independent registered public accounting firm, Deloitte & Touche, independently assessed the effectiveness of our company’s internal control over financial reporting. Deloitte & Touche has issued an attestation report, which is included at the end of this Item 15.

Changes in Internal Control ~~Over~~over Financial Reporting.During ~~2009,~~2012, there was no material change to our internal control over financial ~~reporting occurred that has materially affected, or is reasonably likely to materially affect, our internal control over financial~~ reporting.

Attestation Report of the Independent Registered Public Accounting Firm.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Taiwan Semiconductor Manufacturing Company Limited

We have audited the internal control over financial reporting of Taiwan Semiconductor Manufacturing Company Limited and subsidiaries (the “Company”) as of December 31, ~~2009,~~2012, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, ~~2009,~~2012, based on the criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with auditing standards generally accepted in the Republic of China and the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, ~~2009~~2012 of the Company and our report dated ~~April 6, 2010~~March 14, 2013 expressed an unqualified opinion on those financial statements and included explanatory paragraphs regarding i) the ~~Company’s adoption of the newly revised Republic of China Statements of Financial Accounting Standards No. 10, “Accounting for Inventories”; ii) the~~ reconciliation to accounting principles generally accepted in the United States of America; and ~~iii)~~ii) the convenience translation of New Taiwan dollar amounts into U.S. dollar amounts.

~~/s/ Deloitte & Touche~~
~~Taipei, Taiwan~~
~~The Republic of China~~
~~April 6, 2010~~

/s/ Deloitte & Touche

Taipei, Taiwan

The Republic of China

March 14, 2013

ITEM 16A.

AUDIT COMMITTEE FINANCIAL EXPERT

~~ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT~~

Our Audit Committee is currently comprised of ~~three~~five independent directors. Since June 1, 2005, no Audit Committee member has served as audit committee financial expert. Instead, our Audit Committee has engaged a financial expert consultant who our board of directors determined has the attributes required of an “audit committee financial expert” as defined under the applicable rules of the U.S. SEC issued pursuant to Section 407 of the Sarbanes-Oxley Act of 2002. In particular, our board of directors appointed Mr. J.C. Lobbezoo to serve as an independent financial expert consultant to our Audit Committee from February 14, 2006 onwards. Our board of directors believes that the Audit Committee members along with the advisors of the Audit Committee, including the financial expert consultant, possess sufficient financial knowledge and experience.

~~ITEM 16B. CODE OF ETHICS~~

ITEM 16B.

CODE OF ETHICS

We have adopted a “Policy of Ethics and Business Conduct” for employees, officers and directors, which also applies to our Chief Executive Officer, Chief Financial Officer, Controller, and any other persons performing similar functions.

We will provide to any person without charge, upon request, a copy of our “Policy of Ethics and Business Conduct”. Any request should be made per email to our Investor Relations Division atinvest@tsmc.com.

~~ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES~~

ITEM 16C.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The table below summarizes the fees that we paid for services provided by Deloitte & Touche and its affiliated firms (the “Deloitte Entities”) for the years ended December 31, ~~2008~~2011 and ~~2009.~~

2008 2009
NT$ NT$
(In thousands)
Audit Fees 82,412 74,166
Audit Related Fees 1,023 285
Tax Fees 160 —
All Other fees — 600

Total 83,595 75,051

2012.
   2011    2012
               NT$                             NT$
   (In thousands)
Audit Fees
   77,056       66,048
Audit-Related Fees
   350       590
All Other Fees
   400       2,250




Total
   77,806       68,888




Audit Fees.This category includes the audit of our annual financial statements and internal control over financial reporting, review of quarterly financial statements and services that are normally provided by the independent auditors in connection with statutory and regulatory filings or engagements for those fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of quarterly financial statements and statutory audits required by non-U.S. jurisdictions, including statutory audits required by the Tax Bureau of the R.O.C., Customs Bureau of the R.O.C., and Financial Supervisory Commission (“R.O.C. Financial Supervisory Commission”) of the R.O.C.

Audit-Related Fees. This category consists of assurance and related services by the Deloitte Entities that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.” The services for the fees disclosed under this category ~~includes~~include review of certain regulatory filings with the R.O.C. Financial Supervisory Commission.

~~Tax Fees.~~~~This category consists of professional services rendered by the Deloitte Entities for tax compliance and tax advice.~~

All Other Fees. This category consists of professional services rendered by the Deloitte Entities for IFRS adoption.

We have not established any pre-approval policies and procedures, and, accordingly, all non-audit services need to be pre-approved by the Audit Committee on a case-by-case basis. In its meeting of May 5, 2006, the Audit Committee agreed to delegate to the Chairman of the Audit Committee authority to pre-approve non-material unanticipated non-audit services and to report any such actions to the Audit Committee for ratification at its next scheduled meeting. All audit and non-audit services performed by Deloitte & Touche after May 6, 2003, the effective date of revised Rule 2-01(c) (7) of Regulation S-X entitled “Audit Committee Administration of the Engagement” on strengthening requirements regarding auditor independence, were pre-approved by the Audit Committee.

~~ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES~~

ITEM 16D.

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not applicable.

~~ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS~~

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

Not applicable.

~~ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT~~

ITEM 16F.

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

Not applicable.

~~ITEM 16G. CORPORATE GOVERNANCE~~

ITEM 16G.

CORPORATE GOVERNANCE

TSMC’s corporate governance practices are governed by applicable Taiwan law, specifically, the Company Law and Securities Exchange Law, and also TSMC’s Articles of Incorporation. Also, because TSMC securities are registered with the U.S. Securities and Exchange Commission (“U.S. SEC”) and are listed on the New York Stock Exchange (“NYSE”), TSMC is subject to corporate governance requirements applicable to NYSE-listed foreign private issuers.

Under Section 303A of the NYSE Listed Company Manual, NYSE-listed non-US companies may, in general, follow their home country corporate governance practices in lieu of most of the new NYSE corporate governance requirements. However, all NYSE-listed foreign private issuers must comply with NYSE Sections 303A.06, 303A.11, 303A.12(b) and 303A.12(c).

Item 16G as well as NYSE Section 303A.11 requires that foreign private issuers disclose any significant ways in which their corporate governance practices differ from US companies under NYSE listing standards. A NYSE-listed foreign private issuer is required to provide to its US investors, a brief, general summary of the significant differences, either: (a) on the company website in English, or (b) in its annual report distributed to its US investors. To comply with NYSE Section 303A.11, TSMC has prepared the comparison in the table below.

The most relevant differences between TSMC corporate governance practices and NYSE standards for listed companies are as follows:


NYSE Standards for US Companies
under Listed Company Manual Section 303A
~~Section 303A~~		TSMC Corporate Practices
NYSE Section 303A.01requires a NYSE-listed company to have a majority of independent directors on its board of directors.		Taiwan law does not require a board of directors of publicly traded companies to consist of a majority of independent directors. Taiwan law requires public companies meeting certain criteria to have at least two independent directors but no less than one fifth of the total number of directors on its board of directors. In addition, Taiwan law requires public companies to disclose information pertaining to their directors, including their independence status. Please see TSMC’s annual report for the relevant year filed with the Taiwan authorities and the U.S. SEC (both of which are available online at www.tsmc.com) for information on the total number of TSMC directors and directors who would be considered independent under NYSE Section 303A.02 and Taiwan law.


~~NYSE Standards for US Companies~~
~~under Listed Company Manual~~
~~Section 303A~~		~~TSMC Corporate Practices~~
NYSE Section 303A.02 establishes general standards to evaluate directors’ independence (no director qualifies as independent unless the board of directors affirmatively determines that the director has no material relationship with the listed company either directly or as a partner, shareholder or officer of an organization that has a relationship with the listed company).		Taiwan law establishes comparable standards to evaluate director independence. For further information, please consult TSMC’s Taiwan Annual Report for the relevant year.

NYSE Section 303A.03requires non-management directors to meet at regularly scheduled executive meetings that are not attended by management.		Taiwan law does not contain such a requirement. Except for meetings of sub-committees of the board of directors and those held by managing directors, Taiwan law does not allow separate board meetings of part but not all of the board of directors.

NYSE Section 303A.04requires listed companies to have a nominating/corporate governance committee comprised entirely of independent directors which committee shall have a written charter establishing certain minimum responsibilities as set forth in NYSE Section 303A.04(b)(i) and providing for an annual evaluation of the committee’s performance.
Taiwan law does not contain such a requirement. Taiwan law requires directors to be nominated either by the shareholders or by the entire board of directors.
NYSE Section 303A.05(a)requires listed companies to have a compensation committee comprised entirely of independent directors.
Taiwan law ~~does not require the board of directors~~requires certain public companies, such as us, to establish a compensation ~~committee. Nevertheless,~~committee by September 30, 2011. TSMC, however, has established aits compensation ~~committee.~~committee since 2003, which has met the requirements under the Taiwan law. Please see TSMC’s annual report for the relevant year filed with the Taiwan authorities and the U.S. SEC (both of which are available online at www.tsmc.com) for further information regarding the composition and functions of its compensation committee.
NYSE Section 303A.05(b)requires a compensation committee’s charter to establish certain minimum responsibilities and to provide for an annual evaluation of the committee’s performance.
Taiwan law ~~does not contain~~requires certain public companies, such as us, to establish a ~~requirement. Nevertheless,~~compensation committee by September 30, 2011. TSMC, however, has established its compensation committee since 2003, which has met the requirements under the Taiwan law, and TSMC’s compensation committee charter contains the same responsibilities as those provided under NYSE Section 303A.05(b)(i) and mandates the committee to review the adequacy of its charter annually.
NYSE Section 303A.06requires listed companies to have an audit committee that satisfies the requirements of Rule 10A-3 under the Securities Exchange Act of 1934 (the Exchange Act). Foreign private issuers must satisfy the requirements of Rule 10A-3 under the Exchange Act by July 31, 2005.
Taiwan law requires public companies meeting certain criteria (which has yet been promulgated) to have an audit committee that satisfies comparable standards or public companies may voluntarily elect to establish an audit committee. TSMC has voluntarily elected to establish an audit committee. Please see TSMC’s annual report for the relevant year filed with the Taiwan authorities and the U.S. SEC (both of which are available online at www.tsmc.com) for further information regarding the composition of its audit committee. TSMC’s audit committee members are all financially literate and are assisted by a financial expert consultant.
NYSE Section 303A.07(a)requires an audit committee to consist of at least three board members. All of its members shall be financially literate or must acquire such financial knowledge within a reasonable period and at least one of its members shall have experience in accounting or financial administration.
Taiwan law requires all independent directors of a public company to be members of the audit committee if the company has established such a committee of which at least one shall have accounting or financial expertise. Please see TSMC’s annual report for the relevant year filed with the Taiwan authorities and the U.S. SEC (both of which are available online at www.tsmc.com) for further information regarding the composition of its audit committee. TSMC’s audit committee members are all financially literate and are assisted by a financial expert consultant.


~~NYSE Standards for US Companies~~
~~under Listed Company Manual~~
~~Section 303A~~		~~TSMC Corporate Practices~~
NYSE Section 303A.07(a) requires that if an audit committee member is simultaneously a member of the audit committee of more than three public companies, and the listed company does not limit the number of audit committees on which its members may serve, then, in each case the board of that company shall determine whether the simultaneous service would prevent such member from effectively serving on the listed company’s audit committee, and shall report its decision in the annual proxy statement of the company or in the company’s annual report on Form 10-K filed with the SEC.		Taiwan law does not contain such requirement. Taiwan law requires all independent directors of a public company to be members of the audit committee if the company has established such a committee. Taiwan law forbids an independent director from serving as an independent director on a total of four or more Taiwan public companies.

NYSE Section ~~303A.07(b)~~303A.07(a)All members of the audit committee are required to be independent.
Taiwan law requires all independent directors of a public company to be members of the audit committee if the company has established such a committee.
NYSE Section ~~303A.07(c)~~303A.07(b)requires an audit committee to have a written charter establishing the duties and responsibilities of its members, including the duties and responsibilities required, at a minimum, by ~~Section~~Rule 10A-3(b)~~(1)~~(2), (3), (4) & (5) of the Exchange Act.
Taiwan law requires comparable standards. TSMC currently has a written audit committee charter containing the same duties and responsibilities as those provided under Section 10A-3(b)(1) of the Exchange Act.
NYSE Section ~~303A.07(c)~~303A.07(b)(iii)(B) and (C) establishes audit committee objectives: (i) to discuss the annual audited financial statements and the quarterly financial statements of the company with management and the independent auditor, including the information disclosed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; and (ii) to discuss the company’s press releases relating to its earnings as well as the financial information and guidelines relating to its earnings that are supplied to analysts and rating agencies.
TSMC’s written audit committee charter establishes the same audit committee objectives.
NYSE Section ~~303A.07(c)~~303A.07(b)(iii)(G)requires an audit committee to establish clear policies for hiring external auditor’s employees.
Taiwan law does not contain such requirement.
NYSE Section ~~303A.07(d)~~303A.07(c)requires each company to have an internal audit function that provides to the management and to the audit committee ~~regular~~ongoing assessments on the company’s risk management processes and internal control system.
Taiwan law requires public companies to establish an internal audit department. Internal auditors are subject to strict qualification standards under Taiwan law, which require the board of directors to approve the head of a company’s internal audit department. TSMC’s internal audit department has substantially the same responsibilities as provided under NYSE Section 303A.07(d).
NYSE Section 303A.08requires each company to give to shareholders the opportunity to vote on all equity based compensation plans and material revisions thereto with certain exceptions.
Taiwan law imposes a similar requirement. TSMC currently has in place ~~two~~an equity based compensation ~~plans. First,~~plan. TSMC’s employee stock option plans (“ESOPs”) are required to be approved by the board of directors. Shareholders’ approval is not required if the number of options granted under the relevant ESOP does not exceed the reservation made in TSMC’s Articles of Incorporation. Otherwise, any change to such reservation in the Articles requires shareholders’ approval. ~~Second, TSMC’s employees’ profit sharing requires shareholders’ approval.~~
NYSE Section 303A.09requires public companies to adopt and disclose corporate governance guidelines, including several issues for which such reporting is mandatory, and to include such information on the company’s website (which website should also include the charters of the audit committee, the nominating committee, and the compensation committee.)
Under Taiwan law, if a listed company has adopted corporate governance guidelines, it must inform investors how to access such guidelines.


~~NYSE Standards for US Companies~~
~~under Listed Company Manual~~
~~Section 303A~~		~~TSMC Corporate Practices~~
NYSE Section 303A.09requires the board of directors to make a self-assessment of its performance at least once a year to determine if it or its committees function effectively and report thereon.		Taiwan law does not contain such requirement.

NYSE Section 303A.10provides for the adoption of a Code of Business Conduct and Ethics and sets out the topics that such code must contain.		Taiwan law does not contain such requirement. But, because of sound corporate governance principles, TSMC has adopted a “Policy of Ethics and Business Conduct”, which complies with the Sarbanes-Oxley Act’s requirements concerning financial officers and CEO accountability.

NYSE Section 303A.12(a) requires the CEO, on a yearly basis, to certify to the NYSE that he or she knows of no violation by the company of NYSE rules relating to corporate governance.
Taiwan law does not contain such a requirement. But, in order to comply with relevant SEC regulations, TSMC’s CEO is required to certify in TSMC’s 20-F annual report that, to his or her knowledge the information contained therein fairly represents in all material respects the financial condition and results of operation of TSMC.
NYSE Section 303A.12(b)requires the CEO to notify the NYSE in writing whenever any executive officer of the company becomes aware of any substantial non-fulfillment of any applicable provision under NYSE Section 303A.
Taiwan law does not contain such requirement. But, in order to be consistent with the corporate governance principles established under the Sarbanes-Oxley Act of 2002, TSMC’s CEO complies with the notice provision as set forth under NYSE Section 303A.12(b).
NYSE Section 303A.12(c)requires each listed company to submit an executed Written Affirmation annually to the NYSE and Interim Written Affirmation each time a change occurs in the board or any of the committees subject to Section 303A.
Taiwan law does not contain such requirement. But, in order to comply with the corporate governance principles established under the Sarbanes-Oxley Act of 2002, TSMC ~~will comply~~complies with NYSE Section 303A.12(c).

ITEM 16H.

MINE SAFETY DISCLOSURE

Not applicable.

PART III

~~ITEM 17. FINANCIAL STATEMENTS~~

ITEM 17.

FINANCIAL STATEMENTS

The Company has elected to provide the financial statements and related information specified in Item 18 in lieu of Item 17.

~~ITEM 18. FINANCIAL STATEMENTS~~

ITEM 18.

FINANCIAL STATEMENTS

Refer to the consolidated financial statements on page F-1.

~~ITEM 19. EXHIBITS~~

ITEM 19.

EXHIBITS


(a)		See page F-1 for an index of the financial statements filed as part of this annual report.

(b)		Exhibits to this Annual Report:


1.1⁽¹⁾		Articles of Incorporation of Taiwan Semiconductor Manufacturing Company Limited, as amended and restated on ~~May 7, 2007.~~June 12, 2012.


2b.1		The Company hereby agrees to furnish to the Securities and Exchange Commission, upon request, copies of instruments defining the rights of holders of long-term debt of the Company and its subsidiaries.


3.1⁽¹⁾		Rules for Election of Directors, as amended and restated on ~~May 7, 2007.~~June 12, 2012.


3.2⁽¹¹⁾		Rules and Procedures of Board of Directors Meetings, as ~~adopted~~“amended and restated” on ~~June~~Nov 13, ~~2008~~2012.


3.3⁽³⁾⁽²⁾		Rules and Procedures of Shareholders’ Meetings, as amended and restated on May 7, 2002.



4.1⁽³⁾⁽²⁾		Land Lease with Southern Taiwan Science Park Administration (formerly Tainan Science Park Administration) relating to the fabs located in ~~Tainan~~Southern Taiwan Science Park (effective August 1, 1997 to July 31, 2017) (in Chinese with English summary).

4.2⁽⁴⁾⁽³⁾
   Land Lease with Southern Taiwan Science Park Administration (formerly Tainan Science Park Administration) relating to the fabs located in ~~Tainan~~Southern Taiwan Science Park (effective May 1, 1998 to April 30, 2018) (in Chinese with English summary).

4.3⁽⁴⁾⁽³⁾
   Land Lease with Southern Taiwan Science Park Administration (formerly Tainan Science Park Administration) relating to the fabs located in ~~Tainan~~Southern Taiwan Science Park (effective November 1, 1999 to October 31, 2019) (in Chinese with English summary).

4.4⁽⁴⁾⁽³⁾
   Land Lease with Hsinchu Science Park Administration relating to Fab 7 (effective December 4, 1989 to December 3, 2009) (in Chinese with English summary).

4.5⁽³⁾⁽²⁾
   Land Lease with Hsinchu Science Park Administration relating to the Fab 7 (effective July 1, 1995 to June 30, 2015) (in Chinese with English summary).

4.6⁽³⁾⁽²⁾
   Land Lease with Hsinchu Science Park Administration relating to Fab 8 (effective March 15, 1997 to March 14, 2017) (in Chinese with English summary).

4.7⁽⁴⁾⁽³⁾
   Land Lease with Hsinchu Science Park Administration relating to Fab 12 (Phase I) (effective December 1, 1999 to November 30, 2019) (in Chinese with English summary).

4.8a⁽⁵⁾⁽⁴⁾
   Taiwan Semiconductor Manufacturing Company Limited 2002 Employee Stock Option Plan, as revised by the board of directors on March 4, 2003.

4.8aa⁽⁶⁾⁽⁵⁾
   Taiwan Semiconductor Manufacturing Company Limited 2003 Employee Stock Option Plan.

4.8aaa⁽⁷⁾⁽⁶⁾
   Taiwan Semiconductor Manufacturing Company Limited 2004 Employee Stock Option Plan.

4.8aaaa⁽²⁾⁽¹⁾
   Taiwan Semiconductor Manufacturing Company Limited 2004 Employee Stock Option Plan, as revised on February 22, 2005.

4.8b⁽⁵⁾⁽⁴⁾
   TSMC North America 2002 Employee Stock Option Plan, as revised on June 5, 2003.

4.8bb⁽⁶⁾⁽⁵⁾
   TSMC North America 2003 Employee Stock Option Plan.

4.8c⁽⁵⁾⁽⁴⁾
   WaferTech, LLC 2002 Employee Stock Option Plan, as revised on June 5, 2003.

4.8cc⁽⁶⁾⁽⁵⁾
   WaferTech, LLC 2003 Employee Stock Option Plan.

4.8ccc⁽⁷⁾⁽⁶⁾
   WaferTech, LLC 2004 Employee Stock Option Plan.

4.8cccc⁽²⁾⁽¹⁾
   WaferTech, LLC 2004 Employee Stock Option Plan, as revised on February 22, 2005.

⁺4.9⁽⁸⁾⁽⁷⁾
   Shareholders Agreement, dated as of March 15, 1999, by and among EDB Investments Pte. Ltd., Koninklijke Philips Electronics N.V. and Taiwan Semiconductor Manufacturing Company Ltd.

4.10^(10)(9)
   Land Lease with Hsinchu Science Park Administration relating to Fabs 2 and 5 and Corporate Headquarters (effective April 1, 1988 to March 31, 2008) (in Chinese with English summary).



4.11^(10)(9)		Land Lease with Hsinchu Science Park Administration relating to Fabs 3 and 4 (effective May 16, 1993 to May 15, 2013) (in Chinese with English summary).

4.12⁽⁹⁾⁽⁸⁾
   Land Lease with Hsinchu Science Park Administration relating to Fab 12 (Phase II) (effective May 1, 2001 to December 31, 2020) (English summary).

4.13⁽⁹⁾⁽⁸⁾
   Land Lease with Southern Taiwan Science Park Administration relating to fabs located in ~~Tainan~~Southern Taiwan Science Park (effective November 1, 2000 to October 31, 2020) (English summary).
  4.14 Land Lease with Central Science Industrial Park Administration relating to fabs located in Taichung Science Park (effective September 1, 2009 to September, 2029) (English summary).
12.1    Certification of Chief Executive Officer required by Rule 13a-14(a) under the Exchange Act.

12.2    Certification of Chief Financial Officer required by Rule 13a-14(a) under the Exchange Act.

13.1    Certification of Chief Executive Officer required by Rule 13a-14(b) under the Exchange Act.

13.2    Certification of Chief Financial Officer required by Rule 13a-14(b) under the Exchange Act.

99.1    Consent of Deloitte & Touche.


⁽¹⁾		~~Previously filed in TSMC’s annual report on Form 20-F for the fiscal year ended December 31, 2007, filed by TSMC on April 15, 2008.~~

⁽²⁾⁽¹⁾		Previously filed in TSMC’s annual report on Form 20-F for the fiscal year ended December 31, 2004, filed by TSMC on May 16, 2005.

	⁽³⁾⁽²⁾		Previously filed in TSMC’s annual report on Form 20-F for the fiscal year ended December 31, 2001, filed by TSMC on May 9, 2002.

	⁽⁴⁾⁽³⁾		Previously filed in TSMC’s annual report on Form 20-F for the fiscal year ended December 31, 1999, filed by TSMC on June 29, 2000.

	⁽⁵⁾⁽⁴⁾		Previously filed in TSMC’s annual report on Form 20-F for the fiscal year ended December 31, 2002, filed by TSMC on June 23, 2003.

	⁽⁶⁾⁽⁵⁾		Previously filed in TSMC’s registration statement on Form S-8, filed by TSMC on October 20, 2003.

	⁽⁷⁾⁽⁶⁾		Previously filed in TSMC’s registration statement on Form S-8, filed by TSMC on January 6, 2005.

	⁽⁸⁾⁽⁷⁾		Previously filed in TSMC’s annual report on Form 20-F for the fiscal year ended December 31, 1998, filed by TSMC on April 30, 1999.

	⁽⁹⁾⁽⁸⁾		Previously filed in TSMC’s annual report on Form 20-F for the fiscal year ended December 31, 2003, filed by TSMC on May 28, 2004.

	^(10)(9)		Previously filed in TSMC’s registration statement on Form F-1, filed by TSMC on September 15, 1997.

⁽¹¹⁾		~~Previously filed in TSMC’s annual report on Form 20-F for the fiscal year ended December 31, 2008, filed by TSMC on April 17, 2009.~~

⁺		Contains portions for which confidential treatment has been requested.

SIGNATURE

~~SIGNATURE~~

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets all the requirements for filing on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned.

Date: April ~~15, 2010~~

2, 2013
TAIWAN SEMICONDUCTOR MANUFACTURING
COMPANY LIMITED
By:
/s/ Lora Ho
Name: Lora Ho
Title:
Senior Vice President, ~~and~~ Chief Financial ~~Office~~Officer &
Spokesperson
75

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


	Page
Consolidated Financial Statements of Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries
Index to Consolidated Financial Statements		F-1
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets		F-3
Consolidated Statements of Income		F-4
Consolidated Statements of Changes in Shareholders’ Equity		F-6
Consolidated Statements of Cash Flows		F-7
Notes to Consolidated Financial Statements		F-10

~~F-1~~

F - 1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Taiwan Semiconductor Manufacturing Company Limited

We have audited the accompanying consolidated balance sheets of Taiwan Semiconductor Manufacturing Company Limited (a Republic of China corporation) and subsidiaries (the “Company”) as of December 31, ~~2008~~2011 and ~~2009,~~2012, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, ~~2009~~2012 (all expressed in New Taiwan dollars). 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 auditing standards generally accepted in the Republic of China and the standards of the Public Company Accounting Oversight Board (United States). Those 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, such consolidated financial statements present fairly, in all material respects, the financial position of Taiwan Semiconductor Manufacturing Company Limited and subsidiaries as of December 31, ~~2008~~2011 and ~~2009,~~2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, ~~2009,~~2012, in conformity with accounting principles generally accepted in the Republic of China.

As discussed in Note 4 to the consolidated financial statements, on January 1, 2009, the Company adopted the newly revised Republic of China Statements of Financial Accounting Standards No. 10, “Accounting for Inventories.” In addition, effective January 1, 2008, the Company adopted Interpretation 2007-052, “Accounting for Bonuses to Employees, Directors and Supervisors,” issued by the Accounting Research and Development Foundation of the Republic of China that requires companies to record bonuses paid to employees, directors and supervisors as an expense rather than an appropriation of earnings.

Accounting principles generally accepted in the Republic of China vary in certain significant respects from accounting principles generally accepted in the United States of America. The application of the latter would have affected the determination of net income for each of the three years in the period ended December 31, ~~2009~~2012 and the determination of shareholders’ equity and financial position as of December 31, ~~2008~~2011 and ~~2009,~~2012, to the extent summarized in Note ~~30.~~

33.
Our audits also comprehended the translation of New Taiwan dollar amounts into U.S. dollar amounts and, in our opinion, such translation has been made in conformity with the basis stated in Note 3. Such U.S. dollar amounts are presented solely for the convenience of the readers in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, ~~2009,~~2012, based on the criteria established inInternal ~~Control-Integrated~~Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated ~~April 6, 2010~~March 14, 2013 expressed an unqualified opinion on the Company’s internal control over financial reporting.

~~/s/ Deloitte & Touche~~
~~Taipei, Taiwan~~
~~The Republic of China~~

~~April 6, 2010~~

~~F-2~~

/s/ Deloitte & Touche

Taipei, Taiwan

The Republic of China

March 14, 2013

F - 2

Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries

CONSOLIDATED BALANCE SHEETS
(In Millions of New Taiwan or U.S. Dollars, Except Par Value)

December 31
Notes 2008 2009
NT$ NT$ US$
(Note 3)
ASSETS

CURRENT ASSETS
Cash and cash equivalents 2, 5 $ 194,613.8 $ 171,276.3 $ 5,360.8
Financial assets at fair value through profit or loss 2, 6, 24 55.7 186.1 5.8
Available-for-sale financial assets 2, 7, 24 10,898.7 14,389.9 450.4
Held-to-maturity financial assets 2, 8, 24 5,882.0 9,944.8 311.3
Receivables from related parties 0.4 12.5 0.4
Notes and accounts receivable, net 2, 9 18,496.6 35,369.8 1,107.0
Other receivables from related parties 99.9 121.3 3.8
Other financial assets 26 1,911.7 1,850.0 57.9
Inventories 2, 4, 10 14,876.6 20,913.8 654.6
Deferred income tax assets 2, 19 3,969.3 4,370.3 136.8
Prepaid expenses and other current assets 1,813.7 1,368.9 42.8

Total current assets 252,618.4 259,803.7 8,131.6

LONG-TERM INVESTMENTS 2, 7, 8, 11, 12, 24
Investments accounted for using equity method 18,907.2 17,871.2 559.3
Available-for-sale financial assets 2,032.7 1,358.1 42.5
Held-to-maturity financial assets 15,426.2 15,553.2 486.8
Financial assets carried at cost 3,615.4 3,063.0 95.9

Total long-term investments 39,981.5 37,845.5 1,184.5

PROPERTY, PLANT AND EQUIPMENT, NET 2, 13, 26 243,645.4 273,674.8 8,565.8

INTANGIBLE ASSETS
Goodwill 2 6,044.4 5,931.3 185.6
Deferred charges, net 2, 14 7,125.8 6,458.6 202.1

Total intangible assets 13,170.2 12,389.9 387.7

OTHER ASSETS
Deferred income tax assets 2, 19 6,636.9 7,988.3 250.0
Refundable deposits 2,767.2 2,733.1 85.5
Others 2, 26 97.0 260.9 8.2

Total other assets 9,501.1 10,982.3 343.7

TOTAL ASSETS $ 558,916.6 $ 594,696.2 $ 18,613.3

December 31
Notes 2008 2009
NT$ NT$ US$
(Note 3)
LIABILITIES AND SHAREHOLDERS’ EQUITY
��
CURRENT LIABILITIES
Financial liabilities at fair value through profit or loss 2, 6, 24 $ 85.2 $ — $ —
Accounts payable 5,553.2 10,905.9 341.3
Payable to related parties 25 489.9 783.0 24.5
Income tax payable 2, 19 9,331.8 8,800.3 275.4
Salary and bonus payable 2,215.8 9,317.0 291.6
Accrued profit sharing to employees and bonus to directors and supervisors 2, 4, 20 15,369.7 6,818.3 213.4
Payables to contractors and equipment suppliers 7,998.8 28,924.3 905.3
Accrued expenses and other current liabilities 17, 24, 28 7,540.0 12,635.2 395.5
Current portion of bonds payable and bank loans 15, 16, 24, 26 8,222.4 949.3 29.7

Total current liabilities 56,806.8 79,133.3 2,476.7

LONG-TERM LIABILITIES
Bonds payable 15, 24 4,500.0 4,500.0 140.8
Long-term bank loans 16, 24, 26 1,420.5 578.6 18.1
Other long-term payables 17, 24, 28 9,548.2 5,602.4 175.3
Obligations under capital leases 2, 24 722.3 707.5 22.2

Total long-term liabilities 16,191.0 11,388.5 356.4

OTHER LIABILITIES
Accrued pension cost 2, 18 3,701.6 3,797.0 118.9
Guarantee deposits 28 1,484.5 1,006.0 31.5
Deferred credits 2 316.5 185.7 5.8
Others 43.7 137.2 4.3

Total other liabilities 5,546.3 5,125.9 160.5

Total liabilities 78,544.1 95,647.7 2,993.6

COMMITMENTS AND CONTINGENCIES 28

EQUITY ATTRIBUTABLE TO SHAREHOLDERS OF THE PARENT
Capital stock — NT$10 par value 20, 22
Authorized: 28,050,000 thousand shares
Issued: 25,625,437 thousand shares in 2008
25,902,706 thousand shares in 2009 256,254.4 259,027.1 8,107.3
Capital surplus 2, 20 49,875.2 55,486.0 1,736.7
Retained earnings 20 170,053.7 181,882.7 5,692.7
Unrealized gain/loss on financial instruments 24 (287.3 ) 453.6 14.2
Cumulative translation adjustments 481.1 (1,766.7 ) (55.3 )

Equity attributable to shareholders of the parent 476,377.1 495,082.7 15,495.6

MINORITY INTEREST 2 3,995.4 3,965.8 124.1

Total shareholders’ equity 480,372.5 499,048.5 15,619.7

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 558,916.6 $ 594,696.2 $ 18,613.3

December 31
ASSETS
Notes
      2011       2012
NT$ NT$ US$
(Note 3)
CURRENT ASSETS

Cash and cash equivalents
2, 5 $ 143,472.3    $ 143,410.6    $ 4,936.7
Financial assets at fair value through profit or loss
2, 6, 26 15.4    39.5    1.4
Available-for-sale financial assets
2, 7, 26 3,308.8    2,410.6    83.0
Held-to-maturity financial assets
2, 8, 26 3,825.7    5,057.0    174.1
Receivables from related parties
4, 27 185.7    353.8    12.2
Notes and accounts receivable, net
2, 4, 9 40,762.0    51,739.6    1,781.0
Other receivables from related parties
4, 27 122.3    185.6    6.4
Other financial assets
28 617.1    473.8    16.3
Inventories
2, 10 24,840.6    37,830.5    1,302.2
Deferred income tax assets
2, 21 5,936.5    8,001.2    275.4
Prepaid expenses and other current assets
2,174.0    2,786.4    95.9

Total current assets
225,260.4    252,288.6    8,684.6

LONG-TERM INVESTMENTS
2, 7, 8, 11, 13, 26
Investments accounted for using equity method
24,900.3    23,430.0    806.5
Available-for-sale financial assets
-       38,751.2    1,334.0
Held-to-maturity financial assets
5,243.2    -       -
Financial assets carried at cost
4,315.0    3,605.1    124.1

Total long-term investments
34,458.5    65,786.3    2,264.6

PROPERTY, PLANT AND EQUIPMENT, NET
2, 14, 27 490,374.9    617,529.5    21,257.5

INTANGIBLE ASSETS

Goodwill
2 5,694.0    5,523.7    190.1
Deferred charges, net
2, 15 5,167.6    5,435.9    187.1

Total intangible assets
10,861.6    10,959.6    377.2

OTHER ASSETS

Deferred income tax assets
2, 21 7,436.7    4,776.0    164.4
Refundable deposits
27 4,518.8    2,426.7    83.5
Others
2, 27 1,354.0    1,267.9    43.7

Total other assets
13,309.5    8,470.6    291.6

TOTAL ASSETS
$ 774,264.9    $ 955,034.6    $ 32,875.5

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

(With Deloitte & Touche audit report dated ~~April 6, 2010)~~

~~F-3~~

March 14, 2013)
December 31
LIABILITIES AND SHAREHOLDERS’ EQUITY
Notes
      2011       2012
NT$ NT$ US$
(Note 3)
CURRENT LIABILITIES

Short-term loans
16 $ 25,926.5    $ 34,714.9    $ 1,195.0
Financial liabilities at fair value through profit or loss
2, 6, 26 13.8    15.6    0.5
Hedging derivative financial liabilities
2, 12, 26 0.2    -       -
Accounts payable
10,530.5    14,490.4    498.8
Payable to related parties
27 1,328.5    748.6    25.8
Income tax payable
2, 21 10,656.1    15,635.6    538.2
Salary and bonus payable
6,148.5    7,535.3    259.4
Accrued profit sharing to employees and bonus to directors and supervisors
2, 22 9,081.3    11,186.6    385.1
Payables to contractors and equipment suppliers
35,540.5    44,831.8    1,543.3
Accrued expenses and other current liabilities
14, 19, 26, 30 13,218.3    13,149.0    452.6
Current portion of bonds payable and long-term bank loans
17, 18, 26 4,562.5    128.1    4.4

Total current liabilities
117,006.7    142,435.9    4,903.1

LONG-TERM LIABILITIES

Bonds payable
17, 26 18,000.0    80,000.0    2,753.9
Long-term bank loans
18, 26, 28 1,587.5    1,359.4    46.8
Other long-term payables
19, 26 -       54.0    1.9
Obligations under capital leases
2, 14, 26 871.0    748.1    25.7

Total long-term liabilities
20,458.5    82,161.5    2,828.3

OTHER LIABILITIES

Accrued pension cost
2, 20 3,908.5    3,979.6    137.0
Guarantee deposits
444.0    203.9    7.0
Others
27 403.7    500.0    17.2

Total other liabilities
4,756.2    4,683.5    161.2

Total liabilities
142,221.4    229,280.9    7,892.6

COMMITMENTS AND CONTINGENCIES
30
EQUITY ATTRIBUTABLE TO SHAREHOLDERS OF THE PARENT

Capital stock - NT$10 par value
22
    Authorized:      28,050,000 thousand shares

    Issued:              25,916,222 thousand shares in 2011

          25,924,435 thousand shares in 2012
259,162.2    259,244.4    8,924.1
Capital surplus
2, 22 55,846.4    56,137.8    1,932.5
Retained earnings
22 322,191.2    410,601.3    14,134.2
Cumulative translation adjustments
2 (6,433.4 ) (10,753.8 ) (370.2 )
Net loss not recognized as pension cost
2 -       (5.3 ) (0.2 )
Unrealized gain/loss on financial instruments
2, 12, 26 (1,172.9 ) 7,973.3    274.5

Equity attributable to shareholders of the parent
629,593.5    723,197.7    24,894.9
MINORITY INTERESTS
2 2,450.0    2,556.0    88.0

Total shareholders’ equity
632,043.5    725,753.7    24,982.9

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$ 774,264.9    $ 955,034.6    $ 32,875.5

F - 3
Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(In Millions of New Taiwan or U.S. Dollars, Except Earnings Per Share that are in New Taiwan or U.S. Dollars)

Year Ended December 31
Notes 2007 2008 2009
NT$ NT$ NT$ US$
(Note 3)

NET SALES $ 322,630.6 $ 333,157.7 $ 295,742.2 $ 9,256.4

COST OF SALES 4, 10, 25 180,280.4 191,408.1 166,413.6 5,208.6

GROSS PROFIT 142,350.2 141,749.6 129,328.6 4,047.8

OPERATING EXPENSES
Research and development 17,946.3 21,480.9 21,593.4 675.8
General and administrative 8,963.8 11,096.6 11,285.5 353.2
Marketing 3,718.2 4,736.7 4,487.8 140.5

Total operating expenses 30,628.3 37,314.2 37,366.7 1,169.5

INCOME FROM OPERATIONS 111,721.9 104,435.4 91,961.9 2,878.3

NON-OPERATING INCOME AND GAINS
Interest income 2 5,651.7 5,373.8 2,600.9 81.4
Settlement income 28 985.1 951.2 1,464.9 45.9
Valuation gain on financial instruments, net 2, 6, 24 63.0 — 594.7 18.6
Technical service income 25, 28 590.4 1,182.0 367.0 11.5
Rental income 25 378.6 166.3 153.9 4.8
Gain on disposal of property, plant and equipment and other assets 2, 25 91.2 100.9 114.0 3.5
Equity in earnings of equity method investees, net 2, 11 2,507.9 701.5 46.0 1.4
Gain on settlement and disposal of financial assets, net 2, 24 874.7 721.0 16.0 0.5
Subsidy income 2 364.3 8.0 9.0 0.3
Foreign exchange gain, net 2 80.9 1,227.7 — —
Others 25 346.0 389.0 287.1 9.0

Total non-operating income and gains 11,933.8 10,821.4 5,653.5 176.9

NON-OPERATING EXPENSES AND LOSSES
Impairment of financial assets 2, 7, 12, 24 54.2 1,560.1 913.2 28.6
Foreign exchange loss, net 2 — — 627.0 19.6
Interest expense 842.2 615.0 391.5 12.2
Loss on disposal of property, plant and equipment 2 6.2 0.6 68.5 2.1
Valuation loss on financial instruments, net 2, 6, 24 — 1,081.0 — —
Loss on idle assets 2 — 210.5 — —
Provision for litigation loss 1,008.6 99.1 — —
Others 102.5 218.3 152.6 4.8

Total non-operating expenses and losses 2,013.7 3,784.6 2,152.8 67.3

INCOME BEFORE INCOME TAX 121,642.0 111,472.2 95,462.6 2,987.9

INCOME TAX EXPENSE 2, 19 11,709.6 10,949.0 5,996.4 187.7

      Year Ended December 31

Notes
   2010    2011 2012
      NT$    NT$ NT$ US$
         (Note 3)
NET SALES
   2, 27, 32    $ 419,537.9       $ 427,080.6    $ 506,248.6    $ 17,426.8
COST OF SALES
   10, 27    212,484.3       232,937.4    262,628.7    9,040.6




GROSS PROFIT BEFORE AFFILIATES ELIMINATION
      207,053.6       194,143.2    243,619.9    8,386.2




UNREALIZED GROSS PROFIT FROM AFFILIATES
   2    -          (74.0 ) (25.0 ) (0.9 )




GROSS PROFIT
      207,053.6       194,069.2    243,594.9    8,385.3




OPERATING EXPENSES

Research and development
   27    29,706.7       33,829.9    40,402.1    1,390.8
General and administrative
      12,804.0       14,164.1    17,638.1    607.1
Marketing
      5,367.6       4,517.8    4,497.5    154.8




Total operating expenses
      47,878.3       52,511.8    62,537.7    2,152.7




INCOME FROM OPERATIONS
   32    159,175.3       141,557.4    181,057.2    6,232.6




NON-OPERATING INCOME AND GAINS

Equity in earnings of equity method investees, net
   2, 11    2,298.2       897.6    2,028.6    69.8
Interest income
      1,665.2       1,479.5    1,645.0    56.6
Settlement income
   30    6,939.8       947.3    883.8    30.4
Foreign exchange gain, net
   2    -          -       582.5    20.1
Gain on settlement and disposal of financial assets, net
   2, 26    736.8       233.2    541.1    18.6
Technical service income
   27    450.5       407.1    496.7    17.1
Valuation gain on financial instruments, net
   2, 6, 26    320.7       507.4    -       -
Others
   2, 27    724.9       886.4    604.3    20.9




Total non-operating income and gains
      13,136.1       5,358.5    6,782.0    233.5




NON-OPERATING EXPENSES AND LOSSES

Impairment of financial assets
   2, 7, 11, 13, 26    159.8       265.5    4,231.6    145.7
Interest expense
      425.4       626.7    1,020.4    35.1
Impairment loss on idle assets
   2    0.3       98.0    444.5    15.3
Loss on disposal of property, plant and equipment
   2    849.3       200.7    31.8    1.1
Foreign exchange loss, net
   2    99.1       185.6    -       -
Casualty loss
   10    191.0       -       -       -
Others
   2, 6, 26    316.1       391.7    556.9    19.2




Total non-operating expenses and losses
      2,041.0       1,768.2    6,285.2    216.4




INCOME BEFORE INCOME TAX
      170,270.4       145,147.7    181,554.0    6,249.7
INCOME TAX EXPENSE
   2, 21    7,988.5       10,694.4    15,590.3    536.7




NET INCOME
      $ 162,281.9       $ 134,453.3    $ 165,963.7    $ 5,713.0




ATTRIBUTABLE TO:

Shareholders of the parent
      $ 161,605.0       $ 134,201.3    $ 166,158.8    $ 5,719.7
Minority interests
      676.9       252.0    (195.1 ) (6.7 )




      $ 162,281.9       $ 134,453.3    $ 165,963.7    $ 5,713.0




(Continued)
~~F-4~~
F - 4
Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(In Millions of New Taiwan or U.S. Dollars, Except Earnings Per Share that are in New Taiwan or U.S. Dollars)

Year Ended December 31
Notes 2007 2008 2009
NT$ NT$ NT$ US$
(Note 3)

NET INCOME $ 109,932.4 $ 100,523.2 $ 89,466.2 $ 2,800.2

ATTRIBUTABLE TO:
Shareholders of the parent $ 109,177.1 $ 99,933.2 $ 89,217.8 $ 2,792.4
Minority interests 755.3 590.0 248.4 7.8

$ 109,932.4 $ 100,523.2 $ 89,466.2 $ 2,800.2

BASIC EARNINGS PER SHARE 2, 23
Before income tax $ 4.48 $ 4.26 $ 3.68 $ 0.12

After income tax $ 4.04 $ 3.84 $ 3.45 $ 0.11

DILUTED EARNINGS PER SHARE 2, 23 $ 4.47 $ 4.23 $ 3.67 $ 0.12

Before income tax $ 4.04 $ 3.81 $ 3.44 $ 0.11

After income tax

BASIC EARNINGS PER EQUIVALENT ADS 2
Before income tax $ 22.38 $ 21.28 $ 18.42 $ 0.58

After income tax $ 20.21 $ 19.19 $ 17.27 $ 0.54

DILUTED EARNINGS PER EQUIVALENT ADS 2
Before income tax $ 22.37 $ 21.13 $ 18.37 $ 0.57

After income tax $ 20.20 $ 19.05 $ 17.21 $ 0.54

BASIC WEIGHTED AVERAGE SHARES OUTSTANDING (THOUSANDS) 2, 23 27,005,032 26,039,186 25,835,802

DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING (THOUSANDS) 2, 23 27,026,254 26,235,679 25,913,603

      Year Ended December 31

Notes
   2010    2011    2012
      NT$    NT$    NT$    US$
               (Note 3)
BASIC EARNINGS PER SHARE
   2, 25
Before income tax
      $ 6.54       $ 5.59       $ 7.01       $ 0.24








After income tax
      $ 6.24       $ 5.18       $ 6.41       $ 0.22








DILUTED EARNINGS PER SHARE
   2, 25
Before income tax
      $ 6.54       $ 5.59       $ 7.01       $ 0.24








After income tax
      $ 6.23       $ 5.18       $ 6.41       $ 0.22








BASIC EARNINGS PER EQUIVALENT ADS
   2
Before income tax
      $ 32.72       $ 27.95       $ 35.06       $ 1.21








After income tax
      $ 31.19       $ 25.89       $ 32.05       $ 1.10








DILUTED EARNINGS PER EQUIVALENT ADS
   2
Before income tax
      $ 32.70       $ 27.94       $ 35.05       $ 1.21








After income tax
      $ 31.17       $ 25.88       $ 32.04       $ 1.10








BASIC WEIGHTED AVERAGE SHARES OUTSTANDING (THOUSANDS)
   2, 25    25,905,832       25,914,076       25,920,735







DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING (THOUSANDS)
   2, 25    25,919,814       25,924,682       25,927,936







The accompanying notes are an integral part of the consolidated financial statements.
(With Deloitte & Touche audit report dated ~~April 6, 2010)~~March 14, 2013)
   (Concluded)
~~F-5~~
F - 5
Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In Millions of New Taiwan Dollars, Except Dividends Per Share)

Equity Attributable to Shareholders of the Parent
Capital Stock Unrealized
(NT$10 Par Value) Gain (Loss) Cumulative Total
Common Stock Capital Retained on Financial Translation Treasury Minority Shareholders’
Shares Amount Surplus Earnings Instruments Adjustments Stock Total Interests Equity
(Thousands) NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$

BALANCE, JANUARY 1, 2007 25,829,688 $ 258,296.9 $ 54,107.5 $ 197,124.5 $ 561.6 $ (1,191.1 ) $ (918.1 ) $ 507,981.3 $ 1,156.8 $ 509,138.1

Appropriations of prior year’s earnings
Profit sharing to employees — in cash — — — (4,572.8 ) — — — (4,572.8 ) — (4,572.8 )
Profit sharing to employees — in stock 457,280 4,572.8 — (4,572.8 ) — — — — — —
Cash dividends to shareholders — NT$3.00 per share — — — (77,489.1 ) — — — (77,489.1 ) — (77,489.1 )
Stock dividends to shareholders — NT$0.02 per share 51,659 516.6 — (516.6 ) — — — — — —
Bonus to directors and supervisors — — — (285.8 ) — — — (285.8 ) — (285.8 )
Capital surplus transferred to capital stock 77,489 774.9 (774.9 ) — — — — — — —
Net income in 2007 — — — 109,177.1 — — — 109,177.1 755.3 109,932.4
Adjustment arising from changes in percentage of ownership in equity method investees — — (28.7 ) — — — — (28.7 ) 31.9 3.2
Translation adjustments — — — — — 118.2 — 118.2 (99.3 ) 18.9
Issuance of stock from exercising employee stock options 10,988 109.9 327.0 — — — — 436.9 — 436.9
Cash dividends received by subsidiaries from TSMC — — 101.8 — — — — 101.8 — 101.8
Valuation gain on available-for-sale financial assets — — — — 241.8 — — 241.8 19.5 261.3
Net change in unrealized gain (loss) on financial instruments from equity method investees — — — — (122.4 ) — — (122.4 ) — (122.4 )
Treasury stock repurchased — — — — — — (48,466.9 ) (48,466.9 ) — (48,466.9 )
Increase in minority interests — — — — — — — — 1,729.9 1,729.9

BALANCE, DECEMBER 31, 2007 26,427,104 264,271.1 53,732.7 218,864.5 681.0 (1,072.9 ) (49,385.0 ) 487,091.4 3,594.1 490,685.5

Appropriations of prior year’s earnings
Profit sharing to employees — in cash — — — (3,939.9 ) — — — (3,939.9 ) — (3,939.9 )
Profit sharing to employees — in stock 393,988 3,939.9 — (3,939.9 ) — — — — — —
Cash dividends to shareholders — NT$3.00 per share — — — (76,881.3 ) — — — (76,881.3 ) — (76,881.3 )
Stock dividends to shareholders — NT$0.02 per share 51,254 512.5 — (512.5 ) — — — — — —
Bonus to directors — — — (176.9 ) — — — (176.9 ) — (176.9 )
Capital surplus transferred to capital stock 76,881 768.8 (768.8 ) — — — — — — —
Net income in 2008 — — — 99,933.2 — — — 99,933.2 590.0 100,523.2
Adjustment arising from changes in percentage of ownership in equity method investees — — (137.1 ) — — — — (137.1 ) 11.8 (125.3 )
Translation adjustments — — — — — 1,554.0 — 1,554.0 (68.8 ) 1,485.2
Issuance of stock from exercising employee stock options 6,027 60.3 166.9 — — — — 227.2 — 227.2
Cash dividends received by subsidiaries from TSMC — — 102.3 — — — — 102.3 — 102.3
Valuation loss on available-for-sale financial assets — — — — (826.2 ) — — (826.2 ) (17.0 ) (843.2 )
Net change in unrealized gain (loss) on financial instruments from equity method investees — — — — (142.1 ) — — (142.1 ) — (142.1 )
Treasury stock repurchased — — — — — — (30,427.5 ) (30,427.5 ) — (30,427.5 )
Treasury stock retired (1,329,817 ) (13,298.2 ) (3,220.8 ) (63,293.5 ) — — 79,812.5 — — —
Decrease in minority interests — — — — — — — — (114.7 ) (114.7 )

BALANCE, DECEMBER 31, 2008 25,625,437 256,254.4 49,875.2 170,053.7 (287.3 ) 481.1 — 476,377.1 3,995.4 480,372.5

Appropriations of prior year’s earnings
Cash dividends to shareholders — NT$3.00 per share — — — (76,876.3 ) — — — (76,876.3 ) — (76,876.3 )
Stock dividends to shareholders — NT$0.02 per share 51,251 512.5 — (512.5 ) — — — — — —
Profit sharing to employees — in stock 141,870 1,418.7 6,076.3 — — — — 7,495.0 — 7,495.0
Capital surplus transferred to capital stock 76,876 768.8 (768.8 ) — — — — — — —
Net income in 2009 — — — 89,217.8 — — — 89,217.8 248.4 89,466.2
Adjustment arising from changes in percentage of ownership in equity method investees — — 115.5 — — — — 115.5 (39.0 ) 76.5
Translation adjustments — — — — — (2,247.8 ) — (2,247.8 ) 39.8 (2,208.0 )
Issuance of stock from exercising employee stock options 7,272 72.7 187.8 — — — — 260.5 — 260.5
Valuation gain on available-for-sale financial assets — — — — 622.5 — — 622.5 6.0 628.5
Net change in unrealized gain (loss) on financial instruments from equity method investees — — — — 118.4 — — 118.4 — 118.4
Decrease in minority interests — — — — — — — — (284.8 ) (284.8 )

BALANCE, DECEMBER 31, 2009 25,902,706 $ 259,027.1 $ 55,486.0 $ 181,882.7 $ 453.6 $ (1,766.7 ) $ — $ 495,082.7 $ 3,965.8 $ 499,048.5

BALANCE, DECEMBER 31, 2009 (IN MILLIONS OF US$ — Note 3) $ 8,107.3 $ 1,736.7 $ 5,692.7 $ 14.2 $ (55.3 ) $ — $ 15,495.6 $ 124.1 $ 15,619.7

~~Note: TSMC’s profit sharing to employees and bonus to directors in the amount of NT$15,148.1 million and NT$6,771.3 million, respectively, had been charged against earnings of 2008 and 2009.~~
Equity Attributable to Shareholders of the Parent
Capital Stock Unrealized
(NT$10 Par Value) Cumulative Net Loss not Gain/Loss Total
Common Stock Capital Retained Translation Recognized as on Financial Treasury Minority Shareholders’
Shares Amount Surplus Earnings Adjustments pension cost Instruments Stock Total Interests Equity
(Thousands) NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$
BALANCE, JANUARY 1, 2010
25,902,706    $ 259,027.1    $ 55,486.0    $ 181,882.7    $ (1,766.7 ) $ -       $ 453.6    $ -       $ 495,082.7    $ 3,965.8    $ 499,048.5
Appropriations of prior year’s earnings

Cash dividends to shareholders - NT$3.00 per share
-       -       -       (77,708.1 ) -       -       -       -       (77,708.1 ) -       (77,708.1 )
Net income in 2010
-       -       -       161,605.0    -       -       -       -       161,605.0    676.9    162,281.9
Adjustment arising from changes in percentage of ownership in equity method investees
-       -       (17.9 ) -       -       -       -       -       (17.9 ) 4.4    (13.5 )
Translation adjustments
-       -       -       -       (4,776.5 ) -       -       -       (4,776.5 ) 7.3    (4,769.2 )
Issuance of stock from exercising employee stock options
7,372    73.7    171.1    -       -       -       -       -       244.8    -       244.8
Net changes of valuation gain/loss on available-for-sale financial assets
-       -       -       -       -       -       (338.0 ) -       (338.0 ) 4.0    (334.0 )
Net change in shareholders’ equity from equity method investees
-       -       59.2    -       -       -       (6.0 ) -       53.2    31.7    84.9
Net change in unrealized gain/loss on hedging derivative financial instruments
-       -       -       -       -       -       (0.3 ) -       (0.3 ) (0.5 ) (0.8 )
Decrease in minority interests
-       -       -       -       -       -       -       -       -       (130.1 ) (130.1 )

BALANCE, DECEMBER 31, 2010
25,910,078    259,100.8    55,698.4    265,779.6    (6,543.2 ) -       109.3    -       574,144.9    4,559.5    578,704.4
Appropriations of prior year’s earnings

Cash dividends to shareholders - NT$3.00 per share
-       -       -       (77,730.2 ) -       -       -       -       (77,730.2 ) -       (77,730.2 )
Net income in 2011
-       -       -       134,201.3    -       -       -       -       134,201.3    252.0    134,453.3
Adjustment arising from changes in percentage of ownership in equity method investees
-       -       59.9    -       -       -       -       -       59.9    1.1    61.0
Translation adjustments
-       -       -       -       109.8    -       -       -       109.8    7.6    117.4
Issuance of stock from exercising employee stock options
7,144    71.4    146.3    -       -       -       -       -       217.7    -       217.7
Net changes of valuation gain/loss on available-for-sale financial assets
-       -       -       -       -       -       (1,241.3 ) -       (1,241.3 ) (3.3 ) (1,244.6 )
Net change in shareholders’ equity from equity method investees
-       -       (56.1 ) -       -       -       (41.1 ) -       (97.2 ) -       (97.2 )
Net change in unrealized gain/loss on hedging derivative financial instruments
-       -       -       -       -       -       0.2    -       0.2    0.3    0.5
Acquisition of treasury stock - shareholders executed the appraisal right
-       -       -       -       -       -       -       (71.6 ) (71.6 ) -       (71.6 )
Retirement of treasury stock
(1,000 ) (10.0 ) (2.1 ) (59.5 ) -       -       -       71.6    -       -       -
Decrease in minority interests
-       -       -       -       -       -       -       -       -       (379.3 ) (379.3 )
Effect of changes in consolidated entities
-       -       -       -       -       -       -       -       -       (1,987.9 ) (1,987.9 )

BALANCE, DECEMBER 31, 2011
25,916,222    259,162.2    55,846.4    322,191.2    (6,433.4 ) -       (1,172.9 ) -       629,593.5    2,450.0    632,043.5
Appropriations of prior year’s earnings

Cash dividends to shareholders - NT$3.00 per share
-       -       -       (77,748.7 ) -       -       -       -       (77,748.7 ) -       (77,748.7 )
Net income in 2012
-       -       -       166,158.8    -       -       -       -       166,158.8    (195.1 ) 165,963.7
Adjustment arising from changes in percentage of ownership in equity method investees
-       -       128.6    -       -       -       -       -       128.6    (38.2 ) 90.4
Translation adjustments
-       -       -       -       (4,320.4 ) -       -       -       (4,320.4 ) 52.9    (4,267.5 )
Net loss not recognized as pension cost
-       -       -       -       -       (4.4 ) -       -       (4.4 ) -       (4.4 )
Issuance of stock from exercising employee stock options
8,213    82.2    160.3    -       -       -       -       -       242.5    -       242.5
Stock option compensation cost
-       -       2.5    -       -       -       -       -       2.5    3.7    6.2
Net changes of valuation gain/loss on available-for-sale financial assets
-       -       -       -       -       -       9,128.6    -       9,128.6    (3.6 ) 9,125.0
Net change in shareholders’ equity from equity method investees
-       -       -       -       -       (0.9 ) 17.5    -       16.6    -       16.6
Net change in unrealized gain/loss on hedging derivative financial instruments
-       -       -       -       -       -       0.1    -       0.1    0.1    0.2
Increase in minority interests
-       -       -       -       -       -       -       -       -       286.2    286.2

BALANCE, DECEMBER 31, 2012
25,924,435    $ 259,244.4    $ 56,137.8    $ 410,601.3    $ (10,753.8 ) $ (5.3 ) $ 7,973.3    $ -       $ 723,197.7    $ 2,556.0    $ 725,753.7

BALANCE, DECEMBER 31, 2012 (IN MILLIONS OF US$ - Note 3)
$ 8,924.1    $ 1,932.5    $ 14,134.2    $ (370.2 ) $ (0.2 ) $ 274.5    $ -       $ 24,894.9    $ 88.0    $ 24,982.9

The accompanying notes are an integral part of the consolidated financial statements.
(With Deloitte & Touche audit report dated ~~April~~March 14, 2013)
F - 6 ~~2010)~~
~~F-6~~
Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions of New Taiwan or U.S. Dollars)

Year Ended December 31
2007 2008 2009
NT$ NT$ NT$ US$
(Note 3)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income attributable to shareholders of the parent $ 109,177.1 $ 99,933.2 $ 89,217.8 $ 2,792.4
Net income attributable to minority interests 755.3 590.0 248.4 7.8
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 80,005.4 81,512.2 80,814.7 2,529.4
Amortization of premium/discount of financial assets (117.2 ) (93.4 ) 21.5 0.7
Impairment of financial assets 54.2 1,560.1 913.2 28.6
Loss (gain) on disposal of available-for-sale financial assets, net (610.2 ) (637.2 ) 20.3 0.6
Gain on held-to-maturity financial assets redeemed by the issuer — — (16.1 ) (0.5 )
Gain on disposal of financial assets carried at cost, net (264.5 ) (83.8 ) (20.2 ) (0.6 )
Equity in earnings of equity method investees, net (2,507.9 ) (701.5 ) (46.0 ) (1.4 )
Dividends received from equity method investees 625.1 1,661.1 1,239.5 38.8
Gain on disposal of property, plant and equipment and other assets, net (85.0 ) (100.3 ) (45.5 ) (1.4 )
Loss on idle assets — 210.5 — —
Deferred income tax 943.8 2,279.4 (1,752.4 ) (54.8 )
Changes in operating assets and liabilities:
Decrease (increase) in:
Financial assets and liabilities at fair value through profit or loss (187.1 ) 1,412.6 (215.6 ) (6.7 )
Receivables from related parties 629.5 10.5 (12.1 ) (0.4 )
Notes and accounts receivable, net (10,977.0 ) 23,916.7 (16,873.2 ) (528.1 )
Other receivables from related parties 13.2 143.7 (21.4 ) (0.7 )
Other financial assets 842.1 (426.0 ) 7.9 0.2
Inventories (2,226.1 ) 8,985.7 (6,037.2 ) (189.0 )
Prepaid expenses and other current assets 290.4 (443.5 ) 585.5 18.3
Increase (decrease) in:
Accounts payable 3,218.3 (6,021.7 ) 4,916.9 153.9
Payables to related parties (375.7 ) (1,013.5 ) 293.1 9.2
Income tax payable 3,179.7 (1,794.3 ) (531.5 ) (16.6 )
Salary and bonus payable 165.8 (17.7 ) 7,101.2 222.3
Accrued profit sharing to employees and bonus to directors and supervisors — 15,369.7 (1,056.4 ) (33.1 )
Accrued expenses and other current liabilities 748.1 (3,936.8 ) 1,356.3 42.4
Accrued pension cost 125.5 36.1 95.4 3.0
Deferred credits 343.9 (858.2 ) (237.7 ) (7.4 )

Net cash provided by operating activities 183,766.7 221,493.6 159,966.4 5,006.9

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of:
Property, plant and equipment (84,001.0 ) (59,222.6 ) (87,784.9 ) (2,747.6 )
Available-for-sale financial assets (87,550.2 ) (85,273.9 ) (38,800.6 ) (1,214.4 )
Held-to-maturity financial assets — (16,523.3 ) (12,224.4 ) (382.6 )
Investments accounted for using equity method (5,803.8 ) (55.9 ) (42.9 ) (1.3 )
Financial assets carried at cost (911.3 ) (463.2 ) (321.2 ) (10.1 )
Proceeds from disposal or redemption of:
Available-for-sale financial assets 94,908.7 138,515.0 36,040.0 1,128.0
Held-to-maturity financial assets 17,325.1 15,634.6 7,944.8 248.7
Financial assets carried at cost 410.5 199.4 131.1 4.1
Property, plant and equipment and other assets 60.5 194.9 24.2 0.8
Proceeds from return of capital by investees — 2,345.9 — —
Increase in deferred charges (3,059.2 ) (3,395.3 ) (1,469.8 ) (46.0 )
Decrease (increase) in refundable deposits (1,434.9 ) 10.6 34.1 1.0
Net cash paid for acquisition of subsidiaries (404.4 ) — — —
Decrease (increase) in other assets (228.8 ) (8.1 ) 1.2 —

Net cash used in investing activities (70,688.8 ) (8,041.9 ) (96,468.4 ) (3,019.4 )

(Continued)
~~F-7~~
   Year Ended December 31
   2010 2011 2012
   NT$ NT$ NT$ US$
   (Note 3)
CASH FLOWS FROM OPERATING ACTIVITIES

Net income attributable to shareholders of the parent
   $ 161,605.0    $ 134,201.3    $ 166,158.8    $ 5,719.7
Net income (loss) attributable to minority interests
   676.9    252.0    (195.1 ) (6.7 )
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization
   87,810.1    107,681.5    131,349.3    4,521.5
Unrealized gross profit from affiliates
   -       74.0    25.0    0.9
Amortization of premium/discount of financial assets
   34.2    24.7    4.9    0.2
Stock option compensation cost
   -       -       6.2    0.2
Impairment loss of financial assets
   159.8    265.5    4,231.6    145.7
Gain on disposal of available-for-sale financial assets, net
   (603.3 ) (212.4 ) (399.6 ) (13.8 )
Gain on disposal of financial assets carried at cost, net
   (133.5 ) (20.8 ) (141.5 ) (4.8 )
Equity in earnings of equity method investees, net
   (2,298.2 ) (897.6 ) (2,028.6 ) (69.8 )
Cash dividends received from equity method investees
   320.0    2,848.1    2,088.5    71.9
Loss (gain) on disposal of property, plant and equipment and other assets, net
   633.2    (3.3 ) (0.1 ) -
Settlement income from receiving equity securities
   (4,434.4 ) (158.8 ) (0.9 ) -
Impairment loss on idle assets
   0.3    98.0    444.5    15.3
Deferred income tax
   (377.3 ) (491.1 ) 573.2    19.7
Changes in operating assets and liabilities:

Financial assets and liabilities at fair value through profit or loss
   198.2    (13.7 ) (22.3 ) (0.8 )
Receivables from related parties
   9.8    123.3    (168.1 ) (5.8 )
Notes and accounts receivable, net
   (7,609.8 ) 1,136.3    (10,971.3 ) (377.7 )
Other receivables from related parties
   (3.3 ) 2.3    (63.3 ) (2.2 )
Other financial assets
   741.0    376.3    122.3    4.2
Inventories
   (7,492.1 ) 2,611.3    (12,989.9 ) (447.2 )
Prepaid expenses and other current assets
   (752.4 ) (403.8 ) (626.4 ) (21.6 )
Accounts payable
   933.9    (1,968.8 ) 1,395.9    48.1
Payables to related parties
   84.1    462.6    (605.2 ) (20.8 )
Income tax payable
   (1,615.6 ) 3,490.3    4,979.5    171.4
Salary and bonus payable
   (2,892.9 ) (275.6 ) 1,386.8    47.7
Accrued profit sharing to employees and bonus to directors and supervisors
   4,277.8    (1,925.6 ) 2,105.3    72.5
Accrued expenses and other current liabilities
   189.0    212.1    2,337.6    80.5
Accrued pension cost
   15.3    98.9    66.7    2.3


Net cash provided by operating activities
   229,475.8    247,587.0    289,063.8    9,950.6


CASH FLOWS FROM INVESTING ACTIVITIES

Acquisitions of:

Property, plant and equipment
   (186,944.2 ) (213,962.5 ) (246,137.4 ) (8,472.9 )
Available-for-sale financial assets
   (48,340.3 ) (35,088.4 ) (31,525.9 ) (1,085.2 )
Held-to-maturity financial assets
   (4,101.5 ) (584.3 ) -       -
Investments accounted for using equity method
   (6,242.4 ) -       -       -
Financial assets carried at cost
   (1,812.9 ) (403.9 ) (56.5 ) (1.9 )
Proceeds from disposal or redemption of:

Available-for-sale financial assets
   37,816.3    59,305.0    964.4    33.2
Held-to-maturity financial assets
   15,943.0    4,789.0    2,711.4    93.3
Financial assets carried at cost
   242.3    226.2    353.7    12.2
Property, plant and equipment and other assets
   115.5    698.1    157.5    5.4
Increase in deferred charges
   (1,801.7 ) (1,715.9 ) (1,782.3 ) (61.4 )
Decrease (increase) in refundable deposits
   (5,944.9 ) 4,149.6    2,092.1    72.0
Decrease (increase) in other assets
   (1,015.4 ) 63.7    26.7    0.9


Net cash used in investing activities
   (202,086.2 ) (182,523.4 ) (273,196.3 ) (9,404.4 )


(Continued)
F - 7
Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions of New Taiwan or U.S. Dollars)

Year Ended December 31
2007 2008 2009
NT$ NT$ NT$ US$
(Note 3)
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in short-term bank loans $ (89.7 ) $ — $ — $ —
Proceeds from long-term bank loans 653.0 98.4 286.6 9.0
Repayments of:
Long-term bank loans (196.2 ) (468.4 ) (378.7 ) (11.9 )
Bonds payable (7,000.0 ) — (8,000.0 ) (250.4 )
Decrease in guarantee deposits (1,574.1 ) (758.5 ) (478.5 ) (15.0 )
Proceeds from exercise of employee stock options 436.8 227.2 260.5 8.1
Cash dividends (77,387.3 ) (76,779.0 ) (76,876.3 ) (2,406.1 )
Profit sharing to employees in cash (4,572.8 ) (3,939.9 ) — —
Bonus to directors (285.8 ) (176.9 ) — —
Repurchase of treasury stock (45,413.4 ) (33,481.0 ) — —
Increase (decrease) in minority interests 19.0 (114.7 ) (284.8 ) (8.9 )

Net cash used in financing activities (135,410.5 ) (115,392.8 ) (85,471.2 ) (2,675.2 )

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (22,332.6 ) 98,058.9 (21,973.2 ) (687.7 )

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (518.1 ) 1,568.4 (1,364.3 ) (42.7 )

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 117,837.2 94,986.5 194,613.8 6,091.2

CASH AND CASH EQUIVALENTS, END OF YEAR $ 94,986.5 $ 194,613.8 $ 171,276.3 $ 5,360.8

SUPPLEMENTAL INFORMATION
Interest paid $ 922.1 $ 676.3 $ 580.4 $ 18.2

Income tax paid $ 7,585.7 $ 10,477.0 $ 8,088.1 $ 253.1

INVESTING AND FINANCING ACTIVITIES AFFECTING BOTH CASH AND NON-CASH ITEMS
Acquisition of property, plant and equipment $ 78,890.0 $ 60,978.5 $ 109,151.2 $ 3,416.3
Decrease (increase) in payables to contractors and equipment suppliers 5,111.0 (1,742.1 ) (21,361.3 ) (668.6 )
Nonmonetary exchange trade-out price — — (0.8 ) —
Increase in obligations under capital leases — (13.8 ) (4.2 ) (0.1 )

Cash paid $ 84,001.0 $ 59,222.6 $ 87,784.9 $ 2,747.6

Disposal of property, plant and equipment and other assets $ 60.5 $ 194.9 $ 25.0 $ 0.8
Nonmonetary exchange trade-out price — — (0.8 ) —

Cash received $ 60.5 $ 194.9 $ 24.2 $ 0.8

Repurchase of treasury stock $ 48,466.9 $ 30,427.5 $ — $ —
Decrease (increase) in accrued expenses and other current liabilities (3,053.5 ) 3,053.5 — —

Cash paid $ 45,413.4 $ 33,481.0 $ — $ —

NON-CASH FINANCING ACTIVITIES
Current portion of bonds payable and long-term bank loans $ 280.8 $ 8,222.4 $ 949.3 $ 29.7

Current portion of other long-term payables (under accrued expenses and other current liabilities) $ 3,735.9 $ 1,126.5 $ 4,005.3 $ 125.4

(Continued)
~~F-8~~
   Year Ended December 31
   2010 2011 2012
   NT$ NT$ NT$ US$
   (Note 3)
CASH FLOWS FROM FINANCING ACTIVITIES

Increase (decrease) in short-term loans
   $ 31,213.9    $ (5,287.4 ) $ 8,788.4    $ 302.5
Cash dividends
   (77,708.1 ) (77,730.2 ) (77,748.7 ) (2,676.4 )
Proceeds from long-term bank loans
   -       2,250.0    50.0    1.7
Repayment of long-term bank loans
   (967.0 ) (1,143.0 ) (212.5 ) (7.3 )
Proceeds from issuance of bonds
   -       18,000.0    62,000.0    2,134.3
Repayment of bonds
   -       -       (4,500.0 ) (154.9 )
Decrease in obligations under capital lease
   -       -       (108.8 ) (3.7 )
Decrease in other long-term payables
   (1,107.3 ) (3,633.1 ) (2,367.9 ) (81.5 )
Decrease in guarantee deposits
   (232.9 ) (342.2 ) (240.1 ) (8.3 )
Proceeds from donation
   49.0    -       -       -
Proceeds from exercise of employee stock options
   244.8    217.7    242.5    8.3
Acquisition of treasury stock
   -       (71.6 ) -       -
Increase (decrease) in minority interests
   (130.1 ) (118.2 ) 286.2    9.9


Net cash used in financing activities
   (48,637.7 ) (67,858.0 ) (13,810.9 ) (475.4 )


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
   (21,248.1 ) (2,794.4 ) 2,056.6    70.8
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
   (2,141.2 ) (147.7 ) (2,118.3 ) (72.9 )
EFFECT OF CHANGES IN CONSOLIDATED ENTITIES
   -       (1,472.6 ) -       -
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
   171,276.3    147,887.0    143,472.3    4,938.8


CASH AND CASH EQUIVALENTS, END OF YEAR
   $ 147,887.0    $ 143,472.3    $ 143,410.6    $ 4,936.7


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Interest paid
   $ 392.8    $ 540.7    $ 736.6    $ 25.4
Capitalized interest
   -       (9.1 ) (6.4 ) (0.2 )


Interest paid (excluding capitalized interest)
   $ 392.8    $ 531.6    $ 730.2    $ 25.2


Income tax paid
   $ 9,818.4    $ 7,677.1    $ 11,312.0    $ 389.4


INVESTING ACTIVITIES AFFECTING BOTH CASH AND NON-CASH ITEMS

Acquisition of property, plant and equipment
   $ 201,696.5    $ 207,175.6    $ 257,689.2    $ 8,870.5
Decrease (increase) in payables to contractors and equipment suppliers
   (14,600.0 ) 6,846.6    (11,551.7 ) (397.6 )
Nonmonetary exchange trade-out price
   (124.7 ) (3.1 ) (0.1 ) -
Increase in other liabilities
   (27.6 ) (56.6 ) -       -


Cash paid
   $ 186,944.2    $ 213,962.5    $ 246,137.4    $ 8,472.9


Disposal of property, plant and equipment and other assets
   $ 458.5    $ 543.2    $ 157.6    $ 5.4
Decrease (increase) in other financial assets
   (218.3 ) 158.0    -       -
Nonmonetary exchange trade-out price
   (124.7 ) (3.1 ) (0.1 ) -


Cash received
   $ 115.5    $ 698.1    $ 157.5    $ 5.4


(Continued)
F - 8
Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions of New Taiwan or U.S. Dollars)
The Company acquired controlling interests in Xintec Inc. (Xintec) and Mutual-Pak Technology Co., Ltd. (Mutual-Pak) in March 2007 and July 2007, respectively, and consolidated the revenue/income and expenses/losses of these two subsidiaries from the respective acquisition dates. Fair values of assets acquired and liabilities at acquisition assumed were as follows:

NT$
Current assets $ 3,101.7
Property, plant and equipment 2,339.6
Other assets 436.7
Current liabilities (1,937.4 )
Long-term liabilities (701.9 )

Net amount $ 3,238.7

Purchase price for Xintec and Mutual-Pak $ 1,413.5
Less: Cash balance of Xintec and Mutual-Pak at acquisition (1,009.1 )

Net cash paid for acquisition of Xintec and Mutual-Pak $ 404.4

   Year Ended December 31
   2010    2011    2012
   NT$    NT$    NT$ US$
         (Note 3)
Acquisition of deferred charges
   $      1,801.7       $      1,715.9       $      2,253.7    $      77.6
Increase in accounts payable
   -          -          (303.6 ) (10.4 )
Increase in payables to related parties
   -          -          (25.3 ) (0.9 )
Increase in other long-term payables
   -          -          (142.5 ) (4.9 )






Cash paid
   $ 1,801.7       $ 1,715.9       $ 1,782.3    $ 61.4






NON-CASH INVESTING AND FINANCING ACTIVITIES

Idle assets reclassified from property, plant and equipment
   $ 0.3       $ 98.0       $ 444.5    $ 15.3






Current portion of other long-term payables (under accrued expenses and other current liabilities)
   $ 1,406.6       $ 3,399.9       $ 913.5    $ 31.4






Current portion of bonds payable
   $ -          $ 4,500.0       $ -       $ -






Current portion of long-term bank loans
   $ 241.4       $ 62.5       $ 128.1    $ 4.4






The accompanying notes are an integral part of the consolidated financial statements.
(With Deloitte & Touche audit report dated ~~April 6, 2010)~~March 14, 2013)    (Concluded)
~~F-9~~
F - 9
Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
Taiwan Semiconductor Manufacturing Company Limited (TSMC), a Republic of China (R.O.C.) corporation, was incorporated on February 21, 1987.    TSMC is a dedicated foundry in the semiconductor industry which engages mainly in the manufacturing, selling, packaging, testing and computer-aided design of integrated circuits and other semiconductor devices and the manufacturing of masks.    Beginning in 2010, TSMC also engages in the researching, developing, designing, manufacturing and selling of solid state lighting devices and related applications products and systems, and renewable energy and efficiency related technologies and products.    In August 2011, TSMC transferred its solid state lighting and solar businesses into its wholly-owned, newly incorporated subsidiaries, TSMC Solid State Lighting Ltd. (TSMC SSL) and TSMC Solar Ltd. (TSMC Solar), respectively.
On September 5, 1994, TSMC’s shares were listed on the Taiwan Stock Exchange (TWSE).    On October 8, 1997, TSMC listed some of its shares of stock on the New York Stock Exchange (NYSE) in the form of American Depositary Shares (ADSs).
  2. ~~GENERAL~~
Taiwan Semiconductor Manufacturing Company, Limited (TSMC), a Republic of China (R.O.C.) corporation, was incorporated on February 21, 1987. TSMC is a dedicated foundry in the semiconductor industry which engages mainly in the manufacturing, selling, packaging, testing and computer-aided designing of integrated circuits and other semiconductor devices and the manufacturing of masks. 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).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements are presented in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers and accounting principles generally accepted in the R.O.C.
Significant accounting policies are summarized as follows:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of all directly and indirectly majority owned subsidiaries of TSMC, and the accounts of investees in which TSMC’s ownership percentage is less than 50% but over which TSMC has a controlling interest.    All significant intercompany balances and transactions are eliminated upon consolidation.
The consolidated entities were as follows:
   Percentage of Ownership
December 31
  Name of Investor

Name of Investee
    2011       2012
Remark
TSMC

TSMC North America
100% 100% -

TSMC Japan Limited (TSMC Japan)
100% 100% -

TSMC Partners, Ltd. (TSMC Partners)
100% 100% -

TSMC Korea Limited (TSMC Korea)
100% 100% -

TSMC Europe B.V. (TSMC Europe)
100% 100% -

TSMC Global Ltd. (TSMC Global)
100% 100% -

TSMC China Company Limited
(TSMC China)
100% 100% -

VentureTech Alliance Fund III, L.P.
(VTAF III)
  53%   50% (Note 1)

VentureTech Alliance Fund II, L.P.
(VTAF II)
  98%   98% -

Emerging Alliance Fund, L.P.
(Emerging Alliance)
99.5% 99.5% -

Global Unichip Corporation (GUC)
(Note 2) (Note 2)   -

Xintec Inc. (Xintec)
  40%   40%
TSMC obtained three out of five director positions and has a controlling interest in Xintec
(Continued)
F - 10
   Percentage of Ownership
December 31
  Name of Investor

Name of Investee
    2011       2012
Remark

TSMC SSL
100%   95%
Established in August 2011
TSMC and TSMC GN aggregately have a controlling interest of 96% in TSMC SSL

TSMC Solar
100% 99%
Established in August 2011
TSMC and TSMC GN aggregately have a controlling interest of 99% in TSMC Solar

TSMC Guang Neng Investment, Ltd. (TSMC GN)
-    100%
Established in January 2012
TSMC Partners

TSMC Design Technology Canada Inc. (TSMC Canada)
100% 100% -

TSMC Technology, Inc. (TSMC Technology)
100% 100% -

TSMC Development, Inc. (TSMC Development)
100% 100% -

InveStar Semiconductor Development Fund, Inc. (ISDF)
97% 97% -

InveStar Semiconductor Development Fund, Inc. (II) LDC. (ISDF II)
97% 97% -
TSMC Development

WaferTech, LLC (WaferTech)
100% 100% -
VTAF III

Mutual-Pak Technology Co., Ltd. (Mutual-Pak)
57% 58% -

Growth Fund Limited (Growth Fund)
100% 100% -
VTAF III, VTAF II and Emerging Alliance

VentureTech Alliance Holdings, LLC (VTA Holdings)
100% 100% -
GUC

Global Unichip Corp.-NA (GUC-NA)
(Note 2) (Note 2) -

Global Unichip Japan Co., Ltd. (GUC-Japan)
(Note 2) (Note 2) -

Global Unichip Europe B.V. (GUC-Europe)
(Note 2) (Note 2) -

Global Unichip (BVI) Corp. (GUC-BVI)
(Note 2) (Note 2) -
GUC-BVI

Global Unichip (Shanghai) Company, Limited (GUC-Shanghai)
(Note 2) (Note 2) -
TSMC SSL

TSMC Lighting North America, Inc. (TSMC Lighting NA)
100% 100% (Note 1)
TSMC Solar

TSMC Solar North America, Inc. (TSMC Solar NA)
100% 100% (Note 1)

TSMC Solar Europe B.V. (TSMC Solar Europe)
100% 100% (Note 1)

VentureTech Alliance Fund III, L.P. (VTAF III)
46% 49% (Note 1)
TSMC Solar Europe

TSMC Solar Europe GmbH
100% 100% (Note 1)
(Concluded)
F - 11
Note 1:    ~~The consolidated financial statements are presented in conformity with the Guidelines Governing the Preparation~~In August 2011, TSMC adjusted its investment structure by transferring TSMC Lighting NA to TSMC SSL and transferring TSMC Solar Europe, TSMC Solar NA and part of ~~Financial Reports by Securities Issuers and accounting principles generally accepted in the R.O.C.~~VTAF III to TSMC Solar.
Note 2:    ~~Significant accounting policies are summarized as follows:~~
~~Principles of Consolidation~~
~~The accompanying consolidated financial statements include the accounts of all directly and indirectly majority owned subsidiaries of~~Since July 2011, TSMC ~~and the accounts of investees in which TSMC’s ownership percentage~~ is ~~less than 50% but over which TSMC has~~no longer deemed to be a controlling ~~interest. All significant intercompany balances~~entity of GUC and ~~transactions~~its subsidiaries due to the termination of a Shareholders’ Agreement.    As a result, GUC and its subsidiaries are ~~eliminated upon consolidation.~~
~~The~~no longer consolidated ~~entities were as follows:~~and are accounted for using the equity method.

Percentage of Ownership
December 31
Name of Investor Name of Investee 2008 2009 Remark

TSMC TSMC North America 100 % 100 % —
TSMC Japan Limited (TSMC Japan) 100 % 100 % —
TSMC Partners, Ltd. (TSMC Partners) 100 % 100 % —
TSMC Korea Limited (TSMC Korea) 100 % 100 % —
Taiwan Semiconductor Manufacturing Company Europe B.V. (TSMC Europe) 100 % 100 % —
TSMC International Investment Ltd. (TSMC International) 100 % — In June 2009, TSMC International was merged into TSMC Partners.
TSMC Global Ltd. (TSMC Global) 100 % 100 % —
TSMC China Company Limited (TSMC China) 100 % 100 % —
VentureTech Alliance Fund III, L.P. (VTAF III) 98 % 98 % —
VentureTech Alliance Fund II, L.P. (VTAF II) 98 % 98 % —
Emerging Alliance Fund, L.P. (Emerging Alliance) 99.5 % 99.5 % —
Global Unichip Corporation (GUC) 36 % 35 % TSMC has a controlling interest over the financial, operating and personnel hiring decisions of GUC.
Xintec Inc. (Xintec) 42 % 41 % TSMC obtained three out of five director positions and has a controlling interest in Xintec.
~~F-10~~

Percentage of Ownership
December 31
Name of Investor Name of Investee 2008 2009 Remark

TSMC Partners TSMC Design Technology Canada Inc. (TSMC Canada) 100 % 100 % —
TSMC Technology, Inc. (TSMC Technology) — 100 % Its previous shareholder, TSMC International, was merged into TSMC Partners in June 2009.
TSMC Development, Inc. (TSMC Development) — 100 % Its previous shareholder, TSMC International, was merged into TSMC Partners in June 2009.
InveStar Semiconductor Development Fund, Inc. (ISDF) — 97 % Its previous shareholder, TSMC International, was merged into TSMC Partners in June 2009.
InveStar Semiconductor Development Fund, Inc. (II) LDC. (ISDF II) — 97 % Its previous shareholder, TSMC International, was merged into TSMC Partners in June 2009.

TSMC Development WaferTech, LLC (WaferTech) 99.9 % 99.9 % —

VTAF III Mutual-Pak Technology Co., Ltd. (Mutual-Pak) 51 % 59 % —
Growth Fund Limited (Growth Fund) 100 % 100 % —

VTAF III, VTAF II and Emerging Alliance VentureTech Alliance Holdings, LLC (VTA Holdings) 100 % 100 % —

GUC Global Unichip Corporation-NA (GUC-NA) 100 % 100 % —
Global Unichip Japan Co., Ltd. (GUC-Japan) 100 % 100 % —
Global Unichip Europe B.V. (GUC-Europe) 100 % 100 % —
Global Unichip (BVI) Corp. (GUC- BVI) — 100 % Newly established in February 2009.
The following diagram presents information regarding the relationship and ownership percentages between TSMC and its consolidated investees as of December 31, ~~2009:~~
~~F-11~~
2012:
Since July 2011, TSMC is no longer deemed to be a controlling entity of GUC and its subsidiaries due to the termination of a Shareholders’ Agreement.    As a result, GUC and its subsidiaries are no longer consolidated and are accounted for using the equity method.
TSMC North America is engaged in selling and marketing of integrated circuits and semiconductor devices.    TSMC Japan, TSMC Korea and TSMC Europe are engaged mainly in marketing or customer service, engineering and technical supporting activities.    TSMC Partners is engaged in investment in companies involved in the design, manufacture, and other related business in the semiconductor industry.    TSMC Global, TSMC Development and TSMC ~~Development~~GN are engaged in investing activities.    TSMC China is engaged in the manufacturing and selling of integrated circuits pursuant to the orders from and product design specifications provided by customers.    Emerging Alliance, VTAF II, VTAF III, VTA Holdings, ISDF, ISDF II and Growth Fund are engaged in investing in new start-up technology companies.    TSMC Canada and TSMC Technology are engaged mainly in engineering support activities.    WaferTech is engaged in the manufacturing, selling, testing and computer-aided designing of integrated circuits and other semiconductor devices.    GUC is engaged in researching, developing, manufacturing, testing and marketing of integrated circuits. GUC-NA, GUC-Japan, and GUC-Europe are engaged in providing products consulting in North America, Japan, and Europe, respectively. GUC-BVI is engaged in investing activities. Xintec is engaged in the provision of wafer packaging service.    TSMC SSL is engaged in researching, developing, designing, manufacturing and selling solid state lighting devices and related applications products and systems.    TSMC Lighting NA is engaged in selling and marketing of solid state lighting related products.    TSMC Solar is engaged in researching, developing, designing, manufacturing and selling renewable energy and energy saving related technologies and products.    TSMC Solar NA is engaged in selling and marketing of solar related products.    TSMC Solar Europe is engaged in investing activities of solar related business.    TSMC Solar Europe GmbH is engaged in the selling and customer service of solar cell modules and related products.    Mutual-Pak is engaged in the manufacturing and selling of electronic parts and researching, developing and testing of RFID.
~~TSMC Partners and TSMC International were both 100% owned subsidiaries of TSMC. To simplify the organization structure of investment, TSMC Partners merged TSMC International in June 2009.~~
Chi Cherng and Hsin Ruey, both 100% owned subsidiaries of TSMC, were engaged in investing activities. To simplify the organization structure of investment, TSMC merged Chi Cherng and Hsin Ruey in the third quarter of 2008.
TSMC together with its subsidiaries are hereinafter referred to collectively as the “Company.”
Minority interests in the aforementioned subsidiaries are presented as a separate component of shareholders’ equity.

Foreign-currency Transactions and Translation of Foreign-currency Financial Statements
Foreign-currency transactions other than derivative contracts are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occur.    Exchange gains or losses derived from foreign-currency transactions or monetary assets and liabilities denominated in foreign currencies are recognized in earnings.
At the balance sheet date, monetary assets and liabilities denominated in foreign currencies are revalued at prevailing exchange rates with the resulting gains or losses recognized in earnings.
The financial statements of foreign subsidiaries are translated into New Taiwan dollars at the following exchange rates: Assets and liabilities - spot rates at year-end; shareholders’ equity - historical rates; income and expenses - average rates during the year.    The resulting translation adjustments are recorded as a separate component of shareholders’ equity.
F - 12
Use of Estimates
The preparation of consolidated financial statements in conformity with the aforementioned guidelines and principles requires management to make reasonable assumptions and estimates of matters that are inherently uncertain.    The actual results may differ from management’s estimates.

Classification of Current and Noncurrent Assets and Liabilities
Current assets are assets held for trading purposes and assets expected to be converted to cash, sold or consumed within one year from the balance sheet date.    Current liabilities are obligations incurred for trading purposes and obligations expected to be settled within one year from the balance sheet date.    Assets and liabilities that are not classified as current are noncurrent assets and liabilities, respectively.

Cash Equivalents
Repurchase agreements collateralized by ~~government~~corporate bonds, ~~agency bonds, corporate issued notes~~short-term commercial paper and ~~corporate~~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.~~
value due to their short term nature.
Financial Assets/Liabilities at Fair Value ~~Through~~through Profit or Loss
Derivatives that do not meet the criteria for hedge accounting ~~and financial assets acquired principally for the purpose of selling them in the near term~~ are initially recognized at fair value, with transaction costs expensed as incurred.    The derivatives ~~and financial assets~~ 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 ~~determined as follows: Publicly traded stocks — closing prices at the end of the year; derivatives —~~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
~~Investments designated as available-for-sale financial assets include debt securities and equity securities.~~
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.
~~F-12~~
Fair value is determined as follows:    ~~open-end mutual funds and money~~Money market funds —- net asset values at the end of the year; and publicly traded stocks —- closing prices at the end of the ~~year; and other debt securities — average of bid and asked prices at the end of the~~ year.
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.investee.    Stock dividends are recorded as an increase in the number of shares held and do not affect investment income.    The cost per share is recalculated based on the new total number of shares.
~~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~~For equity securities, if the ~~previously recognized impairment loss~~fair value subsequently increases, the increase in value is ~~reversed to the extent of the decrease and~~ recorded ~~as an adjustment to~~in 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.
equity.
Held-to-maturity Financial Assets
Debt securities for which the Company has a positive intention and ability to hold to maturity are categorized as held-to-maturity financial assets and are carried at amortized cost.    Those financial assets are initially recognized at fair value plus transaction costs that are directly attributable to the acquisition.    Gains or losses are recognized at the time of derecognition, impairment or amortization.    A regular way purchase or sale of financial assets is accounted for using settlement date accounting.
If there is objective evidence which indicates that a financial asset is impaired, a loss is recognized.    If, in a subsequent period, the amount of the impairment loss decreases and the decrease is clearly attributable to an event which occurred after the impairment loss was recognized, the previously recognized impairment loss is reversed to the extent of the decrease.    The reversal may not result in a carrying amount that exceeds the amortized cost that would have been determined as if no impairment loss had been recognized.

F - 13
Hedging Derivative Financial Instruments
Hedge derivatives are mainly derivatives instruments that are for cash flow hedge purposes and determined to be an effective hedge.    The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognized in shareholders’ equity.    The amount recognized in shareholders’ equity is recognized in profit or loss in the same year or year during which the hedged forecast transaction or an asset or liability arising from the hedged forecast transaction affects profit or loss.    However, if all or a portion of a loss recognized in shareholders’ equity is not expected to be recovered in the future, the amount that is not expected to be recovered is reclassified into profit or loss.
Financial Assets Carried at Cost
Investments for which the Company does not exercise significant influence and that do not have a quoted market price in an active market and whose fair value cannot be reliably measured, such as non-publicly traded stocks and mutual funds, are carried at their original cost.    The costs of non-publicly traded stocks and mutual funds are determined using the weighted-average method.    If there is objective evidence which indicates that a financial asset is impaired, a loss is recognized.    A subsequent reversal of such impairment loss is not allowed.
The accounting treatment for cash dividends and stock dividends arising from financial assets carried at cost is the same as that for cash and stock dividends arising from available-for-sale financial assets.
Allowance for Doubtful Receivables
An allowance for doubtful receivables is provided based on a review of the collectability of receivables.    The ~~amount~~Company assesses the collectability of ~~the allowance for doubtful~~ receivables ~~is determined based on~~by performing the account aging analysis and examining current trends in the credit quality of ~~the~~its customers.
TSMC’s provision iswas originally set at 1% of the amount of outstanding receivables.
~~Revenue~~    On January 1, 2011, the Company adopted the third revision of Statement of Financial Accounting Standards (SFAS) No. 34, “Financial Instruments:    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~~Measurement (SFAS No. 34).”    One of the ~~goods has been transferred~~main revisions is that the impairment of receivables originated by the Company is subject to the ~~buyer, price~~provisions of SFAS No. 34.    Accordingly, the Company evaluates for indication of impairment of accounts receivable based on an individual and collective basis at the end of each reporting period.    When objective evidence indicates that the estimated future cash flow of accounts receivable decreases as a result of one or more events that occurred after the initial recognition of the accounts receivable, such accounts receivable are deemed to be impaired.
Because of the Company’s short average collection period, the amount of the impairment loss recognized is ~~fixed or determinable,~~the difference between the carrying amount of accounts receivable and ~~collectability~~estimated future cash flows without considering the discounting effect.    Changes in the carrying amount of the allowance account are recognized as bad debt expense which is ~~reasonably assured. Provisions for estimated sales returns and others are~~ recorded in the ~~year~~operating expenses - general and administrative.    When accounts receivable are considered uncollectable, the ~~related revenue~~amount is ~~recognized, based on historical experience, management’s judgment, and any known factors that would significantly affect~~written off against 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.
allowance account.
Inventories
Inventories are recorded at standard cost and adjusted to approximate weighted-average cost on the balance sheet date.
~~F-13~~
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 4, effective January 1, 2009, inventories~~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).
F - 14
When an indication of impairment is identified, the carrying amount of the investment is reduced by the difference of the carrying amount (including goodwill) of each investment and its own recoverable amount, with the related impairment loss recognized in earnings.
    If the recoverable amount increases in a subsequent period, the amount previously recognized as impairment would be reversed and recognized as a gain.
When the Company subscribes for additional investee’s shares at a percentage different from its existing ownership percentage, the resulting carrying amount of the investment in the investee differs from the amount of the Company’s share of the investee’s equity.    The Company records such a difference as an adjustment to long-term investments with the corresponding amount charged or credited to capital surplus.
    Cash dividends received from an investee shall reduce the carrying amount of the investment.    Stock dividends are recorded as an increase in the number of shares held and do not affect investment income.
Gains or losses on sales from the Company to equity method investees or from equity method investees to the Company are deferred in proportion to the Company’s ownership percentages in the investees until such gains or losses are realized through transactions with third parties.
If an investee’s functional currency is a foreign currency, differences will result from the translation of the investee’s financial statements into the reporting currency of the Company.    Such differences are charged or credited to cumulative translation adjustments, a separate component of shareholders’ equity.
~~Financial Assets Carried at Cost~~
Investments for which the Company does not exercise significant influence and that do not have a quoted market price in an active market and whose fair value cannot be reliably measured, such as non-publicly traded stocks and mutual funds, are carried at their original cost. The costs of non-publicly traded stocks and mutual funds are determined using the weighted-average method. If there is objective evidence which indicates that a financial asset is impaired, a loss is recognized. A subsequent reversal of such impairment loss is not allowed.
The accounting treatment for cash dividends and stock dividends arising from financial assets carried at cost is the same as that for cash and stock dividends arising from available-for-sale financial assets.

Property, Plant and Equipment, Assets Leased to Others and Idle Assets
Property, plant and equipment and assets leased to others are stated at cost less accumulated depreciation.    Properties covered by agreements qualifying as capital leases are carried at the lower of the leased equipment’s market value or the present value of the minimum lease payments at the inception date of the lease, with the corresponding amount recorded as obligations under capital leases.    Borrowing costs directly attributable to the acquisition or construction of property, plant and equipment are capitalized as part of the cost of those assets.    When an indication of impairment is identified, any excess of the carrying amount of an asset over its recoverable amount is recognized as a loss.    If the recoverable amount increases in a subsequent period, the amount previously recognized as impairment would be reversed and recognized as a gain.    However, the adjusted amount may not exceed the carrying amount that would have been determined, net of depreciation, as if no impairment loss had been recognized.     Significant additions, renewals and betterments incurred during the construction period are capitalized.     Maintenance and repairs are expensed as incurred.
~~F-14~~
Depreciation is computed using the straight-line method over the following estimated service lives: land improvements —- 20 years; buildings —- 10 to 20 years; machinery and equipment —- 3 to 5 years; office equipment —- 3 to 15 years; and leased assets —- 20 years.
Upon sale or disposal of property, plant and equipment and assets leased to others, the related cost and accumulated depreciation are deducted from the corresponding accounts, with any gain or loss recorded as non-operating gains or losses in the year of sale or disposal.
When property, plant and equipment are determined to be idle or useless, they are transferred to idle assets at the lower of the net realizable value or carrying amount.    Depreciation on the idle assets is provided continuously, and the idle assets are tested for impairment on a periodical basis.

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.~~annually, or more frequently if events or changes in circumstances suggest that the carrying amount may not be recoverable.    If an event occurs or circumstances change which indicate that the fair value of goodwill is more likely than not below its carrying amount, an impairment loss is recognized.    A subsequent reversal of such impairment loss is not allowed.
Deferred charges consist of technology license fees, software and system design costs and ~~other charges.~~patent and others.    The amounts are amortized over the following periods:    Technology license fees ~~— the shorter of~~- the estimated life of the technology or the term of the technology transfer contract; software and system design costs ~~and other charges —~~- 2 to 5 ~~years.~~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.
F - 15
Expenditures related to research activities and those related to development activities that do not meet the criteria for capitalization are charged to ~~expenses~~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.
~~Government Subsidies~~
~~Income-related subsidies from governments are~~
If additional accrued pension cost based on actuarial calculation is not in excess of the sum of the unamortized balance of prior service costs and unrecognized net transition obligation, “deferred pension cost” will be debited.    Otherwise, the excess amount should be debited to “net loss not recognized as pension cost” as a deduction in ~~earnings when the requirements for subsidies are met.~~
stockholders’ equity.
Income Tax
The Company applies an inter-period allocation for its income tax whereby deferred income tax assets and liabilities are recognized for the tax effects of temporary differences, net operating loss carryforwards and unused tax credits. Valuation allowances are provided to the extent, if any, that it is more likely than not that deferred income tax assets will not be realized.     A deferred tax asset or liability is classified as current or noncurrent in accordance with the classification of its related asset or liability.    However, if a deferred tax asset or liability does not relate to an asset or liability in the financial statements, then it is classified as either current or noncurrent based on the expected length of time before it is realized or settled.
Any tax credits arising from purchases of machinery ~~equipment~~ and ~~technology,~~equipment, research and development expenditures and 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.
~~F-15~~
Income tax on unappropriated earnings (excluding earnings from foreign consolidated subsidiaries) at a rate of 10% is expensed in the year of shareholder approval which is the year subsequent to the year the earnings are generated.

Stock-based Compensation
Employee stock options that were granted or modified in the period from January 1, 2004 to December 31, 2007 are accounted for by the interpretations issued by the Accounting Research and Development Foundation of the Republic of China.    The Company adopted the intrinsic value method and any compensation cost determined using this method is recognized in earnings over the employee vesting period.    Employee stock option plans that were granted or modified after December 31, 2007 are accounted for using fair value method in accordance with ~~Statement of Financial Accounting Standards~~SFAS No. 39, “Accounting for Share-based Payment.”    ~~The Company did not grant or modify any~~Under the statement, the value of the stock options granted, which is equal to the best available estimate of the number of stock options expected to vest multiplied by the grant-date fair value, is expensed on a straight-line basis over the vesting period, with a corresponding adjustment to capital surplus - employee stock options.    The estimate is revised if subsequent information indicates that the number of stock options ~~since January 1, 2008.~~
~~Profit Sharing~~expected to ~~Employees and Bonus to Directors and Supervisors~~
~~Effective January 1, 2008,~~vest differs from previous estimates.
Treasury Stock
Treasury stock represents the outstanding shares that the Company ~~adopted Interpretation 2007-052, “Accounting for Bonuses to Employees, Directors and Supervisors,”~~buys back from market, which ~~requires companies to record profit sharing to employees and bonus to directors and supervisors as an expense rather than as an appropriation of earnings.~~
~~Treasury Stock~~
~~Treasury stock~~ is stated at cost and shown as a deduction in shareholders’ equity.    When ~~TSMC~~the Company retires treasury stock, the treasury stock account is reduced and the common stock as well as the capital surplus —- additional paid-in capital are reversed on a pro rata basis.    When the book value of the treasury stock exceeds the sum of the par value and additional paid-in capital, the difference is charged to capital surplus —- treasury stock transactions and to retained earnings for any remaining amount.
~~TSMC’s stock held by its subsidiaries is treated as treasury stock and reclassified from investments accounted for using equity method to treasury stock. The gains resulted from disposal~~    While disposing of the treasury stock, ~~held by subsidiaries and cash dividends received by subsidiaries from TSMC are recorded under capital surplus —~~the treasury stock ~~transactions.~~
~~Foreign-currency Transactions~~
~~Foreign-currency transactions~~shall be reversed, and if the disposal value is greater than the book value, the amount in excess of the book value shall be credited to additional paid-in capital - treasury stock.
Revenue Recognition and Allowance for Sales Returns and Others
The Company recognizes revenue when evidence of an arrangement exists, the rewards of ownership and significant risk of the goods has been transferred to the buyer, price is fixed or determinable, and collectability is reasonably assured.    Provisions for estimated sales returns and other ~~than derivative contracts~~allowances are recorded in ~~New Taiwan dollars at~~ the ~~rates~~year the related revenue is recognized, based on historical experience, management’s judgment, and any known factors that would significantly affect the allowance.
F - 16
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 ~~exchange~~the customers and 30 to 45 days after the end of the month in ~~effect when~~which sales occur for some customers.    Since the receivables from sales are collectible within one year and such transactions ~~occur. Exchange gains or losses derived from foreign-currency transactions or monetary assets and liabilities denominated in foreign currencies~~ are ~~recognized in earnings.~~
Atfrequent, fair value of the ~~balance sheet date, monetary assets and liabilities denominated in foreign currencies are revalued at prevailing exchange rates with~~receivables is equivalent to the ~~resulting gains or losses recognized in earnings.~~
~~Translation~~nominal amount of ~~Foreign-currency Financial Statements~~
~~The financial statements of foreign subsidiaries are translated into New Taiwan dollars at~~ the following exchange rates: Assets and liabilities — spot rates at year-end; shareholders’ equity — historical rates; income and expenses — average rates during the year. The resulting translation adjustments are recorded as a separate component of shareholders’ equity.
cash to be received.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, receivables, investments and deposits.    The Company limits its exposure to credit loss by depositing its cash and cash equivalents with high credit rating financial institutions.    The Company’s sales are primarily denominated in U.S. dollars.    Sales to top ten customers represented ~~51%~~54%, ~~53%~~56% and ~~53%~~59% of the consolidated sales for the years ended December 31, ~~2007, 2008~~2010, 2011 and ~~2009,~~2012, respectively.    The Company routinely assesses the financial strength of substantially all customers.    The financial condition of the counter-party to investments and deposits is assessed by management on a regular basis.
~~F-16~~
Fair Values of Financial Instruments
The carrying amount of cash equivalents approximates fair value due to the short period of time to maturity.    Fair values of investments in equity or debt securities and derivative financial instruments are based on quoted market prices or pricing models using current market data.    Receivables, other financial assets, payables and short-term loans are financial instruments with carrying amounts that approximate fair values.    Fair value of long-term loans with floating interest rates is their carrying amount.    Fair value of long-term loans with fixed interest rates is the present value of expected cash flows discounted using the interest rate the Company may obtain for similar long-term loans. For the Company’s investment portfolio without immediately available market quotes, management believes that the carrying amount of the portfolio approximates the fair value at December 31, 2011 and 2012.
Earnings Per Share
Earnings per share is computed by dividing income attributable to shareholders of the parent by the weighted-average number of shares outstanding in each year, which is retroactively adjusted for stock dividends until 2008.    Earnings per equivalent ADS is calculated by multiplying earnings per share by five (one ADS represents five common shares).
3. ~~Fair Values of Financial Instruments~~
The carrying amount of cash equivalents approximates fair value due to the short period of time to maturity. Fair values of investments in equity or debt securities and derivative financial instruments are based on quoted market prices or pricing models using current market data. Receivables, other financial assets, payables and short-term loans are financial instruments with carrying amounts that approximate fair values. Fair value of long-term loans with floating interest rates is their carrying amount. Fair value of long-term loans with fixed interest rates is the present value of expected cash flows discounted using the interest rate the Company may obtain for similar long-term loans. For the Company’s investment portfolio without immediately available market quotes, management believes that the carrying amount of the portfolio approximates the fair value at December 31, 2008 and 2009.
~~Earnings Per Share~~
Earnings per share is computed by dividing income attributable to shareholders of the parent by the weighted-average number of shares outstanding in each year, which is retroactively adjusted for stock dividends until 2008 and profit sharing to employees in stock until 2007. Earnings per equivalent ADS is calculated by multiplying earnings per share by five (one ADS represents five common shares)
3. U.S. DOLLAR AMOUNTS
The Company maintains its accounts and expresses its consolidated financial statements in New Taiwan dollars.    For convenience only, U.S. dollar amounts presented in the accompanying consolidated financial statements have been translated from New Taiwan dollars at the exchange rate as set forth in the statistical release of the Federal Reserve Board, which was NT$29.05 to US$1.00 as of December 31, 2012.    The convenience translations should not be construed as representations that the New Taiwan dollar amounts have been, could have been, or could in the future be, converted into U.S. dollars at this or any other rate of exchange.
4. The Company maintains its accounts and expresses its consolidated financial statements in New Taiwan dollars. For convenience only, U.S. dollar amounts presented in the accompanying consolidated financial statements have been translated from New Taiwan dollars at the noon buying rate in The City of New York for cable transfers in New Taiwan dollars as certified for customs purposes by the Federal Reserve Bank of New York as of December 31, 2009, which was NT$31.95 to US$1.00. The convenience translations should not be construed as representations that the New Taiwan dollar amounts have been, could have been, or could in the future be, converted into U.S. dollars at this or any other rate of exchange.
4. ACCOUNTING CHANGES
~~Effect of Adopting the Newly Released and Revised R.O.C. SFASs~~
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 a change in accounting principle did not have significant effect on the Company’s consolidated financial statements as of and for the year ended December 31, 2009.
Effective January 1, 2008, the Company adopted Interpretation 2007-052, “Accounting for Bonuses to Employees, Directors and Supervisors,” issued in March 2007 by the ARDF, which requires companies to record profit sharing to employees and bonus to directors and supervisors as an expense rather than as an appropriation of earnings. The adoption of this interpretation resulted in a decrease in net income and earnings per share (after income tax and retroactively adjusted for the issuance of stock dividend) of NT$12,827.6 million and NT$0.49, respectively, for the year ended December 31, 2008.
Effective January 1, 2008, the Company adopted SFAS No. 39, “Accounting for Share-based Payment,” which requires companies to record share-based payment transactions in the financial statements at fair value. Such a change in accounting principle did not have any effect on the Company’s consolidated financial statements as of and for the year ended December 31, 2008.
~~F-17~~Effect of Adopting the Newly Released and Revised R.O.C. SFASs
On January 1, 2011, the Company prospectively adopted the newly revised SFAS No. 34, “Financial Instruments: Recognition and Measurement.”    The main revisions include (1) finance lease receivables are now covered by SFAS No. 34; (2) the scope of the applicability of SFAS No. 34 to insurance contracts is amended; (3) loans and receivables originated by the Company are now covered by SFAS No. 34; (4) additional guidelines on impairment testing of financial assets carried at amortized cost when the debtor has financial difficulties and the terms of obligations have been modified; and (5) accounting treatment by a debtor for modifications in the terms of obligations.    This accounting change did not have a significant effect on the Company’s consolidated financial statements as of and for the year ended December 31, 2011.
On January 1, 2011, the Company adopted the newly issued SFAS No. 41, “Operating Segments.”    The statement requires identification and disclosure of operating segments on the basis of how the Company’s chief operating decision maker regularly reviews information in order to allocate resources and assess performance.    This statement supersedes SFAS No. 20, “Segment Reporting” and the Company conformed to the disclosure requirement and provided the operating segments disclosure in the consolidated financial statements accordingly.
F - 17
5. CASH AND CASH EQUIVALENTS

December 31
2008 2009
NT$ NT$
(In Millions)

Cash and deposits in banks $ 185,943.5 $ 167,449.0
Repurchase agreements collaterized by government bonds 8,670.3 3,359.8
Agency bonds — 253.0
Corporate issued notes — 160.1
Corporate bonds — 54.4

$ 194,613.8 $ 171,276.3

   December 31
   2011    2012
   NT$    NT$
   (In Millions)
Cash and deposits in banks
   $ 139,637.4       $ 140,072.3
Repurchase agreements collateralized by corporate bonds
   -          2,691.1
Repurchase agreements collateralized by short-term commercial paper
   -          349.3
Repurchase agreements collateralized by government bonds
   3,834.9       297.9




   $   143,472.3       $   143,410.6




6. FINANCIAL ~~ASSETS/~~ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS

December 31
2008 2009
NT$ NT$
(In Millions)

Trading financial assets

Forward exchange contracts $ 28.4 $ 4.3
Cross currency swap contracts 14.0 181.8
Publicly traded stocks 13.3 �� —

$ 55.7 $ 186.1

Trading financial liabilities

Forward exchange contracts $ 35.8 $ —
Cross currency swap contracts 49.4 —

$ 85.2 $ —

   December 31
   2011    2012
   NT$    NT$
   (In Millions)
Trading financial assets

Forward exchange contracts
   $ 15.4       $          38.6
Cross currency swap contracts
   -          0.9




   $ 15.4       $ 39.5




Trading financial liabilities

Forward exchange contracts
   $          13.7       $ 12.2
Cross currency swap contracts
   0.1       3.4




   $ 13.8       $ 15.6




The Company entered into derivative contracts during the years ended December 31, ~~2008~~2010, 2011 and ~~2009~~2012 to manage exposures due to ~~the~~ fluctuations of foreign exchange rates.    The derivative contracts entered into by the Company did not meet the criteria for hedge accounting.    Therefore, the Company did not apply hedge accounting treatment for ~~its~~ derivative contracts.
Outstanding forward exchange contracts consisted of the following:
   Maturity Date
Contract Amount
(In Millions)
December 31, 2011    ~~Maturity Date~~    ~~(In Millions )~~
~~December 31, 2008~~
Sell ~~US$/buy~~EUR/Buy NT$
   January ~~2009 to February 2009~~2012    ~~US$138.9/~~EUR 38.6/NT$~~4,558.7~~1,528.2
Sell ~~EUR/buy~~US$/Buy NT$
   January ~~2009~~2012 to February 2012    ~~EUR1.5/~~US$16.9/NT$~~63.2~~510.1
Sell ~~RMB/buy~~ US$/Buy EUR
   January ~~2009 to April 2009~~2012    ~~RMB55.0/~~US$~~8.0~~2.1/EUR1.6
Sell US$/~~buy~~Buy JPY
   January ~~2009 to February 2009~~2012    US$~~0.1/JPY11.8~~3.3/JPY259.8
Sell RMB/Buy US$
   January 2012    RMB1,118.7/US$177.0
~~December 31, 2009~~
Sell NT$/Buy US$
   January 2012 to February 2012    NT$163.5/US$5.4
December 31, 2012
Sell ~~US$~~NT$/~~buy NT$~~Buy EUR
   ~~February 2010~~January 2013 NT$9,417.1/EUR246.0
Sell US$/Buy RMB
January 2013    US$~~21.3/NT$686.8~~20.0/RMB124.7
~~F-18~~
Sell US$/Buy NT$
   ~~Outstanding cross currency swap contracts consisted of the following:~~
~~Range of~~
~~Contract Amount~~ ~~Range of~~ ~~Interest Rates~~
~~Maturity Date~~ ~~(in Millions)~~ ~~Interest Rates Paid~~ ~~Received~~
~~December 31, 2008~~
January ~~2009~~2013 to March 2013    US$13.7/NT$398.2
~~307.0/~~
Sell NT$~~10,061.2~~/Buy US$
   January 2013    ~~0.54%-5.00~~NT$590.4/US$20.4
%
Sell NT$/Buy JPY
   ~~0.00%-3.83~~ %
~~December 31, 2009~~January 2013    NT$44.1/JPY130.0
F - 18
Outstanding cross currency swap contracts consisted of the following:
Maturity Date
Contract Amount
(in Millions)

Range of
Interest Rates
Paid

Range of
Interest Rates
Received
December 31, 2011

January ~~2010 to February 2010~~2012
NT$420.4/US$13.9 - 0.48%
December 31, 2012
January 2013
   US$ ~~750.0/~~275.0/NT$~~24,201.7~~7,986.2    0.14%-0.17%    ~~0.24%-0.70~~-
%
January 2013
   ~~0.00%-0.38~~ %
NT$1,083.1/US$37.3    For the years ended December 31, 2008 and 2009, changes in fair value related to derivative financial instruments recognized in earnings was a net loss of NT$1,081.0 million and a net gain of NT$594.7 million, respectively.
7.-    0.06%
For the years ended December 31, 2010, 2011 and 2012, net gains on derivative financial instruments were NT$320.7 million, NT$507.4 million and a net loss on derivative financial instruments was NT$252.5 million, respectively.
7. AVAILABLE-FOR-SALE FINANCIAL ASSETS

December 31
2008 2009
NT$ NT$
(In Millions)

Corporate bonds $ 3,279.1 $ 7,042.2
Agency bonds 5,696.5 5,032.0
Government bonds 340.9 2,341.8
Publicly traded stocks 279.9 574.9
Corporate issued notes — 303.4
Money market funds 1,000.1 283.7
Open-end mutual funds — 170.0
Corporate issued asset-backed securities 2,334.9 —

12,931.4 15,748.0
Current portion (10,898.7 ) (14,389.9 )

$ 2,032.7 $ 1,358.1

December 31
2011 2012
NT$ NT$
(In Millions)
Publicly traded stocks
$       3,306.3    $     41,160.4
Money market funds
2.5    1.4

3,308.8    41,161.8
Current portion
(3,308.8 ) (2,410.6 )

$ -       $ 38,751.2

In October 2012, the Company invested ASML Holding N.V. (ASML) for EUR837.8 million to acquire 5% of equity with a lock-up period of 2.5 years.
For the year ended December 31, 2012, the Company recognized an impairment loss on some of the overseas publicly traded stocks in the amount of NT$2,677.5 million due to the significant decline in fair value.
8. ~~For the years ended December 31, 2008 and 2009, the Company recognized impairment on available-for-sale financial assets of NT$934.6 million and NT$201.3 million, respectively.~~
8. HELD-TO-MATURITY FINANCIAL ASSETS

December 31
2008 2009
NT$ NT$
(In Millions)

Corporate bonds $ 18,158.7 $ 15,120.0
Structured time deposits 1,643.0 7,000.0
Government bonds 1,506.5 3,378.0

21,308.2 25,498.0
Current portion (5,882.0 ) (9,944.8 )

$ 15,426.2 $ 15,553.2

~~F-19~~
December 31
2011 2012
NT$ NT$
(In Millions)
Corporate bonds
$       8,614.6    $       5,057.0
Government bonds
454.3    -

9,068.9    5,057.0
Current portion
(3,825.7 ) (5,057.0 )

$ 5,243.2    $ -

F - 19
9. ~~Structured time deposits categorized as held-to-maturity financial assets consisted of the following:~~RECEIVABLES, NET

Principal Interest Range of
Amount Receivable Interest Rates Maturity Date
NT$ NT$
(In Millions)

December 31, 2008
Callable foreign deposits $ 1,643.0 $ 0.7 4.82% December 2011

December 31, 2009
Callable domestic deposits $ 7,000.0 $ 4.3 0.36%-0.95% July 2010 to August 2011

   December 31
   2011 2012
   NT$ NT$
   (In Millions)
Notes and accounts receivable
   $ 46,321.3    $ 58,257.8


Allowance for doubtful receivables
   (491.0 ) (480.2 )
Allowance for sales returns and others
   (5,068.3 ) (6,038.0 )


   (5,559.3 ) (6,518.2 )


   $    40,762.0    $    51,739.6


Changes in the allowances are summarized as follows:
   Year Ended December 31
   2010 2011 2012
   NT$ NT$ NT$
   (In Millions)
Allowance for doubtful receivables

Balance, beginning of year
   $ 543.3    $ 504.0    $ 491.0
Provision (reversal)
   (37.0 ) (3.1 ) 0.4
Write-off
   (2.3 ) (9.7 ) (11.1 )
Effect of changes in consolidated entities
   -       (0.2 ) -
Effect of exchange rate changes
   -       -       (0.1 )


Balance, end of year
   $ 504.0    $ 491.0    $ 480.2


   Year Ended December 31
   2010 2011 2012
   NT$ NT$ NT$
   (In Millions)
Allowance for sales returns and others

Balance, beginning of year
   $ 8,724.5    $ 7,546.3    $ 5,068.3
Provision
   12,093.0    3,409.9    7,187.0
Write-off
   (13,265.6 ) (5,890.4 ) (6,211.2 )
Effect of exchange rate changes
   (5.6 ) 2.5    (6.1 )


Balance, end of year
   $ 7,546.3    $ 5,068.3    $ 6,038.0


10. ~~As of December 31, 2008, the principal of the structured time deposits that resided in banks located in Hong Kong amounted to US$50.0 million, which was called back in March 2009.~~
9. ~~RECEIVABLES, NET~~INVENTORIES

December 31
2008 2009
NT$ NT$
(In Millions)

Notes receivable $ 5.9 $ 44.1
Accounts receivable 25,017.4 44,593.5

25,023.3 44,637.6

Allowance for doubtful receivables (455.7 ) (543.3 )
Allowance for sales returns and others (6,071.0 ) (8,724.5 )

(6,526.7 ) (9,267.8 )

$ 18,496.6 $ 35,369.8

   December 31
   2011    2012
   NT$    NT$
   (In Millions)
Finished goods
   $ 3,347.8       $ 6,244.8
Work in process
   17,941.0       25,713.2
Raw materials
   1,808.6       3,864.1
Supplies and spare parts
   1,743.2       2,008.4




   $    24,840.6       $    37,830.5




F - 20
Write-down of inventories to net realizable value in the amount of NT$900.2 million, NT$35.3 million and NT$1,558.9 million, respectively, were included in the cost of sales for the years ended December 31, 2010, 2011 and 2012.    Inventory losses related to earthquake in the amount of NT$191.0 million were classified under non-operating expenses and losses for the year ended December 31, 2010.
11. ~~Changes in the allowances are summarized as follows:~~

Year Ended December 31
2007 2008 2009
NT$ NT$ NT$
(In Millions)

Allowance for doubtful receivables
Balance, beginning of year $ 749.9 $ 701.8 $ 455.7
Provision 3.0 14.9 331.5
Write-off (51.1 ) (261.0 ) (243.9 )

Balance, end of year $ 701.8 $ 455.7 $ 543.3

Allowance for sales returns and others
Balance, beginning of year $ 2,870.8 $ 4,089.0 $ 6,071.0
Effect of inclusion of newly consolidated subsidiaries 12.9 — —
Provision 5,705.6 8,825.7 13,913.4
Write-off (4,500.3 ) (6,843.7 ) (11,259.9 )

Balance, end of year $ 4,089.0 $ 6,071.0 $ 8,724.5

~~F-20~~
~~10.~~ ~~INVENTORIES~~

December 31
2008 2009
NT$ NT$
(In Millions)

Finished goods $ 5,782.7 $ 2,743.5
Work in process 7,606.6 15,302.0
Raw materials 334.3 1,541.6
Supplies and spare parts 1,153.0 1,326.7

$ 14,876.6 $ 20,913.8

Write-down of inventories to net realizable value in the amount of NT$1,660.9 million, and reversal of inventories within the original write-down amount to net realizable value in the amount of NT$428.2 million were included in the cost of sales for the years ended December 31, 2008 and 2009, respectively.
~~11.~~ INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD

December 31
2008 2009
% of % of
Carrying Owner- Carrying Owner-
Amount ship Amount ship
NT$ NT$
(In Millions) (In Millions)

Common stock
Vanguard International Semiconductor Corporation (VIS) $ 9,787.3 37 $ 9,365.2 37
Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) 6,808.2 39 6,157.2 39
VisEra Holding Company (VisEra Holding) 2,277.1 49 2,273.1 49
Mcube Inc. (Mcube) — — 25.6 70
Aiconn Technology Corporation (Aiconn) 34.6 44 18.1 42
Preferred stock
Mcube — — 32.0 10

$ 18,907.2 $ 17,871.2

   December 31
   2011    2012
   Carrying
Amount    % of
Owner-
ship    Carrying
Amount    % of
Owner-
ship
   NT$       NT$
   (In Millions)       (In Millions)
Vanguard International Semiconductor Corporation (VIS)
   $ 8,988.0       39       $ 9,462.0       40
Systems on Silicon Manufacturing Company Pte Ltd. (SSMC)
   6,289.4       39       6,711.0       39
Motech Industries, Inc. (Motech)
   5,612.3       20       2,998.4       20
VisEra Holding Company (VisEra Holding)
   2,853.4       49       3,035.6       49
GUC
   1,157.2       35       1,223.0       35
Mcube Inc. (Mcube)
   -          25       -          25





   $ 24,900.3          $ 23,430.0





Since July 2011, TSMC is no longer deemed to be a controlling entity of GUC and its subsidiaries due to the termination of a Shareholders’ Agreement.    As a result, GUC and its subsidiaries are no longer consolidated and are accounted for using the equity method.
For the year ended December 31, 2012, the Company recognized an impairment loss in the amount of NT$1,186.7 million, due to the lower estimated recoverable amount compared with the carrying amount of its investments in stocks traded on the Taiwan GreTai Securities Market.
For the years ended December 31, 2010, 2011 and 2012, equity in earnings of equity method investees was a net gain of NT$2,298.2 million, NT$897.6 million and NT$2,028.6 million, respectively.
As of December 31, 2011 and 2012, the quoted market price of publicly traded stocks in unrestricted investments accounted for using the equity method (VIS and GUC) were NT$11,273.2 million and NT$17,350.8 million, respectively.
Movements of the difference between the cost of investments and the Company’s share in investees’ net assets allocated to depreciable assets were as follows:
   Year Ended December 31
   2010 2011 2012
   NT$ NT$ NT$
   (In Millions)
Balance, beginning of year
   $     1,391.5    $     2,491.9    $     1,645.8
Additions
   2,055.7    -       -
Amortization
   (955.3 ) (846.1 ) (501.8 )


Balance, end of year
   $ 2,491.9    $ 1,645.8    $ 1,144.0


F - 21
Movements of the difference allocated to goodwill were as follows:


   Year Ended December 31
   2010    2011    2012
   NT$    NT$    NT$
   (In Millions)
Balance, beginning of year
   $     1,061.9       $     1,415.6       $     1,415.6
Additions
   353.7       -          -






Balance, end of year
   $ 1,415.6       $ 1,415.6       $ 1,415.6






12. HEDGING DERIVATIVE FINANCIAL INSTRUMENTS
   December 31
   2011    2012
   NT$    NT$
   (In Millions)
Hedging derivative financial liabilities

Interest rate swap contract
   $          0.2       $          -




The Company entered into forward exchange contracts to hedge cash flow risk arising from foreign exchange rate fluctuations of an expected equity security transaction.    The forward exchange contract was due in October 2012. For the year ended December 31, 2012, the adjustment to shareholders’ equity amounted to a net gain of NT$8.8 million for the above forward exchange contracts.
The Company’s long-term bank loans bear floating interest rates; therefore, changes in the market interest rate may cause future cash flows to be volatile.    Accordingly, the Company entered into an interest rate swap contract in order to hedge cash flow risk caused by floating interest rates.    The interest rate swap contract of the Company was due in August 2012.
The outstanding interest rate swap contract consisted of the following:
Contract Amount
NT$
(In Million)
   The Company will subscribe through a private placement for new shares of Motech Industries Inc. (“Motech”) under a Share Subscription Agreement entered into on December 9, 2009. The total consideration is approximately NT$6.2 billion (US$193 million). After the subscription of shares, the Company will own 20% of the Motech shares. The transaction was approved by Motech’s Extraordinary General Shareholders’ Meeting on January 26, 2010.
Maturity Date    ~~In September 2009, the Company acquired common stock and preferred stock~~
Range of Mcube for NT$58.0 million. The Company took both ownership of stock and controlling power into consideration and concluded that the Company did not have controlling interest over Mcube. Accordingly, the Company applied equity method to account for this investment and the related equity in earnings/losses.
Interest Rates
Paid
   ~~For the years ended~~
Range of
Interest Rates
Received
December 31, 2007, 2008 and 2009, equity in earnings/losses of equity method investees was a net gain of NT$2,507.9 million, NT$701.5 million and NT$46.0 million, respectively. Related equity in earnings/losses of equity method investees were determined based on the audited financial statements, except for Mcube for the year ended December 31, 2009. The Company believes that, had Mcube’s financial statements been audited, any adjustments arising would have had no material effect on the Company’s consolidated financial statements.
~~F-21~~2011
   ~~As of December 31, 2008 and 2009, fair values of publicly traded stocks in investments accounted for using equity method (VIS) was NT$4,680.3 million and NT$10,114.4 million, respectively.~~
   ~~Movements of the difference between the cost of investment and the Company’s share in investees’ net assets allocated to depreciable assets were as follows:~~

Year Ended December 31
2007 2008 2009
NT$ NT$ NT$
(In Millions)

Balance, beginning of year $ 952.2 $ 2,589.7 $ 1,990.6
Additions 1,968.6 — —
Amortization (331.1 ) (599.1 ) (599.1 )

Balance, end of year $ 2,589.7 $ 1,990.6 $ 1,391.5

   ~~As of December 31, 2008 and 2009, the ending balances of the aforementioned difference allocated to goodwill were both NT$1,061.9 million.~~
~~12.~~
NT$80.0
   August 31, 2012 1.38% 0.63%-0.86%
For the years ended December 31, 2010, 2011 and 2012, the adjustment to shareholders’ equity amounted to a net loss of NT$1.2 million, NT$0.1 million and nil, respectively; and the amount removed from shareholders’ equity and recognized as a loss from the above interest rate swap contract amounted to NT$0.4 million, NT$0.6 million and NT$0.2 million, respectively.
F - 22
13. FINANCIAL ASSETS CARRIED AT COST

December 31
2008 2009
NT$ NT$
(In Millions)

Non-publicly traded stocks $ 3,453.4 $ 2,899.6
Mutual funds 162.0 163.4

$ 3,615.4 $ 3,063.0

   December 31
   2011    2012
   NT$    NT$
   (In Millions)
Non-publicly traded stocks
   $       4,004.3       $       3,314.7
Mutual funds
   310.7       290.4




   $ 4,315.0       $ 3,605.1




The common stock of InvenSense, Inc. and Audience, Inc. was listed on the NYSE and NASDAQ in November 2011 and in May 2012, respectively.    Thus, the Company reclassified the aforementioned investments from financial assets carried at cost to available-for-sale financial assets.
For the years ended December 31, 2010, 2011 and 2012, the Company recognized impairment on financial assets carried at cost of NT$159.8 million, NT$265.5 million and NT$367.4 million, respectively.
14. In August 2009, the common stock of Leadtrend Technology Corporation (“Leadtrend”) was listed on the Taiwan Stock Exchange. Thus, the Company reclassified its investment in Leadtrend from financial assets carried at cost to available-for-sale financial assets-noncurrent.
~~For the years ended December 31, 2008 and 2009, the Company recognized impairment on financial assets carried at cost of NT$625.5 million and NT$711.9 million, respectively.~~
~~F-22~~
~~13.~~ PROPERTY, PLANT AND EQUIPMENT

December 31
2008 2009
NT$ NT$
(In Millions)

Cost
Land and land improvements $ 953.9 $ 934.1
Buildings 132,250.0 142,294.6
Machinery and equipment 697,498.8 775,653.5
Office equipment 12,430.8 13,667.7
Leased assets 722.3 714.4

843,855.8 933,264.3
Advance payments and construction in progress 18,605.9 34,154.4

862,461.7 967,418.7

Accumulated depreciation
Land and land improvements 295.9 317.6
Buildings 72,681.7 81,821.7
Machinery and equipment 535,962.3 600,795.5
Office equipment 9,693.8 10,589.3
Leased assets 182.6 219.8

618,816.3 693,743.9

Net $ 243,645.4 $ 273,674.8

   December 31
   2011    2012
   NT$    NT$
   (In Millions)
Cost

Land and land improvements
   $ 1,541.1       $ 1,527.1
Buildings
   172,872.5       197,314.7
Machinery and equipment
   1,057,588.7       1,279,167.7
Office equipment
   16,969.3       19,973.7
Leased assets
   791.5       766.8




   1,249,763.1       1,498,750.0
Advance payments and construction in progress
   116,864.0       119,064.0




   1,366,627.1       1,617,814.0




Accumulated depreciation

Land and land improvements
   355.6       367.4
Buildings
   101,004.0       111,737.3
Machinery and equipment
   762,774.4       874,785.4
Office equipment
   11,820.7       13,066.3
Leased assets
   297.5       328.1




   876,252.2       1,000,284.5




Net
   $ 490,374.9       $ 617,529.5




Depreciation expense on property, plant and equipment was NT$85,551.4 million, NT$105,327.2 million and NT$129,161.9 million for the years ended December 31, 2010, 2011 and 2012, respectively.
The Company entered into agreements to lease buildings that qualify as capital leases.    The term of the leases is from December 2003 to November 2018.
F - 23
As of December 31, 2012, future lease payments were as follows:
Year    Amount
   NT$
   (In Millions)
2013
   $ 27.0
2014
   27.0
2015
   27.0
2016
   27.0
2017
   27.0
2018 and thereafter
   729.8


   $         864.8


During the years ended December 31, 2011 and 2012, the Company capitalized the borrowing costs directly attributable to the acquisition or construction of property, plant and equipment.    Information about capitalized interest was as follows:
   Year Ended December 31
   2011    2012
   NT$    NT$
   (In Millions)
Capitalized interest
         $      9.1            $      6.4
Capitalization rates
   1.07%-1.29%    1.08%-1.20%
15. ~~Depreciation expense on property, plant and equipment was NT$77,171.3 million, NT$78,736.8 million and NT$78,662.4 million for the years ended December 31, 2007, 2008 and 2009, respectively.~~
The Company entered into agreements to lease buildings that qualify as capital leases. The term of the leases ranged from December 2003 to December 2013. The future minimum lease payments as of December 31, 2009 is NT$787.1million.
~~F-23~~
~~14.~~ DEFERRED CHARGES, NET

December 31
2008 2009
NT$ NT$
(In Millions)

Technology license fees $ 4,125.2 $ 3,230.6
Software and system design costs 1,801.8 1,834.6
Patent and others 1,198.8 1,393.4

$ 7,125.8 $ 6,458.6

   December 31
   2011    2012
   NT$    NT$
   (In Millions)
Technology license fees
   $       1,682.9       $       1,461.9
Software and system design costs
   2,366.5       2,969.0
Patent and others
   1,118.2       1,005.0




   $ 5,167.6       $ 5,435.9




Amortization expense on deferred charges was NT$2,236.7 million, NT$2,337.6 million and NT$2,180.8 million for the years ended December 31, 2010, 2011 and 2012, respectively.
As of December 31, 2012, the Company’s estimated aggregate amortization expense for each of the five succeeding fiscal years and thereafter is as follows:
   Amount
   NT$
Year    (In Millions)
2013
   $ 2,012.2
2014
   1,573.6
2015
   1,032.2
2016
   442.3
2017
   270.4
2018 and thereafter
   105.2


   $ 5,435.9


F - 24
16. ~~Amortization expense on deferred charges was NT$2,793.0 million, NT$2,716.3 million and NT$2,130.4 million for the years ended December 31, 2007, 2008 and 2009, respectively.~~
~~As of December 31, 2009, the Company’s estimated aggregate amortization expense for each of the five succeeding fiscal years and thereafter is as follows:~~SHORT-TERM LOANS

Amount
NT$
Year (In Millions)

2010 $ 2,127.5
2011 1,677.3
2012 988.8
2013 472.0
2014 368.4
2015 and thereafter 824.6

$ 6,458.6

   December 31
   2011    2012
   NT$    NT$
   (In Millions)
Unsecured loans:

US$856.0 million, due by February 2012 and annual interest at 0.45%-1.00% in 2011; US$1,195.5 million, due in January 2013, and annual interest at 0.39%-0.58 % in 2012
   $     25,926.5       $     34,714.9




~~15.~~17. BONDS PAYABLE

December 31
2008 2009
NT$ NT$
(In Millions)
Domestic unsecured bonds:
Issued in January 2002 and repayable in 2009 and 2012 in two installments, 2.75% and 3.00% interest payable annually, respectively $ 12,500.0 $ 4,500.0
Current portion (8,000.0 ) —

$ 4,500.0 $ 4,500.0

~~F-24~~
   December 31
   2011 2012
   NT$ NT$
   (In Millions)
Domestic unsecured bonds:

Issued in September 2011 and repayable in September 2016, 1.40% interest payable annually
   $ 10,500.0    $ 10,500.0
Issued in September 2011 and repayable in September 2018, 1.63% interest payable annually
   7,500.0    7,500.0
Issued in January 2012 and repayable in January 2017, 1.29% interest payable annually
   -      10,000.0
Issued in January 2012 and repayable in January 2019, 1.46% interest payable annually
   -      7,000.0
Issued in August 2012 and repayable in August 2017, 1.28% interest payable annually
   -      9,900.0
Issued in August 2012 and repayable in August 2019, 1.40% interest payable annually
   -      9,000.0
Issued in September 2012 and repayable in September 2017, 1.28% interest payable annually
   -      12,700.0
Issued in September 2012 and repayable in September 2019, 1.39% interest payable annually
   -      9,000.0
Issued in October 2012 and repayable in October 2022, 1.53% interest payable annually
   -      4,400.0
Issued in January 2002 and repayable in January 2012, 3.00% interest payable annually
   4,500.0    -


   22,500.0    80,000.0
Current portion
   (4,500.0 ) -


   $       18,000.0    $       80,000.0


With the approval from the Financial Supervisory Commission (FSC), the Company issued domestic unsecured bonds in the amount of NT$23,600.0 million and NT$21,400.0 million in January 2013 and February 2013, respectively.
The provision of a loan guarantee to TSMC Global, a subsidiary of TSMC, for its issuance of unsecured corporate bonds for an amount not to exceed US$1,500.0 million had been approved in the meeting of the Board of Directors of TSMC held on February 5, 2013.
F - 25
~~16.~~18. LONG-TERM BANK LOANS

December 31
2008 2009
NT$ NT$
(In Millions)
Secured loans:
Repayable from August 2009 in 17 quarterly installments, annual interest at 2.56%- 3.67% in 2008 and 0.67%-2.70% in 2009 $ 728.4 $ 788.3
US$20.0 million, repayable in full in one lump sum payment in November 2010, annual interest at 3.62% in 2008 and 0.68%-0.97% in 2009 658.7 640.9
Repayable from December 2007 in 8 semi-annual installments, annual interest at 2.42%- 3.23% in 2008 and 1.10%- 2.42% in 2009 168.8 98.7
Repayable from May 2007 in 16 quarterly installments, fully repaid in June 2009, annual interest at 2.42%-3.00% 37.8 —
Repayable from March 2007 in 12 quarterly installments, fully repaid in June 2009, annual interest at 2.53%-3.21% 32.5 —
Repayable from April 2005 in 16 quarterly installments, annual interest at 2.42%-3.00% 9.0 —
Repayable from February 2005 in 17 quarterly installments, annual interest at 2.56%-3.15% 7.7 —

1,642.9 1,527.9
Current portion (222.4 ) (949.3 )

$ 1,420.5 $ 578.6

           December 31
   2011 2012
   NT$ NT$
   (In Millions)
Bank loans for working capital:

Repayable in full in one lump sum payment in June 2016, annual interest at 1.00%-1.08% in 2011 and 1.08%-1.21% in 2012
   $ 650.0    $ 550.0
Repayable in full in one lump sum payment in March 2014, annual interest at 1.02%-1.16% in 2011 and 1.16%-1.18% in 2012
   500.0    450.0
Repayable from July 2012 in 16 quarterly installments, annual interest at 1.11%-1.21% in 2011 and 1.21%-1.24% in 2012
   300.0    262.5
Repayable from September 2012 in 16 quarterly installments, annual interest at 1.13%-1.21% in 2011 and 1.21%-1.24% in 2012
   200.0    175.0
Repayable from October 2013 in 16 quarterly installments, annual interest at 1.23%-1.24% in 2012
   -       50.0


   1,650.0    1,487.5
Current portion
   (62.5 ) (128.1 )


   $           1,587.5    $           1,359.4


Pursuant to the loan agreements, financial ratios calculated based on semi-annual and annual financial statements of Xintec must comply with predetermined financial covenants.    As of December 31, 2012, Xintec was in compliance with all such financial covenants.
As of December 31, 2012, future principal repayments for the long-term loans were as follows:
Year of Repayment    Amount

NT$
(In Million)

2013
   $ 128.1
2014
   587.5
2015
   137.5
2016
   625.0
2017
   9.4


   $ 1,487.5


19. Pursuant to the loan agreements, financial ratios calculated based on annual audited financial statements of TSMC China have to meet certain financial covenants. As of December 31, 2009, TSMC China was not in compliance with part of the aforementioned financial covenants. However, this did not have a significant effect on the Company’s financial position. According to the terms of Xintec’s loan agreements, semi-annual and annual financial statements of Xintec must comply with predetermined financial covenants. As of December 31, 2009, Xintec was in compliance with all such financial covenants.
~~As of December 31, 2009, future principal repayments for the long-term bank loans were as follows:~~

Amount
NT$
Year of Repayment (In Millions)
2010 $ 949.3
2011 275.5
2012 242.6
2013 60.5

$ 1,527.9

~~17.~~ OTHER LONG-TERM PAYABLES

December 31
2008 2009
NT$ NT$
(In Millions)

Payables for acquisition of property, plant and equipment (Note 28g) $ 8,579.7 $ 8,355.4
Payables for royalties 2,095.0 1,252.3

10,674.7 9,607.7
Current portion (classified under accrued expenses and other current liabilities) (1,126.5 ) (4,005.3 )

$ 9,548.2 $ 5,602.4

~~F-25~~
   December 31
   2011 2012
   NT$ NT$
   (In Millions)
Payables for acquisition of property, plant and equipment (Note 30g)
   $       3,399.9    $         825.5
Payables for software and system design costs
   -       113.0
Payables for technology transfer
   -       29.0


   3,399.9    967.5
Current portion (classified under accrued expenses and other current liabilities)
   (3,399.9 ) (913.5 )


   $ -       $ 54.0


F - 26
As of December 31, 2012, future payments for other long-term payables were as follows:
Year of Payment    Amount
2013
   $ 913.5
2014
   18.0
2015
   18.0
2016
   18.0


   $ 967.5


20. ~~The payables for royalties were primarily attributable to several license arrangements that the Company entered into for certain semiconductor-related patents.~~
~~As of December 31, 2009, future payments for other long-term payables were as follows:~~PENSION PLANS

Amount
NT$
Year of Payment (In Millions)

2010 $ 4,005.3
2011 3,075.1
2012 2,527.3

$ 9,607.7

~~18.~~ ~~PENSION PLANS~~
The pension mechanism under the Labor Pension Act is deemed a defined contribution plan. Pursuant to the Act, TSMC, GUC, Xintec and Mutual-Pak have made monthly contributions equal to 6% of each employee’s monthly salary to employees’ pension accounts. Furthermore, TSMC North America, TSMC China, TSMC Europe and TSMC Canada are required by local regulations to make monthly contributions at certain percentages of the basic salary of their employees. Pursuant to the aforementioned Act and local regulations, the Company recognized pension costs of NT$725.8 million, NT$779.6 million and NT$748.1 million (US$23.4 million) for the years ended December 31, 2007, 2008 and 2009, respectively.
TSMC, GUC and Xintec have defined benefit plans under the Labor Standards Law that provide benefits based on an employee’s service years and average monthly salary for the six-month period prior to retirement. The aforementioned companies contribute an amount equal to 2% of salaries paid each month to their respective pension funds (the Funds), which are administered by the Labor Pension Fund Supervisory Committee (the Committee) and deposited in the name of the committees in the Bank of Taiwan.
~~TSMC, GUC, Xintec and Mutual-Pak use December 31 as the measurement date for their pension plans.~~
~~F-26~~The pension mechanism under the Labor Pension Act (the “Act”) is deemed a defined contribution plan.    Pursuant to the Act, TSMC, GUC, Xintec, Mutual-Pak, TSMC SSL and TSMC Solar have made monthly contributions equal to 6% of each employee’s monthly salary to employees’ pension accounts.    Furthermore, TSMC North America, TSMC China, TSMC Europe, TSMC Canada, TSMC Solar NA and TSMC Solar Europe GmbH are required by local regulations to make monthly contributions at certain percentages of the basic salary of their employees.    Pursuant to the aforementioned Act and local regulations, the Company recognized pension costs of NT$1,121.7 million, NT$1,297.6 million and NT$1,403.5 million for the years ended December 31, 2010, 2011 and 2012, respectively.
TSMC, GUC, Xintec, TSMC SSL and TSMC Solar have defined benefit plans under the Labor Standards Law that provide benefits based on an employee’s length of service and average monthly salary for the six-month period prior to retirement.    The aforementioned companies contribute an amount equal to 2% of salaries paid each month to their respective pension funds (the Funds), which are administered by the Labor Pension Fund Supervisory Committee (the Committee) and deposited in the Committee’s name in the Bank of Taiwan.
Changes in projected benefit obligation and plan assets for the years ended December 31, 2010, 2011 and 2012 are summarized as follows:
   Year Ended December 31
   2010 2011 2012
   NT$ NT$ NT$
   (In Millions)
Projected benefit obligation

Balance, beginning of year
   $ 6,557.8    $ 9,288.8    $ 9,214.1
Service cost
   129.7    133.0    129.3
Interest cost
   146.7    167.9    160.0
Actuarial loss (gain)
   2,474.6    (330.7 ) 656.1
Benefits paid
   (20.0 ) (7.3 ) (26.1 )
Effect of changes in consolidated entities
   -       (37.6 ) -


Balance, end of year
   $     9,288.8    $     9,214.1    $     10,133.4


Plan assets

Balance, beginning of year
   $ 2,661.6    $ 2,907.2    $ 3,120.6
Actual return of plan assets
   44.4    35.5    37.0
Employer contribution
   212.2    212.0    221.1
Benefits paid
   (11.0 ) (7.3 ) (26.1 )
Effect of changes in consolidated entities
   -       (26.8 ) -


Balance, end of year
   $ 2,907.2    $ 3,120.6    $ 3,352.6


F - 27
Other information of defined benefit plans was as follows:
~~Changes in projected benefit obligation and plan assets for the years ended December 31, 2007, 2008 and 2009 are summarized as follows:~~

Year Ended December 31
2007 2008 2009
NT$ NT$ NT$
(In Millions)
Projected benefit obligation

Balance, beginning of year $ 6,956.1 $ 6,043.7 $ 7,560.8
Effect of inclusion of newly consolidated subsidiaries 19.0 — —
Service cost 184.2 151.7 166.5
Interest cost 156.4 171.3 150.6
Plan amendments — (173.7 ) —
Actuarial loss (gain) (1,257.0 ) 1,396.8 (1,282.3 )
Benefits paid (15.0 ) (29.0 ) (37.8 )

Balance, end of year $ 6,043.7 $ 7,560.8 $ 6,557.8

Plan assets

Balance, beginning of year $ 1,958.6 $ 2,239.0 $ 2,487.6
Effect of inclusion of newly consolidated subsidiaries 17.0 — —
Actual return of plan assets 69.0 70.7 17.6
Employer contribution 209.4 206.9 194.2
Benefits paid (15.0 ) (29.0 ) (37.8 )

Balance, end of year $ 2,239.0 $ 2,487.6 $ 2,661.6

~~Other information of defined benefit plans was as follows:~~
a. Components of net periodic pension cost

Year Ended December 31
2007 2008 2009
NT$ NT$ NT$
(In Millions)

Service cost $ 184.3 $ 151.7 $ 166.5
Interest cost 156.4 171.3 150.6
Projected return on plan assets (51.3 ) (68.4 ) (57.3 )
Amortization 35.8 4.5 29.9

Net periodic pension cost $ 325.2 $ 259.1 $ 289.7

~~F-27~~
   Year Ended December 31
   2010 2011 2012
   NT$ NT$ NT$
   (In Millions)
Service cost
   $ 129.7    $ 133.0    $ 129.2
Interest cost
   146.6    167.9    160.0
Projected return on plan assets
   (40.9 ) (68.0 ) (63.2 )
Amortization
   2.2    74.8    65.1


Net periodic pension cost
   $       237.6    $       307.7    $       291.1


b. Reconciliation of funded status of the plans and accrued pension cost at December 31, ~~2008~~2011 and ~~2009~~2012

December 31
2008 2009
NT$ NT$
(In Millions)

Benefit obligation
Vested benefit obligation $ 114.9 $ 123.5
Nonvested benefit obligation 4,182.5 3,790.6

Accumulated benefit obligation 4,297.4 3,914.1
Additional benefits based on future salaries 3,263.4 2,643.7

Projected benefit obligation 7,560.8 6,557.8
Fair value of plan assets (2,487.6 ) (2,661.6 )

Funded status 5,073.2 3,896.2
Unrecognized net transition obligation (101.3 ) (92.8 )
Prior service cost 169.2 162.0
Unrecognized net loss (1,439.5 ) (168.4 )

Accrued pension cost $ 3,701.6 $ 3,797.0

Vested benefit $ 126.3 $ 135.5

   December 31
   2011 2012
   NT$ NT$
   (In Millions)
Benefit obligation

Vested benefit obligation
   $ 313.5    $ 427.9
Nonvested benefit obligation
   5,456.9    6,069.7


Accumulated benefit obligation
   5,770.4    6,497.6
Additional benefits based on future salaries
   3,443.7    3,635.8


Projected benefit obligation
   9,214.1    10,133.4
Fair value of plan assets
   (3,120.6 ) (3,352.6 )


Funded status
   6,093.5    6,780.8
Unrecognized net transition obligation
   (74.8 ) (66.4 )
Prior service cost
   147.6    140.3
Unrecognized net loss
   (2,257.8 ) (2,879.6 )
Additional liability
   -       4.5


Accrued pension cost
   $       3,908.5    $       3,979.6


Vested benefit
   $ 350.0    $ 479.6


Net loss not recognized as pension cost
   $ -       $ 4.5


c. Actuarial assumptions at December 31, ~~2008~~2011 and ~~2009~~2012
~~Discount rate used in determining present values~~ ~~2.00%-2.50~~ % ~~2.25~~ %
~~Future salary increase rate~~ ~~2.00%-3.00~~ % ~~3.00~~ %
~~Expected rate of return on plan assets~~ ~~2.25%-2.50~~ % ~~1.50%-2.00~~ %
              2011                       2012
Discount rate used in determining present values
   1.75%              1.50%-1.75%
Future salary increase rate
   2.50%-3.00%            2.00%-3.00%
Expected rate of return on plan assets
   2.00%              1.75%-2.00%
F - 28
d. Expected benefit payments

Amount
NT$
Year (In Millions)

2010 $ 77.0
2011 21.1
2012 31.5
2013 50.2
2014 79.6
2015 and thereafter 1,025.2
~~F-28~~
   Amount
   NT$
Year    (In Millions)
2013
     $ 157.5
2014
   100.5
2015
   144.3
2016
   217.9
2017
   224.7
2018 and thereafter
   1,998.9
e. TSMC, ~~GUC~~Xintec, TSMC SSL and ~~Xintec~~TSMC Solar expect to make contributions to their pension funds in ~~2010~~2013 of NT$~~177.6~~221.2 million, NT$~~2.4~~1.9 million, NT$1.5 million and NT$~~1.9~~0.9 million, respectively.

Year Ended December 31
2007 2008 2009
NT$ NT$ NT$
(In Millions)

f.      Contributions to the Funds for the year $ 209.4 $ 206.9 $ 194.2

g.      Payments from the Funds for the year $ 15.0 $ 29.0 $ 37.8

   Year Ended December 31
   2010    2011    2012
   NT$    NT$    NT$
   (In Millions)
f.      Contributions to the Funds for the year
   $       212.2       $       212.0       $       221.1






g.      Payments from the Funds for the year
   $ 20.0       $ 7.3       $ 26.1






h. Plan assets allocation
The government is responsible for the administration of all the defined benefit plans for the companies in Taiwan under the Labor Standards Law.    The government also sets investment policies and strategies, determines investment allocation and selects investment managers.    As of December 31, 2011 and 2012, the asset allocation was primarily in cash, equity securities and debt securities.    Furthermore, under the Labor Standards Law, the rate of return on assets shall not be less than the average interest rate on a two-year time deposit published by the local banks and the government is responsible for any shortfall in the event that the rate of return is less than the required rate of return.    However, information on how investment allocation decisions are made, inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period and significant concentrations of risk within plan assets is not fully made available to the companies by the government.    Therefore, the Company is unable to provide the required fair value disclosures related to pension plan assets.
21. The government is responsible for the administration of all the defined benefit plans for the companies in Taiwan under the Labor Standards Law. The government also sets investment policies and strategies, determines investment allocation and selects investment managers. As of December 31, 2008 and 2009, the asset allocation was primarily in cash, equity securities and debt securities. Furthermore, under the Labor Standards Law, the rate of return on assets shall not be less than the average interest rate on a two-year time deposit published by the local banks and the government is responsible for any shortfall in the event that the rate of return is less than the required rate of return. However, information on how investment allocation decisions are made, inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period and significant concentrations of risk within plan assets is not fully made available to the companies by the government. Therefore, the Company is unable to provide the required fair value disclosures related to pension plan assets.INCOME TAX
~~19.~~ ~~INCOME TAX~~
a. Income tax expense consisted of:

Year Ended December 31
2007 2008 2009
NT$ NT$ NT$
(In Millions)

Current
Domestic $ 10,595.9 $ 8,580.7 $ 7,499.0
Foreign 170.6 82.8 258.6

10,766.5 8,663.5 7,757.6

Deferred
Domestic 976.9 2,307.2 (1,700.6 )
Foreign (33.8 ) (21.7 ) (60.6 )

943.1 2,285.5 (1,761.2 )

Income tax expense $ 11,709.6 $ 10,949.0 $ 5,996.4

~~F-29~~
   Year Ended December 31
   2010 2011 2012
   NT$ NT$ NT$
   (In Millions)
Current

Domestic
   $ 8,131.6    $ 11,040.4    $ 14,853.4
Foreign
   159.4    144.4    163.7


   8,291.0    11,184.8    15,017.1


Deferred

Domestic
   (327.9 ) (466.4 ) 2,603.1
Foreign
   25.4    (24.0 ) (2,029.9 )


   (302.5 ) (490.4 ) 573.2


Income tax expense
   $     7,988.5    $     10,694.4    $     15,590.3


F - 29
b. A reconciliation of income tax expense based on “income before income tax” at the statutory rates and income tax currently payable was as follows:

Year Ended December 31
2007 2008 2009
NT$ NT$ NT$
(In Millions)

Income tax expense based on “income before income tax” statutory rates $ 30,829.4 $ 27,970.4 $ 24,182.9
The effect of the following:
Tax-exempt income (7,668.4 ) (9,670.5 ) (8,652.0 )
Temporary and permanent differences (150.9 ) 2,122.8 3,136.0
Others — 44.1 247.0
Additional tax at 10% on unappropriated earnings 2,710.9 13.9 30.7
Net operating loss carryforwards used (814.1 ) (205.2 ) (66.1 )
Income tax credits used (13,899.6 ) (11,109.3 ) (9,984.6 )

Income tax currently payable $ 11,007.3 $ 9,166.2 $ 8,893.9

   Year Ended December 31
   2010 2011 2012
   NT$ NT$ NT$
   (In Millions)
Income tax expense based on “income before income tax” at statutory rates
   $   30,456.4    $   25,964.2    $   33,654.1
Tax effect of the following:

Tax-exempt income
   (17,410.2 ) (13,832.2 ) (9,830.3 )
Temporary and permanent differences
   (827.0 ) (1,597.3 ) (3,020.7 )
Additional income tax under the Alternative Minimum Tax Act
   -       286.8    -
Additional tax at 10% on unappropriated earnings
   138.2    6,293.4    4,193.5
Net operating loss carryforwards used
   (529.3 ) (395.3 ) (647.8 )
Investment tax credits used
   (4,888.0 ) (6,318.2 ) (9,588.2 )


Income tax currently payable
   $ 6,940.1    $ 10,401.4    $ 14,760.6


c. Income tax expense consisted of the following:

Year Ended December 31
2007 2008 2009
NT$ NT$ NT$
(In Millions)

Income tax currently payable $ 11,007.3 $ 9,166.2 $ 8,893.9
Income tax adjustments on prior years 4.4 (707.3 ) (1,159.3 )
Other income tax adjustments (245.2 ) 204.6 23.0
Net change in deferred income tax assets
Investment tax credits 5,122.5 1,060.6 (1,291.1 )
Net operating loss carryforwards 841.5 411.4 59.9
Temporary differences (800.4 ) (2,129.1 ) (1,042.3 )
Valuation allowance (4,220.5 ) 2,942.6 512.3

Income tax expense $ 11,709.6 $ 10,949.0 $ 5,996.4

~~F-30~~
   Year Ended December 31
   2010 2011 2012
   NT$ NT$ NT$
   (In Millions)
Income tax currently payable
   $     6,940.1    $     10,401.4    $   14,760.6
Income tax adjustments on prior years
   977.9    470.4    55.3
Other income tax adjustments
   373.1    313.0    201.2
Net change in deferred income tax assets

Investment tax credits
   (7,129.5 ) 2,304.9    7,102.8
Net operating loss carryforwards
   546.2    224.1    182.8
Temporary differences
   (78.2 ) (71.0 ) 74.3
Valuation allowance
   6,358.9    (2,873.4 ) (6,786.7 )
Effect of changes in consolidated entities
   -       (75.0 ) -


Income tax expense
   $ 7,988.5    $ 10,694.4    $ 15,590.3


d. Net deferred income tax assets consisted of the following:

December 31
2008 2009
NT$ NT$
(In Millions)

Current deferred income tax assets
Investment tax credits $ 2,885.7 $ 3,304.1
Temporary differences
Allowance for sales returns and others 710.1 814.5
Others 846.4 665.6
Valuation allowance (472.9 ) (413.9 )

$ 3,969.3 $ 4,370.3

Noncurrent deferred income tax assets
Investment tax credits $ 11,311.9 $ 12,184.6
Net operating loss carryforwards 3,589.0 3,440.8
Temporary differences
Depreciation (2,134.5 ) (1,573.0 )
Others 506.2 1,106.8
Valuation allowance (6,635.7 ) (7,170.9 )

$ 6,636.9 $ 7,988.3

In May 2009, the amendment of Article 5 of the Income Tax Law of the Republic of China announced that the income tax rate of profit-seeking enterprises will be reduced from 25% to 20%, and will be effective starting in 2010. TSMC and its domestic subsidiaries which are subject to the Income Tax Law of the Republic of China had recalculated their deferred tax assets in accordance with the amended Article and adjusted the resulting difference as an income tax expense.
~~As of December 31, 2009, the net operating loss carryforwards generated by WaferTech, TSMC Development, Xintec and Mutual-Pak would expire on various dates through 2026.~~
   December 31
   2011 2012
   NT$ NT$
   (In Millions)
Current deferred income tax assets

Investment tax credits
   $ 4,913.8    $ 6,214.7
Temporary differences

Allowance for sales returns and others
   506.2    718.0
Unrealized loss on inventories
   44.0    416.6
Unrealized loss on financial instruments, net
   308.9    224.6
Others
   304.1    473.7
Valuation allowance
   (140.5 ) (46.4 )


   $      5,936.5    $    8,001.2


(Continued)
F - 30
   December 31
   2011 2012
   NT$ NT$
   (In Millions)
Noncurrent deferred income tax assets

Investment tax credits
   $ 15,399.5    $ 6,995.8
Net operating loss carryforwards
   2,491.7    2,224.2
Temporary differences

Depreciation
   2,280.9    1,420.8
Others
   654.7    759.7
Valuation allowance
      (13,390.1 )    (6,624.5 )


   $ 7,436.7    $ 4,776.0


(Concluded)
Effective in May 2010, the Article 5 of the Income Tax Law of the Republic of China was amended, in which the income tax rate of profit-seeking enterprises would be reduced from 20% to 17%.    The last amended income tax rate of 17% is retroactively applied on January 1, 2010.
Under the Article 10 of the Statute for Industrial Innovation (SII), effective in May 2010, a profit-seeking enterprise may deduct up to 15% of its research and development expenditures from its income tax payable for the year in which these expenditures are incurred, but this deduction should not exceed 30% of the income tax payable for that year.    This incentive is retroactive to January 1, 2010 and effective until December 31, 2019.
Under the Income Basic Tax Act amended in August 2012, the standard deduction and the tax rate of Alternative Minimum Tax were amended from NT$2.0 million to be NT$0.5 million and from 10% to 12%, respectively.    The amended Income Basic Tax Act is effective on January 1, 2013.
The Company has evaluated the impact from above amendments and adjusted the deferred tax assets with the resulting differences recorded as income tax expense for the year ended December 31, 2012.    In addition, the Company evaluated the effect of Alternative Minimum Tax and the applicable year of the profits generated from projects exempt from income tax for a five-year period.    As the Company plans to apply the tax-exempt income in later years, income tax payable is anticipated to increase and the Company will utilize available investment tax credits as an offset against income taxes.    Since more investment tax credits can be utilized, valuation allowance has been adjusted down accordingly.
As of December 31, 2012, the net operating loss carryforwards generated by WaferTech, Xintec, Mutual-Pak, TSMC SSL and TSMC Solar would expire on various dates through 2023.
e. Integrated income tax information:
~~The balance of the imputation credit account (ICA) of TSMC as of December 31, 2008 and 2009 was NT$521.6 million and NT$369.3 million, respectively.~~
~~The actual and estimated creditable ratios for distribution of TSMC’s earnings of 2008 and 2009 were 9.10% and 0.35%, respectively.~~
The imputation credit allocated to the shareholders is based on its balance as of the date of dividend distribution. The estimated creditable ratio may change when the actual distribution of imputation credit is made.
The balance of the imputation credit account of TSMC as of December 31, 2011 and 2012 was NT$4,003.2 million and NT$8,130.1 million, respectively.
The actual and estimated creditable ratios for distribution of TSMC’s earnings of 2011 and 2012 were 6.69% and 7.92%, respectively.
The imputation credit allocated to shareholders is based on its balance as of the date of the dividend distribution. The estimated creditable ratio may change when the actual distribution of the imputation credit is made.
f. All of TSMC’s earnings generated prior to December 31, 1997 have been appropriated.
~~F-31~~
F - 31
g. As of December 31, ~~2009,~~2012, investment tax credits of TSMC, ~~GUC,~~ Xintec, Mutual-Pak and ~~Mutual-Pak~~TSMC SSL consisted of the following:

Total Remaining
Creditable Creditable Expiry
Law/Statute Item Amount Amount Year
NT$ NT$
(In Millions)

Statute for Upgrading Industries Purchase of machinery and equipment $ 587.1 $ — 2009
1,331.2 110.5 2010
4,711.0 66.3 2011
3,464.9 3,464.9 2012
3,315.5 3,315.5 2013

$ 13,409.7 $ 6,957.2

Statute for Upgrading Industries Research and development expenditures $ 2,711.8 $ 9.4 2010
2,809.8 2,090.3 2011
2,968.2 2,968.2 2012
3,409.7 3,409.7 2013

$ 11,899.5 $ 8,477.6

Statute for Upgrading Industries Personnel training expenditures $ 23.9 $ 0.8 2010
20.1 20.1 2011
32.5 32.5 2012
0.5 0.5 2013

$ 77.0 $ 53.9

Statute for Upgrading Industries Investments in important technology-based enterprises $ 7.3 $ — 2009
79.8 — 2010

$ 87.1 $ —

      Total    Remaining
      Creditable    Creditable    Expiry
Law/Statute    Item    Amount       Amount       Year
      NT$    NT$
      (In Millions)
Statute for Upgrading Industries

Purchase of machinery and equipment
   $ 7.0       $ -          2012
      6,514.2       927.6       2013
      7,045.6       7,045.6       2014
      505.2       505.2       2015







$

  14,072.0


   $   8,478.4





Statute for Upgrading Industries

Research and development expenditures
   $ 1,179.8       $ -          2012
      4,732.1       4,732.1       2013







$

5,911.9


   $ 4,732.1





Statute for Upgrading Industries

Personnel training expenditures
   $ 17.4       $ -          2012






Statute for Industrial Innovation

Research and development expenditures
   $ 2,828.3       $ -          2012






h. The profits generated from the following projects of TSMC ~~GUC~~ and Xintec are exempt from income tax for a five-year period:
   Tax-Exemption Period
Construction ~~of Fab 14 — Module A~~
~~2006 to 2010~~
~~Construction of Fab 12 — Module B~~ and expansion of ~~Fab 14 — Module A~~ ~~2007 to 2011~~
~~Construction of Fab 14 — Module B and expansion of Fab 12 and others~~2004 by TSMC
   2008 to 2012
~~2003 plant~~
Construction and expansion of ~~GUC~~2005 by TSMC
   ~~2007~~2010 to ~~2011~~2014
~~2005~~
Construction and ~~2006 plant~~ expansion of ~~GUC~~2006 by TSMC
   ~~To be determined~~2011 to 2015
~~2003 plant~~
Construction and expansion of 2003 and 2006 by Xintec
   ~~2007~~2010 to ~~2011~~2014
i. The tax authorities have examined income tax returns of TSMC through ~~2007.~~2009.    All investment tax credit adjustments assessed by the tax authorities have been recognized accordingly.
~~F-32~~
22. SHAREHOLDERS’ EQUITY
Common Stock, Capital Surplus and Earnings
As of December 31, 2012, 1,091,468 thousand ADSs of TSMC were traded on the NYSE.    The number of common shares represented by the ADSs was 5,457,339 thousand (one ADS represents five common shares).
Capital surplus can be used to offset a deficit under the Company Law.    However, the capital surplus generated from donations and the excess of the issuance price over the par value of capital stock (including the stock issued for new capital, mergers, convertible bonds and the surplus from treasury stock transactions) may be appropriated as stock dividends, which are limited to a certain percentage of TSMC’s paid-in capital.    In addition, the capital surplus from long-term investments may not be used for any purpose.    However, according to the revised Company Law, effective January 2012, the aforementioned capital surplus generated from donations and the excess of the issuance price over the par value of capital stock can also be used to distribute cash in proportion to original shareholders’ holding.
F - 32
Capital surplus consisted of the following:
   December 31
   2011    2012
   NT$    NT$
   (In Millions)
Additional paid-in capital
   $     23,774.3       $     23,934.6
From merger
   22,804.5       22,804.5
From convertible bonds
   8,892.9       8,892.9
From long-term investments
   374.7       503.3
From employee stock options
   -          2.5




   $ 55,846.4       $ 56,137.8




As of December 31, 2011 and 2012, retained earnings consisted of:
~~20.~~ ~~SHAREHOLDERS’ EQUITY~~
~~Common Stock, Capital Surplus and Earnings~~
~~As of December 31, 2009, 1,097,513 thousand ADSs of TSMC were traded on the NYSE. The number of common shares represented by the ADSs was 5,487,565 thousand (one ADS represents five common shares).~~
Capital surplus can only be used to offset a deficit under the Company Law. However, the capital surplus generated from donations and the excess of the issuance price over the par value of capital stock (including the stock issued for new capital, mergers, convertible bonds and the surplus from treasury stock transactions) may be appropriated as stock dividends, which are limited to a certain percentage of TSMC’s paid-in capital. Also, the capital surplus from long-term investment may not be used for any purpose.
~~Capital surplus consisted of the following:~~

December 31
2008 2009
NT$ NT$
(In Millions)

Additional paid-in capital $ 17,962.5 $ 23,457.8
From merger 22,805.4 22,805.4
From convertible bonds 8,893.2 8,893.2
From long-term investments 214.1 329.6

$ 49,875.2 $ 55,486.0

~~As of December 31, 2008 and 2009, retained earnings consisted of:~~

December 31
2008 2009
NT$ NT$
(In Millions)

Unappropriated earnings $ 102,337.4 $ 104,565.0
Legal capital reserve 67,324.4 77,317.7
Special capital reserve 391.9 —

$ 170,053.7 $ 181,882.7

TSMC’s Articles of Incorporation provide that, when allocating the net profits for each fiscal year, TSMC shall first offset its losses in previous years and then set aside the following items accordingly:
   December 31
   2011    2012
   NT$    NT$
   (In Millions)
Unappropriated earnings
   $   213,357.3       $   287,174.9
Legal capital reserve
   102,400.0       115,820.1
Special capital reserve
   6,433.9       7,606.3




   $ 322,191.2       $ 410,601.3




TSMC’s Articles of Incorporation provide that, when allocating the net profits for each fiscal year, TSMC shall first offset its losses in previous years and then set aside the following items accordingly:
a. Legal capital reserve at 10% of the profits left over, until the accumulated legal capital reserve equals TSMC’s paid-in capital;
b. Special capital reserve in accordance with relevant laws or regulations or as requested by the authorities in charge;
~~F-33~~
c. Bonus to directors and profit sharing to employees of TSMC of not more than 0.3% and not less than 1% of the remainder, respectively.    Directors who also serve as executive officers of TSMC are not entitled to receive the bonus to directors.    TSMC may issue profit sharing to employees in stock of an affiliated company meeting the conditions set by the Board of Directors or, by the person duly authorized by the Board of Directors;
d. Any balance left over shall be allocated according to the resolution of the shareholders’ meeting.
TSMC’s Articles of Incorporation also provide that profits of TSMC may be distributed by way of cash dividend and/or stock dividend.    However, distribution of profits shall be made preferably by way of cash dividend.    Distribution of profits may also be made by way of stock dividend; provided that the ratio for stock dividend shall not exceed 50% of the total distribution.
Any appropriations of the profits are subject to shareholders’ approval in the following year.
TSMC accrued profit sharing to employees based on certain percentage of net income during the year, which amounted to NT$8,990.0 million and NT$11,115.2 million for the years ended December 2011 and 2012, respectively.    Bonuses to directors were expensed based on estimated amount of payment.    If the actual amounts subsequently resolved by the shareholders differ from the estimated amounts, the differences are recorded in the year of shareholders’ resolution as a change in accounting estimate.    If profit sharing is resolved to be distributed to employees in stock, the number of shares is determined by dividing the amount of profit sharing by the closing price (after considering the effect of dividends) of the shares on the day preceding the shareholders’ meeting.
TSMC no longer has supervisors since January 1, 2007.    The required duties of supervisors are being fulfilled by the Audit Committee.
F - 33
According to the revised Company Law, effective January 2012, the appropriation for legal capital reserve shall be made until the reserve equals the Company’s paid-in capital.    The reserve may be used to offset a deficit, or be distributed as dividends in cash or stocks for the portion in excess of 25% of the paid-in capital if the Company incurs no loss.
A special capital reserve equivalent to the net debit balance of the other components of shareholders’ equity (for example, cumulative translation adjustments, unrealized loss on financial instruments and net loss not recognized as pension cost, but excluding treasury stock) shall be made from unappropriated earnings pursuant to existing regulations promulgated by the Securities and Futures Bureau (SFB).    Any special reserve appropriated may be reversed to the extent that the net debit balance reverses.
The appropriations of earnings for 2010 and 2011 had been approved in TSMC’s shareholders’ meetings held on June 9, 2011 and June 12, 2012, respectively.    The appropriations and dividends per share were as follows:

Appropriation of Earnings
   Dividends Per Share

For Fiscal
      Year 2010

For Fiscal
      Year 2011
   For Fiscal
  Year 2010      For Fiscal
  Year 2011
NT$ NT$    NT$    NT$
(In Millions)
Legal capital reserve
$ 16,160.5    $ 13,420.1
Special capital reserve
5,120.8    1,172.4
Cash dividends to shareholders
77,730.2    77,748.7       $3.00    $3.00


$ 99,011.5    $ 92,341.2


TSMC’s profit sharing to employees and bonus to directors in the amounts of NT$10,908.3 million and NT$51.1 million in cash for 2010, respectively, and profit sharing to employees and bonus to directors in the amounts of NT$8,990.0 million and NT$62.3 million in cash for 2011, respectively, had been approved in the shareholders’ meeting held on June 9, 2011 and June 12, 2012, respectively.    The resolved amounts of the profit sharing to employees and bonus to directors were consistent with the resolutions of meeting of the Board of Directors held on February 15, 2011 and February 14, 2012 and same amount had been charged against earnings of 2010 and 2011, respectively.
TSMC’s appropriations of earnings for 2012 had been resolved in the meeting of the Board of Directors held on February 5, 2013.    The appropriations and dividends per share were as follows:
   Appropriation of
Earnings     Dividends Per
Share
   For Fiscal
Year 2012 For Fiscal
Year 2012
   NT$ NT$
   (In Millions)
Legal capital reserve
   $         16,615.9
Special capital reserve
   (4,820.5 )
Cash dividends to shareholders
   77,773.3 $ 3.0


   $ 89,568.7


The Board of Directors of TSMC also resolved to appropriate profit sharing to employees and bonus to directors in the amounts of NT$11,115.2 million and NT$71.4 million in cash for 2012, respectively.    There is no significant difference between the aforementioned resolved amounts and the amounts charged against earnings of 2012.
The appropriations of earnings, profit sharing to employees and bonus to directors for 2012 are to be resolved in the TSMC’s shareholders’ meeting held on June 11, 2013 (expected).
The information about the appropriations of TSMC’s profit sharing to employees and bonus to directors is available at the Market Observation Post System website.
F - 34
Under the Integrated Income Tax System that became effective on January 1, 1998, R.O.C. resident shareholders are allowed a tax credit for their proportionate share of the income tax paid by TSMC on earnings generated since January 1, 1998.
23. STOCK-BASED COMPENSATION PLANS
a. TSMC’s Articles of Incorporation also provide that profits of TSMC may be distributed by way of cash dividend and/or stock dividend. However, distribution of profits shall be made preferably by way of cash dividend. Distribution of profits may also be made by way of stock dividend; provided that the ratio for stock dividend shall not exceed 50% of the total distribution.Under Intrinsic Value Method
TSMC’s Employee Stock Option Plans, consisting of the TSMC 2002 Plan, TSMC 2003 Plan, and TSMC 2004 Plan, were approved by the SFB on June 25, 2002, October 29, 2003 and January 6, 2005, respectively.    The maximum number of options authorized to be granted under the TSMC 2002 Plan, TSMC 2003 Plan and TSMC 2004 Plan was 100,000 thousand, 120,000 thousand and 11,000 thousand, respectively, with each option eligible to subscribe for one common share of TSMC when exercised.    The options may be granted to qualified employees of TSMC or any of its domestic or foreign subsidiaries, in which TSMC’s shareholding with voting rights, directly or indirectly, is more than fifty percent (50%). The options of all the plans are valid for ten years and exercisable at certain percentages subsequent to the second anniversary of the grant date.    Under the terms of the plans, the options are granted at an exercise price equal to the closing price of TSMC’s common shares listed on the TWSE on the grant date.
Options of the plans that had never been granted or had been granted but subsequently canceled had expired as of December 31, 2012.
Information about TSMC’s outstanding options for the years ended December 31, 2010, 2011 and 2012 was as follows:

Number of
Options
(In Thousands)
Weighted- average
Exercise Price
(NT$)
Year ended December 31, 2010

Balance, beginning of year
   28,810 $ 32.4
Options exercised
   (7,372 ) 33.2
Options canceled
   (1 ) 50.1


Balance, end of year
           21,437 32.3


Year ended December 31, 2011

Balance, beginning of year
   21,437 $ 31.4
Options exercised
   (7,144 ) 30.5


Balance, end of year
   14,293 32.1


Year ended December 31, 2012

Balance, beginning of year
   14,293 $ 31.4
Options exercised
   (8,213 ) 29.5
Options canceled
   (135 ) 34.6


Balance, end of year
   5,945 34.6


The numbers of outstanding options and exercise prices have been adjusted to reflect the distribution of earnings by TSMC in accordance with the plans.
F - 35
As of December 31, 2012, information about TSMC’s outstanding options was as follows:

Options Outstanding
Range of Exercise
      Price (NT$)

    Number of Options
(In Thousands)
   Weighted-average
Remaining Contractual
Life (Years)    Weighted-average
Exercise Price (NT$)
$20.2-$28.3
   3,362                    0.4                    $  25.9
  38.0-  50.1
        2,583                    2.0                    45.8
        5,945                     1.1                    34.6
As of December 31, 2012, all of the above outstanding options were exercisable.
Xintec’s Employee Stock Option Plans, consisting of the Xintec 2006 Plan and Xintec 2007 Plan, were approved by the SFB on July 3, 2006 and June 26, 2007, respectively.    The maximum number of options authorized to be granted under the Xintec 2006 Plan and Xintec 2007 Plan was 6,000 thousand each, with each option eligible to subscribe for one common share of Xintec when exercised.    The options may be granted to qualified employees of Xintec or any of its subsidiaries.    The options of Xintec 2006 Plan and Xintec 2007 Plan are valid for ten years and exercisable at certain percentages subsequent to the second anniversary of the grant date.
Information about Xintec’s outstanding options for the years ended December 31, 2010, 2011 and 2012 was as follows:
   Number of
Options
(In Thousands) Weighted-average
Exercise Price
(NT$)
Year ended December 31, 2010

Balance, beginning of year
   3,960    $14.7
Options exercised
   (1,856 ) 13.9
Options canceled
               (272 ) 17.3
Balance, end of year
             1,832    15.1
Year ended December 31, 2011

Balance, beginning of year
   1,832    $14.4
Options exercised
   (967 ) 14.4
Options canceled
                 (40 ) 17.4
Balance, end of year
                825    15.1
Year ended December 31, 2012

Balance, beginning of year
   825    $15.0
Options exercised
   (291 ) 17.1
Options canceled
                 (19 ) 15.0
Balance, end of year
                515    13.8
The exercise prices have been adjusted to reflect the distribution of earnings by Xintec in accordance with the plans.
F - 36
As of December 31, 2012, information about Xintec’s outstanding and exercisable options was as follows:
   Options Outstanding    Options Exercisable
Range of Exercise
     Price (NT$)
   Number of
Options (In
Thousands)    Weighted-
average
Remaining
Contractual
Life (Years)    Weighted-
average
Exercise
Price (NT$)    Number of
Options (In
Thousands)    Weighted-
average
Exercise
Price (NT$)
$10.7-$12.5
           201            3.7    $ 10.7            198    $ 10.7
  14.8-  18.6
   314    4.6    15.8    314    15.8





   515    4.2    13.8    512    13.8





The requisite service period under the TSMC 2002 Plan, 2003 Plan, and 2004 Plan is 4 years, which is the same as the vesting period. Based on the vesting schedule, 50% of the options vest two years after the date of grant, 25% of the options vest three years after the date of grant, and the remaining 25% of the options vest four years after the date of grant. If employment is terminated voluntarily by an employee or by the Company, any vested options must be exercised within three months of the employment termination date.    For the Xintec 2006 Plan and 2007 Plan, the requisite service period is also 4 years, with 50% of the options vested two years after the date of grant, 25% of the options vested three years after the date of grant, and the remaining 25% of the options vested four years after the date of grant. If employment is terminated voluntarily by an employee or by the Company, any vested options must be exercised within three months of the employment termination date.
No compensation cost was recognized under the intrinsic value method for the years ended December 31, 2010, 2011 and 2012.    Had the Company used the fair value based method to evaluate the options using the Black-Scholes model, the assumptions at the various grant dates and pro forma results of the Company for the years ended December 31, 2010, 2011 and 2012 would have been as follows:
   ~~Any appropriations of the profits are subject to shareholders’ approval in the following year.~~TSMC Xintec
Valuation assumptions:
Expected dividend yield
1.00%-3.44% 0.80%
Expected volatility
43.77%-46.15% 31.79%-47.42%
Risk free interest rate
3.07%-3.85% 1.88%-2.45%
Expected life
5 years 3 years
   Year Ended December 31
   2010    2011    2012
   NT$    NT$    NT$
   (In Millions)
Net income attributable to shareholders of the parent:

As reported
   $     161,605.0       $   134,201.3       $   166,158.8
Pro forma
   161,470.0       134,146.5       165,986.0
Earnings per share (EPS) - after income tax (NT$):

Basic EPS as reported
   $  6.24       $  5.18       $6.41
Pro forma basic EPS
   6.23       5.18       6.40
Diluted EPS as reported
   6.23       5.18       6.41
Pro forma diluted EPS
   6.23       5.17       6.40
The expected volatility is determined based on the historical stock price trends.    The expected life computation is based on business environment and the option plan itself.    The risk-free interest rate for periods within the contractual life of the option is based on the treasury yield curve in effect at the time of grant.    The dividend yield is based on the anticipated future cash dividends yield at the time of grant.
F - 37
b. Under Fair Value Method
The Board of Directors of TSMC SSL and TSMC Solar resolved on November 21, 2011 to issue new shares for cash and reserved 17,175 thousand shares and 12,341 thousand shares, respectively, for their employees to subscribe to, according to the Company Law.    The aforementioned shares were fully vested on the grant date.
Information about TSMC SSL’s and TSMC Solar’s employee stock options related to the aforementioned new shares issued was as follows:
   TSMC SSL    TSMC Solar
   Weighted-    Weighted-
   Number of average    Number of average
   Options Exercise    Options Exercise
   (In Thousands) Price (NT$)    (In Thousands) Price (NT$)
Year ended December 31, 2012

Balance, beginning of year
   -    $ -       -    $ -
Options granted
   17,175 10.0    12,341 10.0
Options exercised
       (17,175 ) 10.0        (12,341 ) 10.0




Balance, end of year
   -       -




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

Stock price on grant date (NT$/share)
   $ 8.9    $ 9.0
Exercise price (NT$/share)
   $ 10.0    $ 10.0
Expected volatility
   40.32 % 40.32 %
Expected life
   40 days    40 days
Risk free interest rate
   0.76 % 0.76 %
The stock price on grant date was determined based on the cost approach.    The expected volatility was calculated using the historical rate of return based on the TWSE Optoelectronic Index.
The fair value of the aforementioned stock option was close to nil, and accordingly, no compensation cost was recognized.
Xintec’s Employee Stock Option Plan was approved by the SFB on January 10, 2012 (the “Xintec 2011 Plan”). The maximum number of options authorized to be granted under the Xintec 2011 Plan was 6,000 thousand, with each option eligible to subscribe for one common share of Xintec when exercised.    The options may be granted to qualified employees of Xintec or any of its subsidiaries.    The options of Xintec 2011 Plan are valid for five years and exercisable at certain percentages subsequent to the second anniversary of the grant date.
   Weighted-
   Number of average
   Options Exercise
   (In Thousands) Price (NT$)
Year ended December 31, 2012

Balance, beginning of year
   -    $ -
Options granted
           6,000 22.3
Options canceled
   (472 ) 22.1


Balance, end of year
   5,528 22.1


Weighted-average fair value of options granted (NT$)
   $ 5.82


F - 38
The exercise prices have been adjusted to reflect the distribution of earnings by Xintec in accordance with the plan.
As of December 31, 2012, information about the outstanding and exercisable options of Xintec 2011 Plan was as follows:
   Options Outstanding    Options Exercisable
Range of Exercise
     Price (NT$)
   Number of
Options (In
Thousands)    Weighted-
average
Remaining
Contractual
Life (Years)    Weighted-
average
Exercise
Price (NT$)    Number of
Options (In
Thousands)    Weighted-
average
Exercise
Price (NT$)
$22.1
           5,528            4.5    $ 22.1            -       $ -





For the Xintec 2011 Plan, the requisite service period is 4 years, with 50% of the options vested two years after the date of grant, 25% of the options vested three years after the date of grant, and the remaining 25% of the options vested four years after the date of grant. If employment is terminated voluntarily by an employee or by the Company, any vested options must be exercised within one months of the employment termination date.
The grant date of Xintec 2011 Plan was June 14, 2012.    Xintec used the Black-Scholes model to determine the fair value of the option.    The valuation assumptions were as follow:
   TSMC has recorded profit sharing to employees as a charge to earnings of approximately 15% and 7.5% of net income for the years ended December 2008 and 2009, respectively; bonuses to directors were accrued with an estimate based on historical experience. If the actual amounts subsequently resolved by the shareholders differ from the estimated amounts, the differences are recorded in the year of shareholders’ resolution as a change in accounting estimate. If profit sharing is resolved to be distributed to employees in stock, the number of shares is determined by dividing the amount of profit sharing by the closing price (after considering the effect of dividends) of the shares on the day preceding the shareholders’ meeting.Xintec
Valuation assumptions:
   ~~TSMC no longer has supervisors since January 1, 2007. The required duties of supervisors are being fulfilled by the Audit Committee.~~
Stock price on grant date (NT$/share)
   The appropriation for legal capital reserve shall be made until the reserve equals TSMC’s paid-in capital. The reserve may be used to offset a deficit, or be distributed as dividends and bonuses for the portion in excess of 50% of the paid-in capital if TSMC has no unappropriated earnings and the reserve balance has exceeded 50% of TSMC’s paid-in capital. The Company Law also prescribes that, when the reserve has reached 50% of TSMC’s paid-in capital, up to 50% of the reserve may be transferred to capital.$19.42
Exercise price (NT$/share)
   A special capital reserve equivalent to the net debit balance of the other components of shareholders’ equity (for example, cumulative translation adjustments and unrealized loss on financial instruments, but excluding treasury stock) shall be made from unappropriated earnings pursuant to existing regulations promulgated by the Securities and Futures Bureau (SFB). Any special reserve appropriated may be reversed to the extent that the net debit balance reverses.$22.30
Expected volatility
   The appropriations of earnings for 2007 and 2008 had been approved in TSMC’s shareholders’ meetings held on June 13, 2008 and June 10, 2009, respectively. The appropriations of earnings of 2009 were approved by the Board of Directors on February 9, 2010. The appropriations of earnings of 2009 have not yet been resolved by the shareholders. The appropriations and dividends per share were as follows:43.73%

Appropriations of Earnings Dividends Per Share
For Fiscal For Fiscal For Fiscal For Fiscal For Fiscal For Fiscal
Year 2007 Year 2008 Year 2009 Year 2007 Year 2008 Year 2009
NT$ NT$ NT$ NT$ NT$ NT$
(In Millions)

Legal capital reserve $ 10,917.7 $ 9,993.3 $ 8,921.8
Special capital reserve (237.7 ) (391.9 ) 1,313.1
Profit sharing to employees — in cash 3,939.9 — —
Profit sharing to employees — in stock 3,939.9 — —
Cash dividends to shareholders 76,881.3 76,876.3 77,708.1 3.00 3.00 3.00
Stock dividends to shareholders 512.5 512.5 — 0.02 0.02 —
Bonus to directors 176.9 — —

$ 96,130.5 $ 86,990.2 $ 87,943.0

~~F-34~~
Expected life
   TSMC’s profit sharing to employees and bonus to directors that will be paid in cash in the amounts of NT$6,691.3 million and NT$67.7 million for the year ended December 31, 2009, respectively, were resolved in the meeting of the Board of Directors held on February 9, 2010. Such amounts were not materially different from the amounts that have been charged against earnings for the year ended December 31, 2009.3.875 years
Expected dividend yield
   The 2009 earnings appropriations related to employee profit sharing and bonus to directors will be resolved by the shareholders. TSMC’s annual shareholders’ meeting is scheduled for June 15, 2010.-
Risk free interest rate
   TSMC’s profit sharing to employees that have been paid in cash and in stock as well as bonus to directors in the amounts of NT$7,495.0 million, NT$7,495.0 million and NT$158.1 million for 2008, respectively, had been approved in the shareholders’ meeting held on June 10, 2009. The profit sharing to employee in stock of 141.9 million shares was determined by the closing price of TSMC’s common shares (after considering the effect of dividends) of the day immediately preceding the shareholders’ meeting, which was NT$52.83. The resolved amounts of the profit sharing to employees and bonus to directors were consistent with the resolutions of meeting of the Board of Directors held on February 10, 2009 and same amount had been charged against earnings of 2008.
TSMC’s shareholders meeting held on June 10, 2009 also resolved to distribute stock dividends out of capital surplus, and stock dividends to shareholders as well as profit sharing to employees to be paid in stock in the amount of NT$768.8 million, NT$512.5 million and NT$7,495.0 million, respectively. The aforementioned capital increase had taken effect on July 21, 2009.
The amount of the appropriations of earnings for 2007 was consistent with the resolutions of the meetings of the Board of Directors held on February 19, 2008. If the above bonus to employees, directors and supervisors had been paid entirely in cash and charged to earnings of 2007, the basic earnings per share (after income tax) for the year ended December 31, 2007 shown in the respective financial statements would have decreased from NT$4.56 to NT$4.93. The shares distributed as a bonus to employees represented 1.49% of TSMC’s total outstanding common shares as of December 31, 2007.
~~The information about the appropriations of profit sharing to employees, directors and supervisors is available at the Market Observation Post System website.~~
Under the Integrated Income Tax System that became effective on January 1, 1998, R.O.C. resident shareholders are allowed a tax credit for their proportionate share of the income tax paid by TSMC on earnings generated since January 1, 1998.0.96%
The stock price on grant date was determined based on the market approach.    The expected volatility was calculated based on the historical stock prices of the comparative companies of Xintec.
For the year ended December 31, 2012, Xintec recognized compensation cost of the above stock option in the amount of NT$ 6.2 million.
~~21.~~24. ~~STOCK-BASED COMPENSATION PLANS~~
TSMC’s Employee Stock Option Plans, consisting of the TSMC 2002 Plan, TSMC 2003 Plan, and TSMC 2004 Plan, were approved by the SFB on June 25, 2002, October 29, 2003 and January 6, 2005, respectively. The maximum number of options authorized to be granted under the TSMC 2002 Plan, TSMC 2003 Plan and TSMC 2004 Plan was 100,000 thousand, 120,000 thousand and 11,000 thousand, respectively, with each option eligible to subscribe for one common share of TSMC when exercisable. The options may be granted to qualified employees of TSMC or any of its domestic or foreign subsidiaries, in which TSMC’s shareholding with voting rights, directly or indirectly, is more than fifty percent (50%). The options of all the plans are valid for ten years and exercisable at certain percentages subsequent to the second anniversary of the grant date. Under the terms of the plans, the options are granted at an exercise price equal to the closing price of TSMC’s common shares listed on the TSE on the grant date.
~~Options of the aforementioned plans that had never been granted or had been granted but subsequently canceled had expired as of December 31, 2009.~~TREASURY STOCK
         (Shares in Thousands)
Purpose of Treasury Stock

Number of
Shares,
Beginning of
Year
   Addition    Retirement Number of
Shares, End of
Year
Year ended December 31, 2011

Shareholders executed the appraisal right
                   -               1,000               (1,000 )                 -






~~F-35~~In August 2011, at the option of the shareholders of TSMC, certain shareholders requested TSMC to buy back their shares pursuant to the Company Law, which shares were subsequently retired in November 2011.
F - 39
25. ~~Information about TSMC’s outstanding stock options for the years ended December 31, 2007, 2008 and 2009 was as follows:~~

Weighted- average
Number of Options Exercise Price
(In Thousands) (NT$)
Year ended December 31, 2007

Balance, beginning of year 52,814 $ 37.9
Options granted 1,094 37.9
Options exercised (10,988 ) 39.8
Options canceled (1,045 ) 45.9

Balance, end of year 41,875 37.4

Year ended December 31, 2008

Balance, beginning of year 41,875 $ 35.6
Options granted 767 35.2
Options exercised (6,027 ) 37.7
Options canceled (381 ) 46.5

Balance, end of year 36,234 35.3

Year ended December 31, 2009

Balance, beginning of year 36,234 $ 34.0
Options granted 175 34.0
Options exercised (7,272 ) 35.8
Options canceled (327 ) 46.5

Balance, end of year 28,810 33.5

The number of outstanding options and exercise prices had been adjusted to reflect the distribution of earnings by TSMC in accordance with the plans. The options granted were the result of the aforementioned adjustment.
~~As of December 31, 2009, information about TSMC’s outstanding options was as follows:~~

Options Outstanding
Weighted-average
Range of Exercise Number of Options Remaining Contractual Weighted- average
Price (NT$) (in Thousands) Life (Years) Exercise Price (NT$)

$22.8-$32.0 21,179 3.18 $ 29.1
  38.0 - 50.1 7,631 4.88 45.5

28,810 3.63 33.5

~~As of December 31, 2009, all of the above outstanding options were exercisable.~~
GUC’s Employee Stock Option Plans, consisting of the GUC 2002 Plan and GUC 2003 Plan, were approved by its Board of Directors on July 1, 2002 and January 23, 2003, respectively. The maximum number of options authorized to be granted under the GUC 2002 Plan and GUC 2003 Plan was 5,000 and 7,535, respectively, with each option eligible to subscribe for one thousand common shares of GUC when exercisable. The options may be granted to qualified employees of GUC. The options of all the plans are valid for six years and exercisable at certain percentages subsequent to the second anniversary of the grant date.
~~F-36~~
Moreover, the GUC 2004 Plan, GUC 2006 Plan, and GUC 2007 Plan were approved by the SFB on August 16, 2004, July 3, 2006, and November 28, 2007 to grant a maximum of 2,500 options, 3,665 options and 1,999 options, respectively, with each option eligible to subscribe for one thousand common shares of GUC when exercisable. The options may be granted to qualified employees of GUC or any of its subsidiaries. Except for the options of the GUC 2006 Plan which are valid until August 15, 2011, the options of the other two GUC option Plans are valid for six years. Options of all three Plans are exercisable at certain percentages subsequent to the second anniversary of the grant date.
~~Information about GUC’s outstanding stock options for the years ended December 31, 2007, 2008 and 2009 was as follows:~~

Weighted-average
Exercise Prices
Number of Options (NT$)
Year ended December 31, 2007

Balance, beginning of year 7,342 $ 14.0
Options granted 2,053 183.6
Options exercised (1,563 ) 10.2
Options canceled (234 ) 13.5

Balance, end of year 7,598 60.3

Year ended December 31, 2008

Balance, beginning of year 7,598 $ 60.3
Options granted 284 14.8
Options exercised (2,115 ) 14.0
Options canceled (210 ) 168.4

Balance, end of year 5,557 66.6

Year ended December 31, 2009

Balance, beginning of year 5,557 $ 63.9
Options granted 87 13.8
Options exercised (1,475 ) 11.0
Options canceled (359 ) 63.4

Balance, end of year 3,810 83.5

The number of outstanding options and exercise prices have been adjusted to reflect the appropriation of earnings by GUC in accordance with the plans. The options granted were the result of the aforementioned adjustment.
~~As of December 31, 2009, information about GUC’s outstanding and exercisable options was as follows:~~

Options Outstanding Options Exercisable
Weighted-
Range of Weighted-average average Weighted-average
Exercise Price Number of Remaining Contractual Exercise Price Number of Exercise Price
(NT$) Options Life (Years) (NT$) Options (NT$)

  $8.4 374 1.00 $ 8.4 374 $ 8.4
  15.5 1,796 1.67 15.5 154 15.5
175.0 1,640 4.00 175.0 — —

3,810 2.61 83.5 528 10.5

~~F-37~~
Xintec’s Employee Stock Option Plans, consisting of the Xintec 2006 Plan and Xintec 2007 Plan, were approved by the SFB on July 3, 2006 and June 26, 2007, respectively. The maximum number of options authorized to be granted under the Xintec 2006 Plan and Xintec 2007 Plan was 6,000 thousand each, with each option eligible to subscribe for one common share of Xintec when exercisable. The options may be granted to qualified employees of Xintec or any of its subsidiaries. The options of all the plans are valid for ten years and exercisable at certain percentages subsequent to the second anniversary of the grant date.
~~Information about Xintec’s outstanding options for the years ended December 31, 2007, 2008 and 2009 was as follows:~~

Weighted-
Number of average
Options Exercise
(in Thousands) Price (NT$)

Year ended December 31, 2007

Balance, beginning of year 4,968 $ 13.0
Options granted 5,555 17.3
Options canceled (881 ) 14.1

Balance, end of year 9,642 15.1

Year ended December 31, 2008

Balance, beginning of year 9,642 $ 15.1
Options granted (728 ) 12.4
Options canceled (1,472 ) 15.5

Balance, end of year 7,442 14.8

Year ended December 31, 2009

Balance, beginning of year 7,442 $ 14.8
Options granted (2,552 ) 13.5
Options canceled (930 ) 17.1

Balance, end of year 3,960 14.7

~~The exercise prices have been adjusted to reflect the appropriation of earnings by Xintec in accordance with the plans.~~
~~As of December 31, 2009, information about Xintec’s outstanding and exercisable options was as follows:~~

Options Outstanding Options Exercisable
Weighted-
average Weighted- Weighted-
Range of Number of Remaining average Number of average
Exercise Options (in Contractual Exercise Options (in Exercise
Price (NT$) Thousands) Life (Years) Price (NT$) Thousands) Price (NT$)

   $12.2-$14.1 2,092 6.79 $ 12.5 904 $ 12.5
15.2-  19.2 1,868 7.68 17.2 550 17.2

3,960 7.21 14.7 1,454 14.4

The requisite service period under the TSMC 2002 Plan, 2003 Plan, and 2004 Plan is 4 years, which is the same as the vesting period. Based on the vesting schedule, 50% of the options vest two years after the date of grant, 25% of the options vest three years after the date of grant, and the remaining 25% of the options vest four years after the date of grant. If employment is terminated voluntarily by an employee or by the Company, any vested options must be exercised within three months of the employment termination date. For the GUC 2002 Plan, 2003 Plan, 2004 Plan, 2006 Plan and 2007 Plan, the requisite service period is also four years,
~~F-38~~
which is the same as the vesting period. Based on the vesting schedule, 50% of the options vest two years after the date of grant and 50% of the options vest four years after the date of grant. If employment is terminated voluntarily by an employee or by the Company, any vested options must be exercised within three days of the employment termination date. For the Xintec 2006 Plan and 2007 Plan, the requisite service period is also 4 years, with 50% of the options vested two years after the date of grant, 25% of the options vested three years after the date of grant, and the remaining 25% of the options vested four years after the date of grant. If employment is terminated voluntarily by an employee or by the Company, any vested options must be exercised within three months of the employment termination date.
No compensation cost was recognized under the intrinsic value method for the years ended December 31, 2007, 2008 and 2009. Had the Company used the fair value based method to evaluate the options using the Black-Scholes model, the assumptions and pro forma results of the Company for the years ended December 31, 2007, 2008 and 2009 would have been as follows:

Year Ended December 31
2007 2008 2009

Assumptions:
TSMC Weighted average fair value of grants — — —
Expected dividend yield 1.00%-3.44% 1.00%-3.44% 1.00%-3.44%
Expected volatility 43.77%-46.15% 43.77%-46.15% 43.77%-46.15%
Risk free interest rate 3.07%-3.85% 3.07%-3.85% 3.07%-3.85%
Expected life 5 years 5 years 5 years

GUC Weighted average fair value of grants 63.74 — —
Expected dividend yield 0.00%-0.60% 0.00%-0.60% 0.00%-0.60%
Expected volatility 22.65%-45.47% 22.65%-45.47% 22.65%-45.47%
Risk free interest rate 2.12%-2.56% 2.12%-2.56% 2.12%-2.56%
Expected life 3-6 years 3-6 years 3-6 years

Xintec Weighted average fair value of grants 2.84 — —
Expected dividend yield 0.80% 0.80% 0.80%
Expected volatility 31.79%-47.42% 31.79%-47.42% 31.79%-47.42%
Risk free interest rate 1.88%-2.45% 1.88%-2.45% 1.88%-2.45%
Expected life 3 years 3 years 3 years

Year Ended December 31
2007 2008 2009
NT$ NT$ NT$
(In Millions)

Net income attributable to shareholders of the parent:
As reported $ 109,177.1 $ 99,933.2 $ 89,217.8
Pro forma 109,054.9 100,037.6 88,838.2

Earnings per share (EPS) — after income tax (NT$):
Basic EPS as reported $ 4.04 $ 3.84 $ 3.45
Pro forma basic EPS 4.04 3.84 3.44
Diluted EPS as reported 4.04 3.81 3.44
Pro forma diluted EPS 4.04 3.81 3.43
The expected volatility is determined based on the historical stock price trends. The expected life computation is based on business environment and the option plan itself. The risk-free interest rate for periods within the contractual life of the option is based on the treasury yield curve in effect at the time of grant. The dividend yield is based on the anticipated future cash dividends yield at the time of grant.
~~F-39~~
~~22.~~ ~~TREASURY STOCK~~
~~(Shares in Thousands)~~

Beginning Stock Ending
Shares Addition Dividends Retirement Shares
Year ended December 31, 2008

Parent company stock held by subsidiaries 34,096 — 171 34,267 —
Repurchase under share buyback plan 800,000 495,549 — 1,295,549 —

834,096 495,549 171 1,329,816 —

TSMC held a meeting of the Board of Directors on November 13, 2007 and approved a share buyback plan to repurchase the TSMC’s common shares up to 800,000 thousand shares listed on the TSE during the period from November 14, 2007 to January 13, 2008 for the buyback price in the range from NT$43.2 to NT$94.2. TSMC had repurchased 800,000 thousand common shares. All the treasury stock repurchased under this share buyback plan was retired on February 2008.
TSMC held a meeting of the Board of Directors on May 13, 2008 and approved a share buyback plan to repurchase the TSMC’s common shares up to 500,000 thousand shares listed on the TSE during the period from May 14, 2008 to July 13, 2008 for the buyback price in the range from NT$48.25 to NT$100.50. TSMC had repurchased 216,674 thousand common shares. All the treasury stock repurchased under this share buyback plan was retired on August 2008.
TSMC held a meeting of the Board of Directors on August 12, 2008 and approved a share buyback plan to repurchase the TSMC’s common shares up to 283,000 thousand shares listed on the TSE during the period from August 13, 2008 to October 12, 2008 for the buyback price in the range from NT$42.85 to NT$86.20. TSMC had repurchased 278,875 thousand common shares. All the treasury stock repurchased under this share buyback plan was retired in November 2008.
~~TSMC merged Chi Cherng and Hsin Ruey in the third quarter of 2008. TSMC’s common shares held by Chi Cherng and Hsin Ruey in the number of 34,267 thousand shares were retired on August 2008.~~
~~F-40~~
~~23.~~ EARNINGS PER SHARE
   Amounts (Numerator)    Number of    EPS
   Before    After    Shares    Before    After
   Income Tax    Income Tax    (Denominator)    Income    Income
   NT$    NT$    (In Thousands)    Tax    Tax
   (In Millions)       NT$    NT$
Year ended December 31, 2010

Basic EPS

Earnings available to common shareholders of the parent
   $  169,520.1       $  161,605.0       25,905,832       $    6.54       $    6.24
Effect of dilutive potential common shares
                  -                         -                  13,982
Diluted EPS

Earnings available to common shareholders of the parent (including effect of dilutive potential common shares)
   $  169,520.1       $  161,605.0       25,919,814       $    6.54       $    6.23
Year ended December 31, 2011

Basic EPS

Earnings available to common shareholders of the parent
   $  144,852.9       $  134,201.3       25,914,076       $    5.59       $    5.18
Effect of dilutive potential common shares
                  -                         -                  10,606
Diluted EPS

Earnings available to common shareholders of the parent (including effect of dilutive potential common shares)
   $  144,852.9       $  134,201.3       25,924,682       $    5.59       $    5.18
Year ended December 31, 2012

Basic EPS

Earnings available to common shareholders of the parent
   $  181,756.6       $  166,158.8       25,920,735       $    7.01       $    6.41
Effect of dilutive potential common shares
                  -                         -                    7,201
Diluted EPS

Earnings available to common shareholders of the parent (including effect of dilutive potential common shares)
   $  181,756.6       $  166,158.8       25,927,936       $    7.01       $    6.41

Amounts (Numerator) EPS
Before After Number of Before �� After
Income Tax Income Tax Shares Income Income
NT$ NT$ (Denominator) Tax Tax
(In Millions) (In Thousands) NT$ NT$
Year ended December 31, 2007

Basic EPS
Earnings available to common shareholders of the parent $ 120,890.7 $ 109,177.1 27,005,032 $ 4.48 $ 4.04

Effect of dilutive potential common stocks — — 21,222

Diluted EPS
Earnings available to common shareholders of the parent (including effect of dilutive potential common stocks) $ 120,890.7 $ 109,177.1 27,026,254 $ 4.47 $ 4.04

Year ended December 31, 2008

Basic EPS
Earnings available to common shareholders of the parent $ 110,847.8 $ 99,933.2 26,039,186 $ 4.26 $ 3.84

Effect of dilutive potential common shares — — 196,493

Diluted EPS
Earnings available to common shareholders of the parent (including effect of dilutive potential common stocks) $ 110,847.8 $ 99,933.2 26,235,679 $ 4.23 $ 3.81

Year ended December 31, 2009

Basic EPS
Earnings available to common shareholders of the parent $ 95,189.8 $ 89,217.8 25,835,802 $ 3.68 $ 3.45

Effect of dilutive potential common shares — — 77,801

Diluted EPS
Earnings available to common shareholders of the parent (including effect of dilutive potential common stocks) $ 95,189.8 $ 89,217.8 25,913,603 $ 3.67 $ 3.44

If the Company may settle the obligation by cash, by issuing shares, or in combination of both cash and shares, profit sharing to employees which will be settled in shares should be included in the weighted average number of shares outstanding in calculation of diluted EPS, if the shares have a dilutive effect.    The number of shares is estimated by dividing the amount of profit sharing to employees in stock by the closing price (after considering the dilutive effect of dividends) of the common shares on the balance sheet date.    Such dilutive effect of the potential shares needs to be included in the calculation of diluted EPS until the shares of profit sharing to employees are resolved in the shareholders’ meeting in the following year.
F - 40
26. As discussed in Note 4, effective January 1, 2008, the Company adopted Interpretation 2007-052 that requires companies to record profit sharing to employees as an expense rather than as an appropriation of earnings. If the Company may settle the obligation by cash, by issuing shares, or in combination of both cash and shares, profit sharing to employees which will be settled in shares should be included in the weighted average number of shares outstanding in calculation of diluted EPS, if the shares have a dilutive effect. The number of shares is estimated by dividing the amount of profit sharing to employees in stock by the closing price (after considering the dilutive effect of dividends) of the common shares on the balance sheet date. Such dilutive effect of the potential shares needs to be included in the calculation of diluted EPS until the shares of profit sharing to employees are resolved in the shareholders’ meeting in the following year.
The average number of shares outstanding for EPS calculation has been retroactively adjusted for stock dividends until 2008 and profit sharing to employees in stock until 2007. This adjustment caused each of the basic after income tax EPS for the year ended December 31, 2007 and 2008 to decrease from NT$4.14 to NT$4.04 and NT$3.86 to NT$3.84, respectively. This adjustment caused diluted after income tax EPS for the year ended December 31, 2007 and 2008 to decrease from NT$4.14 to NT$4.04 and NT$3.83 to NT$3.81, respectively.
~~F-41~~
~~24.~~ DISCLOSURES FOR FINANCIAL INSTRUMENTS
a. Fair values of financial instruments were as follows:
   December 31
   2011    2012
     Carrying
Amount      Fair Value        Carrying
Amount      Fair Value
   NT$    NT$    NT$    NT$
   (In Millions)    (In Millions)
Assets

Financial assets at fair value through profit or loss
   $ 15.4       $ 15.4       $ 39.5       $ 39.5
Available-for-sale financial assets
   3,308.8       3,308.8       41,161.8       41,161.8
Held-to-maturity financial assets
   9,068.9       9,128.1       5,057.0       5,066.4
Financial assets carried at cost
   4,315.0       -          3,605.1       -
Liabilities

Financial liabilities at fair value through profit or loss
   $ 13.8       $ 13.8       $ 15.6       $ 15.6
Hedging derivative financial liabilities
   0.2       0.2       -          -
Bonds payable (including current portion)
   22,500.0       22,597.1       80,000.0       80,343.4
Long-term bank loans (including current portion)
   1,650.0       1,650.0       1,487.5       1,487.5
Other long-term payables (including current portion)
   3,399.9       3,399.9       967.5       967.5
Obligations under capital leases (including current portion)
   871.0       871.0       756.3       756.3

December 31
2008 2009
Carrying Carrying
Amount Fair Value Amount Fair Value
NT$ NT$ NT$ NT$
(In Millions) (In Millions)
Assets

Financial assets at fair value through profit or loss $ 55.7 $ 55.7 $ 186.1 $ 186.1
Available-for-sale financial assets 12,931.4 12,931.4 15,748.0 15,748.0
Held-to-maturity financial assets 21,308.2 21,457.0 25,498.0 25,671.7

Liabilities

Financial liabilities at fair value through profit or loss 85.2 85.2 — —
Bonds payable (including current portion) 12,500.0 12,612.4 4,500.0 4,575.0
Long-term bank loans (including current portion) 1,642.9 1,642.9 1,527.9 1,527.9
Other long-term payables (including current portion) 10,674.7 10,674.7 9,607.7 9,607.7
Obligations under capital leases 722.3 722.3 707.5 707.5
b. Methods and assumptions used in the estimation of fair values of financial instruments
1) The aforementioned financial instruments do not include cash and cash equivalents, receivables, other financial assets, refundable deposits, short-term loans, payables and guarantee deposits.    The carrying amounts of these financial instruments approximate their fair values due to their short maturities.
2) Except for derivatives, ~~and structured time deposits, fair values of financial assets at fair value through profit or loss,~~ available-for-sale and held-to-maturity financial assets were based on their quoted market prices.
3) The fair values of those derivatives ~~and structured time deposits~~ are determined using valuation techniques incorporating estimates and assumptions that were consistent with prevailing market conditions.
4) Financial assets carried at cost have no quoted prices in an active market and entail an unreasonably high cost to obtain verifiable fair values.    Therefore, no fair value is presented.
5) Fair value of ~~the~~ bonds payable was based on their quoted market price.
5) 6) Fair values of long-term bank loans, other long-term payables and obligations under capital leases were based on the present value of expected cash flows, which approximate their carrying amounts.
c. ~~The~~Valuation gains/losses arising from changes in fair value of derivatives contracts ~~which were outstanding as of December 31, 2008 and 2009 estimated~~determined using valuation techniques were recognized as ~~valuation losses~~a net loss of NT$~~42.7~~12.1 million and net gains of NT$~~186.1~~1.6 million and NT$23.9 million for the years ended December 31, 2010, 2011 and 2012, respectively.
d. As of December 31, ~~2008~~2011 and ~~2009,~~2012, financial assets exposed to fair value interest rate risk were NT$~~34,002.2~~9,086.8 million and NT$~~40,857.3~~5,097.9 million, respectively; financial liabilities exposed to fair value interest rate risk were NT$~~12,585.2~~52,711.2 million and NT$~~4,500.0~~116,312.3 million, ~~respectively,~~respectively; and financial liabilities exposed to cash flow interest rate risk were NT$~~1,642.9~~1,650.2 million and NT$~~1,527.9~~1,487.5 million, respectively.
F - 41
e. Movements of the unrealized ~~gain~~gains or ~~loss~~losses on financial instruments for the years ended December 31, ~~2008~~2010, 2011 and ~~2009~~2012 were as follows:
Year Ended December 31, 2010
From
Available-
for-sale
    Financial
       Assets        Equity
Method
Investments Gain (Loss)
on Cash Flow
        Hedges                     Total
NT$ NT$ NT$ NT$
(In Millions)
Balance, beginning of year
$ 424.1 $          29.5 $ -   $         453.6
Recognized directly in shareholders’ equity
250.4 (6.0 ) (0.4 ) 244.0
Removed from shareholders’ equity and recognized in earnings
      (588.4 ) -   0.1 (588.3 )

Balance, end of year
$ 86.1 $ 23.5 $         (0.3 ) $ 109.3

Year Ended December 31, 2011
From
Available-
for-sale
    Financial
       Assets         Equity
Method
Investments Gain (Loss)
on Cash Flow
        Hedges                     Total
NT$ NT$ NT$ NT$
(In Millions)
Balance, beginning of year
$ 86.1 $ 23.5 $ (0.3 ) $ 109.3
Recognized directly in shareholders’ equity
(1,034.5 ) (41.4 ) -   (1,075.9 )
Removed from shareholders’ equity and recognized in earnings
(206.5 ) -   0.2 (206.3 )
Effect of changes in consolidated entities
(0.3 ) 0.3 -   -

Balance, end of year
$ (1,155.2 ) $ (17.6 ) $ (0.1 ) $ (1,172.9 )

Year Ended December 31, 2012
From
Available-
for-sale
    Financial
       Assets        Equity
Method
Investments Gain (Loss)
on Cash Flow
        Hedges                     Total
NT$ NT$ NT$ NT$
(In Millions)
Balance, beginning of year
$ (1,155.2 ) $ (17.6 ) $ (0.1 ) $ (1,172.9 )
Recognized directly in shareholders’ equity
7,282.3 17.5 -   7,299.8
Removed from shareholders’ equity and recognized in earnings
1,846.3 -   0.1 1,846.4

Balance, end of year
$ 7,973.4 $ (0.1 ) $ -   $ 7,973.3

~~F-42~~

Year Ended December 31, 2008
From
From Available-
Available- for-sale
for-sale Financial
Financial Assets Held by
Assets Investees Total

Balance, beginning of year $ 627.8 $ 53.2 $ 681.0
Recognized directly in shareholders’ equity (1,130.6 ) (142.1 ) (1,272.7 )
Removed from shareholders’ equity and recognized in earnings 304.4 — 304.4

Balance, end of year $ (198.4 ) $ (88.9 ) $ (287.3 )

Year Ended December 31, 2009
From
From Available-
Available- for-sale
for-sale Financial
Financial Assets Held by
Assets Investees Total

Balance, beginning of year $ (198.4 ) $ (88.9 ) $ (287.3 )
Recognized directly in shareholders’ equity 391.8 118.4 510.2
Removed from shareholders’ equity and recognized in earnings 230.7 — 230.7

Balance, end of year $ 424.1 $ 29.5 $ 453.6

f. Information about financial ~~risk~~risks
1) Market risk. ~~The publicly traded stocks categorized as financial assets at fair value through profit or loss are exposed to market price fluctuations.~~    The derivative financial instruments categorized as financial assets/liabilities at fair value through profit or loss are mainly used to hedge the market exchange rate fluctuations of foreign-currency assets and liabilities; therefore, the market exchange rate risk of derivatives will be offset by the foreign exchange risk of these hedged items.    Available-for-sale financial assets and held-to-maturity financial assets held by the Company are mainly fixed-interest-rate debt ~~securities;~~securities and publicly traded stocks; therefore, the fluctuations in market interest rates ~~would~~and market prices will result in changes in fair ~~value~~values of these debt ~~securities. Subject to turmoil~~securities and the fluctuations in ~~the global financial~~ market the Company evaluated its financial assets and determined that certain impairment for its asset-backed securities is other-than-temporary. The Company had appropriately recognized related impairment losses.prices will result in changes in fair values of publicly traded stocks.
F - 42
2) Credit risk.    Credit risk represents the potential loss that would be incurred by the Company if the counter-parties or third-parties breached contracts.    Financial instruments with positive fair values at the balance sheet date are evaluated for credit risk.    ~~Subject to turmoil in the global financial market, the~~The Company evaluated whether the financial instruments for any possible ~~counter-party~~counter-parties or ~~third-party default. As a result of the evaluation,~~third-parties are reputable financial institutions, business enterprises, and government agencies and accordingly, the Company ~~determined~~believed that ~~certain financial instruments are exposed~~the Company’s exposure to credit risk ~~and had appropriately recognized related impairment losses.~~was not significant.
3) Liquidity risk.    The Company has sufficient operating capital and bank facilities to meet cash needs upon settlement of derivative financial instruments, bonds payable and bank loans.    Therefore, the liquidity risk is low.
4) Cash flow interest rate risk.    The Company mainly invests in fixed-interest-rate debt securities.    Therefore, cash flows are not expected to fluctuate significantly due to changes in market interest rates.    The ~~Company’s~~ long-term bank loans were floating-rate ~~loans. Therefore,~~loans; therefore, changes in the market interest rates will result in changes in the ~~effective~~interest rate of the long-term bank loans, which will affect future cash flows.
~~F-43~~
~~25.~~ g. The Company seeks to reduce the effects of future cash flow related interest rate changes by primarily using derivative financial instruments.
The Company entered into forward exchange contracts to hedge cash flow risk arising from foreign exchange rate fluctuations of an expected equity transaction.    The forward exchange contract was due in October 2012.
The Company’s long-term bank loans bear floating interest rates; therefore, changes in the market interest rate may cause future cash flows to be volatile.    Accordingly, the Company entered into an interest rate swap contract in order to hedge cash flow risk caused by floating interest rates.    The interest rate swap contract of the Company was due in August 2012.    Information about outstanding interest rate swap contract consisted of the following:
Hedged Item
Hedging
Financial
Instrument
   Fair Value
NT$
(In Millions)
Expected
Cash Flow
Generated Period

Expected Timing for the
Recognition of Gains
or Losses from Hedge
December 31, 2011

Long-term bank loans
   Interest rate swap contract    $ (0.2 ) 2011 to 2012    2011 to 2012
27. RELATED PARTY TRANSACTIONS
~~Except as disclosed in the consolidated financial statements and other notes, the following is a summary of significant related party transactions:~~
Except as disclosed in the consolidated financial statements and other notes, the following is a summary of significant related party transactions:
a. ~~Philips, one~~Investees of ~~the major shareholders of~~ TSMC ~~which has become a non-related party since March 2007.~~
GUC (prior to July 2011, GUC was a subsidiary.    Since July 2011, GUC is accounted for using the equity method.)
VIS (accounted for using the equity method)
SSMC (accounted for using the equity method)
b. ~~Investees of TSMC~~Indirect investees
~~VIS (accounted for using equity method)~~
~~SSMC (accounted for using equity method)~~
VisEra Technology Company, Ltd. (VisEra) (accounted for using the equity method)
Mcube (accounted for using the equity method)
c. ~~VisEra Technology Company, Ltd. (VisEra), an indirect investee accounted for using equity method.~~
d. Others
~~Related parties over which the Company exercises significant influence but with which the Company had no material transactions.~~

Year Ended December 31
2007 2008 2009
NT$ NT$ NT$
(In Millions)
For the year

Sales
VIS $ 59.2 $ 80.1 $ 139.5
VisEra 739.9 30.8 15.5
SSMC 2.9 1.9 0.2
Others — — 0.1

$ 802.0 $ 112.8 $ 155.3

Purchases
SSMC $ 5,468.4 $ 4,441.8 $ 3,537.6
VIS 4,208.2 3,260.2 3,330.3
VisEra 0.6 0.5 —

$ 9,677.2 $ 7,702.5 $ 6,867.9

Non-operating income and gains
VIS (primarily technical service income, see Note 28e) $ 346.3 $ 296.2 $ 224.8
SSMC (primarily technical service income, see Note 28d) 290.6 244.9 141.5
VisEra 321.8 101.6 0.1

$ 958.7 $ 642.7 $ 366.4

As of December 31

Payables
VIS $ 839.6 $ 317.9 $ 531.5
SSMC 655.1 162.8 238.7
VisEra 8.7 9.2 12.8

$ 1,503.4 $ 489.9 $ 783.0

~~F-44~~Related parties over which the Company has significant influence but with which the Company had no material transactions.
F - 43
   Year Ended December 31
         2010                2011                2012
   NT$    NT$    NT$
   (In Millions)
For the year

Sales

GUC
   $           -          $  2,461.4       $  4,880.5
VIS
   223.6       302.8       177.5
VisEra
   82.6       10.9       3.4
Others
             11.4                50.3              249.6
   $      317.6       $  2,825.4       $  5,311.0
Purchases

VIS
   $   4,959.1       $  5,597.9       $  4,475.7
SSMC
   4,521.0       3,949.2       3,638.6
Others
             39.1              124.6                   -
   $   9,519.2       $  9,671.7       $  8,114.3
Manufacturing expenses

VisEra (primarily outsourcing and rent)
   $      102.2       $       49.2       $       15.5
VIS (rent)
   10.2       5.9       8.3
Others
               -                     -                     0.1
   $      112.4       $       55.1       $       23.9
Research and development expenses

VisEra
   $        12.1       $       19.0       $         8.9
GUC
   -          -          4.5
VIS (primarily rent)
   12.0       2.0       -
Others
               0.1                  -                     0.1
   $        24.2       $       21.0       $       13.5
Sales of property, plant and equipment and other assets

VIS
   $        37.0       $       36.0       $       20.4
VisEra
   4.4       -          9.0
SSMC
               2.4                  -                     -
   $        43.8       $       36.0       $       29.4
Purchase of property, plant and equipment and other assets

GUC
   $          -          $         1.8       $       47.1
VisEra
   -          11.1       1.2
VIS
           109.9                45.5                  -
   $      109.9       $       58.4       $       48.3
Non-operating income and gains

VIS (primarily technical service income)
   $      267.4       $     227.0       $     261.8
SSMC (primarily technical service income)
   198.2       199.4       221.2
Others
               -                     4.1                  2.5
   $      465.6       $     430.5       $     485.5
F - 44
   Year Ended December 31
         2010                2011                2012
   NT$    NT$    NT$
   (In Millions)
As of December 31

Receivables

GUC
   $           -          $       154.1       $       273.4
Mcube
   -          31.4       80.2
Others
               2.7                   0.2                   0.2
   $          2.7       $       185.7       $       353.8
Other receivables

VIS
   $        70.8       $         87.5       $       128.8
SSMC
   53.8       34.3       56.8
Others
               -                      0.5                    -
   $      124.6       $       122.3       $       185.6
Refundable deposit

VIS
   $          2.3       $           -          $           5.8
Payables

VIS
   $      428.8       $       987.9       $       368.6
SSMC
   430.2       336.0       351.4
Others
               8.1                    4.6                  28.6
   $      867.1       $    1,328.5       $       748.6
Deferred credits (other assets)

VIS
   $           -          $           -          $          (7.8 )
VisEra
                -                       -                       0.9
   $           -          $           -          $          (6.9 )
The sales prices and payment terms to related parties were not significantly different from those of sales to third parties.    For other related party transactions, prices and terms were determined in accordance with mutual agreements.
The Company leased certain office space and facilities from VIS.    The lease terms and prices were determined in accordance with mutual agreements.    The rental expense was paid monthly and the related expenses were classified under research and development expenses and manufacturing expenses.
The Company leased certain factory building from VisEra.    The lease terms and prices were determined in accordance with mutual agreements.    The rental expense was paid monthly and the related expenses were classified under manufacturing expenses.    The lease expired in June 2011.
The Company deferred the disposal gains/losses (classified under other assets and deferred credits) derived from sales of property, plant and equipment and other assets to VIS and VisEra, and then recognized such gains/losses (classified under non-operating gains and losses) over the depreciable lives of the disposed assets.
F - 45
28. The sales prices and payment terms to related parties were not significantly different from those of sales to third parties. For other related party transactions, prices and terms were determined in accordance with mutual agreements.
TSMC deferred the net gains (classified under deferred credits) derived from sales of property, plant and equipment to VisEra, and then recognized such gains (classified under non-operating income and gains) over the depreciable lives of the disposed assets.
TSMC leased certain buildings and facilities to VisEra. The related rental income was classified under non-operating income and gains. The lease terms and prices were determined in accordance with mutual agreements. The lease agreement between TSMC and VisEra expired in April 2008.
~~26.~~ PLEDGED OR MORTGAGED ASSETS
~~The Company provided certain assets as collateral mainly for long-term bank loans, land lease agreements and customs duty guarantee, which were as follows:~~

December 31
2008 2009

Other financial assets $ 33.4 $ 949.4
Property, plant and equipment, net 4,032.6 2,808.0
Other assets — 20.0

$ 4,066.0 $ 3,777.4

The Company provided other financial assets as collateral mainly for building lease agreements.    As of December 31, 2011 and 2012, the aforementioned other financial assets amounted to NT$121.1 million and NT$119.7 million, respectively.
~~27.~~29. SIGNIFICANT LONG-TERM LEASES
The Company leases several parcels of land, factory and office premises from the Science Park Administration and Jhongli Industrial Park Service Center.    These operating leases expire on various dates from March 2013 to July 2032 and can be renewed upon expiration.
The Company entered into lease agreements for its office premises and certain office equipment located in the United States, Japan, Shanghai and Taiwan.    These operating leases expire between 2013 and 2020 and can be renewed upon expiration.
As of December 31, 2012, future lease payments were as follows:
Year    Amount
NT$
(In Millions)
2013
   $ 693.8
2014
   651.3
2015
   639.1
2016
   625.2
2017
   562.8
2018 and thereafter
   4,221.5


   $ 7,393.7


Rent expense for the years ended December 31, 2010, 2011 and 2012 was NT$1,907.1 million, NT$1,809.5 million and NT$2,423.6 million, respectively.
30. The Company leases several parcels of land and office premises from the SPA and Jhongli Industrial Park Service Center. These operating leases expire on various dates from March 2010 to December 2029 and can be renewed upon expiration.
The Company entered into lease agreements for its office premises and certain equipment located in the United States, Europe, Japan, Shanghai and Taiwan. These operating leases expire between 2010 and 2018 and can be renewed upon expiration.
~~As of December 31, 2009, future lease payments were as follows:~~

Amount
Year NT$
(In Millions)

2010 $ 557.6
2011 504.3
2012 487.1
2013 462.4
2014 444.2
2015 and thereafter 3,293.5

$ 5,749.1

~~Rent expense for the years ended December 31, 2007, 2008 and 2009 was NT$1,398.3 million, NT$1,620.6 million and NT$1,293.3 million, respectively.~~
~~F-45~~
~~28.~~ SIGNIFICANT COMMITMENTS AND CONTINGENCIES
~~Significant commitments and contingencies of the Company as of December 31, 2009, excluding those disclosed in other notes, were as follows:~~
Significant commitments and contingencies of the Company as of December 31, 2012, excluding those disclosed in other notes, were as follows:
a. Under a technical cooperation agreement with ~~ITRI,~~Industrial Technology Research Institute, the R.O.C. Government or its designee approved by TSMC can use up to 35% of TSMC’s capacity if TSMC’s outstanding commitments to its customers are not prejudiced.    The term of this agreement is for five years beginning from January 1, 1987 and is automatically renewed for successive periods of five years unless otherwise terminated by either party with one year prior notice.
b. Under several foundry agreements, TSMC shall reserve a portion of its production capacity for certain major customers that have guarantee deposits with TSMC. As of December 31, 2009 TSMC had a total of US$29.6 million of guarantee deposits.
c. Under a Shareholders Agreement entered into with Philips and EDB Investments Pte Ltd. on March 30, 1999, the parties formed a joint venture company, SSMC, which is an integrated circuit foundry in Singapore.    TSMC’s equity interest in SSMC was 32%.    Nevertheless, Philips parted with its semiconductor company which was renamed as NXP B.V. in September 2006.    TSMC and NXP B.V. purchased all the SSMC shares owned by EDB Investments Pte Ltd. pro rata according to the Shareholders Agreement on November 15, 2006.    After the purchase, TSMC and NXP B.V. currently own approximately 39% and 61% of the SSMC shares respectively.    TSMC and Philips (now NXP B.V.) are required, in the aggregate, to purchase at least 70% of SSMC’s capacity, but TSMC alone is not required to purchase more than 28% of the capacity.    If any party defaults on the commitment and the capacity utilization of SSMC fall below a specific percentage of its capacity, the defaulting party is required to compensate SSMC for all related unavoidable costs.
d. TSMC provides technical services to SSMC under a Technical Cooperation Agreement (the Agreement) effective March 30, 1999. TSMC receives compensation for such services computed at a specific percentage of net selling price of all products sold by SSMC. The Agreement shall remain in force for ten years and will be automatically renewed for successive periods of five years each unless pre-terminated by either party under certain conditions.
e. TSMC provides a technology transfer to VIS under a Manufacturing License and Technology Transfer Agreement entered into on April 1, 2004. TSMC receives compensation for such technology transfer in the form of royalty payments from VIS computed at specific percentages of net selling price of certain products sold by VIS. VIS agreed to reserve its certain capacity to manufacture for TSMC certain products at prices as agreed by the parties.
~~F-46~~
F - 46
f.c. In August 2006, TSMC ~~TSMC North America and WaferTech~~ filed a ~~series of lawsuits in late 2003 and 2004~~lawsuit against Semiconductor Manufacturing International Corporation, SMIC (Shanghai) and SMIC Americas (aggregately ~~referring~~referred to as “SMIC”). The lawsuits alleged that SMIC infringed multiple TSMC, TSMC North America and WaferTech patents and misappropriated TSMC, TSMC North America and WaferTech’s trade secrets. These suits were settled out of court on January 30, 2005. As part of in the settlement, Semiconductor Manufacturing International Corporation shall pay US$175.0 million over six years to resolve TSMC, TSMC North America and WaferTech’s claims. As of December 31, 2009, SMIC had paid US$135.0 million in accordance with the terms of this settlement agreement. In August 2006, TSMC, TSMC North America and WaferTech filed a lawsuit against SMIC in Alameda County Superior Court inof California for Alameda County for breach of a 2005 agreement that settled an earlier trade secret misappropriation and patent infringement litigation between the ~~aforementioned settlement agreement, breach of promissory notes and~~parties, as well as for trade secret misappropriation, seeking injunctive relief and monetary damages.    In September 2006, SMIC filed a cross-complaint against TSMC ~~TSMC North America and WaferTech~~ in the same court alleging ~~TSMC, TSMC North America and WaferTech of~~ breach of ~~the~~ settlement agreement, ~~and~~ implied covenant of good faith and fair ~~dealing,~~dealing.    SMIC also filed a civil action against TSMC in ~~response to TSMC, TSMC North America and WaferTech’s August complaint. In~~ November 2006 ~~SMIC filed a complaint~~ with the Beijing People’s High Court ~~against TSMC, TSMC North America and WaferTech~~ alleging defamation and breach of good faith.    The California State Superior Court of Alameda County issued an Order on TSMC, TSMC North America and WaferTech’s pre-trial motion for a preliminary injunction against SMIC on September 7, 2007. In the Order, the Court found “TSMC has demonstrated a significant likelihood that it will ultimately prevail on the merits of its claim for breach of certain paragraphs of the (2005) Settlement Agreement” with SMIC. The Court also found “TSMC has demonstrated a significant probability of establishing that SMIC retains and is using TSMC Information in SMIC’s 0.13um and smaller technologies, and there is significant threat of serious irreparable harm to TSMC if SMIC were to disclose or transfer that information before final resolution of the case.” Therefore, the Court ordered that, effective immediately, SMIC must provide advance notice and an opportunity for TSMC, TSMC North America and WaferTech to object before disclosing items enumerated in the Court Order to SMIC’s third party partners. The Court, however, did not grant a preliminary injunction as requested by TSMC, TSMC North America and WaferTech. In January 2009, the court in the California action held a four-day bench trial to determine whether a Settlement Agreement existed between the parties, and if there were an agreement, the interpretation of certain terms. SMIC contended that there was no binding Settlement Agreement, and TSMC, TSMC North America and WaferTech contended that the Settlement Agreement signed on January 30, 2005 and finalized shortly thereafter and repeatedly ratified bound by the parties. On ~~March~~June 10, 2009, the Court issued its Statement of Decision. The Court rejected SMIC’s contention, and found that the parties were bound by the Settlement Agreement identified by TSMC, TSMC North America and WaferTech. The Court also interpreted the meaning of certain provisions within the Settlement Agreement. Regarding the claims raised by SMIC in the Beijing lawsuit, the Beijing People’s High Court ~~has on June 10, 2009 rejected those claims~~ruled in favor of TSMC and dismissed ~~the~~SMIC’s lawsuit.    On November 4, 2009, after a two-month trial, a jury in the California action found SMIC to have both breached the 2005 settlement agreement and misappropriated ~~TSMC, TSMC North America and WaferTech’s~~TSMC’s trade secrets.    TSMC ~~TSMC North America and WaferTech have~~has subsequently settled both lawsuits with SMIC.    ~~The~~Pursuant to the new settlement agreement, the parties have agreed to the entry of a stipulated judgment in favor of TSMC in the California action, and to the dismissal of SMIC’s appeal against the Beijing High Court’s finding in favor of TSMC.    Under the new settlement agreement and the related stipulated judgment, ~~require~~ SMIC ~~to: (a)~~has agreed to make cash payments by installments to TSMC totaling US$200 million, which are in addition to the US$135 million previously paid to TSMC under the 2005 settlement ~~agreement;~~agreement, and, ~~(b)~~ conditional upon relevant government regulatory approvals, to issue to TSMC a total of 1,789,493,218 common shares of ~~SMIC (representing about 8% of SMIC’s total shares outstanding as of December 31, 2009)~~Semiconductor Manufacturing International Corporation and a three-year warrant to purchase 695,914,030 ~~SMIC~~ common shares (subject to adjustment) of Semiconductor Manufacturing International Corporation at HK$1.30 per share (subject to adjustment).    TSMC has acquired the above mentioned common shares in July 2010, which are recorded within available for sale financial assets, and obtained the subsequent cash settlement income in accordance with the agreement.
d. In June 2010, Keranos, LLC. filed a lawsuit in the U.S. District Court for the Eastern District of Texas alleging that TSMC, TSMC North America, and several other leading technology companies infringe three expired U.S. patents.    In response, TSMC, TSMC North America, and several co-defendants in the Texas case filed a lawsuit against Keranos in the U.S. District Court for the Northern District of California in November 2010, seeking a judgment declaring that they did not infringe the asserted patents, and that those patents are invalid.    These two litigations have been consolidated into a single case in the U.S. District Court for the Eastern District of Texas.    The outcome cannot be determined at this time.
e. In December 2010, Ziptronix, Inc. filed a complaint in the U.S. District Court for the Northern District of California accusing TSMC, TSMC North America and one other company of allegedly infringing several U.S. patents.    The outcome cannot be determined at this time.
f. TSMC joined the Customer Co-Investment Program of ASML and entered into the investment agreement in August 2012.    The agreement includes an investment of EUR837.8 million by TSMC Global to acquire 5% of ASML’s equity with a lock-up period of 2.5 years.    TSMC Global has acquired the aforementioned equity in October 2012.    Both parties also ~~agreed~~signed the research and development funding agreement and TSMC will provide EUR277.0 million to ~~terminate the patent cross-licensing agreement signed in 2005.~~ASML’s research and development programs from 2013 to 2017.
g. ~~The Company~~TSMC entered into an agreement with a counterparty in 2003 whereby TSMC China is obligated to purchase certain property, plant and equipment at the agreed-upon price within the contract period.    If the purchase is not completed, TSMC China is obligated to compensate the counterparty for the loss incurred.    The property, plant and equipment have been in use by TSMC China since 2004 and are being depreciated over their estimated service lives.    The related obligation totaled NT$~~8,579.7~~3,399.9 million and NT$~~8,355.4~~825.5 million as of December 31, ~~2008~~2011 and ~~2009,~~2012, respectively, which is included in accrued expenses and other ~~long-term payables.~~current liabilities.
h. Amounts available under unused letters of credit as of December 31, ~~2009~~2012 were NT$~~16.2~~99.7 million.
F - 47
~~29.~~31. ~~SEGMENT~~EXCHANGE RATE INFORMATION OF FOREIGN-CURRENCY FINANCIAL ~~INFORMATION~~ASSETS AND LIABILITIES
The significant financial assets and liabilities denominated in foreign currencies were as follows:
   December 31
   2011    2012

Foreign
Currency
    (In Millions)

    Exchange Rate
(Note)

Foreign
Currency
    (In Millions)

    Exchange Rate
(Note)
Financial assets

Monetary items

USD
       $         3,744.8         30.288        $         3,437.2         29.038
EUR
   135.9         39.18-39.27    126.0         38.39-38.49
JPY
   37,276.7         0.3897-0.3906    35,734.9         0.3352-0.3364
RMB
   201.4         4.81    103.0         4.66
Non-monetary items

USD
   141.5         30.288    1,611.5         29.038
HKD
   671.1         3.90    492.0         3.75
Investments accounted for using equity method

USD
   294.8         30.288    328.3         29.038
Financial liabilities

Monetary items

USD
   1,744.7         30.288    2,193.3         29.038
EUR
   111.8         39.18-39.27    247.1         38.39-38.49
JPY
   35,349.2         0.3897-0.3906    43,311.4         0.3352-0.3364
RMB
   278.9         4.81    205.9         4.66
Note:   Exchange rate represents the number of N.T. dollars for which one foreign currency could be exchanged.
32. OPERATING SEGMENTS INFORMATION
The Company’s only reportable segment is the foundry segment.    The foundry segment engages mainly in the manufacturing, selling, packaging, testing and computer-aided design of integrated circuits and other semiconductor devices and the manufacturing of masks.    The Company also had other operating segments that did not exceed the quantitative threshold for separate reporting.    These segments mainly engage in the researching, developing, and providing SoC (System on Chip) design and also engage in the researching, developing, designing, manufacturing and selling of solid state lighting devices and renewable energy and efficiency related technologies and products.
The Company uses the operating profit as the measurement for segment profit and the basis of performance assessment.    There was no material inconsistency between the accounting policies of the operating segment and the accounting policies described in Note 2.
F - 48
The Company’s operating segment information was as follows:
a. Industry financial information
~~The Company operates in one industry. Therefore, the disclosure of industry financial information is not applicable to the Company.~~
   Foundry    Others Elimination Total
   NT$    NT$ NT$ NT$
   (In Millions)
Year ended December 31, 2010

Sales from external customers
   $       409,216.7       $       10,321.2    $ -        $       419,537.9
Sales among intersegments
   3,816.5       8.8    (3,825.3 ) -
Operating profit (loss)
   159,633.6       (458.3 ) -        159,175.3
Equity in earnings of equity method investees, net
   1,756.0       542.2    -        2,298.2
Income tax expense
   7,928.7       59.8    -        7,988.5
Year ended December 31, 2011

Sales from external customers
   422,691.1       4,389.5    -        427,080.6
Sales among intersegments
   1,588.6       6.2    (1,594.8 ) -
Operating profit (loss)
   143,222.1       (1,664.7 ) -        141,557.4
Equity in earnings (losses) of equity method investees, net
   1,635.3       (737.7 ) -        897.6
Income tax expense
   10,649.7       44.7    -        10,694.4
Year ended December 31, 2012

Sales from external customers
   506,097.9       150.7    -        506,248.6
Sales among intersegments
   -           14.7    (14.7 ) -
Operating profit (loss)
   183,683.0       (2,625.8 ) -        181,057.2
Equity in earnings (losses) of equity method investees, net
   3,428.4       (1,399.8 ) -        2,028.6
Income tax expense
   15,590.3       -        -        15,590.3
~~F-47~~
b. Geographic ~~information:~~information

Adjustments
North America and
and Others Taiwan Elimination Consolidated
NT$ NT$ NT$ NT$
(In Millions)

Year ended December 31, 2007

Sales to other than consolidated entities $ 193,066.2 $ 129,564.4 $ — $ 322,630.6
Sales among consolidated entities 18,084.1 194,035.5 (212,119.6 ) —

Total sales $ 211,150.3 $ 323,599.9 $ (212,119.6 ) $ 322,630.6

Gross profit $ 3,895.1 $ 139,227.5 $ (772.4 ) $ 142,350.2

Operating expenses (30,628.3 )
Non-operating income and gains 11,933.8
Non-operating expenses and losses (2,013.7 )

Income before income tax $ 121,642.0

Net income attributable to minority interest $ 755.3

Identifiable assets $ 145,483.4 $ 439,675.9 $ (50,755.4 ) $ 534,403.9

Long-term investments 36,461.3

Total assets $ 570,865.2

Year ended December 31, 2008

Sales to other than consolidated entities $ 193,727.6 $ 139,430.1 $ — $ 333,157.7
Sales among consolidated entities 16,280.8 �� 194,731.5 (211,012.3 ) —

Total sales $ 210,008.4 $ 334,161.6 $ (211,012.3 ) $ 333,157.7

Gross profit $ 2,114.1 $ 140,540.3 $ (904.8 ) $ 141,749.6

Operating expenses (37,314.2 )
Non-operating income and gains 10,821.4
Non-operating expenses and losses (3,784.6 )

Income before income tax $ 111,472.2

Net income attributable to minority interest $ 590.0

Identifiable assets $ 122,781.6 $ 425,545.2 $ (29,391.7 ) $ 518,935.1

Long-term investments 39,981.5

Total assets $ 558,916.6

~~(Continued)~~
~~F-48~~
   Year Ended December 31
   Sales to Other Than Consolidated Entities
             2010                         2011                         2012
   NT$    NT$    NT$
   (In Millions)
Taiwan
   $ 56,420.4       $ 49,798.5       $ 64,744.1
United States
   221,148.7       250,811.7       334,704.7
Asia
   91,862.9       75,946.7       72,953.2
Europe
   49,000.3       48,982.7       30,476.6
Others
   1,105.6       1,541.0       3,370.0






   $     419,537.9       $     427,080.6       $     506,248.6






F - 49
   Year Ended December 31
   Non-current Assets
             2010                         2011                         2012
   NT$    NT$    NT$
   (In Millions)
Taiwan
   $     379,553.6       $     472,168.7       $     603,844.8
United States
   8,164.8       8,284.6       7,699.4
Asia
   13,817.1       22,122.0       18,196.8
Europe
   17.8       15.2       16.0






   $ 401,553.3       $ 502,590.5       $ 629,757.0






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

Adjustments
North America and
and Others Taiwan Elimination Consolidated
NT$ NT$ NT$ NT$
(In Millions)

Year ended December 31, 2009

Sales to other than consolidated entities $ 162,783.5 $ 132,958.7 $ — $ 295,742.2
Sales among consolidated entities 11,891.2 163,407.4 (175,298.6 ) —

Total sales $ 174,674.7 $ 296,366.1 $ (175,298.6 ) $ 295,742.2

Gross profit $ 2,004.7 $ 128,456.5 $ (1,132.6 ) $ 129,328.6

Operating expenses (37,366.7 )
Non-operating income and gains 5,653.5
Non-operating expenses and losses (2,152.8 )

Income before income tax $ 95,462.6

Net income attributable to minority interest $ 248.4

Identifiable assets $ 113,023.5 $ 468,112.3 $ (24,285.1 ) $ 556,850.7

Long-term investments 37,845.5

Total assets $ 594,696.2

~~(Concluded)~~
~~F-49~~
c. ~~Net sales~~Production information

Year Ended December 31
Areas 2007 2008 2009
NT$ NT$ NT$
(In Millions)

Taiwan $ 42,876.0 $ 44,663.5 $ 40,430.4
United States 163,242.2 203,998.8 171,989.3
Europe 37,416.0 35,710.6 30,401.4
Asia and others 84,802.0 57,610.5 66,834.5

328,336.2 341,983.4 309,655.6
Sales returns and allowances (5,705.6 ) (8,825.7 ) (13,913.4 )

Net sales $ 322,630.6 $ 333,157.7 $ 295,742.2

   Year Ended December 31
Production    2010    2011    2012
   NT$    NT$    NT$
   (In Millions)
Wafer
   $     375,060.8       $     384,632.5       $     462,970.5
Mask
   19,796.9       23,818.6       26,266.9
Others
   24,680.2       18,629.5       17,011.2






   $ 419,537.9       $ 427,080.6       $ 506,248.6






~~The net sales information is presented by billed regions.~~
d. Major customers representing at least 10% of gross sales
   Year Ended December 31
   2010    2011    2012

Amount
NT$ (In Millions)
   %
Amount
NT$ (In Millions)
   %
Amount
NT$ (In Millions)
   %
Customer A
       $         37,962.0           9               $         60,412.1           14               $         87,099.3           17
Customer B
   41,022.2           10           31,635.5           7           43,392.4           8

Year Ended December 31
2007 2008 2009
NT$ % NT$ % NT$ %
(In Millions)

Customer A $ 37,731.0 11 $ 46,523.1 14 $ 33,025.5 11

Customer B $ 29,502.8 9 $ 30,271.1 9 $ 31,995.0 10

33. e. ~~Net sales by product categories:~~

Year Ended December 31
Product Category 2007 2008 2009
NT$ NT$ NT$
(In Millions)

Wafer fabrication $ 293,431.3 $ 295,535.9 $ 260,386.0
Mask making 16,984.5 19,081.8 17,333.3
Others 12,214.8 18,540.0 18,022.9

$ 322,630.6 $ 333,157.7 $ 295,742.2

~~F-50~~
~~30.~~ SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES FOLLOWED BY THE COMPANY AND GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES OF AMERICA
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the Republic of China (R.O.C. GAAP), which differ in the following respects from accounting principles generally accepted in the United States of America (U.S. GAAP):
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the Republic of China (R.O.C. GAAP), which differ in the following respects from accounting principles generally accepted in the United States of America (U.S. GAAP):
a. ~~Marketable securities~~Equity-method investees
Under R.O.C. GAAP, effective January 1, 2006, the Company adopted R.O.C. SFAS No. 34, “Financial Instruments: Recognition and Measurement”, and No. 36, “Financial Instruments: Disclosure and Presentation”. Financial instruments including debt securities and equity securities are categorized as financial assets or liabilities at fair value through profit or loss (FVTPL), available-for-sale or held-to-maturity securities. FVTPL has two sub-categories, financial assets designated on initial recognition as one to be measured at fair value, and those that are classified as held for trading, which are also measured at fair value with fair value changes recognized in profit and loss. These classifications are similar to those required by the U.S. GAAP guidance relating to accounting for certain investments in debt and equity securities.
Under the U.S. GAAP guidance relating to accounting for certain investments in debt and equity securities, debt and equity securities that have readily determinable fair values are classified as either trading, available-for-sale or held-to-maturity securities. Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Debt and equity securities that are bought and traded for short-term profit are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. Debt and equity securities not classified as either held-to-maturity or trading are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity.
Upon adoption of R.O.C. SFAS No. 34 and No. 36 on January 1, 2006, the Company recorded an accumulated effect of changes in accounting principles of NT$1,606.7 million to adjust the carrying amount of trading securities, which were recorded at the lower of aggregate cost or market value, to fair market value, which is a one-time reconciling adjustment between U.S. GAAP and R.O.C. GAAP in 2006.
Upon adoption of R.O.C. SFAS No. 34 and No. 36, the Company also adjusted the carrying amount of the marketable securities categorized as available-for-sale, which were carried at the lower of aggregate cost or market with unrealized losses included in earnings, to fair market value on January 1, 2006. Therefore, prior to January 1 2006, unrealized gains and losses included in shareholders’ equity associated with available-for-sale marketable securities under R.O.C. GAAP were different from those under U.S. GAAP.
~~The Company classified money market funds as available-for-sale marketable securities under both R.O.C. GAAP and U.S. GAAP.~~
The Company’s proportionate share of the net income (loss) from an equity-method investee may differ if the equity-method investee’s net income (loss) under R.O.C. GAAP differs from that under U.S. GAAP. Such differences between R.O.C. GAAP and U.S. GAAP would result in adjustments to investments accounted for using the equity method and the equity in earnings (losses) of equity-method investees recorded in net income.
F - 50
b. ~~Equity-method investees~~
The Company’s proportionate share of the net income (loss) from an equity-method investee may differ if the equity-method investee’s net income (loss) under R.O.C. GAAP differs from that under U.S. GAAP. Such differences between R.O.C. GAAP and U.S. GAAP would result in adjustments to investments accounted for using the equity method and the equity in earnings (losses) of equity-method investees recorded in net income.
c. ~~Impairment of long-lived assets~~
Under U.S. GAAP, an impairment loss is recognized when the carrying amount of an asset or a group of assets is not recoverable from the expected undiscounted future cash flows and the impairment loss is measured as the difference between the fair value and the carrying amount of the asset or group of assets. The impairment loss is recorded in earnings and cannot be reversed subsequently. Long-lived assets (excluding goodwill and other indefinite lived assets) held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
~~F-51~~
Prior to 2005, under R.O.C. GAAP, for purposes of evaluating the recoverability of long-lived assets, assets purchased for use in the business but subsequently determined to have no use were written down to fair value and recorded as either idle assets or assets held for disposition. R.O.C. GAAP did not provide guideline for impairment of assets that could be used in the business. Effective January 1, 2005, the Company is required to recognize an impairment loss when an indication is identified that the carrying amount of an asset or a group of assets is not recoverable from the expected discounted future cash flows. However, if the recoverable amount increases in a future period, the amount previously recognized as impairment would be reversed and recognized as a gain. The adjusted amount may not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognized. Accordingly, the depreciation basis of long-lived assets impaired prior to January 1, 2005 under U.S. GAAP is different from the depreciation basis under R.O.C. GAAP.
d. 10% tax on unappropriated earnings
In the R.O.C., a 10% tax is imposed on unappropriated earnings (excluding earnings from foreign consolidated subsidiaries).    For R.O.C. GAAP purposes, the Company records the 10% tax on unappropriated earnings in the year of shareholders’ approval.    In the U.S., the 10% tax on unappropriated earnings should be accrued during the period the earnings arise and adjusted to the extent that distributions are approved by the shareholders in the following year.    To the extent the Company does not have sufficient tax credits to offset the 10% tax, additional tax expense would be recognized under U.S. GAAP.
In the R.O.C., a 10% tax is imposed on unappropriated earnings (excluding earnings from foreign consolidated subsidiaries). For R.O.C. GAAP purposes, the Company records the 10% tax on unappropriated earnings in the year of shareholders’ approval. Starting from 2002, the American Institute of Certified Public Accountants International Practices Task Force concluded that in accordance with U.S. GAAP guidance, the 10% tax on unappropriated earnings should be accrued during the period the earnings arise and adjusted to the extent that distributions are approved by the shareholders in the following year. To the extent the Company does not have sufficient tax credits to offset the 10% tax, additional tax expense would be recognized under U.S. GAAP.
e. c. Goodwill and intangible assets
Under R.O.C. GAAP, goodwill was recorded for the excess of the purchase price over the net tangible assets for the purchase of a 32% equity interest in TSMC-Acer Semiconductor Manufacturing Corporation (TASMC) in 1999 and was amortized over ten years.    Under U.S. GAAP, the goodwill was originally amortized over five years.
Goodwill was not recorded under R.O.C. GAAP for the acquisition of the remaining 68% equity interest in TASMC in June 2000, because under R.O.C. GAAP, goodwill from a business combination in the form of a share exchange was charged to capital surplus.    Under U.S. GAAP, the acquisition cost is the fair value of the shares issued in exchange and the difference between the acquisition cost and the sum of the fair values of the net tangible and identifiable intangible assets acquired is recorded as goodwill.    Accordingly, the goodwill from the acquisition of the remaining 68% equity interest in TASMC was recorded for U.S. GAAP purposes and was originally amortized over the estimated life of five years.
Effective January 1, 2002, the Company adopted the U.S. GAAP guidance relating to goodwill and other intangible assets and ceased amortization of goodwill which is now assessed for impairment annually or more frequently if impairment indicators arise.    In accordance with the U.S. GAAP guidance relating to goodwill and other intangible assets, the Company had completed its goodwill impairment test at the reporting unit level and found no impairment as of December 31, 2010, 2011 and 2012.
Effective January 1, 2005, the Company adopted R.O.C. SFAS No. 35, “Accounting for Impairment of Assets” which required the Company to evaluate impairment of an asset group, including goodwill allocated to such group.    The Company found no impairment as of December 31, 2010, 2011 and 2012.    Effective January 1, 2006, the Company adopted R.O.C. SFAS No. 25 (revised 2005), “Business Combinations” which is similar to U.S. GAAP guidance relating to goodwill and other intangible assets.    Upon adoption of R.O.C. SFAS No. 25, the Company ceased amortization of goodwill which is now assessed for impairment in accordance with the provisions of the standard and R.O.C. SFAS No. 35.
Under R.O.C. GAAP, goodwill was recorded for the excess of the purchase price over the net tangible assets for the purchase of a 32% equity interest in TSMC-Acer Semiconductor Manufacturing Corporation (TASMC) in 1999 and was amortized over ten years. Under U.S. GAAP, the goodwill was originally amortized over five years.
Goodwill was not recorded under R.O.C. GAAP for the acquisition of the remaining 68% equity interest in TASMC in June 2000, because under R.O.C. GAAP goodwill from a business combination in the form of a share exchange was charged to capital surplus. Under U.S. GAAP, the acquisition cost is the fair value of the shares issued in exchange and the difference between the acquisition cost and the sum of the fair values of the net tangible and identifiable intangible assets acquired is recorded as goodwill. Accordingly, the goodwill from the acquisition of the remaining 68% equity interest in TASMC was recorded for U.S. GAAP purposes and was originally amortized over the estimated life of five years.
Effective January 1, 2002, the Company adopted the U.S. GAAP guidance relating to goodwill and other intangible assets and ceased amortization of goodwill which is now assessed for impairment annually or more frequently if impairment indicators arise. In accordance with the U.S. GAAP guidance relating to goodwill and other intangible assets, the Company had completed its goodwill impairment test at the reporting unit level and found no impairment as of December 31, 2007, 2008 and 2009.
Effective January 1, 2005, the Company adopted R.O.C. SFAS No. 35, “Accounting for Impairment of Assets” which required the Company to evaluate impairment of an asset group, including goodwill allocated to such group. The Company found no impairment as of December 31, 2007, 2008 and 2009. Effective January 1, 2006, the Company adopted R.O.C. SFAS No. 25 (revised 2005), “Business Combinations” which is similar to U.S. GAAP guidance relating to goodwill and other intangible assets. Upon adoption of R.O.C. SFAS No.25, the Company ceased amortization of goodwill which is now assessed for impairment in accordance with the provisions of the standard and R.O.C. SFAS No. 35.
f. d. Profit sharing to employees ~~and bonus to directors and supervisors~~
According to R.O.C. regulations and TSMC’s Articles of Incorporation, a portion of the Company’s distributable earnings should be set aside as profit sharing to employees and bonus to directors and supervisors. Bonuses to directors and supervisors are usually paid in ~~cash. However, profit sharing to employees may be paid in cash or stock, or a combination of both.~~stocks
~~F-52~~
The Company accrues compensation expense related to profit sharing to employees during the period the earnings arise.    The number of shares is determined based on the compensation expense recorded during the period the earnings arise divided by the market value of the Company’s common stock at the date before the shareholders’ meeting in the following year.    However, under U.S. GAAP, the amount of compensation expense is the product of the number of shares and the market value at the date of stock distribution.    Therefore, any difference of the market value of the Company’s common stock between the date of stock distribution and the date before the shareholders’ meeting gives rise to adjustments to U.S. GAAP.
e. Under R.O.C. GAAP, prior to January 1, 2008, the profit sharing, including profit sharing in stock which is valued at the par value of NT$10 each, were treated as appropriations of retained earnings and were charged to retained earnings after such profit sharing is formally approved by the shareholders in the following year.Pension benefits
The U.S. GAAP guidance relating to employer’s accounting for pensions was amended on September 29, 2006 to require employers to recognize the overfunded or underfunded status of a defined benefit pension plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income.    The funded status of a benefit plan is defined as the difference between the fair value of the plan assets and the projected benefit obligation.    Previously unrecognized items such as gains or losses, prior service credits and the transition asset or obligation are required to be recognized in other comprehensive income and subsequently recognized through net periodic benefit cost.
F - 51
R.O.C. SFAS No. 18 does not require a company to recognize the overfunded or underfunded status of a defined benefit pension plan as an asset or liability in the statement of financial position.    However, if the accrued pension liability is less than the minimum pension liability, which is the excess of accumulated benefit obligation over the pension plan assets, the difference shall be additionally accrued and charged to the net loss not recognized as pension cost in shareholders’ equity.    Due to the GAAP difference in pension accounting, there were adjustments to U.S. GAAP for the current year pension expense, comprehensive income and net loss not recognized as pension cost in shareholders’ equity.
The difference of the overfunded or underfunded status at the date of adoption and hereafter give rise to a U.S. GAAP difference in the actuarial computation and the related amortization.
f. ~~Under U.S. GAAP, such profit sharing is treated as~~Stock-based compensation expense and is charged to earnings. The amount of compensation expense related to profit sharing in stock is determined based on the market value of TSMC’s common stock at the date of stock distribution in the following year. The total amount of the aforementioned profit sharing to be paid in the following year is initially accrued based on management’s estimate pursuant to TSMC’s Articles of Incorporation in the year to which it relates. Any difference between the amount initially accrued and the market value of the profit sharing upon the payment of cash and the issuance of shares is recognized in the year of approval by shareholders. Subsidiaries registered in the R.O.C. follow the same accounting treatment as TSMC.
Prior to January 1, 2008, the Company recorded two separate U.S. GAAP reconciling adjustments relating to profit sharing to employees and bonus to directors and supervisors each year. The first reconciling adjustment, referred to as “Profit sharing to employees and bonus to directors and supervisors — current year accrual”, recorded the full profit sharing earned in the current year, in an amount equal to the product of the total net income for the current year multiplied by the percentage set forth based on management’s estimate pursuant to TSMC’s Articles of Incorporation. The second reconciling adjustment, referred to as “Fair market value adjustment of prior year accrual”, was made in the following year to record the additional compensation expense for prior-year profit sharing paid in stock, which is measured at the fair market value on the date of stock distribution.
Effective January 1, 2008, the Company adopted Interpretation 2007-052, “Accounting for Bonuses to Employees, Directors and Supervisors” issued in March 2007 by the ARDF, which requires companies to record profit sharing to employees, directors and supervisors as an expense rather than as an appropriation of earnings. The amount of compensation expense related to profit sharing in stock is determined based on the market value of TSMC’s common stock at the date before the shareholders’ meeting.
Accordingly, as of December 31, 2008, the Company was no longer required to record the first reconciling adjustment as referred above. However, the Company still recorded the second reconciling adjustment to reflect the additional compensation expense recognized in 2008 for 2007 profit sharing in stock, which was measured at the fair market value on the date of stock distribution. Starting from January 1, 2009, the only U.S. GAAP reconciling adjustment for the profit sharing in stock is the difference of the market value of TSMC’s common stock between the date of stock distribution and the date before the shareholders’ meeting.
Under U.S. GAAP, effective January 1, 2006, the Company adopted the fair value recognition provisions to account for share-based payments, and applied the modified prospective transition method and therefore has not restated the results for prior periods.    Under this transition method, stock-based compensation expense for the year ended December 31, 2006 included compensation expense for all unvested stock-based compensation awards granted prior to January 1, 2006 that were expected to vest, based on the grant-date fair value or the intrinsic value described in the next paragraph.    Upon an employee’s termination, unvested awards are forfeited, which affects the quantity of options to be included in the calculation of stock-based compensation expense.    Forfeitures do not include vested options that expire unexercised.    Stock-based compensation expense for all stock-based compensation awards granted after January 1, 2006 was based on the grant-date fair value.    The Company recognizes these compensation costs using the graded vesting method over the requisite service period of the award, which is generally the option vesting term of four years.    Please refer to Note 34e for additional stock-based compensation disclosures.
Under R.O.C. GAAP, employee stock option plans 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 ARDF.    The Company adopted the intrinsic value method and any compensation expense determined using this method is recognized over the vesting period.    No stock-based compensation expense was recognized under R.O.C. GAAP for the years ended December 31, 2010, 2011 and 2012 for the employee stock options granted or modified in the period from January 1, 2004 to December 31, 2007.
Effective January 1, 2008, the Company adopted R.O.C. SFAS No. 39, “Accounting for Share-based Payment,” which is similar in many respects to U.S. GAAP and requires companies to record share-based payment transactions in the financial statements at fair value for the employee stock option plans that were granted or modified after December 31, 2007.    Please refer to Note 23b and 34e for the employee stock option plans granted in 2012 and accounted for using the fair value method.
Certain characteristics of the stock options granted under the TSMC 2002 Plan is not reasonably estimable using appropriate valuation methodologies and have been accounted for using the variable accounting method under U.S. GAAP.    Such method requires the Company to account for these stock options based on their intrinsic value, remeasured at each reporting date through the date of exercise or settlement, which gives rise to a R.O.C. GAAP difference in the recognition of stock-based compensation expense.
g. ~~Pension benefits~~
The U.S. GAAP guidance relating to employer’s accounting for pensions requires the Company to determine the accumulated pension obligation and the pension expense on an actuarial basis. The Company adopted the U.S. GAAP guidance relating to employer’s accounting for pensions at the beginning of 1993 for U.S. GAAP purposes.
The U.S. GAAP guidance relating to employer’s accounting for pensions was amended on September 29, 2006 to require employers to recognize the overfunded or underfunded status of a defined benefit pension plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. The amended U.S. GAAP guidance defines the funded status of a benefit plan as the difference between the fair value of the plan assets and the projected benefit obligation. Previously unrecognized items such as gains or losses, prior service credits and the transition asset or obligation are required to be recognized in other comprehensive income and subsequently recognized through net periodic benefit cost.
R.O.C. SFAS No. 18 is similar in many respects to U.S. GAAP and was adopted by the Company in 1996. However, R.O.C. SFAS No. 18 does not require a company to recognize the overfunded or underfunded status of a defined benefit pension plan as an asset or liability in the statement of financial position. Due to the GAAP difference in pension accounting, there were adjustments to US GAAP for the current year pension expense and other comprehensive income.Consolidated entities
~~F-53~~Under R.O.C. GAAP, the Company adopted R.O.C. SFAS No. 7, “Consolidated Financial Statements,” which requires that the accompanying consolidated financial statements include the accounts of all directly and indirectly majority owned subsidiaries of TSMC, and the accounts of investees in which TSMC’s ownership percentage is less than 50% but over which TSMC has a controlling interest.    All significant intercompany balances and transactions are eliminated upon consolidation.    Partially owned, non-controlled equity investees are accounted for under the equity method.
U.S. GAAP has two different models for determining whether consolidation is appropriate.    If a reporting entity has a variable interest in another entity that meets the definition of a variable interest entity (VIE), the VIE model should be applied.    Under this model, consolidation is based on which interest holder has the power to direct the activities that most significantly impact the VIE’s economics and has the right to receive benefits or the obligation to absorb the losses that could potentially be significant to the VIE.    However, if a reporting entity has an interest in an entity that is not considered a VIE, consolidation is based on whether the reporting enterprise has a controlling financial interest in the entity (i.e. the majority voting interest requirement) which is similar to R.O.C. GAAP.
F - 52
~~The difference of the overfunded or underfunded status at the date of adoption and hereafter give rise to a U.S. GAAP difference in the actuarial computation and the related amortization.~~
h. ~~Stock-based compensation~~
Under U.S. GAAP, effective January 1, 2006, the Company adopted the fair value recognition provisions to account for share-based payments, and applied the modified prospective transition method and therefore has not restated the results for prior periods. Under this transition method, stock-based compensation expense for the year ended December 31, 2006 included compensation expense for all unvested stock-based compensation awards granted prior to January 1, 2006 that were expected to vest, based on the grant-date fair value or the intrinsic value described in the next paragraph. Upon an employee’s termination, unvested awards are forfeited, which affects the quantity of options to be included in the calculation of stock-based compensation expense. Forfeitures do not include vested options that expire unexercised. Stock-based compensation expense for all stock-based compensation awards granted after January 1, 2006 was based on the grant-date fair value. The Company recognizes these compensation costs using the graded vesting method over the requisite service period of the award, which is generally the option vesting term of four years. See Note 31d for additional stock-based compensation disclosures.
Certain characteristics of the stock options granted under the TSMC 2002 Plan and GUC 2004 Plan are not reasonably estimable using appropriate valuation methodologies and have been accounted for using the variable accounting method under U.S. GAAP. Such method requires the Company to account for these stock options based on their intrinsic value, remeasured at each reporting date through the date of exercise or settlement.
Under R.O.C. GAAP, employee stock option plans 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 ARDF. The Company adopted the intrinsic value method and any compensation expense determined using this method is recognized over the vesting period. No stock-based compensation expense was recognized under R.O.C. GAAP for the years ended December 31, 2007, 2008 and 2009.
Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 39, “Accounting for Share-based Payment”, which is similar in many respects to U.S. GAAP and requires companies to record share-based payment transactions in the financial statements at fair value for the employee stock option plans that were granted or modified after December 31, 2007. The Company did not grant or modify employee stock options since January 1, 2008.
i. ~~Earnings per share~~
Under R.O.C. GAAP, earnings per share is calculated as described in Notes 2 and 23. Under U.S. GAAP, earnings per share is calculated by dividing net income by the average number of shares outstanding in each period, adjusted retroactively for any stock dividends issued and stock splits subsequently. Other shares issued from unappropriated earnings, such as profit sharing to employees in stock, are included in the calculation of weighted-average number of shares outstanding from the date of issuance.
Under both R.O.C. GAAP and U.S. GAAP, the unvested stock options are included in the diluted EPS calculation using the treasury stock method if the inclusion of such would be dilutive. However, the calcuation of shares using the treasury stock method is different between U.S. GAAP and R.O.C GAAP.
In applying the treasury stock method, the assumed proceeds shall be the sum of (a) the exercise price, (b) the amount of compensation cost attributed to future services and not yet recognized, and (c) the amount of excess tax benefits that would be credited to additional paid-in capital assuming exercise of the options. However, as the amount of stock-based compensation recognized is different between R.O.C. GAAP and U.S. GAAP described in Note 30h above, the number of shares included in the denominator of the diluted EPS calculation will be different from that under R.O.C. GAAP. Earnings per equivalent American Depository Share (ADS) is calculated by multiplying earnings per share by five (one ADS represents five common shares).Deconsolidation
~~F-54~~
Under R.O.C. GAAP and U.S. GAAP, a parent must deconsolidate a subsidiary as of the date the parent ceases to have a controlling interest in that subsidiary due to the termination of a Shareholders’ Agreement.    Under R.O.C. GAAP, the carrying amount of the investment on the date when control is lost should be reflected as the cost on the initial measurement of such financial asset.    However, under U.S. GAAP, the parent’s retained noncontrolling interest in the former subsidiary is remeasured to fair value with any resulting adjustments being included as part of the gain or loss recognized on deconsolidation.    The difference between the carrying amount and the fair value of the identifiable assets from the purchase price allocation process is amortized.    Please refer to Note 34h Deconsolidation of GUC for details.
j. ~~Consolidated entities~~
Under R.O.C. GAAP, the Company adopted R.O.C. SFAS No. 7, “Consolidated Financial Statements”, which requires that the accompanying consolidated financial statements include the accounts of all directly and indirectly majority owned subsidiaries of TSMC, and the accounts of investees in which TSMC’s ownership percentage is less than 50% but over which TSMC has a controlling interest. All significant intercompany balances and transactions are eliminated upon consolidation. Partially owned, non-controlled equity investees are accounted for under the equity method.
U.S. GAAP has two different models for determining whether consolidation is appropriate. If a reporting entity has a variable interest in another entity that meets the definition of a variable interest entity (VIE), the VIE model should be applied. Under this model, consolidation is based on which interest holder absorbs a majority of the risks and rewards of the VIE. However, if a reporting entity has an interest in an entity that is not considered a VIE, consolidation is based on whether the reporting enterprise has a controlling financial interest in the entity (i.e. the majority voting interest requirement) which is similar to R.O.C. GAAP.
Under U.S. GAAP, the Company consolidated the accounts of VisEra for the year ended December 31, 2004 and for the ten-month period ended October 31, 2005 based on the majority voting interest requirement. Subsequent to October 31, 2005, however, VisEra was no longer treated as a consolidated subsidiary of the Company. The Company believes that this accounting treatment is appropriate under U.S. GAAP because: (i) the Company lost its control over VisEra in November 2005 due to changes in the investment structure through which VisEra became a subsidiary of VisEra Holdings (Cayman), in which the Company owns only a 50% equity interest; (ii) Cayman is not a VIE; (iii) Cayman is not a majority owned subsidiary of the Company that would require consolidation; and (iv) the Company does not otherwise have control over Cayman. Therefore, the Company deconsolidated VisEra as of November 1, 2005.
Under U.S. GAAP, the Company consolidated the accounts of GUC for the years ended December 31, 2007, 2008 and 2009. GUC is a business entity and an independent operation, and therefore is not within the scope of VIE consolidated model. Since the company has a controlling financial interest in GUC, it has been consolidated.
~~F-55~~
The following reconciles consolidated net income and shareholders’ equity under R.O.C. GAAP as reported in the consolidated financial statements to the consolidated net income and shareholders’ equity determined under U.S. GAAP, giving effect to the differences listed above.

Year Ended December 31
2007 2008 2009
NT$ NT$ NT$ US$
(Note 3)
(In Millions Except Per Share Amounts)
Net income

Consolidated net income based on R.O.C. GAAP $ 109,932.4 $ 100,523.2 $ 89,466.2 $ 2,800.2

Adjustments:
a. Realization of unrealized loss on marketable securities (52.3 ) (98.0 ) — —
b. U.S. GAAP adjustments on equity-method investees (69.9 ) (16.4 ) (6.3 ) (0.2 )
c. Reversal of depreciation on assets impaired under U.S. GAAP 1,408.4 675.6 — —
d. 10% tax on undistributed earnings (2,260.3 ) 983.4 966.9 30.3
e. Profit sharing to employees and bonus to directors and supervisors
1. Current year accrual (8,232.8 ) — — —
2. Fair market value adjustment of prior year accrual (28,352.0 ) (20,369.3 ) (648.1 ) (20.3 )
f. Pension expense 3.9 4.3 3.9 0.1
g. Stock-based compensation (373.9 ) 215.7 (559.1 ) (17.5 )
Income tax effect of U.S. GAAP adjustments (41.9 ) (96.3 ) 69.9 2.2

Net adjustment (37,970.8 ) (18,701.0 ) (172.8 ) (5.4 )

Consolidated net income based on U.S. GAAP $ 71,961.6 $ 81,822.2 $ 89,293.4 $ 2,794.8

Attributable to
Shareholders of the parent $ 71,657.6 $ 81,473.2 $ 89,102.2 $ 2,788.8
Noncontrolling interests 304.0 349.0 191.2 6.0

$ 71,961.6 $ 81,822.2 $ 89,293.4 $ 2,794.8

Earnings per common share based on U.S. GAAP
Basic $ 2.71 $ 3.15 $ 3.45 $ 0.11

Diluted $ 2.71 $ 3.13 $ 3.44 $ 0.11

Earnings per ADS
Basic $ 13.57 $ 15.77 $ 17.24 $ 0.54

Diluted $ 13.56 $ 15.65 $ 17.19 $ 0.54

Number of weighted average shares outstanding under U.S. GAAP (in thousands)
Basic 26,409,174 25,826,062 25,835,802

Diluted 26,430,396 26,022,555 25,913,589

~~F-56~~
      Year Ended December 31
      2010 2011 2012
      NT$ NT$ NT$ US$
      (Note 3)
      (In Millions Except Per Share Amounts)
Net income

Consolidated net income based on R.O.C. GAAP
   $ 162,281.9    $ 134,453.3    $ 165,963.7    $ 5,713.0


Adjustments:

1.

U.S. GAAP adjustments on equity- method investees
   (7.0 ) (127.2 ) (319.5 ) (11.0 )
2.

10% tax on undistributed earnings
   2,208.4    (1,428.8 ) (6,820.8 ) (234.8 )
3.

Profit sharing to employees- Fair market value adjustment of prior year accrual
   -        (30.6 ) -        -
4.

Pension expense
   4.2    3.8    3.9    0.1
5.

Stock-based compensation
   (179.7 ) (60.1 ) (157.7 ) (5.4 )
6.

Gain from deconsolidation of GUC
   -        4,304.1    -        -
Income tax effect of U.S. GAAP adjustments
   12.6    (11.2 ) (15.1 ) (0.5 )


Net adjustment
   2,038.5    2,650.0    (7,309.2 ) (251.6 )


Consolidated net income based on U.S. GAAP
   $ 164,320.4    $ 137,103.3    $ 158,654.5    $ 5,461.4


Attributable to

Shareholders of the parent
   $ 163,638.6    $ 136,872.7    $ 158,849.6    $ 5,468.1
Noncontrolling interests
   681.8    230.6    (195.1 ) (6.7 )


      $ 164,320.4    $ 137,103.3    $ 158,654.5    $     5,461.4


Earnings per common share based on U.S. GAAP

Basic
   $      6.32    $      5.28    $      6.13    $    0.21
Diluted
   $      6.31    $      5.28    $      6.13    $    0.21
Earnings per ADS

Basic
   $    31.58    $    26.41    $    30.64    $    1.05
Diluted
   $    31.57    $    26.40    $    30.63    $    1.05
Number of weighted average shares outstanding under U.S. GAAP (in thousands)

Basic
   25,905,832    25,914,076    25,920,735


Diluted
     25,919,814      25,924,682      25,927,936


December 31
2008 2009
NT$ NT$ US$
(Note 3)
(In Millions)
Shareholders’ equity

Total shareholders’ equity based on R.O.C. GAAP $ 480,372.5 $ 499,048.5 $ 15,619.7

Adjustments:
a. U.S. GAAP adjustments on equity-method investees (485.0 ) (449.9 ) (14.1 )
b. Impairment of long-lived assets
1. Loss on impairment of assets (10,709.6 ) (10,439.1 ) (326.8 )
2. Reversal of depreciation on assets impaired under U.S. GAAP 10,709.6 10,439.1 326.8
c. 10% tax on undistributed earnings (4,554.9 ) (3,588.0 ) (112.3 )
d. Goodwill
1. Carrying amount difference from 68% equity interest in TASMC’s share acquisition 52,212.7 52,212.7 1,634.2
2. Reversal of amortization of goodwill recognized under R.O.C. GAAP (11,228.9 ) (11,318.9 ) (354.3 )
e. Accrued pension cost (35.6 ) (31.7 ) (1.0 )
f. Accrual for deferred pension loss under US SFAS No. 158 (1,288.9 ) (10.7 ) (0.3 )
Income tax effect of U.S. GAAP adjustments 68.4 134.3 4.2

Net adjustment 34,687.8 36,947.8 1,156.4

Total equity based on U.S. GAAP $ 515,060.3 $ 535,996.3 $ 16,776.1

Attributable to
Shareholders of the parent $ 511,089.2 $ 532,042.8 $ 16,652.4
Noncontrolling interests 3,971.1 3,953.5 123.7

$ 515,060.3 $ 535,996.3 $ 16,776.1

~~F-57~~
F - 53
      December 31
      2011 2012
      NT$ NT$ US$
      (Note 3)
      (In Millions)
Shareholders’ equity

Total shareholders’ equity based on R.O.C. GAAP
   $ 632,043.5    $ 725,753.7    $ 24,982.9


Adjustments:

1.

U.S. GAAP adjustments on equity-method investees
   (627.0 ) (939.0 ) (32.4 )
2.

10% tax on undistributed earnings
   (2,808.4 ) (9,629.2 ) (331.4 )
3.

Goodwill


3-1. Carrying amount difference from 68% equity interest in TASMC’s share acquisition
   52,212.7    52,212.7    1,797.3

3-2. Reversal of amortization of goodwill recognized under R.O.C. GAAP
   (11,507.8 ) (11,643.4 ) (400.8 )
4.

Pension benefits


4-1. Accrued pension cost
   (23.7 ) (19.8 ) (0.7 )

4-2. Accrual for deferred pension loss
   (2,108.3 ) (2,734.6 ) (94.1 )

4-3. Reversal of the increase in pension liability resulted from net loss not recognized as pension cost under R.O.C. GAAP
   -        4.4    0.2
5.

Gain from deconsolidation of GUC
   4,304.1    4,304.1    148.2
Income tax effect of U.S. GAAP adjustments
   127.5    107.2    3.7


Net adjustment
   39,569.1    31,662.4    1,090.0


Total equity based on U.S. GAAP
   $ 671,612.6    $ 757,416.1    $ 26,072.9


Attributable to

Shareholders of the parent
   $ 669,162.6    $ 754,860.1    $ 25,984.9
Noncontrolling interests
   2,450.0    2,556.0    88.0


      $     671,612.6    $     757,416.1    $     26,072.9


   Year Ended December 31
   2010 2011 2012
   NT$ NT$ NT$ US$
   (Note 3)
   (In Millions)
Changes in equity based on U.S. GAAP

Balance, beginning of year
   $     535,996.3    $     615,156.2    $   671,612.6    $   23,119.2
Net income for the year
   164,320.4    137,103.3    158,654.5    5,461.4
Unrealized gain (loss) on available-for-sale marketable securities and hedging derivative financial instruments

TSMC
   (338.3 ) (1,241.1 ) 9,128.7    314.2
Equity-method investees
   (6.0 ) (41.1 ) 17.5    0.6
Noncontrolling interests
   4.0    (3.0 ) (3.5 ) (0.1 )
Common shares issued as profit sharing to employees

TSMC
   -        12.3    -        -
Equity-method investees
   -        1.1    3.0    0.1
Noncontrolling interests
   -        18.3    -        -
Adjustment arising from changes of ownership percentage in investees

TSMC
   41.3    3.8    128.6    4.4
Equity-method investees
   (3.7 ) (3.1 ) (8.1 ) (0.2 )
Noncontrolling interests
   4.4    1.1    (38.2 ) (1.3 )
(Continued)
F - 54

Year Ended December 31    Year Ended December 31
2007 2008 2009    2010 2011 2012
NT$ NT$ NT$ US$    NT$ NT$ NT$ US$
(Note 3)    (Note 3)
(In Millions)    (In Millions)
Changes in equity based on U.S. GAAP

Balance, beginning of year $ 533,559.7 $ 516,822.1 $ 515,060.3 $ 16,120.8
Net income for the year 71,961.6 81,822.2 89,293.4 2,794.8
Unrealized gain (loss) on available-for-sale marketable securities
TSMC 290.9 (728.2 ) 622.5 19.5
Equity-method investees (119.2 ) (142.1 ) 118.4 3.7
Noncontrolling interests 19.5 (17.0 ) 6.0 0.2
Common shares issued as profit sharing to employees
TSMC 32,776.7 24,213.8 8,152.3 255.2
Equity-method investees 78.7 52.0 (0.2 ) —
Noncontrolling interests 262.9 214.0 (9.2 ) (0.3 )
Adjustment arising from changes of ownership percentage in investees
TSMC (28.7 ) (137.1 ) 115.5 3.6
Equity-method investees (56.9 ) (1.8 ) (1.9 ) (0.1 )
Noncontrolling interests 31.9 11.8 (39.0 ) (1.2 )
Translation adjustments
TSMC 118.2 1,554.0 (2,247.8 ) (70.4 )    $ (4,776.5 ) $ 109.8    $ (4,320.4 ) $ (148.7 )
Equity-method investees (24.8 ) 62.9 (93.9 ) (2.9 )    (187.9 ) (9.4 ) (140.7 )�� (4.8 )
Noncontrolling interests (99.3 ) (68.8 ) 39.8 1.2    86.2    7.6    52.9    1.8
Treasury stock repurchased by the Company (48,466.9 ) (30,427.5 ) — —    -        (71.6 ) -        -
Cash dividends received by subsidiaries from parent company 101.8 102.3 — —
Cash dividends to common shareholders (77,489.1 ) (76,881.3 ) (76,876.3 ) (2,406.1 )    (77,708.1 ) (77,730.2 ) (77,748.7 ) (2,676.4 )
Stock-based compensation
TSMC 185.5 (218.6 ) 480.7 15.0    172.4    57.0    160.2    5.5
Equity-method investees 47.9 (34.0 ) 8.2 0.3    (7.8 ) (0.4 ) 30.7    1.1
Noncontrolling interests 188.4 2.8 78.3 2.4    7.3    3.1    3.7    0.1
Issuance of stock from exercising stock options 436.9 227.2 260.5 8.2    244.8    217.7    242.5    8.4
Changes in actuarial gain (loss) and transition obligation
TSMC 1,303.8 (1,201.4 ) 1,278.2 40.0    (2,467.0 ) 369.4    (626.3 ) (21.6 )
Equity-method investees 12.7 (52.3 ) 35.3 1.1    (47.8 ) 19.0    (19.1 ) (0.7 )
Decrease in noncontrolling interests 1,729.9 (114.7 ) (284.8 ) (8.9 )
Deconsolidation of GUC

Noncontrolling interests
   -        (1,987.9 ) -        -
Increase (decrease) in noncontrolling interests
   (177.8 ) (379.3 ) 286.2    9.9


Balance, end of year $ 516,822.1 $ 515,060.3 $ 535,996.3 $ 16,776.1    $   615,156.2    $   671,612.6    $   757,416.1    $   26,072.9


Attributable to
Shareholders of the parent $ 513,228.1 $ 511,089.2 $ 532,042.8 $ 16,652.4    $ 610,596.7    $ 669,162.6    $ 754,860.1    $ 25,984.9
Noncontrolling interests 3,594.0 3,971.1 3,953.5 123.7    4,559.5    2,450.0    2,556.0    88.0


   $ 615,156.2    $ 671,612.6    $ 757,416.1    $ 26,072.9
$ 516,822.1 $ 515,060.3 $ 535,996.3 $ 16,776.1

(Concluded)
The following U.S. GAAP condensed balance sheets as of December 31, ~~2008~~2011 and ~~2009,~~2012, and statements of operations for the years ended December 31, ~~2007, 2008~~2010, 2011 and ~~2009~~2012 have been derived from the audited consolidated financial statements and reflect the adjustments presented above.
~~F-58~~
Certain accounts have been reclassified to conform to U.S. GAAP.    Technical service income is included in sales with the related costs included in cost of sales.    ~~Provision for litigation~~Casualty loss ~~gains and~~recorded in non-operating expense was reclassified under cost of sales.    Gains or losses on disposal of property, plant and equipment and other assets, rental income with related costs, impairment losses on idle assets and certain other items in non-operating income (expense) are included in operating expenses.

December 31
2008 2009
NT$ NT$ US$
(Note 3)
(In Millions)

Assets
Current assets $ 252,618.4 $ 259,803.7 $ 8,131.6
Long-term investments 39,496.5 37,395.6 1,170.4
Property, plant and equipment, net 243,645.4 273,674.8 8,565.8
Goodwill 47,028.2 46,825.1 1,465.6
Other assets 16,695.3 17,575.3 550.0

Total assets $ 599,483.8 $ 635,274.5 $ 19,883.4

Liabilities
Current liabilities $ 61,361.7 $ 82,721.3 $ 2,589.1
Long-term liabilities 16,191.0 11,388.5 356.4
Other liabilities 6,870.8 5,168.4 161.8
Equity attributable to shareholders of the parent 511,089.2 532,042.8 16,652.4
Noncontrolling interests 3,971.1 3,953.5 123.7

Total liabilities and equity $ 599,483.8 $ 635,274.5 $ 19,883.4

��
Year Ended December 31
2007 2008 2009
NT$ NT$ NT$ US$
(Note 3)
(In Millions)
Net sales $ 323,221.0 $ 334,339.6 $ 296,109.2 $ 9,267.9
Cost of sales 202,045.7 203,733.9 167,122.5 5,230.7

Gross profit 121,175.3 130,605.7 128,986.7 4,037.2
Operating expenses 44,775.0 44,423.4 37,626.6 1,177.8

Income from operations 76,400.3 86,182.3 91,360.1 2,859.4
Non-operating income, net 9,573.1 5,701.9 2,892.9 90.6

Income before income tax 85,973.4 91,884.2 94,253.0 2,950.0
Income tax expense 14,011.8 10,062.0 4,959.6 155.2

Net income $ 71,961.6 $ 81,822.2 $ 89,293.4 $ 2,794.8

Net income attributable to shareholders of the parent $ 71,657.6 $ 81,473.2 $ 89,102.2 $ 2,788.8

Net income attributable to noncontrolling interests $ 304.0 $ 349.0 $ 191.2 $ 6.0

The Company reports comprehensive income (loss) in accordance with the guidance related to reporting comprehensive income for U.S. GAAP purposes.    The guidance related to reporting comprehensive income requires that in addition to net income (loss), a company should report other comprehensive income (loss) consisting of the changes in equity of the company during the year from transactions and other events and circumstance from nonowner sources.    It includes all changes in equity during the year except those resulting from investments by shareholders and distribution to shareholders.    The components of other comprehensive income for the Company consist of ~~unrealised~~unrealized gains and losses relating to the translation of financial statements maintained in foreign currencies, unrealized gains and losses relating to the Company’s investments in available-for-sale securities and hedging derivative financial instruments and changes in actuarial gain or loss and transition obligation of the defined benefit pension ~~plan.~~
plans.
~~F-59~~
F - 55
   December 31
   2011    2012
   NT$    NT$    US$
         (Note 3)
   (In Millions)
Assets

Current assets
   $     225,260.4       $     252,288.6       $ 8,684.6
Long-term investments
   38,135.6       69,151.3       2,380.4
Property, plant and equipment, net
   490,374.9       617,529.5       21,257.5
Goodwill
   46,398.9       46,093.0       1,586.7
Other assets
   18,604.6       14,013.7       482.4






Total assets
   $ 818,774.4       $ 999,076.1       $ 34,391.6






Liabilities

Current liabilities
   $ 119,815.1       $ 152,065.2       $ 5,234.6
Long-term liabilities
   20,458.5       82,161.5       2,828.3
Other liabilities
   6,888.2       7,433.3       255.8
Equity attributable to shareholders of the parent
   669,162.6       754,860.1       25,984.9
Noncontrolling interests
   2,450.0       2,556.0       88.0






Total liabilities and equity
   $ 818,774.4       $ 999,076.1       $     34,391.6






   Year Ended December 31
   2010 2011 2012
   NT$ NT$ NT$ US$
   (Note 3)
   (In Millions)
Net sales
   $     419,988.4    $     427,487.7    $     506,745.2    $     17,443.9
Cost of sales
   212,772.1    232,988.4    262,717.0    9,043.6


Gross profit before affiliates elimination
   207,216.3    194,499.3    244,028.2    8,400.3
Unrealized gross profit from affiliates
   -      (74.0 ) (25.0 ) (0.9 )


Gross profit
   207,216.3    194,425.3    244,003.2    8,399.4
Operating expenses
   48,433.6    52,405.6    63,045.7    2,170.2


Income from operations
   158,782.7    142,019.7    180,957.5    6,229.2
Non-operating income, net
   11,305.2    7,218.0    123.3    4.2


Income before income tax
   170,087.9    149,237.7    181,080.8    6,233.4
Income tax expense
   5,767.5    12,134.4    22,426.3    772.0


Net income
   $ 164,320.4    $ 137,103.3    $ 158,654.5    $ 5,461.4


Net income attributable to shareholders of the parent
   $ 163,638.6    $ 136,872.7    $ 158,849.6    $ 5,468.1


Net income attributable to noncontrolling interests
   $ 681.8    $ 230.6    $ (195.1 ) $ (6.7 )


Consolidated net income based on U.S. GAAP
   $ 164,320.4    $ 137,103.3    $ 158,654.5    $ 5,461.4


Other comprehensive income (loss), net of tax:

Adjustment of unrealized gain (loss) on financial instruments, net of tax benefit of NT$87.7 million and NT$221.2 million for 2010 and 2011, respectively, and net of tax expense of NT$409.3 million for 2012

TSMC
   (338.3 ) (1,241.1 ) 9,128.7    314.2
Equity-method investees
   (6.0 ) (41.1 ) 17.5    0.6
Noncontrolling interests
   4.0    (3.0 ) (3.5 ) (0.1 )
(Continued)
~~Statements of comprehensive income for the years ended December 31, 2007, 2008 and 2009 are as follows:~~

Year Ended December 31
2007 2008 2009
NT$ NT$ NT$ US$
(Note 3)
(In Millions)
Consolidated net income based on U.S. GAAP $ 71,961.6 $ 81,822.2 $ 89,293.4 $ 2,794.8

Other comprehensive income (loss), net of tax:
Adjustment of unrealized gain (loss) on financial instruments
TSMC 290.9 (728.2 ) 622.5 19.5
Equity-method investees (119.2 ) (142.1 ) 118.4 3.7
Noncontrolling interests 19.5 (17.0 ) 6.0 0.2
Translation adjustments
TSMC 118.2 1,554.0 (2,247.8 ) (70.4 )
Equity-method investees (24.8 ) 62.9 (93.9 ) (2.9 )
Noncontrolling interests (99.3 ) (68.8 ) 39.8 1.2
Changes in actuarial gain /loss and transition obligation
TSMC 1,303.8 (1,201.4 ) 1,278.2 40.0
Equity-method investees 12.7 (52.3 ) 35.3 1.1

Consolidated comprehensive income $ 73,463.4 $ 81,229.3 $ 89,051.9 $ 2,787.2

Attributable to
Shareholders of the parent $ 73,239.2 $ 80,966.1 $ 89,462.2 $ 2,800.0
Noncontrolling interests 224.2 263.2 (410.3 ) (12.8 )

$ 73,463.4 $ 81,229.3 $ 89,051.9 $ 2,787.2

F - 56
   Year Ended December 31
   2010 2011 2012
   NT$ NT$ NT$ US$
   (Note 3)
   (In Millions)
Translation adjustments, net of tax expense of nil

TSMC
   $ (4,776.5 ) $ 109.8    $ (4,320.4 ) $ (148.7 )
Equity-method investees
   (187.9 ) (9.4 ) (140.7 ) (4.8 )
Noncontrolling interests
   86.2    7.6    52.9    1.8
Changes in actuarial gain/loss and transition obligation, net of tax expense of nil

TSMC
   (2,467.0 ) 369.4    (626.3 ) (21.6 )
Equity-method investees
   (47.8 ) 19.0    (19.1 ) (0.7 )


Consolidated comprehensive income
   $ 156,587.1    $ 136,314.5    $ 162,743.6    $ 5,602.1


Attributable to

Shareholders of the parent
   $ 155,815.1    $ 136,079.3    $ 162,889.3    $ 5,607.1
Noncontrolling interests
   772.0    235.2    (145.7 ) (5.0 )


   $     156,587.1    $     136,314.5    $     162,743.6    $     5,602.1


(Concluded)
The components of accumulated other comprehensive income (loss) of the parent were as follows:

December 31
2008 2009
NT$ NT$ US$
(Note 3)
(In Millions)

Cumulative translation adjustment $ 415.8 $ (1,925.9 ) $ (60.3 )
Unrealized gain on financial instruments (287.3 ) 453.6 14.2
Actuarial gain or loss and transition obligation (1,310.2 ) 3.3 0.1

Total accumulated other comprehensive loss $ (1,181.7 ) $ (1,469.0 ) $ (46.0 )

   December 31
   2011 2012
   NT$ NT$ US$
   (Note 3)
   (In Millions)
Cumulative translation adjustment
   $ (6,789.9 ) $ (11,251.0 ) $ (387.3 )
Unrealized gain on financial instruments
   (1,172.9 ) 7,973.3    274.5
Actuarial gain or loss and transition obligation
   (2,123.1 ) (2,768.5 ) (95.3 )


Total accumulated other comprehensive loss
   $     (10,085.9 ) $     (6,046.2 ) $     (208.1 )


The Company applies R.O.C. SFAS No. 17, “Statement of Cash ~~Flows”.~~Flows.” Its objectives and principles are similar to those set out under U.S. GAAP.    The principal differences between the two standards relate to classification. ~~Cash flows from investing activities for changes~~Changes in deferred charges, refundable deposits and other assets-miscellaneous ~~and~~under cash flows from ~~financing~~investing activities ~~for changes in guarantee deposits, and profit sharing to employees in cash, directors and supervisors~~under R.O.C. GAAP are reclassified to operating activities under U.S. GAAP.    Changes in guarantee deposits under cash flows from financing activities under R.O.C. GAAP are reclassified to operating activities under U.S. GAAP.    Effect of change in consolidated entities, which represents the cash decrease as a result of deconsolidation of GUC, is also reclassified to investing activities under U.S. GAAP guidance related to statement of cash flows.    Summarized cash flow data by operating, investing and financing activities in accordance with ~~the~~U.S. GAAP guidance related to statement of cash flows are as follows:
~~F-60~~
F - 57
   Year Ended December 31
   2010 2011 2012
   NT$ NT$ NT$ US$
   (Note 3)
   (In Millions)
Net cash inflow (outflow) from:

Operating activities
   $ 222,028.4    $ 251,103.0    $ 290,626.7    $ 10,004.4
Investing activities
       (194,871.7 )     (187,854.2 )     (274,999.3 )      (9,466.4 )
Financing activities
   (48,404.8 ) (67,515.8 ) (13,570.8 ) (467.2 )


Change in cash and cash equivalents
   (21,248.1 ) (4,267.0 ) 2,056.6    70.8
Cash and cash equivalents at the beginning of year
   171,276.3    147,887.0    143,472.3    4,938.8
Effect of exchange rate changes
   (2,141.2 ) (147.7 ) (2,118.3 ) (72.9 )


Cash and cash equivalents at the end of year
   $ 147,887.0    $ 143,472.3    $ 143,410.6    $ 4,936.7


Year Ended December 31
2007 2008 2009
NT$ NT$ NT$ US$
(Note 3)
(In Millions)
Net cash inflow (outflow) from:
Operating activities $ 173,886.5 $ 214,396.6 $ 159,019.1 $ 4,977.1
Investing activities (67,241.4 ) (5,820.2 ) (95,999.6 ) (3,004.7 )
Financing activities (128,977.7 ) (110,517.5 ) (84,992.7 ) (2,660.1 )

Change in cash and cash equivalents (22,332.6 ) 98,058.9 (21,973.2 ) (687.7 )
Cash and cash equivalents at the beginning of year 117,837.2 94,986.5 194,613.8 6,091.2
Effect of exchange rate changes (518.1 ) 1,568.4 (1,364.3 ) (42.7 )

Cash and cash equivalents at the end of year $ 94,986.5 $ 194,613.8 $ 171,276.3 $ 5,360.8

~~31.~~34.   ADDITIONAL DISCLOSURES REQUIRED BY U.S. GAAP
a. Transition to IFRS in 2013
Starting in 2013, the Company’s financial statements are prepared in accordance with International Financial Reporting Standards, International Accounting Standards, and relevant Interpretations (collectively, “IFRSs”) as issued by International Accounting Standards Board (“IASB”) and IFRSs as endorsed for use in R.O.C. Since the transition date to IFRSs was January 1, 2012, the Company’s 2012 consolidated financial statements under IFRSs may be materially different from the accompanied 2012 consolidated financial statements under R.O.C. GAAP.
b. Recent accounting pronouncements
In April 2009, the Financial Accounting Standards Board (“FASB”) issued a standard that provides additional guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly decreased. It also included guidance on identifying circumstances that indicate a transaction is not orderly. This guidance is effective for interim and annual reporting periods ending after June 15, 2009, and should be applied prospectively. This standard is effective for the Company for the year ending December 31, 2009. The adoption of the guidance did not have a material effect on the Company’s results of operations, financial position and cash flows.
In April 2009, the FASB issued a standard that provides guidance on the recognition and presentation of other-than-temporary impairments of debt securities classified as available-for-sale and held-to-maturity. This standard is effective for interim and annual reporting periods ending after June 15, 2009. This guidance is effective for the Company for the year ending December 31, 2009. The adoption of the guidance did not have a material effect on the Company’s results of operations, financial position and cash flows.
In May 2009 and subsequently updated in February 2010, the FASB issued new guidance on subsequent events that establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. This standard defines two types of subsequent events, recognized or nonrecognized. The new guidance is effective for the Company for the year ending December 31, 2009.
In June 2009, the FASB issued new guidance relating to the transfer of financial assets. The new guidance requires entities to provide more information regarding sales of securitized financial assets and similar transactions, particularly if the entity has continuing exposure to the risks related to transferred financial assets. It also eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets and requires additional disclosures. The new guidance becomes effective for annual reporting periods beginning after November 15, 2009. Based on the Company’s analysis, the Company currently does not anticipate that the new guidance will have a material effect on the Company’s results of operations and financial position or cash flows.
In ~~June 2009,~~May 2011, the FASB issued an accounting update to amend the fair value measurement guidance and include some enhanced disclosure requirements.    The most significant change in disclosures is an expansion of the information required for Level 3 measurements based on unobservable inputs.    The standard is effective for the Company for the year ending December 31, 2012.    The Company has included these new ~~guidance~~disclosures, as applicable, in Note 34c below.
In June and December 2011, the FASB issued an accounting update to ~~improve financial reporting by enterprises involved with variable interest entities (VIE).~~eliminate the current option to report other comprehensive income and its components in the statement of stockholders’ equity.    Instead, an entity will be required to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements.    The new requirements do not change which components of comprehensive income are recognized in net income or other comprehensive income, or when an item of other comprehensive income must be reclassified to net income.    This guidance ~~modifies~~must be applied retroactively and is effective for fiscal years beginning after December 15, 2011.    Earlier application is permitted. The Company has determined to present items of net income and other comprehensive income in one continuous statement starting 2012.
In September 2011, the ~~approach for determining~~FASB issued an accounting update, which is intended to reduce the ~~primary beneficiary~~cost and complexity of the annual goodwill impairment test by providing entities an option to perform a “qualitative” assessment to determine whether further impairment testing is necessary.    Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a ~~variable interest entity (“VIE”). Under~~reporting unit is less than its carrying amount, the ~~modified approach,~~quantitative impairment test is required.    Otherwise, no further testing is required. This standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.    The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or cash flows.
In December 2011, the FASB issued an ~~enterprise is required to make a qualitative assessment whether it has (1)~~accounting update, which creates new disclosure requirements regarding the ~~power to direct the activities~~nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments.    Certain disclosures of the ~~VIE that most significantly impact~~amounts of certain instruments subject to enforceable master netting arrangements or similar agreements would be required, irrespective of whether the ~~entity’s economic performance and (2)~~entity has elected to offset those instruments in the ~~obligation to absorb losses~~statement of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. If an enterprise has both of these characteristics, the enterprise is considered the primary beneficiary and must consolidate the VIE.financial position.    The ~~new guidance becomes~~disclosure requirements are effective for annual reporting periods beginning on or after ~~November~~January 1, 2013 with retrospective application required.    Since this standard impacts disclosure requirements only, its adoption is not expected to have a material impact on the Company’s results of operations, financial condition or cash flows.
F - 58
In July 2012, the FASB issued an accounting update to simplify how entities test indefinite-lived intangible assets for impairment which improves consistency with impairment testing requirements among long-lived asset categories. The update permits an assessment of qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value.    For assets in which this assessment concludes it is more likely than not that the fair value is more than its carrying value, these amended standards eliminate the requirement to perform quantitative impairment testing as outlined in the previously issued standards. The standard is effective for fiscal years beginning after December 15, ~~2009.~~2012.    Based on the Company’s analysis, the Company currently does not anticipate that the new guidance will have a material effect on the Company’s results of operations and financial position or cash flows.
~~F-61~~
In June 2009, the FASB issued its Accounting Standards Codification (ASC) 105, which became the source of authoritative U.S. generally accepted accounting principles (U.S. GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities law are also sources of authoritative U.S. GAAP for SEC registrants. The ASC became effective for the financial statements issued for interim and annual periods ending after September 15, 2009 and superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the ASC will become nonauthoritative. The FASB will not issue new standards in the form of Statements (SFAS’s) FASB Staff Positions (FSP’s) or Emerging Issues Task Force Abstracts (EITF’s), but rather it will issue Accounting Standards Updates (ASU’s). FASB will not consider the ASU’s as authoritative in their own right as they will only serve to update the ASC, provide background information about guidance and provide the bases for conclusions on the changes in the ASC. The Company has adopted the ASC effective for its December 31, 2009 annual report on Form 20-F and has revised the disclosure of the U.S. GAAP source references in its financial reporting upon such adoption.
In September 2009, the FASB issued an accounting standard update which provides guidance on how to separate consideration in multiple-deliverable arrangements and significantly expands disclosure requirements. The standard establishes a hierarchy for determining the selling price of a deliverable, eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The update is effective for annual reporting periods beginning on or after June 15, 2010. Based on the Company’s analysis, the Company currently does not anticipate that the new guidance will have a material effect on the Company’s results of operations and financial position or cash flows.
In December 2008, the FASB issued accounting standard relating to the disclosure requirements for defined benefit plans, which provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The new accounting standard is effective for annual reporting periods ending after December 15, 2009. The Company has adopted the standard effective for its December 31, 2009 annual report on Form 20-F. The Company is not able to provide the required fair value disclosure related to pension plan assets. See Note 18 to the Consolidated Financial Statements for further discussions.
b. c. Fair Value
On January 1, 2008, the Company adopted the guidance related to fair value measurements, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.
~~The guidance related to fair value measurements defines fair value as~~
Fair value is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability.    The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the Company.In addition to defining fair value, the guidance related to fair value measurements expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which is determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:~~Level 1 — Use unadjusted quoted prices in active markets for identical assets or liabilities.~~Level 2 — Use observable inputs other than Level 1 prices such as quoted prices for identical or similar instruments in markets that are not active, quoted prices for similar instruments in active markets, and model-based valuation in which all significant inputs are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
~~F-62~~
The fair value prioritizes the valuation inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market.    Each fair value measurement is reported in one of the three levels which is determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
Level 1 - Use unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 - Use observable inputs other than Level 1 prices such as quoted prices for identical or similar instruments in markets that are not active, quoted prices for similar instruments in active markets, and model-based valuation in which all significant inputs are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 —- Use inputs that are generally unobservable and reflect the use of significant management judgments and estimates.
~~The following section describes the valuation methodologies the Company uses to measure financial assets~~
Assets and liabilities measured at fair ~~value.~~
~~For investments other than forward exchange and cross currency swap contracts, the~~value on a recurring basis
The Company uses quoted prices in active markets for identical assets to determine fair value ~~where applicable. This pricing methodology applies to our~~for Level 1 investments such as ~~agency bonds, corporate bonds,~~publicly traded stocks and money market funds, government bonds and publicly traded stocks. If quoted prices in active markets for identical assets are not available, then the Company uses quoted prices that are observable and can be corroborated with other observable market data for identical assets in less active markets. These investments are included in Level 2 and primarily consist of corporate issued asset-backed securities. For the years ended December 31, 2008 and 2009, none of the Company’s financial assets measured at fair value on a recurring basis was determined by using significant unobservable inputs and classified as Level 3.
funds.
For forward exchange and cross currency swap contracts, fair values are estimated using ~~industry standard valuation models. These models use~~discounted cash flow model.    The model uses market-based observable inputs including interest rate curves, foreign exchange rates, and forward and spot prices for currencies to project fair value.    The forward exchange and cross currency swap contracts financial assets and liabilities are included in Level 2.
~~As of Decemeber 31, 2008 and 2009, there were no financial liabilities measured at fair value.~~
The following table presents ~~our~~the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, ~~2008~~2011 and ~~2009:~~
2012:

December 31, 2008 Level 1 Level 2 Level 3 Total
NT$ NT$ NT$ NT$
(In Millions)
Assets
Derivative financial assets
Forward and Cross currency swap contract $ — $ 42.4 $ — $ 42.4
Marketable securities — trading
Publicly traded stocks 13.3 — — 13.3

Marketable securities — available-for-sale
Agency bonds 5,696.5 — — 5,696.5
Corporate bonds 3,241.1 38.0 — 3,279.1
Corporate issued asset-backed securities — 2,334.9 — 2,334.9
Money market funds 1,000.1 — — 1,000.1
Government bonds 340.9 — — 340.9
Publicly traded stocks 279.9 — — 279.9

Total $ 10,571.8 $ 2,415.3 $ — $ 12,987.1

Liabilities
Derivative financial liabilities
Forward and Cross currency swap contract $ — $ 85.2 $ — $ 85.2

~~F-63~~
December 31, 2011      Level 1           Level 2          Level 3           Total
NT$ NT$ NT$ NT$
(In Millions)
Assets

Derivative financial assets

Forward exchange contract
$               -    $      15.4      $          -      $          15.4
Marketable securities - available-for-sale

Publicly traded stocks
3,306.3    -      -      3,306.3
Money market funds
             2.5                -                  -                   2.5
Total
$    3,308.8    $      15.4    $          -      $    3,324.2
Liabilities

Derivative financial liabilities

Forward and Cross currency swap contract
$           -        $      13.8    $          -      $         13.8
F - 59

Level 1 Level 2 Level 3 Total
December 31, 2009 NT$ NT$ NT$ NT$
(In Millions)
Derivative financial assets
Forward and Cross currency swap contract $ — $ 186.1 $ — $ 186.1

Marketable securities — available-for-sale
Corporate bonds 7,042.2 — �� — 7,042.2
Agency bonds 5,032.0 — — 5,032.0
Government bonds 2,341.8 — — 2,341.8
Publicly traded stocks 574.9 — — 574.9
Corporate issued notes 303.4 — — 303.4
Money market funds 283.7 — — 283.7
Open-end mutual funds 170.0 — — 170.0

Total $ 15,748.0 $ 186.1 $ — $ 15,934.1


December 31, 2012    Level 1    Level 2    Level 3    Total
   NT$    NT$    NT$    NT$
   (In Millions)
Assets

Derivative financial assets

Forward and Cross currency swap contract
   $ -           $ 39.5       $ -           $ 39.5








Marketable securities - available-for-sale

Publicly traded stocks
   41,160.4       -           -           41,160.4
Money market funds
   1.4       -           -           1.4








Total
   $     41,161.8       $ -           $ -           $     41,161.8








Liabilities

Derivative financial liabilities

Forward and Cross currency swap contract
   $ -           $ 15.6       $     -           $ 15.6








~~The table below sets out the balances for those assets required to be~~
Assets and liabilities measured at fair value on a nonrecurring basis
The Company measures certain assets, including investments accounted for using the equity method and financial assets carried at cost, at fair value on a nonrecurring basis when they are deemed to be impaired.    The valuation processes include controls that are designed to ensure appropriate fair values are recorded. These controls include model validation, review of key model inputs, and analysis of period-over-period fluctuations where appropriate. Due to significant unobservable inputs used, the Company classified these measurements as Level 3.
The Company assesses the impairment of investments accounted for using the equity method whenever triggering events or changes in circumstances indicate that an investment may be impaired and carrying value may not be recoverable.    The Company measures the fair value based on the discounted cash flow of the investees, the underlying assumptions, for which had been formulated by such investees’ internal management team, taking into account market conditions for the industries which the investees operate in to ensure the reasonableness of such assumptions.    The compound annual revenue growth rate within the period covered by the most recent forecasts and the ~~associated losses recognized during~~weighted average cost of capital, which are significant unobservable inputs used in the ~~years ended December 31, 2008~~fair value measurement, were 9.30% and ~~2009:~~

December 31, Total
2008 Level 1 Level 2 Level 3 Gain(Losses)
NT$ NT$ NT$ NT$ NT$
(In Millions)
Assets
Financial assets carried at cost $ 3,615.4 $ — $ — $ 3,615.4 $ (625.5 )
Idle assets — — — — (210.5 )

Total $ 3,615.4 $ — $ — $ 3,615.4 $ (836.0 )

Total
December 31, Losses (Refer to
2009 Level 1 Level 2 Level 3 Note 12)
NT$ NT$ NT$ NT$ NT$
(In Millions)

Financial assets carried at cost $ 3,063.0 $ — $ — $ 3,063.0 $ (711.9 )

8.01%, respectively.
Financial assets carried at cost consist primarily of non-publicly traded stocks.    The Company reviews ~~the carrying values of~~ financial assets carried at cost for impairment quarterly and records an impairment charge when ~~impairment indicators are present.~~the Company believes an investment has experienced an other-than-temporary decline in value.    Determining whether an other-than-temporary decline in value of the investment has occurred is highly subjective.    Factors the Company considers include the value of the investment in relation to its cost basis and the duration of the decline in value below the cost basis of the investment.    Due to the absence of quoted market prices, the fair values are determined significantly based on management judgment with the best information available.    The Company calculates these fair values using the market approach which includes recent financing activities, valuation of comparable companies, technology development stage, market condition and other economic factors as their inputs.
F - 60
The table below sets out the balances for those assets required to be measured at fair value ~~inputs. When~~on a nonrecurring basis and the ~~market approach~~associated losses recognized during the years ended December 31, 2011 and 2012:

   December 31,
2011    Level 1    Level 2    Level 3    Total Loss
(Refer to
Note 13)
   NT$    NT$    NT$    NT$    NT$
   (In Millions)
Assets

Financial assets carried at cost
   $ 4,315.0       $     -           $     -           $ 4,315.0       $ (265.5 )










   December 31,
2012    Level 1    Level 2    Level 3    Total Loss
(Refer to
Note 11 and
13)
   NT$    NT$    NT$    NT$    NT$
   (In Millions)
Assets

Investments accounted for using the equity method
   $     23,430.0       $ -           $ -           $     23,430.0       $     (1,186.7 )










Financial assets carried at cost
   $ 3,605.1       $ -           $ -           $ 3,605.1       $ (367.4 )










Financial Assets and Liabilities not Measured at Fair Value but for which the Fair Value is ~~not available, the~~Disclosed
The Company uses quoted prices in active markets for identical assets to determine fair value for Level 1 investments such as corporate bonds and government bonds.    For investments in corporate bonds using quoted prices in a less active market are classified as Level 2.
The fair value of the ~~income approach which includes the~~Company’s bonds payable is determined using active market prices and classified as Level 1. The Company uses discounted cash flow model with observable market data, such as LIBOR based yield curve, to determine the fair value of long-term bank loans, other long-term payables and ~~other economic factors~~obligations under capital leases. These liabilities are therefore included in Level 2.
The table below sets out the balances for the Company’s assets and liabilities at amortized cost but for which the fair value is disclosed as ~~inputs.~~
of December 31, 2011 and 2012:
~~F-64~~

December 31, 2011    Level 1    Level 2    Level 3    Total
   NT$    NT$    NT$    NT$
   (In Millions)
Assets

Held-to-maturity securities

Corporate bonds
   $ 6,410.9       $ 2,263.2       $ -           $ 8,674.1
Government bonds
   454.0       -           -           454.0








Total
   $ 6,864.9       $ 2,263.2       $ -           $ 9,128.1








Liabilities

Bonds payable
   $     22,597.1       $ -           $ -           $     22,597.1








Long-term bank loans
   $ -           $ 1,650.0       $ -           $ 1,650.0








Other long-term payables
   $ -           $     3,399.9       $ -           $ 3,399.9








Obligations under capital leases
   $ -           $ 871.0       $     -           $ 871.0








F - 61

December 31, 2012    Level 1    Level 2    Level 3    Total
   NT$    NT$    NT$    NT$
   (In Millions)
Assets

Held-to-maturity securities

Corporate bonds
   $ 2,886.7       $ 2,179.7       $ -           $ 5,066.4








Liabilities

Bonds payable
   $     80,343.4       $ -           $ -           $     80,343.4








Long-term bank loans
   $ -           $     1,487.5       $ -           $ 1,487.5








Other long-term payables
   $ -           $ 967.5       $ -           $ 967.5








Obligations under capital leases
   $ -           $ 756.3       $     -           $ 756.3








c. d. Marketable securities
~~As of December 31, 2008 and 2009, the marketable securities by category was as follows:~~
As of December 31, 2011 and 2012, the marketable securities by category were as follows:
   December 31
   2011    2012
   NT$    NT$
   (In Millions)
Marketable securities - available-for-sale
   $     3,308.8       $     41,161.8
Marketable securities - held-to-maturity
   9,068.9       5,057.0

December 31
2008 2009
NT$ NT$
(In Millions)
Marketable securities — trading — publicly traded stock $ 13.3 $ —
Marketable securities — available-for-sale 12,931.4 15,748.0
Marketable securities — held-to-maturity 21,308.2 25,498.0
The Company uses the average cost method for ~~trading securities and~~ available-for-sale securities when determining their cost basis. Proceeds from sales of available-for-sale securities for the years ended December 31, ~~2007, 2008~~2010, 2011 and ~~2009~~2012 were NT$~~94,908.7~~37,816.3 million, NT$~~138,515.0~~59,305.0 million and NT$~~36,040.0~~964.4 million, respectively.    The ~~company’s~~Company’s gross realized gains on the sale of ~~investments~~marketable securities for the years ended December 31, ~~2007, 2008~~2010, 2011 and ~~2009~~2012 were NT$~~957.8~~749.5 million, NT$~~1,021.7~~357.6 million and NT$~~504.7~~399.6 million, respectively.    The ~~company’s~~Company’s gross realized losses on the sale of ~~investments~~marketable securities for the years ended December 31, ~~2007, 2008~~2010, 2011 and ~~2009~~2012 were NT$~~399.9~~146.2 million, NT$~~482.5~~145.2 million and ~~NT$525.0 million,~~nil, respectively.
~~Total appreciation~~
As of ~~trading~~December 31, 2011 and 2012, available-for-sale and held-to-maturity securities of the Company were as follows:
   December 31, 2011
        Cost         Gross
    Unrealized
Gains    Gross
  Unrealized
Losses   Estimated
Fair
Value
   NT$    NT$    NT$ NT$
   (In Millions)
Available-for-sale securities

Publicly traded stocks
   $ 4,723.7       $ 488.0       $       (1,905.4 ) $      3,306.3
Money market funds
   2.5       -         -      2.5






Total
   $ 4,726.2       $ 488.0       $ (1,905.4 ) $ 3,308.8






Held-to-maturity securities

Corporate bonds
   $ 8,614.6       $ 75.5       $ (16.0 ) $ 8,674.1
Government bonds
   454.3       -         (0.3 ) 454.0






Total
   $      9,068.9       $ 75.5       $ (16.3 ) $ 9,128.1






F - 62
   December 31, 2012
        Cost         Gross
    Unrealized
Gains    Gross
  Unrealized
Losses   Estimated
Fair
Value
   NT$    NT$    NT$ NT$
   (In Millions)
Available-for-sale securities

Publicly traded stocks
   $      33,057.7       $ 8,143.1       $       (40.4 ) $      41,160.4
Money market funds
   1.4       -         -      1.4






Total
   $ 33,059.1       $       8,143.1       $ (40.4 ) $ 41,161.8






Held-to-maturity securities

Corporate bonds
   $ 5,057.0       $ 11.0       $ (1.6 ) $ 5,066.4






The following table shows the fair value and gross unrealized losses of the marketable securities ~~held~~with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by ~~the Company~~investment category and length of time that such securities have been in a continuous unrealized loss position as of December 31, ~~2008~~2012:
       Less than 12 Months       12 Months or Greater   Total
   Fair
Value    Unrealized
Losses Fair
    Value      Unrealized
Losses Fair
    Value        Unrealized
Losses
   NT$    NT$ NT$    NT$ NT$    NT$
   (In Millions)
Available-for-sale securities

Publicly traded stocks
   $ -         $ -      $ 109.0       $       (40.4 ) $ 109.0       $       (40.4 )








Held-to-maturity securities

Corporate bonds
   $   1,166.1       $         (1.6 ) $ -         $ -      $   1,166.1       $ (1.6 )








The gross unrealized losses related to bonds and ~~2009 was NT$12.1 million~~publicly traded stock were due to fair value fluctuations. The Company presently does not intend to sell the above securities and ~~nil, respectively.~~believes that it is not more likely than not that the Company will be required to sell these securities that are in an unrealized loss position before recovery of the Company’s cost.
As of December 31, 2012, the amortized cost and fair value of the Company’s held-to-maturity investments in debt securities by contractual maturity were as follows:
         Cost            Fair Value
   NT$    NT$
   (In Millions)
Held-to-maturity securities

Due in one year or less
   $       5,057.0       $       5,066.4




~~F-65~~
~~As of December 31, 2008 and 2009, available-for-sale and held-to-maturity securities of the Company were as follows:~~

December 31, 2008
Gross Gross Estimated
Adjusted Unrealized Unrealized Fair
Cost Gains Losses Value
NT$ NT$ NT$ NT$
(In Millions)

Available-for-sale securities
Agency bonds $ 5,583.1 $ 118.5 $ (5.1 ) $ 5,696.5
Corporate bonds 3,290.7 41.5 (53.1 ) 3,279.1
Corporate issued asset-backed securities 2,752.4 — (417.5 ) 2,334.9
Money market funds 1,000.1 — — 1,000.1
Government bonds 376.6 — (35.7 ) 340.9
Publicly traded stocks 118.7 161.2 — 279.9

Total $ 13,121.6 $ 321.2 $ (511.4 ) $ 12,931.4

Held-to-maturity securities
Corporate bonds $ 18,158.7 $ 51.7 $ (64.1 ) $ 18,146.3
Structured time deposits 1,643.0 142.3 — 1,785.3
Government bonds 1,506.5 34.8 (15.9 ) 1,525.4

Total $ 21,308.2 $ 228.8 $ (80.0 ) $ 21,457.0

December 31, 2009
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
NT$ NT$ NT$ NT$
(In Millions)

Available-for-sale securities
Corporate bonds $ 7,004.3 $ 54.9 $ (17.0 ) $ 7,042.2
Agency bonds 5,051.1 0.3 (19.4 ) 5,032.0
Government bonds 2,381.6 0.1 (39.9 ) 2,341.8
Corporate issued notes 303.4 — — 303.4
Money market funds 283.7 — — 283.7
Open-ended mutual funds 170.0 — — 170.0
Publicly traded stocks 119.1 455.8 — 574.9

Total $ 15,313.2 $ 511.1 $ (76.3 ) $ 15,748.0

Held-to-maturity securities
Corporate bonds $ 15,120.0 $ 176.8 $ (5.9 ) $ 15,290.9
Structured time deposits 7,000.0 0.1 (3.1 ) 6,997.0
Government bonds 3,378.0 28.6 (22.8 ) 3,383.8

Total $ 25,498.0 $ 205.5 $ (31.8 ) $ 25,671.7

The following table shows the gross unrealized losses and fair value of the investments with unrealized losses that are not deemed to be other-than-temporary impaired, aggregated by investment category and length of time that have been in a continuous unrealized loss position as of December 31, 2009:
~~F-66~~

Less than 12 Months 12 Months or Greater Total
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
NT$ NT$ NT$ NT$ NT$ NT$
(In Millions)

Available-for-sale securities
Agency bonds $ 4,691.8 $ (19.4 ) $ — $ — $ 4,691.8 $ (19.4 )
Corporate bonds 4,292.4 (17.0 ) — — 4,292.4 (17.0 )
Government bonds 1,934.8 (11.4 ) 337.9 (28.5 ) 2,272.7 (39.9 )

Total $ 10,919.0 $ (47.8 ) $ 337.9 $ (28.5 ) $ 11,256.9 $ (76.3 )

Held-to-maturity securities
Structured time deposits $ 5,996.9 $ (3.1 ) $ — $ — $ 5,996.9 $ (3.1 )
Corporate bonds 2,107.5 (2.8 ) 2,586.4 (3.1 ) 4,693.9 (5.9 )
Government bonds — — 275.1 (22.8 ) 275.1 (22.8 )

Total $ 8,104.4 $ (5.9 ) $ 2,861.5 $ (25.9 ) $ 10,965.9 $ (31.8 )

The gross unrealized losses related to bonds and structured time deposits were due to fair value fluctuations. The Company presently does not intend to sell the above debt securities and believes that it is not more likely than not that the Company will be required to sell these securities that are in an unrealized loss position before recovery of the Company’s amortized cost. The Company has recognized the impairment loss related to available for sale, totaled NT$201.3 million in earnings in 2009.
~~As of December 31, 2009, the amortized cost and fair value of the Company’s available-for-sale and held-to-maturity investments in debt securities by contractual maturity were as follows:~~

Cost Fair Value
NT$ NT$
(In Millions)

Available-for-sale securities
Due in one year or less $ 2,961.6 $ 2,919.2
Due after one year through two years 7,985.6 7,974.2
Due after two years through five years 1,548.0 1,594.8
Due after five years 2,245.2 2,231.2

Total $ 14,740.4 $ 14,719.4

Held-to-maturity securities
Due in one year or less $ 9,944.8 $ 9,971.5
Due after one year through two years 14,145.3 14,262.5
Due after two years through five years 1,407.9 1,437.7

Total $ 25,498.0 $ 25,671.7

d. e. Stock-based compensation plans
Effective January 1, 2006, TSMC adopted the fair value recognition provisions to account for share-based payments, using the modified prospective transition method and therefore has not restated the results for prior periods. Under the transition method, stock-based compensation expense in the year ended December 31, 2006 includes stock-based compensation expense for all share-based payment awards granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value. In addition, the stock-based compensation expense also includes intrinsic value of certain outstanding share-based awards for which it was not possible to reasonably estimate their grant-date fair value.
~~F-67~~Effective January 1, 2006, TSMC adopted the fair value recognition provisions to account for share-based payments, using the modified prospective transition method and therefore has not restated the results for prior periods.    Under the transition method, stock-based compensation expense in the year ended December 31, 2006 includes stock-based compensation expense for all share-based payment awards granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value.    In addition, the stock-based compensation expense also includes intrinsic value of certain outstanding share-based awards for which it was not possible to reasonably estimate their grant-date fair value.
F - 63
Stock-based compensation expense for all share-based payment awards granted after January 1, 2006 is based on the grant-date fair value.    The Company recognizes these compensation costs using the graded vesting method over the requisite service period of the award, which is generally a four-year vesting period.    The adoption of the guidance relating to share-based payment resulted in a cumulative gain from accounting change of NT$37.9 million, which reflects the net cumulative impact of estimating future forfeitures in the determination of period expense, rather than recording forfeitures when they occur as previously permitted.    In March 2005, the SEC issued an interpretation relating to share-based payment and the value of share-based payments for public companies. TSMC has applied the interpretation in its adoption of the guidance relating to share-based payment. In December 2007, the SEC issued an amendment for prior interpretation regarding the use of the simplified method in developing estimates of the expected life of stock options in accordance with the guidance relating to share-based payment.    The amendment allowed the continued use, subject to specific criteria, of the simplified method in estimating the expected life of stock options granted after December 31, 2008.    During 2012, the Company granted employee stock option plans accounted for using the fair value method from TSMC Solar, TSMC SSL and Xintec.
The fair values of the options granted under the TSMC 2002 Plan was not reasonably estimable using appropriate valuation methodologies because the terms of such plans included a provision for a reduction in the exercise price in the event TSMC issues additional common shares or issues ADSs at a price lower than the exercise price of a granted stock option.    Accordingly, the expenses for the stock options granted under the TSMC 2002 Plan were determined using the variable accounting method.    Under such method, the Company accounts for these stock options based on their intrinsic value, remeasured at each reporting date through the date of exercise or other settlement.
Please refer to Note 23 of the Consolidated Financial Statements for other general terms of Employee Stock Option Plans of TSMC, TSMC Solar, TSMC SSL and Xintec, such as the maximum contractual term and the number of shares authorized for each stock option plan, as well as the supplemental information such as outstanding options as of December 31, 2012.
The weighted average remaining aggregate intrinsic value and contractual term of options under the foregoing plans as of December 31, 2012 were as follows:
   Aggregate
  Intrinsic Value      Weighted
Average
Remaining
    Contractual
Term
   NT$    (In Years)
   (In Millions)
TSMC:

Options outstanding
   371.1               1.1
Options exercisable
   371.1               1.1
Xintec:

Options outstanding
   2.4               4.4
Options exercisable
   2.4               4.3
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the stock closing price on the last trading date of the year ended December 31, 2012 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2012.
The number of options expected to vest for the years ended December 31, 2011 and 2012 was nil and 5,528 thousand shares, respectively.
Total intrinsic value of options exercised in the years ended December 31, 2011 and 2012 was NT$313.5 million and NT$453.5 million, respectively.    Total fair value of options vested, net of taxes, during the years ended December 31, 2011 and 2012 was NT$2.5 million and NT$1.7 million, respectively.
As of December 31, 2012, the unrecognized compensation cost related to stock-based compensation plans was NT$22.7 million.    The unrecognized compensation cost is expected to be recognized over a weighted average period of 3.5 years.
F - 64
Stock-based compensation expense for all share-based payment awards granted after January 1, 2006 is based on the grant-date fair value. The Company recognizes these compensation costs using the graded vesting method over the requisite service period of the award, which is generally a four-year vesting period. The adoption of the guidance relating to share-based payment resulted in a cumulative gain from accounting change of NT$37.9 million, which reflects the net cumulative impact of estimating future forfeitures in the determination of period expense, rather than recording forfeitures when they occur as previously permitted. In March 2005, the SEC issued an interpretation relating to share-based payment and the value of share-based payments for public companies. TSMC has applied the interpretation in its adoption of the guidance relating to share-based payment. In December 2007, the SEC issued an amendment for prior interpretation regarding the use of the simplified method in developing estimates of the expected life of stock options in accordance with the guidance relating to share-based payment. The amendment allowed the continued use, subject to specific criteria, of the simplified method in estimating the expected life of stock options granted after December 31, 2008. The Company did not grant any employee stock options since then.
The fair values of the options granted under the TSMC 2002 Plan and GUC 2004 Plan were not reasonably estimable using appropriate valuation methodologies because the terms of such plans included a provision for a reduction in the exercise price in the event TSMC or GUC issues additional common shares or issues ADSs at a price lower than the exercise price of a granted stock option. Accordingly, the expenses for the stock options granted under the TSMC 2002 Plan and GUC 2004 Plan were determined using the variable accounting method. Under such method, the Company accounts for these stock options based on their intrinsic value, remeasured at each reporting date through the date of exercise or other settlement.
Please refer to Note 21 of the Consolidated Financial Statements for other general terms of TSMC’s, GUC’s and Xintec’s Employee Stock Option Plans, such as the maximum contractual term and the number of shares authorized for each stock option plan, as well as the supplemental information such as outstanding options as of December 31, 2009.
~~The weighted average remaining contractual term and aggregate intrinsic value of options under the foregoing plans as of December 31, 2009 were as follows:~~

Weighted
Average
Remaining
Aggregate Contractual
Intrinsic Value Term
NT$ (In Years)
(In Millions)
TSMC:
Options outstanding 894.4 $ 3.6
Options exercisable 894.4 3.6

GUC:
Options outstanding 336.8 2.6
Options exercisable 84.0 1.2

Xintec:
Options outstanding 6.3 7.2
Options exercisable 2.9 7.2
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between TSMC’s or GUC’s stock closing price on the last trading date of the year ended December 31, 2009 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2009.
~~The number of options expected to vest for the years ended December 31, 2008 and 2009 was 10,779 thousand shares and 4,939 thousand shares, respectively.~~
~~F-68~~
Total intrinsic value of options exercised in the years ended December 31, 2008 and 2009 was NT$508.0 million and NT$379.7 million, respectively. Total fair value of options vested, net of taxes, during the years ended December 31, 2008 and 2009 was NT$116.3 million and NT$177.1 million, respectively.
As of December 31, 2009, there was NT$37.9 million of unrecognized compensation cost related to stock-based compensation plans. The unrecognized compensation cost is expected to be recognized over a weighted average period of 1.7 years.
e. f. Uncertainty in income taxes
On January 1, 2007, the Company adopted new guidance related to accounting for uncertainty in income taxes, which clarifies the accounting for uncertainty in income taxes by prescribing a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This guidance also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the implementation of this guidance, the Company did not recognize any cumulative effect adjustment impacting retained earnings as of the beginning of fiscal year 2007. As of December 31, 2008 and 2009, there were no material uncertain tax positions or unrecognized tax benefits identified by the Company. The Company does not expect there will be any significant change in this tax position on unrecognized tax benefits within 12 months of the reporting date.
f. ~~Subsidy income~~
The subsidy income of NT$364.3 million, NT$8.0 million and NT$9.0 million recognized in the years ended December 31, 2007, 2008 and 2009, respectively, represented payments granted by the government of the People’s Republic of China in connection with the Company’s investment in Mainland China. Under R.O.C. GAAP, such government grants are recorded as non-operating income when received. In the absence of specific U.S. GAAP accounting guidance, the Company applied the International Accounting Standard 20, “Accounting for Government Grants and Disclosure of Government Assistance”. Therefore the subsidy income was recognized when received as non-operating income under U.S. GAAP as well.
On January 1, 2007, the Company adopted new guidance related to accounting for uncertainty in income taxes, which clarifies the accounting for uncertainty in income taxes by prescribing a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This guidance also provides rules guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the implementation of this guidance, the Company did not recognize any cumulative effect adjustment impacting retained earnings as of the beginning of fiscal year 2007. As of December 31, 2011 and 2012, there were no material uncertain tax positions or unrecognized tax benefits identified by the Company.    The Company does not expect there will be any significant change in this uncertain tax position or unrecognized tax benefits within 12 months of the reporting date.
g. Settlement income
Settlement income of NT$6,939.8 million, NT$947.3 million and NT$883.8 million was recognized in the years ended December 31, 2010, 2011 and 2012, respectively, under the settlement agreement with Semiconductor Manufacturing International Corporation (SMIC).    The dispute settlement is not a component of the activities that constitute the Company’s ongoing major or central operations and therefore is classified as non-operating income.
The Company recognized such settlement income on a cash basis due to the Company’s serious doubt as to its collectability at the time the settlement agreement was consummated.    The Company continues to analyze the recognition of the remaining settlement income based on its collectability, and will evaluate SMIC’s reported financial condition, capital resources and liquidity condition on a regular basis.
h. ~~Settlement income~~Deconsolidation of NT$985.1 million, NT$951.2 million and NT$1,464.9 million was recognized in the years ended December 31, 2007, 2008 and 2009, respectively, under the settlement agreement with Semiconductor Manufacturing International Corporation (SMIC). The dispute settlement is not a component of the activities that constitute the Company’s ongoing major or central operations and therefore is classified as non-operating income.
The Company recognized such settlement income on a cash basis due to the Company’s serious doubt as to its collectability at the time the settlement agreement was consummated. The Company continues to analyze the recognition of the remaining settlement income based on its collectability, and will evaluate SMIC’s reported financial condition, capital resources and liquidity condition on a regular basis.GUC
~~F-69~~Since July 2011, the Company ceased to have controlling interest in GUC and its subsidiaries due to the termination of a Shareholders’ Agreement; as a result, the Company no longer consolidates GUC.    Under the deconsolidation accounting guidelines, the investor’s opening investment is recorded at fair value as of the date of deconsolidation.    The difference between this fair value of the investment and the net carrying value is recognized as a gain or loss in earnings.    During the third quarter of 2011, the Company completed a valuation analysis to determine the initial fair value of its investment in GUC.    In determining the fair value, as GUC is listed on TSE, the Company used the market approach by considering GUC’s market price and the Company’s shareholding in GUC upon deconsolidation.
Based on the results of the valuation, the Company determined that at the deconsolidation date the fair value of its investment in GUC was NT$5,369.2 million and recognized a non-cash gain of NT$4,304.1 million in non-operating income under U.S. GAAP for the year ended December 31, 2011.
F - 65


Title of Each Class
		Name of Each Exchange
~~Title of Each Class~~		on Which Registered
Common Shares, par value NT$10.00 each*		The New York Stock Exchange, Inc.


			Page
					~~Page~~
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION				1

PART I				2

ITEM 1.
~~ITEM 1.~~ IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS		2

ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE			2

ITEM 3.	KEY INFORMATION			2

ITEM 4.	INFORMATION ON THE COMPANY			1312

ITEM 4A.	UNRESOLVED STAFF COMMENTS			2321

ITEM 5.	OPERATING AND FINANCIAL REVIEWS AND PROSPECTS			2321

ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES			3733

ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS			40

ITEM 8.	FINANCIAL INFORMATION			42

ITEM 9.	THE OFFER AND LISTING			43

ITEM 10.	ADDITIONAL INFORMATION			44

ITEM ~~8. FINANCIAL INFORMATION~~11.		46
~~ITEM 9. THE OFFER AND LISTING~~		48
~~ITEM 10. ADDITIONAL INFORMATION~~		48
~~ITEM 11.~~ QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS		59

ITEM 12D.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES			62

PART II				63

ITEM ~~12D. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES~~13.		65

~~PART II~~		66

~~ITEM 13.~~ DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES		6663


	Year ended and as of December 31,
	2005			2006			2007			2008			2009			2009
	NT$			NT$			NT$			NT$			NT$			US$
	(in millions, except for percentages,
	earnings per share and per ADS, and operating data)
Income Statement Data:
R.O.C. GAAP
Net sales		266,565			317,407			322,630			333,158			295,742			9,256
Cost of sales⁽⁹⁾		(148,362	)		(161,597	)		(180,280	)		(191,408	)		(166,413	)		(5,208	)
Gross profit		118,203			155,810			142,350			141,750			129,329			4,048
Operating expenses⁽⁹⁾		(27,234	)		(28,545	)		(30,628	)		(37,315	)		(37,367	)		(1,170	)
Income from operations		90,969			127,265			111,722			104,435			91,962			2,878
Non-operating income and gains^{(1) (8)}		9,399			9,839			11,934			10,822			5,654			177
Non-operating expenses and losses^{(1) (8)}		(6,105	)		(3,742	)		(2,014	)		(3,785	)		(2,153	)		(67	)
Income before income tax and minority interest		94,263			133,362			121,642			111,472			95,463			2,988
Income tax expense		(630	)		(7,774	)		(11,710	)		(10,949	)		(5,997	)		(188	)
Income before cumulative effect of changes in accounting principles		93,633			125,588			109,932			100,523			89,466			2,800
Cumulative effect of changes in accounting principles		—			1,607			—			—			—			—
Income before minority interest		93,633			127,195			109,932			100,523			89,466			2,800
Minority interest in loss (income) of subsidiaries		(58	)		(185	)		(755	)		(590	)		(248	)		(8	)
Net income attributable to shareholders of the parent		93,575			127,010			109,177			99,933			89,218			2,792
Basic earnings per share⁽²⁾		3.47			4.70			4.04			3.84			3.45			0.11
Diluted earnings per share⁽²⁾		3.46			4.69			4.04			3.81			3.44			0.11
Basic earnings per ADS equivalent⁽²⁾		17.33			23.49			20.21			19.19			17.27			0.54


	Year ended and as of December 31,
	2005			2006			2007			2008			2009			2009
	NT$			NT$			NT$			NT$			NT$			US$
	(in millions, except for percentages,
	earnings per share and per ADS, and operating data)
Diluted earnings per ADS equivalent⁽²⁾		17.32			23.47			20.20			19.05			17.21			0.54
Basic weighted average shares outstanding⁽²⁾		27,005			27,031			27,005			26,039			25,836			25,836
Diluted weighted average shares outstanding⁽²⁾		27,016			27,054			27,026			26,236			25,914			25,914
U.S. GAAP
Net sales		267,028			317,979			323,221			334,340			296,109			9,268
Cost of sales⁽³⁾		(161,808	)		(179,175	)		(202,046	)		(203,734	)		(167,122	)		(5,231	)
Operating expenses⁽³⁾		(32,764	)		(37,050	)		(44,775	)		(44,424	)		(37,627	)		(1,178	)
Income from operations		72,456			101,754			76,400			86,182			91,360			2,859
Income before income tax and minority interest		75,983			106,647			85,973			91,884			94,253			2,950
Income tax expense		(483	)		(10,954	)		(14,012	)		(10,062	)		(4,960	)		(155	)
Cumulative effect of changes in accounting principles		—			38			—			—			—			—
Net income		75,418			95,711			71,658			81,473			89,102			2,789
Income attributable to common shareholders		75,418			95,711			71,658			81,473			89,102			2,789
Basic earnings per share⁽⁴⁾		2.94			3.68			2.71			3.15			3.45			0.11
Diluted earnings per share⁽⁴⁾		2.94			3.67			2.71			3.13			3.44			0.11
Basic earnings per ADS equivalent⁽⁴⁾		14.68			18.40			13.57			15.77			17.24			0.54
Diluted earnings per ADS equivalent⁽⁴⁾		14.68			18.38			13.56			15.65			17.19			0.54
Basic weighted average shares outstanding⁽⁴⁾		25,685			26,011			26,409			25,826			25,836			25,836
Diluted weighted average shares outstanding⁽⁴⁾		25,695			26,034			26,430			26,023			25,914			25,914
Balance Sheet Data:
R.O.C. GAAP
Working capital⁽¹⁾		177,179			213,457			201,116			195,812			180,671			5,655
Long-term investments⁽¹⁾		42,383			53,895			36,461			39,982			37,845			1,185
Properties		244,823			254,094			260,252			243,645			273,675			8,566
Goodwill		6,011			5,985			5,988			6,044			5,931			186
Total assets		519,510			587,485			570,865			558,917			594,696			18,613
Long term bank borrowing		663			654			1,722			1,420			579			18
Long-term bonds payable		19,500			12,500			12,500			4,500			4,500			141
Guaranty deposit-in and other liabilities⁽⁵⁾		17,986			18,333			17,251			15,817			11,436			358
Total liabilities		73,271			78,347			80,179			78,544			95,648			2,994
Capital stock		247,300			258,297			264,271			256,254			259,027			8,107
Cash dividend on common shares		46,504			61,825			77,489			76,881			76,876			2,406


	Year ended and as of December 31,
	2005			2006			2007			2008			2009			2009
	NT$			NT$			NT$			NT$			NT$			US$
	(in millions, except for percentages,
	earnings per share and per ADS, and operating data)
Shareholders’ equity attributable to shareholders of the parent		445,631			507,981			487,092			476,377			495,083			15,495
Minority interest in subsidiaries		608			1,157			3,594			3,996			3,965			124
U.S. GAAP
Goodwill		46,993			46,940			46,926			47,028			46,825			1,466
Total assets		558,919			626,108			610,843			599,484			635,275			19,883
Total liabilities		80,962			92,549			94,021			84,424			99,278			3,107
Capital Stock		247,300			258,297			264,271			256,254			259,027			8,107
Shareholders’ equity attributable to common shareholders of the parent		477,297			532,403			513,228			511,089			532,043			16,652
Minority interest in subsidiaries		660			1,156			3,594			3,971			3,954			124

	Year ended and as of December 31,
	2005			2006			2007			2008			2009			2009
	NT$			NT$			NT$			NT$			NT$			US$
	(in millions, except for percentages,
	earnings per share and per ADS, and operating data)
Other Financial Data:
R.O.C. GAAP
Gross margin		44%			49%			44%			42%			44%			44%
Operating margin		34%			40%			35%			31%			31%			31%
Net margin		35%			40%			34%			30%			30%			30%
Capital expenditures		79,879			78,737			84,001			59,223			87,785			2,748
Depreciation and amortization		75,649			73,715			80,005			81,512			80,815			2,529
Cash provided by operating activities⁽¹⁾		157,225			204,997			183,766			221,494			159,966			5,007
Cash used in investing activities⁽¹⁾		(77,652	)		(119,724	)		(70,689	)		(8,042	)		(96,468	)		(3,019	)

Cash used in financing activities		(57,969	)		(63,783	)		(135,410	)		(115,393	)		(85,471	)		(2,675	)

Net cash inflow (outflow)		22,181			21,353			(22,851	)		99,628			(23,338	)		(730	)
Operating Data:
Wafer (200mm equivalent) shipment⁽⁶⁾		5,622			7,215			8,005			8,467			7,737			7,737
Billing Utilization Rate⁽⁷⁾		94%			102%			93%			88%			75%			75%

þx		ANNUAL REPORT PURSUANT TO SECTION 13 OR 1~~5(d)~~15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		~~For the fiscal year ended December 31, 2009~~

o¨		TRANSITION REPORT PURSUANT TO SECTION 13 OR 1~~5(d)~~15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		~~For the transition period from~~to


Taiwan Semiconductor Manufacturing Company Limited		Republic of China
(Translation of Registrant’s Name Into English)		(Jurisdiction of Incorporation or Organization)


ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	6663

ITEM 15.	CONTROLS AND PROCEDURES	6663

ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERT	6865

ITEM 16B.	CODE OF ETHICS	6865

ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	6865

ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	6965

ITEM 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	66

ITEM 16F.	CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT	66

ITEM 16G.	CORPORATE GOVERNANCE	66

ITEM 16H.	MINE SAFETY DISCLOSURE	69

~~ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT~~PART III		69

ITEM ~~16G. CORPORATE GOVERNANCE~~17.	FINANCIAL STATEMENTS	69

ITEM 18.	FINANCIAL STATEMENTS	69

ITEM 19.	~~PART III~~EXHIBITS	7269

~~ITEM 17. FINANCIAL STATEMENTS~~ EX-1.1 ARTICLES OF INCORPORATION			72
~~ITEM 18. FINANCIAL STATEMENTS~~ EX-3.1 RULES FOR ELECTION OF DIRECTORS			72
~~ITEM 19. EXHIBITS~~ EX-3.2 RULES AND PROCEDURES OF BOARD OF DIRECTORS MEETINGS			72
EX-4.14 LAND LEASE WITH CENTRAL SCIENCE INDUSTRIAL PARK ADMINISTRATION
EX-12.1 CERTIFICATION OF CEO - RULE 13A-14(A)
EX-12.2 CERTIFICATION OF CFO - RULE 13A-14(A)
EX-13.1 CERTIFICATION OF CEO - RULE 13A-14(B)
EX-13.2 CERTIFICATION OF CFO - RULE 13A-14(B)
EX-99.1 CONSENT OF DELOITTE & TOUCHE

	•—		the volatility of the semiconductor and ~~microelectronics~~electronics industry;

	•—		the increased competition from other companies and our ability to retain and increase our market share;

	•—		our ability to develop new technologies successfully and remain a technological leader;

	•—		our ability to maintain control over expansion and facility modifications;

	•—		our ability to acquire required equipment and supplies necessary to meet business needs;


	Year ended and as of December 31
	2008		2009		2010		2011		2012		2012
	NT$		NT$		NT$		NT$		NT$		US$
	(in millions, except for percentages, earnings per share and per ADS)
Income Statement Data:
R.O.C. GAAP
Net sales		333,158		295,742		419,538		427,081		506,249		17,427
Cost of sales		(191,408)		(166,413)		(212,484)		(232,938)		(262,629)		(9,041)
Gross profit before affiliates elimination		141,750		129,329		207,054		194,143		243,620		8,386
Unrealized gross profit from affiliates		—		—		—		(74)		(25)		(1)
Gross profit		141,750		129,329		207,054		194,069		243,595		8,385
Operating expenses		(37,315)		(37,367)		(47,879)		(52,512)		(62,538)		(2,152)
Income from operations		104,435		91,962		159,175		141,557		181,057		6,233
Non-operating income and gains		10,822		5,654		13,136		5,359		6,782		233
Non-operating expenses and losses		(3,785)		(2,153)		(2,041)		(1,768)		(6,285)		(216)
Income before income tax		111,472		95,463		170,270		145,148		181,554		6,250
Income tax expense		(10,949)		(5,997)		(7,988)		(10,695)		(15,590)		(537)
Net income		100,523		89,466		162,282		134,453		165,964		5,713
Net income attributable to minority interests		(590)		(248)		(677)		(252)		195		7
Net income attributable to shareholders of the parent		99,933		89,218		161,605		134,201		166,159		5,720
Basic earnings per share⁽¹⁾		3.84		3.45		6.24		5.18		6.41		0.22
Diluted earnings per share⁽¹⁾		3.81		3.44		6.23		5.18		6.41		0.22
Basic earnings per ADS equivalent⁽¹⁾		19.19		17.27		31.19		25.89		32.05		1.10
Diluted earnings per ADS equivalent⁽¹⁾		19.05		17.22		31.17		25.88		32.04		1.10
Basic weighted average shares outstanding⁽¹⁾		26,039		25,836		25,906		25,914		25,921		25,921
Diluted weighted average shares outstanding⁽¹⁾		26,234		25,912		25,920		25,925		25,928		25,928
U.S. GAAP
Net sales		334,340		296,109		419,988		427,488		506,745		17,444
Cost of sales		(203,734)		(167,122)		(212,771)		(232,989)		(262,717)		(9,044)
Gross profit before affiliates elimination		130,606		128,987		207,217		194,499		244,028		8,400
Unrealized gross profit from affiliates		—		—		—		(74)		(25)		(1)
Gross profit		130,606		128,987		207,217		194,425		244,003		8,399
Operating expenses		(44,424)		(37,627)		(48,434)		(52,405)		(63,046)		(2,170)
Income from operations		86,182		91,360		158,783		142,020		180,957		6,229
Income before income tax		91,884		94,253		170,088		149,238		181,081		6,233
Income tax expense		(10,062)		(4,960)		(5,768)		(12,135)		(22,426)		(772)


⁽⁶⁾⁽³⁾		In thousands.


	NT dollars per U.S. dollar
	Average⁽¹⁾		High		Low		Period-End
2004		33.37		34.16		31.74		31.74
2005		32.16		33.77		30.65		32.80
2006		32.51		33.31		31.28		32.59
2007		32.82		33.41		32.26		32.43
2008		31.51		33.55		29.99		32.76
2009		32.96		35.21		31.95		31.95
October 2009		32.29		32.61		32.04		32.61
November 2009		32.32		32.58		32.12		32.20
December 2009		32.25		32.38		31.95		31.95
January 2010		31.87		32.04		31.65		31.94
February 2010		32.06		32.14		31.98		32.12
March 2010		31.83		32.04		31.70		31.73
April 2010 (through April 9, 2010)		31.65		31.74		31.53		31.53


	NT dollars per U.S. dollar
	Average⁽¹⁾	High	Low	Period-End

2008	31.51	33.58	29.99	32.76
2009	32.96	35.21	31.95	31.95
2010	31.39	32.43	29.14	29.14
2011	29.42	30.67	28.50	30.27
2012	29.47	29.91	29.05	29.05
October 2012	29.24	29.31	29.15	29.20
November 2012	29.11	29.26	28.96	29.07
December 2012	29.04	29.10	29.00	29.05
January 2013	29.10	29.54	28.93	29.54
February 2013	29.63	29.73	29.52	29.67
March 2013 (through March 29, 2013)	29.74	29.88	29.63	29.81


⁽¹⁾		As a result of the adoption of the R.O.C. Statements of Financial Accounting Standards No. 34, “Financial Instruments: Recognition and Measurement” (R.O.C. SFAS No. 34), and R.O.C. Statements of Financial Accounting Standards No. 36, “Financial Instruments: Disclosure and Presentation” (R.O.C. SFAS No. 36), the balance in 2005 was reclassified to be consistent with the classification used in our consolidated financial statements for 2006 included herein. Amounts in 2005 reflect the reclassification of NT$2,331 million gains from non-operating expenses and losses to non-operating income and gains, NT$46 million from long-term investments to current investments in marketable financial instruments, and NT$212 million from cash used in investing activities to cash provided by operating activities.

⁽²⁾		Retroactively adjusted for stock dividends ~~until 2008 and profit sharing to employees in stock until 2007.~~for earning year 2008.


⁽³⁾⁽²⁾		Amounts in 2006, 2007, 2008 and 2009 include share-based compensation expenses as a result of the adoption of U.S. GAAP guidance related to share-based payment (revised 2004), effective January 1, 2006. See note 30.h. to our consolidated financial statements for additional details about this new accounting standard. Amounts in 2005 reflected the reclassification of NT$159 million from net non-operating income/expenses to operating expenses.

⁽⁴⁾		~~Retroactively adjusted for all subsequent stock dividends.~~

⁽⁵⁾		Consists of other ~~long term~~long-term payables, obligations under capital leases and total other liabilities.

⁽⁴⁾
⁽⁷⁾		“Billing Utilization Rate” is equal to annual wafer shipment divided by annual capacity. Capacity ~~for the years 2007, 2008 and 2009~~ includes wafers committed by ~~Vanguard.~~

⁽⁸⁾		~~The specified 2005, 2006~~Vanguard and ~~2007 amounts for gains/losses on settlement~~SSMC. Please see “Item 7. Major Shareholders and disposal of financial assets at fair value through profit or loss were reclassified into valuation gains/losses on financial instruments for comparison purposes. Such reclassification resulted in a change of non-operating income and gains from NT$9,705 million to NT$9,839 million and a change in non-operating expenses and losses from NT$3,608 million to NT$3,742 million for the year ended December 31, 2006.

⁽⁹⁾		~~As a result of the adoption of Interpretation 2007-052, “Accounting for Bonuses to Employees, Directors and Supervisors,~~Related Party Transactions — Related Party Transactions.” the Company records profit sharing to employees and bonus to directors and supervisors as an expense rather than as an appropriation of earnings starting in 2008. Please refer to note 4 to the consolidated financial statements for more details.


⁽¹⁾		Annual averages calculated from month-end rates and monthly averages calculated from daily closing rates.

	•—		our future financial condition, results of operations and cash flow;

	•—		market conditions for financing activities of semiconductor companies; and

	•—		significant penalties and legal liabilities, such as the denial of import permits;

	•—		the temporary or permanent suspension of production of the affected products;

	•—		~~alteration of~~ unfavorable alterations in our manufacturing, fabrication and assembly and test processes; and


			Current most
			advanced technology
	Year of		for volume		Monthly capacity⁽³⁾⁽⁴⁾
Fab⁽¹⁾	commencement		production⁽²⁾		2005		2006		2007		2008		2009
2		1990		0.45		47,584		50,506		51,685		51,609		53,649
3⁽⁵⁾		1995		0.15		83,300		89,900		90,500		92,400		95,377
5		1997		0.15		42,500		51,500		55,800		54,200		48,600
6		2000		0.11		73,000		83,400		94,000		95,100		96,800
7⁽⁷⁾		1995		0.35		13,400		—		—		—		—
8		1998		0.15		76,500		83,500		89,400		91,600		85,750
10		2004		0.18		15,600		32,000		31,000		43,000		45,500
11		1998		0.15		33,500		35,500		35,500		35,500		36,565
12		2001		0.040		106,875		131,175		160,755		167,910		199,283
14		2004		0.055		46,125		79,650		133,279		179,258		186,443
SSMC⁽⁶⁾		2000		0.15		16,700		17,700		20,700		24,600		22,010
Total						555,084		654,831		762,619		835,177		869,977


Fab⁽¹⁾	Year of commencement	Current most advanced technology for volume production⁽²⁾	Monthly capacity⁽³⁾⁽⁴⁾
			2008		2009		2010		2011		2012
2	1990	450		51,609		53,649		48,244		48,244		48,412
3	1995	150		92,400		95,377		100,957		102,173		103,023
5	1997	150		54,200		48,600		47,500		42,740		49,849
6	2000	110		95,100		96,800		94,997		96,282		100,440
8	1998	110		91,600		85,750		85,753		85,737		89,587
10	2004	150		43,000		45,500		49,600		77,500		80,300
11	1998	150		35,500		36,565		36,300		36,500		37,500
12	2001	28		167,910		199,283		238,927		265,419		289,747
14	2004	40		179,258		186,443		311,447		387,206		418,862
15	2012	28		-		-		-		-		116,782
SSMC⁽⁵⁾	2000	150		24,600		22,010		23,146		21,907		21,907

Total				835,177		869,977		1,036,871		1,163,708		1,356,409


⁽¹⁾		Fab 2 produces 150mm wafers. Fabs 3, 5, 6, 8, 10, Fab 11 (WaferTech) and SSMC produce 200mm wafers. Fab 12, Fab 14, and Fab 1415 produce 300mm wafers. Fabs 2, 3, 5, 8 and 12 are located in Hsinchu Science Park. Fab 6 and Fab 14 are located in the ~~Tainan~~Southern Taiwan Science Park. Fab15 is located in Central Taiwan Science Park. WaferTech is located in the United States, SSMC is located in Singapore and Fab 10 is located in Shanghai.


⁽³⁾		Estimated capacity in 200mm equivalent wafers as of year-end for the total technology range available for production. ~~Actual capacity during each year will be lower as new production capacity is phased in during the course of the year.~~


⁽⁴⁾		Under an agreement with Vanguard, TSMC is required to use its best commercial efforts to maintain utilization of a fixed amount of reserved capacity and will not increase or decrease the stipulated quantity by more than 5,000 wafers per month. Please see “Item 7. Major Shareholders and Related Party Transactions — Related Party Transactions — Vanguard International Semiconductor Corporation” for a discussion of certain of the Vanguard contract terms. The amounts to be used at Vanguard are not included in our monthly capacity figures.


⁽⁵⁾		~~Fab 4, which commenced operation in 1999 with initial technology of 0.5 micron, was consolidated into Fab 3 during the fourth quarter of 2001.~~

⁽⁶⁾		Represents that portion of the total capacity that we had the option to utilize as of December 31, ~~2005,~~2008, December 31, ~~2006,~~2009, December 31, ~~2007,~~2010, December 31, ~~2008~~2011 and December 31, ~~2009.~~2012. This fab commenced production in September 2000.

⁽⁷⁾		~~Fab 7 was decommissioned in June 2006 as we integrated its manufacturing facility as a part of Fab 12’s operation.~~

	•—		~~Fab 12~~ capacity expansion for mask and ~~Fab 14 facilities;~~backend operations; and

	•—		~~backend capacity;~~ solar and

	•		~~new technologies development for mask operations.~~ solid state lighting businesses.


⁽¹⁾		~~Translated from weighted average exchange rate of NT$32.868 to US$1.00.~~


	Year ended December 31,
	2007					2008					2009
Customer Type	Net Sales		Percentage			Net Sales		Percentage			Net Sales		Percentage
			(in millions, except percentages)
Fabless semiconductor companies/systems companies	NT$	215,662		66.8	%	NT$	236,542		71.0	%	NT$	235,516		79.6	%
Integrated device manufacturers		106,968		33.2	%		96,616		29.0	%		60,226		20.4	%
Total	NT$	322,630		100.0	%	NT$	333,158		100.0	%	NT$	295,742		100.0	%


	Year ended December 31
	2010				2011				2012
Customer Type	Net Sales		Percentage		Net Sales		Percentage		Net Sales		Percentage
	(in millions, except percentages)
Fabless semiconductor companies/systems companies		NT$331,264		78.9%		NT$346,615		81.2%		NT$432,090		85.4%
Integrated device manufacturers		88,054		21.0%		80,431		18.8%		74,007		14.6%
Others		220		0.1%		35		0.0%		152		0.0%

Total		NT$419,538		100.0%		NT$427,081		100.0%		NT$506,249		100.0%